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Fortinet Reports First Quarter 2016 Financial Results

The following excerpt is from the company's SEC filing.

Fortinet’s Security Fabric Offerings and Strong Execution Drive Revenue Growth of

Year Over Year

Billings of

$330.5 million

year over year

Revenue of

$284.6 million

Non-GAAP diluted net income per share of

Cash flow from operations of

$100.6 million

Free cash flow of

$70.6 million

Cash, cash equivalents and investments of

$1.19 billion

Deferred revenue of

$837.2 million

- Fortinet® (NASDAQ: FTNT), a global leader in high performance cyber security sol utions, today announced financial results for the first quarter ended March 31, 2016.

“During the first quarter, Fortinet executed very well and outperformed across all key metrics,” said Ken Xie, founder, chairman and chief executive officer. “The increasing complexity of the IT security landscape is driving customer adoption of broad, integrated platforms, which has been our vision from the company’s inception. Fortinet’s Security Fabric is a strategic asset, since it allows customers to protect and gain intelligence on all points in the network - from IoT to cloud - through a unified operating system and management platform

This, along with recently announced products like our FortiGate-6000E Series of high-performance systems, strengthens our competitive position, expands our market opportunity, and helps to drive continued growth in 2016 and beyond

Financial Highlights for the First Quarter of 2016

Total billings were

for the first quarter of 2016, an increase of

compared to

$254.3 million

in the same quarter of 2015.

Revenue:

Total revenue was

$212.9 million

in the same quarter of 2015. Within total revenue, product revenue was

$124.6 million

$97.5 million

the same quarter of 2015. Service revenue was

$160.0 million

$115.4 million

Deferred Revenue:

Total deferred revenue was

as of March 31, 2016, an increase of

$45.9 million

$791.3 million

as of December 31, 2015.

Cash and Cash Flow

As of March 31, 2016, cash, cash equivalents and investments were

, compared to

$1.16 billion

as of December 31, 2015. In the first quarter of 2016, cash flow from operations was

$64.6 million

in the same quarter of 2015. Free cash flow

during the first quarter of 2016 compared to

$59.7 million

GAAP Operating Income or Loss:

GAAP operating loss was

$5.7 million

for the first quarter of 2016, representing a GAAP operating margin of

. GAAP operating income was

$0.9 million

for the same quarter of 2015, representing a GAAP operating margin of

Non-GAAP operating income was

$30.1 million

for the first quarter of 2016, representing a non-GAAP operating margin of

. Non-GAAP operating income was

$20.1 million

for the same quarter of 2015, representing a non-GAAP operating margin of

GAAP Net Income or Loss and Diluted Net Income or Loss Per Share:

GAAP net loss was

$3.4 million

for the first quarter of 2016, compared to GAAP net income of

$1.6 million

for the same quarter of 2015. GAAP diluted net loss per share was

for the first quarter of 2016, compared to GAAP diluted net income per share of

Net Income and Diluted Net Income Per Share

Non-GAAP net income was

for the first quarter of 2016, compared to non-GAAP net income of

$13.5 million

for the same quarter of 2015. Non-GAAP diluted net income per share was

A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Measures.”

During the first quarter of 2016, we repurchased $50.0 million of our common stock under our share repurchase program. During the first quarter of 2015, there were no shares repurchased under our repurchase program.

Conference Call Details

Fortinet will host a conference call today, April 26, 2016, at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss its financial results. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 82225827. A live webcast of the conference call and supplemental slides will be accessible from the Investor Relations page of Fortinet's website at

http://investor.fortinet.com

and a replay will be archived and accessible at

http://investor.fortinet.com/events.cfm

. A replay of this conference call can also be accessed through May 3, 2016, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 82225827

Following Fortinet's financial results conference call, the Company will host an additional question-and-answer session at 3:30 p.m. Pacific Time (6:30 p.m. Eastern Time) to provide an

opportunity for financial analysts and investors to ask more detailed questions. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 82229345

This follow-up call will be webcast live and accessible at

, and a replay will be archived and available after the call at

. A replay of this conference call will also be available through May 3, 2016 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 82229345

About Fortinet

www.fortinet.com

Fortinet (NASDAQ: FTNT) protects the most valuable assets of some of the largest enterprise, service provider and government organizations across the globe. The company’s fast, secure and global cyber security solutions provide broad, high-performance protection against dynamic security threats while simplifying the IT infrastructure. They are strengthened by the industry’s highest level of threat research, intelligence and analytics. Unlike pure-play network security providers, Fortinet can solve organizations’ most important security challenges, whether in networked, application or mobile environments - be it virtualized/cloud or physical. More than 270,000 customers worldwide, including some of the largest and most complex organizations, trust Fortinet to protect their brands. Learn more at

www.fortinet.com, the Fortinet Blog or FortiGuard Labs

Copyright © 2016 Fortinet, Inc. All rights reserved. The symbols ® and ™ denote respectively federally registered trademarks and unregistered trademarks of Fortinet, Inc., its subsidiaries and affiliates. Fortinet's trademarks include, but are not limited to, the following: Fortinet, FortiGate, FortiGuard, FortiManager, FortiMail, FortiClient, FortiCloud, FortiCare, FortiAnalyzer, FortiReporter, FortiOS, FortiASIC, FortiWiFi, FortiSwitch, FortiVoIP, FortiBIOS, FortiLog, FortiResponse, FortiCarrier, FortiScan, FortiAP, FortiDB, FortiVoice and FortiWeb. Other trademarks belong to their respective owners.

FTNT-F

Forward-looking Statements

This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding market adoption of cybersecurity and Fortinet’s future growth potential. 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; global economic conditions and foreign currency risks; increasing competitiveness in the security market; the dynamic nature of the security market; specific economic risks worldwide and 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; longer sales cycles, particularly for larger enterprise customers; 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 and market acceptance of new products; 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, our products and services in general and

by specific customer segments; competition and pricing pressure; risks related to integrating acquisitions; 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

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). These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. 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 peer companies, 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 provided in the financial statement tables below.

Billings.

We define billings as revenue recognized in accordance with GAAP plus the change in deferred revenue from the beginning to the end of the period less any deferred revenue balances acquired from business combination(s) during the period. We consider billings to be a useful metric for management and investors because billings drives future revenue, which is an important indicator of the health and viability of our business. There are a number of limitations related to the use of billings instead of GAAP revenue. 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 accounts for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with GAAP revenue.

Free cash flow.

We define free cash flow as net cash provided by operating activities minus capital expenditures such as purchases of property and equipment. 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, repurchasing outstanding common stock, and strengthening the balance sheet. Analysis of free cash flow facilitates management

s comparison of our operating results to those of our peer companies. A limitation of using free cash flow rather than the GAAP measure of net cash provided by operating activities as a means for evaluating liquidity is that free cash flow does not represent the total increase or decrease in the cash, cash equivalents and investments balance for the period because it excludes cash provided by or used for other investing and financing activities. Management accounts for this limitation by providing information about our capital expenditures and other investing and financing activities 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 or loss plus stock-based compensation, business acquisition-related charges, including inventory fair value adjustment amortization and other purchase accounting adjustments, impairment and amortization of acquired intangible assets, restructuring charges, expenses associated with the implementation of a new Enterprise Resource Planning (ERP) system, and, when applicable, any other significant non-recurring items in a given quarter. Non-GAAP operating margin is defined as non-GAAP operating income divided by GAAP revenue. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the items noted above 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 instead of operating income or loss calculated in accordance with GAAP. First, non-GAAP operating income excludes the items noted above. 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 may impact their performance. Third, the components of the costs that we exclude from our calculation of non-GAAP operating income may differ from the components that peer companies exclude when they report their non-GAAP results of operations. Management accounts 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 or loss calculated in accordance with GAAP.

Non-GAAP net income and diluted net income per share.

We define non-GAAP net income as net income or loss plus the items noted above under non-GAAP operating income and operating margin, adjusted for the impact of the tax adjustment, if any required, resulting in an effective tax rate on a non-GAAP basis, which often differs from the GAAP effective tax rate. 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 include in non-GAAP net income and non-GAAP diluted net income per share, the tax adjustment required resulting in an effective tax rate on a non-GAAP basis, which often differs from the GAAP tax rate. We believe the effective tax rates we used are reasonable estimates of normalized tax rates for our current and prior fiscal years 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 account 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 or loss and diluted net income or loss per share calculated in accordance with GAAP.

FORTINET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

March 31,

December 31,

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

568,008

543,277

Short-term investments

384,591

348,074

Accounts receivable—net

220,135

259,563

Inventory

78,239

83,868

Prepaid expenses and other current assets

34,728

35,761

Total current assets

1,285,701

1,270,543

LONG-TERM INVESTMENTS

241,888

272,959

DEFFERRED TAX ASSETS

131,696

119,216

PROPERTY AND EQUIPMENT—net

115,782

91,067

OTHER INTANGIBLE ASSETS—net

16,457

17,640

GOODWILL

OTHER ASSETS

15,305

14,393

TOTAL ASSETS

1,811,521

1,790,510

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable

47,955

61,500

Accrued liabilities

33,543

33,028

Accrued payroll and compensation

58,165

61,111

Income taxes payable

538,449

514,652

Total current liabilities

687,342

678,670

DEFERRED REVENUE

298,739

276,651

INCOME TAXES LIABILITIES

65,163

60,624

OTHER LIABILITIES

17,874

19,188

Total liabilities

1,069,118

1,035,133

STOCKHOLDERS' EQUITY:

Common stock

Additional paid-in capital

718,849

687,658

Accumulated other comprehensive income (loss)

Retained earnings

23,089

68,481

Total stockholders’ equity

742,403

755,377

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

Three Months Ended

REVENUE:

Product

124,572

97,509

160,004

115,377

284,576

212,886

COST OF REVENUE:

Product

49,359

41,368

28,390

22,234

Total cost of revenue

77,749

63,602

GROSS PROFIT:

75,213

56,141

131,614

93,143

Total gross profit

206,827

149,284

OPERATING EXPENSES:

Research and development

44,966

35,816

Sales and marketing

147,403

100,609

General and administrative

19,802

11,961

Restructuring charges

Total operating expenses

212,499

148,386

OPERATING INCOME (LOSS)

(5,672

INTEREST INCOME

OTHER EXPENSE—net

(1,312

INCOME (LOSS) BEFORE INCOME TAXES

(5,238

PROVISION FOR (BENEFIT FROM) INCOME TAXES

(1,809

NET INCOME (LOSS)

(3,429

Net income (loss) per share:

Weighted-average shares outstanding:

171,745

168,077

173,720

Includes stock-based compensation as follows:

Cost of product revenue

Cost of service revenue

17,114

30,881

18,922

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Other comprehensive income—net of taxes:

Unrealized gains on investments

Tax provision related to items of other comprehensive income

Comprehensive income (loss)

(2,202

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

10,550

Amortization of investment premiums

18,880

Other non-cash items—net

Changes in operating assets and liabilities:

38,920

23,621

(6,296

Deferred tax assets

(13,141

(7,918

(1,203

Other assets

(11,426

(11,305

(3,450

(2,945

(3,149

Other liabilities

(1,332

(1,569

46,106

40,696

Net cash provided by operating activities

100,591

64,619

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of investments

(115,672

(120,991

Sales of investments

Maturities of investments

108,557

135,363

Purchases of property and equipment

(29,956

(4,927

Net cash provided by (used in) investing activities

(34,204

16,124

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of common stock

17,785

28,955

Taxes paid related to net share settlement of equity awards

(9,441

(6,600

Repurchase and retirement of common stock

(50,000

Net cash provided by (used in) financing activities

(41,656

22,355

NET INCREASE IN CASH AND CASH EQUIVALENTS

24,731

103,098

CASH AND CASH EQUIVALENTS—Beginning of period

283,254

CASH AND CASH EQUIVALENTS—End of period

386,352

Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures

Reconciliation of GAAP revenue to billings

Add increase in deferred revenue

45,885

41,414

Total billings (Non-GAAP)

330,461

254,300

Reconciliation of net cash provided by operating activities to free cash flow

Less purchases of property and equipment

Free cash flow (Non-GAAP)

70,635

59,692

Reconciliation of non-GAAP results of operations to the nearest comparable GAAP measures

Reconciliation of GAAP operating income or loss to Non-GAAP operating income, operating margin, net income and diluted net income per share

Three Months Ended March 31, 2016

Three Months Ended March 31, 2015

GAAP Results

Non-GAAP Results

Operating income (loss)

35,766

30,094

19,166

20,064

Operating margin

Adjustments:

Amortization of acquired intangible assets

ERP-related expenses

Inventory fair value adjustment amortization

Tax adjustment

(12,189

(7,200

23,577

20,148

11,966

13,526

Diluted net income (loss) per share

Shares used in diluted net income (loss) per share calculations

174,263

(a) To exclude

$30.9 million

of stock-based compensation,

$1.2 million

of amortization of acquired intangible assets,

$3.0 million

of ERP-related expenses,

$0.4 million

of inventory fair value adjustment amortization recorded pursuant to our business acquisition and

$0.3 million

of restructuring charges in the three months ended March 31, 2016.

(b) To exclude

$18.9 million

of stock-based compensation and

$0.2 million

of amortization of acquired intangible assets in the three months ended March 31, 2015.

Non-GAAP financial information is adjusted to achieve an overall 34% percent and 35% percent effective tax rate in the three months ended March 31, 2016 and March 31, 2015, respectively, on a non-GAAP basis, which differs from the GAAP effective tax rate.

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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