10-QPeriod: Q2 FY2011

Fortinet, Inc. Quarterly Report for Q2 Ended Jun 30, 2011

Filed August 4, 2011For Securities:FTNT

Summary

Fortinet, Inc. reported strong financial performance for the second quarter and first half of 2011, showcasing robust revenue growth driven by both product and service offerings. The company's total revenue for the second quarter of 2011 increased by 35% year-over-year, reaching $103.0 million, with product revenue up 50.4% and services revenue up 28.6%. This growth was supported by an expanded customer base and the adoption of new revenue recognition rules. The company also demonstrated operational leverage, with operating expenses growing at a slower pace than revenue, leading to a significant increase in operating income and margin. Fortinet maintained a healthy financial position, with total cash, cash equivalents, and investments growing to $468.5 million by the end of the second quarter. Operating cash flow remained strong, indicating effective cash management and the benefit of deferred revenue from subscription and support services. The company also reported positive free cash flow, underscoring its ability to generate cash from its core operations. Despite ongoing legal proceedings, notably the dispute with Trend Micro, Fortinet expressed confidence that potential losses would not exceed amounts already recognized.

Financial Highlights

47 data points
Beta

Revenue

$103.02M

74.2% Gross Margin

Net Income

$14.49M

14.1% Net Margin

EPS (Diluted)

$0.02

Total Assets

$635.24M

Cash & Equivalents

$78.02M

Free Cash Flow

$34.07M

Financial Statements
Beta
Revenue$103.02M
Cost of Revenue$26.56M
Gross Profit$76.47M
R&D Expenses$15.94M
Operating Expenses$57.69M
Operating Income$18.78M
Net Income$14.49M
EPS (Basic)$0.02
EPS (Diluted)$0.02
Shares Outstanding (Basic)761.34M
Shares Outstanding (Diluted)819.43M

Key Highlights

  • 1Total revenue for Q2 2011 increased 35% year-over-year to $103.0 million.
  • 2Product revenue saw a significant 50.4% increase, while Services revenue grew by 28.6%.
  • 3Operating income more than doubled to $18.8 million, and operating margin improved to 18.2% from 12.8% in the prior year period.
  • 4Total cash, cash equivalents, and investments grew to $468.5 million, reflecting strong liquidity.
  • 5Billings, a non-GAAP measure, increased 22% year-over-year to $110.2 million.
  • 6Effective tax rate decreased to 25.4% in Q2 2011 from 33.1% in Q2 2010, primarily due to tax adjustments and credits.
  • 7Acquired TalkSwitch Corp. in April 2011 for $2.6 million, diversifying product offerings.

Frequently Asked Questions

The adoption of new revenue recognition rules, effective January 1, 2011, had a positive impact on Fortinet's Q2 2011 results. It contributed $5.7 million to revenue, primarily by allowing for upfront recognition of certain product revenue that would have previously been deferred. This also led to a decrease in ratable revenue and a shift towards higher upfront product revenue recognition.

Fortinet is in a dispute with Trend Micro regarding royalty payments stemming from a 2006 settlement and license agreement. Fortinet disputes the validity of the patents and believes it has no contractual obligation to pay the royalties. While the company has been accruing for potential payments, it has determined there is not a reasonable possibility that a loss exceeding amounts already recognized may be incurred. The U.S. Patent and Trademark Office has issued final office actions rejecting several of Trend Micro's patent claims, which Fortinet believes is a positive development.

Fortinet demonstrated strong revenue growth across all regions. The Americas region contributed 39.4% of total revenue, increasing 40.3% year-over-year. EMEA accounted for 35.5% of revenue, with a 24.3% increase. The Asia Pacific and Japan (APAC) region showed the highest percentage growth at 43.9%, contributing 25.1% of total revenue.

Fortinet expects continued revenue growth driven by product innovation, sales force expansion, and penetration in key verticals and emerging markets. While facing competitive pressures and market uncertainties, the company anticipates maintaining its gross margin and leveraging its operating expenses to drive profitability. The growth in services revenue, providing recurring income, is also a key factor for future profitability and business visibility.