Fortinet Reports Third Quarter 2012 Financial Results

FTNT-F

Forward-looking Statements
This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding the momentum in our business, growth of our business, and operating margin expansion. Although we attempt to be accurate in making forward-looking statements, it is possible that future circumstances might differ from the assumptions on which such statements are based. Important factors that could cause results to differ materially from the statements herein include the following: general economic risks; specific economic risks in different geographies and among different customer segments; uncertainty regarding increased business and renewals from existing customers; uncertainties around continued success in sales growth and market share gains; failure to convert sales pipeline into final sales; risks associated with successful implementation of multiple integrated software products and other product functionality risks; execution risks around new product development and introductions and innovation; litigation and disputes and the potential cost, distraction and damage to sales and reputation caused thereby; market acceptance of new products and services; the ability to attract and retain personnel; changes in strategy; risks associated with management of growth; lengthy sales and implementation cycles, particularly in larger organizations; technological changes that make our products and services less competitive; risks associated with the adoption of, and demand for, the UTM model in general and by specific customer segments; competition and pricing pressure; and the other risk factors set forth from time to time in our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q and our other filings with the SEC, copies of which are available free of charge at the SEC's website at www.sec.gov or upon request from our investor relations department. All forward-looking statements herein reflect our opinions only as of the date of this release, and we undertake no obligation, and expressly disclaim any obligation, to update forward-looking statements herein in light of new information or future events.

Non-GAAP Financial Measures
We have provided in this release financial information that has not been prepared in accordance with Generally Accepted Accounting Principles (GAAP). We use these non-GAAP financial measures internally in analyzing our financial results and believe they are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial results with other companies in our industry, many of which present similar non-GAAP financial measures to investors.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures below. As previously mentioned, a reconciliation of our non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included below in this press release.

Billings. We define billings as revenue recognized plus the change in deferred revenue from the beginning to the end of the period. We consider billings to be a useful metric for management and investors because billings drive deferred revenue, which is an important indicator of the health and visibility of our business, and has historically represented a majority of the quarterly revenue that we recognize. There are a number of limitations related to the use of billings versus revenue calculated in accordance with GAAP. First, billings include amounts that have not yet been recognized as revenue. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. Management compensates for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with revenues calculated in accordance with GAAP.

Free cash flow. We define free cash flow as net cash provided by operating activities minus capital expenditures. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the acquisition of property and equipment, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. Analysis of free cash flow facilitates management's comparisons of our operating results to competitors' operating results. A limitation of using free cash flow versus the GAAP measure of net cash provided by operating activities as a means for evaluating the Company is that free cash flow does not represent the total increase or decrease in the cash balance from operations for the period because it excludes cash used for capital expenditures. Management compensates for this limitation by providing information about our capital expenditures on the face of the cash flow statement and under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in our most recent Quarterly Report on Form 10-Q and Annual Report on Form 10-K.

Non-GAAP operating income and operating margin. We define non-GAAP operating income as operating income plus stock-based compensation reduced by the income from payments we received from a patent settlement. Non-GAAP operating margin is defined as non-GAAP operating income divided by revenue. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of stock-based compensation expense and patent settlement related income so that our management and investors can compare our recurring core business operating results over multiple periods. There are a number of limitations related to the use of non-GAAP operating income versus operating income calculated in accordance with GAAP. First, non-GAAP operating income excludes stock-based compensation expense. Stock-based compensation has been and will continue to be for the foreseeable future a significant recurring expense in our business. Second, stock-based compensation is an important part of our employees' compensation and impacts their performance. Third, the components of the costs that we exclude in our calculation of non-GAAP operating income may differ from the components that our peer companies exclude when they report their non-GAAP results of operations. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP operating income and evaluating non-GAAP operating income together with operating income calculated in accordance with GAAP.

Non-GAAP net income and diluted net income per share. We define non-GAAP net income as net income plus stock-based compensation expense reduced by the income from payments we received from a patent settlement, less the related tax effects. We define non-GAAP diluted net income per share as non-GAAP net income divided by the weighted-average diluted shares outstanding. We consider these non-GAAP financial measures to be useful metrics for management and investors for the same reasons that we use non-GAAP operating income and non-GAAP operating margin. However, in order to provide a complete picture of our recurring core business operating results, we exclude from non-GAAP net income and non-GAAP diluted net income per share, the tax effects associated with stock-based compensation and the patent settlement. We believe the effective tax rates we used are reasonable estimates of long-term normalized tax rates under our global operating structure. The same limitations described above regarding our use of non-GAAP operating income and non-GAAP operating margin apply to our use of non-GAAP net income and non-GAAP diluted net income per share. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP net income and non-GAAP diluted net income per share and evaluating non-GAAP net income and non-GAAP diluted net income per share together with net income and diluted net income per share calculated in accordance with GAAP.

                               FORTINET, INC.                               
                   CONDENSED CONSOLIDATED BALANCE SHEETS                    
                         (Unaudited, in thousands)                          
                                                                                                                    
                                                                                                                                                        
                                                                                              September  30,      December  31,  
                                                                                                        2012                      2011          
                                                                                              -------------    -------------  
                                        ASSETS                                                                                                    
CURRENT  ASSETS:                                                                                                                          
    Cash  and  cash  equivalents                                        $            75,466    $            71,990  
    Short-term  investments                                                          299,180                318,283  
    Accounts  receivable,  net  of  allowance  for                                                                  
      doubtful  accounts  of  $234  and  $336,                                                                            
      respectively                                                                              89,843                  95,522  
    Inventory                                                                                      26,182                  16,249  
    Deferred  tax  assets                                                                    7,088                    7,578  
    Prepaid  expenses  and  other  current  assets                      16,893                  13,948  
                                                                                              -------------    -------------  
        Total  current  assets                                                          514,652                523,570  
PROPERTY  AND  EQUIPMENT-Net                                                        26,020                    7,966  
DEFERRED  TAX  ASSETS-Non-current                                              50,393                  46,523  
LONG-TERM  INVESTMENTS                                                                315,657                148,414  
OTHER  ASSETS                                                                                      6,546                    8,274  
                                                                                              -------------    -------------  
TOTAL  ASSETS                                                                      $          913,268    $          734,747  
                                                                                              =============    =============  
          LIABILITIES  AND  STOCKHOLDERS'  EQUITY                                                                      
CURRENT  LIABILITIES:                                                                                                                
    Accounts  payable                                                          $            23,160    $            19,768  
    Accrued  liabilities                                                                  19,032                  15,971  
    Accrued  payroll  and  compensation                                        25,940                  24,197  
    Deferred  revenue                                                                      230,562                206,928  
                                                                                              -------------    -------------  
        Total  current  liabilities                                                298,694                266,864  
DEFERRED  REVENUE-Non-current                                                  109,516                  87,905  
OTHER  LIABILITIES                                                                          26,589                  21,624  
                                                                                              -------------    -------------  
        Total  liabilities                                                                434,799                376,393  
                                                                                              -------------    -------------  
STOCKHOLDERS'  EQUITY:                                                                                                              
    Common  stock                                                                                      161                        156  
    Additional  paid-in  capital                                                  388,632                317,026  
    Treasury  stock                                                                            (2,995)                (2,995)
    Accumulated  other  comprehensive  income                              3,577                        402  
    Retained  earnings                                                                      89,094                  43,765  
                                                                                              -------------    -------------  
        Total  stockholders'  equity                                              478,469                358,354  
                                                                                              -------------    -------------  
TOTAL  LIABILITIES  AND  STOCKHOLDERS'  EQUITY          $          913,268    $          734,747  
                                                                                              =============    =============  
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
 

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