|
FORTINET INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. These statements include, among other
things, statements concerning our expectations regarding:
• variability in sales in certain product categories from year to year
and between quarters;
• expected impact of sales of certain products;
• continued sales into large enterprises and service providers;
32--------------------------------------------------------------------------------
Table of Contents
• mix of billings between products and services;
• mix of service sales containing multi-year support and subscription contracts;
• the significance of stock-based compensation as an expense;
• the proportion of our revenue that consists of our product and
service revenues and future trends with respect to services revenue
as we renew existing services contracts and expand our customer
base;
• the impact of our product innovation strategy;
• trends in revenue, costs of revenue, and gross margin;
• trends in our operating expenses, including personnel costs,
research and development expense, sales and marketing expense and
general and administrative expense;
• our effective tax rate; and
• the sufficiency of our existing cash and investments to meet our
cash needs for at least the next 12 months;
as well as other statements regarding our future operations, financial condition
and prospects and business strategies. These forward-looking statements are
subject to certain risks and uncertainties that could cause our actual results
to differ materially from those reflected in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this Annual Report on Form 10-K and, in
particular, the risks discussed under the heading "Risk Factors" in Part I,
Item 1A of this Annual Report on Form 10-K and those discussed in other
documents we file with the SEC. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements. Given
these risks and uncertainties, readers are cautioned not to place undue reliance
on such forward-looking statements.
Business Overview
We provide network security solutions, which enable broad, integrated and high
performance protection against dynamic security threats while simplifying the IT
security infrastructure for enterprises, service providers and governmental
entities worldwide. Since inception through December 31, 2012, we had shipped
over 1,100,000 appliances via more than 10,000 channel partners to more than
150,000 end-customers worldwide, including a majority of the 2012 Fortune Global
100.
Our core UTM/NGFW product line of FortiGate physical and virtual appliances
ships with a set of security and networking capabilities, including firewall,
VPN, application control, antivirus, intrusion prevention, Web filtering,
anti-spam and WAN acceleration functionality. We derive a substantial majority
of product sales from our FortiGate appliances, which range from the
FortiGate-20, designed for small businesses, to the FortiGate-5000 series for
large enterprises, telecommunications carriers, and service providers. Our
UTM/NGFW solution also includes our FortiGuard security subscription services,
which end-customers can subscribe to in order to obtain access to dynamic
updates to intrusion prevention, application control, antivirus, Web filtering,
vulnerability management and anti-spam functionality included in our appliances.
End-customers can also choose to purchase FortiCare technical support services
for our products. End-customers also often use FortiManager and FortiAnalyzer
products in conjunction with a FortiGate deployment to provide centralized
management, analysis and reporting capabilities. We complement our core
FortiGate product line with other appliances and software that offer additional
protection from security threats to other critical areas of the enterprise, such
as messaging, Web application firewalls, databases, protection against denial of
service attacks (DDoS) and endpoint security for employee computers and mobile
devices. Sales of these complementary products have grown in recent quarters,
although these products still represent less than 10% of our total revenue.
During fiscal 2012, we announced our new FortiOS 5.0 operating system. FortiOS
5.0 is our fifth generation security operating system, and this release brings
more than 150 new features to our FortiGate product line. In addition, we
announced version 5.0 operating systems for our FortiManager, FortiAnalyzer, and
FortiClient products, to address the need for increasingly sophisticated
management and analysis of the network infrastructure and endpoint devices in
various environments. During fiscal 2012, we also announced our new
FortiASIC-SoC2 processor. FortiASIC-SoC2 is our second-generation processor that
combines general purpose processing power with Fortinet's custom technology to
provide hardware-accelerated network security performance for our FortiGate
appliances. It provides more than double the general processing capacity than
its predecessor. During fiscal 2012, we expanded and enhanced our FortiGate
UTM/NGFW and FortiAP secure wireless access product lines. We also introduced
software-based virtual appliances for many
33--------------------------------------------------------------------------------
Table of Contents
of our FortiGate and FortiManager product lines, which help secure the
end-customer's cloud-based network infrastructures with the same functionality
as the traditional physical appliance in their respective product lines.
Financial Highlights
• We recorded total revenue of $533.6 million in fiscal 2012. This
represents an increase of 23% in fiscal 2012, compared to fiscal 2011.
Revenue included $3.7 million and $2.6 million from the sales of previously-acquired patents in fiscal 2012 and 2011, respectively. Product
revenue was $248.9 million, an increase of 26% in fiscal 2012, compared to
fiscal 2011. Services revenue was $274.0 million in fiscal 2012, an
increase of 24% in fiscal 2012, compared to fiscal 2011.
• We generated cash flows from operating activities of $183.9 million in
fiscal 2012, an increase of 38% compared to fiscal 2011.
• Cash, cash equivalents and investments were $739.6 million as of December
31, 2012, an increase of $200.9 million from December 31, 2011.
• Deferred revenue was $363.2 million as of December 31, 2012, an increase
of $68.4 million from December 31, 2011.
Fiscal 2012 was our third full year as a public company, following our initial
public offering in November 2009. We believe the greater visibility and brand
recognition derived from being a public company, combined with success in
selling to enterprise and service provider customers and new product
introductions, served as contributors to the growth in our business during
fiscal 2012.
We continue to invest in research and development to strengthen our technology
leadership position and believe continued product innovation has strengthened
our technology advantage and resulted in market share gains, as evidenced by the
recent introduction of several noteworthy new FortiGate appliance models, such
as the FG-100D, FG-800C, FG-3240C and FG-5101C. During fiscal 2012, we also made
a significant investment in sales and marketing to increase brand awareness and
grow our global sales force and distribution channels to grow our global
presence both geographically and by industry segment. As a result, we
experienced increased deal volumes driven by traction in enterprise data center
deployments and large enterprise deals, with particular strength in the retail,
financial and telecommunication sectors.
The number of deals involving sales greater than $100,000 was 718 in fiscal
2012, compared to 560 in fiscal 2011. The number of deals involving sales
greater than $250,000 was 241 in fiscal 2012, compared to 167 in fiscal 2011.
The number of deals of involving sales greater than $500,000 was 81 in fiscal
2012, compared to 57 in fiscal 2011. We expect some variability in this metric,
and remain focused on investing in our sales and research and development
resources in order to expand our reach into new high-growth verticals and
emerging markets, and meet increasing customer expectations about the quality
and functionality of our products, as we continue to sell to large customers,
such as enterprise and service providers. While we have experienced some success
selling into certain vertical customer segments, such as service providers and
enterprise, we have experienced less traction selling into other verticals such
as the U.S. federal government and there can be no assurance we will be
successful selling into certain vertical customer segments.
Sales of FortiGate products have generally been balanced across entry-level
(FortiGate-20 to -100 series), mid-range (FortiGate-200 to -800 series) and
high-end (FortiGate-1000 to -5000 series) models with each product category
representing approximately one-third of FortiGate sales, with some degree of
variability from year to year and between quarters over the three-year period
ended December 31, 2012. The percentage of our FortiGate related billings from
the mid-range category increased from 31% in fiscal 2011 to 33% in fiscal 2012,
while the high-end category decreased from 37% to 35%, while the entry-level
category remained flat year over year. See "-Key Metrics" below for more
information on billings and "-Other Non-GAAP Financial Measures" for a
discussion of the limitations of non-GAAP financial measures.
In fiscal 2012, operating expenses increased by 24% compared to fiscal 2011. The
increase was primarily driven by additional headcount to support our growth as
we continued to invest in the development of new products and expand our sales
coverage. We also incurred $1.3 million of litigation settlement expense in
fiscal 2012. Of this amount, we recorded $1.0 million as a general and
administrative expense and $0.3 million as a sales and marketing expense. These
increases were partially offset by favorable foreign currency exchange rates
compared to fiscal 2011. We also experienced improvements in productivity and
efficiencies in our overall headcount as our annualized fiscal 2012 revenue per
employee, defined as annual revenue divided by average headcount, reached
$303,000, up from $297,000 for fiscal 2011. Headcount increased to 1,954 as of
December 31, 2012 from 1,583 as of December 31, 2011. Our accelerated pace of
hiring continued in fiscal 2012, particularly in support, sales and marketing
and research and development.
34--------------------------------------------------------------------------------
Table of Contents
Our Business Model
Our sales strategy is based on a distribution model whereby we primarily sell
our products and services directly to distributors who sell to resellers and
service providers, who, in turn, sell to our end-customers. In certain cases, we
sell directly to government-focused resellers, large service providers and major
systems integrators, who have significant purchasing power and unique customer
deployment requirements. Typically, FortiGuard security subscription services
and FortiCare technical support services are purchased along with our physical
and virtual appliances. We invoice at the time of our sale for the total price
of the products and subscription and support services, and the invoice generally
becomes payable within 30 to 90 days. We generally recognize product revenue
up-front based on the allocated revenue value and defer revenue for the sale of
new and renewal subscription and support services contracts. We recognize the
related services revenue over the service period, which is typically one year
from the date the end-customer registers for these services (the date on which
the services can first be used by the customer), although it can be as long as
five years. Sales of new and renewal services increase our deferred revenue
balance, which contributes significantly to our positive cash flow from
operations.
Key Metrics
We monitor the key financial metrics set forth below to help us evaluate growth
trends, establish budgets, measure the effectiveness of our sales and marketing
efforts, and assess operational efficiencies. Our total deferred revenue
increased by $68.4 million from $294.8 million as of December 31, 2011 to $363.2
million as of December 31, 2012. Revenue recognized plus the change in deferred
revenue from the beginning to the end of the period is a useful metric that
management identifies as billings. Billings for services drive deferred revenue,
which is an important indicator of the health and visibility of our business,
and has historically represented a majority of the revenue that we recognize in
a typical quarter. We ended fiscal 2012 with $739.6 million in cash, cash
equivalents and investments and have had positive cash flow from operations
every fiscal year since 2005. We discuss revenue, gross margin, and the
components of operating income and margin below under "-Components of Operating
Results," and we discuss our cash, cash equivalents, and investments under
"-Liquidity and Capital Resources." Deferred revenue and cash flow from
operations are discussed immediately below the following table.
Fiscal Year or as of Fiscal Year End
2012 2011 2010
($ amounts in 000's)
Revenue 533,639 433,576 324,696
Gross margin 72 % 74 % 74 %
Operating income (1) 100,475 88,904 55,341
Operating margin 19 % 21 % 17 %
Total deferred revenue 363,185 294,833 252,631
Increase in total deferred revenue 68,352 42,202 50,701
Cash, cash equivalents and investments 739,586 538,687 387,460
Cash provided by operating activities 183,866 132,842 103,383
Free cash flow (2) 161,783 135,218 99,607
___________________
(1) Includes:
Stock-based compensation expense 30,690 19,015 9,315
Patent settlement income 1,912 1,911 -
(2) See " -Cash flow from operations" below for a definition of free cash flow.
Deferred revenue. Our deferred revenue consists of amounts that have been
invoiced but that have not yet been recognized as revenue. The majority of our
deferred revenue balance consists of the unamortized portion of services revenue
from subscription and support service contracts. We monitor our deferred revenue
balance because it represents a significant portion of revenue to be recognized
in future periods. We define billings as revenue recognized during a period plus
the change in deferred revenue from the beginning to the end of the period. The
following table reflects the calculation of billings as discussed in the
paragraph above. For a discussion of the limitations of non-GAAP financial
measures, see "-Other Non-GAAP Financial Measures" below.
35--------------------------------------------------------------------------------
Table of Contents
Fiscal Year
2012 2011 2010
($ amounts in 000's)
Billings:
Revenue 533,639 433,576 324,696Increase in deferred revenue 68,352 42,202 50,701
Total billings (Non-GAAP) 601,991 475,778 375,397
Cash flow from operations. We monitor cash flow from operations as a measure of
our overall business performance. Our cash flow from operations is driven in
large part by advance payments for both new and renewal contracts for
subscription and support services, consistent with our billings for the period.
Monitoring cash flow from operations and free cash flow enables us to analyze
our financial performance excluding the non-cash effects of certain items such
as depreciation, amortization and stock-based compensation expenses, thereby
allowing us to better understand and manage the cash needs of our business. Free
cash flow, an alternative non-GAAP financial measure of liquidity, is defined as
net cash provided by operating activities less capital expenditures. For a
discussion of the limitations of non-GAAP financial measures, see "-Other
Non-GAAP Financial Measures" below.
Fiscal Year
2012 2011 2010
($ amounts in 000's)
Free Cash Flow:
Net cash provided by operating activities 183,866 132,842 103,383
Less purchases of property and equipment (22,083 ) (3,624 ) (3,776 )
Free cash flow (Non-GAAP)
161,783 129,218 99,607
Other Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with
U.S. generally accepted accounting principles ("U.S. GAAP"), we consider certain
financial measures that are not prepared in accordance with U.S. GAAP, including
billings and free cash flow discussed above as well as non-GAAP gross margin,
non-GAAP operating income, non-GAAP operating margin, non-GAAP operating
expenses, and non-GAAP net income. 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 and enhancing an
overall understanding of our past financial performance, as they help illustrate
underlying trends in our business that could otherwise be masked by the effect
of the expenses that we exclude in these non-GAAP financial measures.
Furthermore, we use many of these measures to establish budgets and operational
goals for managing our business and evaluating our performance. We also believe
that the use of these non-GAAP financial measures provides an additional tool
for investors to use in comparing our recurring core business operating results
over multiple periods with other companies in our industry, many of which
present similar non-GAAP financial measures to investors.
These non-GAAP financial measures should not be considered in isolation from, or
as a substitute for, financial information prepared in accordance with GAAP.
There are a number of limitations related to the use of these non-GAAP financial
measures versus the nearest GAAP equivalent of these financial measures. First,
these non-GAAP financial measures exclude certain recurring, non-cash charges
such as stock-based compensation expense, offset by patent settlement income.
Stock-based compensation expense has been, and will continue to be for the
foreseeable future, a significant recurring expense in our business and is an
important part of our employees' overall compensation. Second, the expenses that
we exclude in our calculation of these non-GAAP financial measures may differ
from the expenses, if any, that our peer companies may exclude when they report
their results of operations. We compensate for these limitations by providing
the nearest GAAP equivalents of these non-GAAP financial measures and describing
these GAAP equivalents in the section entitled "-Results of Operations" below.
36--------------------------------------------------------------------------------
Table of Contents
Non-GAAP gross margin is gross margin as reported on our consolidated statements
of operations, excluding the impact of stock-based compensation expense, which
is a non-cash charge. Non-GAAP operating income is operating income, as reported
on our consolidated statements of operations, excluding the impact of
stock-based compensation expense and the income we received from a patent
settlement. Non-GAAP operating margin is non-GAAP operating income divided by
revenue. The following tables reconcile GAAP gross margin, operating income, and
operating margin to non-GAAP gross margin, non-GAAP operating income, and
non-GAAP operating margin for fiscal 2012, 2011 and 2010.
Fiscal Year
2012 2011 2010
% of % of % of
Amount ($) Revenue Amount ($) Revenue Amount ($) Revenue
($ amounts in 000's)
Total revenue 533,639 433,576 324,696
GAAP gross profit and margin 386,219 72 319,978 74 239,490 74
Stock-based compensation
expense 4,069 1 1,973 - 1,030 -
Non-GAAP gross profit and
margin 390,288 73 321,951 74 240,520 74
GAAP operating income and
margin 100,475 19 88,904 21 55,341 17
Stock-based compensation
expense:
Cost of revenue 4,069 1 1,973 - 1,030 -
Research and development 9,226 1 4,691 1 2,339 1
Sales and marketing 12,793 2 9,325 3 3,810 1
General and administrative 4,602 1 3,026 - 2,136 1
Total stock-based
compensation expense 30,690 5 19,015 4 9,315 3
Patent settlement income (1,912 ) - (1,911 ) (1 ) - -
Non-GAAP operating income
and margin 129,253 24 106,008 24 64,656 20
Non-GAAP operating expenses exclude the impact of stock-based compensation
expense and the income from a patent settlement. The following tables reconcile
GAAP operating expenses to non-GAAP operating expenses for fiscal 2012, 2011 and
2010.
37--------------------------------------------------------------------------------
Table of Contents
Fiscal Year
2012 2011 2010
% of % of % of
Amount ($) Revenue Amount ($) Revenue Amount ($) Revenue
($ amounts in 000's)
Operating Expenses:
Research and development
expenses:
GAAP research and
development expenses 81,078 15 63,577 15 49,801 15
Stock-based compensation
expense (9,226 ) (1 ) (4,691 ) (1 ) (2,339 ) (1 )
Non-GAAP research and
development expenses 71,852 14 58,886 14 47,462 14
Sales and marketing
expenses:
GAAP sales and marketing
expenses 179,155 33 145,532 34 111,968 34
Stock-based compensation
expense (12,793 ) (2 ) (9,325 ) (3 ) (3,810 ) (1 )
Non-GAAP sales and marketing
expenses 166,362 31 136,207 31 108,158 33
General and administrative
expenses:
GAAP general and
administrative expenses 25,511 5 21,965 4 22,380 8
Stock-based compensation
expense (4,602 ) (1 ) (3,026 ) - (2,136 ) (1 )
Patent settlement income 1,912 - 1,911 1 - -
Non-GAAP general and
administrative expenses 22,821 4 20,850 5 20,244 7
Total operating expenses:
GAAP operating expenses 285,744 53 231,074 53 184,149 57
Stock-based compensation
expense (26,621 ) (4 ) (17,042 ) (4 ) (8,285 ) (3 )
Patent settlement income 1,912 - 1,911 1 - -
Non-GAAP operating expenses 261,035 49 215,943 50 175,864 54
Non-GAAP net income is net income, as reported in our consolidated statements of
operations, excluding the impact of stock-based compensation expense and income
from a patent settlement. The following tables reconcile GAAP net income as
reported on our consolidated statements of operations to non-GAAP net income for
fiscal 2012, 2011 and 2010.
Fiscal Year
2012 2011 2010
($ and share amounts in 000's, except per share amounts)
Net Income:
GAAP net income 66,836 62,492 41,245
Stock-based compensation expense (1) 30,690 19,015 9,315
Patent settlement income (2) (1,912 ) (1,911 ) -
Provision for income taxes (3) 38,160 29,581 15,096
Non-GAAP income before provision for
income taxes 133,774 109,177 65,656
Tax adjustment (4) (45,483 ) (36,028 ) (21,010 )
Non-GAAP net income 88,291 73,149 44,646
Non-GAAP net income per share-diluted 0.53 0.45 0.29
Shares used in per share
calculation-diluted 166,329 163,781 156,406
____________________(1) Stock-based compensation expense is added back to GAAP net income to
reconcile to non-GAAP income before taxes.
(2) The patent settlement income is removed from GAAP net income to reconcile
to non-GAAP income before taxes.
(3) Provision for income taxes is our GAAP provision that must be added to GAAP
net income to reconcile to non-GAAP income before taxes.
38--------------------------------------------------------------------------------
Table of Contents
(4) Non-GAAP financial information is adjusted to achieve the overall effective
tax rates of 34%, 33%, and 32%, on a pro forma basis, which could differ
from the GAAP tax rate, for fiscal 2012, 2011, and 2010, respectively.
Components of Operating Results
Revenue
We derive our revenue from sales of our products and subscription and support
services. In fiscal 2011, we recognized our revenue in accordance with the new
revenue recognition accounting guidance which is discussed in further detail in
"-Critical Accounting Policies and Estimates-Revenue Recognition" below.
According to the new accounting standards, revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the price is fixed or
determinable and collection is probable.
Our total revenue is comprised of the following:
• Product revenue. Product revenue is generated from sales of our
appliances. The substantial majority of our product revenue has been
generated by our FortiGate line of appliances, and we do not expect
this to change in the foreseeable future. Product revenue also
includes revenue derived from sales of FortiManager,FortiAnalyzer,
FortiSwitch, FortiMail, FortiDB, FortiWeb, FortiAP, FortiScan,
FortiCarrier, FortiBalancer, FortiCache, FortiVoice, FortiBridge,
FortiDDoS, FortiDNS, and FortiAuthenticator appliances, and our
FortiClient and virtual domain, or VDOM, software. Forarrangements
which include end-customer acceptance criteria, revenue is
recognized upon acceptance. We recognize product revenue on sales to
distributors that have no general right of return and direct sales
to end-customers upon shipment, once all other revenuerecognition
criteria have been met. Certain distributors that stock our products
are granted stock rotation rights as well as rebates for sales of
our products. The arrangement fee for this group ofdistributors is
not fixed and determinable when products are shipped and revenue is
therefore deferred and recognized upon sell-through. As a percentage
of total revenue, we expect our product revenue may vary from
quarter-to-quarter based on seasonal and cyclical factors discussed
below under "-Quarterly Results of Operations" but generally may
remain at relatively comparable levels or decline modestly over
time, as services revenue becomes a larger portion of our business
as our customers renew existing services contracts and we expand our
customer base.
• Services revenue. Services revenue is generated primarily from
FortiCare technical support services for software updates,
maintenance releases and patches, Internet access to technical
content, telephone and Internet access to technical support
personnel and hardware support, and FortiGuard securitysubscription
services related to application control, antivirus, intrusion
prevention, Web filtering, anti-spam and vulnerability management
updates. We recognize revenue from subscription and support services
over the service performance period. Our typical contractual support
and subscription term is one year from the date ofregistration,
although we do offer multi-year support and subscription contracts.
We also generate a small portion of our revenue from professional
services and training services, and we recognize this revenue as the
services are provided. As a percentage of total revenue, we expect
our services revenue to remain at comparable levels orincrease as
our customers renew existing service contracts and we expand our
customer base. Our services revenue growth rate depends
significantly on the growth of our customer base and the renewal of
service contracts by our current customers.
• Ratable and other revenue. Ratable and other revenue isgenerated
from sales of our products and services in cases where the fair
value of the services being provided cannot be separated from the
value of the entire sale. In these cases, the value of the entire
sale is deferred and recognized ratably over the serviceperformance
period. See "-Critical Accounting Policies and Estimates-Revenue
Recognition." Ratable and other revenue was formerly referred to as
Ratable product and services revenue. In fiscal 2012 and 2011, this
category includes a $3.7 million and a $2.6 million sale of
previously-acquired patents, respectively. In fiscal 2012 and 2011,
ratable and other revenue represented 2% and 4% of total revenue,
respectively. Over time we expect this category to continue to
decline due to the current revenue recognition rules, which allow us
to use best estimate of selling price ("BESP") in ourallocation of
arrangement consideration when vendor-specific objective evidence
("VSOE") is not available.
Our total cost of revenue is comprised of the following:
• Cost of product revenue. A substantial majority of the cost of
product revenue consists of third-party manufacturing costs. Our
cost of product revenue also includes product testing costs,
write-offs for excess
39--------------------------------------------------------------------------------
Table of Contents
and obsolete inventory, royalty payments, amortization and any impairment of
applicable acquired intangible assets, warranty costs, shipping and allocated
facilities costs, stock-based compensation expense, and personnel costs
associated with logistics and quality control. Personnel costs include
cash-based personnel costs such as salaries, benefits and bonuses. Royalties
reflect amounts related to the litigation with Trend Micro Incorporated, which
was settled in December 2011.
• Cost of services revenue. Cost of services revenue is primarily
comprised of cash-based personnel costs associated with our
FortiGuard Labs team and our technical support, professional
services and training teams, as well as depreciation,supplies, data
center, data communications, facility-related costs and stock-based
compensation expense. We expect our cost of services revenue will
increase in absolute dollars but remain comparable as a percentage
of revenue as we continue to invest in subscription and support
services to meet the needs of our growing customer base and service
levels expected by our enterprise customers.
• Cost of ratable and other revenue. Cost of ratable and other revenue
is comprised primarily of deferred product costs and
services-related costs.
Gross profit. Gross profit as a percentage of revenue, or gross margin, has been
and will continue to be affected by a variety of factors, including the average
sales price of our products, any excess inventory write-offs, product costs, the
mix of products sold and the mix of revenue between products and services. We
believe our overall gross margin for the near term will remain at levels
comparable to that achieved in fiscal 2012.
Services revenue has historically increased as a percentage of total revenue
since inception, and this trend has had a positive effect on our total gross
margin given the higher services gross margins compared to product gross
margins. During fiscal 2012 service margins decreased slightly from fiscal 2011
as we made the decision to invest in support services infrastructure that will
allow us to both expand our base of enterprise customers and to support future
growth and higher service levels to our existing enterprise customers.
Operating expenses. Our operating expenses consist of research and development,
sales and marketing and general and administrative expenses. Personnel costs are
the most significant component of operating expenses and consist of cash-based
personnel costs such as salaries, benefits, bonuses, and sales commissions. They
also include non-cash charges, specifically, stock-based compensation expense.
We expect personnel costs to continue to increase in absolute dollars as we hire
new employees.
• Research and development. Research and development expense consists
primarily of cash-based personnel costs. Additional research and
development expenses include ASIC and system prototypes and
certification-related expenses, depreciation of capital equipment,
facility-related expenses and stock-based compensationexpenses. The
majority of our research and development is focused on both software
development and the ongoing development of our hardwareplatform. We
record all research and development expenses as incurred, except for
capital equipment which is depreciated over time. Ourdevelopment
teams are primarily located in Canada, China, and the United States.
• Sales and marketing. Sales and marketing expense is the largest
component of our operating expenses and primarily consists of
cash-based personnel costs including salary, benefits and
commissions. Additional sales and marketing expenses include
stock-based compensation expense, promotional and other marketing
expenses, travel, depreciation of capital equipment and
facility-related expenses. We intend to hire additional personnel
focused on sales and marketing and expand our sales and marketing
efforts worldwide in order to increase our presence in new
geographic markets and enterprise verticals, add new customers and
increase penetration within our existing customer base.
• General and administrative. General and administrative expense
consists of cash-based personnel costs as well as professional fees,
stock-based compensation expense, depreciation of capital equipment
and software, and facility-related expenses. General and
administrative personnel include our executive, finance, human
resources, information technology and legal organizations. Our
professional fees principally consist of outside legal, auditing,
accounting, information technology and other consulting costs.
Interest income. Interest income consists of income earned on our cash, cash
equivalents and investments. We have historically invested our cash in money
market funds, commercial paper, corporate debt securities, municipal bonds,
certificates of deposit and term deposits, and U.S. government and agency debt
securities.
40--------------------------------------------------------------------------------
Table of Contents
Other expense, net. Other expense, net consists primarily of foreign exchange
and related hedging gains and losses. Foreign exchange gains and losses relate
to foreign currency exchange re-measurement. The hedging gains and losses are
related to our settled balance sheet hedges.
Provision for income taxes. We are subject to tax in the United States as well
as other tax jurisdictions or countries in which we conduct business. Earnings
from our non-U.S. activities are subject to income taxes in the local country
which are generally lower than U.S. tax rates, and may be subject to U.S. income
taxes. Our effective tax rate differs from the U.S. statutory rate primarily due
to foreign income subject to different tax rates than the U.S., research and
development tax credits, withholding taxes, nondeductible stock-based
compensation expense and adjustments related to our intercompany transfer
pricing.
The income tax provision for fiscal 2012 was comprised primarily of domestic
income taxes, foreign income taxes and withholding taxes. Our effective tax rate
approximates the U.S. federal statutory tax rates plus the impact of state
taxes, research and development tax credits (when applicable), withholding tax,
nondeductible stock-based compensation expense, foreign income subject to lower
tax than the U.S., and adjustments related to intercompany transfer pricing.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with U.S. GAAP. These principles require us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, cash
flow and related disclosure of contingent assets and liabilities. Our estimates
include those related to revenue recognition, stock-based compensation expense,
valuation of inventory, warranty liabilities and accounting for income taxes. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates. To the extent that there are material differences
between these estimates and our actual results, our future financial statements
will be affected.
We believe that of our significant accounting policies, which are described in
Note 1 to our consolidated financial statements included in Part II, Item 8 of
this Annual Report on Form 10-K, the following accounting policies involve a
greater degree of judgment and complexity. Accordingly, we believe these are the
most critical to fully understand and evaluate our financial condition and
results of operations.
Revenue Recognition
In October 2009, the FASB amended the accounting standards for multiple
deliverable revenue arrangements to provide guidance on how the deliverables in
an arrangement should be separated and eliminates the use of the residual
method. The new accounting standards also require an entity to allocate revenue
using the relative selling price method. The new accounting standards establish
a hierarchy of evidence to determine the stand-alone selling price of a
deliverable based on VSOE, third party evidence ("TPE"), and the BESP. If VSOE
is available, it would be used to determine the selling price of a deliverable.
If VSOE is not available, the entity would determine whether TPE is available.
If so, TPE must be used to determine the selling price. If TPE is not available,
then the BESP would be used. The new accounting standards amended industry
specific revenue accounting guidance for software and software related
transactions to exclude from its scope tangible products containing software
components and non-software components that function together to deliver the
product's essential functionality.
This guidance did not generally change the units of accounting for our revenue
transactions. Most non-software products and services qualify as separate units
of accounting because they have value to the customer on a standalone basis and
our revenue arrangements generally do not include a right of return relative to
delivered products.
The majority of our products are hardware appliances containing software
components that function together to provide the essential functionality of the
product. Therefore, our hardware appliances are considered non-software
deliverables and are no longer within the scope of industry-specific software
revenue recognition guidance.
Our product revenue also includes software products that may operate on the
hardware appliances, but are not considered essential to the functionality of
the hardware and continue to be subject to the industry-specific software
revenue recognition guidance. Certain of our software, when sold with our
appliances, is considered essential to its functionality and as a result is no
longer accounted for under industry-specific software revenue recognition
guidance. However, this same software, if sold separately, is accounted for
under industry-specific software revenue recognition guidance.
41--------------------------------------------------------------------------------
Table of Contents
For all transactions originating or materially modified after December 31, 2010,
we recognize revenue in accordance with the new accounting standards. Certain
arrangements with multiple deliverables may continue to have software
deliverables that are subject to industry-specific software revenue recognition
guidance, along with non-software deliverables that are subject to the new
accounting standards. When a sales arrangement contains multiple elements, such
as hardware appliances, software, customer support services, and/or professional
services, we allocate revenue to each element based on the aforementioned
selling price hierarchy. In multiple element arrangements where software is
more-than-incidental, revenue is allocated to each separate unit of accounting
for each of the non-software deliverables and to the software deliverables as a
group using the relative selling prices of each of the deliverables in the
arrangement based on the selling price hierarchy in the new revenue recognition
accounting guidance.
VSOE of fair value for elements of an arrangement is based upon the normal
pricing and discounting practices for those services when sold separately. In
determining VSOE, we require that a substantial majority of the selling prices
for a service fall within a reasonably narrow pricing range, generally evidenced
by a substantial majority of such historical stand-alone transactions falling
within a reasonably narrow range of the median rates. In addition, we consider
major segments, geographies, customer classifications, and other variables in
determining VSOE.
We are typically not able to determine TPE for our products or services. TPE is
determined based on competitor prices for similar deliverables when sold
separately. Generally, our go-to-market strategy differs from that of our peers
and our offerings contain a significant level of differentiation such that the
comparable pricing of products with similar functionality cannot be obtained.
Furthermore, we are unable to reliably determine what similar competitor
products' selling prices are on a stand-alone basis.
For our hardware appliances, we use BESP as our selling price. For our support
and other services, we generally use VSOE as our selling price. When we are
unable to establish a selling price using VSOE for our support and other
services, we use BESP in our allocation of arrangement consideration. The
objective of BESP is to determine the price at which we would transact a sale if
the product or service were sold on a stand-alone basis. We determine BESP for a
product or service by considering multiple factors including, but not limited
to, cost of products, gross margin objectives, pricing practices, geographies,
customer classes and distribution channels. We review our BESP estimates on a
quarterly basis to coincide with our VSOE review process.
We recognize revenue for our software sales based on industry-specific software
revenue recognition guidance. Under industry-specific software revenue
recognition guidance, we use the residual method to recognize revenue when a
product agreement includes one or more elements to be delivered and VSOE of fair
value for all undelivered elements exists. If evidence of the fair value of one
or more undelivered elements does not exist, all revenue is generally deferred
and recognized when delivery of those elements occurs or when fair value can be
established. When the undelivered element for which we do not have VSOE of fair
value is support, revenue for the entire arrangement is recognized ratably over
the support period.
We derive revenue from sales of products, including appliances and software, and
services, including subscription, support and other services. Our appliances
include operating system software that is integrated into the appliance hardware
and is deemed essential to its functionality. As a result, we account for
revenue in accordance with the new revenue recognition accounting guidance and
all related interpretations.
Revenue is recognized when all of the following criteria have been met:
• Persuasive evidence of an arrangement exists. Binding contracts or
purchase orders are generally used to determine the existence of an
arrangement.
• Delivery has occurred. Delivery occurs when we fulfill anorder and
title and risk of loss has been transferred or upon delivery of the
service contract registration code.
• The fee is fixed or determinable. We assess whether the feeis fixed
or determinable based on the payment terms associated with the
transaction. In the event payment terms differ from ourstandard
business practices, the fees are deemed to be not fixed or
determinable and revenue is recognized when the payments become due,
provided the remaining criteria for revenue recognition have been
met.
• Collectability is probable. We assess collectability basedprimarily
on creditworthiness as determined by credit checks andanalysis, as
well as payment history. Payment terms generally range from 30 to
90 days from invoice date.
42--------------------------------------------------------------------------------
Table of Contents
For arrangements which include end-customer acceptance criteria, revenue is
recognized upon acceptance. We recognize product revenue on sales to
distributors that have no general right of return and direct sales to
end-customers upon shipment, once all other revenue recognition criteria have
been met. Certain distributors that stock our products are granted stock
rotation rights as well as rebates for sales of our products. The arrangement
fee for this group of distributors is not fixed and determinable when products
are shipped and revenue is therefore deferred and recognized upon sell-through.
Substantially all of our products have been sold in combination with services,
which consist of subscriptions and/or support. Subscription services provide
access to our antivirus, intrusion prevention, web filtering, and anti-spam
functionality. Support services include rights to unspecified software upgrades,
maintenance releases and patches, telephone and Internet access to technical
support personnel, and hardware support.
The subscription and support services start on the date the customer registers
the appliance. The customer is then entitled to service for the stated
contractual period beginning on the registration date.
We offer certain sales incentives to channel partners. We reduce revenue for
estimates of sales returns and allowances. Additionally, in limited
circumstances we may permit end-customers, distributors and resellers to return
our products, subject to varying limitations, for a refund within a reasonably
short period from the date of purchase. We estimate and record reserves for
sales incentives and sales returns based on historical experience.
As of December 31, 2012, our allowance for sales returns was $2.3 million
compared to $2.4 million as of December 31, 2011. If our allowance for sales
returns had increased by 10%, or $0.2 million, our net revenue would have
decreased by $0.2 million in fiscal 2012.
Stock-Based Compensation Expense
Employees Stock Options. We estimate the fair value of employee stock options
using the Black-Scholes-Merton ("Black-Scholes") pricing model. For all employee
stock options, we recognize expense over the requisite service period using the
straight-line method. Our option pricing model requires the input of highly
subjective assumptions, including the expected stock price volatility, expected
term, and forfeiture rate. Any changes in these highly subjective assumptions
could significantly impact stock-based compensation expense.
Employee Stock Purchase Plan. We estimate the fair value of the rights to
acquire stock under our employee stock purchase plan ("ESPP") using the
Black-Scholes pricing model. Our ESPP provides for consecutive six-month
offering periods and we use our own historical volatility data in the valuation
of ESPP shares.
Restricted Stock Units. We account for the fair value of restricted stock units
("RSUs") awarded to employees and members of our board of directors using the
closing market price of our common stock on the date of grant. RSUs are payable
in shares of our common stock as the periodic vesting requirements are
satisfied. RSUs will vest over a four-year period from the date of grant if the
employees, non-employees, or directors, as applicable, remain with us for the
duration of the vesting period.
Valuation of Inventory
Inventory is recorded at the lower of cost (using the first-in, first-out
method) or market, after we give appropriate consideration to obsolescence and
inventory in excess of anticipated future demand. In assessing the ultimate
recoverability of inventory, we are required to make estimates regarding future
customer demand, the timing of new product introductions, economic trends and
market conditions. If the actual product demand is significantly lower than
forecasted, we could be required to record additional inventory write-downs
which would be charged to cost of product revenue. Any write-downs could have an
adverse impact on our gross margins and profitability.
Warranty Liabilities
We generally provide a one-year warranty on hardware products and a 90-day
warranty on software. A provision for estimated future costs related to warranty
activities is charged to cost of product revenue based upon historical product
failure rates and historical costs incurred in correcting product failures. If
we experience an increase in warranty claims compared with our historical
experience, or if the cost of servicing warranty claims is greater than
expected, our gross margin could be adversely affected.
Accounting for Income Taxes
43--------------------------------------------------------------------------------
Table of Contents
We record income taxes using the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements or
tax returns. In estimating future tax consequences, generally all expected
future events other than enactments or changes in the tax law or rates are
considered. Valuation allowances are provided when necessary to reduce deferred
tax assets to the amount expected to be realized.
We operate in various tax jurisdictions and are subject to audit by various tax
authorities. We provide for tax contingencies whenever it is deemed more likely
than not that a tax asset has been impaired or a tax liability has been incurred
for events such as tax claims or changes in tax laws. Tax contingencies are
based upon their technical merits, relevant tax law and the specific facts and
circumstances as of each reporting period. Changes in facts and circumstances
could result in material changes to the amounts recorded for such tax
contingencies.
We account for uncertain tax positions in accordance with U.S. GAAP, which
defines the confidence level that a tax position must meet in order to be
recognized in the financial statements. The tax effects of a position are
recognized only if it is "more likely than not" to be sustained based solely on
its technical merits as of the reporting date. We consider many factors when
evaluating and estimating our tax positions and tax benefits, which may require
periodic adjustments and which may not accurately anticipate actual outcomes.
As part of the process of preparing our consolidated financial statements, we
are required to estimate our taxes in each of the jurisdictions in which we
operate. We estimate actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
accruals and allowances not currently deductible for tax purposes. These
differences result in deferred tax assets, which are included in our
consolidated balance sheets. In general, deferred tax assets represent future
tax benefits to be received when certain expenses previously recognized in our
consolidated statements of operations become deductible expenses under
applicable income tax laws, or loss or credit carryforwards are utilized.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. We continue to assess the
need for a valuation allowance on the deferred tax assets by evaluating both
positive and negative evidence that may exist. Any adjustment to the net
deferred tax asset valuation allowance would be recorded in the income statement
for the period that the adjustment is determined to be required.
We make estimates and judgments about our future taxable income that are based
on assumptions that are consistent with our plans and estimates. Should the
actual amounts differ from our estimates, the amount of our tax expense and
liabilities could be materially impacted.
Results of Operations
The following tables set forth our results of operations for the periods
presented and as a percentage of our total revenue for those periods. The
period-to-period comparison of financial results is not necessarily indicative
of financial results to be achieved in future periods.
44--------------------------------------------------------------------------------
Table of Contents
Fiscal Year
2012 2011 2010
($ amounts in 000's)
Consolidated Statement of Operations Data:
Revenue:
Product 248,948 197,408 135,140
Services 274,043 220,268 172,046
Ratable and other revenue 10,648 15,900 17,510
Total revenue 533,639 433,576 324,696
Cost of revenue
Product 93,971 73,201 51,944
Services 50,682 35,486 26,967
Ratable and other revenue 2,767 4,911 6,295
Total cost of revenues 147,420 113,598 85,206
Gross profit:
Product 154,977 124,207 83,196
Services 223,361 184,782 145,079
Ratable and other revenue 7,881 10,989 11,215
Total gross profit 386,219 319,978 239,490
Operating expenses:
Research and development 81,078 63,577 49,801
Sales and marketing 179,155 145,532 111,968
General and administrative 25,511 21,965 22,380
Total operating expenses 285,744 231,074 184,149
Operating income 100,475 88,904 55,341
Interest income 5,006 3,523 1,815
Other expense, net (485 ) (354 ) (815 )
Income before income taxes 104,996 92,073 56,341
Provision for income taxes 38,160 29,581 15,096
Net income 66,836 62,492 41,245
45--------------------------------------------------------------------------------
Table of Contents
Fiscal Year
2012 2011 2010
(as % of revenue)
Revenue:
Product 47 45 42
Services 51 51 53
Ratable and other revenue 2 4 5
Total revenue 100 100 100
Total cost of revenue 28 26 26
Total gross profit 72 74 74
Operating expenses:
Research and development 15 15 15
Sales and marketing 33 34 34
General and administrative 5 4 8
Total operating expenses 53 53 57
Operating income 19 21 17
Interest income 1 1 1
Other expense, net - - -
Income before income taxes 20 22 18
Provision for income taxes 7 7 5
Net income 13 15 13
Fiscal Years 2012 and 2011
Revenue
Fiscal Year
2012 2011
% of % of
Amount ($) Revenue Amount ($) Revenue Change % Change
($ amounts in 000's)
Revenue:
Product 248,948 47 197,408 45 51,540 26
Services 274,043 51 220,268 51 53,775 24
Ratable and other
revenue 10,648 2 15,900 4 (5,252 ) (33 )
Total revenue 533,639 100 433,576 100 100,063 23
Revenue by geography:
Americas 217,056 41 172,494 40 44,562 26
Europe, Middle East and
Africa ("EMEA") 184,175 35 152,385 35 31,790 21
Asia Pacific and Japan
("APAC") 132,408 24 108,697 25 23,711 22
Total revenue 533,639 100 433,576 100 100,063 23
Total revenue increased by $100.1 million, or 23%, in fiscal 2012 compared to
fiscal 2011. The Americas region contributed the largest portion of our revenue
growth on a percentage basis, while the EMEA and APAC regions both demonstrated
growth of over 20%. Product revenue increased by $51.5 million, or 26%, compared
to fiscal 2011. The increase in product revenue was primarily driven by greater
sales volume in our FortiGate product family due to increased demand across all
product categories from our entry-level and mid-range products for smaller
enterprises and branch deployments to our high-end products for large enterprise
and service provider customers. Services revenue increased by $53.8 million, or
24%, in fiscal 2012 compared to fiscal 2011 due to the recognition of revenue
from our growing deferred revenue balance consisting of subscription and support
contracts sold to a larger customer base. The decrease in ratable and other
revenue of $5.3 million was primarily due to the continuing decline in
amortization of ratable revenue. Ratable and other revenue for fiscal
46--------------------------------------------------------------------------------
Table of Contents
2012 included a $3.7 million sale of previously-acquired patents, which was an
increase from a $2.6 million sale of previously-acquired patents in fiscal 2011.
Excluding the decline in ratable and other revenue, product and services revenue
combined together increased by 25% compared to fiscal 2011.
Cost of revenue and gross margin
Fiscal Year
2012 2011 Change % Change
($ amounts in 000's)
Cost of revenue:
Product 93,971 73,201 20,770 28
Services 50,682 35,486 15,196 43
Ratable and other revenue 2,767 4,911 (2,144 ) (44 )
Total cost of revenue 147,420 113,598 33,822 30
Gross margin (%):
Product 62.3 62.9 (0.6 )
Services 81.5 83.9 (2.4 )
Ratable and other revenue 74.0 69.1 4.9
Total gross margin 72.4 73.8 (1.4 )
Total gross margin decreased by 1.4 percentage points in fiscal 2012 compared to
fiscal 2011, as both product and services gross margins declined. Product gross
margin decreased by 0.6 percentage points in fiscal 2012 compared to fiscal 2011
primarily related to a higher quantity of mid-range products purchased by a
large retail customer with lower than average gross margins. We also experienced
the impact from cost increases related to higher material costs incurred to
support higher density storage requirements for our recent release of FortioOS
5.0, our next generation operating system. From time to time, we have
experienced sales of previously reserved inventory. During fiscal 2012, we
experienced a positive impact to gross margin of 0.2 percentage points due to
the sale of fully reserved inventory compared to a positive impact to gross
margin of 0.4 percentage points in the prior year. Services gross margin
decreased by 2.4 percentage points during fiscal 2012 primarily due to our
continued investments in our technical support organization to accommodate our
expanding customer base and higher service level expectations from our
enterprise customers. In addition, we experienced growth in our professional
consulting services which have lower gross margins than our support and
subscription businesses. Cost of services revenue increased by $15.2 million
primarily due to an $8.6 million increase in cash-based personnel costs related
to headcount increases, a $1.9 million increase in stock-based compensation
expense, a $1.8 million increase in costs associated with extended support
contracts, a $0.7 million increase in occupancy-related costs, a $0.5 million
increase in professional services expenses, a $0.5 million increase in travel
expenses, and a $1.1 million increase in depreciation and other expenses.
Operating expenses
Fiscal Year
2012 2011
% of % of
Amount ($) Revenue Amount ($) Revenue Change % Change
($ amounts in 000's)
Operating expenses:
Research and development 81,078 15 63,577 15 17,501 28
Sales and marketing 179,155 33 145,532 34 33,623 23
General and administrative 25,511 5 21,965 4 3,546 16
Total operating expenses 285,744 53 231,074 53 54,670 24
Research and development expense
Research and development expense increased by $17.5 million, or 28%, in fiscal
2012 compared to fiscal 2011 primarily due to an increase of $9.3 million in
cash-based personnel costs as a result of increased headcount to support the
development of new products and continued enhancements of our existing products.
In addition, we incurred higher stock-
47--------------------------------------------------------------------------------
Table of Contents
based compensation expense of $4.5 million, product development expenses of $1.2
million, depreciation expense of $0.9 million, supplies expense of $0.6 million,
occupancy-related costs of $0.4 million, and other expenses of $0.5 million. The
increase in research and development expense was partially offset by a 2%
year-over-year increase in the U.S. dollar exchange rate against the CAD, as a
majority of our research and development personnel are located in Canada. We
intend to continue to invest in our research and development organization but
expect research and development expense as a percentage of revenue to remain at
comparable levels in fiscal 2013.
Sales and marketing expense
Sales and marketing expense increased by $33.6 million, or 23%, in fiscal 2012
compared to fiscal 2011, primarily due to an increase of $21.6 million in
cash-based personnel costs as we continued to increase our sales headcount in
order to expand our global footprint. In addition, we incurred increases in
stock-based compensation expense of $3.5 million, marketing-related expenses of
$3.2 million, depreciation expenses of $1.6 million, occupancy-related costs of
$0.7 million, travel expenses of $1.0 million, supplies expense of $0.4 million,
and other expenses of $1.2 million. As a percentage of revenue, sales and
marketing expenses remained flat as we accelerated the investment in our sales
force during the past year to support future growth. The increase in sales and
marketing expense was partially offset by a 9% year-over-year increase in the
U.S. dollar exchange rate against the Euro. We intend to continue to make
investments in our sales resources and infrastructure, which are critical to
support sustainable growth but expect sales and marketing expense as a
percentage of revenue to remain at comparable levels in fiscal 2013.
General and administrative expense
General and administrative expense increased by $3.5 million, or 16%, in fiscal
2012 compared to fiscal 2011. Stock-based compensation expense increased by $1.6
million and cash-based personnel costs increased by $0.7 million. In addition,
we incurred $1.0 million of litigation settlement expense. We expect general and
administrative expense as a percentage of revenue to remain at comparable levels
in fiscal 2013.
Interest income and other expense, net
Fiscal Year
2012 2011 Change % Change
($ amounts in 000's)
Interest income 5,006 3,523 1,483 42
Other expense, net (485 ) (354 ) (131 ) 37
The $1.5 million increase in interest income in fiscal 2012 compared to fiscal
2011 was primarily due to interest earned on higher invested balances of cash,
cash equivalents and investments. The change in other expense, net, for fiscal
2012 when compared to fiscal 2011, was the result of higher foreign exchange
losses.
Provision for income taxes
Fiscal Year
2012 2011 Change % Change
($ amounts in 000's)
Provision for income taxes 38,160 29,581 8,579 29
Effective tax rate (%) 36 32 4
-
Our effective tax rate was 36% for fiscal 2012, compared with an effective tax
rate of 32% for fiscal 2011. The provision for income taxes for fiscal 2012 was
comprised primarily of federal, state and foreign income taxes as well as the
inclusion of stock option benefits, which affected the transfer pricing
calculations between some of our foreign subsidiaries. The 2011 effective tax
rate was impacted by the inclusion of stock option benefits, which affected the
transfer pricing calculations between some of our foreign subsidiaries, as well
as research and development tax credit. The increase in the provision for income
taxes for fiscal 2012 compared to fiscal 2011 was primarily due to an increase
in profits subject to U.S. tax, a decrease in stock option benefits, and their
corresponding impact on the transfer pricing calculations between some of our
foreign subsidiaries, and the reduction in U.S. Federal Research and Development
Tax Credit that was reinstated in fiscal 2013, but not recognized in fiscal
2012.
48--------------------------------------------------------------------------------
Table of Contents
During January 2013, the U.S. Federal Research and Development Tax Credit was
reinstated retroactively to fiscal 2012. The U.S. Federal Research and
Development Tax Credit benefit will be recorded in the first quarter of fiscal
2013, which is the period of enactment. The State of California will be
conducting an audit of our income tax returns for fiscal 2010 and fiscal 2011.
We do not currently expect a material impact on our results of operations to
arise from this audit that would have a detrimental impact on our income tax
liability.
Fiscal Years 2011 and 2010
Revenue
Fiscal Year
2011 2010
% of % of
Amount ($) Revenue Amount ($) Revenue Change % Change
($ amounts in 000's)
Revenue:
Product 197,408 45 135,140 42 62,268 46
Services 220,268 51 172,046 53 48,222 28
Ratable and other revenue 15,900 4 17,510 5 (1,610 ) (9 )
Total revenue 433,576 100 324,696 100 108,880 34
Revenue by Geography:
Americas 172,494 40 123,961 38 48,533 39
EMEA 152,385 35 121,604 38 30,781 25
APAC 108,697 25 79,131 24 29,566 37
Total revenue 433,576 100 324,696 100 108,880 34
Total revenue increased by $108.9 million, or 34%, in fiscal 2011 compared to
fiscal 2010. The adoption of the new revenue recognition rules, described in
Note 1of our consolidated financial statements in Part II, Item 8 of this Annual
Report on Form 10-K, contributed to $20.0 million of the increase, primarily
with respect to product revenue. The Americas and APAC regions contributed the
largest portion of our revenue growth on a percentage basis. Product revenue
increased by $62.3 million, or 46%, compared to fiscal 2010. The increase in
product revenue was primarily driven by greater sales volume and higher average
sales prices in our FortiGate product family due to increased demand for our
high-end products from enterprise and service provider customers. The impact of
adopting the new revenue recognition rules referenced above also contributed to
the increase in product revenue. Services revenue increased by $48.2 million, or
28%, in fiscal 2011 compared to fiscal 2010 due to the recognition of revenue
from our increased focus on contract renewals and our growing deferred revenue
balance consisting of subscription and support contracts sold to a larger
customer base. Ratable and other revenue was $4.2 million lower due to the
impact of no longer deferring ratable revenue as a result of the above-mentioned
adoption of new revenue recognition rules, offset by a $2.6 million sale of
previously-acquired patents.
Cost of revenue and gross margin
49--------------------------------------------------------------------------------
Table of Contents
Fiscal Year
2011 2010 Change % Change
($ amounts in 000's)
Cost of revenue:
Product 73,201 51,944 21,257 41
Services 35,486 26,967 8,519 32Ratable and other revenue 4,911 6,295 (1,384 ) (22 )
Total cost of revenue 113,598 85,206 28,392 33
Gross margin (%):
Product
62.9 61.6 1.3
Services 83.9 84.3 (0.4 )
Ratable and other revenue 69.1 64.0 5.1
Total gross margin
73.8 73.8 -
Total gross margin remained consistent in fiscal 2011 compared to fiscal 2010.
Product gross margin increased by 1.3 percentage points in fiscal 2011 compared
to fiscal 2010 primarily due to a greater mix of our high-end products. From
time to time, we have experienced sales of previously reserved inventory. During
fiscal 2011, we experienced a positive impact of 0.4 percentage points in our
product gross margin due to the sale of fully reserved inventory compared to a
positive impact of 0.7 percentage points in fiscal 2010. Services gross margin
was relatively flat as we continued to make investments in our support,
professional services and FortiGuard global security organizations at a rate
slightly greater than the increase in revenue in order to improve service
capabilities. Cost of services revenue increased by $8.5 million primarily due
to a $6.1 million increase in cash-based personnel costs related to headcount
increases, a $0.9 million increase in stock-based compensation expense, a $0.8
million increase in warranty and other expenses and a $0.7 million increase in
professional services costs. Ratable and other revenue gross margin increased by
5.1 percentage points as a result of a $2.6 million sale of previously-acquired
patents during fiscal 2011, which had a direct positive impact to gross margins.
Operating expenses
Fiscal Year
2011 2010
% of % of
Amount ($) Revenue Amount ($) Revenue Change % Change
($ amounts in 000's)
Operating expenses:
Research and development 63,577 15 49,801 15 13,776 28
Sales and marketing 145,532 34 111,968 34 33,564 30
General and administrative 21,965 4 22,380 8 (415 ) (2 )
Total operating expenses 231,074 53 184,149 57 46,925 25
Research and development expense
Research and development expense increased by $13.8 million, or 28%, in fiscal
2011 compared to fiscal 2010 primarily due to an increase in cash-based
personnel costs and stock-based compensation expense. Cash-based personnel costs
increased by $9.7 million as a result of increased headcount to support
continued enhancements of our existing products. Stock-based compensation
expense increased by $2.4 million primarily due to the increase in headcount and
stock price, and the introduction of the ESPP in fiscal 2011. In addition, we
incurred increases in product development expenses, such as non-recurring
engineering, testing and certifications of $0.8 million, depreciation expense of
$0.6 million, occupancy-related costs of $0.2 million and other expenses of $0.1
million. The increase in the CAD exchange rate against the U.S. dollar also
significantly contributed to the increase in research and development expenses
by $2.0 million.
Sales and marketing expense
Sales and marketing expense increased by $33.6 million, or 30%, in fiscal 2011
compared to fiscal 2010 as we continued to increase our sales headcount in order
to expand our global footprint. Cash-based personnel costs increased by
50--------------------------------------------------------------------------------
Table of Contents
$21.3 million primarily as a result of increased headcount. Stock-based
compensation expense increased by $5.5 million primarily due to the increase in
headcount and stock price, and the introduction of the ESPP in fiscal 2011. In
addition, we incurred increases in marketing-related expenses of $2.9 million
and travel of $1.5 million to support our overall revenue growth of 34%. We also
had a combined $1.6 million increase in depreciation and other expenses and a
$0.8 million increase in occupancy-related costs. As a percentage of revenue,
sales and marketing expenses decreased by 0.9 percentage points due to the
leverage achieved from the investment in our sales force in fiscal 2011, as
evidenced by revenue growth of 34% exceeding sales and marketing expenses growth
of 30%.
General and administrative expense
In fiscal 2011, general and administrative expense decreased by $0.4 million, or
2%, compared to fiscal 2010. Cash-based personnel costs increased by $1.5
million, stock-based compensation expense increased by $0.9 million and
occupancy-related costs and other expenses increased by a combined $0.1 million,
partially offset by $2.0 million in royalties received from a patent settlement
and a $1.0 million decrease in legal expenses compared to fiscal 2010.
Interest income and other expense, net
Fiscal Year
2011 2010 Change % Change
($ amounts in 000's)
Interest income 3,523 1,815 1,708 94
Other expense, net (354 ) (815 ) 461 (57 )
The $1.7 million increase in interest income in fiscal 2011 compared to fiscal
2010 was primarily due to interest earned on higher invested balances of cash,
cash equivalents and investments. The change in other expense, net, for fiscal
2011 when compared to fiscal 2010 was the result of lower foreign exchange
losses in fiscal 2011.
Provision for income taxes
Fiscal Year
2011 2010 Change % Change
($ amounts in 000's)
Provision for income taxes 29,581 15,096 14,485 96.0
Effective tax rate (%) 32 27 5
-
Our effective tax rate was 32% for fiscal 2011, compared with an effective tax
rate of 27% for fiscal 2010. The provision for income taxes for fiscal 2011 was
comprised primarily of federal, state and foreign income taxes. The 2010
effective tax rate was impacted by the inclusion of stock option benefits, which
affected the transfer pricing calculations between some of our foreign
subsidiaries, as well as the reinstated U.S. Federal Research and Development
Tax Credit. The increase in the provision for income taxes for fiscal 2011
compared to fiscal 2010 was primarily due to an increase in profits subject to
U.S. tax.
51--------------------------------------------------------------------------------
Table of Contents
Quarterly Results of Operations
The following table sets forth our unaudited quarterly statements of operations
data for the last eight fiscal quarters. The information for each of these
quarters has been prepared on the same basis as the audited annual financial
statements included elsewhere in this annual report and, in the opinion of
management, includes all adjustments, which includes only normal recurring
adjustments, necessary for the fair presentation of the results of operations
for these periods. This data should be read in conjunction with our audited
consolidated financial statements and related notes included elsewhere in this
annual report. These quarterly operating results are not necessarily indicative
of our operating results for any future period.
Three Months Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31,
2011 2011 2011 2011 2012 2012 2012 2012
($ amounts in 000's, except per share amounts)
Consolidated
Statements of
Operations Data:
Revenue:
Product 40,165 46,687 53,093 57,463 53,204 61,692 63,027 71,025
Services 48,686 52,671 57,835 61,076 62,138 65,412 69,782 76,711
Ratable and other
revenue (1) 4,415 3,665 5,498 2,322 1,905 1,858 3,459 3,426
Total revenue 93,266 103,023 116,426 120,861 117,247 128,962 136,268 151,162
Cost of revenue:
Product (2) 14,075 16,591 20,606 21,929 19,067 23,935 23,995 26,974
Services (2) 7,781 8,596 9,438 9,671 11,213 12,467 13,166 13,836
Ratable and other
revenue 1,560 1,371 1,095 886 763 725 647 632
Total cost of
revenue 23,416 26,558 31,139 32,486 31,043 37,127 37,808 41,442
Total gross
profit 69,850 76,465 85,287 88,375 86,204 91,835 98,460 109,720
Operating
expenses:
Research and
development (2) 14,421 15,942 16,834 16,379 19,667 20,388 20,498 20,525
Sales and
marketing (2) 32,718 35,896 36,934 39,984 42,036 44,259 44,743 48,117
General and
administrative
(2) 5,266 5,848 5,359 5,492 5,786 6,238 7,449 6,038
Total operating
expenses 52,405 57,686 59,127 61,855 67,489 70,885 72,690 74,680
Operating income
(3) 17,445 18,779 26,160 26,520 18,715 20,950 25,770 35,040
Interest income 793 863 904 963 1,085 1,203 1,318 1,400
Other (expense)
income, net (95 ) (207 ) 60 (112 ) (71 ) 73 (317 ) (170 )
Income before
income taxes 18,143 19,435 27,124 27,371 19,729 22,226 26,771 36,270
Provision for
income taxes 4,556 4,941 9,207 10,877 5,556 8,276 9,565 14,763
Net income (3) 13,587 14,494 17,917 16,494 14,173 13,950 17,206 21,507
Net income per
share
attributable to
common
stockholders (4):
Basic 0.09 0.10 0.12 0.11 0.09 0.09 0.11 0.13
Diluted 0.08 0.09 0.11 0.10 0.09 0.08 0.10 0.13
_______________________________________________
(1) Ratable and other revenue included the sales of previously-acquired
patents of $2.6 million, $1.8 million and $1.9 million for the three
months ended September 30, 2011, September 30, 2012 and December 31, 2012,
respectively.
52--------------------------------------------------------------------------------
Table of Contents
(2) Includes stock-based compensation expense and patent settlement income as
follows:
Three Months Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31,
2011 2011 2011 2011 2012 2012 2012 2012 (3)
($ amounts in 000's)
Cost of product
revenue 22 43 64 54 64 88 85 96
Cost of services
revenue 198 362 564 666 745 941 1,018 1,032
Research and
development 453 985 1,516 1,737 1,957 2,292 2,525 2,452
Sales and
marketing 1,900 1,681 2,708 3,036 3,443 3,475 3,879 1,996
General and
administrative 497 799 882 848 1,037 1,056 1,323 1,186
Total
stock-based
compensation
expense 3,070 3,870 5,734 6,341 7,246 7,852 8,830 6,762
Patent
settlement
income 477 478 478 478 478 478 478 478
Total stock
based
compensation
expense and
patent
settlement
income 3,547 4,348 6,212 6,819 7,724 8,330 9,308 7,240
_______________________________________________
(3) During the three months ended December 31, 2012, we recorded a $1.5
million non-recurring cumulative out-of-period adjustment to reflect a
true-up related to forfeitures of stock awards granted to employees. Of this amount, $0.9 million and $0.6 million were related to fiscal 2011 and
the first three quarters of fiscal 2012, respectively. The adjustment
resulted in lower stock-based compensation expense and higher operating
income and net income during the three months ended December 31, 2012. We
believe the impact of the adjustment is not material to the current or
prior fiscal periods.
(4) See Note 7 to our consolidated financial statements in Part II, Item 8 of
this Annual Report on Form 10-K.
Seasonality, Cyclicality and Quarterly Revenue Trends
Our quarterly results reflect seasonality in the sale of our products,
subscriptions and services. In general, a pattern of increased customer buying
at year-end has positively impacted sales activity in the fourth quarter. In the
first quarter we generally experience lower sequential billings and product
revenues, which results in lower product revenue. In the third quarter, we
generally experience lower revenue in Europe compared to the second quarter due
to reduced economic activity in Europe during the summer months, but this may
not always be the case. Similarly, our gross margins and operating income have
been affected by these historical trends because expenses are relatively fixed
in the near-term. Although these seasonal factors are common in the technology
sector, historical patterns should not be considered a reliable indicator of our
future sales activity or performance. On a quarterly basis, we have usually
generated the majority of our product revenue in the final month of each quarter
and a significant amount in the last two weeks of a quarter. We believe this is
due to customer buying patterns typical in this industry.
Our total quarterly revenue over the past eight quarters has increased
sequentially in each quarter except the first quarter of fiscal 2012 which was
down slightly. Product revenue in all of the quarters of fiscal 2012 was higher
as compared to the same periods in fiscal 2011, which we believe was due in part
to the investments made in our sales organization, continued product innovation
and improvements in overall corporate IT spending.
53--------------------------------------------------------------------------------
Table of Contents
Three Months Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31,
2011 2011 2011 2011 2012 2012 2012 2012
($ amounts in 000's)
Consolidated
Statements of
Operations Data:
Revenue:
Product 40,165 46,687 53,093 57,463 53,204 61,692 63,027 71,025
Services 48,686 52,671 57,835 61,076 62,138 65,412 69,782 76,711
Ratable and
other revenue 4,415 3,665 5,498 2,322 1,905 1,858 3,459 3,426
Total revenue 93,266 103,023 116,426 120,861 117,247 128,962 136,268 151,162
As a percentage
of revenue:
Revenue (%):
Product 43 45 45 47 45 48 46 47
Services 52 51 50 51 53 51 51 51
Ratable and
other revenue 5 4 5 2 2 1 3 2
Total revenue 100 100 100 100 100 100 100 100
Quarterly Gross Margin Trend
Total gross margin has fluctuated on a quarterly basis primarily due to shifts
in the mix of sales between products and services. Product gross margin varies
based on the types of products sold and the average selling prices of our
products. Services gross margins were lower in each quarter of fiscal 2012
compared to the same quarter of fiscal 2011 as we made investments in our
support organizations at a rate slightly greater than the increase in services
revenue.
Three Months Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31,
2011 2011 2011 2011 2012 2012 2012 2012
Gross Margin by
Component of
Revenue:
Gross margin
(%):
Product 65 64 61 62 64 61 62 62
Services 84 84 84 84 82 81 81 82
Ratable and
other revenue 65 63 80 62 60 61 81 82
Total gross
margin 75 74 73 73 74 71 72 73
Three Months Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31,
2011 2011 2011 2011 2012 2012 2012 2012
Reconciliation
of GAAP to
non-GAAP gross
margin:
GAAP gross
margin (%) 75 74 73 73 74 71 72 73
Stock-based
compensation
expense - 1 1 1 - 1 1 -
Non-GAAP gross
margin 75 75 74 74 74 72 73 73
54--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
As of Fiscal Year End
2012 2011 2010
($ amounts in 000's)
Cash and cash equivalents 122,975 71,990 66,859
Investments 616,611 466,697 320,601Total cash, cash equivalents and investments 739,586 538,687
387,460
Working capital 249,970 256,706 201,776
Fiscal Year
2012 2011 2010
($ amounts in 000's)
Cash provided by operating activities 183,866 132,842 103,383
Cash used in investing activities (182,711 ) (166,826 ) (283,710 )
Cash provided by financing activities 50,156 39,797 34,019
Effect of exchange rates on cash and cash
equivalents (326 ) (682 ) 709
Net increase (decrease) in cash and cash
equivalents 50,985 5,131 (145,599 )
As of December 31, 2012, our cash, cash equivalents, and investments of $739.6
million were held for working-capital purposes and were invested primarily in
money market funds, commercial paper, corporate debt securities, municipal
bonds, certificates of deposit and term deposits and U.S. government and agency
debt securities. As of December 31, 2012, $26.6 million of our cash was held by
our international subsidiaries and is therefore not immediately available to
fund domestic operations unless the cash is repatriated. While we do not intend
to do so, should this amount be repatriated, it would be subject to U.S. federal
income tax which would be partially offset by foreign tax credits. We do not
enter into investments for trading or speculative purposes. We believe that our
existing cash and cash equivalents will be sufficient to meet our anticipated
cash needs for at least the next 12 months. Our future capital requirements will
depend on many factors including our growth rate, the timing and extent of
spending to support development efforts, the expansion of sales and marketing
activities, the introduction of new and enhanced products and services
offerings, the costs to ensure access to adequate manufacturing capacity and the
continuing market acceptance of our products. In the event that additional
financing is required from outside sources, we may not be able to raise it on
terms acceptable to us or at all. If we are unable to raise additional capital
when desired, our business, operating results and financial condition would be
adversely affected.
Fiscal Year
2012 2011 2010
($ amounts in 000's)
Net income 66,836 62,492 41,245
Adjustments for non-cash charges (1) 44,028 18,712 16,593
Net income before non-cash charges 110,864 81,204 57,838
Increase in deferred revenue 68,292 42,177 50,701
Increase in income taxes payable 28,265 35,964 16,017
Increase in accrued payroll and compensation 4,599 4,773
5,465
Increase in accounts payable and accrued
liabilities, net 1,262 8,566 4,800
Decrease in other assets 2,470 227 255
Decrease (increase) in prepaid expenses and
other current assets 791 (2,915 ) (3,685 )
Increase in accounts receivable-net (12,120 ) (23,246 ) (17,784 )
Increase in inventory (11,303 ) (6,034 ) (5,946 )
Increase in deferred tax assets (9,254 ) (7,874 ) (4,278 )
Net cash provided by operating activities 183,866 132,842 103,383
____________________
55--------------------------------------------------------------------------------
Table of Contents
(1) Non-cash charges consist of stock-based compensation expense, depreciation
and amortization, amortization of investment premiums, an excess tax
benefit from our employee stock option plans, and other non-cash items,
net. For additional information regarding such non-cash charges, see our
consolidated statements of cash flows in Part II, Item 8 of this Annual
Report on Form 10-K.
Operating Activities
In fiscal 2012, operating activities provided $183.9 million in cash as a result
of our billings growth, profitability, and the ability to successfully manage
our working capital. Net income was $66.8 million, increased by non-cash
adjustments of $44.0 million and sources of cash of $105.7 million partially
offset by uses of cash of $32.7 million from changes in operating assets and
liabilities. Non-cash adjustments consist of stock-based compensation expense of
$30.7 million, amortization of investment premiums of $13.0 million,
depreciation and amortization of $11.6 million, and other non-cash items, net,
of $0.9 million, partially offset by an excess tax benefit from employee stock
option plans of $12.1 million. Sources of cash were related to a $68.3 million
increase in deferred revenue which was attributable primarily to increased sales
of our subscription and support services, which have yet to be recognized in
income, a $28.3 million increase in income tax payable, due to our continued
profitability and timing of tax payments, a $4.6 million increase in accrued
payroll and compensation primarily related to increased headcount and employer
taxes related to the exercise of stock options, a $2.5 million decrease in other
assets, a $1.3 million increase in accounts payable and accrued liabilities
related to timing of payments, and a $0.8 million decrease in prepaid expenses
and other current assets. Uses of cash were related to a $12.1 million increase
in accounts receivable due to the overall growth of our business and a six day
decrease (from 79 to 73 days) in days sales outstanding due to stronger
collections experience, a $11.3 million increase in inventory primarily to
support new product releases combined with the overall growth of our business,
and a $9.3 million increase in deferred tax assets. Days sales outstanding is
calculated as the ratio of ending accounts receivable, net of allowances,
divided by average daily sales.
In fiscal 2011, operating activities provided $132.8 million in cash as a result
of our strong performance primarily driven by billings growth, profitability,
and the ability to successfully manage our working capital. Net income was $62.5
million, increased by non-cash adjustments of $18.7 million and sources of cash
of $91.5 million partially offset by uses of cash of $39.8 million from changes
in operating assets and liabilities. Non-cash adjustments consist of stock-based
compensation expense of $19.0 million, amortization of investment premiums of
$12.5 million, and depreciation and amortization of $7.0 million, partially
offset by an excess tax benefit from employee stock option plans of $19.8
million. Sources of cash were related to a $42.2 million increase in deferred
revenue which was attributable primarily to increased sales of our subscription
and support services, which have yet to be recognized in income, a $36.0 million
increase in income tax payable, due to our continued profitability and timing of
tax payments, an $8.6 million increase in accrued liabilities and accounts
payable related to timing of payments, a $4.7 million increase in accrued
payroll and compensation primarily related to increased headcount and employer
taxes related to the exercise of stock options, and a $0.2 million decrease in
other assets. Uses of cash were related to a $23.2 million increase in accounts
receivable due to the overall growth of our business with days sales outstanding
remaining relatively flat (from 80 to 79 days), a $7.9 million increase in
deferred tax assets, a $6.0 million increase in inventory primarily to support
new product releases combined with the overall growth of our business, and a
$2.9 million increase in prepaid expenses and current other assets.
In fiscal 2010, operating activities provided $103.4 million in cash as a result
of our strong performance primarily driven by billings growth, profitability,
and the ability to successfully manage our working capital. Net income was $41.2
million, increased by non-cash adjustments of $16.6 million and sources of cash
of $77.0 million, partially offset by uses of cash of $31.4 million from changes
in operating assets and liabilities. Non-cash adjustments consist of stock-based
compensation expense of $9.3 million, amortization of investment premiums of
$7.3 million, and depreciation and amortization of $5.7 million, partially
offset by an excess tax benefit from employee stock option plans of $5.7
million. Sources of cash were related to a $50.7 million increase in deferred
revenue which was attributable primarily to increased sales of our subscription
and support services, which have yet to be recognized in income, an $16.0
million increase in income tax payable, due to our continued profitability and
timing of tax payments, a $5.5 million increase in accrued payroll and
compensation primarily related to increased headcount and employer taxes related
to the exercise of stock options, a $4.8 million increase in accrued liabilities
and accounts payable related to timing of payments, and a $0.3 million decrease
in other assets. Uses of cash were related to a $17.8 million increase in
accounts receivable due to the overall growth of our business with days sales
outstanding remaining relatively flat (from 78 to 80 days), a $5.9 million
increase in inventory primarily to support new product releases in the latter
part of the year combined with the overall growth of our business, a $4.2
million increase in deferred tax assets, and a $3.7 million increase in prepaid
expenses and other assets.
Investing Activities
In fiscal 2012, our investing activities consisted primarily of purchases and
sales of investments, and to a much lesser extent, capital expenditures. The
$182.7 million of cash used by investing activities was due to net purchases of
investments of
56--------------------------------------------------------------------------------
Table of Contents
$159.4 million, purchases of property and equipment of $22.1 million (including
$14.5 million to purchase land and building to support the growth in our
business operations) and acquisitions for $1.2 million.
In fiscal 2011, our investing activities consisted primarily of purchases and
sales of investments, and to a much lesser extent, capital expenditures. The
$166.8 million of cash used by investing activities was due to net purchases of
investments of $160.6 million, purchases of property and equipment of $3.6
million, and an acquisition for $2.6 million.
In fiscal 2010, our investing activities consisted primarily of purchases and
sales of investments, and to a much lesser extent, capital expenditures. The
$283.7 million of cash used by investing activities was due to net purchases of
investments of $280.0 million reflecting primarily the transfer of funds from
money market to corporate bonds, agency notes and commercial paper. We also
purchased property and equipment of $3.8 million.
Financing Activities
In fiscal 2012, our financing activities resulted in net cash provided of $50.2
million as a result of receiving proceeds of $27.2 million and $10.9 million
from the issuance of common stock under our stock option plans and ESPP,
respectively, and an excess tax benefit from employee stock option exercises of
$12.1 million.
In fiscal 2011, our financing activities resulted in net cash provided of $39.8
million as a result of receiving proceeds of $20.0 million from the issuance of
common stock under our stock option plans and an excess tax benefit from
employee stock exercises of $19.8 million.
In fiscal 2010, our financing activities resulted in net cash provided of $34.0
million as a result of receiving proceeds of $29.1 million from the issuance of
common stock under our stock option plans and warrants to purchase our common
stock and an excess tax benefit from employee stock option exercises of $5.8
million, partially offset by $0.9 million of issuance costs paid in connection
with our initial public offering, which had been accrued as of December 31,
2009.
Contractual Obligations and Commitments
The following summarizes our contractual obligations as of December 31, 2012:
Payments Due by Period
Less than More than
Total 1 year 1 - 3 years 3 - 5 years 5 years
($ amounts in 000's)
Operating leases (1) 16,833 8,775 7,481 577 -
Capital leases (2) 105 25 51 29
Purchase commitments (3) 30,040 30,040 - - -
Other contracts (4) 8,107 8,107 - - -
Total (5) 55,085 46,947 7,532 606 -
________________________(1) Consists of contractual obligations from non-cancelable office space under
operating leases.
(2) Consists of contractual obligations, including principal and imputed interest, from non-cancelable equipment financed under capital leases.
(3) Consists of minimum purchase commitments with independent contract
manufacturers.
(4) Consists of an estimate of all open purchase orders and contractual obligations in the ordinary course of business, other than commitments
with contract manufacturers and suppliers, for which we have not received
the goods or services. Purchase obligations do not include contracts that
may be cancelled without penalty. Although open purchase orders are
considered enforceable and legally binding, the terms generally allow us
the option to cancel, reschedule, and adjust our requirements based on our
business needs prior to the delivery of goods or performance of services.
(5) No tax liabilities related to uncertain tax positions have been included
in the table. As of December 31, 2012, we had $28.8 million of long-term
tax liabilities, including interest, related to uncertain tax positions.
Because of the high degree of uncertainty regarding the settlement of
these liabilities, we are unable to estimate the years in which future
cash outflows may occur.
Off-Balance Sheet Arrangements
During fiscal 2012, 2011 and 2010, we did not have any relationships with
unconsolidated organizations or financial partnerships, such as structured
finance or special purpose entities that would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.
57--------------------------------------------------------------------------------
Table of Contents
Recently Adopted Accounting Pronouncements
See Note 1 of the notes to our consolidated financial statements in Part II,
Item 8 of this Annual Report on Form 10-K for a full description of recently
adopted accounting pronouncements.
[ Back To asia.tmcnet.com's Homepage 's Homepage ]
|
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
