2 unchanged sentences
These statements include, among other things, statements concerning our expectations regarding:
−Removed: • supply chain constraints, the global chip and component shortages, and other factors affecting our manufacturing capacity, delivery, cost and inventory management;
−Removed: • increased inflation or stagflation, and rising interest rates in many geographies and changes in currency exchange rates and currency regulations;
−Removed: • the duration and impact of the COVID-19 pandemic, including various COVID-19 variants and “return to office” plans;
• continued growth and market share gains;
• variability in sales in certain product and service categories from year to year and between quarters;
−Removed: • expected impact of sales of certain products and services;
−Removed: • macroeconomic, geopolitical factors and other disruption on our manufacturing or sales, including the impact of the COVID-19 pandemic and other public health issues, wars and natural disasters;
+Added: • expected impact of sales from certain products and services;
+Added: • increasing or decreasing inflation or stagflation, and changing interest rates in many geographies and changes in currency exchange rates and currency regulations;
+Added: • competition in our markets;
+Added: • macroeconomic, geopolitical factors and other disruption on our manufacturing or sales, including public health issues, wars and natural disasters;
+Added: • real estate investments, management of future growth including expansions and enhancements of current properties;
• government regulation, tariffs and other policies;
−Removed: • drivers of long-term growth and operating leverage, such as sales productivity and capacity, functionality and value in our service offerings;
+Added: • drivers of long-term growth and operating leverage, such as pricing of our products and services, sales productivity, pipeline and capacity, functionality, value and technology improvements in our service offerings;
• growing our solution sales through channel partners to businesses, service providers and government organizations, our ability to execute these sales and the complexity of providing solutions 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 sales organization;
+Added: • our ability to successfully anticipate market changes related to cloud-based solutions and to sell, support and meet service level agreements related to cloud-based solutions;
+Added: • growth expectations for the secure networking market;
+Added: • supply chain constraints, component availability and other factors affecting our manufacturing capacity, delivery, cost and inventory management;
+Added: • forecasts of future demand and targeted inventory levels, including changing market drivers and demands;
+Added: • the effect of backlog from prior quarters, including its effect on growth of in-quarter billings and revenue;
+Added: • instability in the global banking system;
• our ability to hire properly qualified and effective sales, support and engineering employees;
• risks and expectations related to acquisitions and equity interests in private and public companies, including integration issues related to go-to-market plans, product plans, employees of such companies, controls and processes and the acquired technology, and risks of negative impact by such acquisitions and equity investments on our financial results;
−Removed: • trends in revenue, cost of revenue and gross margin;
+Added: • trends in revenue, cost of revenue and gross margin, including expectations regarding product revenue and service revenue growth;
• trends in our operating expenses, including sales and marketing expense, research and development expense, general and administrative expense, and expectations regarding these expenses;
−Removed: • expectations that our operating expense will increase in absolute dollars during 2023;
−Removed: • 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;
−Removed: • expectations regarding uncertain tax benefits and our effective domestic and global tax rates, and the impact of the Tax Cuts and Jobs Act of 2017 (“TCJA”), the Coronavirus Aid, Relief, and Economic Security Act of 2020 and the Inflation Reduction Act of 2022 ( “ IRA”);
−Removed: • expectations regarding spending related to real estate acquisitions and development, data center investments, as well as other capital expenditures and to the impact on free cash flow;
−Removed: Table o f Contents
+Added: • expected impact of plans and strategy for the acceleration of our points of presence (“PoP”) deployment;
+Added: • expectations that our operating expenses will increase year over year in absolute dollars during 2024;
+Added: • expectations that proceeds from the exercise of stock options in future years will be adversely impacted by the increased mix of restricted stock units and performance stock units versus stock options granted or a decline in our stock price;
+Added: • expectations regarding uncertain tax benefits and our effective domestic and global tax rates, the impact of interpretations of or changes to tax law, and the timing of tax payments;
+Added: • expectations regarding spending related to real estate acquisitions and development, including data center, office building and warehouse investments, as well as other capital expenditures and to the impact on free cash flow and expenses;
• estimates of a range of 2024 spending on capital expenditures;
−Removed: • competition in our markets;
−Removed: • statements regarding expected outcomes and liabilities in litigation;
+Added: • 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, including our debt servicing requirements, for at least the next 12 months;
6 unchanged sentences
Business Overview
−Removed: Fortinet is a global leader in cybersecurity solutions provided to a wide variety of organizations, including enterprises, communication service providers and security service providers, government organizations and small businesses.
−Removed: Our cybersecurity solutions are designed to provide broad visibility and segmentation of the digital attack surface through our integrated cybersecurity platform products and services providing a mesh architecture, which feature automated protection, detection and response along with consolidated visibility across both Fortinet-developed solutions and a broad ecosystem of third-party solutions and technologies.
−Removed: Our cybersecurity platform portfolio leverages a common operating system or integration to this operating system across our product offerings and helps organizations better secure their environments and reduce their security and network complexities.
−Removed: The Fortinet operating system has an open architecture designed to integrate Fortinet solutions with third-party solutions in a single ecosystem, enabling automated detection and response across the attack surface.
−Removed: Our product offerings consist of our Core Platform (previously referred to as FortiGate network security) and our Enhanced Platform Technologies (previously referred to as Platform Extension).
−Removed: The Enhanced Platform includes Secure Networking (Secure Switching, Access Points, 5G and Network Access Control), Network and Security Operations (Management, Analytics, Security Information and Event Management, Security Operations, Orchestration and Response and Email Security), Endpoint Security (Enhanced Detection and Response and Identity) and Cloud Security (Web Application Firewall, Cloud Network Security and Cloud-native Application Protection).
−Removed: Our cloud- and hosted- Enhanced Platform Technology products and services include sandboxing, endpoint detection and response (“EDR”), email security, web application and application programming interface (“API”) security, cloud networking security and cloud-native protection as well as management and analytics.
−Removed: Our FortiGuard security subscription services are enabled by FortiGuard Labs, which provides threat research and artificial intelligence capabilities from a cloud network to deliver coordinated protection for the ever-expanding attack surface through Core Platform appliance and virtual machine as well as all Enhanced Platform Technology products that are registered by the end-customer.
−Removed: Our FortiCare support services provide both technical support and professional services to help our customers deploy, maintain, and operationalize our Core Platform and Enhanced Platform Technology products and services .
−Removed: Our proprietary Application-Specific Integrated Circuits (“ASIC”) are implemented in our physical Core Platform appliances and 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.
−Removed: We also provide Fortinet
−Removed: Table o f Contents
−Removed: virtualized Application-Specific Integrated Circuits (“vASICs”) across our Core Platform virtual appliances to deliver similar accelerated capabilities when run in virtualized environments.
−Removed: Our FortiOS operating system provides the foundation for the operation of Core Platform and Enhanced Platform Technology products, whether physical, virtual, private- or public-cloud based.
−Removed: FortiOS directs the operations of processors and ASICs and provides system management functions.
−Removed: We make regular updates to FortiOS available through our FortiCare support services.
−Removed: Networking functionality and security capabilities are integrated into the FortiOS operating system to run both the Core Platform and Enhanced Platform Technology capabilities of our cybersecurity mesh architecture (“Fortinet Security Fabric”).
−Removed: This approach to security combines discrete security solutions together into an integrated operating system which provides centralized management, visibility, automation and intelligence sharing to simplify operations and respond rapidly to threats.
−Removed: The focus areas of our business consist of:
−Removed: • Secure Networking —Our Security-Driven Networking solutions enables the convergence of networking and security across all edges to provide next-generation firewall (“NGFW”), SD-WAN, LAN Edge (Wi-Fi and switch) and secure access service edge (“SASE”).
−Removed: We derive a majority of product sales from our Core Platform network security appliances.
−Removed: Core Platform 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, SD-WAN, Intrusion Prevention system (“IPS”), sandboxing, data leak prevention, virtual private network (“VPN”), switch and wireless controller and wide area network (“WAN”) edge.
−Removed: Our network security appliances are managed by our FortiOS network operating system, which provides the foundation for Core Platform security functions.
−Removed: We enhance the performance of our network security appliances from branch to data center by designing and implementing ASICs technology within our appliances, enabling us to add security and network functionality with minimal impact to network throughput performance.
−Removed: Along with our secure Wi-Fi access points and switches, we help organizations secure their networks across campuses, branches and work from anywhere (“WFA”) deployments.
−Removed: For the Japanese market, we also offer high performance network switches marketed under Alaxala for data center switching.
−Removed: FortiOS supports many more secure networking markets and applications than just Firewall.
−Removed: These include:
−Removed: • Network Firewall (“NFW”)
−Removed: • Software-Defined Wide Area Network (“SD-WAN”)
−Removed: • Secure LAN/WLAN (Wi-Fi and Switch) (SD-Branch/Campus)
−Removed: • Secure Access Service Edge (“SASE”)
−Removed: • Universal Zero Trust Network Access (“ZTNA”)
−Removed: • Encryption Applications (SSL Inspection, Virtual Private Network (“VPN”), and IPsec Connectivity)
−Removed: Further each security application has number of customer use cases.
−Removed: For example, Network Firewall has the following use cases:
−Removed: • Data Center Perimeter NGFW
−Removed: • North–South Internal Segmentation Firewall
−Removed: • Distributed Network Edge Firewall
−Removed: • East–West Micro Segmentation Firewall
−Removed: • Virtual Firewall (“VM”)
−Removed: • Cloud Native Firewall (“CNF”)
−Removed: • Firewall as a Service (“FWaaS”)
−Removed: • Containerized Firewall
−Removed: • Endpoint Firewall
−Removed: • SMB Firewall
−Removed: • Home Firewall
−Removed: • Zero Trust Access —Fortinet’s Enhanced Platform Technology products and services extend beyond the network to create a cybersecurity mesh architecture to cover other attack vectors.
−Removed: Our Zero Trust Access solutions enable
−Removed: Table o f Contents
−Removed: customers to know and control who and what is on their network, in addition to providing security for WFA.
−Removed: Zero Trust Access solutions include FortiNAC, FortiAuthenticator, FortiClient and FortiToken.
−Removed: Additionally, the proliferation of OT and internet of things (“IoT”) devices has generated new opportunities for us to grow our business.
−Removed: Our network access control solutions provide visibility, control and automated event responses in order to secure OT and IoT devices.
−Removed: • Cloud Security —We help customers connect securely to and across their individual, hybrid cloud, multi-cloud and virtualized data center environments by offering security through our virtual firewall and other software products and through integrated cloud-native capabilities with major cloud platforms.
−Removed: Our public and private cloud security solutions, including virtual appliances and hosted solutions, bring our Enhanced Platform Technology products and services into and across cloud environments, delivering security that follows their applications and data.
−Removed: Our solutions include network security, web application firewall and API protection, cloud-native security and workload protection.
−Removed: 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.
−Removed: Our cloud security portfolio also includes securing applications in all environments in which they can be deployed, including physical and virtual data centers, clouds, and edge compute instances.
−Removed: Fortinet cloud security offerings are available for deployment in major public and private cloud environments, including Amazon Web Services, Google Cloud, IBM Cloud, Microsoft Azure, Oracle Cloud and VMWare Cloud.
−Removed: We also offer managed web application firewall (“WAF”) rules delivered by FortiGuard Labs as an overlay service to native security offerings offered by Amazon Web Services.
−Removed: • Security Operations —We develop and provide a range of products and services that enable the security operations center (“SOC”) teams to identify, investigate and remediate potential incidents in which cybercriminals bypass prevention-oriented controls.
−Removed: Given the breadth of the attack surface to monitor, as well as the volume and sophistication of cyber threats, artificial intelligence is a key part of these offerings, which include:
−Removed: FortiGuard and other security subscription services, modern endpoint security with EDR, a range of breach-protection technologies plus our security information and event management (“SIEM”) and security orchestration, automation and response (“SOAR”), all of which can be applied across the entire set of Platform Extension products and services.
−Removed: These solutions automatically deliver security intelligence and insights that enable organizations to protect against and respond to threats faster through integration with Fortinet and third-party controls.
−Removed: • Security as a Service —Our customers purchase our natively integrated FortiGuard security subscription services as an add-on to products and solutions across many of the Enhanced Platform Technology products and services with the goal of receiving real-time threat intelligence and protection updates.
−Removed: The rich set of FortiGuard security subscription services is built from the ground up to provide comprehensive protection for users and applications, including market leading offerings for IPS, Web, video and DNS filtering, AV and cloud sandbox as well as OT and IoT Security.
−Removed: The FortiGuard security subscription services are provided from our FortiGuard Labs and cloud-delivered to provide real-time unified protection across network endpoint and cloud.
−Removed: • Support and Professional Services —We offer technical support, FortiOS updates and extended product warranty through our FortiCare support services.
−Removed: In addition to our technical support services, we offer a range of advanced services, including premium support, professional services and expedited warranty replacement.
−Removed: Our advanced support service offerings include technical account managers that act as a single point of contact and customer advocate within Fortinet.
−Removed: Our professional service offerings include resident engineers and professional service consultants for implementations or trainings.
+Added: Fortinet is a leader in cybersecurity and the convergence of networking and security.
+Added: Our mission is to secure people, devices and data everywhere.
+Added: Our integrated platform, the Fortinet Security Fabric, spans secure networking, unified SASE and AI-driven security operations to deliver cybersecurity where our customers need it.
+Added: As of December 31, 2023, over a half million customers trusted our solutions, including enterprises such as in the financial services, retail and operational technology market verticals, communication and security service providers, government organizations and small and medium-sized businesses.
+Added: As a global company headquartered in Sunnyvale, California with a large international customer base, the majority of our research and development is in the United States and Canada with a global footprint of support and centers of excellence around the world.
+Added: As of December 31, 2023, we held 957 U.S.
+Added: patents and 1,299 global patents and we are recognized in over 80 enterprise analyst reports demonstrating both our vision and execution across networking and security products.
+Added: • Secure Networking —Our Secure Networking solutions focus on the convergence of networking and security via our network firewall and our switches, access points and other secure connectivity solutions.
+Added: FortiOS is our networking and security operating system that is consistent across our firewalls and secure connectivity solutions and supports over 30 functions that can be delivered via a physical, virtual, cloud or SaaS solution.
+Added: When delivered via our network firewall appliances, functionality is accelerated through our proprietary ASIC technology.
+Added: These proprietary ASICs, combined with off-the-shelf CPUs and ASICs, allow our systems to scale, run multiple applications at higher performance, lower power consumption and perform more processor-intensive operations, such as inspecting encrypted traffic, including streaming video.
+Added: The Network Firewall solution consists of FortiGate data centers, hyperscale and distributed firewalls, as well as encrypted applications (SSL inspection, Virtual Private Network and
+Added: IPsec connectivity).
+Added: Our ability to converge networking and security also enables the ethernet to become an extension of a company’s security infrastructure through FortiSwitch and FortiLink.
+Added: Our wireless LAN solution leverages secure networking to provide secure wireless access for the enterprise LAN edge.
+Added: FortiExtender secures 5G/LTE and remote ethernet extenders to connect and secure any branch environment.
+Added: The Secure Connectivity solution includes FortiSwitch Secure Ethernet Switches, FortiAP Wireless Local Area Network Access Points and FortiExtender 5G Connectivity Gateways, among other products.
+Added: • Unified Secure Access Service Edge (SASE) —As applications move to the cloud and work from anywhere becomes established, cloud delivery is needed to enable secure access to applications on any cloud.
+Added: The Fortinet Unified SASE solution is a single-vendor SASE solution that includes Firewall, SD-WAN, Secure Web Gateway, Cloud Access Services Broker, Data Loss Prevention, Zero Trust Network Access and cloud security, including Web Application Firewalls, Virtualized Firewalls and Cloud-Native Firewalls, among other products.
+Added: These functions are delivered through our FortiOS operating systems, which can deploy the full SASE stack through the cloud or on our ASIC-driven appliances.
+Added: All functions can be managed through a unified management console.
+Added: • Security Operations (SecOps) —Fortinet’s Security Operations solutions comply with the NIST cybersecurity framework of identify, protect, detect, respond and recover, and are delivered as a platform that automates detection and response to accelerate discovery and remediation.
+Added: The SecOps solution includes FortiAI generative AI assistant, FortiSIEM Security Information and Event Management, FortiSOAR Security Orchestration, Automation and Response, FortiEDR Endpoint Detection and Response, FortiXDR Extended Detection and Response, FortiMDR Managed Detection and Response Service, FortiNDR Network Detection and Response, FortiRecon Digital Risk Protection, FortiDeceptor Deception technology, FortiGuard SoCaaS, FortiSandbox Sandboxing Services and FortiGuard Incident Response Services, among other products.
+Added: FortiGuard Labs is our cybersecurity threat intelligence and research organization comprised of experienced threat hunters, researchers, analysts, engineers and data scientists who develop and utilize machine learning and AI technologies to provide timely protection updates and actionable threat intelligence for the benefit of our customers.
+Added: FortiGuard Security Services are a suite of AI-powered security capabilities that are natively integrated as part of the Fortinet Security Fabric to deliver coordinated detection and enforcement across the entire attack surface.
+Added: The portfolio consists of FortiGuard application security services, content security services, device security services, NOC/SOC security services and web security services.
+Added: FortiCare Technical Support Service is a per-device support service, which provides customers access to experts to ensure efficient and effective operations and maintenance of their Fortinet capabilities.
+Added: Global technical support is offered 24x7 with flexible add-ons, including enhanced SLAs and premium hardware replacement through in-country depots.
+Added: Organizations have the flexibility to procure different levels of service for different devices based on their availability needs.
+Added: We offer three per-device support options tailored to the needs of our enterprise customers:
+Added: FortiCare Premium, FortiCare Elite and FortiCare Essential.
+Added: The FortiCare Elite service aims to provide 15-minute response times for key product families.
+Added: We also offer training services to our end-customers and channel partners through our training team and authorized training partners.
+Added: We have also implemented a training certification program, NSE, to help ensure an understanding of our products and services.
+Added: Since 2020, Fortinet has also offered a number of free online training courses to help address prevalent industry-wide cybersecurity skills gaps and shortages.
Financial Highlights
3 unchanged sentences
• Total gross profit was $4.07 billion in 2023, an increase of 22% compared to $3.33 billion in 2022.
−Removed: • Operating income was $969.6 million in 2022, an increase of 49% compared to $650.4 million in 2021.
−Removed: • Cash, cash equivalents, investments and marketable equity securities were $2.26 billion as of December 31, 2022, a decrease of $736.0 million, or 25%, from December 31, 2021.
−Removed: Table o f Contents
+Added: • Operating income was $1.24 billion in 2023, an increase of 28% compared to $969.6 million in 2022.
+Added: • Cash, cash equivalents, investments and marketable equity securities were $2.44 billion as of December 31, 2023, an increase of $183.9 million, or 8%, from December 31, 2022.
• Long-term debt, net of unamortized discount and debt issuance costs, was $992.3 million and $990.4 million as of December 31, 2023 and 2022, respectively.
−Removed: • In 2022, we repurchased 36.0 million shares of common stock under the Repurchase Program for an aggregate purchase price of $1.99 billion.
−Removed: In 2021, we repurchased 12.9 million shares of common stock for a total purchase price of $741.8 million.
+Added: • In 2023, we repurchased 27.2 million shares of common stock under the Repurchase Program for an aggregate purchase price of $1.50 billion, which excludes a $10.9 million accrual related to the 1% excise tax imposed by the Inflation Reduction Act of 2022.
+Added: In 2022, we repurchased 36.0 million shares of common stock for a total purchase price of $1.99 billion.
• Deferred revenue was $5.74 billion as of December 31, 2023, an increase of $1.09 billion, or 24%, from December 31, 2022.
1 unchanged sentence
• Cash flows from operating activities were $1.94 billion in 2023, an increase of $204.9 million, or 12%, compared to 2022.
−Removed: • In October 2022, we acquired the remaining 25% of equity interests in Alaxala for $13.5 million in cash, and Alaxala became a wholly owned subsidiary.
−Removed: • Our loss related to our equity method investment in Linksys Holdings, Inc.
−Removed: (“Linksys”) in fiscal 2022 totaled $68.1 million, which comprised of our proportionate share of Linksys’ financial results as well as the amortization of the basis differences of $45.9 million, which included a $17.5 million charge in connection with a valuation allowance established on deferred tax assets at Linksys, and the other-than-temporary impairment (“OTTI”) charge of $22.2 million.
−Removed: Our revenue growth was driven by both product and service revenue.
+Added: Our revenue growth was driven primarily by service revenue.
On a geographic basis, revenue continues to be diversified globally, which remains a key strength of our business.
−Removed: In 2022, the Americas region, the Europe, Middle East and Africa (“EMEA”) region and the Asia Pacific (“APAC”) region contributed 41%, 38% and 21% of our total revenue, respectively, and increased by 31%, 33% and 33% compared to 2021, respectively.
−Removed: Product revenue grew 42% in 2022.
−Removed: Product revenue growth was consistent with an elevated cyber threat landscape and changes in our pricing model.
−Removed: The product revenue growth was primarily due to strong growth across many of our Enhanced Platform Technology products, including our secure access products and software licenses.
−Removed: In addition, our product revenue growth was driven by a strong demand for the wide range operating system capabilities embedded in our Core Platform products.
+Added: In 2023, 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 22%, 23% and 12% compared to 2022, respectively.
+Added: Product revenue growth was impacted by an elevated cyber threat landscape, the convergence of security and networking, the impact of certain historical pricing actions, improving supply chain dynamics and changes in the backlog balance.
+Added: Product revenue growth rates decreased from 42% in 2022 to 8% in 2023 partially due to overall softening macroeconomic conditions.
+Added: We expect that product revenue growth rates will continue to be impacted by overall macroeconomic conditions in 2024.
Service revenue growth has accelerated over the past three years from 24% in 2021, to 26% in 2022, to 28% in 2023.
−Removed: Service revenue growth of 26% in 2022 was driven by the strength of our FortiGuard and other security subscription revenue and FortiCare technical support and other service revenue, which grew 27% and 26%, respectively.
−Removed: The increases were primarily due to the recognition of revenue from our growing deferred revenue balance related to FortiGuard and other security subscriptions delivered to on-premise and cloud-based environments, as well as FortiCare and other technical support, including our customers moving to higher-tier support offerings and the early effects of certain pricing actions.
+Added: Service revenue growth of 28% in 2023 was primarily driven by the strength of our security subscription revenue, which grew 33%.
+Added: The increase was primarily due to the recognition of revenue from our growing deferred revenue balance related to FortiGuard and other security subscriptions delivered to on-premise and cloud-based environments.
+Added: Security subscriptions outpaced technical support growth due to strength in secure networking subscriptions, SecOps and SASE.
+Added: We expect our service revenue to continue to grow in 2024, with growth opportunities coming from our SecOps and SASE offerings.
+Added: While service revenue is expected to grow, we anticipate that the growth rates will be impacted by overall macroeconomic conditions in 2024.
Our billings were diversified on a geographic basis.
−Removed: In 2022, six countries represented approximately 50% of our billings and the remaining 50% in the aggregate were from over 100 countries that individually contributed less than 4% of our billings.
−Removed: Operating expenses as a percentage of revenue decreased by approximately 3.6 percentage points in 2022 compared to 2021, which benefited from the favorable impact of foreign currency fluctuations.
−Removed: Headcount increased by 24% to 12,595 employees as of December 31, 2022, up from 10,195 as of December 31, 2021.
−Removed: Impact of Macroeconomic Developments and COVID-19 Pandemic Update
−Removed: Our overall performance depends in part on worldwide economic and geopolitical conditions and their impact on customer behavior.
−Removed: Worsening economic conditions, including inflation, higher interest rates, slower growth, fluctuations in foreign exchange rates and other changes in economic conditions, may adversely affect our results of operations and financial performance.
−Removed: We continue to monitor and respond to developments relating to the COVID-19 pandemic.
−Removed: In response to the COVID-19 pandemic, we undertook a number of actions to protect our employees, including restricting travel and directing
−Removed: Table o f Contents
−Removed: many of our employees to work from home.
−Removed: In certain geographies, we have transitioned back to an in-person working mode, allowing increasing numbers of employees to work from our offices with reasonable precautions and, in all cases, subject to abiding by local legal restrictions.
−Removed: We intend to continue to monitor and abide by local employee health and safety protocols and other regulations as applicable to each local office.
−Removed: 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 year ended December 31, 2022.
−Removed: Conversely, some aspects of our business do not appear to have been significantly affected.
−Removed: During the year ended December 31, 2022, we observed the following:
−Removed: • We saw continued supply chain challenges, including chip and other component shortages and increased costs for certain chips and other components and shipping, and we did not have enough inventory to promptly meet all demand for all products.
−Removed: • In many countries, our employees’ ability to travel was reduced and certain in-person sales and marketing events or meetings that would normally have been held were canceled, postponed or converted into virtual events.
−Removed: However, as certain country’s restrictions continued to ease, we have started to see an increase in expenses related to travel and marketing events.
−Removed: Although we cannot predict if or when such expenses will return to pre-pandemic levels, as of December 31, 2022, we had started to see an increase in such expenses as compared to the same peri od last year.
−Removed: • In order to mitigate supply chain disruptions and other supply chain risks and in anticipation of future demand, we increased our commitments with certain suppliers to secure capacity and are meeting regularly with our contract manufacturers and component suppliers to manage future commitments, address component shortages and monitor delivery.
−Removed: We have also transitioned primarily to air shipping to avoid port congestion and extended ocean freight time.
−Removed: • Our days sales outstanding increased to 89 days for the year ended December 31, 2022, compared to 75 days for the year ended December 31, 2021, primarily due to the sales linearity.
+Added: In 2023, seven countries represented approximately 50% of our billings and the remaining 50% in the aggregate were from over 100 countries that individually contributed less than 3% of our billings.
+Added: Operating expenses as a percentage of revenue decreased approximately 0.2 percentage points in 2023 compared to 2022.
+Added: Headcount increased 8% to 13,568 employees as of December 31, 2023, up from 12,595 as of December 31, 2022.
+Added: Impact of Macroeconomic Developments
+Added: Our overall performance depends in part on worldwide economic and geopolitical conditions, such as the war in Ukraine and the Israel-Hamas war or tensions between China and Taiwan, and their impact on customer behavior.
+Added: Worsening economic conditions, including inflation, higher interest rates, slower growth, any recession, fluctuations in foreign exchange rates, instability in the global banking industry and other changes in economic conditions, may result in decreased sales productivity and growth and adversely affect our results of operations and financial performance.
+Added: We have seen certain impacts on our business, results of operations, financial condition, cash flows, liquidity and capital and financial resources such as longer sales cycles, delayed purchases and increased commitments with certain suppliers and increased inventory and inventory purchase commitment reserves.
+Added: Our days sales outstanding remained flat at 89 days for the years ended December 31, 2023 and 2022, primarily due to the sales linearity and certain geographies where extended payment terms are more prevalent.
The accounts receivable allowance for credit losses was $8.2 million as of December 31, 2023, an increase of $4.6 million compared to $3.6 million as of December 31, 2022, primarily due to an increase in past due invoices over 60 and 90 days.
−Removed: The COVID-19 pandemic may have a material negative impact on our future periods.
−Removed: If we experience component, shipping, inventory or customer payment challenges, it will negatively impact billings and 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 service term, generally starting on the contract registration date.
−Removed: In addition, the broader implications of the pandemic on our business and operations and our financial results, including the extent to which the effects of the pandemic may impact future results and growth in the cybersecurity industry, remain uncertain.
−Removed: The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on ongoing developments, including the duration and spread of the virus and its variants, the impact on our end-customers’ spending, the volume of sales and length of our sales cycles, the impact on our partners, suppliers, and employees, actions that may be taken by governmental authorities and other factors identified in Part I, Item 1A “Risk Factors” in this Form 10-K.
−Removed: Given the dynamic nature of these circumstances, the full impact of the COVID-19 pandemic on our business and operations, results of operations, financial condition, cash flows, liquidity and capital and financial resources cannot be reasonably estimated at this time.
+Added: Worsening economic conditions may have a material negative impact on our results in future periods and may negatively impact our billings, revenue and costs, and may decrease growth and profitability.
+Added: The extent of the impact of economic conditions on our operational and financial performance will depend on ongoing developments, including those
+Added: discussed above and others identified in Part I, Item 1A “Risk Factors” in this Form 10-K.
+Added: Given the dynamic nature of these circumstances, the full impact of worsening economic conditions on our business and operations, results of operations, financial condition, cash flows, liquidity and capital and financial resources cannot be reasonably estimated at this time.
Business Model
−Removed: We typically sell our security solutions to distributors that sell to networking security focused resellers and to certain service providers, who, in turn, sell to end-customers or use our products and services to provide hosted solutions to other enterprises.
+Added: We typically sell our security solutions to distributors that sell to networking security focused resellers and to certain service providers and managed security service providers (“MSSPs”), who, in turn, sell to end-customers or use our products and services to provide hosted solutions to other enterprises.
At times, we also sell directly to certain large enterprise customers, large service providers and major systems integrators.
−Removed: Our end-customers are located in over 100 countries and include small, medium and large enterprises and government organizations across a wide range of industries, including education, financial services, government, healthcare, manufacturing, retail, technology and telecommunications.
−Removed: An end-customer deployment may involve as few as one or as many as thousands of Core Platform products as well as Enhanced Platform Technology products, depending on the end-customer’s size and security requirements.
−Removed: We also offer our products hosted in our own data centers and through co-locations and major cloud providers, including Amazon Web Services, Google Cloud, IBM Cloud, Microsoft Azure and Oracle Cloud.
−Removed: We have also recognized revenue from customers who deploy our products in a bring-your-own-license (“BYOL”) arrangements at cloud providers or at private clouds.
−Removed: In a BYOL arrangement, a customer purchases a software license through our channel partners and deploys the software in a cloud provider’s environment in third-party clouds or in their private cloud.
−Removed: Table o f Contents
−Removed: Our customers purchase our hardware products and software licenses, as well as our FortiGuard and other security subscription and FortiCare technical support services.
−Removed: We generally invoice at the time of our sale for the total price of the products and services.
+Added: In addition, we sell our software licenses and services via different cloud service provider platforms, both directly and through our channel partners.
+Added: Our end-customers are located in over 100 countries and include small, medium and large enterprises and government organizations across a wide range of industries, including financial services, government, healthcare, manufacturing, retail, technology and telecommunications.
+Added: An end-customer deployment may involve as few as one or as many as thousands of secure networking, unified SASE and security operations technology products, depending on the end-customer’s size and security requirements.
+Added: Our customers purchase our hardware products, software licenses and cloud-delivered solutions, as well as our FortiGuard and other security subscription and FortiCare technical support services.
+Added: We generally invoice network security at the time of our sale for the total price of the products and services.
Standard payment terms are generally no more than 60 days, though we may offer extended payment terms to certain distributors or related to certain transactions.
+Added: We also offer our products hosted in our own data centers, PoPs and through co-locations and major cloud service providers, including Amazon Web Services, Microsoft Azure and Google Cloud.
+Added: We have also recognized revenue from customers who deploy our products in a bring-your-own-license (“BYOL”) arrangements at cloud service providers or at private clouds.
+Added: In a BYOL arrangement, a customer purchases a software license through our channel partners and deploys the software in a cloud provider’s environment, in third-party clouds or in their private cloud.
We monitor several 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.
11 unchanged sentences
Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue.
−Removed: The majority of our deferred revenue balance consists of the unrecognized portion of service revenue from FortiGuard and other security subscription and FortiCare technical support service contracts, which is recognized as revenue ratably over the service term.
+Added: The majority of our deferred revenue balance consists of the unrecognized portion of service revenue from FortiGuard and other security subscriptions and FortiCare technical support service contracts, which is recognized as revenue ratably over the service term.
We monitor our deferred revenue balance, short term and total 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 $5.74 billion as of December 31, 2023, an increase of $1.09 billion, or 24%, from December 31, 2022.
−Removed: Short term deferred revenue was $2.35 billion as of December 31, 2022, and increase of $571.9 million, or 32%, from December 31, 2021.
+Added: Short term deferred revenue was $2.85 billion as of December 31, 2023, an increase of $499.4 million, or 21%, from December 31, 2022.
Billings (non-GAAP).
1 unchanged sentence
We consider billings to be a useful metric for management and investors because billings drive current and future revenue, which is an important indicator of the health and viability of our business.
−Removed: There are several limitations related to the use of billings instead of GAAP revenue.
+Added: There are several
+Added: limitations related to the use of billings instead of GAAP revenue.
First, billings include amounts that have not yet been recognized as revenue and are impacted by the term of FortiGuard security subscription and FortiCare and other support agreements.
2 unchanged sentences
Total billings were $6.40 billion in 2023, an increase of 14% compared to $5.59 billion in 2022.
−Removed: Table o f Contents
+Added: During 2023, our billings and product revenue fell below our expectations due to a slowdown in secure networking growth, along with challenges in sales execution and marketing programs.
+Added: In addition, we believe secure networking growth in the near term may be below historical growth rates.
+Added: In response to the slowdown in the secure networking market, we plan to shift our marketing and sales teams’ focus towards the faster growing SecOps and Unified SASE markets over the next several quarters, while maintaining our continued focus on leading innovation in secure networking and the convergence of security and networking.
+Added: We anticipate limited near-term growth in the secure networking market and shifting sales and marketing focus may result in certain risks, including go-to-market challenges, increased sales turnover and other execution challenges.
+Added: Our backlog has fluctuated over past quarters and any decrease in growth or negative growth of in-quarter billings and revenue may not be reflected by our aggregate billings and revenue.
+Added: As we have fulfilled, shipped and billed during a quarter to satisfy backlog, this has increased our aggregate billings and revenue during any particular quarter, and as the supply chain challenges normalize, the growth comparisons versus prior quarters where backlog contributed more to billings have become more challenging.
A reconciliation of revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP, to billings is provided below:
20 unchanged sentences
Purchases of property and equipment (204.1) (281.2) (295.9)
−Removed: Proceeds from intellectual property matter — — (50.0)
Free cash flow (non-GAAP) $ 1,731.4 $ 1,449.4 $ 1,203.8
1 unchanged sentence
Net cash provided by (used in) financing activities $ (1,570.4) $ (2,130.3) $ 82.8
−Removed: Table o f Contents
Components of Operating Results
4 unchanged sentences
Product revenue is primarily generated from sales of our physical and virtual machine appliances.
−Removed: The majority of our product revenue continues to be generated by our Core Platform product line.
−Removed: Product revenue also includes revenue from sales of Enhanced Platform Technologies.
+Added: The majority of our product revenue continues to be generated by our secure networking product lines.
+Added: Product revenue also includes revenue from sales of unified SASE and SecOps technologies.
As a percentage of total revenue, our product revenue has varied from quarter to quarter.
3 unchanged sentences
Our typical contractual support and subscription term is one to five years.
−Removed: We also generate a small portion of our revenue from other services, for which we recognize revenue as the services are provided, and cloud-based services, for which we recognize revenue as the services are delivered or on a monthly usage basis.
+Added: We also generate our revenue from other services, for which we recognize revenue as the services are provided, and cloud-based services, for which we recognize revenue as the services are delivered or on a monthly usage basis.
As a percentage of total revenue, we continue to expect service revenue to be higher than product revenue.
6 unchanged sentences
• Cost of service revenue .
−Removed: Cost of service revenue is primarily comprised of personnel costs, third-party repair and contract fulfillment, data center costs, colocation expenses and cloud hosting, supplies, facility-related costs and amortization of intangible assets.
+Added: Cost of service revenue is primarily comprised of personnel costs, third-party repair and contract fulfillment, data center costs, colocation expenses and cloud provider fees, supplies, facility-related costs and amortization of intangible assets.
Gross margin .
1 unchanged sentence
Service revenue and software licenses have higher gross margins compared to hardware products.
−Removed: During 2022, product gross margin benefited from gains in average selling price, partially offset by higher component costs due to supply chain constraints and the consolidation of Alaxala Networks Corporation (“Alaxala”) starting from August 31, 2021.
−Removed: It also benefited from software revenue growth.
−Removed: Service gross margin decreased due to data center expansion, increased labor cost and our consolidation of Alaxala, partially offset by favorable impact of foreign currency exchange rates and higher average selling prices.
Overall gross margin in 2024 will be impacted by service and product revenue mix.
5 unchanged sentences
Research and development expense consists primarily of personnel costs.
−Removed: Additional research and development expenses include ASIC and system prototypes and certification-related expenses, depreciation of property and equipment and facility-related expenses.
−Removed: The majority of our research and development is focused on software development and the ongoing development of our hardware products.
+Added: Additional research and development expenses include ASIC and system prototypes and certification-related
+Added: expenses, depreciation of property and equipment and facility-related expenses.
+Added: The majority of our research and development is focused on software and hardware development.
We record research and development expenses as incurred.
−Removed: As of December 31, 2022, approximately 89% of our research and development teams were located in Canada, the United States and India.
+Added: As of December 31, 2023, approximately 80%, 8%, 4%, 3% and 3% of our research and development teams were located in North America, India, Japan, Taiwan and Israel, respectively.
As of December 31, 2023, approximately two-thirds of our engineers worked on software development while the remainder worked on hardware development.
−Removed: Table o f Contents
• Sales and marketing .
6 unchanged sentences
Our professional fees principally consist of outside legal, auditing, tax, information technology and other consulting costs.
−Removed: • Gain on intellectual property matter.
−Removed: Gai n on intellectual property matter consists of the amortization of the deferred component of an agreement with a competitor in the network security industry, whereby, the competitor party paid us a lump sum of $50.0 million for a seven-year mutual covenant-not-to-sue for patent claims.
Interest income.
Interest income consists primarily of interest earned on our cash equivalents and investments.
−Removed: Historically, our investments include corporate debt securities, certificates of deposit and term deposits, commercial paper, money market funds, U.S.
+Added: Historically, our interest-bearing investments include corporate debt securities, certificates of deposit and term deposits, commercial paper, money market funds, U.S.
government and agency securities and municipal bonds.
Interest expense.
−Removed: Interest expense consists primarily of interest expense due to the senior notes and other miscellaneous interest expense.
+Added: Interest expense consists of interest expense due to the senior notes and other miscellaneous interest expense.
Other expense — net .
−Removed: Other expense—net consists primarily of foreign exchange gains and losses related to foreign currency remeasurement, gains or losses due to the changes in fair value of our marketable equity securities, realized gains and losses of available-for-sale securities, net rental income from real estate, as well as the gain on the sale or the impairment charges of our investments in privately held companies without readily determinable fair values, which are not accounted for under the equity method.
+Added: Other expense—net consists primarily of foreign exchange gains and losses related to foreign currency remeasurement, gains or losses due to the changes in fair value of our marketable equity securities, realized gains and losses of available-for-sale investments, net rental income from real estate, as well as the gain on the sale or the impairment of investments in privately held companies without readily determinable fair values, which are not accounted for under the equity method.
Provision for income taxes.
5 unchanged sentences
statutory rate primarily due to foreign income subject to different tax rates than in the U.S., federal research and development tax credit, state income taxes, withholding taxes, excess tax benefits related to stock-based compensation expense and the tax impacts of the foreign-derived intangible income (“FDII”) deduction.
+Added: Loss from equity method investments.
+Added: Loss from equity method investments consists of our proportionate share of the investees’ net loss, the amortization of any basis differences, as well as any other-than-temporary impairment (“OTTI”) when events or circumstances suggest that the carrying amount of the investment may be impaired.
Critical Accounting Policies and Estimates
9 unchanged sentences
• identification of a contract or contracts with a customer;
−Removed: Table o f Contents
• identification of the performance obligations in a contract, including evaluation of performance obligations as to being distinct goods or services in a contract;
29 unchanged sentences
In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards.
−Removed: Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled.
+Added: Deferred tax assets and liabilities are measured using the currently enacted tax rates that
+Added: apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled.
Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
2 unchanged sentences
These differences result in deferred tax assets, which are included in our consolidated balance sheets.
−Removed: In general, deferred tax assets
−Removed: Table o f Contents
−Removed: represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of income become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized.
+Added: In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of income become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.
4 unchanged sentences
The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
−Removed: Investments in privately held companies
−Removed: Our investments in privately held companies consist of investments in common stock or in-substance common stock.
−Removed: One of these investments provides us with the ability to exercise significant influence over the investee, but not an absolute controlling financial interest.
−Removed: The investment is accounted for under the equity method of accounting.
−Removed: Determining that we do not control but exercise significant influence over the operating and financial policies of the investee requires significant judgement when considering many factors, including but not limited to, the ownership interest in the investee, board representation, participation in policy-making processes, and participation rights in certain significant financial and operating decisions of the investee in the ordinary course of business.
−Removed: Our investment in Linksys is our only equity method investment.
−Removed: We record our proportionate share of the net earnings or losses of Linksys based on the most recently available financial statements of Linksys, which are provided to us on a three-month lag.
−Removed: We evaluate if there are material transactions or events that occur during the intervening period that materially affect the financial position or results of operations.
−Removed: We also record our share of the amortization of any basis differences, as well as any OTTI as gain or loss from equity method investment in our consolidated statements of income and as an adjustment to the investment balance.
−Removed: We evaluate our equity method investment at the end of each reporting period to determine whether events or changes in business circumstances indicate that the carrying value of the investment may not be recoverable.
−Removed: Evidence of a loss in value might include, but would not necessarily be limited to, series of operating losses, current expected performance relative to expected performance when we initially invested, performance relative to peers and the results of a discounted cash flow analysis.
−Removed: We consider various factors in determining whether an OTTI has occurred, including Linksys financial results and operating history, our ability and intent to hold the investment until its fair value recovers, the implied revenue valuation multiples compared to guideline public companies, Linksys’ ability to achieve milestones and any notable operational and strategic changes.
−Removed: Table o f Contents
+Added: We have elected to account for the tax effect of the Global Intangible Low-Taxed Income (“GILTI”) as a current period expense.
Results of Operations
26 unchanged sentences
Other expense—net (6.1) (13.5) (11.6)
−Removed: Income before income taxes and loss from equity method investment 955.5 628.4 541.7
+Added: Income before income taxes and loss from equity method investments
+Added: 1,333.7 955.5 628.4
Provision for income taxes 143.8 30.8 14.1
−Removed: Loss from equity method investment (68.1) (7.6) —
+Added: Loss from equity method investments
+Added: (42.1) (68.1) (7.6)
Net income including non-controlling interests 1,147.8 856.6 606.7
2 unchanged sentences
$ 1,147.8 $ 857.3 $ 606.8
−Removed: Table o f Contents
Year Ended December 31,
22 unchanged sentences
Other expense—net — — —
−Removed: Income before income taxes and loss from equity method investment 22 19 21
+Added: Income before income taxes and loss from equity method investments
Provision for income taxes 3 1 —
−Removed: Loss from equity method investment (2) — —
+Added: Loss from equity method investments
Net income including non-controlling interests 22 19 18
4 unchanged sentences
Discussion regarding our financial condition and results of operations for 2022 as compared to 2021 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 24, 2023.
−Removed: Table o f Contents
2023 and 2022
11 unchanged sentences
Total revenue $ 5,304.8 100 % $ 4,417.4 100 % $ 887.4 20 %
−Removed: Total revenue increased by $1.08 billion, or 32%, in 2022 compared to 2021.
−Removed: We continued to experience significant organic revenue growth (i.e., revenue growth excluding attribution from recent acquisitions) with diversification of revenue geographically, and across both customer and industry segments.
−Removed: Revenue from all regions grew, with the Americas contributing the largest portion of the increase on an absolute dollar basis and APAC, which included Alaxala, contributing the largest portion of the increase on a percentage basis.
−Removed: Product revenue increased by $525.5 million, or 42%, in 2022 compared to 2021.
−Removed: Product revenue growth was consistent with an elevated cyber threat landscape, the convergence of security and networking and included the benefit of certain pricing actions.
−Removed: The product revenue growth was primarily due to strong growth across many of our Enhanced Platform Technology products, including our secure access products and software licenses.
−Removed: In addition, our product revenue growth was driven by a strong demand for the wide range operating system capabilities embedded in our Core Platform products.
−Removed: Service revenue increased by $549.7 million, or 26%, in 2022 compared to 2021.
+Added: Total revenue increased $887.4 million, or 20%, in 2023 compared to 2022.
+Added: We continued to experience large organic revenue growth (i.e., revenue growth excluding attribution from recent acquisitions) with diversification of revenue geographically, and across both customer and industry segments.
+Added: Revenue from all regions grew, with the Americas contributing the largest portion of the increase on an absolute dollar basis and EMEA, contributing the largest portion of the increase on a percentage basis.
+Added: Product revenue increased $146.8 million, or 8%, in 2023 compared to 2022 .
+Added: Product revenue growth was impacted by an elevated cyber threat landscape, the convergence of security and networking, the impact of certain historical pricing actions, improving supply chain dynamics, and changes in the backlog balance.
+Added: Product revenue growth rates decreased from 42% in 2022 to 8% in 2023 partially due to overall softening macroeconomic conditions.
+Added: Service revenue increased $740.6 million, or 28%, in 2023 compared to 2022.
Service revenue growth has accelerated over the past three years from 24% in 2021, to 26% in 2022 to 28% in 2023 .
−Removed: Compared to 2021, FortiGuard security subscription revenue increased by $302.0 million, or 27% and FortiCare, other technical support and other revenues increased by $247.7 million, or 26%, in 2022.
−Removed: The increases were primarily due to the recognition of revenue from our growing deferred revenue balance related to FortiGuard and other security subscriptions delivered to on-premise and cloud-based environments as well as FortiCare and other technical support.
−Removed: Our growing deferred revenue balance was primarily due to our growth in customer base, expansion of our service offerings, and impact of pricing actions.
+Added: Compared to 2022, FortiGuard security subscription revenue and other security subs cription revenue increased $471.1 million, or 33% and FortiCare, other technical support and other revenues increased $269.5 million, or 22%, in 2023.
+Added: The increases in service revenue were primarily due to the recognition of revenue from our growing deferred revenue balance related to FortiGuard and other security subscriptions delivered to on-premise and cloud-based environments.
+Added: Security subscriptions outpaced technical support growth due to strength in secure networking subscriptions, SecOps and SASE.
Of the service revenue recognized in 2023, 67% was included in the deferred revenue balance as of December 31, 2022.
1 unchanged sentence
Of the service revenue recognized in each quarter of 2023, from 88% to 89% was included in deferred revenue as of the beginning of the respective quarter.
−Removed: Table o f Contents
Cost of revenue and gross margin
10 unchanged sentences
Total gross margin 76.7 % 75.4 %
−Removed: Total gross margin decreased by 1.2 percentage points in 2022 compared to 2021, primarily driven by a change in revenue mix to lower margin product revenue from higher margin service revenue and the consolidation of Alaxala starting from August 31, 2021 and partially offset by favorable impact of foreign currency fluctuations.
−Removed: Revenue mix shifted by 2.0 percentage points from service revenue to product revenue, as a percentage of total revenue.
−Removed: Product gross margin increased by 0.1 percentage points in 2022 compared to 2021, primarily driven by higher average selling prices and partially offset by higher expedite fees and other component costs due to supply chain constraints and the consolidation of Alaxala.
−Removed: Cost of product revenue was comprised primarily of third-party contract manufacturers’ costs and the costs of materials used in production.
−Removed: Service gross margin decreased by 0.8 percentage points in 2022 compared to 2021, primarily driven by data center expansion, increased labor cost and our consolidation of Alaxala and partially offset by favorable impact of foreign currency fluctuation and higher average selling prices.
+Added: Percentages have been rounded for presentation purposes and may differ from unrounded results.
+Added: Total gross margin increased 1.3 percentage points in 2023 compared to 2022, primarily driven by a shift in the revenue mix and increased service gross margin, partially offset by decreased product gross margin.
+Added: Revenue mix shifted by 4.0 percentage points from product revenue to service revenue, as a percentage of total revenue.
+Added: Product gross margin decreased 0.8 percentage points in 2023 compared to 2022, primarily due to inventory related reserves expense, partially offset by lower expedite fees and freight costs and a shift in revenue mix from hardware to software.
+Added: Cost of product revenue was comprised primarily of third-party contract manufacturers’ costs, costs of materials used in production and inventory reserves.
+Added: Service gross margin increased 0.9 percentage points in 2023 compared to 2022, primarily driven by pricing actions in earlier periods and benefited from the mix shift towards higher margin security subscription services.
Cost of service revenue was comprised primarily of personnel costs, third-party repair and contract fulfillment, data center costs, colocation expenses and cloud hosting, supplies and facility-related costs.
11 unchanged sentences
Research and development
−Removed: Research and development expense increased by $88.2 million, or 21%, in 2022 compared to 2021, primarily due to an increase o f $63.1 mill ion in personnel-related costs as a result of increased compensation rates and headcount to support the development of new products and continued enhancements to our existing products.
−Removed: In addition, we incurred increases in depreciation and other occupancy costs of $16.6 million and product development costs of $4.9 million, partially offset by the favorable impact of foreign currency fluctuations.
+Added: Research and development expense increased $101.4 million, or 20%, in 2023 compared to 2022, primarily due to an increase o f $74.3 million in personnel-related costs as a result of increased headcount and compensation rates to support the development of new products and continued enhancements to our existing products.
+Added: In addition, non-personnel-related product development costs increased $13.8 million and depreciation expense and other occupancy-related expense increased $11.4 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 in 2024.
−Removed: Table o f Contents
Sales and marketing
−Removed: Sales and marketing expense increased by $340.4 million, or 25%, in 2022 compared to 2021, primarily due to an increase of $208.5 million in personnel-related costs.
−Removed: We significantly increased our sales capacity, including newer non-tenured salespeople.
−Removed: The increase in headcount is expected to help drive global revenue increases.
−Removed: In addition, we incurred increases in marketing-related expenses of $52.6 million, travel expense of $38.8 million, depreciation and other occupancy-related expense of $17.8 million and supplies expense of $10.6 million, partially offset by the favorable impact of foreign currency fluctuations.
+Added: Sales and marketing expense increased $319.9 million, or 19%, in 2023 compared to 2022, primarily due to an increase of $244.3 million in personnel-related costs.
+Added: We increased our sales and pipeline generation capacity.
+Added: The increase in headcount is expected to help drive global market revenue increases.
+Added: In addition, marketing-related expenses increased $23.5 million, travel expense increased $20.7 million and depreciation expense and other occupancy-related expense increased $18.4 million.
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 in 2024.
General and administrative
−Removed: General and administrativ e expense increased by $25.5 million, or 18%, in 2022 compared to 2021, primarily due to an increase in personnel-related costs of $17.3 million.
−Removed: In addition, we incurred increases in d epreciation and other occupancy costs of $3.5 million, subscriptions and other expense of $3.2 million, professional services fee of $2.9 million and provision for expected credit losses of $1.4 million , partially offset by a decrease in legal-related costs of $6.1 million and the favorable impact of foreign currency fluctuations.
+Added: General and administrativ e expense increased $42.3 million, or 25%, in 2023 compared to 2022, primarily due to an increase of $19.2 million in professional services fees, an increase of $14.6 million in personnel-related costs and an increase of $3.4 million in provision for expected credit losses .
We currently expect general and administrative expense to increase in absolute dollars in 2024.
Operating income and margin
−Removed: We generated operating income of $969.6 million in 2022, an increase of $319.2 million, or 49%, compared to $650.4 million in 2021.
+Added: We generated operating income of $1.24 billion in 2023, an increase of $271.5 million, or 28%, compared to $969.6 million in 2022.
Operating income as a percentage of revenue increased to 23.4% in 2023 compared to 21.9% in 2022.
−Removed: The increase in our operating margin primarily benefits from a 2.1 percentage point decrease in sales and marketing expense as a percentage of revenue, primarily due to the favorable impact of foreign currency fluctuations, as well as improvement in sales productivity compared to prior year.
−Removed: In addition, research and development expense and general and administrative expense decreased 1.1 percentage points and 0.5 percentage points, respectively, as percentage of revenue.
−Removed: The benefit from lower operating expense as a percentage of revenue was partially offset by a 1.2 percentage point decrease in gross margin.
+Added: The increase in our operating margin primarily benefits from a 1.3 percentage points increase in gross margin and 0.4 percentage points decrease in sales and marketing expense as a percentage of revenue, partially offset by 0.2 percentage points increase in general and administrative expense as percentage of revenue.
Interest income, interest expense and other expense — net
5 unchanged sentences
Other expense—net (6.1) (13.5) 7.4 (55) %
−Removed: Interest income increased by $12.9 million in 2022 as compared to 2021, primarily as a result of higher interest rates, partially offset by lower investment balances.
+Added: Interest income increased $102.3 million in 2023 as compared to 2022, primarily as a result of higher interest rates and investment balances.
Interest income varies depending on our average investment balances during the period, types and mix of investments, and market interest rates.
−Removed: Interest expense increased by $3.1 million in 2022 as compared to 2021, primarily due to our senior notes issued in the first quarter of 2021.
−Removed: Other expense—net increased by $1.9 million in 2022 as compared to 2021 due to an $8.0 million increase in loss on marketable equity securities, partially offset by a $3.6 million decrease in foreign exchange losses and a $2.5 million increase in net rental income from real estate.
+Added: Interest expense increased $3.0 million in 2023 as compared to 2022.
+Added: Other expense—net decreased $7.4 million in 2023 as compared to 2022 due to an $8.7 million lower loss on marketable equity securities and a $1.0 million increase of net rental income from real estate, partially offset by a $2.4 million increase of foreign exchange losses.
Provision for income taxes
7 unchanged sentences
The provision was partially offset by excess tax benefits of $55.1 million from stock-based compensation expense, a tax benefit of $89.5 million from the FDII deduction, and a tax benefit of $14.0 million from federal research and development tax credits.
−Removed: Table o f Contents
Our provision for income taxes for 2022 reflects an effective tax rate of 3%, compared to an effective tax rate of 2% for 2021.
2 unchanged sentences
The provision was partially offset by excess tax benefits of $75.8 million from stock-based compensation expense, a tax benefit of $115.2 million from the FDII deduction, and a tax benefit of $11.6 million from federal research and development tax credits.
−Removed: Loss from Equity Method Investment
+Added: Loss from Equity Method Investments
Year Ended December 31, Change % Change
(in millions, except percentages)
−Removed: Loss from equity method investment $ (68.1) $ (7.6) $ (60.5) 796 %
−Removed: Loss from equity method investment increased by $60.5 million in 2022 as compared to 2021, due to $38.3 million increase in our proportionate share of Linksys’ financial results as well as the amortization of the basis differences, which included a $17.5 million charge in connection with a valuation allowance established on deferred tax assets at Linksys, and the OTTI charge of $22.2 million recorded in the three months ended December 31, 2022.
+Added: Loss from equity method investments
+Added: $ (42.1) $ (68.1) $ 26.0 (38) %
+Added: Loss from equity method investments decreased $26.0 million in 2023 as compared to 2022, as our proportionate share of Linksys’ financial results including our share of the amortization of the basis differences improved over the same period last year .
+Added: Our loss related to Linksys in fiscal 2022 totaled $68.1 million, comprised our proportionate share of Linksys’ financial results as well as the amortization of the basis differences of $45.9 million, which included a $17.5 million charge in connection with a valuation allowance established on deferred tax assets at Linksys, and the OTTI charge of $22.2 million recorded during the three months ended December 31,2022.
Seasonality, Cyclicality and Quarterly Revenue Trends
4 unchanged sentences
We believe this is due to customer buying patterns typical in this industry.
−Removed: Consistent with the seasonality note above, our quarterly revenue over the past two years has increased sequentially each year.
−Removed: Product revenue increased year-over-year as compared to 2021, as we have continued product innovation and launched new product models, expanded our solution sales, including SD-WAN and OT solutions and increased our investments in our sales and marketing organizations.
−Removed: Total gross margin has fluctuated on a quarterly basis primarily due to the relative product and service mix as well as the timing of supplier cost increases and our own price increases.
+Added: Our quarterly revenue over the past two years has increased sequentially each quarter within the year.
+Added: Total gross margin has fluctuated on a quarterly basis primarily due to the relative product and service mix.
Product gross margin varies based on the types of products sold, their cost profile and their average selling prices.
−Removed: In 2022, product gross margin was impacted by new product introductions, the mix of high-end, mid-range and entry-level Core Platform products and the mix of other Enhanced Platform Technologies products, software sales and the timing and impact of supplier cost increases and our own price list increases.
−Removed: In 2022, we experienced an unusual level of component suppliers charging new expedite fees and increases in freight costs.
−Removed: Historically, we have been able to improve our direct cost of appliances and our product gross margin.
Service gross margin is impacted by revenue growth and our personnel-related costs, third-party repair and contract fulfillment, data center, colocation fees, cloud hosting, supplies, facility-related costs and foreign currency fluctuations.
−Removed: Table o f Contents
Liquidity and Capital Resources
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Net increase (decrease) in cash and cash equivalents $ (285.0) $ 363.8 $ 257.3
−Removed: Table o f Contents
−Removed: Liquidity and capital resources are primarily impacted by our operating activities, including cash tax payments, proceeds from issuance of our investment grade debt, as well as cash used on stock repurchases, real estate purchases and other capital expenditures, investments in various companies and business acquisitions.
+Added: Liquidity and capital resources are primarily impacted by our operating activities, proceeds from issuance of our investment grade debt, as well as cash used on stock repurchases, real estate purchases and other capital expenditures, investments in various companies and business acquisitions.
In recent years, we have received significant capital resources from our billings to customers, issuance of investment grade debt and, to some extent, from the exercise of stock options by our employees.
−Removed: Additional increases in billings may depend on a number of factors, including demand for and availability of our products and services, competition, market or industry changes, macroeconomic events such as rising inflation and interest rates, the COVID-19 pandemic, supply chain capacity and disruptions, international conflicts, including the war in Ukraine, and our ability to execute.
−Removed: We expect proceeds from the exercise of stock options in future years to be impacted by the increased mix of restricted stock units versus stock options granted to our employees and to vary based on our share price.
−Removed: We expect our cash tax payments to increase as a result of a provision in the TCJA requiring taxpayers to capitalize and amortize research and development expenses for tax purposes, other tax law changes and our expected growth.
−Removed: In July 2022, our board of directors authorized a $1.0 billion increase in the authorized stock repurchase under the Repurchase Program, bringing the aggregate amount of authorized to be repurchased to $5.25 billion of our outstanding common stock through February 28, 2023.
+Added: Additional increases in billings may depend on a number of factors, including demand for and availability of our products and services, competition, pricing actions, market or industry changes, macroeconomic events such as rising inflation and interest rates, economic strength, supply chain capacity and disruptions, international conflicts, including the war in Ukraine and the Israel-Hamas war, and our ability to execute.
+Added: We expect proceeds from the exercise of stock options in future years to be impacted by the increased mix of restricted stock units and performance stock units versus stock options granted to our employees and to vary based on our share price.
+Added: We expect our cash tax payments to increase as a result of a provision in the Tax Cuts and Jobs Act of 2017 requiring taxpayers to capitalize and amortize research and development expenses for tax purposes, other tax law changes and our expected growth.
+Added: In February 2023, our board of directors approved an extension of the Repurchase Program to February 29, 2024.
+Added: In April 2023 and July 2023, our board of directors approved $1.0 billion and $500.0 million increases in the authorized stock repurchase amount under the Repurchase Program, respectively, bringing the aggregate amount authorized to be repurchased to $6.75 billion.
In 2023, we repurchased 27.2 million shares of common stock under the Repurchase Program for an aggregate purchase price of $1.50 billion.
As of December 31, 2023, $529.1 million remained available for future share repurchases under the Repurchase Program.
+Added: In January 2024, our board of directors approved a $500.0 million increase in the authorized stock repurchase amount under the Repurchase Program, bringing the aggregate amount authorized to be repurchased to $7.25 billion of our outstanding common stock.
In February 2024, our board of directors approved an extension of the Repurchase Program to February 28, 2025.
+Added: As of February 23, 2024, approximately $1.03 billion remained available for future share repurchases.
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.
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Debt in Part II, Item 8 of this Annual Report on Form 10-K for information on the senior notes.
−Removed: We expect to continue to increase our data center, office and warehouse capacity to support growth and the expansion of existing services or introduction of new services.
+Added: We expect to continue to increase our data centers, PoPs, office and warehouse capacity to support growth and the expansion of existing services or introduction of new services.
As we purchase new properties, we will work to incorporate these properties into the environmental goals we have established.
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In certain instances, these agreements allow us the option to reschedule and adjust our requirements based on our business needs prior to firm orders being placed.
−Removed: In 2022, we significantly i ncreased these commitments as contract manufacturers and component suppliers significantly increased their pricing and lead times.
−Removed: Inventory purchase commitments as of December 31, 2022, were $1.34 billion, an increase of $194.5 million compared to $1.14 billion as of December 31, 2021.
−Removed: We estimate payments of $1.27 billion due on or before December 31, 2023 related to these commitments.
+Added: In 2023, we have seen supply chain constraints gradually improve as we continued to work with contract manufacturers and component suppliers to decrease and optimize our non-cancellable inventory purchase commitments.
+Added: Inventory purchase commitments as of December 31, 2023, were $637.3 million, a decrease of $697.7 million compared to $1.34 billion as of December 31, 2022.
+Added: We estimate payments of $381.5 million due on or before December 31, 2024 related to these commitments.
We also have open purchase orders and contractual obligations in the ordinary course of business for which we have not received goods or services.
As of December 31, 2023, we had $66.9 million in other contractual commitments having a remaining term in excess of one year that are non-cancelable.
−Removed: As of December 31, 2022, our cash, cash equivalents, investments and marketable equity securities of $2.26 billion were invested primarily in deposit accounts, commercial paper, corporate debt securities, U.S.
−Removed: government and agency securities, certificates of deposit and term deposits, money market funds, municipal bonds and marketable equity securities.
+Added: As of December 31, 2023, our cash, cash equivalents and short-term and long-term investments of $2.44 billion were invested primarily in deposit accounts, commercial paper, corporate debt securities, U.S.
+Added: government and agency securities, certificates of deposit and term deposits, money market funds, municipal bonds.
It is our investment policy to invest excess cash in a manner that preserves capital, provides liquidity and generates return without significantly increasing risk.
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We believe that our existing cash and cash equivalents and cash flow from operations will be sufficient for at least the next 12 months to meet our requirements and plans for cash, including meeting our working capital requirements and capital expenditure requirements.
−Removed: In the long term, our ability to support our requirements and plans for cash, including our working capital and capital expenditure requirements will depend on many factors, including our growth rate, the timing and amount of our share repurchases, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, the continuing market acceptance of our products, the timing and extent of spending to support development efforts, our investments in purchasing or leasing real estate, cash tax payments and macroeconomic impacts such as rising inflation and interest rates, the war in Ukraine and the COVID-19 pandemic.
−Removed: Historically, we have required capital principally
−Removed: Table o f Contents
−Removed: to fund our working capital needs, share repurchases, capital expenditures and acquisition activities.
+Added: In the long term, our ability to support our requirements and plans for cash, including our working capital and capital expenditure requirements will depend on many factors, including our growth rate;
+Added: the timing and amount of our share repurchases;
+Added: the expansion of sales and marketing activities, pricing actions, the introduction of new and enhanced products and services offerings;
+Added: the continuing market acceptance of our products;
+Added: the timing and extent of spending to support development efforts;
+Added: our investments in purchasing, developing or leasing real estate;
+Added: cash tax payments and macroeconomic impacts such as rising inflation and interest rates;
+Added: the war in Ukraine and the Israel-Hamas war;
+Added: and instability in the global
+Added: banking system.
+Added: Historically, we have required capital principally to fund our working capital needs, share repurchases, capital expenditures and acquisition activities.
In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
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Non-cash adjustments consist primarily of amortization of deferred contract costs, stock-based compensation and depreciation and amortization.
−Removed: Changes in operating assets and liabilities consist primarily of changes in deferred revenue, accounts receivable, net, deferred contract costs and deferred tax assets.
−Removed: Our operating activities during 2022 provided cash flows of $1.73 billion as a result of the continued growth of our business and our ability to successfully manage our working capital.
−Removed: 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 of $1.18 billion in our deferred revenue during 2022.
+Added: Changes in operating assets and liabilities consist primarily of changes in deferred revenue, deferred contract costs, deferred tax assets, inventory and accounts receivable—net.
+Added: Our operating activities during 2023 provided cash flows of $1.94 billion as a result of the continued growth of our business, improved profitability and our ability to successfully manage our working capital.
+Added: Changes in operating assets and liabilities primarily resulted from an increase in sales of our security subscription services and technical support services to new and existing customers, as reflected by an increase of $1.10 billion in our deferred revenue during 2023.
+Added: In addition, changes in operating assets and liabilities were driven by an increase of $353.5 million in deferred contract costs, an increase of $301.9 million in deferred tax assets, an increase of $253.5 million in inventory and an increase of $146.4 million in accounts receivable—net.
Investing Activities
The changes in cash flows from investing activities primarily relate to timing of purchases, maturities and sales of investments, purchases of property and equipment, investments in various companies and business acquisitions.
−Removed: Historically, in making a lease-versus-ownership decision related to warehouse, office or data center space, we have considered various factors including financial metrics and expected long-term growth rates.
−Removed: In certain cases, we have elected to own the facility if we believed that purchasing or developing buildings rather than leasing is more in line with our long-term strategy.
−Removed: We may make similar decisions in the future.
+Added: Historically, in making a lease-versus-ownership decision related to warehouse, office or data center space, we have considered various factors including financial metrics, expected long-term growth rates, time to market and changes in asset values.
+Added: In certain cases, we have elected to own a facility if we believe that purchasing or developing buildings rather than leasing is more closely aligned with our long-term strategy.
+Added: We expect to make similar decisions in the future.
We may also make cash payments in connection with future business combinations.
−Removed: During 2022, cash provided by investing activities was primarily driven by $1.08 billion cash proceeds from maturities and sales of investments, net of purchases of investments, $281.2 million of purchases of property and equipment, and $30.8 million used for the acquisitions of certain assets and liabilities in a network detection and response business and the remaining 25% equity interests in Alaxala, net of cash.
+Added: During 2023, cash used in investing activities was $649.3 million, primarily driven by $437.0 million spent for purchases of investments, net of maturities and sales of investments, $204.1 million used for the purchases of property and equipment, and $8.5 million investment in a privately held company.
Financing Activities
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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.