What changed in this filing

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Item 1A. Risk Factors

2020-11-06 compared with 2020-08-06 · 55 added, 58 removed, 787 unchanged (13% of the section changed)

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dollar, and the impact such fluctuations may have on the actual prices that our partners and customers are willing to pay for our products and services;

• compliance with existing laws and regulations that are applicable to our ability to conduct business with the public sector and other sectors;

• compliance with existing laws and regulations, and our ability to obtain and maintain permits and clearances, that are applicable to our ability to conduct business with the public sector and other sectors;

• litigation, litigation fees and costs, settlements, judgments and other equitable and legal relief granted related to litigation;

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• policy changes and uncertainty with respect to immigration laws, trade policy and tariffs, including increased tariffs applicable to countries where we manufacture our products, foreign imports and tax laws related to international commerce;

• political, economic and social instability, including geo-political instability and uncertainty, such as the impact of the United Kingdom’s exit from the European Union (“Brexit”);

• political, economic and social instability, including geo-political instability and uncertainty;

• general economic conditions, both in domestic and foreign markets;

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This variability and unpredictability could result in our failing to meet our internal operating plan or the expectations of securities analysts or investors for any period.

If we fail to meet or

exceed such expectations for these or any other reasons, the market price of our shares could fall substantially and we could face costly lawsuits, including securities class action suits.

If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fall substantially and we could

face costly lawsuits, including securities class action suits.

In addition, a significant percentage of our operating expenses are fixed in nature over the near term.

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We may experience slowing growth, or a decrease, in billings, revenue, operating margin and free cash flow for a number of reasons, including as a result of the COVID-19 pandemic, a slowdown in demand for our products or services, a shift in demand from products to services, increased competition, a decrease in the growth of our overall market or softness in demand in certain geographies or industry verticals, such as the service provider industry, changes in our strategic opportunities, execution risks and our failure for any reason to continue to capitalize on sales and growth opportunities due to other risks identified in the risk factors described in this periodic report.

profitability in future periods if we fail to increase billings, revenue or deferred revenue, do not appropriately manage our cost structure and free cash flow or encounter unanticipated liabilities.

Our expenses as a percentage of total revenue may be higher than expected if our revenue is lower than expected and, if our investments in sales and marketing and other functional areas do not result in expected billings and revenue growth, we may experience margin declines and may not be able to sustain profitability in future periods if we fail to increase billings, revenue or deferred revenue, do not appropriately manage our cost

structure and free cash flow or encounter unanticipated liabilities.

Any failure by us to maintain profitability, maintain our margins and continue our billings, revenue and free cash flow growth could cause the price of our common stock to materially decline.

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If our partners fail to perform, our ability to sell our products and services will be limited, and if we fail to optimize our channel partner model going forward, our operating results may be harmed.

Additionally, a small number of distributors represents a large percentage of our revenue and gross accounts receivable, and one distributor accounted for 31% of our total net accounts receivable as of June 30, 2020.

A significant portion of our sales is generated through a limited number of distributors, and substantially all of our revenue is from sales by our channel partners, including distributors and resellers.

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We may also become increasingly dependent on a more limited number of channel partners, as consolidation increases the relative proportion of our business for which each channel partner is responsible, which may magnify the risks described in the preceding paragraphs.

Exclusive Networks Group (“Exclusive”) and Ingram Micro, Inc.

(“Ingram Micro”) accounted for 31% and 11% of our total net accounts receivable as of June 30, 2020, respectively.

During the three and six months ended June 30, 2020, Exclusive accounted for 31% of our total revenue.

During the three months ended June 30, 2019, Exclusive and Ingram Micro accounted for 31% and 11% of our total revenue, respectively.

During the six months ended June 30, 2019, Exclusive and Ingram Micro accounted for 31% and 11% of our total revenue, respectively.

In addition to other risks associated with the concentration of accounts receivable and revenue from these distributors, Exclusive is a private entity and we may not have sufficient information to assess its financial condition and, accordingly, if Exclusive were to experience financial difficulties, we might not have advance notice.

Additionally, Exclusive may face liquidity risk as a private equity-backed company, which may harm our ability to collect on our accounts receivable.

Exclusive Networks Group (“Exclusive”), Ingram Micro, Inc.

(“Ingram Micro”) and Tech Data Corporation (“Tech Data”) accounted for 31%, 11% and 10% of our total net accounts receivable as of September 30, 2020, respectively, and six distributor customers accounted for 69% of our total net accounts receivable in the aggregate.

During the three and nine months ended September 30, 2020, Exclusive accounted for 29% and 30% of our total revenue, respectively, and Ingram Micro accounted for 10% of our total revenue in both periods.

During the three and nine months ended September 30, 2019, Exclusive accounted for 30% and 31% of our total revenue, respectively, and Ingram Micro accounted for 11% of our total revenue in both periods.

In addition to other risks associated with the concentration of accounts receivable and revenue from these distributors, all three are privately held entities and we may not have sufficient information to assess their financial conditions and, accordingly, if any were to experience financial difficulties, we might not have advance notice.

Additionally, Exclusive, Ingram Micro and Tech Data may face liquidity risk as private equity-backed companies, which may harm our ability to collect on our accounts receivable.

We provide sales channel partners with specific programs to assist them with selling our products and incentivize them to sell our products, but there can be no assurance that these programs will be effective.

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They may also have incentives to promote our competitors’ products to the detriment of our own, or they may cease selling our products altogether.

We cannot ensure that we will retain these channel partners or that we will be able to secure additional or replacement partners

or that existing channel partners will continue to perform.

We cannot ensure that we will retain these channel partners or that we will be able to secure additional or replacement partners or that existing channel partners will continue to perform.

The loss of one or more of our significant channel partners or the failure to obtain and ship a number of large orders each quarter through them could harm our operating results.

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Our FortiGuard and other security subscription and FortiCare technical support services revenue has historically accounted for a significant percentage of our total revenue.

Revenue from the sale of new, or from the renewal of existing, FortiGuard and other security subscription and FortiCare technical support service contracts may decline and fluctuate as a

result of a number of factors, including fluctuations in purchases of FortiGate appliances or our Fortinet Security Fabric platform products, changes in the sales mix between products and services, end-customers’ level of satisfaction with our products and services, the prices of our products and services, the prices of products and services offered by our competitors, reductions in our customers’ spending levels and the timing of revenue recognition with respect to these arrangements.

Revenue from the sale of new, or from the renewal of existing,

FortiGuard and other security subscription and FortiCare technical support service contracts may decline and fluctuate as a result of a number of factors, including fluctuations in purchases of FortiGate appliances or our Fortinet Security Fabric platform products, changes in the sales mix between products and services, end-customers’ level of satisfaction with our products and services, the prices of our products and services, the prices of products and services offered by our competitors, reductions in our customers’ spending levels and the timing of revenue recognition with respect to these arrangements.

If our sales of new, or renewals of existing, FortiGuard and other security subscription and FortiCare technical support service contracts decline, our revenue and revenue growth may decline and our business could suffer.

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Defects or vulnerabilities may impede or block network traffic, cause our products or services to be vulnerable to electronic break-ins, cause them to fail to help secure our customers or cause our products or services to allow unauthorized access to our customers’ networks.

Additionally, any perception that our products have product vulnerabilities, whether or not accurate, may cause reputation harm.

We are also susceptible to errors, defects, vulnerabilities or attacks that may arise at, or be inserted into our products in, different stages in our supply chain, or manufacturing processes, and which are out of our control.

Attacks may target specific unidentified or unresolved vulnerabilities that exist or arrive only in the supply chain, making these attacks virtually impossible to anticipate and difficult to defend against.

If we are unable to maintain an effective supply chain security risk management program, then the security and integrity of our products and the updates to those products that our customers receive could be exploited by third parties or insiders.

Different customers deploy and use our products in different ways, and certain deployments and usages may subject our products to adverse conditions that may negatively impact the effectiveness and useful lifetime of our products.

Our networks and products, including cloud-based technology, could be targeted by attacks specifically designed to disrupt our business and harm our reputation.

We cannot ensure that our products will prevent all security threats.

Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques.

In addition, defects or errors in our FortiGuard and other security subscription or FortiCare updates or our FortiGate appliances and operating systems could result in a failure of our

FortiGuard and other security subscription services to effectively update end-customers’ FortiGate appliances and cloud-based products and thereby leave customers vulnerable to attacks.

We cannot ensure that our products will prevent all adverse security events.

Because the techniques used by malicious adversaries to access or sabotage networks change frequently and generally are not recognized

until launched against a target, we may be unable to anticipate these techniques.

In addition, defects or errors in our FortiGuard and other security subscription or FortiCare updates or our FortiGate appliances and operating systems could result in a failure of our FortiGuard and other security subscription services to effectively update end-customers’ FortiGate appliances and cloud-based products and thereby leave customers vulnerable to attacks.

Furthermore, our solutions may also fail to detect or prevent viruses, worms or similar threats due to a number of reasons such as the evolving nature of such threats and the continual emergence of new threats that we may fail to add to our FortiGuard databases in time to protect our end-customers’ networks.

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In addition, our systems, processes and controls may not prevent or detect all errors, omissions, malfeasance or fraud, such as corruption and improper “side agreements” that may impact revenue recognition or result in financial liability.

productivity and the quality of our products and services may also be adversely affected if we do not integrate and train our new employees quickly and effectively.

Our productivity and the quality of our products and services may also be adversely affected if we do not integrate and train our new employees quickly and effectively.

Any future growth would add complexity to our organization and require effective coordination throughout our organization.

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Selling our solutions to the U.S.

government, whether directly or through channel partners, also subjects us to certain regulatory and contractual requirements and risks.

Failure to comply with these requirements by either us or our channel partners could subject us to investigations, fines, suspension or debarment from doing business with the U.S.

government or one of its divisions, and other penalties and damages, which could have an adverse effect on our business, operating results, financial condition and prospects.

government, whether directly or through channel partners, also subjects us to certain regulatory and contractual requirements, government permit and clearance requirements and other risks.

Failure to comply with these requirements or to obtain and maintain government permits and clearances required to do certain business, by either us or our channel partners, could subject us to investigations, fines, suspension, limitations on business or debarment from doing business with the U.S.

government or one of its divisions, as well as other penalties and damages, which could have an adverse effect on our business, operating results, financial condition and prospects.

Any violations of regulatory and contractual requirements could result in us being suspended or debarred from future government contracting.

Any of these outcomes could have an adverse effect on our revenue, operating results, financial condition and prospects.

These laws and regulations impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts, loss of exclusive rights in our IP and temporary suspension or permanent debarment from government contracting.

These laws, regulations and other requirements impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts, loss of exclusive rights in our IP and temporary suspension, permanent debarment from government contracting, or other limitations on doing business.

Any such damages, penalties, disruptions or limitations in our ability to do business with the public sector could have an adverse effect on our business and operating results.

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Economic uncertainty in various global markets caused by political instability and conflict and economic challenges caused by the COVID-19 pandemic has resulted, and may continue to result, in weakened demand for our products and services and difficulty in forecasting our financial results and managing inventory levels.

Political developments impacting government spending and international trade, including potential government shutdowns and election year instability in the United States, continued uncertainty surrounding the United Kingdom’s departure from the EU and trade disputes and tariffs, may negatively impact markets and cause weaker macro-economic conditions.

The effects of these events may continue due to potential

additional U.S.

government shutdowns and developments resulting from the 2020 presidential election, instability in the United Kingdom and the EU as negotiations for the terms of Brexit continue, with the ultimate outcome still uncertain, and the United States’ ongoing trade disputes with China and other countries.

Political developments impacting government spending and international trade, including potential government shutdowns and election year instability in the United States and trade disputes and tariffs, may negatively impact markets and cause weaker macro-economic conditions.

The effects of

these events may continue due to potential U.S.

government shutdowns and developments resulting from the 2020 presidential election, and the United States’ ongoing trade disputes with China and other countries.

The continuing effect of any or all of these events could adversely impact demand for our products, harm our operations and weaken our financial results.

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While we do not currently expect these tariffs to have a significant effect on our raw material and product import costs, if the United States expands increased tariffs, or retaliatory trade measures are taken by China or other countries in response to the tariffs, the cost of our products could increase, our operations could be disrupted or we could be required to raise our prices, which may result in the loss of customers and harm to our reputation and operating performance.

Any modification in these areas, any shift in the enforcement or scope of existing regulations or any change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential end-customers with international operations and

could result in increased costs.

Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations.

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• funding authorizations and requirements unique to government agencies, with funding or purchasing reductions or delays adversely affecting public sector demand for our products;

• geopolitical matters, including tariff and trade disputes, Brexit and government shutdowns;

• geopolitical matters, including tariff and trade disputes, government shutdowns and trade protectionism and other political dynamics that may adversely affect our ability to sell in certain locations or obtain the requisite permits and clearances required for certain purchases by government organizations of our products and services;

• rules and regulations applicable to certain government sales, including GSA regulations.

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If we, our channel partners or other third parties do not effectively assist our customers in planning, deploying and operational proficiency for our products, succeed in helping our customers quickly resolve post-deployment issues and provide effective ongoing support, our ability to sell additional products and services to existing customers would be adversely affected and our reputation with potential customers could be damaged.

Many large end-customers, and service provider or government organization end-customers, require higher levels of support than smaller end-customers because of their more complex

deployments and more demanding environments and business models.

If we, our channel partners or other third parties fail to meet the requirements of our larger end-customers, it may be more difficult to execute on our strategy to increase our penetration with large businesses, service providers and government organizations.

Many large end-customers, and service provider or government organization end-customers, require higher levels of support than smaller end-customers because of their more complex deployments and more demanding environments and business models.

If we, our channel partners or other third parties fail to

meet the requirements of our larger end-customers, it may be more difficult to execute on our strategy to increase our penetration with large businesses, service providers and government organizations.

Our failure to maintain high-quality support services would have a material adverse effect on our business, financial condition and results of operations and may subject us to litigation, reputational damage, loss of customers and additional costs.

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Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates.

Forecasts of our income tax position and effective tax rate are complex, subject to uncertainty and periodic updates because our income tax position for each year combines the effects of a mix of profits earned and losses incurred by us in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and

liabilities, the impact of various accounting rules and changes to these rules and tax laws, the results of examinations by various tax authorities, and the impact of any acquisition, business combination or other reorganization or financing transaction.

tax authorities, and the impact of any acquisition, business combination or other reorganization or financing transaction.

To forecast our global tax rate, we estimate our pre-tax profits and losses by jurisdiction and forecast our tax expense by jurisdiction.

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In order to remain competitive, we may seek to acquire additional businesses, products, technologies or IP, such as patents.

For example, we closed our acquisitions of enSilo and CyberSponse in the fourth quarter of 2019, and we acquired OPAQ Networks, Inc.

in July 2020.

For example, we closed our acquisitions of enSilo and CyberSponse in the fourth quarter of 2019, and we acquired OPAQ in July 2020.

For any possible future acquisitions, we may not be successful in negotiating the terms of the acquisition or financing the acquisition.

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Our products must successfully interoperate with products from other vendors.

As a result, when problems occur in a network, it

may be difficult to identify the sources of these problems.

The occurrence of hardware and software errors, whether or not caused by our products, could delay or reduce market acceptance of our products and have an adverse effect on our business and financial performance, and any necessary revisions may cause us to incur significant expenses.

As a result, when problems occur in a network, it may be difficult to identify the sources of these problems.

The occurrence of hardware and software errors, whether or not

caused by our products, could delay or reduce market acceptance of our products and have an adverse effect on our business and financial performance, and any necessary revisions may cause us to incur significant expenses.

The occurrence of any such problems could harm our business, financial condition and results of operations.

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If our contract development projects are not successfully completed, or are not completed in a timely fashion, our product development could be delayed and our business generally could suffer.

Costs for contract development can be substantial and our profitability may be harmed

if we are unable to recover these costs.

Although the market expects rapid introduction of new products or product enhancements to respond to new threats, the development of these products is difficult and the timetable for commercial release and availability is uncertain and there can be long time periods between releases and availability of new products.

Costs for contract development can be substantial and our profitability may be harmed if we are unable to recover these costs.

Although the market expects rapid introduction of new products or product

enhancements to respond to new threats, the development of these products is difficult and the timetable for commercial release and availability is uncertain and there can be long time periods between releases and availability of new products.

We have in the past and may in the future experience unanticipated delays in the availability of new products and services and fail to meet previously announced timetables for such availability.

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We face many competitors across the different cybersecurity markets.

Our competitors include companies such as Barracuda,

Check Point, Cisco, CrowdStrike, F5 Networks, FireEye, Forcepoint, Imperva, Juniper, McAfee, Palo Alto Networks, Proofpoint, SonicWALL, Sophos, Trend Micro and Zscaler.

Our competitors include companies such as Barracuda, Check Point, Cisco, CrowdStrike, F5 Networks, FireEye, Forcepoint, Imperva, Juniper, McAfee, Palo Alto Networks, Proofpoint, SonicWALL, Sophos, Trend Micro and Zscaler.

Many of our existing and potential competitors enjoy substantial competitive advantages such as:

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Furthermore, even if the functionality offered by network infrastructure providers is more limited than our products, a significant number of customers may elect to accept such limited functionality in lieu of adding appliances from an additional vendor such as us.

Many organizations have invested substantial personnel and financial resources to design and operate their

networks and have established deep relationships with other providers of networking products, which may make them reluctant to add new components to their networks, particularly from other vendors such as us.

Many organizations have invested substantial personnel and financial resources to design and operate their networks and have established deep relationships with other providers of networking products, which may make them reluctant to add new components to their networks, particularly from other vendors such as us.

In addition, an organization’s existing vendors or new vendors with a broad product offering may be able to offer concessions that we are not able to match because we currently offer only network security products and have fewer resources than many of our competitors.

If organizations are reluctant to add additional network infrastructure from new vendors or otherwise decide to work with their existing vendors, our business, financial condition and results of operations will be adversely affected.

If organizations are

reluctant to add additional network infrastructure from new vendors or otherwise decide to work with their existing vendors, our business, financial condition and results of operations will be adversely affected.

Risks Related to Intellectual Property

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courts, and there is a risk that these licenses could be construed in a way that, for example, could impose unanticipated conditions or restrictions on our ability to commercialize our products.

In this event, we could be required to seek licenses from third parties to continue offering our products, to make our

proprietary code generally available in source code form, to re-engineer our products or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which requirements could adversely affect our business, operating results and financial condition.

In this event, we could be required to seek licenses from third parties to continue offering our products, to make our proprietary code generally available in source code form, to re-engineer our products or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which requirements could adversely affect our business, operating results and financial condition.

Claims by others that we infringe their proprietary technology or other litigation matters could harm our business.

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The market price of our common stock may be subject to wide fluctuations in response to, among other things, the risk factors described in this periodic report, news about us and our financial results, the impact of the COVID-19 pandemic, news about our competitors and their results, and other factors such as rumors or fluctuations in the valuation of companies perceived by investors to be comparable to us.

For example, the six months ended June 30, 2020, the closing price of our common stock ranged from $75.70 to $145.62 per share.

For example, during the nine months ended September 30, 2020, the closing price of our common stock ranged from $75.70 to $149.60 per share.

Furthermore, stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies.

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In July 2020, our board of directors approved a $500.0 million increase in the authorized stock repurchase amount under the Repurchase Program and extended the term of the Repurchase Program to February 28, 2022, bringing the aggregate amount authorized to be repurchased to $3.0 billion.

As of August 6, 2020, $1.05 billion remained available for future share repurchases under the Repurchase Program.

As of September 30, 2020, $1.05 billion remained available for future share repurchases under the Repurchase Program.

Share repurchases under the Repurchase Program could affect the price of our common stock, increase stock price volatility and diminish our cash reserves.

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Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision.

This provision, as well as provisions providing that certain litigation matters may only be brought against us in state or federal courts in the State of Delaware, may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees.

forum that it finds favorable for disputes with us or any of our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of a substantial majority of all of our outstanding common stock.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors