Fortinet (FTNT) 10-K risk factor changes: FY2019 vs FY2018

[removed: Investing] [added: *Investing] in our common stock involves a high degree of risk.

In that case, the trading price of our common stock could decline substantially, and investors may lose some or all of their [removed: investment.][added: investment.*]

[removed: Risks] [added: Risks] Related to Our [removed: Business][added: Business]

[removed: Our] [added: Our] operating results are likely to vary significantly and be [removed: unpredictable.][added: unpredictable.]

| • | the effectiveness of our sales organization, generally or in a particular geographic region, the time it takes to hire sales personnel and the timing of hiring, and our ability to [removed: retain,] [added: 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 and service providers, and to selling our broad security product and services [removed: portfolio;] [added: portfolio, including, among other execution risks, risks associated with the complexity and distraction in selling to all segments and increased competition and unpredictability of timing to close sales deals with large enterprises;] |

| • | compliance with existing laws and regulations that are applicable to our ability to conduct business with the public [removed: sector;] [added: sector and other sectors;] |

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

| • | future accounting pronouncements or changes in our accounting [removed: policies, such as changes in accounting for leases and stock-based compensation,] [added: policies] as well as the significant costs that may be incurred to adopt and comply with these new pronouncements; |

[removed: Adverse] [added: Adverse] economic conditions or reduced information technology spending may adversely impact our [removed: business.][added: business.]

[removed: Our] [added: Our] billings, revenue, operating margin and free cash flow growth may slow or may not [removed: continue.][added: continue.]

[removed: We] [added: We] rely significantly on revenue from FortiGuard security subscription and FortiCare technical support services, and revenue from these services may decline or fluctuate.

Because we recognize revenue from these services over the term of the relevant service period, downturns or upturns in sales of FortiGuard security subscription and FortiCare technical support services are not immediately reflected in full in our operating [removed: results.][added: results.]

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

Furthermore, we recognize FortiGuard security subscription and FortiCare technical support services revenue monthly over the term of the relevant service period, which is typically from one to [removed: three years, and, to a lesser extent,] five years.

[removed: We] [added: We] generate a majority of revenue from sales to distributors, resellers and end-customers outside of the United States, and we are therefore subject to a number of risks associated with international sales and [removed: operations.][added: operations.]

| • | costs of complying with, and the [removed: risks] [added: risks, reputational damage] and [added: other] costs of non-compliance with, U.S. or other foreign laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act 2010, the General Data Protection Regulation [removed: (which became effective in May 2018),] [added: (the “GDPR”),] import and export control laws, [added: trade laws and regulations,] tariffs and retaliatory measures, trade barriers and economic sanctions; |

Further, we may be unable to keep [removed: up-to-date] [added: up to date] with changes in government requirements as they change over time.

Moreover, our existing corporate structure and intercompany arrangements have been implemented in a manner [added: that] we believe is in compliance with current prevailing tax laws.

[removed: If] [added: If] we are not successful in continuing to execute our strategy to increase our sales to large and medium-sized end-customers, our results of operations may [removed: suffer.][added: suffer.]

We also have experienced uneven traction selling to certain government organizations and service providers and [removed: MSSPs,] [added: managed security service providers (“MSSPs”),] and there can be no assurance that we will be successful selling to these customers.

| • | 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; [removed: and] |

[removed: Managing] [added: Managing] inventory of our products and product components is complex.

Insufficient inventory [added: or components] may result in lost sales opportunities or delayed revenue, while excess inventory may harm our gross [removed: margins.][added: margins.]

Alternatively, insufficient inventory levels may lead to shortages that result in delayed [added: billings and] revenue or loss of sales opportunities altogether as potential end-customers turn to competitors’ products that are readily available.

Our inventory management systems and related supply chain visibility tools may be inadequate to enable us to effectively manage [added: inventory.]

[removed: We] [added: We] are dependent on the continued services and performance of our senior management, the loss of any of whom could adversely affect our business, operating results and financial [removed: condition.][added: condition.]

The loss of services of members of senior management, particularly Ken Xie, our Co-Founder, Chief Executive Officer and [removed: Chairman] [added: Chairman,] or Michael Xie, our Co-Founder, President and Chief Technology Officer, or of any of our senior sales leaders or functional area leaders, could significantly delay or prevent the achievement of our development and strategic objectives.

[removed: The loss of the services or the] distraction of our senior management for any reason could adversely affect our business, financial condition and results of operations.

[removed: If] [added: If] we are unable to hire, retain and motivate qualified personnel, our business will [removed: suffer.][added: suffer.]

Competition for highly skilled personnel is frequently intense, especially for qualified [added: sales, support and engineering] employees in network security and especially in the locations where we have a substantial presence and need for highly skilled personnel, such as the San Francisco Bay Area and Vancouver, Canada.

[removed: If] [added: If] we do not increase the effectiveness of our sales organization, we may have difficulty adding new end-customers or increasing sales to our existing end-customers and our business may be adversely [removed: affected.][added: affected.]

There is significant competition for sales personnel with the skills and technical knowledge that we [removed: require.][added: require, including experienced enterprise sales employees and others.]

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 [removed: contexts] [added: 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.

[removed: The] [added: The] sales prices of our products and services may decrease, which may reduce our gross profits and operating margin, and which may adversely impact our financial results and the trading price of our common [removed: stock.][added: stock.]

Furthermore, we anticipate that the sales prices and gross profits for our products or services will decrease over product life [removed: cycles.]

[removed: Reliance] [added: Reliance] on a concentration of shipments at the end of the quarter could cause our billings and revenue to fall below expected [removed: levels.][added: levels.]

Our ability to integrate the data from this tool into our order processing may cause order processing delays [removed: which] [added: that] could have an effect on our financial results.

[removed: Unless] [added: Unless] we continue to develop better market awareness of our company and our products, and to improve lead generation and sales enablement, our revenue may not continue to [removed: grow.][added: grow.]

[removed: We] [added: We] rely on third-party channel partners for substantially all of our revenue.

| • | component and product inventory shortages, including those caused by factors outside of our control such as natural disasters and health emergencies, including earthquakes, fires, power outages, typhoons, floods, pandemics or epidemics such as the coronavirus and manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars and critical infrastructure attacks; |

| • | 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, fires, power outages, typhoons, floods, pandemics or epidemics such as the coronavirus and manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars and critical infrastructure attacks; |

| • | 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 network security and SD-WAN, infrastructure security, cloud security and endpoint protection, IoT and OT security opportunities; |

| • | any actual or perceived vulnerabilities in our products or services, and any actual or perceived breach of our network or our customers’ networks; |

| • | changes in the growth rates of the network security market in particular and other security and networking markets, such as SD-WAN, for which we sell products and services; |

| • | changes in payment terms of our contracts with service providers and distributors; |

| • | any disruption 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, fires, power outages, typhoons, floods, pandemics or epidemics such as the coronavirus and manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars and critical infrastructure attacks; |

manner that we believe is in compliance with current prevailing tax laws.

| • | uncertainty as to timing to close large deals and any delays in closing those deals; and |

If we cannot manufacture and ship our products due to, for example, natural disasters and health emergencies such as earthquakes, fires, power outages, typhoons, floods, pandemics and epidemics such as the coronavirus or manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars and critical infrastructure attacks, our business and financial results could be materially and adversely impacted.

Widespread health problems, such as the outbreak and spread of the coronavirus, could adversely affect our business in a material way.

While the majority of our products are manufactured outside of China, certain components for our products and certain of our products are manufactured in China and Taiwan.

In addition, certain of our logistics and shipping operations are in Taiwan.

We also have other operations in Asia.

Pandemics and epidemics such as the current coronavirus outbreak or other widespread public health problems could negatively impact our business.

If, for example, the coronavirus progresses in ways that disrupt the manufacture or shipment of our products or otherwise disrupt our operations, this may materially negatively impact our operating results for the first quarter of 2020 and subsequent periods, including billings, revenue, gross margins, operating margins, cash flows and other operating results and our overall business.

If the coronavirus spreads in ways that continue to negatively impact the overall economy and buying patterns of partners or potential customers, this would negatively impact, and may materially negatively impact, our sales, operating results and business.

If the spread of the coronavirus limits the manufacturing of our products, either by limiting components available or by limiting the actual manufacture and assembly, this likely would result in increased product backlog, lower billings, lower revenue and decreased profitability and would negatively impact, and may materially negatively impact, our operating results and business.

In addition, the coronavirus has caused an increase in our expenses, including increased cancellation charges and reduced attendance fees due to the cancellation of our Accelerate Barcelona sales conference, and it may result in increased component and product manufacturing costs.

These increases in expenses will likely negatively impact, and may materially negatively impact, our operating results for the first quarter 2020 and in subsequent periods.

As a result of the foregoing, the coronavirus will likely negatively impact our operating results and may do so in a material way.

The loss of the services or the

Our inability to hire properly qualified and effective sales, support and engineering employees could harm our growth and our ability to effectively support growth.

If we do not hire properly qualified and effective sales employees and organize our sales team effectively to capture the opportunities in the various customer segments we are targeting, our growth and ability to effectively support growth would be harmed.

cycles.

Third parties may also send our customers or others malware or malicious emails that falsely indicate that we are the source, potentially causing lost confidence in us and reputational harm.

For example, as we previously announced, in the second quarter of 2019 we discovered that an unauthorized party targeted us using sophisticated techniques, such as efforts to impersonate our firewall update servers, in order to try to gain access to certain of our customers’ systems.

Although, based on our investigation of this incident, we do not believe that it had a material impact on our or our customers’ businesses, and in general we take numerous measures and implement multiple layers of security to protect our network and our customers’ networks, and, in this particular case, we took immediate additional action to protect our customers, we cannot guarantee that our security products and services will prevent all threats.

Further, we cannot be sure that third parties have not been, or will not in the future be, successful in improperly accessing our system and our customers’ systems, which could negatively impact us and our customers.

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’ 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 natural disasters or widespread public health problems including pandemics and epidemics such as the coronavirus outbreak; |

| • | 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. |

Additionally, a small number of distributors represents a large percentage of our revenue and gross accounts receivable, and one distributor accounted for 36% of our total net accounts receivable as of December 31, 2019.

Moreover, many of our channel partners are privately held, including our largest distributor Exclusive Networks, and we may not have sufficient information to assess their financial condition.

In addition, a small number of channel partners represents a large percentage of our revenue and gross accounts receivable.

| • | changes in the growth rate of the network security market; |

inventory.

If expected orders at the end of any quarter are delayed for any reason, including the failure of anticipated purchase orders to materialize, our logistics partners’ inability to ship products prior to quarter-end to fulfill purchase orders received near the end of the quarter, 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, any delays in shipments due to trade compliance requirements, labor disputes or logistics changes at shipping ports or otherwise, our billings and revenue for that quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price.

the market’s perception of our security products and services and, in some instances, subject us to potential liability that is not contractually limited.

to pay for these projects or free cash flow.

Additionally, in connection with adopting and implementing the new revenue accounting standard, management will continue to make judgments and assumptions based on our interpretation of the new standard.

It is possible that interpretation, industry practice and guidance may evolve.

For example, a change in our sales compensation plan may materially impact our accounting for deferred contract costs, which would impact our commission expense and therefore our future operating results.

Any manufacturing disruption by our third-party manufacturers could impair our ability to fulfill orders.

Lead times for components may be adversely impacted by factors outside of our control, such as natural disasters and other factors.

See Part I, Item 3 of this Annual Report on Form 10-K for more information on our legal proceedings.

For example, in March 2018, the current administration imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports and announced additional tariffs on goods imported from China specifically, as well as certain other countries.

our future sales to such distributor.

In December 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”).

The 2017 Tax Act reduced the federal corporate income tax rate from 35% to 21% and created a territorial tax system with a one-time mandatory tax on foreign earnings of U.S. subsidiaries not previously subject to U.S. income tax.

In December 2017, the Securities and Exchange Commission (the “SEC”) staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.

As a result, we previously provided a provisional estimate of the effect of the 2017 Tax Act in our financial statements.

In the fourth quarter of 2018, we completed our analysis to determine the effect of the 2017 Tax Act within the measurement period under the SEC guidance.

We expect further guidance may be forthcoming from the Financial Accounting Standards Board (“FASB”) and the SEC, as well as regulations, interpretations and rulings from federal and state tax agencies, which could result in additional impacts.

We will continue to monitor and assess the impact of the 2017 Tax Act and the ongoing guidance and accounting interpretations issued in response to the 2017 Tax Act.

The Ninth Circuit Court of Appeals is expected to issue a decision in Altera Corp. v.

Commissioner regarding the treatment of stock-based compensation expense in a cost sharing arrangement, which could have a material effect on our tax obligations and effective tax rate for the quarter in which the decision is issued.

Some of our smaller competitors are using third-party chips designed to accelerate performance.

Our current and potential competitors may also offer point solutions, fabric and/or cloud security services that compete with some of the features present in our platform.

They may also establish cooperative relationships among themselves or with third parties that may further enhance their resources.

In addition, our competitors may bundle products and services competitive with ours with other products and services.

Customers may accept these bundled products and services rather than separately purchasing our products and services.

acceptable to us or at all or may be costly.

We have adopted the new revenue recognition standard as of January 1, 2018.

Refer to Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K for additional information on the new standard and its impact on us.

The new revenue standard is principles based and interpretation of those principles may vary from company to company based on their unique circumstances.

decline.

[removed: In] [added: *In] addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.

These statements include, among other things, statements concerning our expectations [removed: regarding:][added: regarding:*]

| [removed: •] [added: *•*] | [removed: continued] [added: *continued] growth and market share [removed: gains;] [added: gains;*] |

| [removed: •] [added: *•*] | [removed: variability] [added: *variability] in sales in certain product categories from year to year and between [removed: quarters;] [added: quarters;*] |

| [removed: •] [added: *•*] | [removed: expected] [added: *expected] impact of sales of certain products and [removed: services;] [added: services;*] |

| • | [removed: the] [added: *the] impact of [removed: macro-economic and] [added: macro-economic,] geopolitical factors [added: and other disruption] on our [removed: sales;] [added: manufacturing or sales, including the impact of the coronavirus and other public health issues and natural disasters;*] |

| • | [removed: the] [added: *the] proportion of our revenue that consists of our product and service revenue, and the mix of billings between products and services, and the duration of service [removed: contracts;] [added: contracts;*] |

| • | [removed: the] [added: *the] impact of our product innovation [removed: strategy;] [added: strategy;*] |

| • | [removed: the] [added: *the] effects of government regulation, tariffs and other related [removed: policies;] [added: policies;*] |

| • | [removed: drivers] [added: *drivers] of long-term growth and operating leverage, such as increased sales productivity, functionality and value in our standalone and bundled subscription service [removed: offerings;] [added: offerings;*] |

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

| • | [removed: trends] [added: *trends] in revenue, cost of revenue and gross [removed: margin;] [added: margin;*] |

| • | [removed: trends] [added: *trends] in our operating expenses, including sales and marketing expense, research and development expense, general and administrative expense, and expectations regarding these [removed: expenses as a percentage of total revenue;] [added: expenses;*] |

| • | [removed: risks] [added: *risks] and expectations related to acquisitions or sales of assets, including integration issues related to product plans and products, including the acquired [removed: technology;] [added: technology;*] |

| [removed: • | continued investments in research] [added: Research] and [removed: development;] [added: development] | [added: 13 | | | 14 | | | 14 | |]

| • | [removed: expectations] [added: *expectations] regarding uncertain tax benefits and our effective domestic and global tax [removed: rates;] [added: rates, and the impact of the Tax Cuts and Jobs Act (the “2017 Tax Act*”) *and the Ninth Circuit’s* *Altera* *decision regarding stock-based compensation in cost sharing arrangements;*] |

| [removed: •] [added: *•*] | [removed: expectations] [added: *expectations] regarding spending related to real estate and other capital expenditures and to the impact on free cash [removed: flows;] [added: flows;*] |

| [removed: •] [added: *•*] | [removed: competition] [added: *competition] in our [removed: markets;] [added: markets;*] |

| • | [removed: our] [added: *our] intentions regarding share repurchases and the sufficiency of our existing cash, cash equivalents and investments to meet our cash needs for at least the next 12 [removed: months;] [added: months;*] |

| [removed: •] [added: *•*] | [removed: other] [added: *other] statements regarding our future operations, financial condition and prospects and business strategies; [removed: and] [added: and*] |

| [removed: •] [added: *•*] | [removed: adoption] [added: *adoption] and impact of new accounting [removed: standards, including those related to accounting for leases.] [added: standards.*] |

[removed: These] [added: *These] forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements.

We undertake no [removed: obligation] [added: obligation, and specifically disclaim any obligation,] to revise or publicly release the results of any revision to these [added: and any other] forward-looking statements.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking [removed: statements.][added: statements.*]

[removed: Business Overview][added: Business Overview]

Fortinet is a global leader in cybersecurity solutions provided to a wide variety of [removed: businesses,] [added: organizations,] such as enterprises, communication service [removed: providers] [added: providers, government organizations] and small businesses.

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

| • | [removed: Cloud Security—We] [added: Cloud Security—We] help customers connect securely to and across their [added: hybrid, public and private] cloud environments by offering security through our virtual firewall and other software products in public and private cloud environments. Our [removed: Cloud Security] [added: cloud security] solutions, including [removed: our Client Access Security Broker Solution, FortiCASB,] [added: virtual appliances and hosted solutions,] extend the core capabilities of the Fortinet Security Fabric platform to provide businesses with the same level of cybersecurity and threat intelligence in [added: and across] cloud environments that they receive on their physical networks. Fortinet cloud security offerings are available across all major cloud providers, including Amazon Web Services, Microsoft Azure, Google Cloud, Oracle [added: Cloud, Alibaba] Cloud and IBM Cloud. [added: Our Cloud Security portfolio also includes securing applications, including email and web.] |

[removed: Financial Highlights][added: Financial Highlights]

| • | [removed: We recorded total] [added: Total] revenue [removed: of $1.80] [added: was $2.16] billion in [removed: 2018,] [added: 2019,] an increase of 20% compared to [removed: $1.49] [added: $1.80] billion in [removed: 2017.] [added: 2018.] Product revenue was [removed: $674.4] [added: $788.5] million in [removed: 2018,] [added: 2019,] an increase of 17% compared to [removed: $577.2] [added: $674.4] million in [removed: 2017.] [added: 2018.] Service revenue was [removed: $1.13] [added: $1.37] billion in [removed: 2018,] [added: 2019,] an increase of [removed: 23%] [added: 21%] compared to [removed: $917.7 million] [added: $1.13 billion] in [removed: 2017.] [added: 2018.] |

| • | We generated operating income of [removed: $231.0] [added: $344.2] million in [removed: 2018,] [added: 2019,] an increase of [removed: 110%] [added: 49%] compared to [removed: $109.8] [added: $231.0] million in [removed: 2017.] [added: 2018.] |

| • | Cash, cash equivalents and investments were [removed: $1.72] [added: $2.21] billion as of December 31, [removed: 2018,] [added: 2019,] an increase of [removed: $367.3] [added: $493.3] million, or [removed: 27%,] [added: 29%,] from December 31, [removed: 2017.] [added: 2018.] |

| • | Deferred revenue was [removed: $1.69] [added: $2.14] billion as of December 31, [removed: 2018,] [added: 2019,] an increase of [removed: $350.5] [added: $449.1] million, or [removed: 26%,] [added: 27%,] from December 31, [removed: 2017.] [added: 2018.] |

| • | We generated cash flows from operating activities of [removed: $638.9] [added: $808.0] million in [removed: 2018,] [added: 2019,] an increase of [removed: $44.5] [added: $169.1] million, or [removed: 7%,] [added: 26%,] compared to [removed: 2017.] [added: 2018.] |

| • | In [removed: 2018,] [added: 2019,] we repurchased [removed: 3.8] [added: 1.9] million shares of common stock under the Repurchase Program for an aggregate purchase price of [removed: $209.1] [added: $140.9] million. In [removed: 2017,] [added: 2018,] we repurchased [removed: 11.2] [added: 3.8] million shares of common stock for a total purchase price of [removed: $446.3] [added: $209.1] million. |

Product revenue grew 17% in [removed: 2018.][added: 2019.]

Service revenue growth of [removed: 23%] [added: 21%] in [removed: 2018] [added: 2019] was driven by the strength of our [removed: FortiCare technical support] [added: FortiGuard] and other [removed: service revenue, which combined grew 26%, and FortiGuard] security subscription revenue, which grew [removed: 20%.][added: 24%.]

[removed: In 2018,] [added: As a result,] operating expenses as a percentage of revenue decreased by [removed: 5] [added: two] percentage points compared to [removed: 2017.][added: 2018.]

Headcount increased by [removed: 15%] [added: 21%] to [removed: 5,845] [added: 7,082] employees and contractors as of December 31, [removed: 2018,] [added: 2019,] up from [removed: 5,066] [added: 5,845] as of December 31, [removed: 2017.][added: 2018.]

[removed: Business Model][added: Business Model]

| • | *our ability to hire properly qualified and effective sales, support and engineering employees;* |

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

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

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

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

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

| • | *statements regarding expected outcomes and liabilities in litigation;* |

| • | Network Security—We derive a majority of product sales from our FortiGate network security appliances. Our FortiGate network security appliances include a broad set of built-in security and networking features and functionalities, including firewall, next-generation firewall, secure web gateway, SSL inspection, SD-WAN, intrusion prevention, SSL data leak prevention, VPN, switch and wireless controller and wide area network edge. Our network security appliances are managed by our FortiOS network operating system, which provides the foundation for FortiGate security functions. We enhance the performance of our network security appliances from branch to data center by designing and implementing SPU technology within our appliances, enabling us to add security and network functionality with minimal impact to network throughput performance. |

| • | Infrastructure Security—The Fortinet Security Fabric platform is a broad, automated and integrated security platform that extends beyond the network to cover other attack vectors. Other infrastructure solutions covered include Secure Access (Wi-Fi and switch). |

| • | Endpoint Protection, Internet of Things and Operational Technology Security—We protect end-customers from advanced threats that target their devices and the data that reside on them through our advanced endpoint solutions that provide core endpoint protection, advanced threat protection, incident monitoring, and response. Additionally, the proliferation of IoT and the digitization of OT devices has generated new opportunities for us to grow our business. We offer network access control solutions that provide visibility, control and automated event responses in order to secure IoT devices. |

We also develop and provide AI\-driven security operations solutions, including FortiGuard security services that can be applied across the entire Fortinet Security Fabric platform.

These solutions help customers better secure their environments by delivering deeper intelligence and insights and by narrowing the gaps in security skills and resources that are present in many organizations.

In addition to our security solutions, our customers, channel partners and end-customers may purchase FortiGuard and other security subscription services to receive threat intelligence updates, FortiCare technical support services across all of our products and the support of Technical Account Managers, Resident Engineers and professional service consultants for implementations or training services.

We experienced revenue growth across several of our hardware and software products, including FortiGate enabled with SD-WAN features.

During the second quarter of 2019, we reclassified the 100 series of our FortiGate product from an entry-level product to a mid-range product.

Prior periods have been reclassified to conform with current period presentation.

Including this reclassification, we saw a mix shift from high-end to mid-range products in 2019.

During the fourth quarter of 2019, we acquired enSilo Limited (“enSilo”) and CyberSponse Inc. (“CyberSponse”) to further strengthen our Fortinet Security Fabric platform by providing real-time automated endpoint detection and response capability (enSilo) and security orchestration, automation and response products and services (CyberSponse).

The impact of these acquisitions, individually and in the aggregate, were not material to our consolidated financial statements.

In 2019, our revenue growth outpaced our growth in operating expenses.

The acquisition of enSilo and CyberSponse increased headcount by 135 employees.

Excluding these two acquisitions, headcount would have increased 19% year over year.

The impact of the coronavirus outbreak on our business remains uncertain, and, though the majority of our products are manufactured outside of China, certain components for our products and certain of our products are manufactured in China and Taiwan and we have international shipping and logistics centers in Taiwan.

While any significant impact is uncertain at this point, if the coronavirus outbreak continues to spread, the business disruption caused thereby could have a material negative impact on our billings, revenue, gross margin, operating margin, cash flows and other financial results for the first quarter of 2020 and certain periods thereafter.

We primarily sell our products and services through a two-tier distribution model.

In certain cases, we sell directly to large service providers and major systems integrators.

We also offer our products across major cloud providers, and have recognized on-demand revenue from Amazon Web Services, Microsoft Azure, IBM Cloud, Google Cloud and Oracle Cloud.

We consider billings to be a useful metric for management and investors because billings

Product gross margin benefited from gains in average selling price, as well as lower direct and indirect product costs as a percentage of product revenue.

It also benefited from deal mix, software revenue growth and a stable product transition environment.

| • | *Sales and marketing*. Sales and marketing expense is the largest component of our operating expenses and primarily consists of personnel costs. Additional sales and marketing expenses include product marketing, public relations, field marketing and channel marketing programs (e.g. partner cooperative marketing arrangements), as well as travel, depreciation of property and equipment and facility-related expenses. We |

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| --- | --- |

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| --- | --- |

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| --- | --- |

claims develop.

For 2019, we were not subject to GILTI.

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

| • | managing our continued investments in sales and marketing, and the impact of those investments; |

| • | Network Security—We derive a majority of product sales from our FortiGate network security appliances. Our FortiGate network security appliances include a broad set of built-in security and networking features and functionalities, including firewall, SD-WAN, SSL data leak prevention, VPN, switch and wireless controller and WAN acceleration. Our network security appliances include our FortiOS operating system, which provides the foundation for FortiGate security functions, and FortiASIC integrated circuit, which is designed to accelerate the processing of security and networking functions. Our customers may also purchase FortiGuard subscription services to receive threat intelligence updates. We provide standard technical support across all of our products through our FortiCare support services. We also offer services to end-customers including TAMs, REs and professional service consultants for implementations, as well as training services to our end-customers and channel partners. |

| • | Fortinet Security Fabric—The Fortinet Security Fabric platform is an architectural approach that protects the entire digital attack surface, including network core, endpoints, applications, data centers and private and public cloud. Together with our network of Fabric-Ready Partners, the Fortinet Security Fabric platform enables disparate security devices to work together as an integrated, automated and collaborative solution. |

| • | Internet of Things and Operational Technology—The proliferation of IoT and OT devices has generated new opportunities for us to grow our business. IoT and OT have created an environment where data move freely between devices across locations, network environments, remote offices, mobile workers and public cloud environments, making the data difficult to consistently track and secure. |

FortiGate unit shipments increased year-over-year.

Sales of non-FortiGate products, such as the Fortinet Security Fabric and cloud products and services, also grew significantly.

The percentage of our FortiGate-related billings from entry-level products increased from 31% in 2017 to 33% in 2018, the percentage of our FortiGate-related billings from mid-range products increased from 30% in 2017 to 32% in 2018 and the percentage of our FortiGate-related billings from high-end products decreased from 39% in 2017 to 35% in 2018.

We continue to see our enterprise customers purchasing a fairly balanced mix of products across these product groups.

The decrease in operating expenses was primarily driven by a decrease of 4 percentage points in sales and marketing expenses as a percentage of revenue, benefiting from the adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”) for deferred contract costs, which reduced our commissions expense in absolute dollars and as a percentage of total revenue.

In addition, general and administrative expenses as a percentage of revenue decreased by 1 percentage point while research and development expenses as a percentage of revenue remained consistent.

Our sales and marketing expenses included a benefit of $45.5 million in 2018 from the adoption of Topic 606 related to deferred contract costs.

Under Topic 606, we capitalized certain commissions on service contracts and amortize the amount over a certain period.

Prior to the adoption of Topic 606, we expensed the commissions related to these service contracts upfront.

Excluding this benefit, sales and marketing expense as a percentage of revenue would have been 46% in 2018 compared to 47% in 2017.

Refer to Note 1 to our consolidated financial statements for more information.

Our sales strategy is based on a two-tier distribution model.

While the revenue from such sales is still relatively insignificant, it has increased significantly in recent periods on a percentage basis.

Our SPU hardware architecture is an important part of our approach to network security.

The SPU includes three lines of proprietary ASICs: SPU CP, SPU NP and SPU SOC.

The ASICs are designed for highly efficient execution of computationally intensive tasks, including policy enforcement, threat detection and encryption.

As such, ASIC-based solutions can run many security applications simultaneously without a significant reduction in performance.

efficiencies.

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

Deferred revenue.

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| Total billings (non-GAAP) | $ | 2,153.3 | | | $ | 1,795.9 | | | $ | 1,515.1 | |

Management accounts for this limitation by providing information about our capital

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| Free cash flow (non-GAAP) | $ | 585.9 | | | $ | 459.1 | | | $ | 278.5 | |

Revenue.

Gross margin.

Product gross margin was negatively impacted by new product introductions.

As a result, the service margin expansion was partially offset by a decline in product gross margin in 2018.

Operating expenses.

[removed: Interest] [added: Interest] Rate Fluctuation [removed: Risk][added: Risk]

[removed: The risk] associated with fluctuating interest rates is limited to our investment portfolio.

A 10% decrease in interest rates in [removed: 2018, 2017] [added: 2019, 2018] and [removed: 2016] [added: 2017] would have resulted in an insignificant decrease in our interest income in each of these periods.

[removed: Foreign] [added: Foreign] Currency Exchange [removed: Risk][added: Risk]

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 Canadian dollar (“CAD”), the [added: Brazilian real (“BRL”), the] Euro (“EUR”) and the British pound (“GBP”).

We recognized an expense of [removed: $9.3] [added: $4.7] million in [removed: 2018] [added: 2019] due to foreign currency transaction [removed: and hedging] losses.

Long-term material changes in the value of the U.S. dollar against other foreign currencies, such as the [removed: EUR] [added: EUR, BRL] and GBP, could adversely impact our operating expenses in the future.

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 [removed: $6.2] [added: $5.6] million change in the value of our foreign currency cash balances as of December 31, [removed: 2018.][added: 2019.]

[removed: Inflation Risk][added: Inflation Risk]

| [removed: ITEM 8.] [added: ITEM 8.] | [removed: Financial] [added: Financial] Statements and Supplementary [removed: Data] [added: Data] |

[removed: INDEX] [added: INDEX] TO CONSOLIDATED FINANCIAL [removed: STATEMENTS][added: STATEMENTS]

[removed: For] [added: For] the years ended December 31, [added: 2019,] 2018, [removed: 2017,] and [removed: 2016][added: 2017]

| | [removed: Page] [added: Page] |

[removed: | [Report of Independent Registered Public Accounting Firm](#sED828B28DD71CD9FCD2557B38844E58A) | [67](#sED828B28DD71CD9FCD2557B38844E58A) |][added: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM]

[removed: | [Consolidated Balance Sheets](#s2C1A53B2CD6A3D9689DD57B32EB6043C) | [68](#s2C1A53B2CD6A3D9689DD57B32EB6043C) |][added: CONSOLIDATED BALANCE SHEETS]

[removed: | [Consolidated Statements of Income](#sEB4382CCBD03E862665557B3313FC36A) | [69](#sEB4382CCBD03E862665557B3313FC36A) |][added: CONSOLIDATED STATEMENTS OF INCOME]

[removed: | [Consolidated Statements of Comprehensive Income](#s14D882FBCE6C01AF5C1957B331217151) | [70](#s14D882FBCE6C01AF5C1957B331217151) |][added: CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME]

[removed: | [Consolidated Statements of Stockholders’ Equity](#s84B8BFA3F65E4756FE8C57B32ED4C947) | [71](#s84B8BFA3F65E4756FE8C57B32ED4C947) |][added: CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY]

[removed: | [Consolidated Statements of Cash Flows](#s43BA1F5C40E0D231444A57B3315D52B3) | [72](#s43BA1F5C40E0D231444A57B3315D52B3) |][added: CONSOLIDATED STATEMENTS OF CASH FLOWS]

[removed: | [Notes to Consolidated Financial Statements](#s26B0081581CF3C68F0C957B3893E71B9) | [73](#s26B0081581CF3C68F0C957B3893E71B9) |][added: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS]

[removed: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM][added: | [Report of Independent Registered Public Accounting Firm](#s004122A02E62751662DB670F66CEF8F6) | [63](#s004122A02E62751662DB670F66CEF8F6) |]

[removed: Opinion] [added: Opinion] on the Financial [removed: Statements][added: Statements]

We have audited the accompanying consolidated balance sheets of Fortinet, Inc. and subsidiaries (the “Company”) as of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash [removed: flows] [added: flows,] for each of the three years in the period ended December 31, [removed: 2018,] [added: 2019,] and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] and the results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2018,] [added: 2019,] in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, [removed: 2018,] [added: 2019,] based on criteria established in [removed: Internal Control — Integrated] [added: *Internal Control–Integrated] Framework [removed: (2013)] [added: (2013)*] issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February [removed: 26, 2019,] [added: 25, 2020,] expressed an unqualified opinion on the [removed: Company's] [added: Company’s] internal control over financial reporting.

[removed: Change] [added: Change] in Accounting [removed: Principle][added: Principle]

[removed: Basis] [added: Basis] for [removed: Opinion][added: Opinion]

[removed: /s/] [added: */s/] DELOITTE & TOUCHE [removed: LLP][added: LLP*]

[removed: FORTINET, INC.][added: FORTINET, INC.]

[removed: CONSOLIDATED BALANCE SHEETS][added: | [Consolidated Balance Sheets](#s90445431C9E9DCA2C07B670F1C5B7E6F) | [65](#s90445431C9E9DCA2C07B670F1C5B7E6F) |]

[removed: (in] [added: (in] millions, except per share [removed: amounts)][added: amounts)]

| | [removed: December] [added: December] 31, [removed: 2018] [added: 2019] | | | | [removed: December] [added: December] 31, [removed: 2017] [added: 2018] | | | [added: December 31, 2017 (1) | | |]

| [removed: ASSETS] [added: ASSETS] | | | | | | | |

| Cash and cash equivalents | $ | [removed: 1,112.4] [added: 1,222.5] | | | $ | [removed: 811.0] [added: 1,112.4] | |

| Short-term investments | [removed: 537.2] [added: 843.1] | | | | [removed: 440.3] [added: 537.2] | | |

| Accounts receivable—Net of reserves for doubtful accounts of [removed: $0.9] [added: $1.2] million [removed: at December 31, 2018] and [removed: net of reserves for sales returns and doubtful accounts of $14.5] [added: $0.9] million at December 31, [removed: 2017] [added: 2019 and 2018, respectively] | [removed: 444.5] [added: 544.3] | | | | [removed: 348.2] [added: 444.5] | | |

| Inventory | [removed: 90.0] [added: 117.9] | | | | [removed: 77.3] [added: 90.0] | | |

| Prepaid expenses and other current assets | [removed: 36.8] [added: 41.2] | | | | [removed: 40.0] [added: 36.8] | | |

| Total current assets | [removed: 2,220.9] [added: 2,769.0] | | | | [removed: 1,716.8] [added: 2,220.9] | | |

| LONG-TERM INVESTMENTS | [removed: 67.0] [added: 144.3] | | | | [removed: 98.0] [added: 67.0] | | |

The risk

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Litigation Contingencies–Refer to Note 11 to the financial statements

*Critical Audit Matter Description*

The Company is involved in disputes, litigation and other legal actions in the normal course of business.

Claims from third parties may result in a requirement to pay substantial damages and could prevent the Company from selling certain of their products.

An estimated loss from a loss contingency is accrued by a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Where a range of loss can be reasonably estimated with no best estimate in the range, management records the minimum estimated liability.

The determination of litigation contingency accruals is subject to significant management judgement in assessing the likelihood of a loss being incurred and when determining whether a reasonable estimate of the loss or range of loss can be made.

Given the inherent uncertainty of the outcome of identified current matters, auditing the valuation assertion of litigation contingencies required a high degree of auditor judgment and an increased extent of effort when performing audit procedures.

*How the Critical Audit Matter Was Addressed in the Audit*

Our audit procedures related to the litigation contingencies included the following, among others:

| • | We tested the effectiveness of controls over management’s litigation contingency accrual analysis and assessment of matters with potential impact. |

| • | We obtained and evaluated legal letters from internal and external legal counsel, and we discussed with internal legal counsel the pending litigation matters. |

| • | We made inquiries with management to obtain an understanding of litigation matters that the Company is currently undergoing. |

| • | We read available court filings for litigation matters to search for contradictory information. |

| • | We read Board of Directors meeting minutes to search for contradictory information. |

| --- | --- |

| • | We evaluated the assumptions used by the Company to estimate the litigation contingency, including corroborating the assumptions with internal legal counsel. |

| | |

| --- | --- |

| • | We evaluated the Company’s litigation contingencies disclosure for consistency with our knowledge of the Company’s litigation matters. |

February 25, 2020

| BALANCE—December 31, 2019 | 171.7 | | | $ | 0.2 | | | $ | 1,180.3 | | | $ | 1.1 | | | $ | 140.3 | | | $ | 1,321.9 | |

| Other | 5.7 | | | | (0.9 | | ) | | 3.8 | | |

| Other | (0.3 | | ) | | — | | | | — | | |

| Operating lease liabilities arising from obtaining right-of-use assets | $ | 20.4 | | | $ | — | | | $ | — | |

| Finance lease liabilities arising from obtaining right-of-use assets | $ | 3.6 | | | $ | — | | | $ | — | |

| Cash paid to settle liability incurred for repurchase of common stock | $ | 4.2 | | | $ | — | | | $ | — | |

| Liability incurred in connection with business combination | $ | 3.0 | | | $ | — | | | $ | — | |

| | |

| --- | --- |

As of December 31, 2019, Ingram Micro Inc. (“Ingram Micro”) accounted for 10% of total net accounts receivable.

During 2019, Exclusive and Ingram Micro accounted for 31% and 11% of total revenue, respectively.

We rely on a small number of manufacturing partners, primarily in Taiwan but also in China and the United States, to manufacture our products, and some of the components of our products are available from limited or sole sources of supply.

Each of our proprietary Application-Specific Integrated Circuits is built by a sole contract manufacturer.

An investment is impaired if the fair value of the investment is less than its cost.

If the fair value of an investment is less than its amortized cost basis at the balance sheet date and if we do not intend to sell the investment, we consider available evidence to assess whether it more likely than not that we will be required to sell the investment before the recovery of its amortized cost basis.

February 26, 2019

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| | | | | | | | | | | | |

| GROSS PROFIT: | | | | | | | | | | | |

| OPERATING EXPENSES: | | | | | | | | | | | |

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| BALANCE—December 31, 2015 | 171.4 | | | $ | 0.2 | | | $ | 687.6 | | | $ | (0.9 | ) | | $ | 68.5 | | | $ | 755.4 | |

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | |

| Other non-cash items—net | (0.9 | | ) | | 3.8 | | | | 2.6 | | |

| Net cash provided by operating activities | 638.9 | | | | 594.4 | | | | 345.7 | | |

In July 2017, Exclusive Networks Group (“Exclusive”), which distributes our solutions to a large group of resellers and end-customers, acquired the U.S. division of Fine Tec Computers (“Fine Tec U.S.”).

Fine Tec U.S.’s revenue and accounts receivable have been combined with Exclusive’s from the date of acquisition.

Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary.

We consult with our investment managers and consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis.

Some of our lease agreements contain rent holidays, scheduled rent increases, lease incentives and renewal options.

We derive a majority of product sales from our FortiGate products.

We recognize revenue from term licenses upon electronic transfer of the license key to a customer.

Under Topic 605, the sales return reserve of $13.6 million was presented as a reduction to accounts receivable as of December 31, 2017.

interest.

In January 2016, the FASB issued ASU 2016-01—Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, with further clarifications made recently with the issuance of ASU 2018-03—Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires most equity investments to be measured at fair value, with subsequent changes in fair value recognized in net income.

A practicality exception applies to those equity investments that do not have a readily determinable fair value.

ASU 2016-01 was effective prospectively for us beginning on January 1, 2018 for our equity investments, which were previously accounted for under the cost-method.

Revenue Recognition

In May 2014, the FASB issued Topic 606, which supersedes the revenue recognition requirements in Topic 605 and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method.

The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

We recorded a net reduction to our accumulated deficit as of January 1, 2018 of $117.3 million due to the cumulative impact of adopting Topic 606.

The primary impact of adopting Topic 606 relates to the deferral of our incremental contract costs, which are comprised of sales commissions.

Prior to January 1, 2018, we expensed all sales commissions upfront.

Beginning on January 1, 2018, we continue to expense sales commissions related to product sales upfront, but capitalize and then amortize certain sales commissions on service contracts over the applicable amortization period.

The deferred contract costs for capitalized sales commissions related to the initial service contracts are deferred and then amortized as expense on a straight-line basis over the period of benefit which we have determined to be five years.

Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the contractual period of the underlying contracts.

The deferral of contract costs generated a deferred tax liability of $23.8 million, of which $18.0 million was recorded against deferred tax assets and the remaining $5.8 million was recorded in other long-term liabilities on our consolidated balance sheet.

The impact on deferred revenue as of January 1, 2018 was $4.1 million, which primarily relates to certain changes in revenue

[removed: Overview][added: Overview]

Fortinet is a global leader in cybersecurity solutions provided to a wide variety of [removed: businesses,] [added: organizations,] such as enterprises, communication service [removed: providers] [added: providers, government organizations] and small businesses.

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

| [removed: •] [added: •] | [removed: Network Security—We] [added: Network Security—We] derive a majority of product sales from our FortiGate network security appliances. Our FortiGate network security appliances include a broad set of built-in security and networking features and functionalities, including firewall, [removed: software-defined wide-area network (“SD-WAN”),] [added: next-generation firewall,] secure [added: web gateway, secure] sockets layer (“SSL”) [added: inspection, software-defined wide-area network (“SD-WAN”), intrusion prevention, SSL] data leak prevention, virtual private network (“VPN”), switch and wireless controller and wide area network [removed: (“WAN”) acceleration.] [added: edge.] Our network security appliances [removed: include] [added: are managed by] our FortiOS [added: network] operating system, which provides the foundation for FortiGate security [removed: functions, and FortiASIC integrated circuit, which is designed to accelerate the processing of security and networking] functions. [removed: Our customers may also purchase FortiGuard subscription services to receive threat intelligence updates.] We [removed: provide standard technical support across all] [added: enhance the performance] of our [removed: products through our FortiCare support services. We also offer services] [added: network security appliances from branch] to [removed: end-customers including Technical Account Managers (“TAMs”), Resident Engineers (“REs”)] [added: data center by designing] and [removed: professional service consultants for implementations, as well as training services to] [added: implementing Security Processing Unit (“SPU”) technology within] our [removed: end-customers] [added: appliances, enabling us to add security] and [removed: channel partners.] [added: network functionality with minimal impact to network throughput performance.] |

| • | [removed: Cloud Security—We] [added: Cloud Security—We] help customers connect securely to and across their [added: hybrid, public and private] cloud environments by offering security through our virtual firewall and other software products in public and private cloud environments. Our [removed: Cloud Security] [added: cloud security] solutions, including [removed: our Client Access Security Broker Solution, FortiCASB,] [added: virtual appliances and hosted solutions,] extend the core capabilities of the Fortinet Security Fabric platform to provide businesses with the same level of cybersecurity and threat intelligence in [added: and across] cloud environments that they receive on their physical networks. Fortinet cloud security offerings are available across all major cloud providers, including Amazon Web Services, Microsoft Azure, Google Cloud, Oracle [added: Cloud, Alibaba] Cloud and IBM Cloud. [added: Our Cloud Security portfolio also includes securing applications, including email and web.] |

During our year ended December 31, [removed: 2018,] [added: 2019,] we generated total revenue of [removed: $1.80] [added: $2.16] billion and net income of [removed: $332.2] [added: $326.5] million.

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, [removed: 2018] [added: 2019] and [removed: 2017] [added: 2018] and our consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years ended December 31, [removed: 2018, 2017] [added: 2019, 2018] and [removed: 2016.][added: 2017.]

[removed: Technology] [added: Technology] and [removed: Architecture][added: Architecture]

Our proprietary [removed: Security Processing Unit (“SPU”)] [added: SPU] hardware architecture, FortiOS operating system and associated security and networking functions are combined to form the Fortinet Security Fabric platform.

[removed: SPU][added: *SPU*]

Our proprietary SPUs are Application-Specific Integrated Circuits (“ASICs”) that [removed: are divided into three main types:] [added: include] (i) the Content Processor (“SPU CP”), (ii) the Network Processor (“SPU NP”) and (iii) the System-on-a-Chip (“SPU [removed: SOC”).][added: SoC”).]

Our SPUs are designed to enhance the security processing capabilities implemented in software by accelerating computationally intensive tasks such as firewall policy enforcement, [added: SD-WAN,] network address translation, Intrusion Prevention Systems (“IPS”) threat detection and encryption.

Entry-level FortiGate products often use the SPU [removed: SOC2 or SPU SOC3] [added: SoC] to provide the necessary acceleration at this level.

[removed: FortiOS][added: *FortiOS*]

| • | key enablement for the Fortinet Security Fabric [added: platform] architecture; |

| • | [removed: option for] [added: optionality to configure] FortiGate appliances [removed: to be configured] into different security environments, such as our Internal Network Firewall, Next-Generation Firewall and Data Center Firewall; |

| • | implementation of security updates from our FortiGuard distribution network, delivering [removed: Advanced Threat Protection (“ATP”),] [added: FortiGuard security subscription services and intelligence,] such as IPS, antivirus and application control; |

FortiOS is designed to help control network traffic in order to optimize performance by including functionality such as packet classification, queue disciplines, policy enforcement, congestion management, [removed: WAN] [added: wide-area network (“WAN”)] optimization and caching.

We make [added: regular] updates to FortiOS available through our FortiCare support services.

[removed: Products][added: Products]

These security services are enabled by [removed: FortiGuard,] [added: FortiGuard Labs,] which provides extensive threat research and artificial intelligence capabilities from a global cloud network to deliver protection services to each FortiGate [removed: appliance.][added: appliance that is registered by the end-customer.]

Our non-FortiGate products [added: span the full range of our customers’ core security needs and] include the Fortinet Security Fabric [removed: (such as FortiAP, FortiAnalyzer, FortiSwitch and FortiManager), certain cloud security products (such as virtual machines and] [added: platform, email security,] cloud [removed: services)] [added: security, endpoint protection] and other products.

[removed: FortiGate][added: *FortiGate*]

With over [removed: 30] [added: 40] models in the FortiGate product line, FortiGate is designed to address security requirements for small- to medium-sized businesses, large enterprises and government organizations worldwide.

The FortiGate-20 through [removed: -100] [added: -90] series models are designed for perimeter protection for small- to medium-sized businesses and enterprises with distributed offices.

The [removed: FortiGate-200] [added: FortiGate-100] through -900 series models are designed for perimeter deployment in medium-sized to large enterprise networks.

We also incorporate additional technologies within FortiGate appliances that differentiate our solutions, including data [removed: leakage] [added: leak] protection, traffic optimization, [removed: secure socket layer] [added: SSL] inspection, threat vulnerability management and wireless controller technology.

The following [added: Fortinet] products [removed: are key elements] [added: can operate as part] of the Fortinet Security Fabric [removed: platform:][added: platform.]

| [removed: •] [added: •] | [removed: FortiAP—Our] [added: FortiAP—Our] FortiAP product family provides secure wireless networking solutions. FortiAPs allow a variety of management options including from the cloud and directly from our FortiGate [removed: Next Generation Firewall] [added: firewall] product. FortiAPs create a scalable and secure access layer for connecting wireless devices such as computers, laptops, cell phones and tablets, as well as IoT devices. |

| [removed: •] [added: •] | [removed: FortiSwitch—Our] [added: FortiSwitch—Our] FortiSwitch product family provides secure switching solutions that can be deployed in traditional network switching designs with Layer 2 or Layer 3 access control features. FortiSwitch creates a scalable and secure access layer for customers to connect their end devices, such as computers and laptops, as well as to expand the field of IoT devices. |

| • | [removed: FortiAnalyzer—Our] [added: FortiAnalyzer—Our] FortiAnalyzer family of products provides centralized network logging, analyzing and reporting solutions that securely aggregate content and log data from our FortiGate devices, other Fortinet products and third-party devices to enable network logging, analysis and reporting. |

| • | [removed: FortiManager—Our] [added: FortiManager—Our] FortiManager family of products provides a central and scalable management solution for our FortiGate products, including software updates, configuration, policy settings and security updates. FortiManager facilitates the coordination of policy-based provisioning, device configuration and operating system revision management, as well as network security monitoring and device control. |

| • | [removed: FortiSandbox—Our] [added: FortiSandbox—Our] FortiSandbox technology delivers proactive detection and mitigation with the ability to generate a directly actionable protection capability. Available in both hardware and cloud-based form, the FortiSandbox subjects suspicious code to a set of multi-layer protection techniques, culminating in execution within an operating system, allowing real-time behavioral analysis to be performed in a secure environment. When malicious code is identified, a signature can be generated locally for distribution across the Fortinet Security [removed: Fabric.] [added: Fabric platform.] |

| • | [removed: FortiSIEM—Our] [added: FortiSIEM—Our] FortiSIEM family of software solutions provides a cloud-ready security information and event management (“SIEM”) solution. FortiSIEM unifies analytics that are traditionally monitored discretely, parses the information and then processes it in an event-based analytics engine for handling real-time searches, rules, dashboards and ad-hoc queries. This unification of diverse sources of data enables organizations to create comprehensive dashboards and reports to identify root causes of threats, and take the steps necessary to remediate and prevent them in the future. |

[removed: Services][added: Services]

[removed: FortiGuard] [added: *FortiGuard] Security Subscription [removed: Services][added: Services*]

Our FortiGuard security subscription services are designed to [removed: allow us to] quickly deliver new threat detection and prevention capabilities to end-customers worldwide as new threats evolve.

Our FortiGuard Labs global threat research team identifies emerging threats, collects threat samples, and replicates, reviews, characterizes and collates attack [removed: data.][added: data through the use of AI, automation and original research.]

FortiGuard functionality varies depending on which FortiGate and non-FortiGate products the end-customer is using, but will typically include one or more of the following functions: application control, antivirus, intrusion prevention, web filtering, anti-spam, VPN functions, email image analysis, vulnerability management, database functions, web functions, advanced threat [removed: protection] [added: protection, sandboxing] and domain and IP reputation services.

End-customers purchase FortiGuard security subscription services in advance, typically with terms of one [removed: or more] [added: to five] years.

| • | Infrastructure Security—The Fortinet Security Fabric platform is a broad, automated and integrated security platform that extends beyond the network to cover other attack vectors. Other infrastructure solutions covered include Secure Access (Wi-Fi and switch). |

| • | Endpoint Protection, Internet of Things and Operational Technology Security—We protect end-customers from advanced threats that target their devices and the data that reside on them through our advanced endpoint solutions that provide core endpoint protection, advanced threat protection, incident monitoring, and response. Additionally, the proliferation of Internet of Things (“IoT”) and the digitization of Operational Technology (“OT”) devices has generated new opportunities for us to grow our business. We offer network access control solutions that provide visibility, control and automated event responses in order to secure IoT devices. |

We also develop and provide Artificial Intelligence (“AI”)-driven security operations solutions, including FortiGuard security services, that can be applied across the entire Fortinet Security Fabric platform.

These solutions help customers better secure their environments by delivering deeper intelligence and insights and by reducing the gaps in security skills and resources that are present in many organizations.

In addition to our security solutions, our customers, channel partners and end-customers may purchase FortiGuard and other security subscription services to receive threat intelligence updates, FortiCare technical support services across all of our products and the support of Technical Account Managers, Resident Engineers and professional service consultants for implementations or training services.

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

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

Each successive generation of SPU adds network speed and the capacity to perform security functions.

The use of SPUs allows our appliances to deliver security functionality with minimal impact to network throughput performance, which we believe delivers a lower total cost of ownership (“TCO”) to our customers.

As the security needs of our end-customers increase, we believe that our TCO and our SPUs will give our products a competitive advantage against other architectural approaches.

| • | the ability to deploy and orchestrate SD-WAN instances; |

| • | native integrations with major cloud provider platforms; and |

*Fortinet Security Fabric Platform and Non-FortiGate Products*

| • | FortiExtender—Our FortiExtender appliance provides a WAN connection to our FortiGate products using wireless broadband networks. End-customers that use multiple WAN connections, including SD-WAN, can use FortiExtender for one of those WAN links. FortiExtender can also be used as the primary connection for a location where wireless is the preferred broadband option. |

| • | FortiWeb—Our FortiWeb product family provides web application firewall solutions, including internet protocol (“IP”) reputation and anti-botnet security, distributed denial-of-service protection, protocol validation, application attack signatures and deep learning AI to protect applications against a wide range of threats. |

| • | FortiMail—Our FortiMail product family provides secure email gateway solutions. FortiMail utilizes the technologies and security services from FortiGuard Labs to deliver protection against threats that use email as an attack vector. FortiMail also integrates data protection capabilities to avoid data loss. |

| • | FortiToken and FortiAuthenticator—Our FortiToken and FortiAuthenticator product families allow organizations to implement multi-factor authentication to better safeguard systems, assets and data. |

| • | FortiNAC—Our FortiNAC product family enables customers to implement zero trust network access strategies by gaining visibility into devices connecting into the network, including IoT devices, in order to meet minimum required security postures and to control access. |

All of the products listed above are available in multiple form factors, such as hardware, virtual machine, cloud or software-as-a-service (“SaaS”), except for FortiSwitch, FortiAP and FortiExtender, which are available as hardware appliances only.

In the fourth quarter of 2019, we acquired enSilo Limited (“enSilo”), a provider of endpoint detection and response products and services, and CyberSponse, Inc. (“CyberSponse”), a provider of security orchestration, automation and response products and services.

We expect that the enSilo acquisition will further enhance the Fortinet Security Fabric platform and strengthen endpoint and network security solutions by providing customers with advanced endpoint security.

We expect that the CyberSponse acquisition will further extend the automation and incident response capabilities of our FortiAnalyzer, FortiSIEM and FortiGate solutions.

| | |

| --- | --- |

| | |

| --- | --- |

| | |

| --- | --- |

| | |

| --- | --- |

| • | 360 Protection—Our 360 Protection bundle includes application control, intrusion prevention, web filtering, sandbox, antivirus, mobile security, IP reputation and anti-botnet security, antispam, CASB, industrial control systems, security rating, virus outbreak protection and data sanitation, along with enhanced FortiCare support services and operational services such as SD-WAN orchestration and cloud-based management and visibility of the Fortinet Security Fabric platform. |

Our professional services consultants and security architects help to formulate customer-specific security strategies, develop roadmaps for securing digital initiatives and design product deployments.

During 2019, Exclusive Networks Group (“Exclusive”) and Ingram Micro Inc. (“Ingram Micro”) accounted for 31% and 11% of total revenue, respectively.

In certain cases, we sell directly to large service providers and major systems integrators.

The majority of our hardware is manufactured in Taiwan.

We periodically have discussions with third parties regarding licensing Fortinet’s intellectual property and have sometimes taken legal action against competitors to protect our intellectual property, and as a result third parties have paid us fees in return for licenses or covenants-not-to-sue related to Fortinet intellectual property.

| • | Fortinet Security Fabric—The Fortinet Security Fabric platform is an architectural approach that protects the entire digital attack surface, including network core, endpoints, applications, data centers and private and public cloud. Together with our network of Fabric-Ready Partners, the Fortinet Security Fabric platform enables disparate security devices to work together as an integrated, automated and collaborative solution. |

| • | Internet of Things and Operational Technology—The proliferation of Internet of Things (“IoT”) and Operational Technology (“OT”) devices has generated new opportunities for us to grow our business. IoT and OT have created an environment where data move freely between devices across locations, network environments, remote offices, mobile workers and public cloud environments, making the data difficult to consistently track and secure. |

This architecture provides the ability to implement accelerated processing of new threat detection.

| • | access to cloud-based web and email filtering databases; |

| • | direct integration with both cloud and on-premises FortiSandbox technology; |

| • | security policy objects and enforcement; |

| • | data leak prevention and document finger printing; and |

Fortinet Security Fabric

For information regarding our geographic revenue based on the billing address of our distributors and direct customers, see Note 14 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

The majority of our hardware is manufactured in Taiwan, with some products manufactured in the United States or China.

As previously disclosed, in October 2016, we received a letter from the United States Attorney's Office for the Northern District of California requesting information on events from over two years ago related to our compliance with the Trade Agreements Act.

We have been fully cooperating with this ongoing inquiry and have periodically met and spoken with the United States Attorney’s Office in connection with this matter.

We are currently in settlement discussions with the United States Attorney’s Office.

[removed: UNITED STATES][added: UNITED STATES]

[removed: SECURITIES] [added: SECURITIES] AND EXCHANGE [removed: COMMISSION][added: COMMISSION]

[removed: Washington,] [added: Washington,] D.C. [removed: 20549][added: 20549]

[removed: FORM 10-K][added: FORM 10-K]

| [removed: x] [added: ☒] | [removed: ANNUAL] [added: ANNUAL] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: For] [added: For] the fiscal year [removed: ended December] [added: ended December] 31, [removed: 2018][added: 2019]

| [removed: o] [added: ☐] | [removed: TRANSITION] [added: TRANSITION] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: For] [added: For] the transition period [removed: from to][added: from to]

[removed: Commission] [added: Commission] file [removed: number: 001-34511][added: number: 001-34511]

[removed: FORTINET, INC.][added: FORTINET, INC.]

[removed: (Exact] [added: (Exact] name of registrant as specified in its [removed: charter)][added: charter)]

| [removed: Delaware] [added: Delaware] | [removed: 77-0560389] [added: 77-0560389] |

| [removed: (State] [added: (State] or other jurisdiction [removed: of incorporation] [added: of incorporation] or [removed: organization)] [added: organization)] | [removed: (I.R.S. Employer Identification No.)] [added: (I.R.S. Employer Identification No.)] |

[removed: | 899] [added: 899] Kifer [removed: Road Sunnyvale, California | 94086 |][added: Road]

[removed: | (Address] [added: (Address] of principal executive [removed: offices) | (Zip Code) |][added: offices, including zip code)]

[removed: (408) 235-7700][added: (408) 235-7700]

[removed: (Registrant’s] [added: (Registrant’s] telephone number, including area [removed: code)][added: code)]

[removed: Securities] [added: Securities] registered pursuant to Section 12(b) of the [removed: Act:][added: Act:]

| [removed: Common] [added: Common] Stock, $0.001 Par [removed: Value] [added: Value] | [added: FTNT] | [removed: The] [added: The] Nasdaq Stock Market [removed: LLC] [added: LLC] |

| [removed: (Title] [added: (Title] of each [removed: class)] [added: class)] | [added: (Trading Symbol)] | [removed: (Name] [added: (Name] of exchange on which [removed: registered)] [added: registered)] |

[removed: Securities] [added: Securities] registered pursuant to Section 12(g) of the Act: [removed: None][added: None]

Yes [removed: x] [added: ☒] No [removed: o][added: ☐]

Yes [removed: o] [added: ☐] No [removed: x][added: ☒]

Yes [removed: x] [added: ☒] No [removed: o][added: ☐]

Yes [removed: x] [added: ☒] No [removed: o][added: ☐]

| Large accelerated filer | [removed: x] [added: ☒] | | | Accelerated filer | [removed: o] [added: ☐] |

| Non-accelerated filer | [removed: o] [added: ☐] | | | Smaller reporting company | [removed: o] [added: ☐] |

| | Emerging growth company | [removed: o] [added: ☐] | | | |

Yes [removed: o] [added: ☐] No [removed: x][added: ☒]

The aggregate market value of voting stock held by non-affiliates of the registrant, as of June [removed: 29, 2018,] [added: 28, 2019,] the last business day of the registrant’s most recently completed second quarter, was [removed: $7,073,006,351] [added: $8,793,866,992] (based on the closing price for shares of the registrant’s common stock as reported by The Nasdaq Global Select Market on that date).

As of February [removed: 22, 2019,] [added: 21, 2020,] there were [removed: 170,633,671] [added: 172,514,722] shares of the registrant’s common stock outstanding.

Portions of the registrant’s definitive Proxy Statement relating to its [removed: 2019] [added: 2020] Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

[removed: FORTINET, INC.][added: FORTINET, INC.]

[removed: ANNUAL] [added: ANNUAL] REPORT ON FORM [removed: 10-K][added: 10-K]

[removed: For] [added: For] the Year [removed: Ended December] [added: Ended December] 31, [removed: 2018][added: 2019]

[removed: Table] [added: Table] of [removed: Contents][added: Contents]

| | | [removed: Page] [added: Page] |

| | [removed: Part I] [added: Part I] | |

| Item 1. | [removed: [Business](#s3045B713AB686D888DFD57B385CACEA1)] [added: [Business](#sCA8A248484993C80BE03670F39A7579E)] | [removed: [1](#s3045B713AB686D888DFD57B385CACEA1)] [added: [1](#sCA8A248484993C80BE03670F39A7579E)] |

| Item 1A. | [Risk [removed: Factors](#sDEE012C30A1B0DECFAAE57B385FC29B6)] [added: Factors](#s0B52AB8F0BACDAAFADCA670F643246B9)] | [removed: [9](#sDEE012C30A1B0DECFAAE57B385FC29B6)] [added: [10](#s0B52AB8F0BACDAAFADCA670F643246B9)] |

or

Sunnyvale, California 94086

| | [Exhibit Index](#s6BB7D1DC88CF3A319D13670F6DD41677) | [101](#s6BB7D1DC88CF3A319D13670F6DD41677) |

| | [Signatures](#sC2D54F8120F6C1370DE0670F6DF557FC) | [103](#sC2D54F8120F6C1370DE0670F6DF557FC) |

10-K 1 ftnt-201810xk.htm 10-K

| | |

| --- | --- |

| | |

or

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

| | [Exhibit Index](#s27ABA9782AA05EC505CC57B38EC4D7F1) | [108](#s27ABA9782AA05EC505CC57B38EC4D7F1) |

| | [Signatures](#sDD7AE3691AD193C3CE3457B38EE8E459) | [110](#sDD7AE3691AD193C3CE3457B38EE8E459) |

Our corporate headquarters is located in Sunnyvale, California and comprises approximately [removed: 162,000] [added: 160,000] square feet of [removed: office and] building space on ten acres of land.

Along with our corporate headquarters, as of December 31, [removed: 2018,] [added: 2019,] we also [removed: owned] [added: own] approximately [removed: 202,000] [added: 200,000] square feet in Union City, California used as a [removed: distribution] [added: manufacturing assembly] and [removed: office facility; approximately 167,000 square feet of buildings adjacent to our corporate headquarters intended to support growth in our business] operations [removed: and provide space for construction of a second building;] [added: center;] approximately [removed: 342,000] [added: 375,000] square feet of office and building space in Burnaby and Ottawa, Canada used for operations, support and research and development work; and 40,000 square feet of office space in Valbonne, France predominantly used as a sales and support office.

For information regarding the geographical location of our property and equipment, see Note [removed: 14] [added: 15] to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

In 2019, we began construction on a second building of approximately 170,000 square feet that will serve as the cornerstone of our headquarters campus.

We maintain additional leased offices throughout the world, predominantly used as sales and support offices.

We maintain additional offices throughout the United States and various international locations, including India, France, China, the United Kingdom, Japan, Singapore, Germany and Mexico.

[removed: Part II][added: Part II]

| [removed: ITEM 5.] [added: ITEM 5.] | [removed: Market] [added: Market] for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities] [added: Securities] |

[removed: Holders] [added: Holders] of [removed: Record][added: Record]

As of February [removed: 22, 2019,] [added: 21, 2020,] there were [removed: 48] [added: 43] holders of record of our common stock.

[removed: Dividends][added: Dividends]

[removed: Stock] [added: Stock] Performance [removed: Graph][added: Graph]

[removed: This] [added: *This] performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of [removed: 1934 (the] [added: 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 [removed: filing.][added: filing.*]

[removed: COMPARISON] [added: COMPARISON] OF CUMULATIVE TOTAL [removed: RETURN*][added: RETURN*]

[removed: Among] [added: Among] Fortinet, Inc., [removed: The S&P] [added: the S&P] 500 [removed: Index and][added: Index and]

[removed: The] [added: the] NASDAQ Computer [removed: Index][added: Index]

[removed: ][added: ]

| | | December [removed: 2013] [added: 2014] * | | | | December [removed: 2014] [added: 2015] | | | | December [removed: 2015] [added: 2016] | | | | December [removed: 2016] [added: 2017] | | | | December [removed: 2017] [added: 2018] | | | | December [removed: 2018] [added: 2019] | | |

* Assumes that $100 was invested on December 31, [removed: 2013] [added: 2014] in stock or index, including reinvestment of dividends.

[removed: Sales] [added: Sales] of Unregistered [removed: Securities][added: Securities]

[removed: Purchases] [added: Purchases] of Equity Securities by the Issuer and Affiliated [removed: Purchasers][added: Purchasers]

[removed: Share] [added: *Share] Repurchase [removed: Program][added: Program*]

In January 2016, our board of directors approved [removed: the] [added: our] Share Repurchase [removed: Program, which authorized the repurchase of up to $200.0 million of our outstanding common stock through December 31, 2017.][added: Program (the “Repurchase Program”).]

In [removed: July 2018,] [added: November 2019,] our board of directors approved a [removed: $500.0 million] [added: $1.0 billion] increase in the authorized stock repurchase under the Repurchase Program and extended the term of the Repurchase Program to [removed: December 31, 2019,] [added: February 28, 2021,] bringing the aggregate amount authorized to be repurchased to [removed: $1.5] [added: $2.5] billion of our outstanding common stock through [removed: December 31, 2019.][added: February 28, 2021.]

The following table provides information with respect to the shares of common stock we repurchased during the three months ended December 31, [removed: 2018] [added: 2019] (in millions, except [removed: share and] per share amounts):

| | | [removed: Total] [added: Total] Number of Shares [removed: Purchased] [added: Purchased] | | | [removed: Average] [added: Average] Price Paid per [removed: Share] [added: Share] | | | | [removed: Total] [added: Total] Number of Shares Purchased as Part of Publicly Announced Plans or [removed: Programs] [added: Programs] | | | [removed: Approximate] [added: Approximate] Dollar Value of Shares that May Yet Be Purchased Under the Plans or [removed: Programs] [added: Programs] | | |

| Fortinet, Inc. | | $ | 100 | | | $ | 102 | | | $ | 98 | | | $ | 142 | | | $ | 230 | | | $ | 348 | |

| S&P 500 Index | | $ | 100 | | | $ | 99 | | | $ | 109 | | | $ | 130 | | | $ | 122 | | | $ | 157 | |

| NASDAQ Computer | | $ | 100 | | | $ | 106 | | | $ | 119 | | | $ | 166 | | | $ | 159 | | | $ | 240 | |

Since its inception, we have repurchased 20.8 million shares of our common stock under the Repurchase Program for an aggregate purchase price of $907.2 million.

| October 1 - October 31, 2019 | | 0.3 | | | $ | 77.39 | | | 0.3 | | | $ | 592.9 | |

| November 1 - November 30, 2019 | | — | | | $ | — | | | — | | | $ | 1,592.9 | |

| December 1 - December 31, 2019 | | * | | | $ | 100.01 | | | * | | | $ | 1,592.8 | |

| Total | | 0.3 | | | $ | 77.40 | | | 0.3 | | | | | |

* Number rounds to zero

| Fortinet, Inc. | | $ | 100 | | | $ | 160 | | | $ | 163 | | | $ | 157 | | | $ | 228 | | | $ | 368 | |

| S&P 500 Index | | $ | 100 | | | $ | 111 | | | $ | 111 | | | $ | 121 | | | $ | 145 | | | $ | 136 | |

| NASDAQ Computer | | $ | 100 | | | $ | 120 | | | $ | 127 | | | $ | 143 | | | $ | 198 | | | $ | 191 | |

________________

In 2016 and 2017, our board of directors approved the increases in the aggregate authorized repurchase amount under the Repurchase Program by $100.0 million and $700.0 million, respectively, bringing the total amount authorized to $1.0 billion.

| October 1 - October 31, 2018 | | — | | | $ | — | | | — | | | $ | 825.8 | |

| November 1 - November 30, 2018 | | 559,792 | | | $ | 71.29 | | | 559,792 | | | $ | 785.9 | |

| December 1 - December 31, 2018 | | 741,623 | | | $ | 70.26 | | | 741,623 | | | $ | 733.8 | |

| Total | | 1,301,415 | | | | | | | 1,301,415 | | | | | |

| | [removed: Year] [added: Year] Ended December [removed: 31,] [added: 31,] | | | | | | | | | | | | | | | | | | |

| | [removed: 2018] [added: 2019] | | | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | |

| | [removed: (in] [added: (in] millions, except per share [removed: amounts)] [added: amounts)] | | | | | | | | | | | | | | | | | | |

| [removed: Consolidated] [added: Consolidated] Statements of Income [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Total revenue | $ | [removed: 1,801.2] [added: 2,156.2] | | | $ | [removed: 1,494.9] [added: 1,801.2] | | | $ | [removed: 1,275.4] [added: 1,494.9] | | | $ | [removed: 1,009.3] [added: 1,275.4] | | | $ | [removed: 770.4] [added: 1,009.3] | |

| Total gross profit | $ | [removed: 1,350.8] [added: 1,650.3] | | | $ | [removed: 1,109.6] [added: 1,350.8] | | | $ | [removed: 937.6] [added: 1,109.6] | | | $ | [removed: 722.5] [added: 937.6] | | | $ | [removed: 539.4] [added: 722.5] | |

| Operating income | $ | [removed: 231.0] [added: 344.2] | | | $ | [removed: 109.8] [added: 231.0] | | | $ | [removed: 42.9] [added: 109.8] | | | $ | [removed: 14.9] [added: 42.9] | | | $ | [removed: 59.3] [added: 14.9] | |

| Net income | $ | [removed: 332.2] [added: 326.5] | | | $ | [removed: 31.4] [added: 332.2] | | | $ | [removed: 32.2] [added: 31.4] | | | $ | [removed: 8.0] [added: 32.2] | | | $ | [removed: 25.3] [added: 8.0] | |

| Basic | $ | [removed: 1.96] [added: 1.91] | | | $ | [removed: 0.18] [added: 1.96] | | | $ | [removed: 0.19] [added: 0.18] | | | $ | [removed: 0.05] [added: 0.19] | | | $ | [removed: 0.15] [added: 0.05] | |

| Diluted | $ | [removed: 1.91] [added: 1.87] | | | $ | [removed: 0.18] [added: 1.91] | | | $ | 0.18 | | | $ | [removed: 0.05] [added: 0.18] | | | $ | [removed: 0.15] [added: 0.05] | |

| Basic | [removed: 169.1] [added: 171.0] | | | | [removed: 174.3] [added: 169.1] | | | | [removed: 172.6] [added: 174.3] | | | | [removed: 170.4] [added: 172.6] | | | | [removed: 163.8] [added: 170.4] | | |

| Diluted | [removed: 174.2] [added: 175.0] | | | | [removed: 178.1] [added: 174.2] | | | | [removed: 176.3] [added: 178.1] | | | | [removed: 176.1] [added: 176.3] | | | | [removed: 169.3] [added: 176.1] | | |

| | [removed: As] [added: As] of December [removed: 31,] [added: 31,] | | | | | | | | | | | | | | | | | | |

| [removed: 2018] [added: 2019] | | | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | |

| [removed: (in millions)] [added: (in millions)] | | | | | | | | | | | | | | | | | | | |

| [removed: Consolidated] [added: Consolidated] Balance Sheet [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Cash, cash equivalents and investments | $ | [removed: 1,716.6] [added: 2,209.9] | | | $ | [removed: 1,349.3] [added: 1,716.6] | | | $ | [removed: 1,310.5] [added: 1,349.3] | | | $ | [removed: 1,164.3] [added: 1,310.5] | | | $ | [removed: 991.7] [added: 1,164.3] | |

| Total assets | $ | [removed: 3,078.0] [added: 3,885.5] | | | $ | [removed: 2,257.9] [added: 3,078.0] | | | $ | [removed: 2,139.9] [added: 2,257.9] | | | $ | [removed: 1,790.5] [added: 2,139.9] | | | $ | [removed: 1,424.8] [added: 1,790.5] | |

| Total stockholders’ equity | $ | [removed: 1,010.2] [added: 1,321.9] | | | $ | [removed: 589.4] [added: 1,010.2] | | | $ | [removed: 837.7] [added: 589.4] | | | $ | [removed: 755.4] [added: 837.7] | | | $ | [removed: 676.0] [added: 755.4] | |

[removed: Evaluation] [added: Evaluation] of Disclosure Controls and [removed: Procedures][added: Procedures]

Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, [removed: 2018] [added: 2019] to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

[removed: Management’s] [added: Management’s] Report on Internal Control Over Financial [removed: Reporting][added: Reporting]

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in [removed: Internal] [added: *Internal] Control—Integrated Framework [removed: (2013)] [added: (2013)*] set forth by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, [removed: 2018.][added: 2019.]

The effectiveness of our internal control over financial reporting as of December 31, [removed: 2018] [added: 2019] has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report, which appears in this Item under the heading “Report of Independent Registered Public Accounting Firm.”

[removed: Changes] [added: Changes] in Internal Control over Financial [removed: Reporting][added: Reporting]

In January [removed: 2018,] [added: 2019,] we implemented certain internal controls over financial reporting in connection with our adoption of Topic [removed: 606.][added: 842.]

There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during [removed: 2018] [added: 2019] that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

[removed: REPORT] [added: REPORT] OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING [removed: FIRM][added: FIRM]

[removed: Opinion] [added: Opinion] on Internal Control over Financial [removed: Reporting][added: Reporting]

We have audited the internal control over financial reporting of Fortinet, Inc. and subsidiaries (the “Company”) as of December 31, [removed: 2018,] [added: 2019,] based on criteria established in [removed: Internal Control — Integrated] [added: *Internal Control–Integrated] Framework [removed: (2013)] [added: (2013)*] issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2018,] [added: 2019,] based on criteria established in [removed: Internal Control — Integrated] [added: *Internal Control–Integrated] Framework [removed: (2013)] [added: (2013)*] issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, [removed: 2018,] [added: 2019,] of the Company and our report dated February [removed: 26, 2019,] [added: 25, 2020,] expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to the Company’s change in its method of accounting for revenue due to adoption of the new revenue [removed: standard.][added: standard in 2018.]

[removed: Basis] [added: Basis] for [removed: Opinion][added: Opinion]

[removed: Definition] [added: Definition] and Limitations of Internal Control over Financial [removed: Reporting][added: Reporting]

/s/ [removed: DELOITTE] [added: *DELOITTE] & TOUCHE [removed: LLP][added: LLP*]

February 25, 2020

February 26, 2019

[removed: Part III][added: Part III]

Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

[removed: Part IV][added: Part IV]

| 1. | [removed: Financial Statements:] [added: *Financial Statements:*] The information concerning Fortinet’s financial statements and the Report of Independent Registered Public Accounting Firm required by this Item 15(a)(1) is incorporated by reference herein to the section of this Annual Report on Form 10-K in Part II, Item 8, titled “Financial Statements and Supplementary Data.” |

| [removed: 2.] [added: *2.*] | [removed: Financial] [added: *Financial] Statement [removed: Schedule:] [added: Schedule:*] The following financial statement schedule of Fortinet, Inc., for the fiscal years ended December 31, [removed: 2018, 2017] [added: 2019, 2018] and [removed: 2016,] [added: 2017,] is filed as part of this Annual Report on Form 10-K and should be read in conjunction with our consolidated financial statements. |

[removed: SCHEDULE] [added: SCHEDULE] II—VALUATION AND QUALIFYING [removed: ACCOUNTS][added: ACCOUNTS]

| | [removed: Year] [added: Year] Ended December [removed: 31,] [added: 31,] | | | | | | | | | | |

| | [removed: 2018 (1)] [added: 2019 (1)] | | | | [removed: 2017] [added: 2018 (1)] | | | | [removed: 2016] [added: 2017] | | |

| | [removed: (in millions)] [added: (in millions)] | | | | | | | | | | |

| Beginning balance | $ | [removed: 14.5] [added: 0.9] | | | $ | [removed: 11.2] [added: 14.5] | | | $ | [removed: 6.2] [added: 11.2] | |

| Charged to costs and expenses, net of deductions | [removed: —] [added: 0.3] | | | | [removed: 3.3] [added: —] | | | | [removed: 5.0] [added: 3.3] | | |

| Reclassification due to adoption of Topic 606 (1) | [removed: (13.6] [added: —] | | [removed: )] | | [removed: —] [added: (13.6] | | [added: )] | | — | | |

| Ending balance | $ | [removed: 0.9] [added: 1.2] | | | $ | [removed: 14.5] [added: 0.9] | | | $ | [removed: 11.2] [added: 14.5] | |

| (1) Effective January 1, 2018, we reclassified our sales returns reserve in the amount of $13.6 million from accounts receivable to accrued liabilities, in connection with the adoption of Topic 606. The ending [removed: balance] [added: balances] for the [removed: year] [added: years] ended December 31, [added: 2019 and] 2018 [removed: consists] [added: consist] only of the allowance for doubtful accounts. | | | | | | | | | | | |

| 3. | [removed: Exhibits:] [added: *Exhibits*:] See Item 15(b) below. We have filed, or incorporated into this Annual Report on Form 10-K by reference, the exhibits listed on the accompanying Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K. |

[removed: EXHIBIT INDEX][added: EXHIBIT INDEX]

| [removed: Exhibit Number] [added: Exhibit Number] | | [removed: Description] [added: Description] | | [removed: Incorporated] [added: Incorporated] by reference [removed: herein] [added: herein] | | | | |

| | | | | [removed: Form] [added: Form] | | [removed: Date] [added: Date] | | [removed: Exhibit Number] [added: Exhibit Number] |

| [removed: [10.2](http://www.sec.gov/Archives/edgar/data/1262039/000119312509169817/dex102.htm)†] [added: [10.14](http://www.sec.gov/Archives/edgar/data/1262039/000119312509169817/dex1010.htm)†] | | [removed: 2000 Stock Plan and forms] [added: Offer Letter, dated as] of [removed: agreement thereunder] [added: October 23, 2006, by and between the Company and John Whittle] | | Registration Statement on Form [removed: S-l] [added: S-l, as amended] (File No. 333-161190) | | August 10, 2009 | | [removed: 10.2] [added: 10.10] |

| [removed: [10.4](http://www.sec.gov/Archives/edgar/data/1262039/000119312509169817/dex104.htm)†] [added: [10.4](http://www.sec.gov/Archives/edgar/data/1262039/000126203913000044/fortinet_20130630x10-qex991.htm)†] | | [removed: 2009 Equity Incentive Plan and forms] [added: Form] of [removed: restricted] [added: performance] stock unit award [removed: and restricted stock] agreement [removed: thereunder] [added: under Amended and Restated 2009 Equity Incentive Plan] | | [removed: Registration Statement] [added: Quarterly Report] on Form [removed: S-l] [added: 10-Q] (File No. [removed: 333-161190)] [added: 001-34511)] | | August [removed: 10, 2009] [added: 6, 2013] | | [removed: 10.4] [added: 99.1] |

| [removed: [10.5](http://www.sec.gov/Archives/edgar/data/1262039/000126203912000013/ftnt-ex105_20111231xk.htm)†] [added: [10.3](http://www.sec.gov/Archives/edgar/data/1262039/000126203912000013/ftnt-ex105_20111231xk.htm)†] | | Forms of stock option agreement under [added: Amended and Restated] 2009 Equity Incentive Plan | | Annual Report on Form 10-K (File No. 001-34511) | | February 28, 2012 | | 10.5 |

| [removed: [10.6](http://www.sec.gov/Archives/edgar/data/1262039/000126203913000044/fortinet_20130630x10-qex991.htm)†] [added: [10.5](http://www.sec.gov/Archives/edgar/data/1262039/000126203915000009/ftnt-ex107_20141231xk.htm)†] | | [removed: Form] [added: Forms] of [added: restricted stock unit award and] performance stock unit award agreement under [added: Amended and Restated] 2009 Equity Incentive Plan [added: (Additional Forms)] | | [removed: Quarterly] [added: Annual] Report on Form [removed: 10-Q] [added: 10-K] (File No. 001-34511) | | [removed: August 6, 2013] [added: March 2, 2015] | | [removed: 99.1] [added: 10.7] |