Fortinet Q3 Revenue Up

Revenue: Total revenue was $85.0 million for the third quarter of 2010, an increase of 29% compared to the third quarter of 2009. Within total revenue, product revenue was $35.9 million, an increase of 41% compared to the third quarter of 2009. Services revenue was $44.5 million, an increase of 21% compared to the third quarter of 2009. Ratable product and services revenue was $4.5 million, an increase of 26% compared to the third quarter of 2009.

Deferred Revenue: Deferred revenue was $235.3 million as of September 30, 2010, an increase of 24% compared to deferred revenue as of September 30, 2009, and up $9.7 million from June 30, 2010.

Cash and Cash Flow: As of September 30, 2010, cash, cash equivalents and investments were $352.3 million, compared to $309.0 million as of June 30, 2010. Cash flow from operations was $32.2 million for the third quarter of 2010, compared to $15.9 million for the third quarter of 2009. In the third quarter of 2010, free cash flow was $31.5 million, compared to $14.6 million for the third quarter of 2009. We define free cash flow, a non-GAAP financial measure of liquidity, as net cash provided by operating activities less capital expenditures.1

GAAP Operating Income: GAAP operating income was $18.2 million for the third quarter of 2010, representing a GAAP operating margin of 21% and an increase of 88% compared to the third quarter of 2009.

Non-GAAP1 Operating Income: Non-GAAP operating income was $20.6 million for the third quarter of 2010, representing a non-GAAP operating margin of 24% and an increase of 76% compared to the third quarter of 2009. Non-GAAP operating income and operating margin exclude stock-based compensation expense and, for the third quarter of 2009, non-cash asset acquisition related write-offs. Non-cash asset acquisition related write-offs consist of intangible assets that have no future value but exclude ongoing amortization of intangible assets that provide an ongoing benefit to our recurring operations.

GAAP Net Income and EPS: GAAP net income was $14.0 million for the third quarter of 2010, based on tax expense of 23% of pre-tax income as a result of bringing the year-to-date effective tax rate to 29%. This compares to $7.9 million for the third quarter of 2009 based on a 21% tax rate. GAAP EPS was $0.18 for the third quarter of 2010, based on 77.9 million weighted-average diluted shares outstanding, compared to $0.10 for the third quarter of 2009, based on 64.2 million weighted-average diluted shares outstanding. GAAP EPS for the third quarter of 2009 was based on net income attributable to common stockholders of $6.4 million (after reducing net income by $1.5 million which was allocated to our participating preferred stock that converted into common stock at the time of our IPO).

Non-GAAP1 Net Income and EPS: Non-GAAP net income was $13.5 million for the third quarter of 2010, based on a 35% tax rate. This compares to $9.2 million of non-GAAP net income for the third quarter of 2009, based on a 24% tax rate. Non-GAAP EPS was $0.17 for the third quarter of 2010 based on 77.9 million weighted-average diluted shares outstanding, compared to $0.14 for the third quarter of 2009 based on 64.2 million weighted-average diluted shares outstanding. Non-GAAP net income excludes stock-based compensation expense, non-cash asset acquisition related write-offs (for the third quarter of 2009) and the related tax effects. Non-GAAP EPS for the third quarter of 2009 was based on non-GAAP net income of $9.2 million, which includes the income allocated to our participating preferred stock of $1.5 million.

1A 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.”

Management Commentary:

Ken Xie, founder, president and chief executive officer of Fortinet, stated: “Our ability to execute across all verticals and geographies drove our strong performance this quarter, as we once again proved to be the partner of choice for many large enterprises seeking a complete UTM solution. We continue to demonstrate our value proposition, gain market share, and grow our customer base. Furthermore, our focus on security innovation is yielding tangible results, as the introduction of new cutting edge solutions, including our highly differentiated FortiGate-3950B, FortiGate-1240B and FortiAP appliances are resonating well with our customers and further differentiating us in the market.”

Ken Goldman, chief financial officer of Fortinet, stated: “We are very pleased with our third quarter results, which marks the fourth consecutive quarter as a publicly traded company that we have exceeded our expectations in terms of billings, revenue and profitability. We are excited about the momentum in our business and the robust demand for network security and UTM solutions, and will continue to invest significantly in the near term to strengthen our sales and support infrastructure, as well as our research and development capabilities in order to support our growth.”

Conference Call Details

Fortinet will host a conference call today, October 21, 2010, at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss the Company’s financial results. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 16168970. 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 November 4, 2010, by dialing (800) 642-1687 (domestic) or (706) 645-9291 (international). The replay passcode is 16168970.

Following Fortinet’s earnings 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 to ask more detailed product and financial questions. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 16170554. This follow-up call will be webcast live and accessible at http://investor.fortinet.com, and will be archived and available after the call at http://investor.fortinet.com/events.cfm. A replay of this conference call will also be available through November 4, 2010 at (800) 642-1687 (domestic) or (706) 645-9291 (international). The replay passcode is 16170554.

About Fortinet (www.fortinet.com)

Fortinet (NASDAQ: FTNT) is a worldwide provider of network security appliances and the market leader in unified threat management (UTM). Our products and subscription services provide broad, integrated and high-performance protection against dynamic security threats while simplifying the IT security infrastructure. Our customers include enterprises, service providers and government entities worldwide, including the majority of the 2009 Fortune Global 100. Fortinet's flagship FortiGate' product delivers ASIC-accelerated performance and integrates multiple layers of security designed to help protect against application and network threats. Fortinet's broad product line goes beyond UTM to help secure the extended enterprise -- from endpoints, to the perimeter and the core, including databases and applications. Fortinet is headquartered in Sunnyvale, Calif., with offices around the world.