Item 1. Financial Statements

FORTINET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in millions, except per share amounts)

			September 30, 2024						December 31, 2023
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$	2,489.3					$	1,397.9
Short-term investments			1,162.4						1,021.5
Marketable equity securities			49.0						21.0
Accounts receivable—net			1,044.1						1,402.0
Inventory			354.3						484.8
Prepaid expenses and other current assets			121.5						101.1
Total current assets			5,220.6						4,428.3
PROPERTY AND EQUIPMENT—NET			1,273.4						1,044.4
DEFERRED CONTRACT COSTS			599.4						605.6
DEFERRED TAX ASSETS			1,300.4						868.8
GOODWILL			212.8						126.5
OTHER INTANGIBLE ASSETS—NET			111.6						35.3
OTHER ASSETS			133.8						150.0
TOTAL ASSETS			$	8,852.0					$	7,258.9
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable			$	177.9					$	204.3
Accrued liabilities			376.6						423.7
Accrued payroll and compensation			248.2						242.3
Deferred revenue			3,081.2						2,848.7
Total current liabilities			3,883.9						3,719.0
DEFERRED REVENUE			2,930.5						2,886.3
LONG-TERM DEBT			993.8						992.3
OTHER LIABILITIES			135.7						124.7
Total liabilities			7,943.9						7,722.3
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY (DEFICIT):
Common stock, $0.001 par value—1,500.0 shares authorized; 765.7 and 761.0 shares issued and outstanding on September 30, 2024 and December 31, 2023, respectively			0.8						0.8
Additional paid-in capital			1,568.6						1,416.4
Accumulated other comprehensive loss			(18.0)						(18.9)
Accumulated deficit			(643.3)						(1,861.7)
Total stockholders’ equity (deficit)			908.1						(463.4)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)			$	8,852.0					$	7,258.9

See notes to condensed consolidated financial statements.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, in millions, except per share amounts)

			Three Months Ended												Nine Months Ended
September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
REVENUE:
Product			$	473.9					$	465.9					$	1,334.7					$	1,439.2
Service			1,034.2						868.7						2,961.0						2,450.5
Total revenue			1,508.1						1,334.6						4,295.7						3,889.7
COST OF REVENUE:
Product			136.1						198.3						474.0						566.4
Service			127.3						119.4						369.1						354.9
Total cost of revenue			263.4						317.7						843.1						921.3
GROSS PROFIT:
Product			337.8						267.6						860.7						872.8
Service			906.9						749.3						2,591.9						2,095.6
Total gross profit			1,244.7						1,016.9						3,452.6						2,968.4
OPERATING EXPENSES:
Research and development			187.3						156.9						525.7						461.3
Sales and marketing			515.9						504.4						1,518.3						1,498.6
General and administrative			71.7						53.5						182.7						156.2
Gain on intellectual property matter			(1.1)						(1.1)						(3.4)						(3.4)
Total operating expenses			773.8						713.7						2,223.3						2,112.7
OPERATING INCOME			470.9						303.2						1,229.3						855.7
INTEREST INCOME			42.4						37.0						112.9						89.2
INTEREST EXPENSE			(5.0)						(5.4)						(15.1)						(15.6)
GAIN ON BARGAIN PURCHASE			106.3						—						106.3						—
OTHER INCOME (EXPENSE)—NET			11.8						(7.0)						6.7						(11.2)
INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENTS			626.4						327.8						1,440.1						918.1
PROVISION FOR (BENEFIT FROM) INCOME TAXES			81.2						(0.3)						197.2						48.6
LOSS FROM EQUITY METHOD INVESTMENTS			(5.3)						(5.2)						(23.9)						(32.6)
NET INCOME			$	539.9					$	322.9					$	1,219.0					$	836.9
Net income per share (Note 9):
Basic			$	0.71					$	0.41					$	1.60					$	1.07
Diluted			$	0.70					$	0.41					$	1.58					$	1.05
Weighted-average shares outstanding:
Basic			765.0						781.2						763.7						783.1
Diluted			771.9						791.2						770.8						793.5

See notes to condensed consolidated financial statements.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in millions)

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Net income			$	539.9					$	322.9					$	1,219.0					$	836.9
Other comprehensive income (loss):
Change in foreign currency translation			9.1						(2.4)						(0.3)						(9.9)
Change in unrealized gains (losses) on investments			2.5						1.6						1.6						7.5
Less: tax provision related to items of other comprehensive income (loss)			0.6						0.4						0.4						1.7
Other comprehensive income (loss)			11.0						(1.2)						0.9						(4.1)
Comprehensive income			$	550.9					$	321.7					$	1,219.9					$	832.8

See notes to condensed consolidated financial statements.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited, in millions)

			Three Months Ended September 30, 2024
			Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Loss						Accumulated Deficit						Total Stockholders’ Equity
Shares						Amount
BALANCE—June 30, 2024			764.2						$	0.8					$	1,499.0					$	(29.0)					$	(1,182.6)					$	288.2
Issuance of common stock in connection with equity incentive plans - net of tax withholding			1.5						—						3.7						—						—						3.7
Repurchase and retirement of common stock			—						—						—						—						(0.6)						(0.6)
Stock-based compensation expense			—						—						65.9						—						—						65.9
Net unrealized gain on investments - net of tax			—						—						—						1.9						—						1.9
Foreign currency translation adjustment			—						—						—						9.1						—						9.1
Net income			—						—						—						—						539.9						539.9
BALANCE—September 30, 2024			765.7						$	0.8					$	1,568.6					$	(18.0)					$	(643.3)					$	908.1
			Three Months Ended September 30, 2023
			Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Loss						Accumulated Deficit						Total Stockholders’ Equity
Shares						Amount
BALANCE—June 30, 2023			785.6						$	0.8					$	1,375.9					$	(23.1)					$	(1,032.4)					$	321.2
Issuance of common stock in connection with equity incentive plans - net of tax withholding			1.1						—						(25.1)						—						—						(25.1)
Repurchase and retirement of common stock			(10.4)						—						(15.3)						—						(589.9)						(605.2)
Excise tax on net stock repurchases			—						—						(2.8)						—						—						(2.8)
Stock-based compensation expense			—						—						64.3						—						—						64.3
Net unrealized gain on investments - net of tax			—						—						—						1.2						—						1.2
Foreign currency translation adjustment			—						—						—						(2.4)						—						(2.4)
Net income			—						—						—						—						322.9						322.9
BALANCE—September 30, 2023			776.3						$	0.8					$	1,397.0					$	(24.3)					$	(1,299.4)					$	74.1

See notes to condensed consolidated financial statements.

			Nine Months Ended September 30, 2024
			Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Loss						Accumulated Deficit						Total Stockholders’ Equity (Deficit)
Shares						Amount
BALANCE—December 31, 2023			761.0						$	0.8					$	1,416.4					$	(18.9)					$	(1,861.7)					$	(463.4)
Issuance of common stock in connection with equity incentive plans - net of tax withholding			4.7						—						(39.9)						—						—						(39.9)
Repurchase and retirement of common stock			—						—						—						—						(0.6)						(0.6)
Stock-based compensation expense			—						—						192.1						—						—						192.1
Net unrealized gain on investments - net of tax			—						—						—						1.2						—						1.2
Foreign currency translation adjustment			—						—						—						(0.3)						—						(0.3)
Net income			—						—						—						—						1,219.0						1,219.0
BALANCE—September 30, 2024			765.7						$	0.8					$	1,568.6					$	(18.0)					$	(643.3)					$	908.1
			Nine Months Ended September 30, 2023
			Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Loss						Accumulated Deficit						Total Stockholders’ Equity (Deficit)
Shares						Amount
BALANCE—December 31, 2022			781.5						$	0.8					$	1,284.2					$	(20.2)					$	(1,546.4)					$	(281.6)
Issuance of common stock in connection with equity incentive plans - net of tax withholding			5.2						—						(54.7)						—						—						(54.7)
Repurchase and retirement of common stock			(10.4)						—						(15.3)						—						(589.9)						(605.2)
Excise tax on net stock repurchases			—						—						(2.8)						—						—						(2.8)
Stock-based compensation expense			—						—						185.6						—						—						185.6
Net unrealized gain on investments - net of tax			—						—						—						5.8						—						5.8
Foreign currency translation adjustment			—						—						—						(9.9)						—						(9.9)
Net income			—						—						—						—						836.9						836.9
BALANCE—September 30, 2023			776.3						$	0.8					$	1,397.0					$	(24.3)					$	(1,299.4)					$	74.1

See notes to condensed consolidated financial statements.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)

			Nine Months Ended
			September 30, 2024						September 30, 2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$	1,219.0					$	836.9
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation			192.1						185.6
Amortization of deferred contract costs			218.3						195.9
Depreciation and amortization			87.6						83.2
Amortization of investment discounts			(37.3)						(16.1)
Loss from equity method investments			23.9						32.6
Gain on bargain purchase			(106.3)						—
Other			(3.3)						13.7
Changes in operating assets and liabilities, net of impact of business combinations:
Accounts receivable—net			376.5						243.4
Inventory			104.9						(231.0)
Prepaid expenses and other current assets			(9.0)						(29.3)
Deferred contract costs			(212.2)						(247.5)
Deferred tax assets			(187.6)						(221.7)
Other assets			(8.8)						13.5
Accounts payable			(32.0)						10.4
Accrued liabilities			(72.3)						253.7
Accrued payroll and compensation			(7.9)						(8.0)
Other liabilities			0.5						(17.7)
Deferred revenue			234.4						646.2
Net cash provided by operating activities			1,780.5						1,743.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments			(1,485.3)						(1,327.6)
Sales of investments			—						4.0
Maturities of investments			1,382.7						931.5
Purchases of property and equipment			(281.3)						(177.2)
Purchase of investment in privately held company			—						(8.5)
Payments made in connection with business combinations, net of cash acquired			(247.0)						—
Purchases of marketable equity securities			(16.7)						—
Other			0.1						0.1
Net cash used in investing activities			(647.5)						(577.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common stock			(0.6)						(604.3)
Proceeds from issuance of common stock			39.7						36.0
Taxes paid related to net share settlement of equity awards			(79.6)						(90.8)
Other			(0.8)						(1.2)
Net cash used in financing activities			(41.3)						(660.3)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			(0.3)						(1.9)
NET INCREASE IN CASH AND CASH EQUIVALENTS			1,091.4						503.9
CASH AND CASH EQUIVALENTS—Beginning of period			1,397.9						1,682.9
CASH AND CASH EQUIVALENTS—End of period			$	2,489.3					$	2,186.8
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes—net			$	423.0					$	84.9
Operating lease liabilities arising from obtaining right-of-use assets			$	29.4					$	14.3
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units and equipment from inventory to property and equipment			$	26.1					$	24.5
Liability for purchase of property and equipment			$	29.1					$	24.7
Liability incurred for repurchase of common stock			$	—					$	0.9

See notes to condensed consolidated financial statements.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Preparation—The unaudited condensed consolidated financial statements of Fortinet, Inc. and its subsidiaries (collectively, “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2023, contained in our Annual Report on Form 10-K filed with the SEC on February 26, 2024. In the opinion of management, all adjustments, which include normal recurring adjustments, considered necessary for a fair presentation, have been included. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2023 is derived from the audited consolidated financial statements for the year ended December 31, 2023.

The condensed consolidated financial statements include the accounts of Fortinet, Inc. and its subsidiaries. We consolidate all legal entities in which we have an absolute controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

There have been no material changes to our significant accounting policies as of and for the three and nine months ended September 30, 2024, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC.

Recent Accounting Standards Not Yet Effective

Segment Reporting

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The amendments are effective for our annual reporting for fiscal year 2024, and for our interim period reporting starting in fiscal year 2025 retrospectively, with early adoption permitted. We are currently evaluating the ASU to determine its impact on our disclosures.

Income Taxes

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The amendments are effective for our annual period beginning fiscal year 2025, with early adoption permitted, and should be applied prospectively. We are currently evaluating the ASU to determine its impact on our disclosures.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. REVENUE RECOGNITION

Disaggregation of Revenue

The following table presents our revenue disaggregated by major product and service lines (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Product			$	473.9					$	465.9					$	1,334.7					$	1,439.2
Service:
Security subscription			595.8						494.6						1,691.4						1,373.6
Technical support and other			438.4						374.1						1,269.6						1,076.9
Total service revenue			1,034.2						868.7						2,961.0						2,450.5
Total revenue			$	1,508.1					$	1,334.6					$	4,295.7					$	3,889.7

Deferred Revenue

During the three and nine months ended September 30, 2024, we recognized $660.3 million and $2.28 billion in revenue that was included in the deferred revenue balance as of December 31, 2023, respectively. During the three and nine months ended September 30, 2023, we recognized $514.3 million and $1.80 billion in revenue that was included in the deferred revenue balance as of December 31, 2022, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $6.08 billion, which was substantially comprised of deferred security subscription and technical support services revenue that will be recognized in future periods. We expect to recognize approximately $3.12 billion as revenue over the next 12 months and the remainder thereafter.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount, net of an allowance for expected credit losses. We measure expected credit losses of accounts receivable on a collective (pooled) basis, aggregating accounts receivable that are either current or no more than 60 days past due, and aggregating accounts receivable that are more than 60 days past due. We apply a credit-loss percentage to each of the pools that is based on our historical credit losses. We review whether each of our significant accounts receivable that is more than 60 days past due continues to exhibit similar risk characteristics with the other accounts receivable in the pool. If we determine that it does not, we evaluate it for expected credit losses on an individual basis. Expected credit losses are recorded as general and administrative expenses on our condensed consolidated statements of income.

The allowance for credit losses was $4.7 million and $8.2 million as of September 30, 2024 and December 31, 2023, respectively. Provisions, write-offs and recoveries were not material during the nine months ended September 30, 2024 and 2023.

Deferred Contract Costs

Amortization of deferred contract costs during the three months ended September 30, 2024 and 2023 were $73.6 million and $68.0 million, respectively. Amortization of deferred contract costs during the nine months ended September 30, 2024 and 2023 were $218.3 million and $195.9 million, respectively.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. FINANCIAL INSTRUMENTS AND FAIR VALUE

Available-for-Sale Investments

The following tables summarize our available-for-sale investments (in millions):

			September 30, 2024
			Amortized Cost						Unrealized Gains						Unrealized Losses						Fair Value
U.S. government and agency securities			$	536.7					$	0.8					$	—					$	537.5
Commercial paper			434.8						0.5						—						435.3
Corporate debt securities			123.5						0.3						—						123.8
Certificates of deposit and term deposits			65.7						0.1						—						65.8
Total available-for-sale investments			$	1,160.7					$	1.7					$	—					$	1,162.4

			December 31, 2023
			Amortized Cost						Unrealized Gains						Unrealized Losses						Fair Value
U.S. government and agency securities			$	461.5					$	0.2					$	(0.3)					$	461.4
Commercial paper			401.7						0.2						(0.1)						401.8
Corporate debt securities			70.0						0.1						(0.1)						70.0
Certificates of deposit and term deposits			88.2						0.1						—						88.3
Total available-for-sale investments			$	1,021.4					$	0.6					$	(0.5)					$	1,021.5

The following tables show the gross unrealized losses and the related fair values of our available-for-sale investments that have been in a continuous unrealized loss position (in millions):

			September 30, 2024
			Less Than 12 Months												12 Months or Greater												Total
			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
U.S. government and agency securities			$	40.2					$	—					$	—					$	—					$	40.2					$	—
Commercial paper			60.8						—						—						—						60.8						—
Corporate debt securities			15.8						—						—						—						15.8						—
Total available-for-sale investments			$	116.8					$	—					$	—					$	—					$	116.8					$	—

			December 31, 2023
			Less Than 12 Months												12 Months or Greater												Total
			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
U.S. government and agency securities			$	47.1					$	—					$	11.7					$	(0.3)					$	58.8					$	(0.3)
Commercial paper			200.8						(0.1)						—						—						200.8						(0.1)
Corporate debt securities			21.8						—						26.9						(0.1)						48.7						(0.1)
Total available-for-sale investments			$	269.7					$	(0.1)					$	38.6					$	(0.4)					$	308.3					$	(0.5)

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The contractual maturities of our investments were (in millions):

			September 30, 2024						December 31, 2023
Due within one year			$	1,162.4					$	1,021.5
Due within one to three years			—						—
Total			$	1,162.4					$	1,021.5

Available-for-sale investments are reported at fair value, with unrealized gains and losses and the related tax impact included as a separate component of stockholders’ equity (deficit) and in comprehensive income. We do not intend to sell any of the securities in an unrealized loss position and it is not more likely than not that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity.

Realized gains and losses on available-for-sale investments were insignificant in the periods presented.

Marketable Equity Securities

Our marketable equity securities were $49.0 million and $21.0 million as of September 30, 2024 and December 31, 2023. The changes in fair value of our marketable equity securities are recorded in other income (expense)—net on the condensed consolidated statements of income. We recognized a $11.1 million and $11.2 million gain during the three and nine months ended September 30, 2024, respectively. We recognized a $2.3 million and $5.7 million loss during the three and nine months ended September 30, 2023, respectively.

Fair Value of Financial Instruments

Fair Value Accounting—We apply the following fair value hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3—Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

We measure the fair value of money market funds, certain U.S. government and agency securities and marketable equity securities using quoted prices in active markets for identical assets. The fair value of all other financial instruments was based on quoted prices for similar assets in active markets, or model-driven valuations using significant inputs derived from or corroborated by observable market data.

We classify investments within Level 1 if quoted prices are available in active markets for identical securities.

We classify items within Level 2 if the investments are valued using model-driven valuations using observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Investments are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assets Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial assets measured at fair value on a recurring basis (in millions):

			September 30, 2024																								December 31, 2023
			Aggregate Fair Value						Quoted Prices in Active Markets For Identical Assets						Significant Other Observable Remaining Inputs						Significant Other Unobservable Remaining Inputs						Aggregate Fair Value						Quoted Prices in Active Markets For Identical Assets						Significant Other Observable Remaining Inputs						Significant Other Unobservable Remaining Inputs
									(Level 1)						(Level 2)						(Level 3)												(Level 1)						(Level 2)						(Level 3)
Assets:
U.S. government and agency securities			$	545.0					$	530.2					$	14.8					$	—					$	501.4					$	433.3					$	68.1					$	—
Commercial paper			473.0						—						473.0						—						472.2						—						472.2						—
Corporate debt securities			123.8						—						123.8						—						73.0						—						73.0						—
Certificates of deposit and term deposits			67.6						—						67.6						—						104.8						—						104.8						—
Money market funds			256.0						256.0						—						—						277.1						277.1						—						—
Marketable equity securities			49.0						49.0						—						—						21.0						21.0						—						—
Total			$	1,514.4					$	835.2					$	679.2					$	—					$	1,449.5					$	731.4					$	718.1					$	—
Reported as:
Cash equivalents			$	303.0																							$	407.0
Marketable equity securities			49.0																								21.0
Short-term investments			1,162.4																								1,021.5
Total			$	1,514.4																							$	1,449.5

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2024 and year ended December 31, 2023.

4. INVENTORY

Inventory, net of reserves, consisted of (in millions):

			September 30, 2024						December 31, 2023
Raw materials			$	99.2					$	92.1
Work in process			5.4						7.7
Finished goods			249.7						385.0
Inventory			$	354.3					$	484.8

The excess and obsolete inventory reserve was $132.8 million and $89.2 million as of September 30, 2024 and December 31, 2023, respectively. Inventory write-downs related to excess and obsolete inventory were $8.8 million and $37.6 million for the three and nine months ended September 30, 2024, respectively, and were $10.0 million and $22.3 million for the three and nine months ended September 30, 2023, respectively. These were recorded in cost of product revenue on the condensed consolidated statements of income.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. PROPERTY AND EQUIPMENT—Net

Property and equipment—net consisted of (in millions):

			September 30, 2024						December 31, 2023
Land			$	462.6					$	351.7
Buildings and improvements			738.4						595.5
Computer equipment and software			278.7						261.1
Leasehold improvements			65.5						61.4
Evaluation units			32.7						30.8
Furniture and fixtures			36.5						33.6
Construction-in-progress			72.5						63.3
Total property and equipment			1,686.9						1,397.4
Less: accumulated depreciation			(413.5)						(353.0)
Property and equipment—net			$	1,273.4					$	1,044.4

During the first three quarters in 2024, we purchased certain real estate properties in California, United States and Alberta, Canada, for an aggregate purchase price of $229.3 million, to be used predominantly for research and development, warehousing, datacenter operations and sales and support functions. The purchases were accounted for under the asset acquisition method. The cost of the assets allocated to land, buildings and improvements, and furniture and fixtures were $111.0 million, $117.4 million, and $0.9 million , respectively, based on their relative fair values.

Depreciation expense was $24.5 million and $23.9 million during the three months ended September 30, 2024 and 2023, respectively. Depreciation expense was $76.0 million and $69.6 million during the nine months ended September 30, 2024 and 2023, respectively.

6. INVESTMENT IN PRIVATELY HELD COMPANY

Linksys Holdings, Inc.

During 2021, we invested $160.0 million in cash for shares of the Series A Preferred Stock of privately held Linksys Holdings, Inc. (“Linksys”), for a 50.8% ownership interest in outstanding equity of Linksys. As of September 30, 2024 and December 31, 2023, our ownership interest remained the same. Linksys provides router connectivity solutions to the consumer and small business markets.

We have concluded that our investment in Linksys is an in-substance common stock investment and that we do not hold an absolute controlling financial interest in Linksys, but that we have the ability to exercise significant influence over the operating and financial policies of Linksys. Therefore, we determined to account for this investment using the equity method of accounting. We record our share of Linksys’ financial results on a three-month lag basis, with the exception of material transactions or events that occur during the intervening period that materially affect the financial position or results of operations. We determined that there was a basis difference between the cost of our investment in Linksys and the amount of underlying equity in net assets of Linksys.

Due to the presence of impairment indicators, such as a series of operating losses, we evaluated our equity method investment for an other-than-temporary impairment (“OTTI”) during the third quarter of 2024. We considered various factors in determining whether an OTTI has occurred, including Linksys’ financial results, operating history, our ability and intent to hold the investment until its fair value recovers, the implied revenue valuation multiples compared to guideline public companies, the discounted cash flows analysis, Linksys’ ability to achieve milestones and any notable operational and strategic changes. After the evaluation, we determined that an additional OTTI had not occurred as of September 30, 2024. However, we may be required to recognize an impairment loss in future reporting periods if and when our evaluation of the aforementioned factors indicates that the investment in Linksys is determined to be other than temporarily impaired. Such determination will be based on the prevailing facts and circumstances at that time, including the results and disclosures of Linksys.

Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, totaled $5.2 million for the three months ended September 30, 2024. Our loss from our Linksys investment totaled $23.4 million for the

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

nine months ended September 30, 2024, which comprised of our proportionate share of Linksys’ financial results and the amortization of the basis differences of $15.4 million, as well as an OTTI charge of $8.0 million recognized in the second quarter of 2024. Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, totaled $5.2 million and $32.6 million for the three and nine months ended September 30, 2023, respectively.

These losses and the OTTI charge were recorded in loss from equity method investments on the condensed consolidated statements of income. The carrying amount of our Linksys investment was $18.8 million and $42.2 million as of September 30, 2024 and December 31, 2023, respectively, and the investment was included in other assets on our condensed consolidated balance sheets.

7. BUSINESS COMBINATIONS

Lacework Inc.

On August 1, 2024, we closed an acquisition of Lacework Inc. (“Lacework”), a privately held data-driven cloud security company, for $152.3 million in cash. We acquired Lacework with a goal of offering its Cloud-Native Application Protection Platform (“CNAPP”) solution separately as well as integrated with our existing portfolio, forming a comprehensive, AI-driven cloud security platform available from a single vendor, which will help customers identify, prioritize, and remediate risks and threats in complex cloud-native infrastructure from code to cloud.

Under the acquisition method of accounting in accordance with ASC 805, the total preliminary purchase price was allocated to Lacework’s identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values using management’s best estimates and assumptions to assign fair value as of the acquisition date. The following table provides the assets acquired and liabilities assumed as of the date of acquisition:

(in millions)			Estimated Fair Value
ASSETS
Cash			$	6.2
Accounts receivable—net			14.8
Prepaid expenses and other current assets			9.6
Deferred tax assets			244.4
Other intangible assets			61.3
TOTAL ASSETS			$	336.3
LIABILITIES
Accounts payable			$	2.5
Deferred revenue			37.5
Accrued payroll and compensation			12.0
Accrued and other current liabilities			25.5
Other liabilities			0.2
TOTAL LIABILITIES			$	77.7
Gain on bargain purchase			$	106.3
Net purchase consideration			$	152.3

The excess of the fair values of the net assets acquired over the net purchase consideration was recorded as a gain on bargain purchase within other income, net on the condensed consolidated statements of income. The gain on bargain purchase occurred primarily due to the recognition of the deferred tax assets. The deferred tax assets were comprised primarily of pre-acquisition federal net operating loss carryforwards with an indefinite carryforward period.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Identified intangible assets acquired and their estimated useful lives (in years) as of August 1, 2024, were as follows (in millions, except years):

			Fair Value						Estimated Useful Life (in years)
Developed technology (1)			$	39.5					5.0
Customer relationships			7.5						5.0
Trade name			4.3						5.0
Backlog			10.0						3.0
Total identified intangible assets:			$	61.3
(1) Developed technology is Lacework’s CNAPP solution. We valued the developed technology using the relief-from-royalty method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology. The economic useful life was determined based on the technology cycle as well as the cash flows over the forecast period.

Our estimates and assumptions are subject to change within the measurement period, which is up to 12 months after the acquisition date. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation of certain assets and liabilities may occur as additional information becomes available. The primary area of the purchase price that is not yet finalized is related to income taxes.

The operating results of the acquired company were included in our condensed consolidated financial statements from the date of acquisition, which was August 1, 2024. For the period from August 2, 2024 through September 30, 2024, Lacework contributed revenue of $12.9 million and a net loss of $21.6 million. Acquisition-related costs for this acquisition were not material and were recorded as general and administrative expense.

Next DLP Holdings Limited

On August 5, 2024, we completed the acquisition of Next DLP Holdings Limited (“Next DLP”), a privately held insider risk and data loss prevention (“DLP”) company, for approximately $105.0 million in cash. We acquired Next DLP to improve our position in the standalone enterprise DLP market and strengthen our leadership in integrated DLP markets within endpoint and SASE.

This acquisition was accounted for as a business combination using the acquisition method of accounting. The total preliminary purchase price was allocated to Next DLP’s identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values using management’s best estimates and assumptions to assign fair value as of the acquisition date. Of the total preliminary purchase price, $82.6 million was allocated to goodwill, $13.5 million was allocated to developed technology intangible asset, $10.5 million was allocated to customer relationships intangible asset, offset by $1.6 million of net liabilities assumed, which predominantly included deferred revenue and deferred tax liabilities. Goodwill recorded in connection with this acquisition represents the value we expect to be created through expansion into markets within our existing business, and the anticipated operational synergies, and goodwill is not expected to be deductible for tax purposes. Acquisition-related costs related to this acquisition were not material and were recorded as general and administrative expense.

Our estimates and assumptions are subject to change within the measurement period, which is up to 12 months after the acquisition date. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation of certain assets and liabilities may occur as additional information becomes available. The primary areas of the purchase price that are not yet finalized are related to income taxes and the valuation of acquired assets and assumed liabilities.

Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of Fortinet, Inc., Lacework and Next DLP, as if Lacework and Next DLP had been acquired as of the beginning of business on January 1, 2023. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business that would have been achieved if the acquisitions had taken place at the beginning of business on January 1, 2023, or of the results of our future operations of the combined business. The

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

following unaudited pro forma financial information for all periods presented includes purchase accounting adjustments for amortization of acquired intangible assets, the gain on bargain purchase, and various related tax impacts (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Pro forma revenue			$	1,517.8					$	1,358.9					$	4,357.4					$	3,964.2
Pro forma net income			$	349.6					$	267.0					$	928.7					$	758.3

8. GOODWILL AND OTHER INTANGIBLE ASSETS—Net

Goodwill

The following table presents the changes in the carrying amount of goodwill (in millions):

			Amount
Balance—December 31, 2023			$	126.5
Additions due to business combinations			86.5
Foreign currency translation adjustments			(0.2)
Balance—September 30, 2024			$	212.8

There were no impairments to goodwill during the nine months ended September 30, 2024 or during prior periods.

Other Intangible Assets—Net

The following tables present other intangible assets—net (in millions, except years):

			September 30, 2024
			Weighted-Average Useful Life (in Years)						Gross						Accumulated Amortization						Net
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies			4.4						$	134.4					$	68.5					$	65.9
Customer relationships			5.8						49.0						20.7						28.3
Trade name			7.7						9.2						1.6						7.6
Backlog			2.4						13.9						4.1						9.8
Total other intangible assets—net									$	206.5					$	94.9					$	111.6

			December 31, 2023
			Weighted-Average Useful Life (in Years)						Gross						Accumulated Amortization						Net
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies			4.4						$	79.4					$	60.6					$	18.8
Customer relationships			7.1						30.4						17.7						12.7
Trade name			10.0						5.0						1.2						3.8
Backlog			1.0						3.9						3.9						—
Total other intangible assets—net									$	118.7					$	83.4					$	35.3

Amortization expense was $5.3 million and $4.4 million during the three months ended September 30, 2024 and 2023, respectively. Amortization expense was $11.6 million and $13.6 million during the nine months ended September 30, 2024 and 2023, respectively.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes estimated future amortization expense of finite-lived intangible assets—net (in millions):

			Amount
Years:
2024 (the remainder of 2024)			$	9.6
2025			34.2
2026			23.6
2027			19.0
2028			13.3
Thereafter			11.9
Total			$	111.6

9. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units (“RSUs”), stock options and performance stock units (“PSUs”). Dilutive shares of common stock are determined by applying the treasury stock method.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is (in millions, except per share amounts):

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Numerator:
Net income			$	539.9					$	322.9					$	1,219.0					$	836.9
Denominator:
Basic shares:
Weighted-average common stock outstanding-basic			765.0						781.2						763.7						783.1
Diluted shares:
Weighted-average common stock outstanding-basic			765.0						781.2						763.7						783.1
Effect of potentially dilutive securities:
RSUs			2.0						3.5						2.1						3.8
Stock options			4.4						6.2						4.7						6.4
PSUs			0.5						0.3						0.3						0.2
Weighted-average shares used to compute diluted net income per share			771.9						791.2						770.8						793.5
Net income per share
Basic			$	0.71					$	0.41					$	1.60					$	1.07
Diluted			$	0.70					$	0.41					$	1.58					$	1.05

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following weighted-average shares of common stock were excluded from the computation of diluted net income per share for the periods presented, as their effect would have been antidilutive (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
RSUs			0.4						—						0.2						0.6
Stock options			3.1						3.0						3.3						2.8
PSUs			—						—						0.1						—
Total			3.5						3.0						3.5						3.4

10. DEBT

2026 and 2031 Senior Notes

On March 5, 2021, we issued $1.0 billion aggregate principal amount of senior notes (collectively, the “Senior Notes”), consisting of $500.0 million aggregate principal amount of 1.0% notes due March 15, 2026 (the “2026 Senior Notes”) and $500.0 million aggregate principal amount of 2.2% notes due March 15, 2031 (the “2031 Senior Notes”), in an underwritten registered public offering. The Senior Notes are senior unsecured obligations and rank equally with each other in right of payment and with our other outstanding obligations. We may redeem the Senior Notes at any time in whole or in part for cash, at specified redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the 2026 Senior Notes on or after February 15, 2026, or the 2031 Senior Notes on or after December 15, 2030. Interest on the Senior Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2021. As of September 30, 2024 and December 31, 2023, the Senior Notes were recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective contractual terms of these notes using the effective interest method.

The total outstanding debt is summarized below (in millions, except percentages):

			Maturity						Coupon Rate						Effective Interest Rate						September 30, 2024						December 31, 2023
Debt
2026 Senior Notes			March 2026						1.0%						1.3%						$	500.0					$	500.0
2031 Senior Notes			March 2031						2.2%						2.3%						500.0						500.0
Total debt																					1,000.0						1,000.0
Less: Unamortized discount and debt issuance costs																					6.2						7.7
Total long-term debt																					$	993.8					$	992.3

As of September 30, 2024 and December 31, 2023, we accrued interest payable of $0.7 million and $4.7 million, respectively, and there are no financial covenants with which we must comply. During the three months ended September 30, 2024 and 2023, we recorded $4.5 million of total interest expense in relation to these Senior Notes in each period. During the nine months ended September 30, 2024 and 2023, we recorded $13.5 million of total interest expense in relation to these Senior Notes in each period. No interest costs were capitalized for the nine months ended September 30, 2024 and 2023, as the costs that qualified for capitalization were not material.

The total estimated fair value of the outstanding Senior Notes was approximately $912.8 million, including accrued and unpaid interest, as of September 30, 2024. The fair value was determined based on observable market prices of identical instruments in less active markets. The estimated fair values are based on Level 2 inputs.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. COMMITMENTS AND CONTINGENCIES

The following table summarizes our inventory purchase commitments as of September 30, 2024 (in millions):

			Total						2024						Thereafter
Inventory purchase commitments			$	550.0					$	393.7					$	156.3

Inventory Purchase Commitments—We purchase components of our inventory from certain suppliers and use several independent contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that allow them to procure inventory based upon criteria as defined by us or establish the parameters defining our requirements. A significant portion of our reported purchase commitments arising from these agreements consists of firm, non-cancelable and unconditional commitments. Certain of these inventory purchase commitments with contract manufacturers and suppliers relate to arrangements to secure supply and pricing for certain product components for multi-year periods. In certain instances, these agreements allow us the option to reschedule and adjust our requirements based on our business needs prior to firm orders being placed.

As of September 30, 2024, we had $550.0 million of non-cancelable inventory purchase commitments with our independent contract manufacturers. We recorded a liability for these purchase commitments for quantities in excess of our future estimated demand forecasts, consistent with the valuation of our excess and obsolete inventory. As of September 30, 2024 and December 31, 2023, the liability for these inventory purchase commitments was $76.3 million and $84.7 million, respectively, and was recorded in accrued liabilities on our condensed consolidated balance sheets. The cost of product revenue related to such liabilities was a $27.4 million benefit and a $36.9 million cost during the three months ended September 30, 2024 and 2023, respectively. The cost of product revenue related to such accrued liability for inventory purchase commitments was $11.2 million and $59.3 million during the nine months ended September 30, 2024 and 2023, respectively.

Other Contractual Commitments and Open Purchase Orders—In addition to commitments with contract manufacturers, we have open purchase orders and contractual obligations in the ordinary course of business for which we have not received goods or services. A significant portion of our reported purchase commitments consist of non-cancelable commitments. In certain instances, contractual commitments allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to firm orders being placed. As of September 30, 2024, we had $116.5 million in other contractual commitments having a remaining term in excess of one year that are non-cancelable.

As of September 30, 2024, we had $83.1 million in contractual commitments related to payments for operating leases.

Litigation—We are involved in disputes, litigation, and other legal actions. For lawsuits where we are the defendant, we are in the process of defending these litigation matters, and while there can be no assurances and the outcome of certain of these matters is currently not determinable and not predictable, we currently are unaware of any existing claims or proceedings that we believe are likely to have a material adverse effect on our financial position. There are many uncertainties associated with any litigation and these actions or other third-party claims against us may cause us to incur costly litigation fees, costs and substantial settlement charges, and possibly subject us to damages and other penalties. In addition, the resolution of any intellectual property (“IP”) litigation may require us to make royalty payments, which could adversely affect our gross margins in future periods. If any of those events were to occur, our business, financial condition, results of operations, and cash flows could be adversely affected. Litigation is unpredictable and the actual liability in any such matters may be materially different from our current estimates, which could result in the need to adjust any accrued liability and record additional expenses. We accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss. These accruals are generally based on a range of possible outcomes that require significant management judgement. If no amount within a range is a better estimate than any other, we accrue the minimum amount. Litigation loss contingency accruals associated with outstanding cases were not material as of September 30, 2024, and December 31, 2023.

On March 21, 2019, we were sued by Alorica Inc. (“Alorica”) in Santa Clara County Superior Court in California. Alorica alleged breach of warranty and misrepresentation claims, which we denied. After trial, a jury returned a verdict fully in favor of us and against Alorica on October 4, 2024. The time for Alorica to appeal the verdict has not yet expired. We believe that the ultimate outcome of this matter will not materially impact our financial position, results of operations or cash flows. However, if Alorica appeals, any legal proceedings would be subject to inherent uncertainties, and a future unfavorable ruling could occur. No loss accrual had been recorded as of September 30, 2024 or December 31, 2023 related to this litigation.

Indemnification and Other Matters—We enter into indemnification provisions in the ordinary course of business with other companies such as partners, customers, and vendors, where we agree to indemnify, hold harmless, and reimburse the

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

indemnified party for certain losses suffered or incurred by the indemnified party as a result of our activities, including defending against third-party claims asserting various allegations such as product defects, breach of representations or covenants, and infringement of certain IP rights, which may include patents, copyrights, trademarks or trade secrets, and to pay judgments entered on such claims. In some contracts, our exposure under these indemnification provisions is limited by the terms of the contracts to certain defined limits, such as the total amount paid by our customer under the agreement. However, certain agreements include covenants, penalties and indemnification provisions including and beyond indemnification for third-party claims of IP infringement that could potentially expose us to losses in excess of the amount received under the agreement, and in some instances to potential liability that is not contractually limited. Although from time to time there are indemnification claims asserted against us and currently there are pending indemnification claims, to date there have been no material awards under such indemnification provisions.

Periodically we, like other security companies and companies in other industries, have experienced, and may experience in the future, cybersecurity threats, malicious activity directed against our information technology infrastructure and unauthorized attempts to gain access to our and our customers’ sensitive information and systems. For example, in the third quarter of 2024, we discovered that an individual gained unauthorized access to a limited number of files stored on Fortinet’s instance of a third-party cloud-based shared file drive, which included limited data related to a small number of Fortinet customers. We have completed our investigation of this incident and we do not currently believe that it had a material impact on our business or that of any of our customers. We are currently not aware of any significant claims arising from this matter.

12. EQUITY PLANS AND SHARE REPURCHASE PROGRAM

Stock-Based Compensation Plans

We maintain the Amended and Restated Fortinet, Inc. 2009 Equity Incentive Plan (the “Amended Plan”) pursuant to which we have granted RSUs, stock options and PSUs. As of September 30, 2024, there were a total of 50.8 million shares of common stock available for grant under the Amended Plan.

Restricted Stock Units

The following table summarizes the activity and related information for RSUs for the periods presented below (in millions, except per share amounts):

			Restricted Stock Units Outstanding
			Number of Shares						Weighted-Average Grant Date Fair Value per Share
Balance—December 31, 2023			9.1						$	53.61
Granted			4.0						67.49
Forfeited			(0.7)						58.64
Vested			(3.6)						49.14
Balance—September 30, 2024			8.8						$	61.38

Stock compensation expense is recognized on a straight-line basis over the vesting period of each RSU. As of September 30, 2024, total compensation expense related to unvested RSUs granted to employees and non-employees under the Amended Plan, but not yet recognized, was $483.5 million, with a weighted-average remaining vesting period of 2.7 years.

RSUs settle into shares of common stock upon vesting. Upon the vesting of the RSUs, we net-settle the RSUs and withhold a portion of the shares to satisfy employee withholding tax requirements. The payment of the withheld taxes to the tax authorities is reflected as a financing activity within the condensed consolidated statements of cash flows.

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following summarizes the number and value of the shares withheld for employee taxes (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Shares withheld for taxes			0.3						0.4						1.2						1.5
Amount withheld for taxes			$	16.5					$	31.0					$	79.6					$	90.7

Employee Stock Options

The following table summarizes the weighted-average assumptions relating to our employee stock options:

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Expected term in years			4.5						4.4						4.5						4.4
Volatility			41.7		%				42.8		%				42.8		%				42.0		%
Risk-free interest rate			3.7		%				4.5		%				4.3		%				4.2		%
Dividend rate			—		%				—		%				—		%				—		%

The following table summarizes the stock option activity and related information for the periods presented below (in millions, except exercise prices and contractual life):

			Options Outstanding
			Number of Shares						Weighted- Average Exercise Price						Weighted- Average Remaining Contractual Life (Years)						Aggregate Intrinsic Value
Balance—December 31, 2023			11.2						$	31.14					3.3						$	315.8
Granted			0.7						65.94
Forfeited			(0.2)						54.28
Exercised			(2.2)						17.71
Balance—September 30, 2024			9.5						$	36.56
Options vested and expected to vest—September 30, 2024			9.5						$	36.56					3.2						$	391.3
Options exercisable—September 30, 2024			7.3						$	29.39					2.5						$	350.3

The aggregate intrinsic value represents the difference between the exercise price of stock options and the quoted market price of our common stock for all in-the-money stock options. Stock compensation expense is recognized on a straight-line basis over the vesting period of each stock option. As of September 30, 2024, total compensation expense related to unvested stock options granted to employees but not yet recognized was $49.9 million, with a weighted-average remaining vesting period of 2.4 years.

Additional information related to our stock options is summarized below (in millions, except per share amounts):

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Weighted-average fair value per share granted			$	29.86					$	23.67					$	27.05					$	24.37
Intrinsic value of options exercised			$	42.6					$	13.9					$	112.5					$	110.9
Fair value of options vested			$	6.4					$	6.1					$	25.0					$	23.5

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Market/Performance-Based PSUs

We granted market/performance-based PSUs under the Amended Plan to certain of our executives. Based on the achievement of the market/performance-based vesting conditions during the performance period, the final settlement of the PSUs will range between 0% and 200% of the target shares underlying the PSUs based on the percentile ranking of our total stockholder return over one-, two-, three- and four-year periods among companies included in the S&P 500 Index. 20%, 20%, 20% and 40% of the PSUs vest over one-, two-, three- and four-year service periods, respectively.

The following table summarizes the weighted-average assumptions relating to our PSUs:

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Expected term in years			2.7						2.7						2.7						2.7
Volatility			45.4		%				47.5		%				45.4		%				47.5		%
Risk-free interest rate			4.5		%				4.6		%				4.5		%				4.6		%
Dividend rate			—		%				—		%				—		%				—		%

We granted approximately 0.3 million shares of PSU awards with a weighted-average grant date fair value of $97.40 per share to certain of our executives during the three and nine months ended September 30, 2024. We granted approximately 0.3 million shares of PSU awards with a weighted-average grant date fair value of $90.96 per share to certain of our executives during the three and nine months ended September 30, 2023. The grant date fair value of these awards was determined using a Monte Carlo simulation pricing model. Approximately 0.1 million shares of PSU awards vested during the first quarter of 2024. No shares of PSU awards vested during the second and third quarter of 2024 or the nine months ended September 30, 2023. Approximately 0.1 million shares of PSU awards were forfeited during the three and nine months ended September 30, 2024. None of these PSU awards were forfeited during the nine months ended September 30, 2023.

As of September 30, 2024, total compensation expense related to unvested PSUs that were granted to certain of our executives, but not yet recognized, was $27.0 million. This expense is expected to be amortized on a graded vesting method over a weighted-average vesting period of 2.3 years.

Stock-Based Compensation Expense

Stock-based compensation expense, including stock-based compensation expense related to awards classified as liabilities, is included in costs and expenses (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Cost of product revenue			$	0.5					$	0.4					$	1.4					$	1.3
Cost of service revenue			6.3						6.1						19.0						17.2
Research and development			21.9						20.0						63.0						57.0
Sales and marketing			27.0						28.5						79.6						84.1
General and administrative			10.7						9.9						30.7						28.0
Total stock-based compensation expense			$	66.4					$	64.9					$	193.7					$	187.6

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes stock-based compensation expense, including stock-based compensation expense related to awards classified as liabilities, by award type (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
RSUs			$	54.8					$	54.2					$	160.8					$	158.4
Stock options			6.9						7.5						21.3						21.5
PSUs			4.7						3.2						11.6						7.7
Total stock-based compensation expense			$	66.4					$	64.9					$	193.7					$	187.6

Total income tax benefit associated with stock-based compensation that is recognized in the condensed consolidated statements of income is (in millions):

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Income tax benefit associated with stock-based compensation			$	14.7					$	14.3					$	42.9					$	41.4

Share Repurchase Program

In January 2024, our board of directors approved a $500.0 million increase in the authorized share repurchase amount under the Repurchase Program, bringing the aggregate amount authorized to be repurchased to $7.25 billion of our outstanding common stock. In February 2024, our board of directors approved an extension of the Repurchase Program to February 28, 2025. Share repurchases may be made by us from time to time in privately negotiated transactions or in open-market transactions. The Repurchase Program does not require us to purchase a minimum number of shares, and may be suspended, modified or discontinued at any time without prior notice.

During the three and nine months ended September 30, 2024, we repurchased less than 0.1 million shares of our common stock under the Repurchase Program in open-market transactions, at a weighted-average price of $54.99 per share, for an aggregate purchase price of $0.6 million. As of September 30, 2024, $1.03 billion remained available for future share repurchases under the Repurchase Program. Refer to Note 16, Subsequent Events, for information regarding the October 2024 approval of a $1.0 billion increase in the authorized stock repurchase amount under the Repurchase Program and the extension of the Repurchase Program to February 28, 2026.

13. INCOME TAXES

Our effective tax rate was 13% for the three months ended September 30, 2024, compared to an effective tax rate of 0% for the same period last year. Our effective tax rate was 14% for the nine months ended September 30, 2024, compared to an effective tax rate of 5% for the same period last year. The tax rates for the three months ended September 30, 2024 and 2023 were comprised of U.S. federal and state taxes, withholding taxes and foreign taxes that amounted to $123.6 million and $50.2 million, respectively. The tax rate for the three months ended September 30, 2024 was impacted by a tax benefit of $33.1 million from the foreign-derived intangible income (“FDII”) deduction, and excess tax benefits from stock-based compensation expense of $9.3 million. The tax rate for the three months ended September 30, 2023 was impacted by a tax benefit of $41.9 million from the FDII deduction, excess tax benefits from stock-based compensation expense of $8.6 million.

The tax rates for the nine months ended September 30, 2024 and 2023 were comprised of U.S. federal and state taxes, withholding taxes and foreign taxes that amounted to $315.0 million and $220.9 million, respectively. The tax rate for the nine months ended September 30, 2024 was impacted by a tax benefit of $84.0 million from the FDII deduction, and excess tax benefits from stock-based compensation expense of $33.8 million. The tax rate for the nine months ended September 30, 2023 was impacted by a tax benefit of $105.9 million from the FDII deduction, excess tax benefits from stock-based compensation expense of $48.3 million, and the release of reserves of $18.1 million on uncertain tax positions and the accrued interest thereon due to the expiration of statutes of limitations.

As of September 30, 2024 and December 31, 2023, unrecognized tax benefits were $72.3 million and $65.8 million, respectively. If recognized, $61.0 million of the unrecognized tax benefits as of September 30, 2024 would favorably affect our

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

effective tax rate. It is our policy to include accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2024 and December 31, 2023, accrued interest and penalties were $8.4 million and $6.4 million, respectively. It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $1.4 million in the next 12 months, due to the lapse of statutes of limitation in various jurisdictions. This decrease, if recognized, would favorably impact our effective tax rate, and would be recognized as an additional tax benefit.

As of September 30, 2024, our deferred tax assets were $1.30 billion, an increase of $301.9 million over the prior quarter. The increase was primarily due to the acquisition of Lacework, the opening balance sheet of which included deferred tax assets of $244.4 million primarily related to pre-acquisition federal net operating loss carryforwards with an indefinite carryforward period.

We file income tax returns in the U.S. federal jurisdiction and in various U.S. state and foreign jurisdictions. Generally, we are no longer subject to examination by U.S federal income tax authorities for tax years prior to 2015. We are no longer subject to U.S. state and foreign income tax examinations by tax authorities for tax years prior to 2010. We currently have ongoing tax audits in the United Kingdom, Canada and several other foreign jurisdictions. The focus of these audits is the inter-company profit allocation.

On January 4, 2022, the U.S. Treasury published another tranche of final regulations regarding the foreign tax credit. These final regulations impose new requirements that a foreign tax must meet in order to be creditable against U.S. income taxes, and generally apply to tax years beginning on or after December 28, 2021. On July 26, 2022, the U.S. Treasury released corrections to the final regulations. On July 21, 2023, the IRS released a notice that suspended the application of significant portions of the final regulations regarding the foreign tax credit for tax years 2022 and 2023. The notice released in July 2023 favorably impacted our ability to claim foreign tax credits in the United States for certain taxes imposed by certain foreign jurisdictions. On December 11, 2023, the IRS released a notice that extended the suspension of significant portions of the final regulations beyond December 31, 2023, until further guidance is issued.

In December 2021, the Organisation for Economic Co-operation and Development (the “OECD”) enacted model rules for a new global minimum tax framework (“BEPS Pillar Two”), and various governments around the world have enacted, or are in the process of enacting, legislation on this. The OECD continues to release additional guidance on these rules. Based on the enacted laws, BEPS Pillar Two has no impact to our effective tax rate or cash flows for the nine months ended September 30, 2024. We will continue to evaluate the impact of these tax law changes on future reporting periods.

14. DEFINED CONTRIBUTION PLANS

Our tax-deferred savings plan under our 401(k) Plan permits participating U.S. employees to contribute a portion of their pre-tax or after-tax earnings. In Canada, we have a Group Registered Retirement Savings Plan Program (the “RRSP”), which permits participants to make pre-tax contributions. Our board of directors approved 50% matching contributions on employee contributions up to 4% of each employee’s eligible earnings. Our matching contributions to our 401(k) Plan and the RRSP for the three months ended September 30, 2024 and 2023 were $4.6 million and $3.8 million, respectively. Our matching contributions to our 401(k) Plan and the RRSP for the nine months ended September 30, 2024 and 2023 were $15.2 million and $13.9 million, respectively.

15. SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer. Our chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. We have one business activity, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, we have determined that we have one operating segment, and therefore, one reportable segment.

Revenue by geographic region is based on the billing address of our customers. The following tables set forth revenue and property and equipment—net by geographic region (in millions):

			Three Months Ended												Nine Months Ended
Revenue			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Americas:
United States			$	455.1					$	400.8					$	1,297.9					$	1,189.6
Other Americas			168.9						144.8						478.4						416.5
Total Americas			624.0						545.6						1,776.3						1,606.1
Europe, Middle East and Africa (“EMEA”)			599.3						512.2						1,703.9						1,497.3
Asia Pacific (“APAC”)			284.8						276.8						815.5						786.3
Total revenue			$	1,508.1					$	1,334.6					$	4,295.7					$	3,889.7

Property and Equipment—net			September 30, 2024						December 31, 2023
Americas:
United States			$	921.6					$	701.6
Canada			213.7						212.8
Latin America			4.0						2.3
Total Americas			1,139.3						916.7
EMEA			70.9						65.5
APAC			63.2						62.2
Total property and equipment—net			$	1,273.4					$	1,044.4

The following distributors accounted for 10% or more of our revenue:

			Three Months Ended												Nine Months Ended
			September 30, 2024						September 30, 2023						September 30, 2024						September 30, 2023
Distributor A			27		%				28		%				29		%				28		%
Distributor B			15		%				15		%				15		%				15		%
Distributor C			12		%				13		%				13		%				14		%

The following distributors accounted for 10% or more of net accounts receivable:

			September 30, 2024						December 31, 2023
Distributor A			27		%				33		%
Distributor B			13		%				14		%
Distributor C			10		%				10		%

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. SUBSEQUENT EVENTS

Real Property Purchase

In November 2024, we purchased real property in Atlanta, Georgia, for $15.8 million in cash.

Share Repurchase Program

In October 2024, our board of directors approved a $1.0 billion increase in the authorized stock repurchase amount under the Repurchase Program and extended the term of the Repurchase Program to February 28, 2026, bringing the aggregate amount authorized to be repurchased to $8.25 billion of our outstanding common stock through February 28, 2026. As of November 8, 2024, approximately $2.03 billion remained available for future share repurchases.