What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-03 compared with 2020-11-06 · 160 added, 264 removed, 207 unchanged (67% of the section changed)

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These statements include, among other things, statements concerning our expectations regarding:

• the duration and impact of the COVID-19 pandemic;

• the duration and impact of the COVID-19 pandemic and the implementation of “return to office” plans;

• continued growth and market share gains;

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• the impact of our product innovation strategy;

• the effects of government regulation, tariffs and other related policies;

• drivers of long-term growth and operating leverage, such as sales productivity, functionality and value in our standalone and bundled subscription service offerings;

• the effects of government regulation, tariffs and other policies;

• the effects of the global chip shortage and other factors affecting our manufacturing capacity and inventory management;

• drivers of long-term growth and operating leverage, such as sales productivity, functionality and value in our subscription service offerings;

• growing our sales to businesses, service providers and government organizations, our ability to execute these sales and of the complexity of selling to all segments (including the increased competition and unpredictability of timing associated with sales to larger enterprises), the impact of sales to these organizations on our long-term growth, expansion and operating results, and the effectiveness of our internal sales organization;

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• trends in our operating expenses, including sales and marketing expense, research and development expense, general and administrative expense, and expectations regarding these expenses;

• risks and expectations related to acquisitions or sales of assets, including integration issues related to product plans and products, including the acquired technology;

• continued investments in research and development, and expectations that our research and development expense will increase in absolute dollars during 2020;

• continued investments in our sales resources and infrastructure and marketing strategy, and expectations that our sales and marketing expense will increase in absolute dollars during 2020;

• expectations that our general and administrative expense will increase in absolute dollars during 2020;

• risks and expectations related to acquisitions and equity interests in private companies, including integration issues related to product plans and products, including the acquired technology;

• expectations that our operating expense will increase in absolute dollars during 2021;

• expectations that proceeds from the exercise of stock options in future years will be adversely impacted by the increased mix of restricted stock units versus stock options granted;

• estimates of a range of 2020 spending on our headquarters expansion project;

• expectations regarding uncertain tax benefits and our effective domestic and global tax rates, and the impact of the Tax Cuts and Jobs Act (the “2017 Tax Act”);

• estimates of a range of 2021 spending on our headquarters expansion project and of the anticipated completion timeline for the project;

• expectations regarding uncertain tax benefits and our effective domestic and global tax rates, and the impact of the Tax Cuts and Jobs Act (the “2017 Tax Act ”) and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”);

• expectations regarding spending related to real estate and other capital expenditures and to the impact on free cash flows;

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• statements regarding expected outcomes and liabilities in litigation;

• our intentions regarding share repurchases and the sufficiency of our existing cash, cash equivalents and investments to meet our cash needs for at least the next 12 months;

• our intentions regarding share repurchases and the sufficiency of our existing cash, cash equivalents and investments to meet our cash needs, including our debt servicing requirements, for at least the next 12 months;

• other statements regarding our future operations, financial condition and prospects and business strategies;

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Business Overview

Fortinet is a global leader in cybersecurity solutions provided to a wide variety of organizations, including enterprises, communication service providers, government organizations and small businesses.

Fortinet is a global leader in cybersecurity solutions provided to a wide variety of organizations, including enterprises, communication and security service providers, government organizations and small businesses.

Our cybersecurity solutions are designed to provide broad visibility and segmentation of the digital attack surface through our integrated Fortinet Security Fabric platform, which features automated protection, detection and response.

The Fortinet Security Fabric platform helps organizations secure their environments and reduce their security and network complexities.

The Fortinet Security Fabric platform leverages a common operating system or integration to this operating system across our product offerings and helps organizations secure their environments and reduce their security and network complexities.

The Fortinet Security Fabric platform has an open architecture designed to connect Fortinet solutions and third-party solutions into a single ecosystem, enabling integration and automation.

Our product offerings consist of our FortiGate network security product family and our non-FortiGate products.

Our product offerings consist of our FortiGate network security products and our non-FortiGate products.

Our FortiGate hardware and software licenses are sold with a set of security services in addition to networking features.

Our security services are enabled by FortiGuard Labs, which provides threat research and artificial intelligence capabilities from a cloud network to deliver protection services to each FortiGate appliance and virtual machine that is registered by the end-customer.

Our FortiOS operating system, virtual machines and associated security and networking functions are combined to form the Fortinet Security Fabric platform.

This approach to security ties discrete security solutions together into an integrated whole.

Our FortiOS operating system, associated security and networking functions, and products that run or are integrated with FortiOS are combined to form the Fortinet Security Fabric platform.

This approach to security ties discrete security solutions together into an integrated whole that provides centralized management and visibility, automation and intelligence sharing to simplify network and security operations and rapid response to threats.

Our proprietary Security Processing Units (“SPUs”) are Application-Specific Integrated Circuits that are designed to enhance the security processing capabilities implemented in software by accelerating computationally intensive tasks such as firewall policy enforcement, software-defined wide-area network (“SD-WAN”), network address translation, Intrusion Prevention Systems (“IPS”), threat detection and encryption.

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• Security-Driven Networking —We derive a majority of product sales from our FortiGate network security appliances.

Our FortiGate network security appliances include a broad set of built-in security and networking features and functionalities, including firewall, next-generation firewall, secure web gateway, secure sockets layer inspection, SD-WAN, IPS, sandboxing, data leak prevention, virtual private network (“VPN”), switch and wireless controller and WAN edge.

Our FortiGate network security appliances include a broad set of built-in security and networking features and functionalities, including firewall, next-generation firewall, secure web gateway, secure sockets layer (“SSL”) inspection, software-defined wide area network (“SD-WAN”), Intrusion Prevention system (“IPS”), sandboxing, data leak prevention, virtual private network (“VPN”), switch and wireless controller and wide area network (“WAN”) edge.

Our network security appliances are managed by our FortiOS network operating system, which provides the foundation for FortiGate security functions.

We enhance the performance of our network security appliances from branch to data center by designing and implementing SPU technology within our appliances, enabling us to add security and network functionality with minimal impact to network throughput performance.

We enhance the performance of our network security appliances from branch to data center by designing and implementing Security Processing Units (“SPUs”) technology within our appliances, enabling us to add security and network functionality with minimal impact to network throughput performance.

• Infrastructure Security —The Fortinet Security Fabric platform extends beyond the network to cover other attack vectors.

Other infrastructure solutions covered include teleworker and remote security solutions such as FortiAuthenticator, FortiClient and FortiToken, as well as Secure Access (Wi-Fi and switch).

• Dynamic Cloud Security —We help customers connect securely to and across their individual, hybrid and multi-cloud environments by offering security through our virtual firewall and other software products and through integrated capabilities with major cloud platforms.

Other infrastructure solutions covered include Zero Trust Access solutions that provide teleworker and remote security such as FortiAuthenticator, FortiClient and FortiToken, as well as Secure Access (Wi-Fi and switch).

Fortinet also extends, protects, and enables customer cloud on-ramp needs through FortiSASE, our Secure Access Service Edge (SASE) solution that is a cloud-delivered service that combines network and security functions with WAN capabilities.

• Adaptive Cloud Security —We help customers connect securely to and across their individual, hybrid and multi-cloud environments by offering security through our virtual firewall and other software products and through integrated capabilities with major cloud platforms.

Our public and private cloud security solutions, including virtual appliances and hosted solutions, extend the core capabilities of the Fortinet Security Fabric platform in and across cloud environments, delivering security that follows their applications and data.

Our Secure SD-WAN for Multi-Cloud solution automates deployment of an overlay network across different cloud networks and offers visibility, control and centralized management that integrates functionality across multiple cloud environments.

Fortinet cloud security offerings are available across all major public and private cloud providers, including Amazon Web Services, Microsoft Azure, Google Cloud, Oracle Cloud, Alibaba Cloud, IBM Cloud and VMWare Cloud.

Our Cloud Security portfolio also includes securing applications, including email and web.

Fortinet cloud security offerings are available for deployment in major public and private cloud environments, including Amazon Web Services, Microsoft Azure, Google Cloud, Oracle Cloud, Alibaba Cloud, IBM Cloud and VMWare Cloud.

We also offer managed IPS and web application firewall (“WAF”) rules delivered by FortiGuard Labs as an overlay service to native security offerings offered by Amazon Web Services.

• Endpoint Protection, Internet of Things (“IoT”) and Operational Technology (“OT”) Security —We protect end-customers from advanced threats that target their devices and the data that reside on them through our advanced endpoint solutions that provide core endpoint protection, advanced threat protection, incident monitoring, and response.

Additionally, the proliferation of IoT and the digitization of OT devices has generated new opportunities for us to grow our business.

Additionally, the proliferation of IoT and OT devices has generated new opportunities for us to grow our business.

We offer network access control solutions that provide visibility, control and automated event responses in order to secure IoT devices.

• AI-Driven Security Operations —We develop and provide AI-driven security operations solutions, including FortiGuard and other security subscription services, endpoint detection and response, and our security operations, analytics, and reporting (“SOAR”) capabilities and solutions, that can be applied across the entire Fortinet Security Fabric platform.

• AI-Driven Security Operations —We develop and provide Artificial Intelligence (“AI”) driven security operations solutions, including FortiGuard and other security subscription services, endpoint detection and response, and our security orchestration, automation and response (“SOAR”) capabilities and solutions, that can be applied across the entire Fortinet Security Fabric platform.

These solutions deliver intelligence and insights.

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Correction of Prior Period Financial Data

As discussed further in Note 2 of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, we identified an immaterial error related to the commencement of revenue recognition for certain FortiCare standalone service contracts, which resulted in an understatement of revenue during the three and nine months ended September 30, 2019 and the six months ended June 30, 2020.

The correction of this error resulted in increases to service revenue, gross profit and operating income of $2.9 million for the six months ended June 30, 2020 and $0.6 million and $3.1 million for the three and nine months ended September 30, 2019, respectively.

Net income increased by $2.3 million for the six months ended June 30, 2020 and by $0.4 million and $2.2 million for the three and nine months ended September 30, 2019, which resulted in an increase to diluted net income per share of $0.02 for the six months ended June 30, 2020, no impact for the three months ended September 30, 2019 and an increase of $0.01 for the nine months ended September 30, 2019.

We evaluated the effect of this correction on the previous results of operations and determined that it did not impact any trends previously disclosed.

This correction did not impact billings, net cash provided by operating activities or free cash flows.

As discussed in Note 2 of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, we identified an immaterial error related to the commencement of revenue recognition for certain FortiCare support service contracts, which resulted in an understatement of revenue during the three months ended March 31, 2020.

The correction of this error resulted in an increase to service revenue, gross profit and operating income of $0.8 million for the three months ended March 31, 2020.

Net income increased by $0.6 million for the three months ended March 31, 2020.

We evaluated the effect of this correction on the previous results of operations and determined that it did not materially impact any trends previously disclosed.

This correction did not impact net cash provided by operating activities, billings or free cash flows.

Financial Highlights

• Total revenue was $651.1 million and $1.85 billion during the three and nine months ended September 30, 2020, respectively, an increase of 19% and 20%, respectively, compared to $548.1 million and $1.54 billion in the same periods last year, respectively.

Product revenue was $223.8 million and $628.0 million during the three and nine months ended September 30, 2020, respectively, an increase of 14% in both periods, compared to $197.1 million and $549.7 million in the same periods last year, respectively.

Service revenue was $427.3 million and $1.22 billion during the three and nine months ended September 30, 2020, respectively, an increase of 22% in both periods, compared to $351.0 million and $995.2 million in the same periods last year, respectively.

• Total gross profit was $511.9 million and $1.44 billion during the three and nine months ended September 30, 2020, respectively, an increase of 21% and 22%, respectively, compared to $424.0 million and $1.18 billion in the same periods last year, respectively.

• We generated operating income of $126.9 million and $362.4 million during the three and nine months ended September 30, 2020, respectively, an increase of 26% and 58%, respectively, compared to $100.6 million and $228.9 million in the same periods last year, respectively.

Operating income during the three and nine months ended September 30, 2020 included gains on an intellectual property (“IP”) matter of $1.1 million and $39.0 million, respectively.

• Cash, cash equivalents and investments were $1.77 billion as of September 30, 2020.

• During the nine months ended September 30, 2020, we repurchased 11.4 million shares of common stock under our Share Repurchase Program (the “Repurchase Program”), for a total purchase price of $1.05 billion.

• Deferred revenue was $2.39 billion as of September 30, 2020, an increase of $282.9 million, or 13%, from December 31, 2019.

• We generated cash flows from operating activities of $787.2 million, which includes $50.0 million proceeds from an IP matter, during the nine months ended September 30, 2020, an increase of $169.6 million, or 27%, compared to the same period last year.

• Total revenue was $710.3 million during the three months ended March 31, 2021, an increase of 23%, compared to $577.7 million in the same period last year.

Product revenue was $240.7 million during the three months ended March 31, 2021, an increase of 25%, compared to $192.3 million in the same period last year.

Service revenue was $469.6 million during the three months ended March 31, 2021, an increase of 22%, compared to $385.4 million in the same period last year.

• Total gross profit was $553.7 million during the three months ended March 31, 2021, an increase of 23%, compared to $449.0 million in the same period last year.

• We generated operating income of $121.6 million during the three months ended March 31, 2021, an increase of 4%, compared to $116.7 million in the same period last year.

Operating income during the three months ended March 31, 2021 and 2020 included gains on an intellectual property (“IP”) matter of $1.1 million and $36.8 million, respectively.

• Cash, cash equivalents and investments were $3.09 billion as of March 31, 2021.

• In March 2021, we issued $1.0 billion of Senior Notes.

Long-term debt, net of unamortized discount and debt issuance costs, was $987.0 million as of March 31, 2021.

There was no such debt outstanding at December 31, 2020.

• Deferred revenue was $2.75 billion as of March 31, 2021, an increase of $140.3 million, or 5%, from December 31, 2020.

Short-term deferred revenue was $1.47 billion as of March 31, 2021, an increase of $72.3 million, or 5%, from December 31, 2020.

• We generated cash flows from operating activities of $315.9 million during the three months ended March 31, 2021, a decrease of $3.5 million, or 1%, compared to the same period last year.

The decrease was mainly due to the $50.0 million proceeds from an IP matter in the first quarter of 2020.

Our revenue growth was driven by both product and service revenue.

On a geographic basis, revenue continues to be diversified, which remains a key strength of our business.

During the three months ended September 30, 2020, the Americas region, the Europe, Middle East and Africa (“EMEA”) region and the Asia Pacific (“APAC”) region contributed 42%, 37% and 21% of our total revenue, respectively, and increased by 13%, 21% and 27% compared to the same period last year, respectively.

During the nine months ended September 30, 2020, the Americas region, the Europe, Middle East and Africa region and the Asia Pacific region contributed 42%, 38% and 20% of our total revenue, respectively, and increased by 16%, 21% and 23% compared to the same period last year, respectively.

Product revenue grew 14% during both the three and nine months ended September 30, 2020 compared to the same periods last year.

We experienced revenue growth across several of our hardware and software products, including SD-WAN and teleworker and remote security solutions.

Service revenue growth of 22% during both the three and nine months ended September 30, 2020 compared to the same periods last year was driven by the strength of our FortiGuard and other security subscription revenue, which grew 22% and 23%, respectively, and of our FortiCare technical support and other service revenue, which grew 21% and 22%, respectively, compared to the same periods last year.

During the three months ended March 31, 2021, the Americas region, the Europe, Middle East and Africa (“EMEA”) region and the Asia Pacific (“APAC”) region contributed 41%, 39% and 20% of our total revenue, respectively, and increased by 20%, 25% and 26% compared to the same period last year, respectively.

Product revenue grew 25% during the three months ended March 31, 2021 compared to the same period last year.

We experienced revenue growth across many of our products primarily due to an increase in product revenue from our security fabric platform products, including our SD-WAN solutions, and software licenses.

Service revenue growth of 22% during the three months ended March 31, 2021, compared to the same period last year, was driven by the strength of our FortiGate technical support and other service revenue and FortiGuard and other security subscription revenue, which grew 23% and 21%, respectively, compared to the same period last year.

Our billings were diversified on a geographic basis.

During the three months ended September 30, 2020, approximately 50% of our billings in the aggregate were from over 80 countries that individually contributed less than 3% of our billings.

During the third quarter of 2020, we acquired OPAQ Networks, Inc.

(“OPAQ”) to further enhance the Fortinet Security Fabric platform by providing enterprises with OPAQ’s patented Zero Trust Network Access, SASE cloud solution.

The impact of this acquisition was not material to our condensed consolidated financial statements.

During the three and nine months ended September 30, 2020, we recognized gains of $1.1 million and $39.0 million, respectively, on an IP matter in connection with a mutual covenant-not-to-sue and release agreement with a competitor in the network security industry.

Excluding the gains on the IP matter, operating expenses as a percentage of revenue increased by 0.3 percentage points and decreased by 0.8 percentage points, respectively, during the three and nine months ended September 30, 2020 compared to the same periods last year.

Headcount increased to 8,075 employees and contractors as of September 30, 2020, a 4% increase compared to 7,756 as of June 30, 2020 and a 14% increase compared to 7,082 as of December 31, 2019.

The acquisition of OPAQ increased headcount by 44 employees.

During the three months ended March 31, 2021, approximately 50% of our billings in the aggregate were from over 80 countries that individually contributed less than 3% of our billings.

During the three months ended March 31, 2021 and 2020, we recognized gains of $1.1 million and $36.8 million, respectively, on an IP matter in connection with a mutual covenant-not-to-sue and release agreement with a competitor in the network security industry.

Excluding the gains on the IP matter in the first quarter of 2020 and 2021, operating expenses as a percentage of revenue decreased by 2.9 percentage points during the three months ended March 31, 2021 compared to the same period last year.

Headcount increased to 8,615 employees and contractors as of March 31, 2021, a 5% increase compared to 8,238 as of December 31, 2020 and a 16% increase compared to 7,448 as of March 31, 2020.

COVID-19 Update

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In response to the pandemic, we have taken a number of actions to protect our employees, including restricting travel and directing most of our employees to work from home.

Where onsite work is permitted, we have implemented measures such as staggered work shifts, social distancing, the use of face coverings, health safety awareness training and frequent disinfection of shared spaces.

We have implemented our readiness plans, which include steps to maintain critical internet infrastructure with most employees working remotely.

We are also providing free online information technology security training for the public, aimed at helping high school and college students and professionals augment their security skill sets to open career opportunities and to help narrow the security skills gap.

As of September 30, 2020, there have been over 600,000 registrations for our free online trainings since we launched the program.

While the broader implications of the COVID-19 pandemic on our employees and overall financial performance remain uncertain, we have seen certain impacts on our business and operations, results of operations, financial condition, cash flows, liquidity and capital and financial resources as of and during the three and nine months ended September 30, 2020.

Where onsite work is permitted, we have implemented measures such

as staggered work shifts, social distancing, the use of face coverings, health safety awareness training and frequent disinfection of shared spaces.

In March 2020, we implemented our readiness plans, which include steps to maintain critical internet infrastructure with many employees working remotely.

We are also continuing to provide free online information technology security training for the public, aimed at helping high school and college students and professionals augment their security skill sets to open career opportunities and to help narrow the security skills gap.

As of March 31, 2021 , there have been over 950,000 registrations for our free online trainings since we launched the program.

We will continue to provide free online trainings throughout 2021.

Conversely, some aspects of our business do not appear to have been significantly affected.

During the three and nine months ended September 30, 2020, we have observed the following:

• The practice of social distancing in most countries has reduced the ability for travel by our employees.

In-person sales and marketing events or meetings that would normally have been held during the three and nine months ended September 30, 2020 were canceled, postponed or converted into virtual events.

During the three months ended March 31, 2021 , we have observed the following:

• In most countries, our employees’ ability to travel was reduced.

In-person sales and marketing events or meetings that would normally have been held were canceled, postponed or converted into virtual events.

As a result, expenses related to travel and marketing events decreased significantly.

To the extent that it becomes safe for our employees to travel and for us to hold or attend marketing events, these expenses may increase in the future, although we cannot predict if or when such expenses will increase or return to pre-pandemic levels.

• We have offered payment terms in excess of our contractual agreements to some of our distributor customers, which has resulted in an increase to the average collection period of our trade receivables.

As of September 30, 2020, 94% of our outstanding trade accounts receivable was due to be collected during the fourth quarter of 2020.

• The countries and geographic regions in which we experienced the fastest billings growth in the third quarter of 2020, as compared to the third quarter of 2019, were countries and geographic regions in which the COVID-19 pandemic is generally considered to have had a comparatively shorter or less severe impact on the local population and economy during the quarter.

• We have noted that, for some of our customers, sales cycles appear to have lengthened, though it is unclear by how long or whether this trend will persist.

• Our average service contract duration remained consistent in the third quarter of 2020 as compared to the third quarter of 2019.

• In order to mitigate supply chain risk and in anticipation of fourth-quarter demand, we have increased our on-hand stock of certain products.

• The countries and geographic regions in which we experienced the fastest billings growth in the first quarter of 2021, as compared to the first quarter of 2020, were countries and geographic regions in which the COVID-19 pandemic is generally considered to have had a comparatively shorter or less severe impact on the local population and economy during the quarter.

• We have noted that, for some of our customers, sales cycles appear to have lengthened, though it is unclear whether this trend will persist.

• Our average service contract duration increased by approximately two months in the first quarter of 2021 as compared to the first quarter of 2020.

• In order to mitigate supply chain risk and in anticipation of future demand, we have increased our on-hand stock of certain products.

• The yield on investment-grade debt has decreased, and while the risk of credit losses on our investments and cash equivalents has not changed significantly, as the debt securities in our portfolio have matured, they have been replaced by securities with lower effective interest rates.

This has contributed to a decrease in our interest income during the three and nine months ended September 30, 2020, compared to the same periods last year.

• In accordance with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), we have deferred the deposit and payment of our employer’s share of Social Security taxes.

This has contributed to a decrease in our interest income during the three months ended March 31, 2021, compared to the same period last year.

• In accordance with the CARES Act, we have deferred the deposit and payment of our employer’s share of Social Security taxes.

This did not materially affect net cash provided by operating activities during the period.

• In addition, we have noted that, in certain countries, the COVID-19 infection rates have eased which might trigger the transition back to an in-person working model.

We expect our “return to office” plan to be country specific and in line with local employee health and safety protocols and other regulations.

T hrough the filing of this Quarterly Report on Form 10-Q, t here have been no material changes to the trends described above.

Going forward, however, the situation is uncertain, rapidly changing and hard to predict, and the COVID-19 pandemic may have a material negative impact on our future periods, including our results for the three months ending December 31, 2020 and beyond.

To highlight the uncertainty remaining for the three months ending December 31, 2020, it should be noted that, due to customer buying patterns and the efforts of our sales force and channel partners to meet or exceed quarterly quotas, we have historically received a substantial portion of each quarter’s sales orders and generated a substantial portion of each quarter’s billings and revenue during the last two weeks of the quarter.

Going forward, however, the situation is uncertain, rapidly changing and hard to predict, and the COVID-19 pandemic may have a material negative impact on our future periods.

If we experience significant changes in our billings growth rates, it will impact product revenue in the current quarter and FortiGuard and FortiCare service revenues in subsequent quarters, as we sell annual and multi-year service contracts that are recognized ratably over the contractual service term.

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Business Model

We typically sell our security solutions to distributors that sell to networking security and enterprise-focused resellers and to service providers and managed security service providers (“MSSPs”), who, in turn, sell to our end-customers.

During the three months ended September 30, 2020, we sold products to over 8,000 different resellers.

We typically sell our security solutions to distributors that sell to networking security focused resellers and to service providers and managed security service providers (“MSSPs”), who, in turn, sell to end-customers.

At times, we also sell directly to large service providers and major systems integrators who may sell to our end-customers or use our products and services to provided hosted solutions to other enterprises.

Our end-customers are located in over 80 countries and include small and medium-sized businesses, large enterprises and government organizations across a wide range of industries, including telecommunications, government, financial services, retail, technology, education, manufacturing and healthcare.

Our end-customers are located in over 80 countries and include small, medium and large enterprises and government organizations across a wide range of industries, including telecommunications, government, financial services, retail, technology, education, manufacturing and healthcare.

An end-customer deployment may involve as few as one or as many as thousands of appliances and other Fortinet Security Fabric platform products, depending on the end-customer’s size and security requirements.

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In a BYOL arrangement, a customer purchases a software license from us through our channel partners and deploys the software in a cloud provider’s environment.

Similarly, customers may purchase such a license from us and deploy in their private cloud.

Similarly, customers may purchase such a license from us and deploy in third-party clouds or in their private cloud.

Our customers purchase our hardware products and software licenses, as well as our FortiGuard and other security subscription and FortiCare technical support services.

We generally invoice at the time of our sale for the total price of the products and security and technical support services.

The invoice is typically payable within 30 to 60 days, though, as noted in the COVID-19 Update above, we have recently offered extended payment terms to certain customers.

Standard payment terms are generally no more than 60 days, though, as noted in the COVID-19 Update above, we have offered extended payment terms to certain distributor customers.

We monitor a number of key metrics, including the key financial metrics set forth below, in order to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies.

The following table summarizes revenue, deferred revenue, billings (non-GAAP), net cash provided by operating activities, and free cash flow (non-GAAP).

We discuss revenue below under “Results of Operations,” and we discuss net cash

provided by operating activities below under “—Liquidity and Capital Resources.” Deferred revenue, billings (non-GAAP), and free cash flow (non-GAAP) are discussed immediately below the following table:

We discuss revenue below under “Results of Operations,” and we discuss net cash provided by operating activities below under “—Liquidity and Capital Resources.” Deferred revenue, billings (non-GAAP), and free cash flow (non-GAAP) are discussed immediately below the following table:

Three Months Ended Or As Of

September 30, 2020 September 30, 2019

March 31, 2021 March 31, 2020

(in millions)

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We monitor our deferred revenue balance, deferred revenue growth and the mix of short-term and long-term deferred revenue because deferred revenue represents a significant portion of free cash flow and of revenue to be recognized in future periods.

Deferred revenue was $2.39 billion as of September 30, 2020, an increase of $282.9 million, or 13%, from December 31, 2019.

Deferred revenue was $2.75 billion as of March 31, 2021, an increase of $140.3 million, or 5%, from December 31, 2020.

Billings (non-GAAP).

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Management accounts for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with GAAP revenue.

Total billings were $749.8 million for the three months ended September 30, 2020, an increase of 20% compared to $626.6 million in the same period last year.

Total billings were $850.6

million for the three months ended March 31, 2021, an increase of 27% compared to $667.8 million in the same period last year.

A reconciliation of revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP, to billings is provided below:

Three Months Ended

September 30, 2020 September 30, 2019

March 31, 2021 March 31, 2020

(in millions)

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Change in deferred revenue 140.3 90.1

Deferred revenue balance acquired in business combination (0.2) —

Total billings (non-GAAP) $ 850.6 $ 667.8

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Management accounts for this limitation by providing information about our capital expenditures and other investing and financing activities on the face of the consolidated statements of cash flows and under “—Liquidity and Capital Resources” and by presenting cash flows from investing and financing activities in our reconciliation of free cash flow.

In addition, it is important to note that other companies, including companies in our industry, may not use free cash flow, may calculate free cash flow in a different manner

than we do or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a comparative measure.

In addition, it is important to note that other companies, including companies in our industry, may not use free cash flow, may calculate free cash flow in a different manner than we do or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a comparative measure.

A reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, to free cash flow is provided below:

Three Months Ended

September 30, 2020 September 30, 2019

March 31, 2021 March 31, 2020

(in millions)

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Purchases of property and equipment (52.1) (27.6)

Proceeds from IP matter — (50.0)

Free cash flow (non-GAAP) $ 263.8 $ 241.8

Net cash used in investing activities $ (224.6) $ (27.1)

Net cash used in financing activities $ (30.3) $ (40.7)

Net cash provided by (used in) investing activities $ (473.5) $ 4.6

Net cash provided by (used in) financing activities $ 956.0 $ (920.4)

Critical Accounting Policies and Estimates

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To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

There were no material changes to our critical accounting policies and estimates as of and for the three and nine months ended September 30, 2020, as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K filed with the SEC on February 26, 2020 (the “Form 10-K”).

There were no material changes to our critical accounting policies and estimates as of and for the three months ended March 31, 2021, as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K filed with the SEC on February 19, 2021 (the “Form 10-K”).

Recent Accounting Pronouncements

1 unchanged sentence

Results of Operations

Three Months Ended September 30, 2020 and September 30, 2019

Three Months Ended March 31, 2021 and March 31, 2020

Three Months Ended

September 30,

2020 September 30,

2021 March 31,

Revenue Amount % of

9 unchanged sentences

Total revenue $ 710.3 100 % $ 577.7 100 % $ 132.6 23 %

Total revenue increased by $103.0 million, or 19%, during the three months ended September 30, 2020 compared to the same period last year.

We continued to experience diversification of revenue geographically and across both customer and industry segments.

Total revenue increased by $132.6 million, or 23%, during the three months ended March 31, 2021 compared to the same period last year.

We continued to experience largely organic revenue growth (i.e.

revenue growth excluding attribution from acquisitions) with diversification of revenue geographically, and across both customer and industry segments.

Revenue from all regions grew, with EMEA contributing the largest portion of the increase on an absolute dollar basis and APAC contributing the largest growth on a percentage basis.

Product revenue increased by $26.7 million, or 14%, during the three months ended September 30, 2020 compared to the same period last year.

We experienced revenue growth across many of our products due to an increase in product revenue from our FortiGate SD-WAN solutions, our security fabric platform products and software licenses.

Service revenue increased by $76.3 million, or 22%, during the three months ended September 30, 2020 compared to the same period last year.

FortiGuard and other security subscription and FortiCare technical support and other revenues increased by $42.6 million, or 22%, and by $33.7 million, or 21%, respectively, during the three months ended September 30, 2020 compared to the same period last year.

Product revenue increased by $48.4 million, or 25%, during the three months ended March 31, 2021 compared to the same period last year.

Service revenue increased by $84.2 million, or 22%, during the three months ended March 31, 2021 compared to the same period last year.

FortiGuard security subscription and FortiCare technical support and other revenues increased by $43.9 million, or 21%, and by $40.3 million, or 23%, respectively, during the three months ended March 31, 2021 compared to the same period last year.

The increases were primarily due to the recognition of revenue from our growing deferred revenue balance related to FortiGuard and other security subscriptions and FortiCare technical support, including our customers moving to higher-tier support offerings.

Of the service revenue recognized during the three months ended September 30, 2020, 92% was included in the deferred revenue balance as of June 30, 2020.

Of the service revenue recognized during the three months ended March 31, 2021, 89% was included in the deferred revenue balance as of December 31, 2020.

Cost of revenue and gross margin

Three Months Ended

September 30,

2020 September 30,

2021 March 31,

2020 Change % Change

8 unchanged sentences

Total gross margin 78.0 % 77.7 %

Total gross margin increased by 1.2 percentage points during the three months ended September 30, 2020 compared to the same period last year, driven by improvements to product gross margins.

Product gross margin increased by 2.4 percentage points during the three months ended September 30, 2020 compared to the same period last year.

Product gross margin benefited from lower direct costs of h ardware as a percentage of product revenue.

Total gross margin increased by 0.3 percentage points during the three months ended March 31, 2021 compared to the same period last year, driven by improvements to product gross margins.

Product gross margin increased by 1.8 percentage points during the three months ended March 31, 2021 compared to the same period last year.

Product gross margin benefited from lower h ardware cost as a percentage of product revenue.

Cost of product revenue was comprised primarily of third-party contract manufacturers’ costs and the costs of materials used in production.

Service gross margin was flat during the three months ended September 30, 2020 compared to the same period last year.

Cost of service revenue was comprised primarily of personnel costs.

Service gross margin decreased by 0.3 percentage points during the three months ended March 31, 2021 compared to the same period last year.

Cost of service revenue was comprised primarily of personnel costs and data center costs.

Operating expenses

Three Months Ended Change % Change

September 30,

2020 September 30,

2021 March 31,

Revenue Amount % of

7 unchanged sentences

Percentages have been rounded for presentation purposes and may differ from unrounded results.

* Not meaningful

Research and development

Research and development expense increased by $20.1 million, or 29%, during the three months ended September 30, 2020 compared to the same period last year, primarily due to an increase of $14.1 million in personnel-related costs as a result of increased headcount to support the development of new products, continued enhancements to our existing products and patent creation.

In addition, product development expenses, such as third-party testing, prototypes and supplies, increased by $3.6 million.

We currently intend to continue to invest in our research and development organization, and expect research and development expense to remain at or increase in absolute dollars during the remainder of 2020.

Research and development expense increased by $16.9 million, or 21%, during the three months ended March 31, 2021 compared to the same period last year, primarily due to an increase of $14.2 million in personnel-related costs as a result of increased headcount to support the development of new products and continued enhancements to our existing products.

In addition, product development costs, such as third-party testing and prototypes, increase $3.0 million.

We currently intend to continue to invest in our research and development organization, and expect research and development expense to increase in absolute dollars during the remainder of 2021.

Sales and marketing

Sales and marketing expense increased by $39.3 million, or 17%, during the three months ended September 30, 2020 compared to the same period last year, primarily due to an increase of $50.0 million in personnel-related costs as a result of increases to sales and marketing headcount in order to drive global market share gains.

Sales and marketing expense increased by $44.0 million, or 17%, during the three months ended March 31, 2021 compared to the same period last year, primarily due to an increase of $48.5 million in personnel-related costs as a result of increases to sales and marketing headcount in order to drive global market revenue increases.

This increase was offset by savings related to decreased travel and fewer in-person marketing events as a result of the COVID-19 pandemic.

We currently intend to continue to make investments in our sales resources and infrastructure and marketing strategy, which are critical to support our future growth, and expect sales and marketing expense to increase in absolute dollars during the remainder of 2020.

We currently intend to continue to make investments in sales and marketing resources, which are critical to support our future growth, and expect sales and marketing expense to increase in absolute dollars during the remainder of 2021.

General and administrative

General and administrative expense increased by $3.3 million, or 13%, during the three months ended September 30, 2020 compared to the same period last year, primarily due to an increase in personnel-related costs of $2.5 million.

We currently expect general and administrative expense to remain at or increase in absolute dollars during the remainder of 2020.

Gain on IP matter

General and administrative expense increased by $3.2 million, or 11%, during the three months ended March 31, 2021 compared to the same period last year, primarily due to an increase in personnel-related costs of $2.5 million.

We currently expect general and administrative expense to increase in absolute dollars during the remainder of 2021.

Gain on IP matter in the first quarter of 2020.

In January 2020, we entered into an agreement with a competitor in the network security industry, whereby, in February 2020, the competitor party paid us a lump sum of $50.0 million for a mutual covenant-not-to-sue for patent claims.

During the three months ended September 30, 2020, we recorded $1.1 million in amortization of the deferred component as a gain on IP matter in our condensed consolidated statements of income.

See Note 12 of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the gain on IP matter.

During the three months ended March 31, 2021, we recorded $1.1 million in amortization of the deferred component as a gain on IP matter in our condensed consolidated statements of income.

During the three months ended March 31, 2020, we recorded $36.0 million upfront and an additional $0.8 million in amortization of the deferred component as a gain on IP matter in our condensed consolidated statements of income.

See Note 13 of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the gain on IP matter in the first quarter of 2020.

Operating income and margin

We generated operating income of $126.9 million during the three months ended September 30, 2020, an increase of $26.3 million, or 26%, compared to $100.6 million in the same period last year.

Operating income as a percentage of revenue increased to 19% during the three months ended September 30, 2020 compared to 18% in the same period last year.

The increase in operating margin is primarily due to the 1.2 percentage point increase in gross margin and the 0.5 percentage point

decrease in sales and marketing expense as a percentage of revenue, partially offset by the 1.0 percentage point increase in research and development expense as percentage of revenue.

Interest income — net and other expense — net

We generated operating income of $121.6 million during the three months ended March 31, 2021, an increase of $4.9 million, or 4%, compared to $116.7 million in the same period last year.

Operating income as a percentage of revenue decreased to 17% during the three months ended March 31, 2021 compared to 20% in the same period last year.

During the first quarter of 2020, we recorded a one-time upfront gain related to an IP matter, which increased our operating margin by 6.2 percentage point.

Excluding the impact of this gain, our operating margin increased 3.2 percentage point primarily due to 2.2 percentage point and 0.5 percentage point decrease in sales and marketing expense and general and administrative expense as percentage of revenue, as well as 0.3 percentage point improvement in gross margin.

Interest income (expense) — net and other expense — net

Three Months Ended

September 30,

2020 September 30,

2021 March 31,

2020 Change % Change

(in millions, except percentages)

Interest income—net $ 2.5 $ 11.4 $ (8.9) (78) %

Interest income (expense)—net $ (0.2) $ 9.2 $ (9.4) (102) %

Other expense—net $ (2.0) $ (8.0) $ 6.0 (75) %

Interest income—net decreased during the three months ended September 30, 2020 compared to the same period last year, primarily due to lower interest rates and lower invested balances of cash, cash equivalents and investments.

The lower cash, cash equivalents and investments were mainly due to our repurchases of common stock under the Repurchase Program during the past twelve months.

The change in other expense—net during the three months ended September 30, 2020 compared to the same period last year was the result of a $3.8 million impairment charge on an investment in a privately held company during the third quarter of 2019.

The change in interest income (expense)—net during the three months ended March 31, 2021 compared to the same period last year was primarily due to the decrease in interest income of $8.1 million, as a result of lower interest rates.

Interest income—net varies depending on our average investment balances during the period, types and mix of investments, and market interest rates.

In addition, interest expense increased $1.3 million, due to the senior notes issued in the first quarter of 2021.

We expect interest expense to increase during the remainder of 2021 as a result of the debt issued in March 2021.

The change in other expense—net during the three months ended March 31, 2021 compared to the same period last year was the result of a $4.3 million impairment charge on an investment in a privately held company in the first quarter of 2020.

In addition, foreign currency exchange losses decreased by $1.5 million compared to the same period last year.

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Three Months Ended Change % Change

September 30,

2020 September 30,

(in millions, except percentages)

Provision for income taxes $ 5.0 $ 25.8 $ (20.8) (81) %

Effective tax rate (%) 4 % 24 %

Our effective tax rate was 4% for the three months ended September 30, 2020 compared to an effective tax rate of 24% for the same period last year.

The provision for income taxes for the three months ended September 30, 2020 was primarily comprised of U.S.

federal and state taxes, withholding taxes and foreign taxes that were $17.5 million, which included a tax benefit of $16.0 million from the foreign-derived intangible income deduction.

This tax provision for income taxes was favorably affected by excess tax benefits from stock-based compensation expense of $12.5 million.

The provision for income taxes for the three months ended September 30, 2019 was comprised of U.S.

federal and state taxes, withholding taxes, and foreign taxes that were $32.7 million, which were offset by excess tax benefits from stock-based compensation expense of $6.9 million.

Results of Operations

Nine Months Ended September 30, 2020 and September 30, 2019

Nine Months Ended

September 30,

2020 September 30,

Revenue Amount % of

Revenue Change % Change

(in millions, except percentages)

Product $ 628.0 34 % $ 549.7 36 % $ 78.3 14 %

Service 1,218.4 66 995.2 64 223.2 22

Total revenue $ 1,846.4 100 % $ 1,544.9 100 % $ 301.5 20 %

Revenue by geography:

Americas $ 776.0 42 % $ 668.0 43 % $ 108.0 16 %

EMEA 693.5 38 571.1 37 122.4 21

APAC 376.9 20 305.8 20 71.1 23

Total revenue $ 1,846.4 100 % $ 1,544.9 100 % $ 301.5 20 %

Total revenue increased by $301.5 million, or 20%, during the nine months ended September 30, 2020 compared to the same period last year.

We continued to experience diversification of revenue geographically and across both customer and industry segments.

Revenue from all regions grew, with EMEA contributing the largest portion of the increase on an absolute dollar basis and APAC contributing the fastest growth on a percentage basis.

Product revenue increased by $78.3 million, or 14%, during the nine months ended September 30, 2020 compared to the same period last year.

We experienced revenue growth across many of our products due to an increase in product revenue from our FortiGate SD-WAN solutions, software licenses and our security fabric platform products.

Service revenue increased by $223.2 million, or 22%, during the nine months ended September 30, 2020 compared to the same period last year.

FortiGuard and other security subscription and FortiCare technical support and other revenues increased by $123.9 million, or 23%, and by $99.3 million, or 22%, respectively, during the nine months ended September 30, 2020 compared to the same period last year.

Of the service revenue recognized during the nine months ended September 30, 2020, 76% was included in the deferred revenue balance as of December 31, 2019.

Cost of revenue and gross margin

Nine Months Ended

September 30,

2020 September 30,

2019 Change % Change

(in millions, except percentages)

Cost of revenue:

Product $ 245.0 $ 231.9 $ 13.1 6 %

Service 158.0 133.5 24.5 18

Total cost of revenue $ 403.0 $ 365.4 $ 37.6 10 %

Gross margin (%):

Product 61.0 % 57.8 %

Service 87.0 86.6

Total gross margin 78.2 % 76.3 %

Total gross margin increased by 1.9 percentage points during the nine months ended September 30, 2020 compared to the same period last year, driven by improvements to both product and service gross margins.

Product gross margin increased by 3.2 percentage points during the nine months ended September 30, 2020 compared to the same period last year.

Product gross margin benefited from lower direct costs of hardware as a percentage of product revenue and increased software sales.

Cost of product revenue was comprised primarily of third-party contract manufacturers’ costs and the costs of materials used in production.

Service gross margin increased by 0.4 percentage points during the nine months ended September 30, 2020 compared to the same period last year, as our personnel costs grew more slowly than our service revenue and we experienced lower costs to replace and repair our products.

Cost of service revenue was comprised primarily of personnel costs.

Operating expenses

Nine Months Ended Change % Change

September 30,

2020 September 30,

Revenue Amount % of

(in millions, except percentages)

Operating expenses:

Research and development $ 252.4 14% $ 205.9 13 % $ 46.5 23 %

Sales and marketing 780.5 42 669.8 43 110.7 17

General and administrative 87.1 5 74.9 5 12.2 16

Gain on IP matter (39.0) (2) — — (39.0) *

Total operating expenses $ 1,081.0 59% $ 950.6 62 % $ 130.4 14 %

Percentages have been rounded for presentation purposes and may differ from unrounded results.

* Not meaningful

Research and development

Research and development expense increased by $46.5 million, or 23%, during the nine months ended September 30, 2020 compared to the same period last year, primarily due to an increase of $37.7 million in personnel-related costs as a result of increased headcount to support the development of new products, continued enhancements to our existing products and patent creation.

Sales and marketing

Sales and marketing expense increased by $110.7 million, or 17%, during the nine months ended September 30, 2020 compared to the same period last year, primarily due to an increase of $128.3 million in personnel-related costs as a result of increases to sales and marketing headcount in order to drive global market share gains.

This increase was offset by savings related to decreased travel and fewer in-person marketing events as a result of the COVID-19 pandemic.

General and administrative

General and administrative expense increased by $12.2 million, or 16%, during the nine months ended September 30, 2020 compared to the same period last year, primarily due to an increase in personnel-related costs of $8.1 million and an increase in the provision for expected credit losses of $1.3 million.

Gain on IP matter

During the nine months ended September 30, 2020, we recorded $36.0 million upfront and an additional $3.0 million in amortization of the deferred component as a gain on IP matter in our condensed consolidated statements of income.

See Note 12 of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the gain on IP matter.

Operating income and margin

We generated operating income of $362.4 million during the nine months ended September 30, 2020, an increase of $133.5 million, or 58%, compared to $228.9 million in the same period last year.

Operating income as a percentage of revenue increased to 20% during the nine months ended September 30, 2020 compared to 15% in the same period last year.

The increase in operating margin is primarily due to the $39.0 million gain on IP matter, the 1.9 percentage point improvement in gross margin and the 1.1 percentage point decrease in sales and marketing expense as a percentage of revenue.

Interest income — net and other expense — net

Nine Months Ended

September 30,

2020 September 30,

2019 Change % Change

(in millions, except percentages)

Interest income—net $ 15.7 $ 32.6 $ (16.9) (52) %

Other expense—net $ (8.1) $ (6.9) $ (1.2) 17 %

Interest income—net decreased during the nine months ended September 30, 2020 compared to the same period last year, primarily due to lower interest rates and lower invested balances of cash, cash equivalents and investments.

The lower cash, cash equivalents and investments were mainly due to our repurchases of common stock under the Repurchase Program during the past twelve months.

The change in other expense—net during the nine months ended September 30, 2020 compared to the same period last year was the result of a $4.3 million impairment charge on an investment in a privately held company during the first quarter of 2020 compared to a $3.8 million impairment charge on an investment in a privately held company during the third quarter of 2019 .

In addition, foreign currency exchange losses increased by $1.0 million compared to the same period last year.

Provision for income taxes

Nine Months Ended Change % Change

September 30,

2020 September 30,

2021 March 31,

(in millions, except percentages)

1 unchanged sentence

Effective tax rate (%) 10 % 11 %

Our effective tax rate was 8% for the nine months ended September 30, 2020 compared to an effective tax rate of 16% for the same period last year.

The provision for income taxes for the nine months ended September 30, 2020 was primarily comprised of U.S.

federal and state taxes, withholding taxes and foreign taxes that were $74.8 million, which included a tax benefit of $25.6 million from the foreign-derived intangible income deduction.

This tax provision for income taxes was favorably affected by excess tax benefits from stock-based compensation expense of $37.6 million and release of reserves of $9.0 million on uncertain tax positions and the interest due to the expiration of the statute of limitations.

The provision for income taxes for the nine months ended September 30, 2019 was comprised of U.S.

federal and state taxes, withholding taxes, and foreign taxes that were $75.4 million, which were offset by excess tax benefits from stock-based compensation expense of $34.6 million and release of reserves of $10.0 million on uncertain tax positions and the interest due to the expiration of the statute of limitations.

This tax provision for income taxes was further impacted by an increase in tax expense of $10.3 million for an unrecognized tax benefit related to the Ninth Circuit’s Altera decision, regarding stock-based compensation expense in cost sharing arrangements.

Our effective tax rate was 10% for the three months ended March 31, 2021 compared to an effective tax rate of 11% for the same period last year.

The provision for income taxes for the three months ended March 31, 2021 was primarily comprised of U.S.

federal and state taxes, withholding taxes and foreign taxes that were $35.7 million.

This tax provision for income taxes was favorably affected by a tax benefit of $7.3 million from the foreign-derived intangible income deduction and excess tax benefits from stock-based compensation expense of $16.2 million.

Liquidity and Capital Resources

September 30,

2021 December 31,

4 unchanged sentences

Working capital $ 1,901.5 $ 910.9

Nine Months Ended

September 30,

2020 September 30,

Three Months Ended

2021 March 31,

(in millions)

Net cash provided by operating activities $ 315.9 $ 319.4

Net cash used in investing activities (7.8) (402.7)

Net cash used in financing activities (1,119.6) (151.8)

Net cash provided by (used in) investing activities (473.5) 4.6

Net cash provided by (used in) financing activities 956.0 (920.4)

Net increase (decrease) in cash and cash equivalents $ 798.4 $ (596.4)

Liquidity and capital resources may be impacted by our operating activities, as well as by our stock repurchases, proceeds from the issuance of common stock under our the Amended and Restated Fortinet, Inc.

2009 Equity Incentive Plan (the “Amended Plan”) and payment of taxes in connection with the net settlement of equity awards, real estate and other capital expenditures and business acquisitions.

Liquidity and capital resources may be impacted by our operating activities, as well as by our stock repurchases, proceeds from the issuance of common stock under Amended and Restated Fortinet, Inc.

2009 Equity Incentive Plan (the “Amended Plan”), investment grade debt issuance and payment of taxes in connection with the net settlement of equity awards, real estate and other capital expenditures and business acquisitions.

In recent years, we have received significant capital resources from our billings to customers and, to some extent, from the exercise of stock options by our employees.

3 unchanged sentences

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.

During the nine months ended September 30, 2020, we repurchased $1.05 billion in shares of our common stock under the Repurchase Program.

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

There were no shares repurchased under the Repurchase Program during the three months ended March 31, 2021.

As of March 31, 2021, $1.01 billion remained available for future share repurchases under the Repurchase Program.

In March 2021, we issued $1.0 billion aggregate principal amount of senior notes, consisting of $500.0 million aggregate principal amount of 1.0% notes due March 15, 2026 and $500.0 million aggregate principal amount of 2.2% notes due March 15, 2031, in an underwritten registered public offering.

We believe that our cash provided by operating activities, together with our existing cash, cash equivalents and investments will be sufficient to meet our anticipated cash needs and do not intend to retire these Notes early.

Refer to Note 12.

Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Notes.

As of March 31, 2021, the long-term debt, net of unamortized discount and debt issuance costs, was $987.0 million.

Construction of a second building at our headquarters campus started in the fourth quarter of 2018 and related spending will continue in 2021 and until project completion.

We estimate 2020 spending on the headquarters campus project to be between $95.0 million and $105.0 million dollars.

The COVID-19 pandemic has resulted in a delay to the project schedule.

We estimate 2021 spending on the second building of our headquarters campus project to be between $50.0 million and $60.0 million, which was moved from 2020 due to a delay to the project schedule as a result of the COVID-19 pandemic.

We estimate construction to be completed in the first half of 2021.

As of September 30, 2020, our cash, cash equivalents and investments of $1.77 billion were invested primarily in deposit accounts, money market funds, corporate debt securities, commercial paper, certificates of deposit and term deposits and U.S.

As of March 31, 2021, our cash, cash equivalents and investments of $3.09 billion were invested primarily in deposit accounts, money market funds, corporate debt securities, commercial paper, certificates of deposit and term deposits and U.S.

government securities.

It is our investment policy to invest excess cash in a manner that preserves capital, provides

liquidity and generates return without significantly increasing risk.

It is our investment policy to invest excess cash in a manner that preserves capital, provides liquidity and generates return without significantly increasing risk.

We do not enter into investments for trading or speculative purposes.

The amount of cash, cash equivalents and investments held by our international subsidiaries was $121.9 million as of September 30, 2020 and $109.3 million as of December 31, 2019.

The amount of cash, cash equivalents and investments held by our international subsidiaries was $115.5 million as of March 31, 2021 and $119.8 million as of December 31, 2020.

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.

6 unchanged sentences

Non-cash adjustments consist primarily of stock-based compensation, amortization of deferred contract costs and depreciation and amortization.

Changes in operating assets and liabilities consist primarily of changes in deferred revenue, deferred contract costs, accounts receivable, inventory and prepaid expenses and other current assets.

Our operating activities during the nine months ended September 30, 2020 provided cash flows of $787.2 million.

Changes in operating assets and liabilities primarily resulted from an increase in sales of our FortiGuard and other security subscription services and FortiCare technical support services to new and existing customers, as reflected by an increase in our deferred revenue, and proceeds from the mutual covenant-not-to-sue and release agreement.

Our total deferred revenue balance grew $282.9 million, or 13%, during the nine months ended September 30, 2020.

Changes in operating assets and liabilities consist primarily of changes in deferred revenue, deferred contract costs and accounts receivable.

Our operating activities during the three months ended March 31, 2021 provided cash flows of $315.9 million as a result of the continued growth of our business and our ability to successfully manage our working capital.

Our total deferred revenue balance grew $140.3 million, or 5%, during the three months ended March 31, 2021.

Investing Activities

4 unchanged sentences

We may also make cash payments in connection with future business combinations.

During the nine months ended September 30, 2020, cash used in investing activities was $7.8 million, primarily driven by $93.6 million of purchases of property and equipment, a large portion of which relates to our headquarters building construction, and $9.2 million used for the OPAQ acquisition, net of cash acquired, and partially offset by $95.4 million in cash proceeds from maturities and sales of investments, net of purchases of investments.

During the three months ended March 31, 2021, cash used in investing activities was $473.5 million, driven by $336.1 million spent for purchases of investments, net of maturities and sales of investments, $75.0 million used for purchases of investment in a privately held company, $52.1 million of purchases of property and equipment, a large portion of which relates to our headquarters building construction, and $10.3 million used for the acquisition of ShieldX Networks, Inc.

(“ShieldX”), net of cash acquisition.

Financing Activities

The changes in cash flows from financing activities primarily relate to repurchase and retirement of common stock and taxes paid related to net share settlement of equity awards, net of proceeds from the issuance of common stock under the Amended Plan.

During the nine months ended September 30, 2020, cash used in financing activities was $1.12 billion, primarily driven by $1.05 billion used to repurchase shares of our common stock, $68.3 million used to pay tax withholding, net of proceeds from the issuance of common stock and $4.1 million used to pay debt assumed in connection with the OPAQ acquisition.

The changes in cash flows from financing activities primarily relate to repurchase and retirement of common stock, taxes paid related to net share settlement of equity awards, net of proceeds from the issuance of common stock under the Amended Plan and the issuance of long-term notes, net of discount and underwriting.

During the three months ended March 31, 2021, cash provided by financing activities was $956.0 million, primarily driven by $989.4 million in cash proceeds from long-term investment grade debt, net of discount and underwriting fees, partially offset by $31.5 million used to pay tax withholding, net of proceeds from the issuance of common stock.

Contractual Obligations and Commitments

There were no material changes outside the ordinary course of business during the nine months ended September 30, 2020 to the contractual obligations and commitments disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of the Form 10-K.

See Note 13 of the notes to condensed

consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding contractual obligations and commitments.

There were no material changes outside the ordinary course of business during the three months ended March 31, 2021 to the contractual obligations and commitments disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of the Form 10-K.

See Note 14 of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding contractual obligations and commitments.

Off-Balance Sheet Arrangements

As of September 30, 2020, 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.

As of March 31, 2021, 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.

Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in our market risk during the nine months ended September 30, 2020 compared to the disclosures in Part II, Item 7A of the Form 10-K.

There were no material changes in our market risk during the three months ended March 31, 2021 compared to the disclosures in Part II, Item 7A of the Form 10-K.

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 2. Management’s Discussion and Analysis