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What changed in Fortinet's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Fortinet's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+460 added−516 removedSource: 10-K (2024-02-26) vs 10-K (2023-02-24)

Top changes in Fortinet's 2023 10-K

460 paragraphs added · 516 removed · 321 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeCustomers may also access our products via the cloud through certain cloud providers such as Amazon Web Services, Google Cloud, IBM Cloud, Microsoft Azure and Oracle Cloud. Often, our customers also purchase our FortiGuard security subscription services and FortiCare technical support services. Refer to Note 16.
Biggest changeAn end-customer deployment may involve as few as one or as many as dozens of different types of integrated products and services from across our broad portfolio that spans secure networking, unified SASE, and security operations. Customers may also access our products via the cloud through certain cloud providers such as Amazon Web Services, Microsoft Azure and Google Cloud.
The principal competitive factors in our markets include: • product security performance, throughput, features, effectiveness, interoperability and reliability; • addition and integration of new networking and security features and technological expertise; • compliance with industry standards and certifications; • price of products and services and total cost of ownership; • brand recognition; • customer service and support across varied and complex customer segments and use cases; • sales and distribution capabilities; • size and financial stability; • breadth of product line; • form factor of the solution; and • other competitive differentiators.
The principal competitive factors in our markets include: • product security performance, throughput, features, effectiveness, interoperability and reliability; • addition and integration of new networking and security features and technological expertise; • compliance with industry standards and security and other certifications; • price of products and services and total cost of ownership; • brand recognition; • customer service and support across varied and complex customer segments and use cases; • sales and distribution capabilities; • size and financial stability; • breadth of product line; • form factor of the solution; and • other competitive differentiators.
Government Regulation We are subject to regulation by various federal, state, regional, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, product labeling, environmental laws, consumer protection laws, anti-bribery laws, data privacy laws, import and export controls, federal securities laws and tax laws and regulations.
Government Regulation We are subject to regulation by various federal, state, regional, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, security, product safety, product labeling, environmental laws, consumer protection laws, anti-bribery laws, data privacy laws, import and export controls, federal securities laws and tax laws and regulations.
See Part II, Item 8 of this Annual Report on Form 10-K for more information on our consolidated balance sheets as of December 31, 2022 and 2021 and our consolidated statements of income, comprehensive income, equity (deficit), and cash flows for each of the three years ended December 31, 2022, 2021 and 2020.
See Part II, Item 8 of this Annual Report on Form 10-K for more information on our consolidated balance sheets as of December 31, 2023 and 2022 and our consolidated statements of income, comprehensive income, equity (deficit), and cash flows for each of the three years ended December 31, 2023, 2022 and 2021.
We have no long-term contracts related to the manufacturing of our ASICs or other components that guarantee any capacity or pricing terms. Research and Development We focus our research and development efforts on developing new hardware and software products and services, and adding new features to existing products and services.
We have no long-term contracts related to the manufacturing of our ASICs or other components that guarantee any capacity or pricing terms. Research and Development We focus our research and development efforts on developing new hardware and software products and services, and adding new features to existing products, services and operating systems.
Some of these larger competitors have substantially broader product offerings and leverage their relationships based on other products or incorporate functionality into existing products in a manner that discourages users from purchasing our products. Based in part on these competitive pressures, we may lower prices or attempt to add incremental features and functionalities to our products.
Some of these larger competitors have substantially broader product offerings and leverage their relationships based on other products or incorporate 6 Table of Contents functionality into existing products in a manner that discourages users from purchasing our products. Based in part on these competitive pressures, we may lower prices or attempt to add incremental features and functionalities to our products.
Approximately 88% of our hardware is manufactured in Taiwan. We submit purchase orders to our contract manufacturers that describe the type and quantities of our products to be manufactured, the delivery date and other delivery terms.
Approximately 95% of our hardware is manufactured in Taiwan. We submit purchase orders to our contract manufacturers that describe the type and quantities of our products to be manufactured, the delivery date and other delivery terms.
In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.
In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws 5 Table of Contents of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.
To support our broadly dispersed global channel and end-customer base, we have sales professionals in over 90 countries around the world. Our marketing strategy is focused on building our brand, driving thought leadership with emphasis on the criticality of cybersecurity platform adoption and the convergence of security and networking as well as driving end-customer demand for our security solutions.
To support our broadly dispersed global channel and end-customer base, we have sales professionals in over 100 countries around the world. 4 Table of Contents Our marketing strategy is focused on building our brand, driving thought leadership with emphasis on the criticality of cybersecurity platform adoption and the convergence of security and networking as well as driving end-customer demand for our security solutions.
The components included in our products are sourced from various suppliers by us or, more frequently, by our contract manufacturers. Some of the components important to our business, including certain CPUs from Intel Corporation (“Intel”) and Advanced Micro Devices, Inc. (“AMD”), network and wireless chips from Broadcom Inc. (“Broadcom”), Marvell Technology 9 Table o f Contents Group Ltd.
The components included in our products are sourced from various suppliers by us or, more frequently, by our contract manufacturers. Some of the components important to our business, including certain CPUs from Intel Corporation (“Intel”) and Advanced Micro Devices, Inc. (“AMD”), network and wireless chips from Broadcom Inc. (“Broadcom”), Marvell Technology Group Ltd.
Human Capital Management As of December 31, 2022, our total headcount was 12,595 employees, approximately 30% of whom were employed in the United States and approximately 70% of whom were employed outside of the United States. Our employees are the foundation of our innovation and cybersecurity leadership for the benefit of our customers.
Human Capital Management As of December 31, 2023, our total headcount was 13,568 employees, approximately 30% of whom were employed in the United States and approximately 70% of whom were employed outside of the United States. Our employees are the foundation of our innovation and cybersecurity leadership for the benefit of our customers.
As of December 31, 2022, we had 1,285 U.S. and foreign-issued patents and 255 pending U.S. and foreign patent applications. We also license software from third parties for inclusion in our products, including open source software and other software.
As of December 31, 2023, we had 1,299 U.S. and foreign-issued patents and 252 pending U.S. and foreign patent applications. We also license software from third parties for inclusion in our products, including open source software and other software.
Among others, our competitors include Arista Networks, Inc.(“Arista”), Aruba Networks, Inc.(“Aruba”), Barracuda Networks, Inc. (“Barracuda”), Check Point Software Technologies Ltd. (“Check Point”), Cisco Systems, Inc. (“Cisco”), CrowdStrike Holdings, Inc. (“CrowdStrike”), F5 Networks, Inc. (“F5 Networks”), Huawei Technologies Co., Ltd. (“Huawei”), Juniper Networks, Inc. (“Juniper”), Palo Alto Networks, Inc. (“Palo Alto Networks”), SonicWALL, Inc.
Among others, our competitors include Aruba Networks, Inc. (“Aruba”), Check Point Software Technologies Ltd. (“Check Point”), Cisco Systems, Inc. (“Cisco”), CrowdStrike Holdings, Inc. (“CrowdStrike”), F5 Networks, Inc. (“F5 Networks”), Huawei Technologies Co., Ltd. (“Huawei”), Juniper Networks, Inc. (“Juniper”), Palo Alto Networks, Inc. (“Palo Alto Networks”), SonicWALL, Inc. (“SonicWALL”), Sophos Group Plc (“Sophos”), VMware, Inc. (“VMware”) and Zscaler, Inc. (“Zscaler”).
We have not experienced any work stoppages, and we consider our relations with our employees to be good. Environmental, Social and Governance We are committed to responsible environmental, social and governance (“ESG”) practices.
We have not experienced any work stoppages, and we consider our relations with our employees to be good. Environmental, Social and Governance We are committed to responsible environmental, social and governance (“ESG”) practices and having a positive impact on the sustainability of our society and planet.
We have also implemented a training certification program, Network Security Expert, to help ensure an understanding of our products and services.
We also offer training services to our end-customers and channel partners through our training team and authorized training partners. We have also implemented a training certification program, Network Security Expert (“NSE”), to help ensure an understanding of our products and services.
We value diversity at all levels and continue to focus on enhancing our DEI initiatives across our workforce. We are also committed to community engagement and social responsibility with regards to our employees and beyond, and our board of directors has active oversight of such initiatives.
We are also committed to community engagement and social responsibility with regards to our employees and beyond, and our board of directors has active oversight of such initiatives.
Our compensation programs for our employees include base pay, incentive compensation, opportunities for equity ownership where local statutes allow and employee benefits that promote well-being across different aspects of our employees’ lives, which may include health and welfare insurance, retirement benefits and paid time off. 11 Table o f Contents As a global company, much of our success is rooted in the diversity of our teams and our commitment to diversity, equity and inclusion (“DEI”).
Our compensation programs for our employees include base pay, incentive compensation, opportunities for equity ownership where local statutes allow and employee benefits that promote well-being across different aspects of our employees’ lives, which may include health and welfare insurance, retirement benefits and paid time off.
Additionally, our sales teams help drive and support large enterprise and service provider sales through a direct touch model. Our sales professionals and engineers typically work closely with our channel partners and directly engage with large end-customers to address their unique security and deployment requirements.
Our sales professionals and engineers typically work closely with our channel partners and directly engage with large end-customers to address their unique security and deployment requirements.
We sell to distributors that sell to resellers and to service providers and MSSPs, who, in turn, sell products and/or services to end-customers. In certain cases, we sell directly to large service providers and major systems integrators.
Sales and Marketing We primarily sell our products and services through a two-tier distribution model. We sell to distributors that sell to resellers and to service providers and managed security service providers (“MSSPs”), who, in turn, sell products and/or services to end-customers. In certain cases, we sell directly to large service providers and major systems integrators.
(“SonicWALL”), Sophos Group Plc (“Sophos”), Trend Micro Incorporated (“Trend Micro”), VMware, Inc. (“VMware”) and Zscaler, Inc. (“Zscaler”). We believe we compete favorably based on our products’ security performance, throughput, reliability, breadth and ability to work together, our ability to add and integrate new networking and security features and our technological expertise.
We believe we compete favorably based on our products’ security performance, throughput, reliability, breadth and ability to work together, our ability to add and integrate new networking and security features and our technological expertise.
We are committed to building an inclusive, equitable and diverse workforce within our organization and across the security industry to help empower individuals to reach their full potential. We continue to focus on skilling, upskilling and reskilling individuals to reach our goal of training one million people in cybersecurity by 2026.
We are committed to building an inclusive, equitable and diverse workforce within our organization and across the security industry to help empower individuals to reach their full potential.
We are committed to helping address climate change impacts and minimizing the environmental footprint of our solutions, operations and our broader value chain.
We recognize that environmental considerations such as climate change, resource scarcity and the energy crisis are top priorities for the future of our planet. We are committed to helping address climate change impacts and minimizing the environmental footprint of our solutions, operations and our broader value chain.
Available Information Our web site is located at https://www.fortinet.com, and our investor relations web site is located at https://investor.fortinet.com. The information posted on our website is not incorporated by reference into this Annual Report on Form 10-K.
The information posted on our website is not incorporated by reference into this Annual Report on Form 10-K.
Our end-customers are lo cated 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. An end-customer deployment may involve as few as one or as many as thousands of appliances as well as other Fortinet Security Fabric products.
Customers 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, manufacturing, retail, technology, education, healthcare and telecommunications.
Throughout the year, we encourage healthy behaviors through communications, educational sessions, wellness challenges and other incentives. None of our U.S. employees are represented by a labor union. Our employees in certain European and Latin American countries, however, have the right to be represented by external labor organizations if they maintain up-to-date union membership.
In addition, our Chief Executive Officer regularly communicates the importance of Fortinet’s core values of openness, teamwork and innovation. None of our U.S. employees are represented by a labor union. Our employees in certain European and Latin American countries, however, have the right to be represented by external labor organizations if they maintain up-to-date union membership.
Our approach to responsible business is based on strong corporate governance practices that aim to ensure accountability while meeting our responsibilities across our value chain. Our board of directors frequently reviews our governance practices to ensure that they are appropriate and reflect our company’s maturity.
Our approach to responsible business is based on strong corporate governance practices that aim to ensure accountability while meeting our responsibilities across our value chain, starting with our employees. Our board of directors regularly reviews our governance practices. Our Codes of Conduct apply to employees, partners and suppliers, and we have compliance trainings and controls in place.
Segment Information in Part II, Item 8 of this Annual Report on Form 10-K for distributor customers that accounted for 10% or more of our revenue or net accounts receivable. Sales and Marketing We primarily sell our products and services through a two-tier distribution model.
Often, our customers also purchase our FortiGuard security subscription services and FortiCare technical support services. Refer to Note 16 Segment Information in Part II, Item 8 of this Annual Report on Form 10-K for distributor customers that accounted for 10% or more of our revenue or net accounts receivable.
We have engaged with a consultancy to measure our Scope 1 and Scope 2 emissions and to further engage on our path to carbon neutrality in alignment with the Paris Agreement we formally signed on to the Science-Based Target Initiative commitment in September 2022.
We are engaged on a 7 Table of Contents decarbonization path to reach net zero for our Scope 1 and Scope 2 emissions by 2030, and formally signed on to the Science-Based Target Initiative commitment in September 2022.
We were incorporated in Delaware in November 2000. Our principal executive office is located at 899 Kifer Road, Sunnyvale, California 94086 and our telephone number at that location is (408) 235-7700.
We were incorporated in Delaware in November 2000. Our principal executive office is located at 909 Kifer Road, Sunnyvale, California 94086 and our telephone number at that location is (408) 235-7700. Industry Background: The Trends Driving the Need for a Platform Approach Modern networks are increasingly complex, spanning many edges as well as a mix of cloud and on-premises deployments.
Such commitment starts at the top, with a highly skilled and diverse board of directors. As of December 31, 2022 , women represented 25% of the members of our board of directors, and approximately 50% o f our board of directors was from underrepresented communities.
As of December 31, 2023 , women represented 25% of the members of our board of directors, and approximately 50% o f our board of directors was from underrepresented communities. We value diversity at all levels and continue to focus on enhancing our DEI initiatives across our workforce.
We offer three per-device support options tailored to the needs of our enterprise customers: FortiCare Premium, FortiCare Elite and FortiCare Essential. The newly launched FortiCare Elite service provides 15-minute response times for key product families. During our year ended December 31, 2022, we generated total revenue of $4.42 billion and net income of $857.3 million.
Organizations have the flexibility to procure different levels of service for different devices based on their availability needs. We offer three per-device support options tailored to the needs of our enterprise customers: FortiCare Premium, FortiCare Elite and FortiCare Essential. The FortiCare Elite service aims to provide 15-minute response times for key product families.
We work with many technology distributors, including Arrow Electronics, Inc., Exclusive, Ingram Micro and TD Synnex (formerly Tech Data Corporation and Synnex Corporation, separately). We support our channel partners with a dedicated team of experienced channel account managers, sales professionals and sales engineers who provide business planning, joint marketing strategy, pre-sales and operational sales support.
We support our channel partners with a dedicated team of experienced channel account managers, sales professionals and sales engineers who provide business planning, joint marketing strategy, pre-sales and operational sales support. Additionally, our sales teams help drive and support large enterprise and service provider sales through a direct touch model.
In addition, our Global Head of Sustainability and CSR, along with our internal cross-functional employee CSR Committee, engage with internal and external stakeholders to lead CSR execution, communications and disclosure. Environmental. We recognize that environmental considerations such as climate change, resource scarcity and the energy crisis are top priorities for the future of our planet.
Our senior leadership sponsors the integration of CSR priorities throughout our business operations. In addition, our CSR team, along with our internal cross-functional employee CSR Committee, engage with internal and external stakeholders to lead CSR execution, communications and disclosure. Environmental.
Global technical support is offered 24x7 with flexible add-ons, including enhanced service level agreements (“SLAs”) and premium hardware replacement through in-country depots. Organizations have the flexibility to procure different levels of service for different devices based on their availability needs.
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. Global technical support is offered 24x7 with flexible add-ons, including enhanced Service Level Agreements (“SLAs”) and premium hardware replacement through in- 3 Table of Contents country depots.
We continue to monitor existing and pending laws and regulations and while the impact of regulatory changes cannot be predicted with certainty, we do not currently expect compliance to have a material adverse effect. 10 Table o f Contents Seasonality For information regarding seasonality in our sales, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality, Cyclicality and Quarterly Revenue Trends” in Part II, Item 7 of this Annual Report on Form 10-K.
We continue to monitor existing and pending laws and regulations and while the impact of regulatory changes cannot be predicted with certainty, we do not currently expect compliance to have a material adverse effect.
These Fortinet Proprietary ASICs, along with off-the-shelf CPU/ASICs, allow our systems to scale from the smallest branch to a hyperscale cloud and run multiple applications at high performance.
These proprietary ASICs, combined with off-the-shelf central processing units (“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.
This commitment starts with the Social Responsibility Committee of our board of directors providing oversight of our Corporate Social Responsibility (“CSR”) strategy, initiatives and execution related to ESG matters. Our senior leadership sponsors the integration of CSR priorities throughout our business operations.
Fortinet is a member of the Dow Jones Sustainability Indices — World and North America, for the second consecutive year. Our approach to ESG is based on a strong corporate governance structure, starting with the Social Responsibility Committee of our board of directors, which provides oversight of our Corporate Social Responsibility (“CSR”) strategy, initiatives and execution related to ESG matters.
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ITEM 1. Business Overview Fortinet is a global leader in cybersecurity and networking solutions for organizations, including enterprises, communication service providers, security service providers, government organizations and small businesses.
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ITEM 1. Business Overview Fortinet is a leader in cybersecurity and the convergence of networking and security. Our mission is to secure people, devices and data everywhere. Our integrated platform, the Fortinet Security Fabric, spans secure networking, unified Secure Access Service Edge (“SASE”) and AI-driven security operations to deliver cybersecurity where our customers need it.
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The focus areas of our business consist of: • Secure Networking —Our Secure Networking solutions enable the convergence of networking and security across all edges to provide next-generation firewall (“NGFW”), software-defined wide area network (“SD-WAN”), LAN Edge (Wi-Fi and switch) and secure access service edge (“SASE”). Traditional networking lacks awareness of content, applications, users, devices, location and more.
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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.
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A secure networking approach converges networking and security into a single, accelerated solution. A specially designed operating system and security processors work in concert to improve network performance and security posture while decreasing footprint and power consumption. We derive a majority of product sales from our Core Platform (previously referred to as FortiGate) network security appliances.
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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.
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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.
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As of December 31, 2023, we held 957 U.S. 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. • 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.
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Our network security appliances are managed by our FortiOS network operating system, which provides the foundation for Core Platform security functions.
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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 Software as a Service (“SaaS”) solution. When delivered via our network firewall appliances, functionality is accelerated through our proprietary Application-Specific Integrated Circuits (“ASIC”) technology.
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We enhance the performance of our network security appliances from branch to data center by designing and implementing Application-Specific Integrated Circuits (“ASIC”) technology within our appliances, enabling us to add security and network functionality with minimal impact to network throughput performance.
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The Network Firewall solution consists of FortiGate data centers, hyperscale and distributed firewalls, as well as encrypted applications (secure sockets layer (“SSL”) inspection, Virtual Private Network and IPsec connectivity). 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.
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Along with our secure Wi-Fi access points and switches, Fortinet helps organizations secure their networks across campuses, branches and work from anywhere (“WFA”) deployments. For the Japanese market, we also offer high performance network switches marketed under Alaxala Networks Corporation for data center switching. FortiOS supports many more secure networking markets and applications than just firewall.
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Our wireless local area network (“LAN”) solution leverages secure networking to provide secure wireless access for the enterprise LAN edge. FortiExtender secures 5G/LTE and remote ethernet extenders to connect and secure any branch environment.
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These include: • Network Firewall (“NFW”) • Software-Defined Wide Area Network (“SD-WAN”) • Secure LAN/WLAN (Wi-Fi and Switch) (SD-Branch/Campus) • Secure Access Service Edge (“SASE”) • Universal Zero Trust Network Access (“ZTNA”) • Encryption Applications (SSL Inspection, Virtual Private Network (“VPN”), and IPsec Connectivity) Further each security application has number of customer use cases.
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The Secure Connectivity solution includes FortiSwitch Secure Ethernet Switches, FortiAP Wireless Local Area Network Access Points and FortiExtender 5G Connectivity Gateways, among other products. • 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.
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For example, Network Firewall has the following use cases: • Data Center Perimeter NGFW • North–South Internal Segmentation Firewall • Distributed Network Edge Firewall • East–West Micro Segmentation Firewall • Virtual Firewall (“VM”) • Cloud Native Firewall (“CNF”) • Firewall as a Service (“FWaaS”) • Containerized Firewall • Endpoint Firewall • SMB Firewall • Home Firewall • Zero Trust Access —Our Zero Trust Access solutions enable customers to know and control who and what is on their network, in addition to providing security for WFA.
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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.
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Zero Trust Access solutions include FortiNAC, 3 Table o f Contents FortiAuthenticator, FortiClient/EDR and FortiToken.
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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.
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Our network access control solutions provide visibility, control and automated event responses in order to secure internet of things (“IoT”) and OT devices. • 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 capabilities with major cloud platforms.
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All functions can be managed through a unified management console. • Security Operations (SecOps) —Fortinet’s Security Operations solutions comply with the National Institute of Standards and Technology (“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.
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Our public and private cloud security solutions, including virtual appliances and hosted solutions, extend the core capabilities of Fortinet’s cybersecurity mesh architecture (“Fortinet Security Fabric”) in and across cloud environments, delivering security that follows their applications and data. Our solutions include network security, web application firewall and application programming interface (“API”) protection, cloud-native security and workload protection.
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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.
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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. Our cloud security portfolio also includes securing applications in all environments in which they can be deployed, including physical and virtual data centers, cloud and edge compute instances.
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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.
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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.
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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. The portfolio consists of FortiGuard application security services, content security services, device security services, NOC/SOC security services and web security services.
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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. • AI-Driven 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.
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Since 2020, Fortinet has also offered a number of free online training courses to help address prevalent industry-wide cybersecurity skills gaps and shortages. During the year ended December 31, 2023, we generated total revenue of $5.30 billion and net income of $1.15 billion.
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Given the breadth of the attack surface to monitor, as well as the volume and sophistication of cyber threats, artificial intelligence (“AI”) is a key part of these offerings, which include: FortiGuard and other security subscription services, endpoint security with endpoint detection and response (“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 Fortinet Security Fabric.
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Fortinet was founded with the mission of providing a converged networking and security approach that empowers organizations to adopt new technologies without worrying about how it would impact their ability to manage and secure their environments. The escalating threat landscape has resulted in a significant increase in the demand for secure networking solutions.
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These solutions automatically deliver security intelligence and insights that help organizations to protect against and respond to threats through integration with Fortinet and third-party solutions. • FortiGuard Security Services —FortiGuard security services counter threats in real time with AI-powered, coordinated protection. All of our security services are natively integrated into the Fortinet Security Fabric.
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In fact, we believe the demand for secure networking will overtake the pure networking market by 2030. At the same time, businesses contend with an escalating threat landscape, a cybersecurity skills shortage, and siloed security tools that do not work well together. They need to consolidate point products to gain better visibility and faster threat response times.
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This enables fast detection and enforcement across the entire attack surface. Risk is continually assessed and the Security Fabric automatically adjusts to counter the latest known and unknown threats in real time.
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A platform approach –what we call the Fortinet Security Fabric–has emerged to address these challenges and support enterprises in reducing complexity and improving risk mitigation. The concept of an integrated cybersecurity platform that converges networking and security and consolidates point products is what guides how we design our products and advise our customers and partners .
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It is able to close security gaps with context-aware, consistent security policies for users and applications in hybrid deployments across the network, endpoints and clouds. • Support and Professional Services —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.
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We work with many technology distributors, including Arrow Electronics, Inc., Exclusive, Ingram Micro and TD Synnex (formerly Tech Data Corporation and Synnex Corporation, separately). In addition, we provide our cloud-based subscription offerings through Fortinet-owned data centers, as well as data centers operated under co-location arrangements globally, and via public cloud providers.
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Consolidation of Technology and Architecture Cybersecurity has traditionally been deployed one solution at a time and not designed to work well with other deployed solutions while also increasing management complexity.
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Seasonality For information regarding seasonality in our sales, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality, Cyclicality and Quarterly Revenue Trends” in Part II, Item 7 of this Annual Report on Form 10-K. Competition The markets for our products are extremely competitive and are characterized by rapid technological change.
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A Fortinet Security Fabric approach consolidates point products into a platform, allowing for much tighter integration, increased automation and a more rapid, coordinated and effective response to threats across the network.
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As a global company, much of our success is rooted in the diversity of our teams and our commitment to diversity, equity and inclusion (“DEI”). Such commitment starts at the top, with a highly skilled and diverse board of directors.
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The Fortinet Security Fabric has an open architecture designed to integrate Fortinet solutions and third-party solutions. 4 Table o f Contents Our product offerings consist of our Core Platform network security products and our Enhanced Platform Technology (previously referred to as Platform Extension) products, which are offered in a broad range of form factors spanning physical appliances, virtual appliances, software and cloud-hosted services.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

161 edited+65 added−40 removed324 unchanged
Biggest changeOur operating results have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control or may be difficult to predict, including: • economic conditions, including macroeconomic and regional economic challenges resulting, for example, from a recession or other economic downturn, increased inflation or possible stagflation in certain geographies, rising interest rates, the war in Ukraine, the COVID-19 pandemic or other factors; • our ability to attract and retain new end-customers or sell additional products and services to our existing end-customers; • component shortages, including chips and other components, and product inventory shortages, including those caused by factors outside of our control, such as the COVID-19 pandemic, supply chain disruptions, inflation and other cost increases, international trade disputes or tariffs, natural disasters, health emergencies, power outages, civil unrest, labor disruption, international conflicts, terrorism, wars, such as the war in Ukraine, and critical infrastructure attacks; • inventory management; 13 Table o f Contents • the level of demand for our products and services, which may render forecasts inaccurate, increase backlog and may be impacted by the COVID-19 pandemic and supply chain constraints in ways that we are not able to foresee; • supplier cost increases and any lack of market acceptance of our price increases designed to help offset any supplier cost increases; • the effects of our reduction of operations in Russia; • the timing of channel partner and end-customer orders, market acceptance of our price increases and our reliance on a concentration of shipments at the end of each quarter; • the impact to our business, the global economy, disruption of global supply chains and creation of significant volatility and disruption of the financial markets due to the COVID-19 pandemic, increased inflation or possible stagflation in certain geographies, rising interest rates, the war in Ukraine and other factors; • any actual or perceived vulnerabilities in our products or services, and any actual or perceived breach of our network or our customers’ networks; • the timing of shipments, which may depend on factors such as inventory levels, logistics, manufacturing or shipping delays, our ability to ship products on schedule and our ability to accurately forecast inventory requirements and our suppliers’ ability to deliver components and finished goods; • increased expenses, unforeseen liabilities or write-downs and any negative impact on results of operations from any acquisition or equity investment consummated, as well as accounting risks, integration risks related to product plans and products and risks of negative impact by such acquisitions and equity investments on our financial results; • the mix of products sold, such as the mix between Core Platform and Enhanced Platform Technology solutions, and the mix of revenue between products and services, as well as the degree to which products and services are bundled and sold together for a package price; • the purchasing practices and budgeting cycles of our channel partners and end-customers, including the effect of the end of product lifecycles or refresh cycles; • any decreases in demand by channel partners or end-customers, including any such decreases caused by factors outside of our control such as natural disasters and health emergencies, including earthquakes, droughts, fires, power outages, typhoons, floods, pandemics or epidemics such as the COVID-19 pandemic and manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars, such as the war in Ukraine, and critical infrastructure attacks; • the effectiveness of our sales organization, generally or in a particular geographic region, including the time it takes to hire sales personnel, the timing of hiring and our ability to hire and retain effective sales personnel; • sales execution risk related to effectively selling to all segments of the market, including enterprise and small- and medium-sized businesses, government organizations and service providers, and to selling our broad security product and services portfolio, including, among other execution risks, risks associated with the complexity and distraction in selling to all segments, increased competition and unpredictability of timing to close larger enterprise and large organization deals, and the risk that our sales representatives do not effectively sell our Enhanced Platform Technology products; • execution risk associated with our efforts to capture the opportunities related to our identified growth drivers, such as risk associated with our ability to capitalize on the convergence of networking and security, vendor consolidation of various cyber security solutions, SD-WAN, infrastructure security, cloud security and endpoint protection, and IoT and OT security opportunities; • the seasonal buying patterns of our end-customers; • the timing and level of our investments in sales and marketing, and the impact of such investments on our operating expenses, operating margin and the productivity, capacity, tenure and effectiveness of execution of our sales and marketing teams; 14 Table o f Contents • the timing of revenue recognition for our sales, including any impacts resulting from extension of payment terms to distributors and fluctuations in backlog levels, which could result in more variability and less predictability in our quarter-to-quarter revenue and operating results; • the level of perceived threats to network security, which may fluctuate from period to period; • changes in the requirements, market needs or buying practices and patterns of our distributors, resellers or end-customers; • changes in the growth rates of the network security market in particular and other security and networking markets, such as SD-WAN, OT, switches, access points and cloud solutions for which we and our competitors sell products and services; • the timing and success of new product and service introductions or enhancements by us or our competitors, or any other change in the competitive landscape of our industry, including consolidation among our competitors, partners or end-customers; • the deferral of orders from distributors, resellers or end-customers in anticipation of new products or product enhancements announced by us or our competitors, or the acceleration of orders in response to our announced or expected price list increases; • increases or decreases in our billings, revenue and expenses caused by fluctuations in foreign currency exchange rates or a strengthening of the U.S. dollar, as a significant portion of our expenses is incurred and paid in currencies other than the U.S. dollar, and the impact such fluctuations may have on the actual prices that our partners and customers are willing to pay for our products and services; • compliance with existing laws and regulations; • our ability to obtain and maintain permits, clearances and certifications that are applicable to our ability to conduct business with the public sector, including the U.S. federal government, and other sectors; • litigation, litigation fees and costs, settlements, judgments and other equitable and legal relief granted related to litigation; • the impact of cloud-based security solutions on our billings, revenues, operating margins and free cash flow; • decisions by potential end-customers to purchase network security solutions from newer technology providers, from larger, more established security vendors or from their primary network equipment vendors; • price competition and increased competitiveness in our market, including the competitive pressure caused by product refresh cycles; • our ability to both increase revenues and manage and control operating expenses in order to maintain or improve our operating margins; • changes in customer renewal rates or attach rates for our services; • changes in the timing of our billings, collection for our contracts or the contractual term of service sold; • changes in our estimated annual effective tax rates; • changes in circumstances and challenges in business conditions, including decreased demand, which may negatively impact our channel partners’ ability to sell the current inventory they hold and negatively impact their future purchases of products from us; • increased demand for cloud-based services and the uncertainty associated with transitioning to providing such services; • our channel partners having insufficient financial resources to withstand changes and challenges in business conditions; 15 Table o f Contents • disruptions in our channel or termination of our relationship with important channel partners, including as a result of consolidation among distributors and resellers of security solutions; • insolvency, credit or other difficulties confronting our key suppliers and channel partners, which could affect their ability to purchase or pay for products and services and which could disrupt our supply or distribution chain; • policy changes and uncertainty with respect to immigration laws, trade policy and tariffs, including increased tariffs applicable to countries where we manufacture our products, foreign imports and tax laws related to international commerce; • political, economic and social instability, including geo-political instability and uncertainty, such as that caused by the war in Ukraine, and any disruption or negative impact on our ability to sell to, ship product to and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions; • general economic conditions, both in domestic and foreign markets; • future accounting pronouncements or changes in our accounting policies as well as the significant costs that may be incurred to adopt and comply with these new pronouncements; • possible impairments or acceleration of depreciation of our existing real estate due to our current real estate holdings and future development plans; and • legislative or regulatory changes, such as with respect to privacy, information and cybersecurity, exports, the environment and applicable accounting standards.
Biggest changeAs 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 and may become increasingly challenging; • supplier cost increases and any lack of market acceptance of our price increases designed to help offset any supplier cost increases; • the effects of our reduction of operations in Russia; • the timing of channel partner and end-customer orders and our reliance on a concentration of shipments at the end of each quarter; • the impact to our business, the global economy, disruption of global supply chains and creation of significant volatility and disruption of the financial markets due to factors such as increased inflation or possible stagflation in certain geographies, increasing or decreasing interest rates, the war in Ukraine and the Israel-Hamas war and other factors; • any actual or perceived vulnerabilities in our products or services, and any actual or perceived breach of our network or our customers’ networks; • the timing of shipments, which may depend on factors such as inventory levels, logistics, manufacturing or shipping delays, our ability to ship products on schedule and our ability to accurately forecast inventory requirements and our suppliers’ ability to deliver components and finished goods; • increased expenses, unforeseen liabilities or write-downs and any negative impact on results of operations from any acquisition or equity investment consummated, as well as accounting risks, integration risks related to product plans and products and risks of negative impact by such acquisitions and equity investments on our financial results; • investors’ expectations of our performance relating to environmental, social and governance (“ESG”) and commitment to carbon neutrality; • certain customer agreements which contain service-level agreements, under which we guarantee specified availability of our platform and solutions; • data security requirements that may be inconsistently enforced in certain jurisdictions; 9 Table of Contents • impairments as a result of certain events or changes in circumstances; • the mix of products sold and the mix of revenue between products and services, as well as the degree to which products and services are bundled and sold together for a package price; • the purchasing practices and budgeting cycles of our channel partners and end-customers, including the effect of the end of product lifecycles or refresh cycles; • any decreases in demand by channel partners or end-customers, including any such decreases caused by factors outside of our control such as natural disasters and health emergencies, including earthquakes, droughts, fires, power outages, typhoons, floods, pandemics or epidemics and manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars, such as the war in Ukraine and the Israel-Hamas war, and critical infrastructure attacks; • the effectiveness of our sales organization, generally or in a particular geographic region, including the time it takes to hire sales personnel, the timing of hiring and our ability to hire and retain effective sales personnel, as well as our efforts to align our sales capacity and market demand; • sales productivity and sales execution risk related to effectively selling to all segments of the market, including enterprise and small- and medium-sized businesses, government organizations and service providers, and to selling our broad security product and services portfolio, including, among other execution risks, risks associated with the complexity and distraction in selling to all segments, increased competition and unpredictability of timing to close larger enterprise and large organization deals, and the risk that our sales representatives do not effectively sell products and services; • execution risk associated with our efforts to capture the opportunities related to our identified growth drivers, such as risk associated with our ability to capitalize on the convergence of networking and security, vendor consolidation of various cyber security solutions, SD-WAN, infrastructure security, security operations, SASE and other cloud security solutions, endpoint protection, and IoT and OT security opportunities; • the seasonal buying patterns of our end-customers; • the timing and level of our investments in sales and marketing, and the impact of such investments on our operating expenses, operating margin and the productivity, capacity, tenure and effectiveness of execution of our sales and marketing teams; • the timing of revenue recognition for our sales, including any impacts resulting from extension of payment terms to distributors and fluctuations in backlog levels, which could result in more variability and less predictability in our quarter-to-quarter revenue and operating results; • the level of perceived threats to network security, which may fluctuate from period to period; • changes in the requirements, market needs or buying practices and patterns of our distributors, resellers or end-customers; • changes in the growth rates of the network security market in particular and other security and networking markets, such as SD-WAN, OT, switches, access points, security operations, SASE and other cloud solutions for which we and our competitors sell products and services; • the timing and success of new product and service introductions or enhancements by us or our competitors, or any other change in the competitive landscape of our industry, including consolidation among our competitors, partners or end-customers; • the deferral of orders from distributors, resellers or end-customers in anticipation of new products or product enhancements announced by us or our competitors, price decreases or changes in our registration policies, or the acceleration of orders in response to our announced or expected price list increases; • increases or decreases in our billings, revenue and expenses caused by fluctuations in foreign currency exchange rates or a strengthening of the U.S. dollar, as a significant portion of our expenses is incurred and paid in currencies other than the U.S. dollar, and the impact such fluctuations may have on the actual prices that our partners and customers are willing to pay for our products and services; 10 Table of Contents • compliance with existing laws and regulations; • our ability to obtain and maintain permits, clearances and certifications that are applicable to our ability to conduct business with the U.S. federal government, other foreign and local governments and other industries and sectors; • litigation, litigation fees and costs, settlements, judgments and other equitable and legal relief granted related to litigation; • the impact of cloud-based security solutions on our billings, revenue, operating margins and free cash flow; • decisions by potential end-customers to purchase network security solutions from newer technology providers, from larger, more established security vendors or from their primary network equipment vendors; • price competition and increased competitiveness in our market, including the competitive pressure caused by product refresh cycles; • our ability to both increase revenue and manage and control operating expenses in order to maintain or improve our operating margins; • changes in customer renewal rates or attach rates for our services; • changes in the timing of our billings, collection for our contracts or the contractual term of service sold; • changes in our estimated annual effective tax rates and the tax treatment of research and development expenses and the related impact of cash from operations; • changes in circumstances and challenges in business conditions, including decreased demand, which may negatively impact our channel partners’ ability to sell the current inventory they hold and negatively impact their future purchases of products from us; • increased demand for cloud-based services and the uncertainty associated with transitioning to providing such services; • potential shift or migration from physical appliances that deliver on-premises network security to cloud and SaaS-based security services; • our channel partners having insufficient financial resources to withstand changes and challenges in business conditions; • disruptions in our channel or termination of our relationship with important channel partners, including as a result of consolidation among distributors and resellers of security solutions; • insolvency, credit or other difficulties confronting our key suppliers and channel partners, which could affect their ability to purchase or pay for products and services and which could disrupt our supply or distribution chain; • policy changes and uncertainty with respect to immigration laws, trade policy and tariffs, including increased tariffs applicable to countries where we manufacture our products, foreign imports and tax laws related to international commerce; • political, economic and social instability, including geo-political instability and uncertainty, such as that caused by the war in Ukraine, the Israel-Hamas war, tensions between China and Taiwan, and any disruption or negative impact on our ability to sell to, ship product to and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions; • general economic conditions, both in domestic and foreign markets; • future accounting pronouncements or changes in our accounting policies as well as the significant costs that may be incurred to adopt and comply with these new pronouncements; 11 Table of Contents • possible impairments or acceleration of depreciation of our existing real estate due to our current real estate investments and future acquisition and development plans; and • legislative or regulatory changes, such as with respect to privacy, information and cybersecurity, exports, the environment, regional component bans, and requirements for local manufacture.
Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterly financial and other operating results. This variability and unpredictability could result in our failing to meet our internal operating plan or the expectations of securities analysts or investors for any period.
Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterly financial and other operating results. This variability and unpredictability could result in failing to meet our internal operating plan or the expectations of securities analysts or investors for any period.
These laws and regulations may also impact our suppliers which could have among other things, have an adverse impact on the costs of components in our products.
These laws and regulations may also impact our suppliers, which could have, among other things, an adverse impact on the costs of components in our products.
The SCIP database is established under the WFD and managed by the European Chemicals Agency (“ECHA”). We have incurred costs in order to comply with this new requirement. Similar laws and regulations have been passed or are pending in European Economic Area and UK.
The SCIP database is established under the WFD and managed by the European Chemicals Agency (“ECHA”). We have incurred costs in order to comply with this new requirement. Similar laws and regulations have been passed or are pending in the European Economic Area and the UK.
Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages, long lead times for components, and supply changes, each of which could disrupt or delay our scheduled product deliveries to our customers, result in inventory shortage, cause loss of sales and customers or increase component costs resulting in lower gross margins and free cash flow.
Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages, long or uncertain lead times for components, and supply changes, each of which could disrupt or delay our scheduled product deliveries to our customers, result in inventory shortage, cause loss of sales and customers or increase component costs resulting in lower gross margins and free cash flow.
For example, certain of our competitors are focusing on delivering security services from the cloud which include cloud-based security providers, such as Zscaler. In addition, current or potential competitors may be acquired by third parties with greater available resources, and new competitors may arise pursuant to acquisitions of network security companies or divisions.
For example, certain of our competitors are focusing on delivering security services from the cloud which include cloud-based security providers, such as CrowdStrike and Zscaler. In addition, current or potential competitors may be acquired by third parties with greater available resources, and new competitors may arise pursuant to acquisitions of network security companies or divisions.
Our largest distributors may experience financial difficulties, face liquidity risk or other financial challenges, which may harm our ability to collect on our accounts receivable. We provide sales channel partners with specific programs to assist them with selling our products and incentivize them to sell our products, but there can be no assurance that these programs will be effective.
Our largest distributors may experience financial difficulties, face liquidity risk or other financial challenges, which may harm our ability to collect on our accounts receivable. We provide channel partners with specific programs to assist them with selling our products and incentivize them to sell our products, but there can be no assurance that these programs will be effective.
In evaluating OTTI, we considered factors such as 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.
In evaluating OTTI, we considered factors such as 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.
Furthermore, our solutions may also fail to detect or prevent viruses, worms, ransomware attacks or similar threats due to a number of reasons such as the evolving nature of such threats and the continual emergence of new threats that we may fail to add to our FortiGuard databases in time to protect our end-customers’ networks.
Furthermore, our solutions may also fail to detect or prevent viruses, worms, ransomware attacks or similar threats due to a number of reasons such as the evolving nature of such threats and the continual emergence of new threats that we may fail to anticipate or add to our FortiGuard databases in time to protect our end-customers’ networks.
These include: • the mix of earnings in countries with differing statutory tax rates or withholding taxes; • changes in the valuation of our deferred tax assets and liabilities; • transfer pricing adjustments; • increases to corporate tax rates; • an increase in non-deductible expenses for tax purposes, including certain stock-based compensation expense; • changes in availability of tax credits and/or tax deductions; • tax costs related to intercompany realignments; • tax assessments resulting from income tax audits or any related tax interest or penalties that could significantly affect our provision for income taxes for the period in which the settlement takes place; and • changes in accounting principles, court decisions, tax rulings, and interpretations of or changes to tax laws, and regulations by international, federal or local governmental authorities.
These include: • the mix of earnings in countries with differing statutory tax rates or withholding taxes; • changes in the valuation of our deferred tax assets and liabilities; • transfer pricing adjustments; • increases to corporate tax rates; • an increase in non-deductible expenses for tax purposes, including certain stock-based compensation expense; • changes in availability of tax credits and/or tax deductions; • the timing of tax payments; • tax costs related to intercompany realignments; • tax assessments resulting from income tax audits or any related tax interest or penalties that could significantly affect our provision for income taxes for the period in which the settlement takes place; and • changes in accounting principles, court decisions, tax rulings, and interpretations of or changes to tax laws, and regulations by international, federal or local governmental authorities.
Foreign Corrupt Practices Act, the United Kingdom Bribery Act 2010, the General Data Protection Regulation (the “GDPR”), import and export control laws, trade laws and regulations, tariffs and retaliatory measures, trade barriers and economic sanctions; • other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance; • heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales or sales-related arrangements, such as sales “side agreements” to allow return rights, that could disrupt the sales team through terminations of employment or otherwise, and may adversely impact financial results as compared to those already reported or forecasted and result in restatements of financial statements and irregularities in financial statements; • our ability to effectively implement and maintain adequate internal controls to properly manage our international sales and operations; • political unrest, changes and uncertainty associated with terrorism, hostilities, war or natural disasters; • management communication and integration problems resulting from cultural differences and geographic dispersion; and • changes in tax, tariff, employment and other laws.
Foreign Corrupt Practices Act, the United Kingdom Bribery Act 2010, the General Data Protection Regulation (the “GDPR”), import and 17 Table of Contents export control laws, trade laws and regulations, tariffs and retaliatory measures, trade barriers and economic sanctions; • other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance; • heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales or sales-related arrangements, such as sales “side agreements” to allow return rights, that could disrupt the sales team through terminations of employment or otherwise, and may adversely impact financial results as compared to those already reported or forecasted and result in restatements of financial statements and irregularities in financial statements; • our ability to effectively implement and maintain adequate internal controls to properly manage our international sales and operations; • political unrest, changes and uncertainty associated with terrorism, hostilities, war or natural disasters; • management communication and integration problems resulting from cultural differences and geographic dispersion; and • changes in tax, tariff, employment and other laws.
We and our contract manufacturers currently purchase several key parts and components used in the manufacture of our products from limited sources of supply. We are therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that component suppliers may discontinue or modify components used in our products.
We and our contract manufacturers currently purchase several key parts and components used in the manufacture of our products from limited sources of supply. We are therefore subject to the risk of shortages and long or uncertain lead times in the supply of these components and the risk that component suppliers may discontinue or modify components used in our products.
In addition, defects or errors in our FortiGuard and other security subscription or FortiCare updates or our Fortinet appliances and operating systems could result in a failure of our FortiGuard and other security subscription services to effectively update end-customers’ Fortinet appliances and cloud-based products and thereby leave customers vulnerable to attacks.
In addition, defects or errors in our FortiGuard and other security subscription or FortiCare updates or our Fortinet appliances and operating systems could result in a failure of our FortiGuard and other security subscription services to effectively or correctly update end-customers’ Fortinet appliances and cloud-based products and thereby leave customers vulnerable to attacks.
If our contract development projects are not successfully completed, or are not completed in a timely fashion, our product development could be delayed and our business generally could suffer. Costs for contract development can be substantial and our profitability may be harmed if we are unable to recover these costs.
If our development projects are not successfully completed, or are not completed in a timely fashion, our product development could be delayed and our business generally could suffer. Costs for development can be substantial and our profitability may be harmed if we are unable to recover these costs.
While we have increased sales in recent periods to large- and medium-sized businesses, our sales volume varies by quarter and there is risk as to our level of success selling to these target customers.
While we have increased sales in recent periods to large- and medium-sized businesses, our sales volume varies by quarter and there is a risk as to our level of success selling to these target customers.
Therefore, when we develop and introduce new or enhanced products, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market.
Therefore, when we develop and introduce new or enhanced products or services, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market.
However, there can be no assurance that such posts will be sufficiently timely or complete or those customers will take steps to mitigate the risk of vulnerabilities, and certain customers may be negatively impacted.
There can be no assurance, however, that such posts will be sufficiently timely, accurate or complete or that those customers will take steps to mitigate the risk of vulnerabilities, and certain customers may be negatively impacted.
Furthermore, we recognize FortiGuard and other security subscription and FortiCare technical support services revenue ratably over the term of the relevant service period, which is typically from one to five years.
Furthermore, we recognize FortiGuard and other security subscription and FortiCare technical support services revenue ratably over the term of the service period, which is typically from one to five years.
When we develop a new product or an enhanced version of an existing product, we typically incur expenses and expend resources upfront to market, promote and sell the new offering.
When we develop a new product or service, or an enhanced version of an existing product or service, we typically incur expenses and expend resources upfront to market, promote and sell the new offering.
These risks include: • increased competition from competitors that traditionally target large and medium-sized businesses, service providers and government organizations and that may already have purchase commitments from those end-customers; • increased purchasing power and leverage held by large end-customers in negotiating contractual arrangements; • unanticipated changes in the capital resources or purchasing behavior of large end-customers, including changes in the volume and frequency of their purchases and changes in the mix of products and services, willingness to change to cloud delivery model and related payment terms; • more stringent support requirements in our support service contracts, including stricter support response times, more complex requirements and increased penalties for any failure to meet support requirements; • longer sales cycles and the associated risk that substantial time and resources may be spent on a potential end-customer that elects not to purchase our products and services; • increased requirements from these customers that we have certain third-party security or other certifications, which we may not have, the lack of which may adversely affect our ability to successfully sell to such customers; • uncertainty as to timing to close large deals and any delays in closing those deals; and • longer ramp-up periods for enterprise sales personnel as compared to other sales personnel.
These risks include: • increased competition from competitors that traditionally target large and medium-sized businesses, service providers and government organizations and that may already have purchase commitments from those end-customers; • increased purchasing power and leverage held by large end-customers in negotiating contractual arrangements; 18 Table of Contents • unanticipated changes in the capital resources or purchasing behavior of large end-customers, including changes in the volume and frequency of their purchases and changes in the mix of products and services, willingness to change to cloud delivery model and related payment terms; • more stringent support requirements in our support service contracts, including stricter support response times, more complex requirements and increased penalties for any failure to meet support requirements; • longer sales cycles and the associated risk that deals are delayed and that substantial time and resources may be spent on a potential end-customer that elects not to purchase our products and services; • increased requirements from these customers that we have certain third-party security or other certifications, which we may not have, the lack of which may adversely affect our ability to successfully sell to such customers; • uncertainty as to timing to close large deals and any delays in closing those deals; and • longer ramp-up periods for enterprise sales personnel as compared to other sales personnel.
If our new products or enhancements do not achieve adequate acceptance in the market, our competitive position will be impaired, our revenue will be diminished and the effect on our operating results may be particularly acute because of the significant research, development, marketing, sales and other expenses we incurred in connection with the new product or enhancement.
If our new products, services or enhancements do not achieve adequate acceptance in the market, our competitive position will be impaired, our revenue will be diminished and the effect on our operating results may be particularly acute because of the significant research, development, marketing, sales and other expenses we incurred in connection with the new product, service or enhancement.
In addition, regional instability, international disputes, wars, such as the war in Ukraine and any expansion thereof, and other acts of aggression, civil and political unrest, labor disruptions, rebellions, acts of terrorism and other geo-political unrest could cause disruptions in our business or the business of our manufacturers, suppliers, logistics providers, partners or end-customers, or of the economy as a whole.
In addition, regional instability, international disputes, wars, such as the war in Ukraine and the Israel-Hamas war and any expansion thereof, and other acts of aggression, civil and political unrest, labor disruptions, rebellions, acts of terrorism and other geo-political unrest could cause disruptions in our business or the business of our manufacturers, suppliers, logistics providers, partners or end-customers, or of the economy as a whole.
Our failure to maintain high-quality support services would have a material adverse effect on our business, financial condition and results of operations and may subject us to litigation, reputational damage, loss of customers and additional costs. Our business is subject to the risks of warranty claims, product returns, product liability and product defects.
Our failure to maintain high-quality support services could have a material adverse effect on our business, financial condition and results of operations and may subject us to litigation, reputational damage, loss of customers and additional costs. Our business is subject to the risks of warranty claims, product returns, product liability and product defects.
Although our most recent assessment, testing and evaluation resulted in our conclusion that, as of December 31, 2022, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in 2023 or future periods and there can be no assurance that, in the future, our internal controls over financial reporting will be effective or deemed effective.
Although our most recent assessment, testing and evaluation resulted in our conclusion that, as of December 31, 2023, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in 2024 or future periods and there can be no assurance that, in the future, our internal controls over financial reporting will be effective or deemed effective.
This debt, and any debt that we may incur in the future, may adversely affect our financial condition and future financial results by, among other things: • increasing our vulnerability to downturns in our business, to competitive pressures and to adverse economic and industry conditions; • requiring the dedication of a portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures, share repurchases and acquisitions; and • limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries; If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required, among other things, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our 20 Table o f Contents indebtedness, sell selected assets or reduce or delay planned capital, operating or investment expenditures.
This debt, and any debt that we may incur in the future, may adversely affect our financial condition and future financial results by, among other things: • increasing our vulnerability to downturns in our business, to competitive pressures and to adverse economic and industry conditions; • requiring the dedication of a portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures, share repurchases and acquisitions; and • limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries; If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required, among other things, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets or reduce or delay planned capital, operating or investment expenditures.
Our ability to grow our revenue depends, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth and on the effectiveness of those personnel in selling successfully in different contexts, each of which has its own different complexities, approaches and competitive landscapes, such as managing and growing the channel business for sales to small businesses and more actively selling to the end-customer for sales to larger organizations.
Our ability to grow our revenue depends, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth and on the effectiveness of our sales strategy, sales execution, and sales personnel selling successfully in different contexts, each of which has its own different complexities, approaches and competitive landscapes, such as managing and growing the channel business for sales to small businesses and more actively selling to the end-customer for sales to larger organizations.
Additionally, any perception that our products have vulnerabilities, whether or not accurate, and any actual vulnerabilities may harm our operational results and rep utation, more significantly as compared to certain other companies because we are a security company.
Additionally, any perception that our products have vulnerabilities, whether or not accurate, and any actual vulnerabilities may harm our operational results and rep utation, more significantly as compared to certain other companies in other industries because we are a security company.
If we are unable to effectively manage our inventory and that of our channel partners, our results of operations could be adversely affected. If our new products and product enhancements do not achieve sufficient market acceptance, our results of operations and competitive position will suffer.
If we are unable to effectively manage our inventory and that of our channel partners, our results of operations could be adversely affected. If our new products, services and enhancements do not achieve sufficient market acceptance, our results of operations and competitive position will suffer.
The costs of compliance with and the penalties for violations of the GDPR, the CCPA and other similar state laws, along with other burdens imposed by these regulations, may limit the use and adoption of our products and services and could have an adverse impact on our business.
The costs of compliance with and the penalties for violations of the GDPR, the CCPA and other laws, along with other burdens imposed by these regulations, may limit the use and adoption of our products and services and could have an adverse impact on our business.
An actual, possible or perceived security breach or infection of the network of one of our end-customers, regardless of whether the breach is attributable to the failure of our products or services to prevent the security breach, or any actual or perceived security risk in our supply chain, could adversely affect the market’s perception of our security products and services, cause customers and customer prospects not to buy from us and, in some instances, subject us to potential liability that is not contractually limited.
An actual, possible or perceived security incident or infection of the network of one of our end-customers, regardless of whether the incident is attributable to the failure of our products or services to prevent or detect the security incident, or any actual or perceived security risk in our supply chain, could adversely affect the market’s perception of our security products and services, cause customers and customer prospects not to buy from us and, in some instances, subject us to potential liability that is not contractually limited.
In addition, we may not be able to sustain profitability in future periods if we fail to increase billings, revenue or deferred revenue, and do not appropriately manage our cost structure, free cash flow, or encounter unanticipated liabilities.
In addition, we may not be able to sustain our historical profitability levels in future periods if we fail to increase billings, revenue or deferred revenue, and do not appropriately manage our cost structure, free cash flow, or encounter unanticipated liabilities.
Furthermore, manufacturing cost increases for any reason could result in lower gross margins. Our proprietary ASICs, which are key to the performance of our appliances, are built by contract manufacturers including Renesas and Toshiba America.
Furthermore, manufacturing cost increases for any reason could result in lower gross margins. Our proprietary ASIC, which are key to the performance of our appliances, are built by contract manufacturers including Renesas and Toshiba America.
Accordingly, the effect of significant downturns in sales of new, or renewals of existing, FortiGuard and other security subscription and FortiCare technical support services is not reflected in full in our statements of income until future periods.
Accordingly, the effect of significant downturns in sales of new, or renewals of existing, FortiGuard and other security subscriptions and FortiCare technical support services is not reflected in full in our statements of income until future periods.
Our billings and revenue for any quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price, if expected orders at the end of any quarter are delayed for any reason or our ability to fulfill orders at the end of any quarter is hindered for any reason, including, among others: • the failure of anticipated purchase orders to materialize; • our logistics partners’ failure or inability to ship products prior to quarter-end to fulfill purchase orders received near the end of the quarter; • disruption in manufacturing or shipping based on power outages, system failures, labor disputes or constraints, excessive demand, natural disasters or widespread public health problems including pandemics and epidemics such as the COVID-19 pandemic; • our failure to accurately forecast our inventory requirements and to appropriately manage inventory to meet demand; • our inability to release new products on schedule; • any failure of our systems related to order review and processing; and • any delays in shipments due to trade compliance requirements, labor disputes or logistics changes at shipping ports, airline strikes, severe weather or otherwise.
Our billings and revenue for any quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price, if expected orders at the end of any quarter are delayed or deals are lost for any reason or our ability to fulfill orders at the end of any quarter is hindered for any reason, including, among others: • the failure of anticipated purchase orders to materialize; • our logistics partners’ failure or inability to ship products prior to quarter-end to fulfill purchase orders received near the end of the quarter; • disruption in manufacturing or shipping based on power outages, system failures, labor disputes or constraints, excessive demand, natural disasters or widespread public health problems including pandemics and epidemics; • our failure to accurately forecast our inventory requirements and to appropriately manage inventory to meet demand; • our inability to release new products on schedule; • any failure of our systems related to order review and processing; and • any delays in shipments due to trade compliance requirements, labor disputes or logistics changes at shipping ports, airline strikes, severe weather or otherwise.
If we cannot manufacture and ship our products due to, for example, global chip shortages, excessive demand on contract manufacturers capacity, natural disasters and health emergencies such as earthquakes, fires, power outages, typhoons, floods, cyber events, pandemics and epidemics such as the COVID-19 pandemic or manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars or other foreign conflicts, such as the war in Ukraine or tensions between China and Taiwan, and critical infrastructure attacks, our business and financial results could be materially and adversely impacted.
If we cannot manufacture and ship our products due to, for example, global chip shortages, excessive demand on contract manufacturers capacity, natural disasters and health emergencies such as earthquakes, fires, power outages, typhoons, floods, cyber events, pandemics and epidemics or manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars or other foreign conflicts, such as the war in Ukraine and the Israel-Hamas war or tensions between China and Taiwan, and critical infrastructure attacks, our business and financial results could be materially and adversely impacted.
Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresent the functionality of our products or services to end-customers, our service provider customers suffer a cyber event impacting end-users, or our channel partners violate laws or our corporate policies.
Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for 14 Table of Contents example, any of our channel partners misrepresent the functionality of our products or services to end-customers, our service provider customers suffer a cyber event impacting end-users, or our channel partners violate laws or our corporate policies.
We are also subject to other litigation in addition to patent infringement claims, such as employment-related litigation and disputes, as well as general commercial litigation, and could become subject to other forms of litigation and disputes, including stockholder litigation.
We are also subject to other litigation in addition to patent infringement claims, such as employment-related litigation and disputes, as well as general commercial litigation, such as the Alorica litigation, and could become subject to other forms of litigation and disputes, including stockholder litigation.
In addition, in the event significant customers require payment terms for FortiGuard and other security subscription and FortiCare technical support services in arrears or for shorter periods of time than annually, such as monthly or quarterly, this may negatively impact our billings and revenue.
In addition, in the event significant customers require payment 15 Table of Contents terms for FortiGuard and other security subscription and FortiCare technical support services in arrears or for shorter periods of time than annually, such as monthly or quarterly, this may negatively impact our billings and revenue.
We spend substantial amounts of time and money to develop internally and acquire new products and enhanced versions of our existing products in order to incorporate additional features, improved functionality or other enhancements in order to meet our customers’ rapidly evolving demands for network security in our highly competitive industry.
We spend substantial amounts of time and money to develop internally and acquire new products and services and enhance versions of our existing products and services in order to incorporate additional features, improved functionality or other enhancements in order to meet our customers’ rapidly evolving demands for network security in our highly competitive industry.
Any production or shipping interruptions for any reason, such as a natural disaster, epidemic, capacity shortages, quality problems or strike or other labor disruption at one of our manufacturing partners or locations or at shipping ports or locations, would severely affect sales of our product lines manufactured by that manufacturing partner.
Any production or shipping interruptions for any reason, such as a natural disaster, epidemics, pandemics, capacity shortages, quality problems or strike or other labor disruption at one of our manufacturing partners or locations or at shipping ports or locations, would severely affect sales of our product lines manufactured by that manufacturing partner.
In addition, computer hackers and others who try to attack networks employ increasingly sophisticated techniques to gain access to and attack systems and networks. The technology in our products is especially complex because it needs to effectively identify and respond to new and increasingly sophisticated methods of attack, while minimizing the impact on network performance.
In addition, computer hackers and others who try to attack networks employ increasingly sophisticated techniques to gain access to and attack systems and networks. The technology in our products is especially complex because of the requirements to effectively identify and respond to new and increasingly sophisticated methods of attack, while minimizing the impact on network performance.
In certain jurisdictions, these regulatory requirements may be more stringent than in the United States. Non-compliance with applicable regulations or requirements could subject us to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages and civil and criminal penalties or injunctions.
In certain jurisdictions, these regulatory requirements may be 34 Table of Contents more stringent than in the United States. Non-compliance with applicable regulations or requirements could subject us to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages and civil and criminal penalties or injunctions.
Future credits for price protection will depend on the percentage of our price reductions for the products in inventory and our ability to manage the levels of our major distributors’ inventories. If future price protection adjustments are higher than expected, our future results of operations could be materially and adversely affected.
Future credits for price protection will depend on the percentage of our price reductions for the products in inventory and our ability to manage the levels of certain of our major distributors’ inventories in North America. If future price protection adjustments are higher than expected, our future results of operations could be materially and adversely affected.
Our new products or product enhancements could fail to attain sufficient market acceptance for many reasons, including: • delays in releasing our new products or enhancements to the market; • failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand in a timely fashion; • failure to have the appropriate research and development expertise and focus to make our top strategic Enhanced Platform Technology products successful; 27 Table o f Contents • failure of our sales force and partners to focus on selling new products; • inability to interoperate effectively with the networks or applications of our prospective end-customers; • inability to protect against new types of attacks or techniques used by hackers; • actual or perceived defects, vulnerabilities, errors or failures; • negative publicity about their performance or effectiveness; • introduction or anticipated introduction of competing products by our competitors; • poor business conditions for our end-customers, causing them to delay IT purchases; • changes to the regulatory requirements around security; and • reluctance of customers to purchase products incorporating open source software.
Our new products, services or enhancements could fail to attain sufficient market acceptance for many reasons, including: • delays in releasing our new products, services or enhancements to the market; • failure to accurately predict market demand in terms of product and service functionality and to supply products and services that meet this demand in a timely fashion; 22 Table of Contents • failure to have the appropriate research and development expertise and focus to make our top strategic products and services successful; • failure of our sales force and partners to focus on selling new products and services; • inability to interoperate effectively with the networks or applications of our prospective end-customers; • inability to protect against new types of attacks or techniques used by hackers; • actual or perceived defects, vulnerabilities, errors or failures; • negative publicity about their performance or effectiveness; • introduction or anticipated introduction of competing products and services by our competitors; • poor business conditions for our end-customers, causing them to delay IT purchases; • changes to the regulatory requirements around security; and • reluctance of customers to purchase products or services incorporating open source software.
Moreover, the inclusion in our products of software or other IP licensed from third parties on a non-exclusive basis could limit our ability to differentiate our products from those of our competitors. We also rely on technologies licensed from third parties in order to operate functions of our business.
Moreover, the inclusion in our products of software or other IP licensed from third parties on a non-exclusive basis could limit our ability to differentiate our products from those of our competitors. 33 Table of Contents We also rely on technologies licensed from third parties in order to operate functions of our business.
Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations. If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.
Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations. 36 Table of Contents If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.
Any manufacturing disruption related to our third-party manufacturers or their component suppliers for any reason, including global chip shortages, natural disasters and health emergencies such as earthquakes, fires, power outages, typhoons, floods, health pandemics and epidemics such as the COVID-19 pandemic and manmade events such as civil unrest, labor disruption, cyber events, international trade disputes, international conflicts, terrorism, wars, such as the war in Ukraine, and critical infrastructure attacks, could impair our ability to fulfill orders.
Any manufacturing disruption related to our third-party manufacturers or their component suppliers for any reason, including global chip shortages, natural disasters and health emergencies such as earthquakes, fires, power outages, typhoons, floods, health pandemics and epidemics and manmade events such as civil unrest, labor disruption, cyber events, international trade disputes, international conflicts, terrorism, wars, such as the war in Ukraine and the Israel-Hamas war, and critical infrastructure attacks, could impair our ability to fulfill orders.
Further, any refusal to grant certain certifications or clearances by one government agency, or any decision by one government agency that our products do not meet certain standards, may reduce business opportunities and cause reputational harm and cause concern with other government agencies, governments and businesses and cause them to not buy our products and services and/or lead to a decrease in demand for our products generally.
Further, any refusal to grant certain certifications or clearances by one government agency, or any decision by one government agency that our products do not meet certain standards, may 20 Table of Contents reduce business opportunities and cause reputational harm and cause concern with other government agencies, governments and businesses and cause them to not buy our products and services and/or lead to a decrease in demand for our products generally.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results 42 Table o f Contents of Operations—Critical Accounting Policies and Estimates” in this Annual Report on Form 10-K, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in this Annual Report on Form 10-K, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
The criteria by which our corporate responsibility practices are assessed may change due to the constant evolution of the sustainability landscape, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria.
The criteria by which our corporate 37 Table of Contents responsibility practices are assessed may change due to the constant evolution of the sustainability landscape, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria.
The market price of our common stock may be subject to wide fluctuations in response to, among other things, the risk factors described in this periodic report, news about us and our financial results, the impact of the COVID-19 pandemic, news about our competitors and their results, and other factors such as rumors or fluctuations in the valuation of companies perceived by investors to be comparable to us.
The market price of our common stock may be subject to wide fluctuations in response to, among other things, the risk factors described in this periodic report, news about us and our financial results, news about our competitors and their results, and other factors such as rumors or fluctuations in the valuation of companies perceived by investors to be comparable to us.
Six distributor customers accounted for 69% and 68% of our total net accounts receivable in the aggregate as of December 31, 2022 and 2021, respectively. See Note 16. Segment Information in Part II, Item 8 of this Annual Report on Form 10-K for distributor customers that accounted for 10% or more of our revenue or net accounts receivable.
Six distributor customers accounted for 70% and 69% of our total net accounts receivable in the aggregate as of December 31, 2023 and 2022, respectively. See Note 16. Segment Information in Part II, Item 8 of this Annual Report on Form 10-K for distributor customers that accounted for 10% or more of our revenue or net accounts receivable.
Moreover, the implementation of these compliance measures could adversely affect the sourcing, availability and pricing of materials used in the manufacture of our 29 Table o f Contents products to the extent that there may be only a limited number of suppliers that are able to meet our sourcing requirements, which would make it more difficult to obtain such materials in sufficient quantities or at competitive prices.
Moreover, the implementation of these compliance measures could adversely affect the sourcing, availability and pricing of materials used in the manufacture of our products to the extent that there may be only a limited number of suppliers that are able to meet our sourcing requirements, which would make it more difficult to obtain such materials in sufficient quantities or at competitive prices.
The introduction by component suppliers of new versions of their products, particularly if not anticipated by us or our contract manufacturers, could require us to expend significant resources to incorporate these new components into our products.
The introduction by component suppliers of new versions of their products, particularly if not anticipated by us or our contract manufacturers, could 25 Table of Contents require us to expend significant resources to incorporate these new components into our products.
Larger competitors with more diverse product offerings may reduce the price of products and services that compete with ours in order to promote the sale of other products or services or may bundle them with other products or services.
Larger competitors with more diverse product offerings may reduce the price of products and services that compete with ours in order to promote the sale of other products or services or may bundle them with other products or 26 Table of Contents services.
Moreover, many of our channel partners are privately held, including our largest distributor, and we may not have sufficient information to assess their financial condition. If our channel partners’ financial condition or operations weaken, their ability to sell our product and services could be negatively impacted.
Moreover, many of our channel partners are privately held, including some of our largest partners, and we may not have sufficient information to assess their financial condition. If our channel partners’ financial condition or operations weaken, their ability to sell our products and services could be negatively impacted.
We may experience slowing growth or a decrease in billings, revenue, operating margin and free cash flow for a number of reasons, including as a result of the COVID-19 pandemic, a slowdown in demand for our products or services, a shift in demand from products to services, decrease in services revenue growth, increased competition, worldwide or regional economic challenges based on inflation or possible stagflation, a regional recession or a recession in the global economy, rising interest rates, the war in Ukraine, a decrease in the growth of our overall market or softness in demand in certain geographies or industry verticals, such as the service provider industry, changes in our strategic opportunities, execution risks and our failure for any reason to continue to capitalize on sales and growth opportunities due to other risks identified in the risk factors described in this periodic report.
We may experience slowing growth or a decrease in billings, revenue, operating margin and free cash flow for a number of reasons, including a slowdown in demand for our products or services, a shift in demand from products to services, decrease in services revenue growth, increased competition, execution challenges including sales execution challenges and lack of optimal sales productivity, worldwide or regional economic challenges based on inflation or possible stagflation, a regional recession or a recession in the global economy, rising interest rates, the war in Ukraine and the Israel-Hamas war, a decrease in the growth of our overall market or softness in demand in certain geographies or industry verticals, such as the service provider industry, changes in our strategic opportunities, execution risks, lower sales productivity and our failure for any reason to continue to capitalize on sales and growth opportunities due to other risks identified in the risk factors described in this periodic report.
In addition, an organization’s existing vendors or new vendors with a broad product offering may be able to offer concessions that we are not able to match because we currently offer 28 Table o f Contents only network security products and have fewer resources than many of our competitors.
In addition, an organization’s existing vendors or new vendors with a broad product offering may be able to offer concessions that we are not able to match because we currently offer only network security products and have fewer resources than many of our competitors.
Any security breach could negatively impact our reputation and results of operations. If we do not appropriately manage any future growth, including through the expansion of our real estate facilities, or are unable to improve our systems, processes and controls, our operating results will be negatively affected.
Any security incident could negatively impact our reputation and results of operations. 30 Table of Contents If we do not appropriately manage any future growth, including through the expansion of our real estate facilities, or are unable to improve our systems, processes and controls, our operating results will be negatively affected.
Any change in export or import regulations, economic sanctions or related legislation, shift 40 Table o f Contents in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations.
Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations.
Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.
Similar laws and regulations have been passed or are pending in China, South Korea, Taiwan, Japan, Norway, Saudi Arabia and the UAE and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.
If this exemption is revoked or expires without extension, if there are other changes to these laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be 41 Table o f Contents required to re-engineer our products to use components compatible with these regulations.
If this exemption is revoked or expires without extension, if there are other changes to these laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to re-engineer our products to use components compatible with these regulations.
If our circumstances change or if actual circumstances differ from our assumptions, our operating results may be adversely affected 47 Table o f Contents and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
If our circumstances change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
They may also have incentives to promote our 18 Table o f Contents competitors’ products to the detriment of our own, or they may cease selling our products altogether. We cannot ensure that we will retain these channel partners or that we will be able to secure additional or replacement partners or that existing channel partners will continue to perform.
They may also have incentives to promote our competitors’ products to the detriment of our own, or they may cease selling our products altogether. We cannot ensure that we will retain these channel partners or that we will be able to secure additional or replacement partners or that existing channel partners will continue to perform.
Due to budget constraints or economic downturns, organizations may be more willing to incrementally add solutions to their existing network security infrastructure from competitors than to replace it with our solutions.
Due to budget constraints or economic downturns, organizations may be more willing to incrementally add solutions to their existing network security infrastructure from competitors than to 21 Table of Contents replace it with our solutions.
If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies and/or actions with respect to corporate social responsibility are inadequate. We may face reputational damage in the event that we do not meet the ESG standards set by various constituencies.
If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies and/or actions with respect to corporate social responsibility are inadequate and we may be subject to fines from regulatory authorities. We may face reputational damage in the event that we do not meet the ESG standards set by various constituencies.
These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer customer orders, reduced revenue and gross margins and loss of market share. 26 Table o f Contents Managing inventory of our products and product components is complex.
These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer customer orders, reduced revenue and gross margins and loss of market share. Managing inventory of our products and product components is complex.
Economic uncertainty in various global markets caused by political instability and conflict, such as the war in Ukraine, and economic challenges caused by the effects of the COVID-19 pandemic, the economic downturn, any resulting recession, inflation or rise in interest rates has resulted, and may continue to result, in weakened demand for our products and services and difficulty in forecasting our financial results and managing inventory levels.
Economic uncertainty in various global markets caused by political instability and conflict, such as the war in Ukraine and the Israel-Hamas war, and economic challenges caused by the economic downturn, any resulting recession, inflation or rise in interest rates has resulted, and may continue to result, in weakened demand for our products and services and difficulty in forecasting our financial results and managing inventory levels.
Weak global and regional economic conditions and spending environments, based on a downturn in the economy, a possible recession and the effects of ongoing or increased inflation or possible stagflation in certain geographies, rising interest rates, geopolitical instability and uncertainty, a reduction in information technology spending regardless of macroeconomic conditions, the effects of the COVID-19 pandemic and the impact of the war in Ukraine each could have a material adverse impacts on our business, financial condition and results of operations, including longer sales cycles, lower prices for our products and services, increased component costs, higher default rates among our channel partners, reduced unit sales and slower or declining growth.
Weak global and regional economic conditions and spending environments, based on a downturn in the economy, a possible recession and the effects of ongoing or increased inflation or possible stagflation in certain geographies, increasing or decreasing interest rates, geopolitical instability and uncertainty, a reduction in information technology spending regardless of macroeconomic conditions, the effects of epidemics and pandemics and the impact of the war in Ukraine and the Israel-Hamas war each could have a material adverse impacts on our financial condition and results of operations and our business, including resulting in longer sales cycles, lower prices for our products and services, increased component costs, higher default rates among our channel partners, reduced unit sales, lower prices and slower or declining growth.
For example, government organizations may have contractual or other legal rights to terminate contracts with our 24 Table o f Contents distributors and resellers for convenience or due to a default, and any such termination may adversely impact our future results of operations.
For example, government organizations may have contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact our future results of operations.
Government demand, sales and payment for our products and services may be negatively impacted by numerous factors and requirements unique to selling to government agencies, such as: • policies, laws or regulations have in the past, and may in the future, require us to hold certain third-party and government security certifications in order to sell our products and services and to make organizational and operational changes in order to sell into specific government agencies or programs, and such certifications may be costly to obtain and maintain; • funding authorizations and requirements unique to government agencies, with funding or purchasing reductions or delays adversely affecting public sector demand for our products; and • geopolitical matters, including tariff and trade disputes, government shutdowns, impact of the war in Ukraine, tensions between China and Taiwan and trade protectionism and other political dynamics that may adversely affect our ability to sell in certain locations or obtain the requisite permits and clearances required for certain purchases by government organizations of our products and services.
Government demand, sales and payment for our products and services may be negatively impacted by numerous factors and requirements unique to selling to government agencies, such as: • policies, laws and regulations have in the past, and may in the future, require us to obtain and maintain certain security and other certifications in order to sell our products and services into certain government organizations, and such certifications may be costly and time-consuming to obtain and maintain; • funding authorizations and requirements unique to government agencies, with funding or purchasing reductions or delays adversely affecting public sector demand for our products; and • geopolitical matters, including tariff and trade disputes, government shutdowns, impact of the war in Ukraine and the Israel-Hamas war, tensions between China and Taiwan and trade protectionism and other political dynamics that may adversely affect our ability to sell in certain locations or obtain the requisite permits and clearances required for certain purchases by government organizations of our products and services.
Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and could also cause us to lose end-customers in the public sector or negatively impact our ability to contract with the public sector.
Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and could also cause us to lose end-customers or negatively impact our ability to contract.
We have incurred indebtedness and may incur other debt in the future, which may adversely affect our financial condition and future financial results. As of December 31, 2022, we had an aggregate of $990.4 million of indebtedness outstanding under our senior notes. Under the agreements governing our indebtedness, we are permitted to incur additional debt.
We have incurred indebtedness and may incur other debt in the future, which may adversely affect our financial condition and future financial results. As of December 31, 2023, we had an aggregate of $992.3 million of indebtedness outstanding under our Senior Notes. Under the agreements governing our indebtedness, we are permitted to incur additional debt.
Moreover, business models based on a subscription SaaS, cloud-based services, have become increasingly in-demand by our end-customers and adopted by other providers, including our competitors.
Moreover, business models based on a subscription cloud-based software service have become increasingly in demand by our end-customers and adopted by other providers, including our competitors.
Moreover, many of our end-customers operate in markets characterized by rapidly changing technologies and business plans, which require them to add numerous network access points and adapt increasingly complex networks, incorporating a variety of hardware, software applications, operating systems and networking protocols.
The network security market is expected to continue to evolve rapidly. Moreover, many of our end-customers operate in markets characterized by rapidly changing technologies and business plans, which require them to add numerous network access points and adapt increasingly complex networks, incorporating a variety of hardware, software applications, operating systems and networking protocols.
If we do not have enough time after shipping our products for our systems to perform these processes prior to the end of the quarter, or we have system issues that prevent processing in time to realize service billings in a quarter, we will not be able to bill and realize billings for those services until the following quarter, which may materially negatively impact our billings for a particular quarter.
If we do not have enough time after shipping our products for our systems to perform these processes prior to the end of the quarter, we have system issues that prevent processing in time to realize service billings in a quarter, or there are delays in deals closing or deals are lost, we will not be able to bill and realize billings for those services until possibly the following quarter at the earliest, which may materially negatively impact our billings for a particular quarter.
We are also subject to a number of risks typically associated with international sales and operations, including: • disruption in the supply chain or in manufacturing or shipping, or decreases in demand by channel partners or end-customers, including any such disruption or decreases caused by factors outside of our control such as natural disasters and health emergencies, including earthquakes, droughts, fires, power outages, typhoons, floods, pandemics or epidemics such as the COVID-19 pandemic and manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars or other foreign conflicts, such as the war in Ukraine or tensions between China and Taiwan, and critical infrastructure attacks; • fluctuations in foreign currency exchange rates or a strengthening of the U.S. dollar, as a significant portion of our expenses is incurred and paid in currencies other than the U.S. dollar, and the impact such fluctuations may have on the actual prices that our partners and customers are willing to pay for our products and services; • economic or political instability in foreign markets, such as any economic or political instability caused by economic downturns and wars or other foreign conflicts, such as the war in Ukraine, tensions between China and Taiwan and any expansions thereof; • greater difficulty in enforcing contracts and accounts receivable collection, including longer collection periods; • longer sales processes for larger deals, particularly during the summer months or as a result of the COVID-19 pandemic and related travel and gathering restrictions; • changes in regulatory requirements; • difficulties and costs of staffing and managing foreign operations; • the uncertainty of protection for IP rights in some countries; • costs of compliance with foreign policies, laws and regulations and the risks and costs of non-compliance with such policies, laws and regulations; 21 Table o f Contents • protectionist policies and penalties, and local laws, requirements, policies and perceptions that may adversely impact a U.S.-headquartered business’s sales in certain countries outside of the U.S.; • costs of complying with, and the risks, reputational damage and other costs of non-compliance with, U.S. or other foreign laws and regulations for foreign operations, including the U.S.
We are also subject to a number of risks typically associated with international sales and operations, including: • disruption in the supply chain or in manufacturing or shipping, or decreases in demand by channel partners or end-customers, including any such disruption or decreases caused by factors outside of our control such as natural disasters and health emergencies, including earthquakes, droughts, fires, power outages, typhoons, floods, pandemics or epidemics and manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars or other foreign conflicts, such as the war in Ukraine and the Israel-Hamas war or tensions between China and Taiwan, and critical infrastructure attacks; • fluctuations in foreign currency exchange rates or a strengthening of the U.S. dollar, as a significant portion of our expenses is incurred and paid in currencies other than the U.S. dollar, and the impact such fluctuations may have on the actual prices that our partners and customers are willing to pay for our products and services; • economic or political instability in foreign markets, such as any economic or political instability caused by economic downturns and wars or other foreign conflicts, such as the war in Ukraine and the Israel-Hamas war, tensions between China and Taiwan and any expansions thereof; • instability in the global banking system; • greater difficulty in enforcing contracts and accounts receivable collection, including longer collection periods; • longer sales processes for larger deals; • changes in regulatory requirements; • difficulties and costs of staffing and managing foreign operations; • the uncertainty of protection for Intellectual Property (“IP”) rights in some countries; • costs of compliance with foreign policies, laws and regulations and the risks and costs of non-compliance with such policies, laws and regulations; • protectionist policies and penalties, and local laws, requirements, policies and perceptions that may adversely impact a U.S.-headquartered business’s sales in certain countries outside of the United States; • costs of complying with, and the risks, reputational damage and other costs of non-compliance with, U.S. or other foreign laws and regulations for foreign operations, including the U.S.
Risks Related to our Systems and Technology If our internal enterprise IT networks, on which we conduct internal business and interface externally, our operational networks, through which we connect to customers, vendors and partners systems and provide services, or our research and development networks, our back-end labs and cloud stacks hosted in our data centers, colocation vendors or public cloud providers, through which we research, develop and host products and services, are compromised, public perception of our products and services may be harmed, our customers may be breached and harmed, we may become subject to liability, and our business, operating results and stock price may be adversely impacted.
Any service-level failures could adversely affect our business, financial condition and results of operations. 29 Table of Contents Risks Related to our Systems and Technology If our internal enterprise IT networks, on which we conduct internal business and interface externally, our operational networks, through which we connect to customers, vendors and partners systems and provide services, or our research and development networks, our back-end labs and cloud stacks hosted in our data centers, colocation vendors or public cloud providers, through which we research, develop and host products and services, are compromised, public perception of our products and services may be harmed, our customers may be breached and harmed, we may become subject to liability, and our business, operating results and stock price may be adversely impacted.
If we fail to optimize our channel partner model or fail to manage existing sales channels, our business will be seriously harmed. Reliance on a concentration of shipments at the end of the quarter could cause our billings and revenue to fall below expected levels or delay collections and the related increase in free cash flow.
If we fail to optimize our channel partner model or fail to manage existing sales channels, our business will be seriously harmed. Reliance on a concentration of shipments at the end of the quarter could cause our billings and revenue to fall below expected levels.
Any such damages, penalties, disruptions or limitations in our ability to do business with the public sector could have an adverse effect on our business and operating results. We are subject to governmental export and import controls that could subject us to liability or restrictions on sales, and that could impair our ability to compete in international markets.
Any such damages, penalties, disruptions or limitations in our ability to do business could have an adverse effect on our business and operating results. 35 Table of Contents We are subject to governmental export and import controls that could subject us to liability or restrictions on sales, and that could impair our ability to compete in international markets.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeAlong with our corporate headquarters, as of December 31, 2022, we own approximately 290,000 square feet in Union City, California, used for manufacturing assembly and operations; approximately 560,000 square feet of office space in Burnaby and Ottawa, Canada, used for operations, support and research and development work; approximately 100,000 square feet of office space in Chicago; approximately 100,000 square feet of office space in Florida; approximately 90,000 square feet of office space in Texas; and approximately 70,000 square feet of office space in Valbonne, France, predominantly used for sales and support.
Biggest changeAlong with our corporate headquarters, as of December 31, 2023, we operated the following facilities: Location Owned Square Footage Description of Use Burnaby and Ottawa, Canada 560,000 Datacenter operations, support functions and research and development Union City, California 350,000 Manufacturing assembly and operations Plano & Frisco, Texas 130,000 Office space and datacenter operations Torija, Spain 120,000 Future development of datacenter operations Chicago, Illinois 100,000 Office space and retail Sunrise, Florida 100,000 Office space Valbonne, France 70,000 Sales and support functions We also own additional building space in Sunnyvale and Union City, California, and Sydney, Australia, for future development of approximately 450,000 square feet in the aggregate.
ITEM 2. Properties Our corporate headquarters is located in Sunnyvale, California and comprises approximately 395,000 square feet of building space on 20 acres of land.
ITEM 2. Properties Our corporate headquarters is located in Sunnyvale, California and comprises approximately 395,000 square feet of building space on 21 acres of land.
We believe that our existing properties are sufficient and suitable to meet our current needs. We intend to expand our facilities or add new facilities to support our future growth and enter new markets, and we believe that suitable additional or alternative space will be available or can be developed as needed to accommodate ongoing operations and any such growth.
We intend to expand our facilities, develop unoccupied space, or add new facilities to support our future growth and enter new product markets, and we believe that suitable additional or alternative space will be available or can be developed as needed to accommodate ongoing operations and any such growth.
We also own additional building space in Sunnyvale and Union City, California, for future development of approximately 470,000 square feet. We maintain additional leased offices throughout the world, predominantly used as sales and support offices, and leased data center spaces throughout the world operated under co-location arrangements.
We maintain additional leased offices throughout the world, predominantly used as sales and support offices, and leased data center spaces throughout the world operated under co-location arrangements. We believe that our existing properties 45 Table of Contents are sufficient and suitable to meet our current needs.
Added
Refer to Note 17, Subsequent Events, in Part II, Item 8 of this Annual Report on Form 10-K for the January 2024 purchase of an additional 480,000 square feet in Santa Clara, CA which is located in close proximity to corporate headquarters.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeThere can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.
Biggest changeThere can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows. Refer to Note 12.
Added
Commitments and Contingencies in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe Repurchase Program does not require us to purchase a minimum number of shares, and may be suspended, modified or discontinued at any time without prior notice. Since its inception, we have repurchased 211.4 million shares of our common stock under the Repurchase Program for an aggregate purchase price of $4.72 billion.
Biggest changeUnder the Repurchase Program, share repurchases may be made by us from time to time in privately negotiated transactions or in open market transactions. The Repurchase Program does not require us to purchase a minimum number of shares, and may be suspended, modified or discontinued at any time without prior notice.
Securities Authorized for Issuance Under Equity Compensation Plans Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2023 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the “SEC”) within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the “SEC”) within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions. 48 Table o f Contents Dividends We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends in the foreseeable future.
A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions. Dividends We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends in the foreseeable future.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common Stock Our common stock is traded on The Nasdaq Global Select Market under the symbol “FTNT.” Holders of Record As of February 17, 2023, there were 43 holders of record of our common stock.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common Stock Our common stock is traded on The Nasdaq Global Select Market under the symbol “FTNT.” Holders of Record As of February 22, 2024, there were 45 holders of record of our common stock.
Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. 49 Table o f Contents Sales of Unregistered Securities None.
Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. Sales of Unregistered Securities None.
Stock Performance Graph This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934 ( the “Exchange Act”), or incorporated by reference into any filing of Fortinet under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Stock Performance Graph This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934 ( the “Exchange Act”), or incorporated by reference into any filing of Fortinet under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. 46 Table of Contents The following graph compares the cumulative five-year total return for our common stock, the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”) and the NASDAQ Computer Index.
The following graph compares the cumulative five-year total return for our common stock, the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”) and the NASDAQ Computer Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the S&P 500 Index and the NASDAQ Computer Index assume reinvestment of dividends.
Such returns are based on historical results and are not intended to suggest future performance. Data for the S&P 500 Index and the NASDAQ Computer Index assume reinvestment of dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN* Among Fortinet, Inc., the S&P 500 Index and the NASDAQ Computer Index December 2017 * December 2018 December 2019 December 2020 December 2021 December 2022 Fortinet, Inc. $ 100 $ 161 $ 244 $ 340 $ 823 $ 560 S&P 500 Index $ 100 $ 94 $ 121 $ 140 $ 178 $ 144 NASDAQ Computer $ 100 $ 96 $ 145 $ 217 $ 299 $ 192 * Assumes that $100 was invested on December 31, 2017 in stock or index, including reinvestment of dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN* Among Fortinet, Inc., the S&P 500 Index and the NASDAQ Computer Index December 2018 * December 2019 December 2020 December 2021 December 2022 December 2023 Fortinet, Inc. $ 100 $ 152 $ 211 $ 510 $ 347 $ 416 S&P 500 Index $ 100 $ 129 $ 150 $ 190 $ 153 $ 190 NASDAQ Computer $ 100 $ 150 $ 225 $ 311 $ 200 $ 332 * Assumes that $100 was invested on December 31, 2018 in stock or index, including reinvestment of dividends.
From 2016 through 2021, our board of directors approved increases to our Repurchase Program by various amounts and extended the term to February 28, 2023, bringing the aggregated amount authorized to $4.25 billion. In July 2022, our board of directors approved a $1.0 billion increase, bringing the aggregate amount authorized to be repurchased to $5.25 billion.
From 2016 through 2022, our board of directors approved increases to our Repurchase Program by various amounts and extended the term to February 28, 2023. In February 2023, our board of directors approved an extension of the Repurchase Program to February 29, 2024.
Removed
In February 2023, our board of directors approved an extension of the Repurchase Program to February 29, 2024. Under the Repurchase Program, share repurchases may be made by us from time to time in privately negotiated transactions or in open market transactions.
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.
Removed
There were no repurchases of common stock during the three months ended December 31, 2022. As of December 31, 2022, $529.6 million remained available for future share repurchases under the Repurchase Program.
Added
Since its inception, we have repurchased 238.6 million shares of our common stock under the Repurchase Program for an aggregate purchase price of $6.22 billion. 47 Table of Contents The following table provides information with respect to the shares of common stock we repurchased under the Repurchase Program during the three months ended December 31, 2023 (in millions, except average price paid per share amounts): Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan or Program Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs October 1 - October 31, 2023 7.7 $ 57.43 7.7 $ 980.0 November 1 - November 30, 2023 9.1 $ 49.75 9.1 $ 529.1 December 1 - December 31, 2023 — $ — — $ 529.1 Total 16.8 $ 53.29 16.8 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.
Added
As of February 23, 2024, approximately $1.03 billion remained available for future share repurchases. In February 2024, our board of directors approved an extension of the Repurchase Program to February 28, 2025. ITEM 6. [Reserved] 48 Table of Contents

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

100 edited+41 added−66 removed46 unchanged
Biggest changeThese statements include, among other things, statements concerning our expectations regarding: • supply chain constraints, the global chip and component shortages, and other factors affecting our manufacturing capacity, delivery, cost and inventory management; • increased inflation or stagflation, and rising interest rates in many geographies and changes in currency exchange rates and currency regulations; • 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; • expected impact of sales of certain products and services; • 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; • government regulation, tariffs and other policies; • drivers of long-term growth and operating leverage, such as sales productivity and capacity, functionality and value 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; • 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; • trends in revenue, cost of revenue and gross margin; • trends in our operating expenses, including sales and marketing expense, research and development expense, general and administrative expense, and expectations regarding these expenses; • expectations that our operating expense will increase in absolute dollars during 2023; • 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; • 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”); • 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; 51 Table o f Contents • estimates of a range of 2023 spending on capital expenditures; • competition in our markets; • 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, 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; and • adoption and impact of new accounting standards.
Biggest changeThese statements include, among other things, statements concerning our expectations regarding: • continued growth and market share gains; • variability in sales in certain product and service categories from year to year and between quarters; • expected impact of sales from certain products and services; • increasing or decreasing inflation or stagflation, and changing interest rates in many geographies and changes in currency exchange rates and currency regulations; • competition in our markets; • macroeconomic, geopolitical factors and other disruption on our manufacturing or sales, including public health issues, wars and natural disasters; • real estate investments, management of future growth including expansions and enhancements of current properties; • government regulation, tariffs and other policies; • 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; • 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; • growth expectations for the secure networking market; • supply chain constraints, component availability and other factors affecting our manufacturing capacity, delivery, cost and inventory management; • forecasts of future demand and targeted inventory levels, including changing market drivers and demands; • the effect of backlog from prior quarters, including its effect on growth of in-quarter billings and revenue; • 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; • trends in revenue, cost of revenue and gross margin, including expectations regarding product revenue and service revenue growth; 49 Table of Contents • trends in our operating expenses, including sales and marketing expense, research and development expense, general and administrative expense, and expectations regarding these expenses; • expected impact of plans and strategy for the acceleration of our points of presence (“PoP”) deployment; • expectations that our operating expenses will increase year over year in absolute dollars during 2024; • 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; • 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; • 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; • 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; • other statements regarding our future operations, financial condition and prospects and business strategies; and • adoption and impact of new accounting standards.
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.
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.
It is primarily comprised of net income, as adjusted for non-cash items and changes in operating assets and liabilities. Non-cash adjustments consist primarily of amortization of deferred contract costs, stock-based compensation and depreciation and amortization. Changes in operating assets and liabilities consist primarily of changes in deferred revenue, accounts receivable, net, deferred contract costs and deferred tax assets.
It is primarily comprised of net income, as adjusted for non-cash items and changes in operating assets and liabilities. Non-cash adjustments consist primarily of amortization of deferred contract costs, stock-based compensation and depreciation and amortization. Changes in operating assets and liabilities consist primarily of changes in deferred revenue, deferred contract costs, deferred tax assets, inventory and accounts receivable—net.
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.
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.
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.
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.
During 2022, 2021 and 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. Operating Activities Cash generated by operating activities is our primary source of liquidity.
During 2023, 2022 and 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. Operating Activities Cash generated by operating activities is our primary source of liquidity.
Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the 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.
Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the 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.
Historically, our 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. Interest expense consists primarily of interest expense due to the senior notes and other miscellaneous interest expense. Other expense — net .
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. Interest expense consists of interest expense due to the senior notes and other miscellaneous interest expense. Other expense — net .
We generally invoice 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.
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.
Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations. Revenue Recognition Revenues are recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations. 56 Table of Contents Revenue Recognition Revenues are recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
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. There are several limitations related to the use of billings instead of GAAP revenue.
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. There are several 53 Table of Contents limitations related to the use of billings instead of GAAP revenue.
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.
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.
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 2023.
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.
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. 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.
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. 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.
Our effective tax rate differs from the U.S. 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.
Our effective tax rate differs from the U.S. 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. Loss from equity method investments.
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. Gross margin .
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 .
Historically, we have required capital principally 70 Table o f Contents 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.
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.
Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist primarily of salaries, benefits, bonuses, sales commissions and stock-based compensation. We expect personnel costs to continue to increase in absolute dollars as we expand our workforce. • Research and development .
Personnel costs are the most significant component of operating expenses and consist primarily of salaries, benefits, bonuses, sales commissions and stock-based compensation. We expect personnel costs to continue to increase in absolute dollars as we expand our workforce. • Research and development . Research and development expense consists primarily of personnel costs.
We determine revenue recognition through the following steps: • identification of a contract or contracts with a customer; 60 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; • determination of a transaction price; • allocation of a transaction price to the performance obligations in a contract; and • recognition of revenue when, or as, we satisfy a performance obligation.
We determine revenue recognition through the following steps: • identification of a contract or contracts with a customer; • identification of the performance obligations in a contract, including evaluation of performance obligations as to being distinct goods or services in a contract; • determination of a transaction price; • allocation of a transaction price to the performance obligations in a contract; and • recognition of revenue when, or as, we satisfy a performance obligation.
The provision for income taxes for 2022 w as comprised primarily of a $233.4 million tax expense related to U.S. federal and state income taxes, other foreign income taxes, foreign withholding taxes and unrecognized tax benefits.
The provision for income taxes for 2023 w as comprised primarily of a $302.4 million tax expense related to U.S. federal and state income taxes, other foreign income taxes, foreign withholding taxes and unrecognized tax benefits.
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.
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.
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. We may make similar decisions in the future. We may also make cash payments in connection with future business combinations.
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. We expect to make similar decisions in the future. We may also make cash payments in connection with future business combinations.
As of December 31, 2022, the long-term debt, net of unamortized discount and debt issuance costs, was $990.4 million. $500.0 million in aggregate principal amount of senior notes is due on March 15, 2026 and $500.0 million in aggregate principal amount of senior notes is due on March 15, 2031.
As of December 31, 2023, the long-term debt, net of unamortized discount and debt issuance costs, was $992.3 million. $500.0 million in aggregate principal amount of senior notes is due on March 15, 2026 and $500.0 million in aggregate principal amount of senior notes is due on March 15, 2031.
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.
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.
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.
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.
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.
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.
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.
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, pricing actions, 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, developing or leasing real estate; cash tax payments and macroeconomic impacts such as rising inflation and interest rates; the war in Ukraine and the Israel-Hamas war; and instability in the global 65 Table of Contents banking system.
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. government and agency securities, certificates of deposit and term deposits, money market funds, municipal bonds and marketable equity securities.
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. government and agency securities, certificates of deposit and term deposits, money market funds, municipal bonds.
We estimate payments of $1.27 billion due on or before December 31, 2023 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.
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.
Year Ended or As of December 31, 2022 2021 2020 (in millions) Revenue $ 4,417.4 $ 3,342.2 $ 2,594.4 Deferred revenue $ 4,640.3 $ 3,452.9 $ 2,605.3 Billings (non-GAAP) $ 5,594.0 $ 4,181.4 $ 3,090.0 Net cash provided by operating activities $ 1,730.6 $ 1,499.7 $ 1,083.7 Free cash flow (non-GAAP) $ 1,449.4 $ 1,203.8 $ 907.8 Deferred revenue.
Year Ended or As of December 31, 2023 2022 2021 (in millions) Revenue $ 5,304.8 $ 4,417.4 $ 3,342.2 Deferred revenue $ 5,735.0 $ 4,640.3 $ 3,452.9 Billings (non-GAAP) $ 6,399.5 $ 5,594.0 $ 4,181.4 Net cash provided by operating activities $ 1,935.5 $ 1,730.6 $ 1,499.7 Free cash flow (non-GAAP) $ 1,731.4 $ 1,449.4 $ 1,203.8 Deferred revenue.
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.
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.
As of December 31, 2022, we had $108.1 million in other contractual commitments having a remaining term in excess of one year that are non-cancelable.
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.
The amount of cash, cash equivalents and investments held by our international subsidiaries was $218.1 million and $132.4 million as of December 31, 2022 and 2021, respectively.
The amount of cash, cash equivalents and investments held by our international subsidiaries was $199.9 million and $218.1 million as of December 31, 2023 and 2022, respectively.
The provision was partially offset by excess tax benefits of $82.0 million from stock-based compensation expense, a tax benefit of $33.6 million from the FDII deduction, and a tax benefit of $11.1 million from federal research and development tax credits.
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.
We undertake no obligation, and specifically disclaim any obligation, to revise or publicly release the results of any revision to these and any other forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
We undertake no obligation, and specifically disclaim any obligation, to revise or publicly release the results of any revision to these and any other forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Business Overview Fortinet is a leader in cybersecurity and the convergence of networking and security.
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. Investments in privately held companies Our investments in privately held companies consist of investments in common stock or in-substance common stock.
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.
Total billings were $5.59 billion in 2022, an increase of 34% compared to $4.18 billion in 2021. 57 Table o f Contents A reconciliation of revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP, to billings is provided below: Year Ended December 31, 2022 2021 2020 (in millions) Billings: Revenue $ 4,417.4 $ 3,342.2 $ 2,594.4 Add: Change in deferred revenue 1,187.4 847.6 496.2 Less: Deferred revenue balance acquired in business combinations (10.8) (4.1) (0.6) Less: Adjustment due to adoption of ASU 2021-08 — (4.3) — Total billings (non-GAAP) $ 5,594.0 $ 4,181.4 $ 3,090.0 Free cash flow (non-GAAP).
A reconciliation of revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP, to billings is provided below: Year Ended December 31, 2023 2022 2021 (in millions) Billings: Revenue $ 5,304.8 $ 4,417.4 $ 3,342.2 Add: Change in deferred revenue 1,094.7 1,187.4 847.6 Less: Deferred revenue balance acquired in business combinations — (10.8) (4.1) Less: Adjustment due to adoption of ASU 2021-08 — — (4.3) Total billings (non-GAAP) $ 6,399.5 $ 5,594.0 $ 4,181.4 Free cash flow (non-GAAP).
Year Ended December 31, 2022 2021 2020 (in millions) Consolidated Statements of Income Data: Revenue: Product $ 1,780.5 $ 1,255.0 $ 916.4 Service 2,636.9 2,087.2 1,678.0 Total revenue 4,417.4 3,342.2 2,594.4 Cost of revenue: Product 691.3 487.7 352.4 Service 393.6 295.3 217.6 Total cost of revenue 1,084.9 783.0 570.0 Gross profit: Product 1,089.2 767.3 564.0 Service 2,243.3 1,791.9 1,460.4 Total gross profit 3,332.5 2,559.2 2,024.4 Operating expenses: Research and development 512.4 424.2 341.4 Sales and marketing 1,686.1 1,345.7 1,071.9 General and administrative 169.0 143.5 119.5 Gain on intellectual property matter (4.6) (4.6) (40.2) Total operating expenses 2,362.9 1,908.8 1,492.6 Operating income 969.6 650.4 531.8 Interest income 17.4 4.5 17.7 Interest expense (18.0) (14.9) — Other expense—net (13.5) (11.6) (7.8) Income before income taxes and loss from equity method investment 955.5 628.4 541.7 Provision for income taxes 30.8 14.1 53.2 Loss from equity method investment (68.1) (7.6) — Net income including non-controlling interests 856.6 606.7 488.5 Less: net loss attributable to non-controlling interests, net of tax (0.7) (0.1) — Net income attributable to Fortinet, Inc. $ 857.3 $ 606.8 $ 488.5 63 Table o f Contents Year Ended December 31, 2022 2021 2020 (as percentage of revenue) Revenue: Product 40 % 38 % 35 % Service 60 62 65 Total revenue 100 100 100 Cost of revenue: Product 16 15 14 Service 9 9 8 Total cost of revenue 25 23 22 Gross margin: Product 61 61 62 Service 85 86 87 Total gross margin 75 77 78 Operating expenses: Research and development 12 13 13 Sales and marketing 38 40 41 General and administrative 4 4 5 Gain on intellectual property matter — — (2) Total operating expenses 53 57 58 Operating margin 22 19 20 Interest income — — 1 Interest expense — — — Other expense—net — — — Income before income taxes and loss from equity method investment 22 19 21 Provision for income taxes 1 — 2 Loss from equity method investment (2) — — Net income including non-controlling interests 19 18 19 Less: net loss attributable to non-controlling interests, net of tax — — — Net income attributable to Fortinet, Inc. 19 % 18 % 19 % Percentages have been rounded for presentation purposes and may differ from unrounded results.
Year Ended December 31, 2023 2022 2021 (in millions) Consolidated Statements of Income Data: Revenue: Product $ 1,927.3 $ 1,780.5 $ 1,255.0 Service 3,377.5 2,636.9 2,087.2 Total revenue 5,304.8 4,417.4 3,342.2 Cost of revenue: Product 763.6 691.3 487.7 Service 473.6 393.6 295.3 Total cost of revenue 1,237.2 1,084.9 783.0 Gross profit: Product 1,163.7 1,089.2 767.3 Service 2,903.9 2,243.3 1,791.9 Total gross profit 4,067.6 3,332.5 2,559.2 Operating expenses: Research and development 613.8 512.4 424.2 Sales and marketing 2,006.0 1,686.1 1,345.7 General and administrative 211.3 169.0 143.5 Gain on intellectual property matter (4.6) (4.6) (4.6) Total operating expenses 2,826.5 2,362.9 1,908.8 Operating income 1,241.1 969.6 650.4 Interest income 119.7 17.4 4.5 Interest expense (21.0) (18.0) (14.9) Other expense—net (6.1) (13.5) (11.6) Income before income taxes and loss from equity method investments 1,333.7 955.5 628.4 Provision for income taxes 143.8 30.8 14.1 Loss from equity method investments (42.1) (68.1) (7.6) Net income including non-controlling interests 1,147.8 856.6 606.7 Less: net loss attributable to non-controlling interests, net of tax — (0.7) (0.1) Net income attributable to Fortinet, Inc. $ 1,147.8 $ 857.3 $ 606.8 59 Table of Contents Year Ended December 31, 2023 2022 2021 (as percentage of revenue) Revenue: Product 36 % 40 % 38 % Service 64 60 62 Total revenue 100 100 100 Cost of revenue: Product 14 16 15 Service 9 9 9 Total cost of revenue 23 25 23 Gross margin: Product 60 61 61 Service 86 85 86 Total gross margin 77 75 77 Operating expenses: Research and development 12 12 13 Sales and marketing 38 38 40 General and administrative 4 4 4 Gain on intellectual property matter — — — Total operating expenses 53 53 57 Operating margin 23 22 19 Interest income 2 — — Interest expense — — — Other expense—net — — — Income before income taxes and loss from equity method investments 25 22 19 Provision for income taxes 3 1 — Loss from equity method investments (1) (2) — Net income including non-controlling interests 22 19 18 Less: net loss attributable to non-controlling interests, net of tax — — — Net income attributable to Fortinet, Inc. 22 % 19 % 18 % Percentages have been rounded for presentation purposes and may differ from unrounded results.
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: Year Ended December 31, 2022 2021 2020 (in millions) Free Cash Flow: Net cash provided by operating activities $ 1,730.6 $ 1,499.7 $ 1,083.7 Less: Purchases of property and equipment (281.2) (295.9) (125.9) Less: Proceeds from intellectual property matter — — (50.0) Free cash flow (non-GAAP) $ 1,449.4 $ 1,203.8 $ 907.8 Net cash provided by (used in) investing activities $ 763.9 $ (1,325.1) $ (72.8) Net cash provided by (used in) financing activities $ (2,130.3) $ 82.8 $ (1,171.6) 58 Table o f Contents Components of Operating Results Revenue.
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: 54 Table of Contents Year Ended December 31, 2023 2022 2021 (in millions) Free Cash Flow: Net cash provided by operating activities $ 1,935.5 $ 1,730.6 $ 1,499.7 Less: Purchases of property and equipment (204.1) (281.2) (295.9) Free cash flow (non-GAAP) $ 1,731.4 $ 1,449.4 $ 1,203.8 Net cash provided by (used in) investing activities $ (649.3) $ 763.9 $ (1,325.1) Net cash provided by (used in) financing activities $ (1,570.4) $ (2,130.3) $ 82.8 Components of Operating Results Revenue.
Business Model 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. At times, we also sell directly to certain large enterprise customers, large service providers and major systems integrators.
Business Model 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.
Research and development expense consists primarily of personnel costs. Additional research and development expenses include ASIC and system prototypes and certification-related expenses, depreciation of property and equipment and facility-related expenses. The majority of our research and development is focused on software development and the ongoing development of our hardware products. We record research and development expenses as incurred.
Additional research and development expenses include ASIC and system prototypes and certification-related 55 Table of Contents expenses, depreciation of property and equipment and facility-related expenses. The majority of our research and development is focused on software and hardware development. We record research and development expenses as incurred.
In general, deferred tax assets 61 Table o f Contents 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.
These differences result in deferred tax assets, which are included in our consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of income become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized.
During 2022, cash used in financing activities was $2.13 billion, primarily driven by $1.99 billion used to repurchase shares of our common stock and $134.3 million used to pay tax withholding, net of proceeds from the issuance of common stock.
During 2023, cash used in financing activities was $1.57 billion, primarily driven by $1.50 billion used to repurchase shares of our common stock and $68.7 million used to pay tax withholding, net of proceeds from the issuance of common stock.
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.
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.
(“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.
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.
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.
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. Security subscriptions outpaced technical support growth due to strength in secure networking subscriptions, SecOps and SASE.
Of the service revenue recognized in 2021, 65% was included in the deferred revenue balance as of December 31, 2020.
Of the service revenue recognized in 2023, 67% was included in the deferred revenue balance as of December 31, 2022. Of the service revenue recognized in 2022, 66% was included in the deferred revenue balance as of December 31, 2021.
Research and development 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.
Research and development 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.
Interest income varies depending on our average investment balances during the period, types and mix of investments, and market interest rates. 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.
Interest income varies depending on our average investment balances during the period, types and mix of investments, and market interest rates. Interest expense increased $3.0 million in 2023 as compared to 2022.
Interest income, interest expense and other expense — net Year Ended December 31, 2022 2021 Change % Change (in millions, except percentages) Interest income $ 17.4 $ 4.5 $ 12.9 287 % Interest expense (18.0) (14.9) (3.1) 21 % Other expense—net (13.5) (11.6) (1.9) 16 % 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.
Interest income, interest expense and other expense — net Year Ended December 31, 2023 2022 Change % Change (in millions, except percentages) Interest income $ 119.7 $ 17.4 $ 102.3 588 % Interest expense (21.0) (18.0) (3.0) 17 % Other expense—net (6.1) (13.5) 7.4 (55) % Interest income increased $102.3 million in 2023 as compared to 2022, primarily as a result of higher interest rates and investment balances.
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. Product revenue increased by $525.5 million, or 42%, in 2022 compared to 2021.
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. Product revenue increased $146.8 million, or 8%, in 2023 compared to 2022 .
General and administrative personnel include our executive, finance, human resources, information technology and legal organizations. Our professional fees principally consist of outside legal, auditing, tax, information technology and other consulting costs. • Gain on intellectual property matter.
General and administrative personnel include our executive, finance, human resources, information technology and legal organizations. Our professional fees principally consist of outside legal, auditing, tax, information technology and other consulting costs. Interest income. Interest income consists primarily of interest earned on our cash equivalents and investments.
Operating expenses Year Ended December 31, Change % Change 2022 2021 Amount % of Revenue Amount % of Revenue (in millions, except percentages) Operating expenses: Research and development $ 512.4 12 % $ 424.2 13 % $ 88.2 21 % Sales and marketing 1,686.1 38 1,345.7 40 340.4 25 General and administrative 169.0 4 143.5 4 25.5 18 Gain on intellectual property matter (4.6) — (4.6) — — — Total operating expenses $ 2,362.9 53 % $ 1,908.8 57 % $ 454.1 24 % Percentages have been rounded for presentation purposes and may differ from unrounded results.
Operating expenses Year Ended December 31, Change % Change 2023 2022 Amount % of Revenue Amount % of Revenue (in millions, except percentages) Operating expenses: Research and development $ 613.8 12 % $ 512.4 12 % $ 101.4 20 % Sales and marketing 2,006.0 38 1,686.1 38 319.9 19 General and administrative 211.3 4 169.0 4 42.3 25 Gain on intellectual property matter (4.6) — (4.6) — — — Total operating expenses $ 2,826.5 53 % $ 2,362.9 53 % $ 463.6 20 % Percentages have been rounded for presentation purposes and may differ from unrounded results.
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 2023. 66 Table o f Contents Sales and marketing 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.
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. 62 Table of Contents Sales and marketing 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.
Provision for income taxes Year Ended December 31, Change % Change 2022 2021 (in millions, except percentages) Provision for income taxes $ 30.8 $ 14.1 $ 16.7 118 % Effective tax rate (%) 3 % 2 % Our provision for income taxes for 2022 reflects an effective tax rate of 3%, compared to an effective tax rate of 2% for 2021.
Provision for income taxes Year Ended December 31, Change % Change 2023 2022 (in millions, except percentages) Provision for income taxes $ 143.8 $ 30.8 $ 113.0 367 % Effective tax rate (%) 11 % 3 % Our provision for income taxes for 2023 reflects an effective tax rate of 11%, compared to an effective tax rate of 3% for 2022.
The provision for income taxes for 2021 was comprised primarily of a $140.8 million tax expense related to U.S. federal and state income taxes, other foreign income taxes, foreign withholding taxes and unrecognized tax benefits.
Our provision for income taxes for 2022 reflects an effective tax rate of 3%, compared to an effective tax rate of 2% for 2021. The provision for income taxes for 2022 was comprised primarily of a $233.4 million tax expense related to U.S. federal and state income taxes, other foreign income taxes, foreign withholding taxes and unrecognized tax benefits.
The accounts receivable allowance for credit losses was $3.6 million as of December 31, 2022, an increase of $1.2 million compared to $2.4 million as of December 31, 2021, primarily due to an increase in past due invoices over 60 and 90 days. The COVID-19 pandemic may have a material negative impact on our future periods.
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.
We currently expect general and administrative expense to increase in absolute dollars in 2023. Operating income and margin 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. Operating income as a percentage of revenue increased to 22% in 2022 compared to 19% in 2021.
We currently expect general and administrative expense to increase in absolute dollars in 2024. Operating income and margin 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.
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.
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.
Discussion regarding our financial condition and results of operations for 2021 as compared to 2020 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 25, 2022. 64 Table o f Contents 2022 and 2021 Revenue Year Ended December 31, 2022 2021 Amount % of Revenue Amount % of Revenue Change % Change (in millions, except percentages) Revenue: Product $ 1,780.5 40 % $ 1,255.0 38 % $ 525.5 42 % Service 2,636.9 60 2,087.2 62 549.7 26 Total revenue $ 4,417.4 100 % $ 3,342.2 100 % $ 1,075.2 32 % Revenue by geography: Americas $ 1,785.0 41 % $ 1,358.8 41 % $ 426.2 31 % EMEA 1,691.8 38 1,275.9 38 415.9 33 APAC 940.6 21 707.5 21 233.1 33 Total revenue $ 4,417.4 100 % $ 3,342.2 100 % $ 1,075.2 32 % Total revenue increased by $1.08 billion, or 32%, in 2022 compared to 2021.
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. 60 Table of Contents 2023 and 2022 Revenue Year Ended December 31, 2023 2022 Amount % of Revenue Amount % of Revenue Change % Change (in millions, except percentages) Revenue: Product $ 1,927.3 36 % $ 1,780.5 40 % $ 146.8 8 % Service 3,377.5 64 2,636.9 60 740.6 28 Total revenue $ 5,304.8 100 % $ 4,417.4 100 % $ 887.4 20 % Revenue by geography: Americas $ 2,175.2 41 % $ 1,785.0 41 % $ 390.2 22 % EMEA 2,072.9 39 1,691.8 38 381.1 23 APAC 1,056.7 20 940.6 21 116.1 12 Total revenue $ 5,304.8 100 % $ 4,417.4 100 % $ 887.4 20 % Total revenue increased $887.4 million, or 20%, in 2023 compared to 2022.
In 2022, we repurchased 36.0 million shares of common stock under the Repurchase Program for an aggregate purchase price of $1.99 billion. As of December 31, 2022, $529.6 million remained available for future share repurchases under the Repurchase Program. In February 2023, our board of directors approved an extension of the Repurchase Program to February 29, 2024.
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.
Our billings were diversified on a geographic basis. 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.
Our billings were diversified on a geographic basis. 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. Operating expenses as a percentage of revenue decreased approximately 0.2 percentage points in 2023 compared to 2022.
We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets, which are included in our consolidated balance sheets.
As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes.
Service revenue is generated primarily from FortiGuard security subscription services and FortiCare technical support services. We recognize revenue from FortiGuard security subscription and FortiCare technical support services ratably over the service term. Our typical contractual support and subscription term is one to five years.
As a percentage of total revenue, our product revenue has varied from quarter to quarter. • Service revenue . Service revenue is generated primarily from FortiGuard security subscription services and FortiCare technical support services. We recognize revenue from FortiGuard security subscription and FortiCare technical support services ratably over the service term.
In 2021, we repurchased 12.9 million shares of common stock for a total purchase price of $741.8 million. • Deferred revenue was $4.64 billion as of December 31, 2022, an increase of $1.19 billion, or 34%, from December 31, 2021.
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.
Financial Highlights • Total revenue was $4.42 billion in 2022, an increase of 32% compared to $3.34 billion in 2021. • Product revenue was $1.78 billion in 2022, an increase of 42% compared to $1.26 billion in 2021. • Service revenue was $2.64 billion in 2022, an increase of 26% compared to $2.09 billion in 2021. • Total gross profit was $3.33 billion in 2022, an increase of 30% compared to $2.56 billion in 2021. • Operating income was $969.6 million in 2022, an increase of 49% compared to $650.4 million in 2021. • 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. 54 Table o f Contents • Long-term debt, net of unamortized discount and debt issuance costs, was $990.4 million and $988.4 million as of December 31, 2022 and 2021, respectively. • In 2022, we repurchased 36.0 million shares of common stock under the Repurchase Program for an aggregate purchase price of $1.99 billion.
Financial Highlights • Total revenue was $5.30 billion in 2023, an increase of 20% compared to $4.42 billion in 2022. • Product revenue was $1.93 billion in 2023, an increase of 8% compared to $1.78 billion in 2022. • Service revenue was $3.38 billion in 2023, an increase of 28% compared to $2.64 billion in 2022. • Total gross profit was $4.07 billion in 2023, an increase of 22% compared to $3.33 billion in 2022. • Operating income was $1.24 billion in 2023, an increase of 28% compared to $969.6 million in 2022. • 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. 51 Table of Contents • 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.
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 do not currently intend to retire these senior notes early.
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.
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. 68 Table o f Contents Liquidity and Capital Resources As of December 31, 2022 2021 2020 (in millions) Cash and cash equivalents $ 1,682.9 $ 1,319.1 $ 1,061.8 Short-term and long-term investments 548.1 1,634.8 893.8 Marketable equity securities 25.5 38.6 — Total cash, cash equivalents, investments and marketable equity securities $ 2,256.5 $ 2,992.5 $ 1,955.6 Working capital $ 732.0 $ 1,282.5 $ 910.9 Year Ended December 31, 2022 2021 2020 (in millions) Net cash provided by operating activities $ 1,730.6 $ 1,499.7 $ 1,083.7 Net cash provided by (used in) investing activities 763.9 (1,325.1) (72.8) Net cash provided by (used in) financing activities (2,130.3) 82.8 (1,171.6) Effect of exchange rate changes on cash and cash equivalents (0.4) (0.1) — Net increase (decrease) in cash and cash equivalents $ 363.8 $ 257.3 $ (160.7) 69 Table o f Contents 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.
Liquidity and Capital Resources As of December 31, 2023 2022 2021 (in millions) Cash and cash equivalents $ 1,397.9 $ 1,682.9 $ 1,319.1 Short-term and long-term investments 1,021.5 548.1 1,634.8 Marketable equity securities 21.0 25.5 38.6 Total cash, cash equivalents, investments and marketable equity securities $ 2,440.4 $ 2,256.5 $ 2,992.5 Working capital $ 709.3 $ 732.0 $ 1,282.5 Year Ended December 31, 2023 2022 2021 (in millions) Net cash provided by operating activities $ 1,935.5 $ 1,730.6 $ 1,499.7 Net cash provided by (used in) investing activities (649.3) 763.9 (1,325.1) Net cash provided by (used in) financing activities (1,570.4) (2,130.3) 82.8 Effect of exchange rate changes on cash and cash equivalents (0.8) (0.4) (0.1) Net increase (decrease) in cash and cash equivalents $ (285.0) $ 363.8 $ 257.3 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. 64 Table of Contents 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.
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. 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.
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.
In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. 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.
Deferred tax assets and liabilities are measured using the currently enacted tax rates that 57 Table of Contents 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.
Deferred revenue was $4.64 billion as of December 31, 2022, an increase of $1.19 billion, or 34%, from December 31, 2021. 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. Billings (non-GAAP).
Deferred revenue was $5.74 billion as of December 31, 2023, an increase of $1.09 billion, or 24%, from December 31, 2022. 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).
Product revenue is primarily generated from sales of our physical and virtual machine appliances. The majority of our product revenue continues to be generated by our Core Platform product line. Product revenue also includes revenue from sales of Enhanced Platform Technologies. As a percentage of total revenue, our product revenue has varied from quarter to quarter. • Service revenue .
Product revenue is primarily generated from sales of our physical and virtual machine appliances. The majority of our product revenue continues to be generated by our secure networking product lines. Product revenue also includes revenue from sales of unified SASE and SecOps technologies.
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. The benefit from lower operating expense as a percentage of revenue was partially offset by a 1.2 percentage point decrease in gross margin.
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.
Revenue mix shifted by 2.0 percentage points from service revenue to product revenue, as a percentage of total revenue. 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.
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. Revenue mix shifted by 4.0 percentage points from product revenue to service revenue, as a percentage of total revenue.
We believe this is due to customer buying patterns typical in this industry. Consistent with the seasonality note above, our quarterly revenue over the past two years has increased sequentially each year.
We believe this is due to customer buying patterns typical in this industry. Our quarterly revenue over the past two years has increased sequentially each quarter within the year. Total gross margin has fluctuated on a quarterly basis primarily due to the relative product and service mix.
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. As a percentage of total revenue, we continue to expect service revenue to be higher than product revenue.
Our typical contractual support and subscription term is one to five years. 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 of December 31, 2022, approximately 89% of our research and development teams were located in Canada, the United States and India. As of December 31, 2022, approximately two-thirds of our engineers worked on software development while the remainder worked on hardware development. 59 Table o f Contents • Sales and marketing .
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. • Sales and marketing .
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. 56 Table o f Contents Our customers purchase our hardware products and software licenses, as well as our FortiGuard and other security subscription and FortiCare technical support services.
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.
General and administrative 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.
General and administrative 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 .
Management accounts for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with GAAP revenue.
Management accounts for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with GAAP revenue. Total billings were $6.40 billion in 2023, an increase of 14% compared to $5.59 billion in 2022.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeOn March 5, 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. We carry the senior notes at face value less unamortized discount on our consolidated balance sheets.
Biggest changeA 10% decrease in interest rates would have resulted in a decrease of $12.0 million in our interest income in 2023, and would have resulted in an insignificant decrease in our interest income in 2022 and 2021 On March 5, 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.
However, a substantial portion of our operating expenses incurred outside the United States are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro (“EUR”), the Japanese yen (“JPY”), the Canadian dollar (“CAD”) and the British pound (“GBP”).
However, a substantial portion of our operating expenses incurred outside the United States are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro (“EUR”), the Canadian dollar (“CAD”), the British pound (“GBP”) and the Japanese yen (“JPY”).
Our forward exchange contracts are relatively short-term in nature and are focused on the CAD. Long-term material changes in the value of the U.S. dollar against other foreign currencies, such as the EUR, JPY and GBP, could adversely impact our operating expenses in the future.
Our forward exchange contracts are relatively short-term in nature and are focused on the CAD. Long-term material changes in the value of the U.S. dollar against other foreign currencies, such as the EUR, GBP and JPY could adversely impact our operating expenses in the future.
To minimize this risk, we maintain our portfolio of cash, cash equivalents, investments and marketable equity securities in a variety of securities, including commercial paper, corporate debt securities, U.S. government and agency securities, certificates of deposit and term deposits, money market 71 Table o f Contents funds, municipal bonds and marketable equity securities.
To minimize this risk, we maintain our 66 Table of Contents portfolio of cash, cash equivalents, investments and marketable equity securities in a variety of securities, including commercial paper, corporate debt securities, U.S. government and agency securities, certificates of deposit and term deposits, money market funds, municipal bonds and marketable equity securities.
The rate of inflation, however, affects our cost of revenue and expenses, such as those for employee compensation, which may not be readily recoverable in the price of products and services offered by us. 72 Table o f Contents
The rate of inflation, however, affects our cost of revenue and expenses, such as those for employee compensation, which may not be readily recoverable in the price of products and services offered by us. 67 Table of Contents
We record changes in the fair value of forward exchange contracts related to balance sheet accounts in other expense—net in the consolidated statements of income. We recognized an expense of $4.6 million in 2022 due to foreign currency transaction losses. Our use of forward exchange contracts is intended to reduce, but not eliminate, the impact of currency exchange rate movements.
We record changes in the fair value of forward exchange contracts related to balance sheet accounts in other expense—net in the consolidated statements of income. We recognized an expense of $7.0 million in 2023 due to foreign currency transaction losses. Our use of forward exchange contracts is intended to reduce, but not eliminate, the impact of currency exchange rate movements.
For foreign currency exchange rate risk, a 10% increase or decrease of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $16.4 million change in the value of our foreign currency cash balances as of December 31, 2022.
For foreign currency exchange rate risk, a 10% increase or decrease of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $14.2 million change in the value of our foreign currency cash balances as of December 31, 2023.
As the senior notes bear interest at a fixed rate, we have no financial statement risk associated with changes in interest rates. Refer to Note 11. Debt in Part II, Item 8 of this Annual Report on Form 10-K.
We carry the senior notes at face value less unamortized discount on our consolidated balance sheets. As the senior notes bear interest at a fixed rate, we have no financial statement risk associated with changes in interest rates. Refer to Note 11. Debt in Part II, Item 8 of this Annual Report on Form 10-K.
The risk associated with fluctuating interest rates is limited to our investment portfolio. A 10% decrease in interest rates in 2022, 2021 and 2020 would have resulted in an insignificant decrease in our interest income in each of these periods.
The risk associated with fluctuating interest rates is limited to our investment portfolio.

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