Fortinet Earnings 2020-06-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

ftnt-20200630

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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, 2020


☐			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.)

899 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:

Common Stock, $0.001 Par Value

FTNT

The Nasdaq Stock Market LLC

(Title of each class)

(Trading Symbol)

(Name of exchange on which registered)

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 July 31, 2020, there were 161,831,584 shares of the registrant’s common stock outstanding.

FORTINET, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2020

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		Page

	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets as of June 3 0 , 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Income for the Three and Six Months Ended Jun e 30 , 2020 and 2019	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30 , 2020 and 2019	3
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30 , 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30 , 2020 and 2019	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	39

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 6.	Exhibits	71
	Exhibit Index	71
	Signatures	72

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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, 2020		December 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	916.4	$	1,222.5
Short-term investments	610.5		843.1
Accounts receivable—net	498.7		544.3
Inventory	126.0		117.9
Prepaid expenses and other current assets	57.1		41.2
Total current assets	2,208.7		2,769.0
LONG-TERM INVESTMENTS	100.4		144.3
PROPERTY AND EQUIPMENT—NET	392.6		344.3
DEFERRED CONTRACT COSTS	263.5		237.0
DEFERRED TAX ASSETS	218.9		232.6
GOODWILL	67.2		67.2
OTHER INTANGIBLE ASSETS—NET	23.4		31.1
OTHER ASSETS	55.9		60.0
TOTAL ASSETS	$	3,330.6	$	3,885.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	107.2	$	96.4
Accrued liabilities	118.2		101.8
Accrued payroll and compensation	110.7		101.8
Deferred revenue	1,275.8		1,173.6
Total current liabilities	1,611.9		1,473.6
DEFERRED REVENUE	1,047.0		962.3
INCOME TAX LIABILITIES	77.3		82.8
OTHER LIABILITIES	50.5		44.9
Total liabilities	2,786.7		2,563.6
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value—300 shares authorized; 161.8 and 171.7 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	0.2		0.2
Additional paid-in capital	1,154.3		1,180.3
Accumulated other comprehensive income	2.5		1.1
Retained earnings (accumulated deficit)	(613.1)		140.3
Total stockholders’ equity	543.9		1,321.9
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,330.6	$	3,885.5

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, 2020			June 30, 2019			June 30, 2020			June 30, 2019
REVENUE:
Product	$	211.9		$	189.9		$	404.2		$	352.6
Service	403.6			331.8			788.2			641.7
Total revenue	615.5			521.7			1,192.4			994.3
COST OF REVENUE:
Product	84.4			82.7			160.7			152.9
Service	50.7			45.6			103.1			88.4
Total cost of revenue	135.1			128.3			263.8			241.3
GROSS PROFIT:
Product	127.5			107.2			243.5			199.7
Service	352.9			286.2			685.1			553.3
Total gross profit	480.4			393.4			928.6			753.0
OPERATING EXPENSES:
Research and development	82.1			67.4			162.4			136.0
Sales and marketing	253.8			226.5			513.8			442.4
General and administrative	28.9			24.3			57.7			48.8
Gain on intellectual property matter	(1.1)			—			(37.9)			—
Total operating expenses	363.7			318.2			696.0			627.2
OPERATING INCOME	116.7			75.2			232.6			125.8
INTEREST INCOME—NET	4.0			11.0			13.2			21.2
OTHER INCOME (EXPENSE)—NET	0.9			(0.4)			(7.1)			(0.9)
INCOME BEFORE INCOME TAXES	121.6			85.8			238.7			146.1
PROVISION FOR INCOME TAXES	9.5			13.1			22.6			14.6
NET INCOME	$	112.1		$	72.7		$	216.1		$	131.5
Net income per share (Note 8):
Basic	$	0.69		$	0.42		$	1.30		$	0.77
Diluted	$	0.68		$	0.42		$	1.27		$	0.75
Weighted-average shares outstanding:
Basic	161.6			171.1			166.1			170.6
Diluted	165.4			175.1			169.8			175.0

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, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Net income	$	112.1	$	72.7	$	216.1	$	131.5
Other comprehensive income:
Change in unrealized gains on investments	7.3		1.5		2.1		2.5
Less: tax provision related to change in unrealized gains on investments	1.7		0.4		0.7		0.7
Other comprehensive income	5.6		1.1		1.4		1.8
Comprehensive income	$	117.7	$	73.8	$	217.5	$	133.3

See notes to condensed consolidated financial statements.

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FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in millions)


	Three Months Ended June 30, 2020
	Common Stock							Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
		Shares			Amount
BALANCE—March 31, 2020	162.6		$	0.2		$	1,128.4	$	(3.1)	$	(589.2)	$	536.3
Issuance of common stock in connection with equity incentive plans - net of tax withholding	0.6		—			(12.9)		—		—		(12.9)
Repurchase and retirement of common stock	(1.4)		—			(10.1)		—		(136.0)		(146.1)
Stock-based compensation expense	—		—			48.9		—		—		48.9
Net unrealized gain on investments - net of tax	—		—			—		5.6		—		5.6
Net income	—		—			—		—		112.1		112.1
BALANCE—June 30, 2020	161.8		$	0.2		$	1,154.3	$	2.5	$	(613.1)	$	543.9



	Three Months Ended June 30, 2019
	Common Stock							Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
		Shares			Amount
BALANCE—March 31, 2019	170.7		$	0.2		$	1,108.1	$	(0.2)	$	(50.0)	$	1,058.1
Issuance of common stock in connection with equity incentive plans - net of tax withholding	0.8		—			(19.9)		—		—		(19.9)
Repurchase and retirement of common stock	(0.5)		—			(3.0)		—		(31.7)		(34.7)
Stock-based compensation expense	—		—			45.0		—		—		45.0
Net unrealized gain on investments - net of tax	—		—			—		1.1		—		1.1
Net income	—		—			—		—		72.7		72.7
BALANCE—June 30, 2019	171.0		$	0.2		$	1,130.2	$	0.9	$	(9.0)	$	1,122.3

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	Six Months Ended June 30, 2020
	Common Stock							Additional Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity
		Shares			Amount
BALANCE—December 31, 2019	171.7		$	0.2		$	1,180.3	$	1.1	$	140.3	$	1,321.9
Issuance of common stock in connection with equity incentive plans - net of tax withholding	1.5		—			(43.2)		—		—		(43.2)
Repurchase and retirement of common stock	(11.4)		—			(76.5)		—		(969.5)		(1,046.0)
Stock-based compensation expense	—		—			93.7		—		—		93.7
Net unrealized gain on investments - net of tax	—		—			—		1.4		—		1.4
Net income	—		—			—		—		216.1		216.1
BALANCE—June 30, 2020	161.8		$	0.2		$	1,154.3	$	2.5	$	(613.1)	$	543.9

	Six Months Ended June 30, 2019
	Common Stock							Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
		Shares			Amount
BALANCE—December 31, 2018	169.8		$	0.2		$	1,068.3	$	(0.8)	$	(57.5)	$	1,010.2
Issuance of common stock in connection with equity incentive plans - net of tax withholding	2.5		—			(18.3)		—		—		(18.3)
Repurchase and retirement of common stock	(1.3)		—			(7.8)		—		(83.1)		(90.9)
Stock-based compensation expense	—		—			88.0		—		—		88.0
Cumulative-effect adjustment from adoption of ASU 2018-02								(0.1)		0.1		—
Net unrealized gain on investments - net of tax	—		—			—		1.8		—		1.8
Net income	—		—			—		—		131.5		131.5
BALANCE—June 30, 2019	171.0		$	0.2		$	1,130.2	$	0.9	$	(9.0)	$	1,122.3

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, 2020		June 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	216.1	$	131.5
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation	93.7		88.0
Amortization of deferred contract costs	64.5		51.0
Depreciation and amortization	35.4		30.9
Amortization of investment premiums (discounts)	(0.4)		(3.0)
Other	5.5		0.5
Changes in operating assets and liabilities:
Accounts receivable—net	44.5		41.5
Inventory	(17.9)		(5.5)
Prepaid expenses and other current assets	(15.2)		(5.4)
Deferred contract costs	(91.1)		(72.4)
Deferred tax assets	13.0		(4.4)
Other assets	0.7		2.4
Accounts payable	9.7		(14.6)
Accrued liabilities	6.5		(13.1)
Accrued payroll and compensation	8.9		(7.9)
Other liabilities	5.6		(2.8)
Deferred revenue	186.9		179.7
Net cash provided by operating activities	566.4		396.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments	(399.3)		(748.1)
Sales of investments	130.0		15.1
Maturities of investments	548.1		384.9
Purchases of property and equipment	(58.5)		(27.5)
Payments made in connection with business combination, net of cash acquired	(3.1)		—
Other	(0.4)		—
Net cash provided by (used in) investing activities	216.8		(375.6)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common stock	(1,046.0)		(94.2)
Proceeds from issuance of common stock	15.7		39.6
Taxes paid related to net share settlement of equity awards	(58.9)		(56.5)
Other	(0.1)		—
Net cash used in financing activities	(1,089.3)		(111.1)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(306.1)		(90.3)
CASH AND CASH EQUIVALENTS—Beginning of period	1,222.5		1,112.4
CASH AND CASH EQUIVALENTS—End of period	$	916.4	$	1,022.1
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Operating lease liabilities arising from obtaining right-of-use assets	$	5.9	$	4.9
Cash paid to settle liability incurred for repurchase of common stock	$	—	$	4.2
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units from inventory to property and equipment	$	10.2	$	9.9
Liability for purchase of property and equipment	$	24.9	$	9.9
Liability incurred for repurchase of common stock	$	—	$	1.0

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 wholly owned 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, 2019, contained in our Annual Report on Form 10-K filed with the SEC on February 26, 2020. In the opinion of management, all adjustments, which includes normal recurring adjustments, considered necessary for a fair presentation have been included. All intercompany balances, transactions and cash flows have been eliminated. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2019 is derived from the audited consolidated financial statements for the year ended December 31, 2019. For 2020, the amounts previously reported as Income taxes payable are included in Accrued liabilities. Prior periods have been reclassified to conform with current period presentation.

The preparation of 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, 2020.

Recently Adopted Accounting Standards

Financial Instruments

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”), which provides guidance on how an entity should measure credit losses on financial instruments. The standard replaces the existing incurred loss model with an expected credit loss model for financial assets measured at amortized cost, including trade receivables, and requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The new approach to estimating credit losses (referred to as the current expected credit losses model) generally accelerates recognition of credit losses. We adopted Topic 326 on January 1, 2020 using the modified retrospective method. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Cloud Computing

In August 2018, the FASB issued ASU 2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other, to determine which implementation costs to capitalize as assets or expense as incurred. We adopted ASU 2018-15 on January 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements in ASC 820, Fair Value Measurement, as part of its disclosure framework project. We adopted ASU 2018-13 on January 1, 2020. The adoption of this standard did not have a material impact on our disclosures.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Price	78.86	EPS	1
Shares	175	P/E	65
MCap	13,793	P/FCF	22
Net Debt	-1,176	EBIT	252
TEV	12,617	TEV/EBIT	50
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-06-30	Filed 2020-08-06
10-Q	2020-03-31	Filed 2020-05-07
10-K	2019-12-31	Filed 2020-02-26
10-Q	2019-09-30	Filed 2019-10-31
10-Q	2019-06-30	Filed 2019-08-01
10-Q	2019-03-31	Filed 2019-05-08
10-K	2018-12-31	Filed 2019-02-27
10-Q	2018-09-30	Filed 2018-11-07
10-Q	2018-06-30	Filed 2018-08-07
10-Q	2018-03-31	Filed 2018-05-08
10-K	2017-12-31	Filed 2018-02-26
10-Q	2017-09-30	Filed 2017-11-02
10-Q	2017-06-30	Filed 2017-08-02
10-Q	2017-03-31	Filed 2017-05-03
10-K	2016-12-31	Filed 2017-03-01
10-Q	2016-09-30	Filed 2016-11-08
10-Q	2016-06-30	Filed 2016-08-05
10-Q	2016-03-31	Filed 2016-05-06
10-K	2015-12-31	Filed 2016-02-26
10-Q	2015-09-30	Filed 2015-11-09
10-Q	2015-06-30	Filed 2015-08-04
10-Q	2015-03-31	Filed 2015-05-01
10-K	2014-12-31	Filed 2015-03-02
10-Q	2014-09-30	Filed 2014-11-06
10-Q	2014-06-30	Filed 2014-08-05
10-Q	2014-03-31	Filed 2014-05-07
10-K	2013-12-31	Filed 2014-03-03
10-Q	2013-09-30	Filed 2013-11-05
10-Q	2013-06-30	Filed 2013-08-06
10-Q	2013-03-31	Filed 2013-05-08
10-K	2012-12-31	Filed 2013-02-27
10-Q	2012-09-30	Filed 2012-10-30
10-Q	2012-06-30	Filed 2012-08-08
10-Q	2012-03-31	Filed 2012-05-07
10-K	2011-12-31	Filed 2012-02-28
10-Q	2011-09-30	Filed 2011-11-04
10-Q	2011-06-30	Filed 2011-08-04
10-Q	2011-03-31	Filed 2011-05-05
10-K	2010-12-31	Filed 2011-02-25
10-Q	2010-09-30	Filed 2010-11-05
10-Q	2010-06-30	Filed 2010-08-06
10-Q	2010-03-31	Filed 2010-05-13
10-K	2009-12-31	Filed 2010-03-05

8-K	2020-08-22	Officers, Exhibits
8-K	2020-08-06	Earnings, Exhibits
8-K	2020-07-17	Amend Bylaw, Other Events, Exhibits
8-K	2020-06-19
8-K	2020-05-06
8-K	2020-04-17
8-K	2020-02-26
8-K	2020-02-06
8-K	2019-12-12
8-K	2019-10-31
8-K	2019-10-28
8-K	2019-10-18
8-K	2019-08-01
8-K	2019-06-21
8-K	2019-05-02
8-K	2019-02-06
8-K	2018-11-01
8-K	2018-10-23
8-K	2018-08-01
8-K	2018-06-22
8-K	2018-06-04
8-K	2018-05-03
8-K	2018-02-02

EX-31.1	ftnt-ex31120200630x10q.htm
EX-31.2	ftnt-ex31220200630x10q.htm
EX-32.1	ftnt-ex32120200630x10q.htm

FTNT 10Q Quarterly Report

Fortinet Earnings 2020-06-30