Company Quick10K Filing
Fortinet
Price78.86 EPS1
Shares175 P/E65
MCap13,793 P/FCF22
Net Debt-1,176 EBIT252
TEV12,617 TEV/EBIT50
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-06
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 2020-10-29
8-K 2020-08-22
8-K 2020-08-06
8-K 2020-07-17
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

FTNT 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits, Financial Statement Schedules
EX-31.1 ftnt-ex31120190930x10q.htm
EX-31.2 ftnt-ex31220190930x10q.htm
EX-32.1 ftnt-ex32120190930x10q.htm

Fortinet Earnings 2019-09-30

Balance SheetIncome StatementCash Flow
3.62.92.21.40.70.02012201420172020
Assets, Equity
0.60.50.30.20.0-0.12012201420172020
Rev, G Profit, Net Income
0.30.20.0-0.1-0.3-0.42012201420172020
Ops, Inv, Fin

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Table of Contents

 
 
 
 
 
 
 
 
 
 
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 September 30, 2019
or
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. 


Table of Contents

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 October 23, 2019, there were 171,033,736 shares of the registrant’s common stock outstanding.




FORTINET, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2019
Table of Contents
 
 
 
 
 
 
Page
 
 
 
 
PART IFINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 


 


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1.
Financial Statements
FORTINET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in millions, except per share amounts)
 
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,175.5

 
$
1,112.4

Short-term investments
764.8

 
537.2

Accounts receivable—net
384.1

 
444.5

Inventory
99.2

 
90.0

Prepaid expenses and other current assets
42.6

 
36.8

Total current assets
2,466.2

 
2,220.9

LONG-TERM INVESTMENTS
204.2

 
67.0

PROPERTY AND EQUIPMENT—NET
305.5

 
271.4

DEFERRED CONTRACT COSTS
217.4

 
182.6

DEFERRED TAX ASSETS
243.7

 
255.0

GOODWILL
38.2

 
38.2

OTHER INTANGIBLE ASSETS—NET
14.0

 
22.1

OTHER ASSETS
56.4

 
20.8

TOTAL ASSETS
$
3,545.6

 
$
3,078.0

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
85.9

 
$
86.4

Accrued liabilities
90.4

 
77.5

Accrued payroll and compensation
90.4

 
98.4

Income taxes payable
11.6

 
28.2

Deferred revenue
1,063.6

 
965.9

Total current liabilities
1,341.9

 
1,256.4

DEFERRED REVENUE
882.0

 
720.9

INCOME TAX LIABILITIES
83.1

 
77.5

OTHER LIABILITIES
38.2

 
13.0

Total liabilities
2,345.2

 
2,067.8

COMMITMENTS AND CONTINGENCIES (Note 11)


 


STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $0.001 par value—300 shares authorized; 171.3 and 169.8 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
0.2

 
0.2

Additional paid-in capital
1,152.6

 
1,068.3

Accumulated other comprehensive income (loss)
1.1

 
(0.8
)
Retained earnings (accumulated deficit)
46.5

 
(57.5
)
Total stockholders’ equity
1,200.4

 
1,010.2

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,545.6

 
$
3,078.0

See notes to condensed consolidated financial statements.

1

Table of Contents

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in millions, except per share amounts)
 
 
Three Months Ended
 
Nine Months Ended
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
REVENUE:
 
 
 
 
 
 
 
Product
$
197.1

 
$
164.5

 
$
549.7

 
$
473.6

Service
350.4

 
289.4

 
992.1

 
820.6

Total revenue
547.5

 
453.9

 
1,541.8

 
1,294.2

COST OF REVENUE:
 
 
 
 
 
 
 
Product
79.0

 
72.0

 
231.9

 
204.1

Service
45.1

 
39.6

 
133.5

 
117.8

Total cost of revenue
124.1

 
111.6

 
365.4

 
321.9

GROSS PROFIT:
 
 
 
 
 
 
 
Product
118.1

 
92.5

 
317.8

 
269.5

Service
305.3

 
249.8

 
858.6

 
702.8

Total gross profit
423.4

 
342.3

 
1,176.4

 
972.3

OPERATING EXPENSES:
 
 
 
 
 
 
 
Research and development
69.9

 
58.7

 
205.9

 
179.0

Sales and marketing
227.4

 
198.3

 
669.8

 
576.4

General and administrative
26.1

 
22.5

 
74.9

 
71.0

Total operating expenses
323.4

 
279.5

 
950.6

 
826.4

OPERATING INCOME
100.0

 
62.8

 
225.8

 
145.9

INTEREST INCOME
11.4

 
6.9

 
32.6

 
17.2

OTHER INCOME (EXPENSE)—NET
(6.0
)
 
0.9

 
(6.9
)
 
(4.3
)
INCOME BEFORE INCOME TAXES
105.4

 
70.6

 
251.5

 
158.8

PROVISION FOR INCOME TAXES
25.6

 
11.9

 
40.2

 
9.2

NET INCOME
$
79.8

 
$
58.7

 
$
211.3

 
$
149.6

Net income per share (Note 9):
 
 
 
 
 
 
 
Basic
$
0.47

 
$
0.35

 
$
1.24

 
$
0.89

Diluted
$
0.46

 
$
0.33

 
$
1.21

 
$
0.86

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
171.3

 
169.8

 
170.9

 
168.7

Diluted
174.8

 
175.7

 
174.9

 
173.7

See notes to condensed consolidated financial statements.

2

Table of Contents

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in millions)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Net income
$
79.8

 
$
58.7

 
$
211.3

 
$
149.6

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in unrealized gains (losses) on investments
0.2

 
0.5

 
2.7

 
(0.1
)
Less: tax provision related to change in unrealized gains (losses) on investments

 
0.1

 
0.7

 
0.1

Other comprehensive income (loss)
0.2

 
0.4

 
2.0

 
(0.2
)
Comprehensive income
$
80.0

 
$
59.1

 
$
213.3

 
$
149.4


See notes to condensed consolidated financial statements.

3

Table of Contents

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in millions)

 
Three Months Ended September 30, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive Income
 
Retained Earnings (Accumulated Deficit)
 
Total
Stockholders’
Equity
Shares
 
Amount
 
BALANCE—June 30, 2019
171.0

 
$
0.2

 
$
1,130.2

 
$
0.9

 
$
(9.0
)
 
$
1,122.3

Issuance of common stock in connection with equity incentive plans - net of tax withholding
0.6

 

 
(17.8
)
 

 

 
(17.8
)
Repurchase and retirement of common stock
(0.3
)
 

 
(2.2
)
 

 
(24.3
)
 
(26.5
)
Stock-based compensation expense

 

 
42.4

 

 

 
42.4

Net unrealized gain on investments - net of tax

 

 

 
0.2

 

 
0.2

Net income

 

 

 

 
79.8

 
79.8

BALANCE—September 30, 2019
171.3

 
$
0.2

 
$
1,152.6

 
$
1.1

 
$
46.5

 
$
1,200.4

 
 
Three Months Ended September 30, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholders’
Equity
Shares
 
Amount
 
BALANCE—June 30, 2018
169.0

 
$
0.2

 
$
996.1

 
$
(1.4
)
 
$
(214.7
)
 
$
780.2

Issuance of common stock in connection with equity incentive plans - net of tax withholding
1.3

 

 
9.1

 

 

 
9.1

Repurchase and retirement of common stock

 

 

 

 

 

Stock-based compensation expense

 

 
43.2

 

 

 
43.2

Net unrealized gain on investments - net of tax

 

 

 
0.4

 

 
0.4

Net income

 

 

 

 
58.7

 
58.7

BALANCE—September 30, 2018
170.3

 
$
0.2

 
$
1,048.4

 
$
(1.0
)
 
$
(156.0
)
 
$
891.6



4

Table of Contents

 
Nine Months Ended September 30, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Retained Earnings (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
3.1

 

 
(36.1
)
 

 

 
(36.1
)
Repurchase and retirement of common stock
(1.6
)
 

 
(10.0
)
 

 
(107.4
)
 
(117.4
)
Stock-based compensation expense

 

 
130.4

 

 

 
130.4

Cumulative-effect adjustment from adoption of ASU 2018-02

 

 

 
(0.1
)
 
0.1

 

Net unrealized gain on investments - net of tax

 

 

 
2.0

 

 
2.0

Net income

 

 

 

 
211.3

 
211.3

BALANCE—September 30, 2019
171.3

 
$
0.2

 
$
1,152.6

 
$
1.1

 
$
46.5

 
$
1,200.4

 
 
Nine Months Ended September 30, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholders’
Equity
Shares
 
Amount
 
BALANCE—December 31, 2017
167.9

 
$
0.2

 
$
909.6

 
$
(0.8
)
 
$
(319.6
)
 
$
589.4

Issuance of common stock in connection with equity incentive plans - net of tax withholding
4.9

 

 
32.3

 

 

 
32.3

Repurchase and retirement of common stock
(2.5
)
 

 
(13.8
)
 

 
(103.3
)
 
(117.1
)
Stock-based compensation expense

 

 
120.3

 

 

 
120.3

Cumulative effect adjustments from adoption of ASC 606

 

 

 

 
117.3

 
117.3

Net unrealized gain on investments - net of tax

 

 

 
(0.2
)
 

 
(0.2
)
Net income

 

 

 

 
149.6

 
149.6

BALANCE—September 30, 2018
170.3

 
$
0.2

 
$
1,048.4

 
$
(1.0
)
 
$
(156.0
)
 
$
891.6


See notes to condensed consolidated financial statements.

5

Table of Contents

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
 
Nine Months Ended
 
September 30,
2019
 
September 30,
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
211.3

 
$
149.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation
130.4

 
120.3

Amortization of deferred contract costs
78.5

 
66.3

Depreciation and amortization
45.9

 
41.0

Amortization of investment premiums, net of accretion of purchase discounts
(4.7
)
 

Other
5.0

 
(1.7
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable—net
60.5

 
38.0

Inventory
(25.2
)
 
(19.0
)
Prepaid expenses and other current assets
(6.3
)
 
1.8

Deferred contract costs
(113.1
)
 
(98.8
)
Deferred tax assets
10.6

 
(19.1
)
Other assets
(0.8
)
 
(3.3
)
Accounts payable
(6.2
)
 
(4.9
)
Accrued liabilities
(5.6
)
 
(2.0
)
Accrued payroll and compensation
(9.5
)
 
(8.6
)
Other liabilities
(1.0
)
 
(2.8
)
Deferred revenue
258.8

 
209.9

Income taxes payable
(11.0
)
 
(8.0
)
Net cash provided by operating activities
617.6

 
458.7

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investments
(1,072.4
)
 
(405.2
)
Sales of investments
19.7

 
39.6

Maturities of investments
695.0

 
405.6

Purchases of property and equipment
(45.0
)
 
(41.4
)
Payments made in connection with business combination, net of cash acquired

 
(6.0
)
Net cash used in investing activities
(402.7
)
 
(7.4
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repurchase and retirement of common stock
(117.6
)
 
(117.1
)
Proceeds from issuance of common stock
41.8

 
81.6

Taxes paid related to net share settlement of equity awards
(76.0
)
 
(48.0
)
Payments of debt assumed in connection with business combination

 
(9.5
)
Net cash used in financing activities
(151.8
)
 
(93.0
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
63.1

 
358.3

CASH AND CASH EQUIVALENTS—Beginning of period
1,112.4

 
811.0

CASH AND CASH EQUIVALENTS—End of period
$
1,175.5

 
$
1,169.3

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Operating lease liabilities arising from obtaining right-of-use assets
$
12.6

 
$

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
$
16.3

 
$
16.2

Liability for purchase of property and equipment and asset retirement obligations
$
20.1

 
$
6.7

Liability incurred for repurchase of common stock
$
4.0

 
$

See notes to condensed consolidated financial statements.

6

Table of Contents

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, 2018, contained in our Annual Report on Form 10-K filed with the SEC on February 27, 2019. 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 nine months ended September 30, 2019 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, 2018 is derived from the audited consolidated financial statements for the year ended December 31, 2018.

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 nine months ended September 30, 2019, except for the accounting policies for leases that were updated as a result of adopting Accounting Standards Update (“ASU”) 2016-02—Leases (Topic 842) (“Topic 842”). For more information, refer to the “Recently Adopted Accounting Standards” and Note 10.

Recently Adopted Accounting Standards

Leases

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Topic 842, which requires the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases on the condensed consolidated balance sheet. We adopted Topic 842 and its related amendments as of January 1, 2019 using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. We elected the package of practical expedients permitted under the transition guidance, which allowed us to waive reassessing the lease classification for any expired or existing leases, the initial direct costs for any existing leases and whether any expired or existing contracts contained leases.

Under the new guidance, we determine if an arrangement contains a lease and the classification of that lease, if applicable, at inception or upon modification of a contract. We have elected to not recognize a lease liability or ROU asset for short-term leases (leases that, at the commencement date, have a lease term of twelve months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). We have elected to not allocate the contract consideration for operating lease contracts with lease and non-lease components, and account for the lease and non-lease components as a single lease component. ROU assets represent our right to use an underlying asset for the lease term. Lease liabilities represent our obligation to make lease payments under the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The implicit rate within our operating leases is generally not determinable and therefore we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using indicative bank borrowing rates, adjusted for various factors including level of collateralization, term and currency to align with the terms of a lease. The operating lease ROU asset also includes any lease prepayments, net of lease incentives. Certain leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option.


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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The primary impact of adopting Topic 842 was the recognition of ROU assets and lease liabilities for operating leases of $39.1 million and $40.6 million, respectively, on January 1, 2019, which included reclassifying prepaid rent and deferred rent as a component of the ROU asset. Topic 842 did not have a material impact on our condensed consolidated statements of income and cash flows.

The ROU assets and the short-term and long-term lease liabilities from our operating leases are included in other assets, accrued liabilities and other liabilities in our condensed consolidated balance sheets, respectively. Our accounting for finance leases (formerly referred to as capital leases prior to the adoption of Topic 842) remains substantially unchanged. Finance leases are not material to our condensed consolidated financial statements.

Lease expense for lease payments for our operating leases is recognized on a straight-line basis over the term of the lease.

Comprehensive Income

In February 2018, the FASB issued ASU 2018-02—Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “2017 Tax Act”) from accumulated other comprehensive income to retained earnings. We adopted ASU 2018-02 on January 1, 2019 and elected to reclassify $0.1 million of stranded tax effects as of that date.

Stock Compensation

In June 2018, the FASB issued ASU 2018-07—Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees subject to certain exceptions. ASU 2018-07 expands the scope of Accounting Standards Codification (“ASC”) Topic 718, Compensation—Stock Compensation (“ASC 718”), to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC 505, Equity, by moving it to ASC 718. We adopted ASU 2018-07 on January 1, 2019. ASU 2018-07 did not have a material impact on our condensed consolidated financial statements.

Recent Accounting Standards Not Yet Effective

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 ASC Topic 350, Intangibles—Goodwill and Other, to determine which implementation costs to capitalize as assets or expense as incurred. Companies can choose to adopt the ASU 2018-15 prospectively or retrospectively. ASU 2018-15 is effective for us beginning January 1, 2020, and early adoption is permitted. We are currently evaluating the impact of ASU 2018-15 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. ASU 2018-13 is effective for us beginning January 1, 2020. The amendments in ASU 2018-13 that relate to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments in ASU 2018-13 should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. We are currently assessing the impact the new guidance will have on our disclosures.

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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



Financial Instruments

In June 2016, the FASB issued ASU 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and in November 2018, the FASB issued ASU 2018-19—Codification Improvements to Topic 326, Financial Instruments—Credit Losses, as a subsequent amendment to the initial guidance (collectively, Topic 326). In April 2019, the FASB issued ASU 2019-04—Codification Improvements to Topic 326: Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and in May 2019, the FASB issued ASU 2019-05—Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. Topic 326 requires a financial asset (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. The new approach to estimating credit losses (referred to as the current expected credit losses model) generally accelerates recognition of credit losses. We are in the process of determining the changes needed to our valuation model for trade receivables, and we are reviewing our process to identify credit-related losses on available-for-sale investments. We also expect the new guidance to expand our related financial statement disclosures. The new guidance is effective for us beginning on January 1, 2020, and early adoption is permitted. We are currently assessing the impact of the new guidance on our condensed consolidated financial statements.

2.     REVENUE RECOGNITION

Our revenue consists of product and service revenue. Product revenue is generated by sales of our FortiGate products and other hardware and software solutions. Service revenue relates to sales of our FortiGuard security subscription, FortiCare technical support services and other services.

Disaggregation of Revenue

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Product
$
197.1

 
$
164.5

 
$
549.7

 
$
473.6

Service:
 
 
 
 
 
 
 
   Security subscription
192.8

 
157.0

 
545.5

 
440.7

   Technical support and other
157.6

 
132.4

 
446.6

 
379.9

      Total service revenue
350.4

 
289.4

 
992.1

 
820.6

Total revenue
$
547.5

 
$
453.9

 
$
1,541.8

 
$
1,294.2



Deferred Revenue

During the three months ended September 30, 2019 and September 30, 2018, we recognized $211.6 million and $173.0 million in revenue that was included in the deferred revenue balance as of December 31, 2018 and December 31, 2017, respectively. During the nine months ended September 30, 2019 and September 30, 2018, we recognized $752.2 million and $615.3 million in revenue that was included in the deferred revenue balance as of December 31, 2018 and December 31, 2017, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.95 billion, which was substantially comprised of deferred security subscription and technical support services revenue. We expect to recognize approximately $1.06 billion as revenue over the next 12 months and the remainder thereafter.


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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. Trade accounts receivable are reduced by an allowance for doubtful accounts which is determined based on our assessment of the collectability of customer accounts. The allowance for doubtful accounts was $0.8 million and $0.9 million as of September 30, 2019 and December 31, 2018, respectively.

Deferred Contract Costs

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The amortization of deferred contract costs is included in sales and marketing expense in our condensed consolidated statements of income. Amortization of deferred contract costs during the three months ended September 30, 2019 and September 30, 2018 were $27.5 million and $23.2 million, respectively. Amortization of deferred contract costs during the nine months ended September 30, 2019 and September 30, 2018 were $78.5 million and $66.3 million, respectively.

3.
FINANCIAL INSTRUMENTS AND FAIR VALUE

The following tables summarize our investments (in millions):
 
 
September 30, 2019
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Corporate debt securities
$
541.5

 
$
1.2

 
$
(0.2
)
 
$
542.5

Commercial paper
132.8

 
0.1

 

 
132.9

U.S. government and agency securities
221.3

 
0.3

 

 
221.6

Certificates of deposit and term deposits (1)
72.0

 

 

 
72.0

Total available-for-sale securities
$
967.6

 
$
1.6

 
$
(0.2
)
 
$
969.0

 
 
 
 
 
 
 
 
 
December 31, 2018
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Corporate debt securities
$
299.5

 
$

 
$
(1.2
)
 
$
298.3

Commercial paper
102.5

 

 

 
102.5

Certificates of deposit and term deposits (1)
145.8

 

 

 
145.8

U.S. government and agency securities
57.7

 

 
(0.1
)
 
57.6

Total available-for-sale securities
$
605.5

 
$

 
$
(1.3
)
 
$
604.2

 
 
 
 
 
 
 
 
(1) The majority of our certificates of deposit and term deposits are foreign deposits.


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

 
September 30, 2019
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Corporate debt securities
$
67.3

 
$
(0.1
)
 
$
35.9

 
$
(0.1
)
 
$
103.2

 
$
(0.2
)



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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


 
December 31, 2018
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Corporate debt securities
$
150.1

 
$
(0.2
)
 
$
93.5

 
$
(1.0
)
 
$
243.6

 
$
(1.2
)
Commercial paper
75.6

 
(0.1
)
 

 

 
75.6

 
(0.1
)
Certificates of deposit and term deposits
51.7

 

 

 

 
51.7

 

U.S. government and agency securities
39.0

 

 
3.5

 

 
42.5

 

Total available-for-sale securities
$
316.4

 
$
(0.3
)
 
$
97.0

 
$
(1.0
)