Fortinet, Inc. [FTNT] Filings

10-Q 1 ftnt-20240630.htm FORM 10-Q ftnt-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34511

______________________________________

FORTINET, INC.

(Exact name of registrant as specified in its charter)

______________________________________


Delaware									77-0560389
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

909 Kifer Road

Sunnyvale, California 94086

(Address of principal executive offices, including zip code)

(408) 235-7700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 Par Value

FTNT

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of August 2, 2024, there were 764,907,985 shares of the registrant’s common stock outstanding.

FORTINET, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2024

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		Page

	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 3 0 , 2024 and December 31, 2023	3
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 3 0 , 2024 and 2023	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 3 0 , 2024 and 2023	5
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Six Months Ended June 3 0 , 2024 and 2023	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 3 0 , 2024 and 2023	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	41

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	76
Item 5.	Other Information	76
Item 6.	Exhibits	78
	Exhibit Index	78
	Signatures	79

Summary of Risk Factors

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Some of the principal risks and uncertainties include:

•Our operating results are likely to vary significantly and be unpredictable.

•Adverse economic conditions, such as a possible economic downturn or recession, and possible impacts of inflation or stagflation, increasing or decreasing interest rates, changes in government spending or reduced information technology spending, including firewall spending, may adversely impact our business.

•We have been, and may in the future be, susceptible to supply chain constraints, supply shortages and disruptions, long or less predictable lead times for components and finished goods and supply changes because some of the key components in our products come from limited sources of supply.

•As a result of supply chain disruptions in previous periods, we increased our purchase order commitments in previous periods and, as a result, may be required to accept or pay for components and finished goods regardless of our level of sales in a particular period, which may negatively impact our operating results and financial condition.

•Our billings, revenue, and free cash flow growth may slow further or may not continue, and our operating margins may decline.

•Our real estate assets, including construction, acquisitions, and ongoing maintenance and management of office buildings, warehouses, data centers and points of presence, as well as data center expansions or enhancements, could involve significant risks to our business.

•Our backlog may fluctuate over quarters. A reduction to backlog increases our aggregate billings and revenue during the quarter when delivered. If we experience supply chain shortages and cannot fulfill orders, our backlog may increase, which will negatively impact our aggregate billings and revenue in such quarter.

•As the supply chain challenges normalize, our product revenue growth rate may be lower versus prior quarters where delivery from backlog contributed more to billings. We expect billings growth to normalize and lower impact from backlog fluctuations. For the first half of 2024, the comparably lower backlog contribution to billings has resulted in decreased year-over-year quarterly growth rate.

•Any weakness in sales strategy, productivity, personnel and execution could negatively impact our results of operations.

•We are dependent on the continued services and performance of our senior management, as well as our ability to hire, retain and motivate qualified personnel.

•We rely on third-party channel partners for substantially all of our billings, revenue, and a small number of distributors represents a large percentage of our revenue and accounts receivable.

•Reliance on a concentration of shipments at the end of the quarter or changes in shipping terms could cause our billings and revenue to fall below expected levels.

•We rely significantly on revenue from FortiGuard security subscription and FortiCare technical support services, and revenue from these services may decline or fluctuate.

•We have incurred indebtedness and may incur other debt in the future, which may adversely affect our financial condition and future financial results.

•We generate a majority of billings, revenue and cash flow from sales outside of the United States.

•We may not be successful in executing our strategy to increase our sales to large- and medium-sized end-customers.

•A portion of our revenue is generated by sales to government organizations and other customers, which are subject to a number of regulatory requirements, their own supply chain and contractual requirements, challenges and risks.

•We face intense competition in our market and we may not maintain or improve our competitive position.

•We order components from third-party manufacturers based on our forecasts of future demand and targeted inventory levels, which exposes us to the risk of both product shortages, may result in lost sales and higher expenses, including excess inventory charges and costs related to future purchase commitments, and may require us to sell our products at discounts or offer various other incentives.

•We depend on third parties to provide various components for our products and build our products and are susceptible to manufacturing delays, capacity constraints and cost increases.

•We are susceptible to defects or vulnerabilities in our products or services, as well as reputational harm from the failure or misuse of our products or services, and any actual or perceived defects or vulnerabilities in our products or services, failure of our products or services to detect or prevent a security incident or to cause a disruption to operations, failure of our customers to implement preventative actions such as updates to one of our deployed solutions or failure to help secure our customers, could cause our products or services to allow unauthorized access to our customers’ networks and harm our operational results and reputation more significantly as compared to other companies.

•Our inability to successfully acquire and integrate other businesses, products or technologies, or to successfully invest in and form successful strategic alliances with other businesses, could seriously harm our competitive position and could negatively affect our financial condition and results of operations. In addition, any additional future impairment of the value of our investment in Linksys Holdings, Inc. (“Linksys”) or additional investments in Linksys could negatively affect our financial condition and results of operations.

•Investors’ and regulators’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.

•We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.

•Our proprietary rights may be difficult to enforce and we may be subject to claims by others that we infringe their proprietary technology.

•The trading price of our common stock may be volatile, which volatility may be exacerbated by share repurchases under our Share Repurchase Program (the “Repurchase Program”).

•Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

•Global economic uncertainty can weaken and harm our financial position.

•Weakening product demand caused by political instability, changes in trade agreements, wars and foreign conflicts, such as the war in Ukraine and the Israel-Hamas war or tensions between China and Taiwan, could adversely affect our business and financial performance.

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PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

FORTINET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in millions, except per share amounts)


	June 30, 2024		December 31, 2023
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,203.2	$	1,397.9
Short-term investments	1,114.9		1,021.5
Marketable equity securities	21.2		21.0
Accounts receivable—net	1,083.4		1,402.0
Inventory	383.2		484.8
Prepaid expenses and other current assets	113.4		101.1
Total current assets	4,919.3		4,428.3

PROPERTY AND EQUIPMENT—NET	1,242.7		1,044.4
DEFERRED CONTRACT COSTS	596.9		605.6
DEFERRED TAX ASSETS	998.5		868.8
GOODWILL	127.9		126.5
OTHER INTANGIBLE ASSETS—NET	30.2		35.3
OTHER ASSETS	137.4		150.0
TOTAL ASSETS	$	8,052.9	$	7,258.9
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable	$	132.1	$	204.3
Accrued liabilities	400.6		423.7
Accrued payroll and compensation	217.3		242.3
Deferred revenue	2,975.3		2,848.7
Total current liabilities	3,725.3		3,719.0
DEFERRED REVENUE	2,920.9		2,886.3
LONG-TERM DEBT	993.3		992.3
OTHER LIABILITIES	125.2		124.7
Total liabilities	7,764.7		7,722.3
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY (DEFICIT):
Common stock, $0.001 par value—1,500.0 shares authorized; 764.2 and 761.0 shares issued and outstanding on June 30, 2024 and December 31, 2023, respectively	0.8		0.8
Additional paid-in capital	1,499.0		1,416.4
Accumulated other comprehensive loss	(29.0)		(18.9)
Accumulated deficit	(1,182.6)		(1,861.7)
Total stockholders’ equity (deficit)	288.2		(463.4)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	8,052.9	$	7,258.9

See notes to condensed consolidated financial statements.

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FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, in millions, except per share amounts)


	Three Months Ended				Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
REVENUE:
Product	$	451.9	$	472.6	$	860.8	$	973.3
Service	982.4		820.2		1,926.8		1,581.8
Total revenue	1,434.3		1,292.8		2,787.6		2,555.1
COST OF REVENUE:
Product	155.1		174.5		337.9		368.1
Service	119.9		121.3		241.8		235.5
Total cost of revenue	275.0		295.8		579.7		603.6
GROSS PROFIT:
Product	296.8		298.1		522.9		605.2
Service	862.5		698.9		1,685.0		1,346.3
Total gross profit	1,159.3		997.0		2,207.9		1,951.5
OPERATING EXPENSES:
Research and development	165.4		153.3		338.4		304.4
Sales and marketing	501.3		515.9		1,002.4		994.2
General and administrative	56.6		49.9		111.0		102.7
Gain on intellectual property matter	(1.2)		(1.1)		(2.3)		(2.3)
Total operating expenses	722.1		718.0		1,449.5		1,399.0
OPERATING INCOME	437.2		279.0		758.4		552.5
INTEREST INCOME	38.3		31.6		70.5		52.2
INTEREST EXPENSE	(5.0)		(5.2)		(10.1)		(10.2)
OTHER EXPENSE—NET	(2.2)		(6.2)		(5.1)		(4.2)
INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENTS	468.3		299.2		813.7		590.3
PROVISION FOR INCOME TAXES	76.5		27.6		116.0		48.9
LOSS FROM EQUITY METHOD INVESTMENTS	(12.0)		(5.3)		(18.6)		(27.4)
NET INCOME	$	379.8	$	266.3	$	679.1	$	514.0
Net income per share (Note 8):
Basic	$	0.50	$	0.34	$	0.89	$	0.66
Diluted	$	0.49	$	0.33	$	0.88	$	0.65
Weighted-average shares outstanding:
Basic	763.8		785.0		763.1		784.1
Diluted	769.9		795.9		770.2		794.7

See notes to condensed consolidated financial statements.

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FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in millions)


	Three Months Ended				Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Net income	$	379.8	$	266.3	$	679.1	$	514.0
Other comprehensive loss:
Change in foreign currency translation	(4.2)		(6.7)		(9.4)		(7.5)
Change in unrealized gains (losses) on investments	—		2.1		(0.9)		5.9
Less: tax provision (benefit) related to items of other comprehensive income (loss)	—		0.4		(0.2)		1.3
Other comprehensive loss	(4.2)		(5.0)		(10.1)		(2.9)
Comprehensive income	$	375.6	$	261.3	$	669.0	$	511.1

See notes to condensed consolidated financial statements.

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FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited, in millions)


	Three Months Ended June 30, 2024
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount
BALANCE—March 31, 2024	763.2	$	0.8	$	1,448.9	$	(24.8)	$	(1,562.4)	$	(137.5)
Issuance of common stock in connection with equity incentive plans - net of tax withholding	1.0	—		(13.8)		—		—		(13.8)


Stock-based compensation expense	—	—		63.9		—		—		63.9

Foreign currency translation adjustment	—	—		—		(4.2)		—		(4.2)
Net income	—	—		—		—		379.8		379.8
BALANCE—June 30, 2024	764.2	$	0.8	$	1,499.0	$	(29.0)	$	(1,182.6)	$	288.2



	Three Months Ended June 30, 2023
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
BALANCE—March 31, 2023	784.4	$	0.8	$	1,327.4	$	(18.1)	$	(1,298.7)	$	11.4
Issuance of common stock in connection with equity incentive plans - net of tax withholding	1.2	—		(16.5)		—		—		(16.5)
Stock-based compensation expense	—	—		65.0		—		—		65.0
Net unrealized gain on investments - net of tax	—	—		—		1.7		—		1.7
Foreign currency translation adjustment	—	—		—		(6.7)		—		(6.7)
Net income	—	—		—		—		266.3		266.3
BALANCE—June 30, 2023	785.6	$	0.8	$	1,375.9	$	(23.1)	$	(1,032.4)	$	321.2

See notes to condensed consolidated financial statements.

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	Six Months Ended June 30, 2024
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount
BALANCE—December 31, 2023	761.0	$	0.8	$	1,416.4	$	(18.9)	$	(1,861.7)	$	(463.4)
Issuance of common stock in connection with equity incentive plans - net of tax withholding	3.2	—		(43.6)		—		—		(43.6)
Stock-based compensation expense	—	—		126.2		—		—		126.2
Net unrealized loss on investments - net of tax	—	—		—		(0.7)		—		(0.7)
Foreign currency translation adjustment	—	—		—		(9.4)		—		(9.4)
Net income	—	—		—		—		679.1		679.1
BALANCE—June 30, 2024	764.2	$	0.8	$	1,499.0	$	(29.0)	$	(1,182.6)	$	288.2

	Six Months Ended June 30, 2023
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount
BALANCE—December 31, 2022	781.5	$	0.8	$	1,284.2	$	(20.2)	$	(1,546.4)	$	(281.6)
Issuance of common stock in connection with equity incentive plans - net of tax withholding	4.1	—		(29.6)		—		—		(29.6)
Stock-based compensation expense	—	—		121.3		—		—		121.3
Net unrealized gain on investments - net of tax	—	—		—		4.6		—		4.6
Foreign currency translation adjustment	—	—		—		(7.5)		—		(7.5)
Net income	—	—		—		—		514.0		514.0
BALANCE—June 30, 2023	785.6	$	0.8	$	1,375.9	$	(23.1)	$	(1,032.4)	$	321.2

See notes to condensed consolidated financial statements.

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FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)


	Six Months Ended
	June 30, 2024		June 30, 2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	679.1	$	514.0
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation	126.2		121.3
Amortization of deferred contract costs	144.7		127.9
Depreciation and amortization	57.8		54.9
Amortization of investment discounts	(24.9)		(5.9)
Loss from equity method investments	18.6		27.4
Other	7.0		8.8
Changes in operating assets and liabilities, net of impact of business combination:
Accounts receivable—net	318.9		179.0
Inventory	85.2		(130.2)
Prepaid expenses and other current assets	(12.3)		(35.4)
Deferred contract costs	(136.0)		(168.5)
Deferred tax assets	(130.3)		(161.8)
Other assets	(7.6)		10.8
Accounts payable	(67.2)		(3.6)
Accrued liabilities	(24.9)		168.3
Accrued payroll and compensation	(24.3)		6.0
Other liabilities	0.7		(9.7)
Deferred revenue	161.7		489.3
Net cash provided by operating activities	1,172.4		1,192.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments	(974.3)		(804.6)
Maturities of investments	904.6		445.1
Purchases of property and equipment	(245.0)		(107.1)
Payment made in connection with a business combination, net of cash acquired	(5.7)		—
Other	—		0.1
Net cash used in investing activities	(320.4)		(466.5)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	19.6		29.3
Taxes paid related to net share settlement of equity awards	(63.1)		(59.7)
Other	(0.8)		(1.0)
Net cash used in financing activities	(44.3)		(31.4)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(2.4)		(1.3)
NET INCREASE IN CASH AND CASH EQUIVALENTS	805.3		693.4
CASH AND CASH EQUIVALENTS—Beginning of period	1,397.9		1,682.9
CASH AND CASH EQUIVALENTS—End of period	$	2,203.2	$	2,376.3
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes—net	$	283.2	$	58.6
Operating lease liabilities arising from obtaining right-of-use assets	$	21.6	$	7.3
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units from inventory to property and equipment	$	12.0	$	15.8
Liability for purchase of property and equipment	$	23.0	$	22.0

See notes to condensed consolidated financial statements.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Preparation—The unaudited condensed consolidated financial statements of Fortinet, Inc. and its subsidiaries (collectively, “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2023, contained in our Annual Report on Form 10-K filed with the SEC on February 26, 2024. In the opinion of management, all adjustments, which include normal recurring adjustments, considered necessary for a fair presentation, have been included. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2023 is derived from the audited consolidated financial statements for the year ended December 31, 2023.

The condensed consolidated financial statements include the accounts of Fortinet, Inc. and its subsidiaries. We consolidate all legal entities in which we have an absolute controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

There have been no material changes to our significant accounting policies as of and for the three and six months ended June 30, 2024, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC.

Recent Accounting Standards Not Yet Effective

Segment Reporting

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The amendments are effective for our annual reporting for fiscal year 2024, and for our interim period reporting starting in fiscal year 2025 retrospectively, with early adoption permitted. We are currently evaluating the ASU to determine its impact on our disclosures.

Income Taxes

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The amendments are effective for our annual period beginning fiscal year 2025, with early adoption permitted, and should be applied prospectively. We are currently evaluating the ASU to determine its impact on our disclosures.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. REVENUE RECOGNITION

Disaggregation of Revenue

The following table presents our revenue disaggregated by major product and service lines (in millions):


	Three Months Ended				Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Product	$	451.9	$	472.6	$	860.8	$	973.3
Service:
Security subscription	558.7		457.3		1,095.6		879.0
Technical support and other	423.7		362.9		831.2		702.8
Total service revenue	982.4		820.2		1,926.8		1,581.8
Total revenue	$	1,434.3	$	1,292.8	$	2,787.6	$	2,555.1

Deferred Revenue

During the three and six months ended June 30, 2024, we recognized $764.3 million and $1.62 billion in revenue that was included in the deferred revenue balance as of December 31, 2023, respectively. During the three and six months ended June 30, 2023, we recognized $609.8 million and $1.29 billion in revenue that was included in the deferred revenue balance as of December 31, 2022, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of June 30, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $5.92 billion, which was substantially comprised of deferred security subscription and technical support services revenue that will be recognized in future periods. We expect to recognize approximately $2.99 billion as revenue over the next 12 months and the remainder thereafter.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount, net of an allowance for expected credit losses. We measure expected credit losses of accounts receivable on a collective (pooled) basis, aggregating accounts receivable that are either current or no more than 60 days past due, and aggregating accounts receivable that are more than 60 days past due. We apply a credit-loss percentage to each of the pools that is based on our historical credit losses. We review whether each of our significant accounts receivable that is more than 60 days past due continues to exhibit similar risk characteristics with the other accounts receivable in the pool. If we determine that it does not, we evaluate it for expected credit losses on an individual basis. Expected credit losses are recorded as general and administrative expenses on our condensed consolidated statements of income.

The allowance for credit losses was $5.7 million and $8.2 million as of June 30, 2024 and December 31, 2023, respectively. Provisions, write-offs and recoveries were not material during the six months ended June 30, 2024 and 2023.

Deferred Contract Costs

Amortization of deferred contract costs during the three months ended June 30, 2024 and 2023 were $72.7 million and $65.4 million, respectively. Amortization of deferred contract costs during the six months ended June 30, 2024 and 2023 were $144.7 million and $127.9 million, respectively.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. FINANCIAL INSTRUMENTS AND FAIR VALUE

Available-for-Sale Investments

The following tables summarize our available-for-sale investments (in millions):


	June 30, 2024
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Commercial paper	$	483.1	$	—	$	(0.4)	$	482.7
U.S. government and agency securities	481.2		—		(0.3)		480.9
Corporate debt securities	92.8		—		(0.1)		92.7
Certificates of deposit and term deposits	58.6		—		—		58.6

Total available-for-sale investments	$	1,115.7	$	—	$	(0.8)	$	1,114.9


	December 31, 2023
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Commercial paper	$	401.7	$	0.2	$	(0.1)	$	401.8
U.S. government and agency securities	461.5		0.2		(0.3)		461.4
Corporate debt securities	70.0		0.1		(0.1)		70.0
Certificates of deposit and term deposits	88.2		0.1		—		88.3
Total available-for-sale investments	$	1,021.4	$	0.6	$	(0.5)	$	1,021.5

The following tables show the gross unrealized losses and the related fair values of our available-for-sale investments that have been in a continuous unrealized loss position (in millions):


	June 30, 2024
	Less Than 12 Months				12 Months or Greater				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Commercial paper	$	455.2	$	(0.4)	$	—	$	—	$	455.2	$	(0.4)
U.S. government and agency securities	456.0		(0.3)		—		—		456.0		(0.3)
Corporate debt securities	88.5		(0.1)		—		—		88.5		(0.1)
Total available-for-sale investments	$	999.7	$	(0.8)	$	—	$	—	$	999.7	$	(0.8)


	December 31, 2023
	Less Than 12 Months				12 Months or Greater				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Commercial paper	$	200.8	$	(0.1)	$	—	$	—	$	200.8	$	(0.1)
U.S. government and agency securities	47.1		—		11.7		(0.3)		58.8		(0.3)
Corporate debt securities	21.8		—		26.9		(0.1)		48.7		(0.1)
Total available-for-sale investments	$	269.7	$	(0.1)	$	38.6	$	(0.4)	$	308.3	$	(0.5)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The contractual maturities of our investments were (in millions):


	June 30, 2024		December 31, 2023
Due within one year	$	1,114.9	$	1,021.5
Due within one to three years	—		—
Total	$	1,114.9	$	1,021.5

Available-for-sale investments are reported at fair value, with unrealized gains and losses and the related tax impact included as a separate component of stockholders’ equity (deficit) and in comprehensive income. We do not intend to sell any of the securities in an unrealized loss position and it is not more likely than not that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity.

Realized gains and losses on available-for-sale investments were insignificant in the periods presented.

Marketable Equity Securities

Our marketable equity securities were $21.2 million and $21.0 million as of June 30, 2024 and December 31, 2023. The changes in fair value of our marketable equity securities are recorded in other expense—net on the condensed consolidated statements of income. We recognized a $0.2 million loss and $0.1 million gain during the three and six months ended June 30, 2024, respectively. We recognized a $4.0 million loss and $3.4 million loss during the three and six months ended June 30, 2023, respectively.

Fair Value of Financial Instruments

Fair Value Accounting—We apply the following fair value hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3—Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

We measure the fair value of money market funds, certain U.S. government and agency securities and marketable equity securities using quoted prices in active markets for identical assets. The fair value of all other financial instruments was based on quoted prices for similar assets in active markets, or model-driven valuations using significant inputs derived from or corroborated by observable market data.

We classify investments within Level 1 if quoted prices are available in active markets for identical securities.

We classify items within Level 2 if the investments are valued using model-driven valuations using observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Investments are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assets Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial assets measured at fair value on a recurring basis (in millions):


	June 30, 2024								December 31, 2023
	Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs		Significant Other Unobservable Remaining Inputs		Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs		Significant Other Unobservable Remaining Inputs
			(Level 1)		(Level 2)		(Level 3)				(Level 1)		(Level 2)		(Level 3)
Assets:
Commercial paper	$	514.5	$	—	$	514.5	$	—	$	472.2	$	—	$	472.2	$	—
U.S. government and agency securities	484.4		461.9		22.5		—		501.4		433.3		68.1		—
Corporate debt securities	93.7		—		93.7		—		73.0		—		73.0		—
Certificates of deposit and term deposits	58.6		—		58.6		—		104.8		—		104.8		—
Money market funds	296.4		296.4		—		—		277.1		277.1		—		—

Marketable equity securities	21.2		21.2		—		—		21.0		21.0		—		—
Total	$	1,468.8	$	779.5	$	689.3	$	—	$	1,449.5	$	731.4	$	718.1	$	—

Reported as:
Cash equivalents	$	332.7							$	407.0
Marketable equity securities	21.2								21.0
Short-term investments	1,114.9								1,021.5

Total	$	1,468.8							$	1,449.5

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2024 and year ended December 31, 2023.

4. INVENTORY

Inventory, net of reserves, consisted of (in millions):


	June 30, 2024		December 31, 2023
Raw materials	$	96.0	$	92.1
Work in process	7.3		7.7
Finished goods	279.9		385.0
Inventory	$	383.2	$	484.8

The excess and obsolete inventory reserve was $128.0 million and $89.2 million as of June 30, 2024 and December 31, 2023, respectively. Inventory write-downs related to excess and obsolete inventory were $10.7 million and $28.8 million for the three and six months ended June 30, 2024, respectively, and were $7.2 million and $12.3 million for the three and six months ended June 30, 2023, respectively. These were recorded in cost of product revenue on the condensed consolidated statements of income.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. PROPERTY AND EQUIPMENT—Net

Property and equipment—net consisted of (in millions):


	June 30, 2024		December 31, 2023
Land	$	453.0	$	351.7
Buildings and improvements	713.3		595.5
Computer equipment and software	270.7		261.1
Leasehold improvements	67.0		61.4
Evaluation units	33.3		30.8
Furniture and fixtures	35.9		33.6
Construction-in-progress	65.2		63.3
Total property and equipment	1,638.4		1,397.4
Less: accumulated depreciation	(395.7)		(353.0)
Property and equipment—net	$	1,242.7	$	1,044.4

During the three months ended March 31, 2024, we purchased certain real estate properties in California for a total purchase price of $207.1 million to be used predominantly for research and development and warehousing operations. The purchases were accounted for under the asset acquisition method. The cost of the assets allocated to land, buildings and improvements, and furniture and fixtures were $101.4 million, $104.8 million, and $0.9 million, respectively, based on their relative fair values.

Depreciation expense was $25.9 million and $22.9 million during the three months ended June 30, 2024 and 2023, respectively. Depreciation expense was $51.5 million and $45.7 million during the six months ended June 30, 2024 and 2023, respectively.

6. INVESTMENT IN PRIVATELY HELD COMPANY

Linksys Holdings, Inc.

During 2021, we invested $160.0 million in cash for shares of the Series A Preferred Stock of privately held Linksys Holdings, Inc. (“Linksys”), for a 50.8% ownership interest in outstanding equity of Linksys. As of June 30, 2024 and December 31, 2023, our ownership interest remained the same. Linksys provides router connectivity solutions to the consumer and small business markets.

We have concluded that our investment in Linksys is an in-substance common stock investment and that we do not hold an absolute controlling financial interest in Linksys, but that we have the ability to exercise significant influence over the operating and financial policies of Linksys. Therefore, we determined to account for this investment using the equity method of accounting. We record our share of Linksys’ financial results on a three-month lag basis, with the exception of material transactions or events that occur during the intervening period that materially affect the financial position or results of operations. We determined that there was a basis difference between the cost of our investment in Linksys and the amount of underlying equity in net assets of Linksys.

Due to the presence of impairment indicators, such as a series of operating losses, current expected performance relative to expected performance as of the most recent previous quarter, organizational and go to market changes, performance relative to peers and the results of a discounted cash flows analysis, we evaluated our equity method investment for an other-than-temporary impairment (“OTTI”) during the second quarter of 2024. We considered various factors in determining whether an OTTI has occurred, including Linksys’ financial results, operating history, our ability and intent to hold the investment until its fair value recovers, the discounted cash flows analysis, Linksys’ ability to achieve milestones and any notable operational and strategic changes. After this evaluation, we noted that certain factors were present that indicate that the equity method investment’s decline in value is other-than-temporary, primarily driven by Linksys’ continuous losses, decrease in revenue and operating results, current forecasted results for the foreseeable future as compared to the expected performance as of the most recent previous quarter, and the results of a discounted cash flows analysis. To determine the fair value of our investment in Linksys, we utilized a market approach referencing revenue multiples from publicly traded peer companies and concluded that

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the estimated fair value of the investment was lower than its carrying value. During the three months ended June 30, 2024, we recorded a non-cash charge of $8.0 million related to impairment recognized on our equity method investment in Linksys.

Our loss from our Linksys investment totaled $11.8 million and $18.2 million for the three and six months ended June 30, 2024, respectively, which comprised of our proportionate share of Linksys' financial results as well as the amortization of the basis differences of $3.8 million and $10.2 million for the three and six months ended June 30, 2024, respectively, and an OTTI charge of $8.0 million. Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, totaled $5.3 million and $27.4 million for the three and six months ended June 30, 2023, respectively. These losses and the OTTI charge were recorded in loss from equity method investments on the condensed consolidated statements of income. The carrying amount of our Linksys investment was $24.0 million and $42.2 million as of June 30, 2024 and December 31, 2023, respectively, and the investment was included in other assets on our condensed consolidated balance sheets.

7. GOODWILL AND OTHER INTANGIBLE ASSETS—Net

Goodwill

The following table presents the changes in the carrying amount of goodwill (in millions):


	Amount
Balance—December 31, 2023	$	126.5
Additions due to business combination	3.9
Foreign currency translation adjustments	(2.5)
Balance—June 30, 2024	$	127.9

There were no impairments to goodwill during the six months ended June 30, 2024 or during prior periods.

Other Intangible Assets—Net

The following tables present other intangible assets—net (in millions, except years):


	June 30, 2024
	Weighted-Average Useful Life (in Years)	Gross		Accumulated Amortization		Net
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies	4.1	$	79.0	$	63.5	$	15.5
Customer relationships	6.9	30.2		18.6		11.6
Trade name	10.0	4.3		1.2		3.1
Backlog	1.0	3.4		3.4		—
Total other intangible assets—net		$	116.9	$	86.7	$	30.2


	December 31, 2023
	Weighted-Average Useful Life (in Years)	Gross		Accumulated Amortization		Net
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies	4.4	$	79.4	$	60.6	$	18.8
Customer relationships	7.1	30.4		17.7		12.7
Trade name	10.0	5.0		1.2		3.8
Backlog	1.0	3.9		3.9		—
Total other intangible assets—net		$	118.7	$	83.4	$	35.3

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amortization expense was $3.3 million and $4.5 million during the three months ended June 30, 2024 and 2023, respectively. Amortization expense was $6.3 million and $9.2 million during the six months ended June 30, 2024 and 2023, respectively.

The following table summarizes estimated future amortization expense of finite-lived intangible assets—net (in millions):


	Amount
Years:
2024 (the remainder of 2024)	$	6.2
2025	8.4
2026	4.7
2027	4.3
2028	1.5
Thereafter	5.1
Total	$	30.2

8. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units (“RSUs”), stock options and performance stock units (“PSUs”). Dilutive shares of common stock are determined by applying the treasury stock method.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is (in millions, except per share amounts):


	Three Months Ended				Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Numerator:
Net income	$	379.8	$	266.3	$	679.1	$	514.0

Denominator:
Basic shares:
Weighted-average common stock outstanding-basic	763.8		785.0		763.1		784.1
Diluted shares:
Weighted-average common stock outstanding-basic	763.8		785.0		763.1		784.1
Effect of potentially dilutive securities:
RSUs	1.5		4.1		2.1		3.9
Stock options	4.5		6.6		4.8		6.6
PSUs	0.1		0.2		0.2		0.1
Weighted-average shares used to compute diluted net income per share	769.9		795.9		770.2		794.7
Net income per share
Basic	$	0.50	$	0.34	$	0.89	$	0.66
Diluted	$	0.49	$	0.33	$	0.88	$	0.65

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following weighted-average shares of common stock were excluded from the computation of diluted net income per share for the periods presented, as their effect would have been antidilutive (in millions):


	Three Months Ended		Six Months Ended
	June 30, 2024	June 30, 2023	June 30, 2024	June 30, 2023
RSUs	—	—	—	0.9
Stock options	3.6	3.0	3.4	2.6
PSUs	0.2	—	0.1	—
Total	3.6	3.0	3.4	3.5

9. DEBT

2026 and 2031 Senior Notes

On March 5, 2021, we issued $1.0 billion aggregate principal amount of senior notes (collectively, the “Senior Notes”), consisting of $500.0 million aggregate principal amount of 1.0% notes due March 15, 2026 (the “2026 Senior Notes”) and $500.0 million aggregate principal amount of 2.2% notes due March 15, 2031 (the “2031 Senior Notes”), in an underwritten registered public offering. The Senior Notes are senior unsecured obligations and rank equally with each other in right of payment and with our other outstanding obligations. We may redeem the Senior Notes at any time in whole or in part for cash, at specified redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the 2026 Senior Notes on or after February 15, 2026, or the 2031 Senior Notes on or after December 15, 2030. Interest on the Senior Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2021. As of June 30, 2024 and December 31, 2023, the Senior Notes were recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective contractual terms of these notes using the effective interest method.

The total outstanding debt is summarized below (in millions, except percentages):


	Maturity	Coupon Rate	Effective Interest Rate	June 30, 2024		December 31, 2023
Debt
2026 Senior Notes	March 2026	1.0%	1.3%	$	500.0	$	500.0
2031 Senior Notes	March 2031	2.2%	2.3%	500.0		500.0
Total debt				1,000.0		1,000.0
Less: Unamortized discount and debt issuance costs				6.7		7.7
Total long-term debt				$	993.3	$	992.3

As of June 30, 2024 and December 31, 2023, we accrued interest payable of $4.7 million, and there are no financial covenants with which we must comply. During the three months ended June 30, 2024 and 2023, we recorded $4.5 million of total interest expense in relation to these Senior Notes in each period. During the six months ended June 30, 2024 and 2023, we recorded $9.0 million of total interest expense in relation to these Senior Notes in each period. No interest costs were capitalized for the six months ended June 30, 2024 and 2023, as the costs that qualified for capitalization were not material.

The total estimated fair value of the outstanding Senior Notes was approximately $880.6 million, including accrued and unpaid interest, as of June 30, 2024. The fair value was determined based on observable market prices of identical instruments in less active markets. The estimated fair values are based on Level 2 inputs.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. COMMITMENTS AND CONTINGENCIES

The following table summarizes our inventory purchase commitments as of June 30, 2024 (in millions):


	Total		2024		Thereafter
Inventory purchase commitments	$	566.7	$	500.1	$	66.6

Inventory Purchase Commitments—We purchase components of our inventory from certain suppliers and use several independent contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that allow them to procure inventory based upon criteria as defined by us or establish the parameters defining our requirements. A significant portion of our reported purchase commitments arising from these agreements consists of firm, non-cancelable and unconditional commitments. Certain of these inventory purchase commitments with contract manufacturers and suppliers relate to arrangements to secure supply and pricing for certain product components for multi-year periods. In certain instances, these agreements allow us the option to reschedule and adjust our requirements based on our business needs prior to firm orders being placed.

As of June 30, 2024, we had $566.7 million of non-cancelable inventory purchase commitments with our independent contract manufacturers. We recorded a liability for these purchase commitments for quantities in excess of our future estimated demand forecasts, consistent with the valuation of our excess and obsolete inventory. As of June 30, 2024 and December 31, 2023, the liability for these inventory purchase commitments was $105.2 million and $84.7 million, respectively, and was recorded in accrued liabilities on our condensed consolidated balance sheets. The expense related to such accrued liability for inventory purchase commitments was $7.0 million and $12.0 million during the three months ended June 30, 2024 and 2023, respectively, and was recorded in cost of product revenue on the condensed consolidated statements of income. The expense related to such accrued liability for inventory purchase commitments was $38.6 million and $22.4 million during the six months ended June 30, 2024 and 2023, respectively, and was recorded in cost of product revenue on the condensed consolidated statements of income.

Other Contractual Commitments and Open Purchase Orders—In addition to commitments with contract manufacturers, we have open purchase orders and contractual obligations in the ordinary course of business for which we have not received goods or services. A significant portion of our reported purchase commitments consist of non-cancelable commitments. In certain instances, contractual commitments allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to firm orders being placed. As of June 30, 2024, we had $40.4 million in other contractual commitments having a remaining term in excess of one year that are non-cancelable.

As of June 30, 2024, we had $82.9 million in contractual commitments related to payments for operating leases.

Litigation—We are involved in disputes, litigation, and other legal actions. For lawsuits where we are the defendant, we are in the process of defending these litigation matters, and while there can be no assurances and the outcome of certain of these matters is currently not determinable and not predictable, we currently are unaware of any existing claims or proceedings that we believe are likely to have a material adverse effect on our financial position. There are many uncertainties associated with any litigation and these actions or other third-party claims against us may cause us to incur costly litigation fees, costs and substantial settlement charges, and possibly subject us to damages and other penalties. In addition, the resolution of any intellectual property (“IP”) litigation may require us to make royalty payments, which could adversely affect our gross margins in future periods. If any of those events were to occur, our business, financial condition, results of operations, and cash flows could be adversely affected. Litigation is unpredictable and the actual liability in any such matters may be materially different from our current estimates, which could result in the need to adjust any accrued liability and record additional expenses. We accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss. These accruals are generally based on a range of possible outcomes that require significant management judgement. If no amount within a range is a better estimate than any other, we accrue the minimum amount. Litigation loss contingency accruals associated with outstanding cases were not material as of June 30, 2024, and December 31, 2023.

On March 21, 2019, we were sued by Alorica Inc. (“Alorica”) in Santa Clara County Superior Court in California. Alorica has alleged breach of warranty and misrepresentation claims, which we deny. Fact discovery closed during the quarter ended June 30, 2023 and trial is currently set for September 2024. Although we believe that the ultimate outcome of this matter will not materially impact our financial position, results of operations or cash flows, legal proceedings are subject to inherent uncertainties, and an unfavorable ruling could occur, which may result in a material adverse impact on our business, financial position, results of operations and cash flows. No loss accrual had been recorded as of June 30, 2024 or December 31, 2023 related to this litigation.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Indemnification and Other Matters—We enter into indemnification provisions in the ordinary course of business with other companies such as partners, customers, and vendors, where we agree to indemnify, hold harmless, and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party as a result of our activities, including defending against third-party claims asserting various allegations such as product defects, breach of representations or covenants, and infringement of certain IP rights, which may include patents, copyrights, trademarks or trade secrets, and to pay judgments entered on such claims. In some contracts, our exposure under these indemnification provisions is limited by the terms of the contracts to certain defined limits, such as the total amount paid by our customer under the agreement. However, certain agreements include covenants, penalties and indemnification provisions including and beyond indemnification for third-party claims of IP infringement that could potentially expose us to losses in excess of the amount received under the agreement, and in some instances to potential liability that is not contractually limited. Although from time to time there are indemnification claims asserted against us and currently there are pending indemnification claims, to date there have been no material awards under such indemnification provisions.

Similar to other security companies and companies in other industries, we have experienced and may experience in the future, cybersecurity threats, malicious activity directed against our information technology infrastructure or unauthorized attempts to gain access to our and our customers’ sensitive information and systems. We currently are unaware of any existing claims or proceedings related to these types of matters, including any that we believe are likely to have a material adverse effect on our financial position.

11. EQUITY PLANS AND SHARE REPURCHASE PROGRAM

Stock-Based Compensation Plans

We maintain the Amended and Restated Fortinet, Inc. 2009 Equity Incentive Plan (the “Amended Plan”) pursuant to which we have granted RSUs, stock options and PSUs. As of June 30, 2024, there were a total of 51.2 million shares of common stock available for grant under the Amended Plan.

Restricted Stock Units

The following table summarizes the activity and related information for RSUs for the periods presented below (in millions, except per share amounts):


	Restricted Stock Units Outstanding
	Number of Shares	Weighted-Average Grant Date Fair Value per Share
Balance—December 31, 2023	9.1	$	53.61
Granted	3.0	64.89
Forfeited	(0.5)	56.99
Vested	(2.7)	48.62
Balance—June 30, 2024	8.9	$	58.81

Stock compensation expense is recognized on a straight-line basis over the vesting period of each RSU. As of June 30, 2024, total compensation expense related to unvested RSUs granted to employees and non-employees under the Amended Plan, but not yet recognized, was $477.6 million, with a weighted-average remaining vesting period of 2.7 years.

RSUs settle into shares of common stock upon vesting. Upon the vesting of the RSUs, we net-settle the RSUs and withhold a portion of the shares to satisfy employee withholding tax requirements. The payment of the withheld taxes to the tax authorities is reflected as a financing activity within the condensed consolidated statements of cash flows.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following summarizes the number and value of the shares withheld for employee taxes (in millions):


	Three Months Ended				Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Shares withheld for taxes	0.3		0.4		0.9		1.1
Amount withheld for taxes	$	20.2	$	25.1	$	63.1	$	59.7

Employee Stock Options

The following table summarizes the weighted-average assumptions relating to our employee stock options:


	Three Months Ended				Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Expected term in years	4.5		4.4		4.5		4.4
Volatility	41.9	%	41.0	%	42.8	%	41.9	%
Risk-free interest rate	4.4	%	3.8	%	4.3	%	4.2	%
Dividend rate	—	%	—	%	—	%	—	%

The following table summarizes the stock option activity and related information for the periods presented below (in millions, except exercise prices and contractual life):


	Options Outstanding
	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Balance—December 31, 2023	11.2	$	31.14	3.3	$	315.8
Granted	0.7	65.07
Forfeited	(0.1)	52.93
Exercised	(1.4)	14.25
Balance—June 30, 2024	10.4	$	35.29
Options vested and expected to vest—June 30, 2024	10.4	$	35.29	3.3	$	266.5
Options exercisable—June 30, 2024	7.8	$	27.89	2.6	$	255.5

The aggregate intrinsic value represents the difference between the exercise price of stock options and the quoted market price of our common stock for all in-the-money stock options. Stock compensation expense is recognized on a straight-line basis over the vesting period of each stock option. As of June 30, 2024, total compensation expense related to unvested stock options granted to employees but not yet recognized was $55.7 million, with a weighted-average remaining vesting period of 2.6 years.

Additional information related to our stock options is summarized below (in millions, except per share amounts):


	Three Months Ended				Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Weighted-average fair value per share granted	$	24.93	$	26.55	$	26.79	$	24.41
Intrinsic value of options exercised	$	18.1	$	24.3	$