10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34511

______________________________________

FORTINET, INC.

(Exact name of registrant as specified in its charter)

______________________________________

Delaware	77-0560389
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

899 Kifer Road Sunnyvale, California	94086
(Address of principal executive offices)	(Zip Code)

(408) 235-7700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x		Accelerated filer	o
Non-accelerated filer	o	(Do not check if smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o     No  x

As of July 31, 2015, there were 171,151,438 shares of the registrant’s common stock outstanding.

FORTINET, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2015

Table of Contents

		Page
	Part I
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	35
	Part II
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 6.	Exhibits	59
	Signatures	60

Part I

Item 1. Financial Statements

FORTINET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except per share amounts)

	June 30, 2015			December 31, 2014
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	481,393		$	283,254
Short-term investments	391,634			436,766
Accounts receivable—net of sales returns reserve and allowance for doubtful accounts of $5,834 and $6,204 as of June 30, 2015 and December 31, 2014, respectively	176,849			184,741
Inventory	68,845			69,477
Deferred tax assets	41,463			41,484
Prepaid expenses and other current assets	35,326			31,143
Total current assets	1,195,510			1,046,865
LONG-TERM INVESTMENTS	275,344			271,724
PROPERTY AND EQUIPMENT—net	71,465			58,919
DEFERRED TAX ASSETS	44,152			31,080
GOODWILL	2,824			2,824
OTHER INTANGIBLE ASSETS—net	693			2,832
OTHER ASSETS	14,888			10,530
TOTAL ASSETS	$	1,604,876		$	1,424,774
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	42,336		$	49,947
Accrued liabilities	29,145			29,016
Accrued payroll and compensation	51,545			45,875
Income taxes payable	1,096			2,689
Deferred revenue	441,177			368,929
Total current liabilities	565,299			496,456
DEFERRED REVENUE	216,384			189,828
INCOME TAXES PAYABLE	56,765			45,139
OTHER LIABILITIES	15,601			17,385
Total liabilities	854,049			748,808
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value — 300,000 shares authorized; 170,449 and 166,443 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively	170			166
Additional paid-in capital	634,969			562,504
Accumulated other comprehensive loss	(309		)	(349		)
Retained earnings	115,997			113,645
Total stockholders’ equity	750,827			675,966
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,604,876		$	1,424,774

See notes to condensed consolidated financial statements.

3

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
REVENUE:
Product	$	114,777		$	85,384		$	212,286		$	162,149
Service	125,008			98,714			240,385			190,898
Total revenue	239,785			184,098			452,671			353,047
COST OF REVENUE:
Product	47,397			37,455			88,765			69,594
Service	22,101			20,302			44,335			38,906
Total cost of revenue	69,498			57,757			133,100			108,500
GROSS PROFIT:
Product	67,380			47,929			123,521			92,555
Service	102,907			78,412			196,050			151,992
Total gross profit	170,287			126,341			319,571			244,547
OPERATING EXPENSES:
Research and development	37,389			29,938			73,205			58,993
Sales and marketing	111,928			74,817			212,537			142,143
General and administrative	18,018			10,444			29,979			19,454
Total operating expenses	167,335			115,199			315,721			220,590
OPERATING INCOME	2,952			11,142			3,850			23,957
INTEREST INCOME	1,364			1,319			2,786			2,652
OTHER EXPENSE—net	(830		)	(574		)	(1,507		)	(963		)
INCOME BEFORE INCOME TAXES	3,486			11,887			5,129			25,646
PROVISION FOR INCOME TAXES	2,694			5,806			2,777			11,172
NET INCOME	$	792		$	6,081		$	2,352		$	14,474
Net income per share (Note 6):
Basic	$	—		$	0.04		$	0.01		$	0.09
Diluted	$	—		$	0.04		$	0.01		$	0.09
Weighted-average shares outstanding:
Basic	169,930			163,161			169,009			162,778
Diluted	176,234			168,345			174,983			168,015

See notes to condensed consolidated financial statements.

4

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

	Three Months Ended						Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
Net income	$	792		$	6,081		$	2,352		$	14,474
Other comprehensive income (loss)—net of taxes:
Foreign currency translation gains	—			1,118			—			101
Unrealized gains (losses) on investments	(822		)	(21		)	63			(19		)
Tax benefit (provision) related to items of other comprehensive income or loss	287			7			(23		)	7
Other comprehensive income (loss)—net of taxes	(535		)	1,104			40			89
Comprehensive income	$	257		$	7,185		$	2,392		$	14,563

See notes to condensed consolidated financial statements.

5

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Six Months Ended
	June 30, 2015			June 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,352		$	14,474
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,382			10,914
Amortization of investment premiums	3,881			4,752
Stock-based compensation	40,525			27,646
Excess tax benefit from stock-based compensation	—			(2,443		)
Other non-cash items—net	1,891			3,549
Changes in operating assets and liabilities:
Accounts receivable—net	9,523			2,228
Inventory	(7,917		)	(3,307		)
Deferred tax assets	(13,072		)	(6,470		)
Prepaid expenses and other current assets	(3,492		)	(4,523		)
Other assets	(513		)	159
Accounts payable	(8,383		)	1,253
Accrued liabilities	(228		)	1,544
Accrued payroll and compensation	5,670			8,665
Other liabilities	(1,884		)	15,375
Deferred revenue	97,156			47,871
Income taxes payable	10,033			(16,987		)
Net cash provided by operating activities	148,924			104,700
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments	(229,479		)	(283,338		)
Sales of investments	22,472			22,864
Maturities of investments	240,625			273,214
Purchases of property and equipment	(15,688		)	(21,022		)
Other	—			(17		)
Net cash provided by (used in) investing activities	17,930			(8,299		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	42,647			22,518
Taxes paid related to net share settlement of equity awards	(11,362		)	(5,521		)
Excess tax benefit from stock-based compensation	—			2,443
Repurchase and retirement of common stock	—			(27,167		)
Net cash provided by (used in) financing activities	31,285			(7,727		)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS	—			(600		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	198,139			88,074
CASH AND CASH EQUIVALENTS—Beginning of period	283,254			115,873
CASH AND CASH EQUIVALENTS—End of period	$	481,393		$	203,947
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes—net	$	10,077		$	31,413
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units from inventory to property and equipment	$	8,923		$	5,668
Liability for purchase of property and equipment and asset retirement obligations	$	1,359		$	6,946
Liability incurred for repurchase of common stock	$	—		$	733

See notes to condensed consolidated financial statements.

6

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Preparation—The unaudited condensed consolidated financial statements of Fortinet, Inc. and its wholly-owned 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 (“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, 2014, contained in our Annual Report on Form 10-K (“Form 10-K”) filed with the SEC on March 2, 2015. In the opinion of management, all adjustments, which includes normal recurring adjustments, considered necessary for a fair presentation have been included. All intercompany balances, transactions and cash flows have been eliminated. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2014 is derived from the audited consolidated financial statements for the year ended December 31, 2014.

The preparation of 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 six months ended June 30, 2015.

In the third quarter of 2014, we reevaluated the selected functional currency of our international subsidiaries due to the nature of our business operations and recorded the cumulative impact of the reevaluation of the functional currency in the consolidated statement of operations. Subsequently, the remeasurement of the assets and liabilities of all international subsidiaries has been recorded in the consolidated statement of operations prospectively. The impact of this reevaluation was not material for 2014 or any of our previously issued financial statements.

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-11—Inventory—Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”). ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. It applies to entities that measure inventory using a method other than last-in, first-out or the retail inventory method (e.g., first-in first-out, average cost). ASU 2015-11 will be effective for us beginning on January 1, 2017. We are currently evaluating the impact of ASU 2015-11 on our consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09—Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) to create a single, joint revenue standard that is consistent across all industries and markets for companies that prepare their financial statements in accordance with GAAP. Under ASU 2014-09, an entity is required to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. As such, ASU 2014-09 will be effective for us beginning on January 1, 2018, with the option to adopt earlier on January 1, 2017. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements.

7

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The following table summarizes our investments as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate debt securities	$	551,352	$	187	$	(635	)	$	550,904
Commercial paper	46,639		2		(4		)	46,637
Municipal bonds	58,705		21		(50		)	58,676
Certificates of deposit and term deposits (1)	7,760		—		—			7,760
U.S. government and agency securities	2,999		2		—			3,001
Total available-for-sale securities	$	667,455	$	212	$	(689	)	$	666,978

	December 31, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate debt securities	$	589,526	$	365	$	(875	)	$	589,016
Commercial paper	51,156		3		(4		)	51,155
Municipal bonds	39,745		15		(39		)	39,721
Certificates of deposit and term deposits (1)	22,854		—		—			22,854
U.S. government and agency securities	5,749		1		(6		)	5,744
Total available-for-sale securities	$	709,030	$	384	$	(924	)	$	708,490

⁽¹⁾ The majority of our certificates of deposit and term deposits are foreign deposits.

The following table shows the gross unrealized losses and the related fair values of our investments that have been in a continuous unrealized loss position as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	283,789	$	(522	)	$	41,362	$	(113	)	$	325,151	$	(635	)
Commercial paper	11,769		(4		)	—		—			11,769		(4		)
Municipal bonds	34,667		(46		)	1,576		(4		)	36,243		(50		)
Total available-for-sale securities	$	330,225	$	(572	)	$	42,938	$	(117	)	$	373,163	$	(689	)

8

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	December 31, 2014
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	317,011	$	(858	)	$	6,011	$	(17	)	$	323,022	$	(875	)
Commercial paper	8,185		(4		)	—		—			8,185		(4		)
Municipal bonds	26,684		(39		)	—		—			26,684		(39		)
U.S. government and agency securities	4,745		(6		)	—		—			4,745		(6		)
Total available-for-sale securities	$	356,625	$	(907	)	$	6,011	$	(17	)	$	362,636	$	(924	)

The contractual maturities of our investments as of June 30, 2015 and December 31, 2014 were as follows (in thousands):

	June 30, 2015		December 31, 2014
Due within one year	$	391,634	$	436,766
Due within one to three years	275,344		271,724
Total	$	666,978	$	708,490

Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, included as a separate component of stockholders’ equity and in total comprehensive income. Realized gains and losses on available-for-sale securities are included in Other expense—net in our condensed consolidated statements of operations. Realized gains and losses from the sale of available-for-sale securities were not significant in any period presented.

The unrealized losses on our available-for-sale securities were caused by fluctuations in market value and interest rates as a result of the economic environment. As the decline in market value is attributable to changes in market conditions and not credit quality, and because we have concluded currently that we neither intend to sell nor is it more likely than not that we will be required to sell these investments prior to a recovery of par value, we do not consider these investments to be other-than temporarily impaired as of June 30, 2015.

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 as follows:

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 and certain U.S. government and agency 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

9

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Fair Value of Financial Instruments

Assets Measured at Fair Value on a Recurring Basis

The following table presents the fair value of our financial assets measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015						December 31, 2014
	Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs		Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs
			(Level 1)		(Level 2)				(Level 1)		(Level 2)
Assets:
Corporate debt securities	$	550,904	$	—	$	550,904	$	589,016	$	—	$	589,016
Commercial paper	58,634		—		58,634		51,155		—		51,155
Municipal bonds	58,676		—		58,676		39,721		—		39,721
Certificates of deposit and term deposits	7,760		—		7,760		22,854		—		22,854
Money market funds	31,193		31,193		—		13,311		13,311		—
U.S. government and agency securities	3,001		2,000		1,001		5,744		1,998		3,746
Total	$	710,168	$	33,193	$	676,975	$	721,801	$	15,309	$	706,492
Reported as:
Cash equivalents	$	43,190					$	13,311
Short-term investments	391,634						436,766
Long-term investments	275,344						271,724
Total	$	710,168					$	721,801

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the period ended June 30, 2015.

3. INVENTORY

Inventory consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015		December 31, 2014
Raw materials	$	12,235	$	10,617
Finished goods	56,610		58,860
Total inventory	$	68,845	$	69,477

Inventory includes finished goods held by distributors where revenue is recognized on a sell-through basis of $1.2 million as of June 30, 2015 and December 31, 2014. Inventory also includes raw materials at contract manufacturers of $4.2 million and $4.8 million as of June 30, 2015 and December 31, 2014, respectively.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. PROPERTY AND EQUIPMENT—net

Property and equipment—net consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015			December 31, 2014
Land	$	14,943		$	13,895
Building and building improvements	20,298			20,166
Evaluation units	38,140			31,474
Computer equipment and software	40,616			31,821
Furniture and fixtures	7,160			5,096
Construction-in-progress	7,923			3,902
Leasehold improvements	8,703			7,998
Total property and equipment	137,783			114,352
Less: accumulated depreciation	(66,318		)	(55,433		)
Property and equipment—net	$	71,465		$	58,919

Depreciation expense was $6.8 million and $6.0 million during the three months ended June 30, 2015 and June 30, 2014, respectively. Depreciation expense was $12.8 million and $9.9 million during the six months ended June 30, 2015 and June 30, 2014, respectively.

5. INVESTMENTS IN PRIVATELY-HELD COMPANIES

As of June 30, 2015, we had invested a total of $10.3 million in the equity securities of three privately-held companies. Each of these investments is accounted for as a cost-basis investment, as we own less than 20% of the voting securities and do not have the ability to exercise significant influence over operating and financial policies of the respective entities. These investments are carried at historical cost and are recorded as Other assets on our condensed consolidated balance sheets and would be measured at fair value if indicators of impairment existed.

During the six months ended June 30, 2015, no events have occurred that would adversely affect the carrying value of these investments.

6. 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, plus the dilutive effects of stock options, restricted stock units (“RSUs”) including performance stock units (“PSUs”), and the employee stock purchase plan (“ESPP”). Dilutive shares of common stock are determined by applying the treasury stock method.

11

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Numerator:
Net income	$	792	$	6,081	$	2,352	$	14,474
Denominator:
Basic shares:
Weighted-average common stock outstanding—basic	169,930		163,161		169,009		162,778
Diluted shares:
Weighted-average common stock outstanding—basic	169,930		163,161		169,009		162,778
Effect of potentially dilutive securities:
Stock options	3,720		4,583		3,779		4,753
RSUs (including PSUs)	2,521		600		2,131		462
ESPP	63		1		64		22
Weighted-average shares used to compute diluted net income per share	176,234		168,345		174,983		168,015
Net income per share:
Basic	$	—	$	0.04	$	0.01	$	0.09
Diluted	$	—	$	0.04	$	0.01	$	0.09

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 anti-dilutive (in thousands):

	Three Months Ended		Six Months Ended
	June 30, 2015	June 30, 2014	June 30, 2015	June 30, 2014
Stock options	299	4,201	274	4,323
RSUs (including PSUs)	414	593	873	1,871
ESPP	—	—	84	261
	713	4,794	1,231	6,455

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7. DEFERRED REVENUE

Deferred revenue consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

13

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	June 30, 2015		December 31, 2014
Product	$	4,461	$	4,642
Service	653,100		554,115
Total deferred revenue	$	657,561	$	558,757
Reported as:
Current	$	441,177	$	368,929
Non-current	216,384		189,828
Total deferred revenue	$	657,561	$	558,757

8. COMMITMENTS AND CONTINGENCIES

The following table summarizes our future principal contractual obligations as of June 30, 2015 (in thousands):

	Total		2015 (remainder)		2016		2017		2018		2019		Thereafter
Operating lease commitments	$	50,093	$	7,064	$	12,054	$	8,536	$	6,865	$	5,684	$	9,890
Less: sublease rental income	57		57		—		—		—		—		—
Operating lease commitments—net	50,036		7,007		12,054		8,536		6,865		5,684		9,890
Inventory purchase commitments	74,322		74,322		—		—		—		—		—
Other contractual commitments and open purchase orders	33,944		28,729		3,675		978		305		193		64
Total	$	158,302	$	110,058	$	15,729	$	9,514	$	7,170	$	5,877	$	9,954

Operating Leases—We lease certain facilities under various non-cancelable operating leases, which expire through 2025. In addition to the amounts above, certain leases require us to pay variable costs such as taxes, maintenance, insurance, and asset retirement obligations. The terms of certain operating leases also provide for renewal options and escalation clauses. Rent expense was $2.9 million and $2.4 million during the three months ended June 30, 2015 and 2014, respectively. Rent expense was $6.0 million and $5.1 million during the six months ended June 30, 2015 and 2014, respectively. Rent expense is recognized using the straight-line method over the term of the lease.

Contract Manufacturer and Other Commitments—Our independent contract manufacturers procure components and build our products based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and analysis, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate component supply, we may issue purchase orders to some of our independent contract manufacturers which may not be cancelable. As of June 30, 2015, we had $74.3 million of open purchase orders with our independent contract manufacturers.

In addition to commitments with contract manufacturers, we have other contractual commitments and open purchase orders in the ordinary course of business for which we have not received goods or services. As of June 30, 2015, we had $33.9 million in other contractual commitments and open purchase orders.

14

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Warranties—Accrued warranty activities are summarized as follows (in thousands):

	Six Months Ended
	June 30, 2015			June 30, 2014
Accrued warranty balance—beginning of the period	$	4,269		$	3,037
Warranty costs incurred	(2,059		)	(1,728		)
Provision for warranty for the period	2,294			2,560
Adjustment related to pre-existing warranties	171			(415		)
Accrued warranty balance—end of the period	$	4,675		$	3,454

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 these matters is currently not determinable, we currently believe that there are no existing claims or proceedings that 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 or substantial settlement charges. In addition, the resolution of any intellectual property 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. The actual liability in any such matters may be materially different from our estimates, if any, which could result in the need to adjust the liability and record additional expenses. We have not recorded any significant accrual for loss contingencies associated with such legal proceedings; determined that a significant unfavorable outcome is probable or reasonably possible; or determined that the amount or range of any possible loss is reasonably estimable.

Indemnification—Under the indemnification provisions of our standard sales contracts, we agree to defend our customers against third-party claims asserting various allegations such as damage resulting from product defects and infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Our exposure under these indemnification provisions is generally limited by the terms of our contracts to certain defined limits, such as the total amount paid by our customer under the agreement. However, certain agreements include covenants and indemnification provisions including and beyond indemnification for third-party claims of intellectual property infringement and 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. To date, there have been no awards under such indemnification provisions.

9. STOCKHOLDERS’ EQUITY

Stock-Based Compensation Plans

We have stock-based compensation plans pursuant to which we have granted stock options and RSUs, including PSUs. The Company also has an ESPP for all eligible employees. As of June 30, 2015, there were a total of 43,655,799 shares of common stock available for grant under our stock-based compensation plans.

Employee Stock Options

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Expected term in years	4.3		4.9		4.3		4.9
Volatility	38	%	43	%	38% - 40%		43% - 45%
Risk-free interest rate	1.5	%	1.7	%	1.5	%	1.7	%
Dividend rate	—	%	—	%	—	%	—	%

15

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the stock option activity and related information for the periods presented below (in thousands, 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, 2014	10,702		$	14.98
Granted	349		34.15
Forfeited	(88	)	24.70
Exercised	(2,860	)	11.95
Balance—June 30, 2015	8,103		$	16.78
Options vested and expected to vest—June 30, 2015	8,059		$	16.70	2.6	$	198,516
Options exercisable—June 30, 2015	6,935		$	15.03	2.2	$	182,363

The aggregate intrinsic value represents the pre-tax difference between the exercise price of stock options and the quoted market price of our common stock on June 30, 2015, for all in-the-money options. As of June 30, 2015, total compensation expense related to unvested stock options granted to employees but not yet recognized was $12.6 million. This expense is expected to be amortized on a straight-line basis over a weighted-average period of 2.0 years.

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Weighted-average fair value per share granted	$	12.75	$	8.18	$	11.54	$	8.58
Intrinsic value of options exercised	22,034		16,441		63,038		31,762
Fair value of options vested	2,718		4,209		6,510		8,771

Restricted Stock Units

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

	Restricted Stock Units Outstanding
	Number of Shares		Weighted-Average Grant-Date-Fair Value per Share
Balance—December 31, 2014	6,291		$	22.93
Granted	3,149		34.16
Forfeited	(413	)	26.01
Vested	(1,069	)	22.01
Balance—June 30, 2015	7,958		$	27.62
RSUs expected to vest—June 30, 2015	7,468		$	27.41

16

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of June 30, 2015, total compensation expense related to unvested RSUs that were granted to employees and non-employees, but not yet recognized, was $207.6 million. This expense is expected to be amortized on a straight-line basis over a weighted-average vesting period of 3.0 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 minimum statutory employee withholding taxes. Total payment for the employees’ tax obligations to the taxing authorities is reflected as a financing activity within the condensed consolidated statements of cash flows.

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Shares withheld for taxes	124		86		345		257
Amount withheld for taxes	$	4,762	$	1,888	$	11,362	$	5,521

Performance Stock Units

We have granted PSUs to certain of our executive officers and employees. PSUs granted to executive officers are based on the achievement of the market-based vesting conditions during the performance period, the final settlement of the PSUs will range between 0% and 150% of the target shares underlying the PSUs based on a specified objective formula approved by our Compensation Committee. The PSUs entitle our executive officers to receive a number of shares of our common stock based on the performance of our stock price over a two- or three-year period as compared to the NASDAQ Composite index for the same periods. PSUs granted to our employees who are not executive officers are based on the achievement of personal- and company-based performance vesting conditions during the performance period. The final settlement of these PSUs will range between 50% to 150% of the target shares underlying the PSUs based on specified objective formula approved by our Compensation Committee. The PSUs entitle such employees to receive a number of shares of our common stock based on a one year performance period, and vest equally in the second and third years. There were no PSUs granted during the three months ended June 30, 2015.

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

	Three Months Ended		Six Months Ended
	June 30, 2014		June 30, 2015		June 30, 2014
Expected term in years	3.0		3.0		3.0
Volatility	46	%	38	%	47	%
Risk-free interest rate	0.9	%	1.1	%	0.9	%
Dividend rate	—	%	—	%	—	%

17

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	Three Months Ended		Six Months Ended
	June 30, 2014		June 30, 2015		June 30, 2014
Shares granted to executive officers and employees	95		206		120
Weighted-average fair value per share granted	$	21.05	$	34.86	$	21.21

As of June 30, 2015, total compensation expense related to unvested PSUs that were granted to certain of our executive officers and employees, but not yet recognized, was $8.0 million. This expense is expected to be amortized on a straight-line basis over a weighted-average vesting period of 2.3 years.

Employee Stock Purchase Plan

In determining the fair value of our ESPP, we use the Black-Scholes option pricing model that employs the following weighted-average assumptions:

	Six Months Ended
	June 30, 2015		June 30, 2014
Expected term in years	0.5		0.5
Volatility	28	%	36	%
Risk-free interest rate	0.1	%	0.1	%
Dividend rate	—	%	—	%

Additional information related to the ESPP is provided below (in thousands, except per share amounts):

	Six Months Ended
	June 30, 2015		June 30, 2014
Weighted-average fair value per share granted	$	7.56	$	5.35
Shares issued under the ESPP	427		424
Weighted-average price per share issued	$	21.34	$	17.18

There were no shares granted or issued under the ESPP during the three months ended June 30, 2015 and June 30, 2014.

18

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-based Compensation Expense

Stock-based compensation expense is included in costs and expenses as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Cost of product revenue	$	210	$	178	$	350	$	291
Cost of service revenue	1,660		1,363		3,292		2,692
Research and development	5,541		4,171		10,698		8,053
Sales and marketing	11,271		5,747		20,578		11,493
General and administrative	3,078		3,257		5,764		5,117
Total stock-based compensation expense	$	21,760	$	14,716	$	40,682	$	27,646

The following table summarizes stock-based compensation expense by award type (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Stock options	$	3,017	$	4,421	$	6,472	$	9,113
RSUs (including PSUs)	17,386		9,248		31,678		16,611
ESPP	1,357		1,047		2,532		1,922
Total stock-based compensation expense	$	21,760	$	14,716	$	40,682	$	27,646

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Income tax benefit associated with stock-based compensation	$	4,266	$	4,247	$	7,643	$	7,813

Share Repurchase Program

In December 2013, our Board of Directors (“Board”) authorized a Share Repurchase Program (“Program”) to repurchase up to $200.0 million of our outstanding common stock through December 31, 2014. Under the Program, share repurchases may be made by us from time to time in privately negotiated transactions or in open market transactions. The 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. In October 2014, our Board extended the share repurchase authorization under the Program through December 31, 2015. During the three and six months ended June 30, 2015, there were no shares repurchased under the Program. As of June 30, 2015, $122.5 million remains available for future share repurchases under the Program.

10. INCOME TAXES

The effective tax rate was 77% for the three months ended June 30, 2015, compared to an effective tax rate of 49% for the same period last year. The effective tax rate was 54% for the six months ended June 30, 2015, compared to an effective tax rate of 44% for the same period last year. The provision for income taxes for the periods presented is comprised of U.S. federal and state taxes, Singapore and other foreign income taxes, withholding tax, and transfer pricing allocations which impact jurisdictional income taxed at various tax rates. During the three and six months ended June 30, 2015, there were additional unrecognized tax benefits and non-deductible stock-based compensation expense that adversely impacted the quarterly effective tax rate.

19

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of June 30, 2015 and December 31, 2014, unrecognized tax benefits were $52.4 million and $44.2 million, respectively. The total amount of $52.2 million in unrecognized tax benefits, if recognized, would favorably impact the effective tax rate. It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of June 30, 2015, we had accrued $5.2 million for estimated interest related to uncertain tax positions.

We file income tax returns in the U.S. federal jurisdiction, and various U.S. state and foreign jurisdictions. The statute of limitations is open for years that generated state net operating loss carryforwards and after 2009 for state jurisdictions. Additionally, we have foreign net operating losses that have an indefinite life. Generally, we are no longer subject to non-U.S. income tax examinations by tax authorities for tax years prior to 2008. We are no longer subject to examination by U.S federal income tax authorities for tax years prior to 2010.

11. DEFINED CONTRIBUTION PLANS

Our tax-deferred savings plan under our 401(k) Plan, permits participating employees to defer a portion of their pre-tax earnings. In Canada, we have a Group Registered Retirement Savings Plan program (the “RRSP”) which permits participants to make tax deductible contributions. Our Board approved 50% matching contributions on employee contributions up to 4% of each employee’s eligible earnings. Our matching contributions to the 401(k) Plan and RRSP during the three months ended

June 30, 2015 and June 30, 2014 were $0.9 million and $0.6 million, respectively. Our matching contributions to the 401(k) Plan and RRSP during the six months ended June 30, 2015 and June 30, 2014 were $1.8 million and $1.2 million, respectively.

12. SEGMENT AND SIGNIFICANT CUSTOMER 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 the customer. The following table sets forth revenue (in thousands):

	Three Months Ended				Six Months Ended
Revenue	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Americas:
United States	$	71,224	$	49,672	$	129,725	$	94,465
Canada	26,191		19,909		46,649		38,733
Other Americas	11,178		8,804		23,779		17,619
Total Americas	108,593		78,385		200,153		150,817
Europe, Middle East, and Africa (“EMEA”)	83,404		62,554		159,068		119,197
Asia Pacific (“APAC”)	47,788		43,159		93,450		83,033
Total revenue	$	239,785	$	184,098	$	452,671	$	353,047

20

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table sets forth property and equipment by geographic region as of June 30, 2015 and December 31, 2014 (in thousands):

Property and Equipment—net	June 30, 2015		December 31, 2014
Americas:
United States	$	50,328	$	46,116
Canada	7,902		6,054
Other Americas	764		875
Total Americas	58,994		53,045
EMEA	9,062		3,256
APAC	3,409		2,618
Total property and equipment—net	$	71,465	$	58,919

The following customer, a distributor, accounted for 10% or more of our revenue:

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Exclusive Networks Group	17	%	14	%	17	%	14	%

The following customers, each of which is a distributor, accounted for 10% or more of net accounts receivable:

	June 30, 2015		December 31, 2014
Exclusive Networks Group	20	%	18	%
Fine Tec Computer	13	%	—	%

13. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the changes in accumulated balances of other comprehensive loss (in thousands):

	Unrealized Gains (Losses) on Investments			Tax benefit (provision) related to items of other comprehensive income or loss			Total
Beginning balance as of December 31, 2014	$	(540	)	$	191		$	(349	)
Other comprehensive income before reclassifications	69			(24		)	45
Amounts reclassified from accumulated other comprehensive loss	(6		)	1			(5		)
Net current-period other comprehensive income	63			(23		)	40
Ending balance as of June 30, 2015	$	(477	)	$	168		$	(309	)

21

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table provides details about the reclassification out of accumulated other comprehensive loss (in thousands):

Six Months Ended June 30, 2015
Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains on investments	$	(6	)	Other expense—net
Tax provision related to items of other comprehensive income	1			Provision for income taxes
Total reclassification for the period	$	(5	)

14. FOREIGN CURRENCY DERIVATIVES

Our sales contracts are primarily denominated in U.S. dollars and therefore substantially all of our revenue is not subject to foreign currency translation risk. However, a substantial portion of our operating expenses incurred outside the U.S. 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 Euro (“EUR”), and the British Pound (“GBP”). To help protect against significant fluctuations in value and the volatility of future cash flows caused by changes in currency exchange rates, we engage in foreign currency risk management activities, including forward contracts, to hedge balance sheet items denominated in CAD. We do not use these contracts for speculative or trading purposes. All of the derivative instruments are with high quality financial institutions and we monitor the creditworthiness of these parties. These contracts typically have maturities of one month. We record changes in the fair value of forward exchange contracts related to balance sheet accounts as Other expense—net in the condensed consolidated statement of operations.

Additionally, independent of any hedging activities, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in Other expense—net in our condensed consolidated statements of operations. Our hedging activities are intended to reduce, but not eliminate, the impact of currency exchange rate movements. As our hedging activities are relatively short-term in nature and are focused on CAD, long-term material changes in the value of the U.S. dollar against other foreign currencies, such as the EUR and GBP could adversely impact our operating expenses in the future.

The notional amount of our forward exchange contract to hedge balance sheet accounts were (in thousands):

	Buy/Sell	Notional
Currency—As of June 30, 2015
CAD	Sell	$	6,743
Currency—As of December 31, 2014
CAD	Buy	$	6,879

As of June 30, 2015, the fair value of the forward exchange contract was not material.

15. RELATED PARTY TRANSACTIONS

The son of one member of our Board of Directors (“Board”) is a partner of an outside law firm that we utilize for certain complex litigation matters. Expenses for legal services provided by the law firm related to matters that arose subsequent to the member joining our Board were $0.9 million and $0.5 million for the three months ended June 30, 2015 and June 30, 2014, respectively. Expenses for legal services provided by the law firm related to matters that arose subsequent to the member joining our Board were $2.8 million and $0.7 million for the six months ended June 30, 2015 and June 30, 2014, respectively. Amounts due and payable to the law firm were $2.3 million and $1.3 million as of June 30, 2015 and December 31, 2014, respectively.

22

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. SUBSEQUENT EVENT

In July 2015, we acquired Meru Networks, Inc. (“Meru”), which offers Wi-Fi networking solutions, for a total consideration of approximately $44.0 million. The acquisition expands on our secure wireless vision and enterprise growth focus, broadens our portfolio of solutions , and expands our opportunity to address the global enterprise Wi-Fi market with integrated secure wireless solutions. We are still in the process of evaluating the business combination accounting considerations, including the consideration transferred and the initial purchase price allocation.

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ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

In addition to historical information, this Quarterly Report on Form 10-Q 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 regarding:

• continued growth and market share gains;

• variability in sales in certain product categories from year to year and between quarters;

• expected impact of sales of certain products;

• the proportion of our revenue that consists of our product and service revenue, and the mix of billings between products and services;

• the impact of our product innovation strategy;

• growing our sales to large enterprises, service providers, and government organizations and the impact of sales to these organizations on our long-term growth and operating results;

• trends in revenue, costs of revenue, and gross margin;

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

• continued investments in research and development;

• continued investments in sales and marketing and the impact of those investments;

• expectations regarding uncertain tax benefits and our effective tax rate;

• expectations regarding spending related to capital expenditures;

• competition in our markets;

• integration of acquired companies and technologies;

• implementation of a new enterprise resource planning (“ERP”) system;

• our intentions regarding repatriation of cash, cash equivalents and investments held by our international subsidiaries and the sufficiency of our existing cash, cash equivalents and investments to meet our cash needs for at least the next 12 months; and

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

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. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and, in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings, including the Form 10-K. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Business Overview

We provide high performance cybersecurity solutions to some of the largest enterprises, service providers and government organizations across the globe, including a majority of the 2015 Fortune 100. Our cybersecurity solutions are fast

24

and secure and designed to provide broad, high-performance protection against dynamic security threats while simplifying the information technology (“IT”) infrastructure of our end-customers worldwide.

Our flagship integrated network security solution consists of our FortiGate physical and virtual appliance platforms which are deployable in large enterprise, service provider and small and medium-sized business environments, and government organizations. These platforms provide a broad array of integrated security and networking functions to help protect data, applications, and users from network- and content-level security threats. These functions, which can be integrated in a variety of ways, include firewall, intrusion prevention, anti-malware, application control, virtual private network, web-filtering, vulnerability management, anti-spam, mobile security, wireless controller, and wide area network acceleration. Our FortiGate appliance platforms may be deployed as next generation firewalls, data center firewalls, unified threat management systems, internal segmentation firewalls, virtual machine firewalls or cloud firewalls. For wireless networked environments, we offer our FortiWiFi appliances, which integrate wireless access point capabilities into the FortiGate network security platform. Each FortiWiFi appliance provides secure access to the wired and wireless local area networks, as well as various wide area network connections.

The FortiGate platform includes our FortiASICs, which are specifically designed for accelerated processing of security and networking functions, and our FortiOS operating system, which provides the foundation for all FortiGate security functions. Our FortiGuard security subscription and FortiCare technical support services provide end-customers with access to dynamic updates to our application control, anti-malware, intrusion prevention, web filtering, and anti-spam functionality. Our security subscription services are based in part on intelligence gathered by FortiGuard Labs, a large team of threat researchers who detect threats and help protect our customers. By combining multiple proprietary security and networking functions with our purpose-built FortiASIC and FortiOS, our FortiGate solution delivers broad protection against dynamic security threats while reducing the operational burden and costs associated with managing multiple point products.

We complement our FortiGate product line with the FortiManager and FortiAnalyzer product families. FortiManager provides customers with centralized management of multiple FortiGate appliances while FortiAnalyzer provides customers with a single point of network log data collection. These products enable customers to implement security policies across large networks. The FortiGate platform can be expanded with a number of other security systems including email (FortiMail), endpoint (FortiClient), wireless access points (FortiAP), advanced threat protection (FortiSandbox), and application security (FortiWAF, FortiADC, and FortiDDoS).

We offer virtual appliances for the FortiGate, FortiManager, FortiAnalyzer, FortiWeb, FortiMail, FortiCache, and FortiADC product lines that can be used in conjunction with traditional Fortinet physical appliances, such as FortiGate, FortiManager, and FortiAnalyzer, to help ensure the visibility, management, and protection of physical and virtual environments. We also offer on-demand cloud-based versions of FortiGate and FortiWeb.

Financial Highlights

• We recorded total revenue of $239.8 million and $452.7 million for the three and six months ended June 30, 2015, respectively, an increase of 30% and 28%, respectively, compared to the same periods last year. Product revenue was $114.8 million and $212.3 million during the three and six months ended June 30, 2015, respectively, an increase of 34% and 31%, respectively, compared to the same periods last year. Service revenue was $125.0 million and $240.4 million for the three and six months ended June 30, 2015, an increase of 27% and 26%, respectively, compared to the same periods last year.

• Cash, cash equivalents and investments were $1.15 billion as of June 30, 2015, an increase of $156.6 million, or 16%, from December 31, 2014.

• Deferred revenue was $657.6 million as of June 30, 2015, an increase of $98.8 million, or 18%, from December 31, 2014.

• We generated cash flows from operating activities of $148.9 million during the six months ended June 30, 2015, an increase of $44.2 million, or 42%, compared to the same period last year.

• In July 2015, we acquired Meru Networks, Inc. (“Meru”), which offers Wi-Fi networking solutions, for a total consideration of approximately $44.0 million.

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Revenue grew as our integrated security platform products put us in a strong competitive position in a robust security market. In addition, we continue to expand and upgrade our enterprise sales force, build out vertical-specific sales teams, strengthen partnerships with enterprise resellers, and gain from our prior sales investments. Our strategy is enabling us to gain market share, win new customers, and expand within existing customer accounts, especially in the large enterprise market. Aside from obtaining new customers, other levers to drive long-term growth and operating leverage include adding more functionality and value in our security and support service offerings to customers. We continue to grow the number of large deals with large enterprises, which is also key to our long-term growth and profitability strategy as these high-end customers tend to provide higher lifetime value and are beneficial to our business model over time.

During the three months ended June 30, 2015, our revenue growth was primarily driven by our growth in the U.S. large enterprise market. We also continued to see diversity of product sales in our FortiGate product family due to increased demand across all product categories. Our high-end products (FortiGate 1000 to 5000 series) accounted for 45% of billings primarily driven by continued enterprise adoption of our high-end appliances such as the FortiGate1500D and 3700D series appliances. Our mid-range products (FortiGate 200 to 800 series) accounted for 24% of billings, and our entry-level products (FortiGate 20 to 100 series) accounted for 31% of billings. During the three months ended June 30, 2014, our high-end products (FortiGate1000 to 5000 series) accounted for 40% of billings primarily due to an increase in billings from large enterprise customers. Our mid-range products (FortiGate 200 to 800 series) accounted for 26% of billings, and our entry-level products (FortiGate 20 to 100 series) accounted for 34% of billings.

During the three and six months ended June 30, 2015, operating expenses increased compared to the same periods last year. The increase was primarily driven by our accelerated pace of hiring and continued investments to expand our sales coverage, grow our marketing capabilities, develop new products, and scale our customer support organization to meet the needs of our expanding customer base. Headcount, including full time equivalent employees, increased to 3,336 as of June 30, 2015 from 2,532 as of June 30, 2014.

Key Financial Metrics

We monitor the key financial metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. The following table summarizes revenue, deferred revenue, billings (non-GAAP), cash, cash equivalents and investments, net cash provided by operating activities, and free cash flow (non-GAAP). We discuss revenue below under “—Results of Operations,” and we discuss our cash, cash equivalents, and investments, and net cash provided by operating activities below under “—Liquidity and Capital Resources.” Deferred revenue, billings (non-GAAP), and free cash flow (non-GAAP) are discussed immediately below the following table.

	Three Months Ended Or As Of
	June 30, 2015		June 30, 2014
	(in thousands)
Revenue	$	239,785	$	184,098
Deferred revenue	$	657,561	$	480,202
Increase in deferred revenue	$	57,390	$	28,899
Billings (non-GAAP)	$	297,175	$	212,997
Cash, cash equivalents and investments	$	1,148,371	$	910,594
Net cash provided by operating activities	$	84,305	$	43,798
Free cash flow (non-GAAP)	$	73,544	$	34,094

Deferred revenue. Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the unamortized portion of services revenue from FortiGuard security subscription and FortiCare technical support service contracts. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods.

Billings (Non-GAAP).We define billings as revenue recognized plus the change in deferred revenue from the beginning to the end of the period less any deferred revenue balances acquired from business combination(s) during the period, if any. We consider billings to be a useful metric for management and investors because billings drives deferred revenue, which is an important indicator of the health and viability of our business. There are a number of limitations related to the use of billings versus revenue calculated in accordance with GAAP. First, billings include amounts that have not yet been recognized

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as revenue. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. Management compensates for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with revenue calculated in accordance with GAAP. A reconciliation of billings to revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:

	Three Months Ended
	June 30, 2015		June 30, 2014
	(in thousands)
Billings:
Revenue	$	239,785	$	184,098
Increase in deferred revenue	57,390		28,899
Total billings (Non-GAAP)	$	297,175	$	212,997

Free cash flow (Non-GAAP). We define free cash flow as net cash provided by operating activities minus capital expenditures (purchases of property and equipment). We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the acquisition of property and equipment, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, repurchasing outstanding common stock, and strengthening the balance sheet. Analysis of free cash flow facilitates management’s comparisons of our operating results to competitors’ operating results. A limitation of using free cash flow versus the GAAP measure of net cash provided by operating activities as a means for evaluating liquidity is that free cash flow does not represent the total increase or decrease in the cash, cash equivalents and investments balance for the period because free cash flow excludes cash used for capital expenditures and also excludes cash provided by or used for other investing and financing activities. Management compensates for this limitation by providing information about our capital expenditures and other investing and financing activities on the face of the cash flow statement and under “—Liquidity and Capital Resources.” A reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:

	Three Months Ended
	June 30, 2015			June 30, 2014
	(in thousands)
Free Cash Flow:
Net cash provided by operating activities	$	84,305		$	43,798
Less purchases of property and equipment	(10,761		)	(9,704		)
Free cash flow (Non-GAAP)	$	73,544		$	34,094

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses, and related disclosures. Our estimates include those related to revenue recognition, stock-based compensation expense, valuation of inventory, warranty liabilities, investments, goodwill and other long-lived assets and accounting for income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

There have been no material changes to our critical accounting policies and estimates as of and for the three and six months ended June 30, 2015, as compared to the critical accounting policies and estimates described in the Form 10-K.

Acquisition of Meru

In July 2015, we acquired Meru, which offers Wi-Fi networking solutions, for a total consideration of approximately $44.0 million. The acquisition expands our secure wireless vision and enterprise growth focus, broadens our portfolio of solutions , and expands our opportunity to address the global enterprise Wi-Fi market with integrated secure wireless solutions.

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Results of Operations

Three Months Ended June 30, 2015 and June 30, 2014

Revenue

	Three Months Ended
	June 30, 2015				June 30, 2014
	Amount		% of Revenue		Amount		% of Revenue		Change		% Change
	(in thousands, except percentages)
Revenue:
Product	$	114,777	48	%	$	85,384	46	%	$	29,393	34	%
Service	125,008		52		98,714		54		26,294		27
Total revenue	$	239,785	100	%	$	184,098	100	%	$	55,687	30	%
Revenue by geography:
Americas	$	108,593	45	%	$	78,385	43	%	$	30,208	39	%
EMEA	83,405		35		62,554		34		20,851		33
APAC	47,787		20		43,159		23		4,628		11
Total revenue	$	239,785	100	%	$	184,098	100	%	$	55,687	30	%

Total revenue increased by $55.7 million, or 30%, during the three months ended June 30, 2015 compared to the same period last year. The Americas region grew by 39% as we saw continued strength in the U.S. enterprise market primarily driven by increased sales to large enterprise customers. The EMEA region grew by 33% due to strong sales performance across the region. The APAC region grew by 11% as we saw continued growth in certain parts of the region. Product revenue increased by $29.4 million, or 34%, during the three months ended June 30, 2015 compared to the same period last year. The increase in product revenue was primarily driven by greater sales volume in our FortiGate product family due to increased demand for each of our high-end, mid-range and entry-level product categories, and in particular for our high-end products for large enterprise customers.

Service revenue increased by $26.3 million, or 27%, during the three months ended June 30, 2015 compared to the same period last year due to the recognition of revenue from our deferred revenue balance consisting of FortiGuard security subscription and FortiCare technical support contracts sold to a larger customer base, particularly our large enterprise customers, as well as the renewals of similar contracts sold in earlier periods.

Cost of revenue and gross margin

	Three Months Ended
	June 30, 2015			June 30, 2014			Change			% Change
	(in thousands, except percentages)
Cost of revenue:
Product	$	47,397		$	37,455		$	9,942		27	%
Service	22,101			20,302			1,799			9
Total cost of revenue	$	69,498		$	57,757		$	11,741		20	%
Gross margin (%):
Product	58.7		%	56.1		%	2.6		%
Service	82.3			79.4			2.9
Total gross margin	71.0		%	68.6		%	2.4		%

Total gross margin increased by 2.4 percentage points during the three months ended June 30, 2015 compared to the same period last year as both product and service gross margins increased. Product gross margin increased by 2.6 percentage

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points during the three months ended June 30, 2015 compared to the same period last year primarily due to a greater mix of high-end FortiGate product sales compared to the same period last year.

Service gross margin increased by 2.9 percentage points during the three months ended June 30, 2015 compared to the same period last year as we scale efficiencies resulting from our ability to add more functionality and value to our service offerings, which have translated into improved service margins. Cost of service revenue increased by $1.8 million primarily due to an increase in personnel costs, including stock-based compensation expense, as a result of increased headcount.

Operating expenses

	Three Months Ended								Change		% Change
	June 30, 2015				June 30, 2014
	Amount		% of Revenue		Amount		% of Revenue
	(in thousands, except percentages)
Operating expenses:
Research and development	$	37,389	16	%	$	29,938	16	%	$	7,451	25	%
Sales and marketing	111,928		47		74,817		41		37,111		50
General and administrative	18,018		8		10,444		6		7,574		73
Total operating expenses	$	167,335	70	%	$	115,199	63	%	$	52,136	45	%

Research and development

Research and development expense increased by $7.5 million, or 25%, during the three months ended June 30, 2015 compared to the same period last year primarily due to an increase of $4.8 million in personnel costs and $1.4 million in stock-based compensation expense as a result of increased headcount to support the development of new products and continued enhancements of our existing products. In addition, during the three months ended June 30, 2014, we had a reversal of $0.7 million related to a previously recorded liability for estimated contingent consideration. We intend to continue to invest in our research and development organization and integrate personnel from our acquisition of Meru but expect research and development expense as a percentage of total revenue to remain at comparable levels during the remainder of 2015.

Sales and marketing

Sales and marketing expense increased by $37.1 million, or 50%, during the three months ended June 30, 2015 compared to the same period last year, primarily due to an increase of $20.2 million in personnel costs and $5.5 million in stock-based compensation expense, as we continued to increase our sales headcount in order to drive continued market share gains globally. Marketing-related expense increased by $5.0 million as we invested significantly in marketing programs to capture market share, particularly in the enterprise market, including costs related to trade-shows and lead generation. Travel expense increased by $2.3 million and depreciation and other occupancy-related costs increased by $1.8 million. As a percentage of total revenue, sales and marketing expense increased as we accelerated the investment in our sales force and marketing programs to drive future growth. We intend to continue to make investments in our sales resources and infrastructure and marketing strategy, which are critical to support growth.

General and administrative

General and administrative expense increased by $7.6 million, or 73%, during the three months ended June 30, 2015 compared to the same period last year. Personnel costs, including stock-based compensation expense, increased by $2.1 million, as we continued to increase our headcount in order to support our expanding business. In addition, legal, tax and other professional fees increased by $2.8 million. We also incurred $1.4 million in expenses related to business process design and reengineering in preparation of an ERP system implementation and $1.3 million of transaction costs related to the Meru acquisition. As a percentage of total revenue, we expect general and administrative expense to remain at comparable levels during the remainder of 2015.

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Interest income and Other expense—net

	Three Months Ended
	June 30, 2015			June 30, 2014			Change			% Change
	(in thousands, except percentages)
Interest income	$	1,364		$	1,319		$	45		3	%
Other expense—net	(830		)	(574		)	(256		)	45

Interest income increased during the three months ended June 30, 2015 compared to the same period last year due to interest earned on higher invested balances of cash, cash equivalents and investments. The increase in Other expense—net for the three months ended June 30, 2015 when compared to the same period last year, was the result of higher foreign currency exchange losses.

Provision for income taxes

	Three Months Ended						Change			% Change
	June 30, 2015			June 30, 2014
	(in thousands, except percentages)
Provision for income taxes	$	2,694		$	5,806		$	(3,112	)	(54	)%
Effective tax rate (%)	77		%	49		%	28		%	—

Our effective tax rate was 77% for the three months ended June 30, 2015, compared with an effective tax rate of 49% for the same period last year. The provision for income taxes for the three months ended June 30, 2015 was comprised primarily of U.S. federal and state taxes, other foreign income taxes, foreign withholding taxes, and transfer pricing allocations which impact jurisdictional income taxed at various tax rates. During the three months ended June 30, 2015, there were additional unrecognized tax benefits and non-deductible stock-based compensation expense that adversely impacted the quarterly effective tax rate.

It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of June 30, 2015, we had accrued $5.2 million for estimated interest related to uncertain tax provisions.

It is reasonably possible that over the next twelve-month period, we may experience increases or decreases in our unrecognized tax benefits. However, it is not possible to determine either the magnitude or the range of increases or decreases at this time.

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Six Months Ended June 30, 2015 and June 30, 2014

Revenue

	Six Months Ended
	June 30, 2015				June 30, 2014
	Amount		% of Revenue		Amount		% of Revenue		Change		% Change
	(in thousands, except percentages)
Revenue:
Product	$	212,286	47	%	$	162,149	46	%	$	50,137	31	%
Service	240,385		53		190,898		54		49,487		26
Total revenue	$	452,671	100	%	$	353,047	100	%	$	99,624	28	%
Revenue by geography:
Americas	$	200,153	44	%	$	150,817	43	%	$	49,336	33	%
EMEA	159,068		35		119,197		34		39,871		33
APAC	93,450		21		83,033		23		10,417		13
Total revenue	$	452,671	100	%	$	353,047	100	%	$	99,624	28	%

Total revenue increased by $99.6 million, or 28%, during the six months ended June 30, 2015 compared to the same period last year. All three regions experienced revenue growth compared to the same period last year, with the Americas and EMEA contributing the largest portion of our revenue growth on a percentage basis. Product revenue increased by $50.1 million, or 31%, during the six months ended June 30, 2015 compared to the same period last year. The increase in product revenue was primarily driven by greater sales volume in our FortiGate product family due to increased demand for each of our high-end, mid-range and entry-level product categories, and in particular for our high-end products for large enterprise customers.

Service revenue increased by $49.5 million, or 26%, during the six months ended June 30, 2015 compared to the same period last year due to the recognition of revenue from our deferred revenue balance consisting of FortiGuard security subscription and FortiCare technical support contracts sold to a larger customer base, particularly our large enterprise customers, as well as the renewals of similar contracts sold in earlier periods.

Cost of revenue and gross margin

	Six Months Ended
	June 30, 2015			June 30, 2014			Change			% Change
	(in thousands, except percentages)
Cost of revenue:
Product	$	88,765		$	69,594		$	19,171		28	%
Service	44,335			38,906			5,429			14
Total cost of revenue	$	133,100		$	108,500		$	24,600		23	%
Gross margin (%):
Product	58.2		%	57.1		%	1.1		%
Service	81.6			79.6			2.0
Total gross margin	70.6		%	69.3		%	1.3		%

Total gross margin increased by 1.3 percentage points during the six months ended June 30, 2015 compared to the same period last year, as both product and service gross margins increased. Product gross margin increased by 1.1 percentage points during the six months ended June 30, 2015 compared to the same period last year primarily due to a greater mix of high-end FortiGate product sales compared to the same period last year.

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Service gross margin increased by 2.0 percentage points during the six months ended June 30, 2015 as compared to the same period last year as we scale efficiencies resulting from our ability to add more functionality and value to our service offerings, which have translated into improved service margins. Cost of service revenue increased by $5.4 million primarily due to a $4.8 million increase in personnel costs and a $0.6 million increase in stock-based compensation expense, as a result of increased headcount.

Operating expenses

	Six Months Ended								Change		% Change
	June 30, 2015				June 30, 2014
	Amount		% of Revenue		Amount		% of Revenue
	(in thousands, except percentages)
Operating expenses:
Research and development	$	73,205	16	%	$	58,993	17	%	$	14,212	24	%
Sales and marketing	212,537		47		142,143		40		70,394		50
General and administrative	29,979		7		19,454		6		10,525		54
Total operating expenses	$	315,721	70	%	$	220,590	63	%	$	95,131	43	%

Research and development

Research and development expense increased by $14.2 million, or 24%, during the six months ended June 30, 2015 compared to the same period last year primarily due to an increase of $7.9 million in personnel costs and $2.6 million in stock-based compensation expense as a result of increased headcount to support the development of new products and continued enhancements of our existing products. Depreciation expense and other occupancy-related costs increased by $0.8 million and costs of test supplies and prototype materials used in product development increased by $0.4 million. In addition, during the six months ended June 30, 2014, we had a reversal of $1.9 million related to a previously recorded liability for estimated contingent consideration.

Sales and marketing

Sales and marketing expense increased by $70.4 million, or 50%, during the six months ended June 30, 2015 compared to the same period last year, primarily due to an increase of $40.0 million in personnel costs and $9.1 million in stock-based compensation expense as we continued to increase our sales headcount in order to drive continued market share gains globally. Marketing-related expense increased by $8.6 million as we invested significantly in marketing programs to capture market share, particularly in the large enterprise market, including costs related to trade-shows and lead generation. In addition, depreciation and other occupancy-related expense increased by $3.9 million and travel expense increased by $4.0 million.

General and administrative

General and administrative expense increased by $10.5 million, or 54%, during the six months ended June 30, 2015 compared to the same period last year. Personnel costs, including stock-based compensation expense, increased by $4.7 million, as we continued to increase our headcount in order to support our expanding business. In addition, legal, tax, and other professional fees increased by $2.9 million. We also incurred $1.4 million in expenses related to business process design and reengineering in preparation of the ERP system implementation and $1.3 million of transaction costs related to the Meru acquisition.

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Interest income and Other expense—net

	Six Months Ended
	June 30, 2015			June 30, 2014			Change			% Change
	(in thousands, except percentages)
Interest income	$	2,786		$	2,652		$	134		5	%
Other expense—net	(1,507		)	(963		)	(544		)	56

Interest income increased during the six months ended June 30, 2015 compared to the same period last year due to interest earned on higher invested balances of cash, cash equivalents and investments. The increase in Other expense—net for the six months ended June 30, 2015 when compared to the same period last year, was the result of higher foreign currency exchange losses.

Provision for income taxes

	Six Months Ended						Change			% Change
	June 30, 2015			June 30, 2014
	(in thousands, except percentages)
Provision for income taxes	$	2,777		$	11,172		$	(8,395	)	(75	)%
Effective tax rate (%)	54		%	44		%	10		%	—

Our effective tax rate was 54% for the six months ended June 30, 2015, compared with an effective tax rate of 44% for the same period last year. The provision for income taxes for the six months ended June 30, 2015 was comprised primarily of U.S. federal and state taxes, other foreign income taxes, foreign withholding taxes, and transfer pricing allocations which impact jurisdictional income taxed at various tax rates. During the six months ended June 30, 2015, there were additional unrecognized tax benefits and non-deductible stock-based compensation expense that adversely impacted the effective tax rate.

Liquidity and Capital Resources

	As of
	June 30, 2015		December 31, 2014
	(in thousands)
Cash and cash equivalents	$	481,393	$	283,254
Investments	666,978		708,490
Total cash, cash equivalents and investments	$	1,148,371	$	991,744
Working capital	$	630,211	$	550,409
	Six Months Ended
	June 30, 2015		June 30, 2014
	(in thousands)
Cash provided by operating activities	$	148,924	$	104,700
Cash provided by (used) in investing activities	17,930		(8,299		)
Cash provided by (used in) financing activities	31,285		(7,727		)
Effect of exchange rates on cash and cash equivalents	—		(600		)
Net increase in cash and cash equivalents	$	198,139	$	88,074

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Liquidity and capital resources may be impacted by our operating activities, as well as acquisitions, capital expenditures, stock repurchases, proceeds associated with stock option exercises and issuances of common stock under the ESPP, payment of taxes in connection with the net settlement of equity awards, and investments in strategic relationships that we have made or may make in the future. As of June 30, 2015, $122.5 million remains available for future share repurchases under our stock repurchase program (“Program”), which will be financed through our available working capital. In recent years, we have received significant capital resources as a result of exercises of stock options and purchases under our ESPP. We expect proceeds in future years to be impacted by our share price and the changing mix of stock options and RSUs granted. We expect to spend $35.0 million to $45.0 million in capital expenditures primarily related to expansion of our offices to support worldwide growth, as well as the implementation of our ERP system.

As of June 30, 2015, our cash, cash equivalents, and investments of $1.15 billion were invested primarily in corporate debt securities, commercial paper, municipal bonds, certificates of deposit and term deposits, money market funds, and U.S. government and agency debt securities. It is our investment policy to invest excess cash in a manner that preserves capital, provides liquidity and maximizes return without significantly increasing risk.

As of June 30, 2015, $317.7 million of our cash and investments were held by our international subsidiaries and are therefore not immediately available to fund domestic operations unless the cash is repatriated. While we do not intend to do so, should this amount be repatriated, it would be subject to U.S. federal income tax which would be partially offset by foreign tax credits. We do not enter into investments for trading or speculative purposes. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, the costs to expand our offices to support growth and the continuing market acceptance of our products. Historically, we have required capital principally to fund our working capital needs, capital expenditures, share repurchases, and acquisition activities. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

Operating Activities

Cash generated by operating activities is our primary source of liquidity. It is primarily comprised of net income, adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consisted primarily of stock-based compensation expense, depreciation of property and equipment, amortization of intangible assets, and amortization of investment premiums.

Our operating activities during the six months ended June 30, 2015 provided $148.9 million in cash as a result of our continued growth in billings, profitability, and the ability to successfully manage our working capital. The primary sources of cash from operating activities during the six months ended June 30, 2015 consisted of net income of $2.4 million increased by non-cash adjustments of $59.7 million and changes in operating assets and liabilities of $86.9 million. Changes in operating assets and liabilities primarily resulted from an increase in payments received from customers, partially offset by an increase in payments to vendors and an increase in prepayment of certain expenses.

Our operating activities during the six months ended June 30, 2014, provided $104.7 million in cash as a result of our growth in billings, profitability, and the ability to successfully manage our working capital. The primary sources of cash from operating activities during the six months ended June 30, 2014 consisted of net income of $14.5 million increased by non-cash adjustments of $44.4 million and changes in operating assets and liabilities of $45.8 million. During the six months ended June 30, 2014, we received $20.0 million pursuant to a six year mutual covenant-not-to-sue and release agreement with Palo Alto Networks, Inc. Changes in operating assets and liabilities primarily resulted from an increase in payments received from customers and a receipt of cash related to the mutual covenant-not-to-sue and release agreement, partially offset by payment of income taxes during the period.

Investing Activities

The changes in cash flows from investing activities primarily relate to timing of purchases, maturities, and sales of investments, purchases of property and equipment, and payments made in connection with acquisitions.

During the six months ended June 30, 2015, cash provided by investing activities was a result of positive cash flow due to sales and maturities, net of purchases, from our investments of $33.6 million, partially offset by capital expenditures of $15.7 million.

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During the six months ended June 30, 2014, cash used by investing activities was primarily due to capital expenditures of $21.0 million, partially offset by positive cash flow due to sales and maturities, net of purchases, from our investments of $12.7 million.

Financing Activities

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

During the six months ended June 30, 2015, cash provided by financing activities was $31.3 million as a result of proceeds of $42.6 million from the issuance of common stock under our stock plans. This cash inflow was partially offset by $11.4 million related to withholding taxes paid upon the issuance of RSUs.

During the six months ended June 30, 2014, we used $27.2 million to repurchase and retire our common stock and $5.5 million to pay withholding taxes upon issuance of RSUs. These cash outflows were partially offset by proceeds of $22.5 million from the issuance of common stock under our stock plans, as well as excess tax benefit from employee stock-based compensation expense of $2.4 million.

Contractual Obligations and Commitments

There have been no material changes outside the ordinary course of business during the six months ended June 30, 2015 to the contractual obligations and commitments disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of the Form 10-K. See Note 8 to the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for additional information regarding contractual obligations and commitments.

Off-Balance Sheet Arrangements

As of June 30, 2015, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

ITEM 3.     Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our market risk during the six months ended June 30, 2015 compared to the disclosures in Part II, Item 7A of the Form 10-K.

ITEM 4.     Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of June 30, 2015. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2015 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 CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the six months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II

ITEM 1.     Legal Proceedings

We are subject to various claims, complaints and legal actions that arise from time to time in the normal course of business. We believe that the possibility that any of these claims, complaints or legal proceedings will result in a material loss is remote. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

ITEM 1A.     Risk Factors

Investing in our common stock involves a high degree of risk. Investors should carefully consider the following risks and all other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and investors may lose some or all of their investment.

Risks Related to Our Business

Our quarterly operating results are likely to vary significantly and be unpredictable.

Our operating results have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:

• the level of demand for our products and services, which may render forecasts inaccurate;

• the timing of channel partner and end-customer orders and our reliance on a concentration of shipments at the end of each quarter;

• the timing of shipments, which may depend on many factors such as inventory levels, logistics, shipping delays, our ability to ship new products on schedule and to accurately forecast inventory requirements, and potential delays in the manufacturing process;

• inventory management;

• the mix of products sold, the mix of revenue between products and services and the degree to which products and services are bundled and sold together for a package price;

• the budgeting cycles and purchasing practices of our channel partners and end-customers;

• seasonal buying patterns of our end-customers;

• timing and level of our investments in sales and marketing;

• the timing of revenue recognition for our sales, which may be affected by both the mix of sales by our “sell-in” versus our “sell-through” channel partners, and the accuracy and timing of point of sale reporting by our “sell-through” channel partners, which impacts our ability to recognize revenue;

• the level of perceived threats to network security, which may fluctuate from period to period;

• changes in end-customer, distributor or reseller requirements or market needs and buying practices and patterns;

• changes in the growth rate of the network security markets;

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• the timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors, partners, or end-customers;

• deferral of orders from end-customers in anticipation of new products or product enhancements announced by us or our competitors;

• increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates, as a significant portion of our expenses are incurred and paid in currencies other than the U.S. dollar, and fluctuations may impact the actual prices that partners and customers are willing to pay for our products and services;

• decisions by potential end-customers to purchase network security solutions from newer technology providers, from larger, more established security vendors or from their primary network equipment vendors;

• price competition, and increased competitiveness in general, in our market;

• changes in customer renewal rates for our services;

• changes in the payment terms of services contracts or the length of services contracts sold;

• changes in our estimated annual effective tax rates;

• changes in circumstances and challenges in business conditions, including decreased demand, which may negatively impact our channel partners’ ability to sell the current inventory they hold and negatively impact their future purchases of products from us;

• increased expenses, unforeseen liabilities or write-downs and any impact on results of operations from any acquisition consummated;

• our channel partners may have insufficient financial resources and may not be able to withstand changes and challenges in business conditions;

• disruptions in our channel or termination of our relationship with important channel partners;

• insolvency, credit, or other difficulties confronting our key suppliers or channel partners, affecting their ability to purchase or pay for our products and services, which could disrupt our supply or distribution chain;

• general economic conditions, both in our domestic and foreign markets;

• future accounting pronouncements or changes in our accounting policies; and

• changes in the legislative or regulatory environment, such as with respect to privacy, information security, export, environmental, and accounting.

Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterly financial and other operating results. This variability and unpredictability could result in our failing to meet our internal operating plan or the expectations of securities analysts or investors for any period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fall substantially and we could face costly lawsuits, including securities class action suits. In addition, a significant percentage of our operating expenses are fixed in nature and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on margins in the short term.

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Adverse economic conditions or reduced information technology spending may adversely impact our business.

Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers. In addition, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. Weak global economic conditions, weak economic conditions in certain geographies, or a reduction in information technology spending regardless of macro-economic conditions, could adversely impact our business, financial condition and results of operations in a number of ways, including longer sales cycles, lower prices for our products and services, higher default rates among our channel partners, reduced unit sales and slower or declining growth.

Our billings and revenue growth may slow or may not continue.

Billings and revenue growth may slow, or we may experience a decrease in billings and revenue, for a number of reasons, including a slowdown in demand for our products or services, increased competition, a decrease in the growth of our overall market, softness in demand in certain geographies or industry verticals, such as the service provider industry, if we fail for any reason to continue to capitalize on growth opportunities, and due to other risks identified in the risk factors. Our expenses as a percentage of total revenue may be higher than expected if our revenue is lower than expected and if our investments in sales and marketing and other functional areas do not result in expected billings and revenue growth, and we may not be able to sustain profitability in future periods if we fail to increase billings, revenue or deferred revenue, do not appropriately manage our cost structure, or encounter unanticipated liabilities. Any failure by us to maintain profitability and continue our billings and revenue growth could cause the price of our common stock to materially decline.

We rely significantly on revenue from FortiGuard security subscription and FortiCare technical support services which may decline, and because we recognize revenue from FortiGuard security subscription and FortiCare technical support 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 results.

Our FortiGuard security subscription and FortiCare technical support services revenue has historically accounted for a significant percentage of our total revenue. Sales of new, or renewals of existing, FortiGuard security subscription and FortiCare technical support services contracts may decline and fluctuate as a result of a number of factors, including fluctuations in purchases of FortiGate appliances, 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 or reductions in our customers’ spending levels. If our sales of new, or renewals of existing FortiGuard security subscription and FortiCare technical support services contracts decline, our revenue and revenue growth may decline and our business will suffer. In addition, in the event significant customers require payment terms for FortiGuard security subscription or FortiCare technical support services in arrears or for shorter periods of time than annually, such as monthly or quarterly, this may negatively impact our billings and revenue. 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 three years, but in some instances has been as long as five years. As a result, much of the FortiGuard security subscription and FortiCare technical support services revenue we report each quarter is the recognition of deferred revenue from FortiGuard security subscription and FortiCare technical support services contracts entered into during previous quarters. Consequently, a decline in new or renewed FortiGuard security subscription or FortiCare technical support services contracts in any one quarter will not be fully reflected in revenue in that quarter but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales of new, or renewals of existing, FortiGuard security subscriptions or FortiCare technical support services is not reflected in full in our statements of operations until future periods. Our FortiGuard security subscription and FortiCare technical support services revenue also makes it difficult for us to rapidly increase our revenue through additional service sales in any period, as revenue from new and renewal support services contracts must be recognized over the applicable service period.

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 operations.

We market and sell our products throughout the world and have established sales offices in many parts of the world. Therefore, we are subject to risks associated with having worldwide operations. We are also subject to a number of risks typically associated with international sales and operations, including:

• economic or political instability in foreign markets;

• greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;

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• changes in regulatory requirements;

• difficulties and costs of staffing and managing foreign operations;

• the uncertainty of protection for intellectual property rights in some countries;

• costs of compliance with foreign policies, laws and regulations and the risks and costs of non-compliance with such policies, laws and regulations;

• protectionist policies and penalties, and local laws, requirements, policies and perceptions that may adversely impact U.S. headquartered business’s sales in certain countries outside of the United States;

• costs of complying with U.S. or other foreign laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010, import and export control laws, tariffs, trade barriers, and economic sanctions;

• other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance;

• heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales or sales-related arrangements that could disrupt the sales team through terminations of employment or otherwise, and may adversely impact financial results as compared to those already reported or forecasted and result in restatements of financial statements and irregularities in financial statements;

• our ability to effectively implement and maintain adequate internal controls to properly manage our international sales and operations;

• the potential for political unrest, terrorism, hostilities, war, or natural disasters;

• changes in foreign currency exchange rates;

• management communication and integration problems resulting from cultural differences and geographic dispersion; 

• multiple and possibly overlapping tax structures; and

• changes in foreign tax laws

Product and service sales and employee and contractor matters may be subject to foreign governmental regulations, which vary substantially from country to country. Further, we may be unable to keep up-to-date with changes in government requirements as they change over time. Failure to comply with these regulations could result in adverse effects to our business. In many foreign countries, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in litigation, regulatory action, costs of investigation, delays in revenue recognition, delays in financial reporting, financial reporting misstatements, fines, penalties, or the prohibition of the importation or exportation of our products and services, any of which could have a material adverse effect on our business and results of operations.

If we are not successful in continuing to execute our strategy to increase our sales to larger end-customers, our results of operations may suffer.

An important part of our growth strategy is to increase sales of our products to large enterprises, service providers and government organizations. While we have increased sales to service providers and large enterprises in recent periods, we have experienced less traction selling to certain government organizations and there can be no assurance that we will be successful selling to these customers. Sales to large enterprises, service providers and government organizations involve risks that may not be present (or that are present to a lesser extent) with sales to small-to-mid-sized entities. These risks include:

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• increased competition from competitors that traditionally target large enterprises, service providers and government organizations and that may already have purchase commitments from those end-customers;

• increased purchasing power and leverage held by large end-customers in negotiating contractual arrangements;

• unanticipated changes in the capital resources of or purchasing behavior of large end-customers, including changes in the volume and frequency of their purchases;

• more stringent support requirements in our support service contracts, including stricter support response times, more complex requirements, and increased penalties for any failure to meet support requirements; and

• 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.

Large enterprises, service providers and government organizations often undertake a significant evaluation process that results in a lengthy sales cycle, in some cases over 12 months. Although we have a channel sales model, our sales representatives typically engage in direct interaction with end-customers, along with our distributors and resellers, in connection with sales to larger end-customers. Due to the lengthy nature, the size and scope, and stringent requirements of these evaluations, we typically provide evaluation products to these customers. We may spend substantial time, effort and money in our sales efforts without being successful in producing any sales. If we are unsuccessful in converting these evaluations into sales, we may experience an increased inventory of used products and potentially increased write-offs. In addition, product purchases by large enterprises, service providers and government organizations are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Furthermore, service providers represent our largest industry vertical and consolidation or changes in buying behavior by larger customers within this industry could negatively impact our business. Large enterprises, service providers and government organizations typically have longer implementation cycles, require greater product functionality and scalability and a broader range of services, including design services, demand that vendors take on a larger share of risks, sometimes require acceptance provisions that can lead to a delay in revenue recognition, and expect greater payment flexibility from vendors. All these factors can add further risk to business conducted with these customers. If sales expected from a large end-customer for a particular quarter are not realized in that quarter or at all, our business, operating results and financial condition could be materially and adversely affected.

Managing inventory of our products and product components is complex. Insufficient inventory may result in lost sales opportunities or delayed revenue, while excess inventory may harm our gross margins.

Managing our inventory is complex. Our channel partners may increase orders during periods of product shortages, cancel orders or not place orders commensurate with our expectations if their inventory is too high, return products or take advantage of price protection (if any is available to the particular partner), or delay orders in anticipation of new products. They also may adjust their orders in response to the supply of our products and the products of our competitors that are available to them and in response to seasonal fluctuations in end-customer demand. Furthermore, if the time required to manufacture certain products or ship products increases for any reason, this could result in inventory shortfalls. Management of our inventory is further complicated by the significant number of different products and models that we sell.

In addition, for those channel partners that have rights of return, inventory held by such channel partners affects our results of operations. Our inventory management systems and related supply chain visibility tools may be inadequate to enable us to effectively manage inventory. Inventory management remains an area of focus as we balance the need to maintain inventory levels that are sufficient to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements. If we ultimately determine that we have excess inventory, we may have to reduce our prices and write-down inventory, which in turn could result in lower gross margins. Alternatively, insufficient inventory levels may lead to shortages that result in delayed revenue or loss of sales opportunities altogether as potential end-customers turn to competitors’ products that are readily available. For example, we have in the past experienced inventory shortages due to more demand for certain products than we had forecasted. If we are unable to effectively manage our inventory and that of our channel partners, our results of operations could be adversely affected.

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 condition.

Our future performance depends on the continued services and continuing contributions of our senior management to

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execute on our business plan, and to identify and pursue new opportunities and product innovations. The loss of services of members of senior management, particularly Ken Xie, our Co-founder and Chief Executive Officer and Michael Xie, our Co-founder, President and Chief Technology Officer, and any of our senior sales leaders or functional area leaders, could significantly delay or prevent the achievement of our development and strategic objectives. The loss of the services, or distraction, of our senior management for any reason could adversely affect our business, financial condition and results of operations.

If we are unable to hire, retain and motivate qualified personnel, our business will suffer.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition and results of operations. From time to time, we experience turnover in our management-level personnel. None of our key employees has an employment agreement for a specific term, and any of our employees may terminate their employment at any time. Our ability to continue to attract and retain highly skilled personnel will be critical to our future success. Competition for highly-skilled personnel is frequently intense, especially for qualified 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. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.

The average sales prices of our products may decrease, which may reduce our gross profits and adversely impact our financial results and the trading price of our common stock.

The average sales prices for our products may decline for a variety of reasons, including competitive pricing pressures, discounts we offer, a change in our mix of products, anticipation of the introduction of new products or promotional programs. Competition continues to increase in the market segments in which we participate, and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverse product offerings may reduce the price of products that compete with ours in order to promote the sale of other products or may bundle them with other products. Additionally, although we price our products and services worldwide in U.S. dollars, currency fluctuations in certain countries and regions have in the past and may in the future negatively impact actual prices that partners and customers are willing to pay in those countries and regions. Furthermore, we anticipate that the average sales prices and gross profits for our products will decrease over product life cycles. We cannot assure you that we will be successful in developing and introducing new offerings with enhanced functionality on a timely basis, or that our product offerings, if introduced, will enable us to maintain our prices and gross profits at levels that will allow us to maintain profitability.

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

As a result of customer-buying patterns and the efforts of our sales force and channel partners to meet or exceed quarterly quotas, we have historically received a substantial portion of each quarter’s sales orders and generated a substantial portion of each quarter’s billings and revenue during the last two weeks of the quarter. For example, on average over the past eight quarters, our shipments during the last two weeks of each quarter accounted for approximately 31% of aggregate billings for each quarter. 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 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 based on trade compliance requirements, or any shipment delays based on labor disputes 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.

Unless we continue to develop better market awareness of our company and our products and to improve lead generation, our revenue may not continue to grow.

Increased market awareness of our capabilities and products and increased lead generation are essential to our continued growth and our success in all of our markets, particularly for the large enterprise, service provider and government organization market. We have historically had relatively low spending on marketing activities. While we have recently been increasing our investments in sales and marketing, it is not clear that these investments will continue to result in increased revenue. If our investments in additional sales personnel or if our marketing programs are not successful in continuing to create

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market awareness of our company and products, our business, financial condition and results of operations will be adversely affected, and we will not be able to achieve sustained growth.

We rely on third-party channel partners to generate substantially all of our revenue. If our partners fail to perform, our ability to sell our products and services will be limited, and if we fail to optimize our channel partner model going forward, our operating results will be harmed.

Substantially all of our revenue is generated through sales by our channel partners, which include distributors and resellers. We depend upon our channel partners to generate sales opportunities and manage the sales process. To the extent our channel partners are unsuccessful in selling our products, or we are unable to enter into arrangements with, and retain, a sufficient number of high quality channel partners in each of the regions in which we sell products, and keep them motivated to sell our products, our ability to sell our products and operating results will be harmed. The termination of our relationship with any significant channel partner may adversely impact our sales and operating results.

We provide sales channel partners with specific programs to assist them in selling our products and incentivize them to sell our products, but there can be no assurance that these programs will be effective. In addition, our channel partners may be unsuccessful in marketing, selling and supporting our products and services and may purchase more inventory than they can sell. Our channel partners generally do not have minimum purchase requirements. Some of our channel partners may have insufficient financial resources to withstand changes and challenges in business conditions. In addition, if our channel partners’ financial condition or operations weaken it could negatively impact their ability to sell our product and services. They may also market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales and support of such products. They may also have incentives to promote our competitors’ products to the detriment of our own. They may cease selling our products altogether. We cannot assure you that we will retain these channel partners or that we will be able to secure additional or replacement partners or that existing channel partners will continue to perform. The loss of one or more of our significant channel partners or the failure to obtain and ship a number of large orders each quarter through them could harm our operating results. During the three months ended June 30, 2015 and June 30, 2014, Exclusive Networks Group, which distributed our solutions to a large group of resellers and end-customers, accounted for 17% and 14% of our total revenue. During the six months ended June 30, 2015 and June 30, 2014, Exclusive Networks Group accounted for 17% and 14%, of our total revenue, respectively. In addition, any new sales channel partner will require extensive training and may take several months or more to achieve productivity. Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresent the functionality of our products or services to end-customers or our channel partners violate laws or our corporate policies. We depend on our global channel partners to comply with applicable legal and regulatory requirements. To the extent that they fail to do so, that could have a material adverse effect on our business, operating results, and financial condition. If we fail to optimize our channel partner model or fail to manage existing sales channels, our business will be seriously harmed.

Actual, possible or perceived defects or vulnerabilities in our products or services, the failure of our products or services to prevent a virus or security breach, or misuse of our products could harm our reputation and divert resources.

Because our products and services are complex, they have contained and may contain defects or errors that are not detected until after their commercial release and deployment by our customers. Defects or vulnerabilities may impede or block network traffic or cause our products or services to be vulnerable to electronic break-ins or cause them to fail to help secure networks. We cannot ensure that our products will prevent all security threats. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques. In addition, defects or errors in our FortiGuard security subscription updates or our FortiGate appliances could result in a failure of our FortiGuard security subscription services to effectively update end-customers’ FortiGate appliances and thereby leave customers vulnerable to attacks. Furthermore, our solutions may also fail to detect or prevent viruses, worms or similar threats due to a number of reasons such as the evolving nature of such threats and the continual emergence of new threats that we may fail to add to our FortiGuard databases in time to protect our end-customers’ networks. Our FortiGuard or FortiCare data centers and networks may also experience technical failures and downtime, and may fail to distribute appropriate updates, or fail to meet the increased requirements of our customer base. Any such technical failure, downtime, or failures in general may temporarily or permanently expose our end-customers’ networks, leaving their networks unprotected against the latest security threats.

An actual, possible or perceived security breach or infection of the network of one of our end-customers, regardless of whether the breach is attributable to the failure of our products or services to prevent the security breach, could adversely affect the market’s perception of our security products and services and, in some instances, subject us to potential liability that is not contractually limited. We may not be able to correct any security flaws or vulnerabilities promptly, or at all. Our products may also be misused by end-customers or third parties who obtain access to our products. For example, our products could be used

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to censor private access to certain information on the Internet. Such use of our products for censorship could result in negative press coverage and negatively affect our reputation, even if we take reasonable measures to prevent any improper shipment of our products or if our products are provided by an unauthorized third-party. Any actual, possible, or perceived defects, errors or vulnerabilities in our products, or misuse of our products, could result in:

• expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work-around errors or defects or to address and eliminate vulnerabilities;

• loss of existing or potential end-customers or channel partners;

• delayed or lost revenue;

• delay or failure to attain market acceptance;

• negative publicity, which will harm our reputation; and

• litigation, regulatory inquiries or investigations that may be costly and harm our reputation and, in some instances, subject us to potential liability that is not contractually limited.

Our business and operations have experienced growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results will be negatively affected.

Our business has grown over the last several years. We rely heavily on information technology and accounting systems to help manage critical functions such as order processing, revenue recognition, financial forecasts, inventory and supply chain management and trade compliance reviews. Certain of these systems were developed by us for our internal use and as such may have a higher risk of failure or not receive the same level of support as systems purchased from and supported by external technology companies. In addition, we have been slow to adopt and implement certain automated functions, which could have a negative impact on our business. For example, a large part of our order processing relies on the manual processing of emails internally and receiptof customer purchase orders through email and, to a lesser extent, through electronic data interchangefrom our customers. Combined with the fact that we may receive a majority of our orders in the last few weeks of any given quarter, a significant interruption in our email service or other systems could result in delayed order fulfillment and decreased revenue for that quarter. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement requisite improvements to these systems, controls and processes, such as system access and change management controls, in a timely or efficient manner. Our failure to improve our systems and processes, or their failure to operate in the intended manner, whether as a result of the significant growth of our business or otherwise, may result in our inability to manage the growth of our business and to accurately forecast our revenue, expenses and earnings, or to prevent certain losses. Moreover, the failure of our systems and processes could undermine our ability to provide accurate, timely and reliable reports on our financial and operating results and could impact the effectiveness of our internal control over financial reporting. In addition, our systems and processes may not prevent or detect all errors, omissions or fraud. Our productivity and the quality of our products and services may also be adversely affected if we do not integrate and train our new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination throughout our organization. Failure to manage any future growth effectively could result in increased costs and harm our results of operations.

We may experience difficulties implementing our new enterprise resource planning system.

We purchased a new enterprise resource planning system (“ERP”) and are currently implementing the new system. ERP implementations are complex and time-consuming and involve substantial expenditures on system software and implementation activities. Our ERP system is critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our consolidated financial statements. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system; any such transformation involves risks inherent in the conversion to a new computer system, including loss of information and potential disruption to our normal operations. The implementation of the new ERP system has required, and will continue to require, the investment of significant financial and human resources and may be subject to delays and cost overruns. In addition, we may not be able to successfully complete the implementation of the new ERP system without experiencing difficulties. Any disruptions, delays or deficiencies in the design and implementation of the new ERP system could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments,

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fulfill contractual obligations or otherwise operate our business. Additionally, if we do not effectively implement the ERP system as planned or the system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess it adequately could be delayed.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our condensed consolidated financial statements include those related to revenue recognition, stock-based compensation expense, valuation of inventory, warranty liabilities, goodwill and other long-lived assets, investments, accounting for income taxes, litigation and settlement costs and other loss contingencies, sales returns and allowances, reserve for bad debt, and the accounting for business combinations.

We offer retroactive price protection to certain of our major distributors, and if we fail to balance their inventory with end-customer demand for our products, our allowance for price protection may be inadequate, which could adversely affect our results of operations.

We provide certain of our major distributors with price protection rights for inventories of our products held by them. If we reduce the list price of our products, certain distributors receive refunds or credits from us that reduce the price of such products held in their inventory based upon the new list price. Future credits for price protection will depend on the percentage of our price reductions for the products in inventory and our ability to manage the levels of our major distributors’ inventories. If future price protection adjustments are higher than expected, our future results of operations could be materially and adversely affected.

Because we depend on several third-party manufacturers to build our products, we are susceptible to manufacturing delays that could prevent us from shipping customer orders on time, if at all, and may result in the loss of sales and customers, and third-party manufacturing cost increases could result in lower gross margins.

We outsource the manufacturing of our security appliance products to a variety of contract manufacturing partners and original design manufacturing partners.

Our reliance on our third-party manufacturers in Asia and elsewhere reduces our control over the manufacturing process, exposing us to risks, including reduced control over quality assurance, product costs and product supply and timing. Any manufacturing disruption by our third-party manufacturers could impair our ability to fulfill orders. If we are unable to manage our relationships with these third-party manufacturers effectively, or if these third-party manufacturers experience delays, increased manufacturing lead-times, disruptions, capacity constraints or quality control problems in their manufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products to our customers could be impaired and our business would be seriously harmed.

These manufacturers fulfill our supply requirements on the basis of individual purchase orders. We have no long-term contracts or arrangements with certain of our third-party manufacturers that guarantee capacity, the continuation of particular payment terms or the extension of credit limits. Accordingly, they are not obligated to continue to fulfill our supply requirements, and the prices we are charged for manufacturing services could be increased on short notice. If we are required to change third-party manufacturers, our ability to meet our scheduled product deliveries to our customers would be adversely affected, which could cause the loss of sales and existing or potential customers, delayed revenue or an increase in our costs which could adversely affect our gross margins. Our individual product lines are generally manufactured by only one manufacturing partner. Any production or shipping interruptions for any reason, such as a natural disaster, epidemic, capacity shortages, quality problems, or strike or other labor disruption, at one of our manufacturing partners or locations or at shipping ports or locations would severely affect sales of our product lines manufactured by that manufacturing partner. Furthermore manufacturing cost increases for any reason could result in lower gross margins.

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Our proprietary FortiASIC, which is the key to the performance of our appliances, is fabricated by contract manufacturers in foundries operated by UMC and TSMC. Faraday (using UMC’s foundry), K-Micro (using TSMC’s foundry) and Renesas (using UMC’s foundry) manufacture our ASICs on a purchase order basis, and UMC and TSMC do not guarantee any capacity and could reject orders from Faraday, K-Micro or Renesas or could try to increase pricing. Accordingly, the foundries are not obligated to continue to fulfill our supply requirements, and due to the long lead time that a new foundry would require, we could suffer temporary or long term inventory shortages of our FortiASIC as well as increased costs. Our suppliers may also prioritize orders by other companies that order higher volumes of products. If any of these suppliers materially delays its supply of ASICs or specific product models to us, or requires us to find an alternate supplier and we are not able to do so on a timely and reasonable basis, or if these foundries materially increase their prices for fabrication of our ASICs or specific product models, our business would be harmed.

In addition, our reliance on third-party manufacturers and foundries limits our control over environmental regulatory requirements such as the hazardous substance content of our products and therefore our ability to ensure compliance with the European Union’s (“EU”) Restriction of Hazardous Substances Directive (“RoHS”) and other similar laws. It also exposes us to the risk that certain minerals and metals, known as “conflict minerals,” that are contained in our products have originated in the Democratic Republic of the Congo or an adjoining country.  As a result of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted disclosure requirements for public companies whose products contain conflict minerals that are necessary to the functionality or production of such products. Under these rules, we are required to obtain sourcing data from suppliers, perform supply chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD covering the prior calendar year. We have incurred and expect to incur additional costs to comply with the rules, including costs related to the determination of the origin, source and chain of custody of the conflict minerals used in our products and the adoption of conflict minerals-related governance policies, processes and controls.  Moreover, the implementation of these compliance measures could adversely affect the sourcing, availability, and pricing of materials used in the manufacture of our products to the extent that there may be only a limited number of suppliers that are able to meet our sourcing requirements. There can be no assurance that we will be able to obtain such materials in sufficient quantities or at competitive prices. We may also encounter customers who require that all of the components of our products be certified as conflict free. If we are not able to meet customer requirements, such customers may choose to not purchase our products, which could impact our sales and the value of portions of our inventory.

Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages, long lead times for components, and supply changes, each of which could disrupt or delay our scheduled product deliveries to our customers, result in inventory shortage, and may result in the loss of sales and customers, and increased component costs may result in lower gross margins.

We and our contract manufacturers currently purchase several key parts and components used in the manufacture of our products from limited sources of supply. We are therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that component suppliers discontinue or modify components used in our products. We have in the past experienced, and are currently experiencing, shortages and long lead times for certain components. Certain of our limited source components for particular appliances and suppliers of those components include: specific types of central processing units from Intel, network chips from Broadcom Corporation, Marvell Technology Group Ltd. and Intel, and hard drives from Western Digital Technologies, Inc. The introduction by component suppliers of new versions of their products, particularly if not anticipated by us or our contract manufacturers, could require us to expend significant resources to incorporate these new components into our products. In addition, if these suppliers were to discontinue production of a necessary part or component, we would be required to expend significant resources and time in locating and integrating replacement parts or components from another vendor. Qualifying additional suppliers for limited source parts or components can be time-consuming and expensive.

Our manufacturing partners have experienced long lead times for the purchase of components incorporated into our products. Lead times for components may be adversely impacted by factors outside of our control, such as natural disasters and other factors. Our reliance on a limited number of suppliers involves several additional risks, including:

• a potential inability to obtain an adequate supply of required parts or components when required;

• financial or other difficulties faced by our suppliers;

• infringement or misappropriation of our intellectual property;

• price increases;

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• failure of a component to meet environmental or other regulatory requirements;

• failure to meet delivery obligations in a timely fashion; and

• failure in component quality.

The occurrence of any of these events would be disruptive to us and could seriously harm our business. Any interruption or delay in the supply of any of these parts or components, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to meet our scheduled product deliveries to our distributors, resellers and end-customers. This could harm our relationships with our channel partners and end-customers and could cause delays in shipment of our products and adversely affect our results of operations. In addition, increased component costs could result in lower gross margins.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.

A significant portion of our operating expenses are incurred outside the United States. These expenses are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and Canadian dollar. Although we have been hedging currency exposures relating to certain balance sheet accounts, if we stop hedging against any of these risks or if our attempts to hedge against these currency exposures are not successful, our financial condition and results of operations could be adversely affected. In addition, our sales contracts are primarily denominated in U.S. dollars and therefore, while substantially all of our revenue is not subject to foreign currency risk, it does not serve as a hedge to our foreign currency-denominated operating expenses. In addition, a strengthening of the U.S. dollar could increase the real cost of our products to our customers outside of the United States, which could also adversely affect our financial condition and results of operations. 

We are subject to governmental export and import controls that could subject us to liability, restriction on sales, and/or impair our ability to compete in international markets.

Because we incorporate encryption technology into our products, certain of our products are subject to U.S. export controls and may be exported outside the United States only with the required export license or through an export license exception. If we were to fail to comply with U.S. export licensing, U.S. Customs regulations and import regulations, U.S. economic sanctions and other countries’ import and export laws, we could be subject to substantial civil and criminal penalties, including fines for the company and incarceration for responsible employees and managers, and the possible loss of export or import privileges. In addition, if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, for orders placed by partners as stocking orders for example, we may also be adversely affected through reputational harm and penalties and we may not be able to provide support related to appliances shipped pursuant to such orders. Obtaining the necessary export license for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities.

Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries, governments and persons. Even though we take precautions to prevent our product from being shipped to U.S. sanctions targets, our products could be shipped to those targets by our channel partners, despite such precautions. Any such shipment could have negative consequences including government investigations and penalties and reputational harm. In addition, various countries regulate the import of certain encryption technology, including import permitting/licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products globally or, in some cases, prevent the export or import of our products to certain countries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations.

If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.

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We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to the recycling of electrical and electronic equipment. The laws and regulations to which we are subject include the EU RoHS and the EU Waste Electrical and Electronic Equipment Directive (“WEEE Directive”) as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

The EU RoHS and the similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our products. We have incurred costs to comply with these laws, including research and development costs, costs associated with assuring the supply of compliant components and costs associated with writing off noncompliant inventory. We expect to continue to incur costs related to environmental laws and regulations in the future. With respect to the EU RoHS, we and our competitors rely on an exemption for lead in network infrastructure equipment. It is possible this exemption will be revoked in the near future. If this exemption is revoked, if there are other changes to these laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products to use components compatible with these regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

The EU has also adopted the WEEE Directive, which requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Although currently our EU international channel partners are responsible for the requirements of this directive as the importer of record in most of the European countries in which we sell our products, changes in interpretation of the regulations may cause us to incur costs or have additional regulatory requirements in the future to meet in order to comply with this directive, or with any similar laws adopted in other jurisdictions.

Our failure to comply with these and future environmental rules and regulations could result in reduced sales of our products, increased costs, substantial product inventory write-offs, reputational damage, penalties and other sanctions.

A portion of our revenue is generated by sales to government organizations, which are subject to a number of challenges and risks.

Sales to U.S. and foreign federal, state and local governmental agency end-customers have accounted for a portion of our revenue in past periods, and we may in the future increase sales to government organizations. Sales to government organizations are subject to a number of risks. Selling to government organizations can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense, with long sales cycles and without any assurance that we will win a sale.

Government demand, sales, and payment for our products and services may be negatively impacted by numerous factors and requirements unique to selling to government agencies, such as:

• public sector budgetary cycles,

• funding authorizations and requirements unique to government agencies, with funding or purchasing reductions or delays adversely affecting public sector demand for our products,

• geopolitical matters, and

• rules and regulations applicable to certain government sales.

The rules and regulations applicable to sales to government organizations may also negatively impact sales to other organizations. To date, we have had limited traction in sales to U.S. federal government agencies, and any future sales to government organizations is uncertain. All of our sales to government organizations have been made indirectly through our distribution channel. Government organizations may have contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact our future results of operations. For example, if the distributor receives a significant portion of its revenue from sales to such government organization, the financial health of the distributor could be substantially harmed, which could negatively affect our future sales to such distributor. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our products and services, a reduction of revenue or fines or civil or criminal liability if the audit uncovers improper or illegal activities. Any such penalties could adversely impact our results of operations in a material way. Finally, purchases by the U.S. government may require certain products to be

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manufactured in the United States and other high cost manufacturing locations, and we may not manufacture all products in locations that meet the requirements of the U.S. government.

False detection of viruses or security breaches or false identification of spam or spyware could adversely affect our business.

Our antivirus and our intrusion prevention services may falsely detect viruses or other threats that do not actually exist. This risk is heightened by the inclusion of a “heuristics” feature in our products, which attempts to identify viruses and other threats not based on any known signatures but based on characteristics or anomalies that may indicate that a particular item is a threat. When our end-customers enable the heuristics feature in our products, the risk of falsely identifying viruses and other threats significantly increases. These false positives, while typical in the industry, may impair the perceived reliability of our products and may therefore adversely impact market acceptance of our products. Also, our anti-spam and anti-malware services may falsely identify emails or programs as unwanted spam or potentially unwanted programs, or alternatively fail to properly identify unwanted emails or programs, particularly as spam emails or spyware are often designed to circumvent anti-spam or spyware products. Parties whose emails or programs are blocked by our products may seek redress against us for labeling them as spammers or spyware, or for interfering with their business. In addition, false identification of emails or programs as unwanted spam or potentially unwanted programs may reduce the adoption of our products. If our system restricts important files or applications based on falsely identifying them as malware or some other item that should be restricted, this could adversely affect end-customers’ systems and cause material system failures. Any such false identification of important files or applications could result in negative publicity, loss of end-customers and sales, increased costs to remedy any problem, and costly litigation.

If our internal network system or our website is compromised, public perception of our products and services will be harmed, we may become subject to liability, and our business, operating results and stock price may be adversely impacted.

We will not succeed unless the marketplace is confident that we provide effective network security protection. Increasingly, companies are subject to a wide variety of attacks on their networks and websites. Despite our efforts and processes to prevent breaches of our internal network system and website, we are still vulnerable to computer viruses, break-ins, phishing attacks, attempts to overload our servers with denial-of-service and other cyber-attacks and similar disruptions from unauthorized access to our internal network system or our website. Our security measures may also be breached due to employee error, malfeasance or otherwise and third parties may attempt to fraudulently induce our employees to disclose information in order to gain access to our network. We cannot assure you that the measures we have taken to protect our network and website will provide absolute security. Moreover, because we provide network security products, we may be a more attractive target for attacks by computer hackers. Although we have not experienced significant damages from unauthorized access by a third party of our internal network or website, if an actual or perceived breach of network security occurs in our internal systems or website it could adversely affect the market perception of our products and services and investor confidence in our company. Any breach of our network system or website could impair our ability to operate our business, including our ability to provide FortiGuard security subscription and FortiCare technical support services to our end-customers, lead to interruptions, system slowdowns, cause loss of critical data, or lead to the unauthorized disclosure or use of confidential, proprietary or sensitive information. We could also be subject to liability and litigation and reputational harm and our channel partners and end-customers may be harmed, lose confidence in us and decrease or cease using our products and services. Any breach of our internal network system or our website could have an adverse effect on our business, operating results and stock price.

Our ability to sell our products is dependent on the quality of our technical support services, and our failure to offer high quality technical support services would have a material adverse effect on our sales and results of operations.

Once our products are deployed within our end-customers’ networks, our end-customers depend on our technical support services, as well as the support of our channel partners, to resolve any issues relating to our products. If we or our channel partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing support, our ability to sell additional products and services to existing customers would be adversely affected and our reputation with potential customers could be damaged. Many large end-customers, service provider and government organization end-customers require higher levels of support than smaller end-customers because of their more complex deployments. If we fail to meet the requirements of our larger end-customers, it may be more difficult to execute on our strategy to increase our penetration with large enterprises, service providers and government organizations. As a result, our failure to maintain high quality support services would have a material adverse effect on our business, financial condition and results of operations.

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We could be subject to changes in our tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.

We are subject to taxes in the United States and numerous foreign jurisdictions, where a number of our subsidiaries are organized. Our provision for income taxes is subject to volatility and could be adversely affected by several factors, many of which are outside of our control, including:

• earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;

• the mix of earnings in countries with differing statutory tax rates or withholding taxes;

• changes in the valuation of our deferred tax assets and liabilities;

• expiration of, or lapses in the research and development tax credit laws;

• transfer pricing adjustments;

• an increase in non-deductible expenses for tax purposes, including certain stock-based compensation expense, write-offs of acquired in-process research and development, and impairment of goodwill;

• tax costs related to intercompany realignments;

• tax assessments resulting from income tax audits or any related tax interest or penalties that could significantly affect our provision for income taxes for the period in which the settlement takes place;

• a change in our decision to indefinitely reinvest foreign earnings;

• changes in accounting principles; or

• changes in tax laws and regulations including possible changes in the United States to the taxation of earnings of our foreign subsidiaries, and the deductibility of expenses attributable to foreign income, or the foreign tax credit rules, or changes to the U.S. income tax rate, which would necessitate a revaluation of our deferred tax assets and liabilities.

Significant judgment is required to determine the recognition and measurement attribute prescribed in the Financial Accounting Standards Board standard. In addition, the standard applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain foreign countries is subject to reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of our provision for income taxes.

Although we currently do not have a valuation allowance, we may in the future be required to establish one. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist.

In addition, we hold a significant portion of our cash and investments outside of the United States. Potential legislation could result in us transferring this cash and investments back to the United States, and potentially incurring an additional tax obligation.

Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates.

Forecasts of our income tax position and effective tax rate are complex, subject to uncertainty and periodic updates because our income tax position for each year combines the effects of a mix of profits earned and losses incurred by us in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and

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liabilities, the impact of various accounting rules and changes to these rules and tax laws, the results of examinations by various tax authorities, and the impact of any acquisition, business combination or other reorganization or financing transaction. To forecast our global tax rate, we estimate our pre-tax profits and losses by jurisdiction and forecast our tax expense by jurisdiction. If the mix of profits and losses, our ability to use tax credits, or effective tax rates by jurisdiction is different than those estimated, our actual tax rate could be materially different than forecasted, which could have a material impact on our results of business, financial condition and results of operations.

As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, the availability of tax credits and carryforwards, and the effectiveness of our tax planning strategies. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate.

In addition, we may be subject to examination of our income tax returns by the IRS and other tax authorities. If tax authorities challenge the relative mix of U.S. and international income, our future effective income tax rates could be adversely affected. While we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision for income taxes, there can be no assurance that such provision is sufficient and that a determination by a tax authority will not have an adverse effect on our business, financial condition and results of operations.

Our inability to acquire and integrate other businesses, products or technologies could seriously harm our competitive position.

In order to remain competitive, we may seek to acquire additional businesses, products, or technologies and intellectual property, such as patents. For example, we recently closed our acquisition of Meru for approximately $44.0 million. For any past acquisition or possible future acquisition, we may not be successful in negotiating the terms of the acquisition, financing the acquisition, or effectively integrating the acquired business, product, technology or intellectual property into our existing business and operations. We may have difficulty incorporating acquired technologies, intellectual property or products with our existing product lines and maintaining uniform standards, controls, procedures and policies. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues with intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues, and we may not accurately forecast the financial impact of an acquisition. In addition, any acquisitions we are able to complete, including our acquisition of Meru, may be dilutive to revenue growth and earnings and may not result in any synergies or other benefits we had expected to achieve, which could result in impairment charges that could be substantial. For example, in the second quarter of 2014, we recognized an impairment charge of $2.4 million for intangible assets from our acquisition of Coyote Point Systems, Inc. We may have to pay cash, incur debt, or issue equity securities to pay for any acquisition, each of which could affect our financial condition or the value of our capital stock and could result in dilution to our stockholders. Acquisitions during a quarter may result in increased operating expenses and adversely affect our results of operations for that period or future periods compared to the results that we have previously forecasted or achieved. Further, completing a potential acquisition and integrating acquired businesses, products, technologies or intellectual property could significantly divert management time and resources.

Our business is subject to the risks of warranty claims, product returns, product liability and product defects.

Our products are very complex and, despite testing prior to their release, have contained and may contain undetected defects or errors, especially when first introduced or when new versions are released. Product errors have affected the performance of our products and could delay the development or release of new products or new versions of products, adversely affect our reputation and our end-customers’ willingness to buy products from us, and adversely affect market acceptance or perception of our products. Any such errors or delays in releasing new products or new versions of products or allegations of unsatisfactory performance could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in redesigning the products, cause us to lose significant end-customers, subject us to liability for damages and divert our resources from other tasks, any one of which could materially and adversely affect our business, results of operations and financial condition. Our products must successfully interoperate with products from other vendors. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. The occurrence of hardware and software errors, whether or not caused by our products, could delay or reduce market acceptance of our products, and have an adverse effect on our business and financial performance, and any necessary revisions may cause us to incur

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significant expenses. The occurrence of any such problems could harm our business, financial condition and results of operations.

Although we have limitation of liability provisions in our standard terms and conditions of sale, they may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries, and in some circumstances we may be required to indemnify a customer in full, without a limitation on liability, for certain liabilities, including potential liabilities that are not contractually limited. The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not cover such claim at all or may not adequately cover any claim asserted against us, and in some instances may subject us to potential liability that is not contractually limited. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources.

Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such as civil unrest, labor disruption, and terrorism.

A significant natural disaster, such as an earthquake, fire, power outages, floods, or other catastrophic events could have a material adverse impact on our business, operating results and financial condition. Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our manufacturing vendors, suppliers or logistics providers’ ability to perform services such as obtaining product components and manufacturing products on a timely basis and assisting with shipments on a timely basis. In the event our or our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in us missing financial targets, such as revenue and shipment targets, for a particular quarter. In addition, regional instability, civil unrest, labor disruptions, acts of terrorism and other geo-political unrest could cause disruptions in our business or the business of our manufacturers, logistics providers, partners, or end-customers or the economy as a whole. Given our typical concentration of sales at each quarter end, any disruption in the business of our manufacturers, logistics providers, partners or end-customers that impacts sales at the end of our quarter could have a significant adverse impact on our quarterly results. To the extent that any of the above results in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our products, our business, financial condition and results of operations would be adversely affected.

Risks Related to Our Industry

The network security market is rapidly evolving and the complex technology incorporated in our products makes them difficult to develop. If we do not accurately predict, prepare for and respond promptly to technological and market developments and changing end-customer needs, our competitive position and prospects will be harmed.

The network security market is expected to continue to evolve rapidly. Moreover, many of our end-customers operate in markets characterized by rapidly changing technologies and business plans, which require them to add numerous network access points and adapt increasingly complex enterprise networks, incorporating a variety of hardware, software applications, operating systems and networking protocols. In addition, computer hackers and others who try to attack networks employ increasingly sophisticated techniques to gain access to and attack systems and networks. The technology in our products is especially complex because it needs to effectively identify and respond to new and increasingly sophisticated methods of attack, while minimizing the impact on network performance. Additionally, some of our new products and enhancements may require us to develop new hardware architectures and ASICs that involve complex, expensive and time consuming research and development processes. Although the market expects rapid introduction of new products or product enhancements to respond to new threats, the development of these products is difficult and the timetable for commercial release and availability is uncertain and there can be long time periods between releases and availability of new products. We have in the past and may in the future experience unanticipated delays in the availability of new products and services and fail to meet previously announced timetables for such availability. If we do not quickly respond to the rapidly changing and rigorous needs of our end-customers by developing and releasing and making available on a timely basis new products and services or enhancements that can respond adequately to new security threats, our competitive position and business prospects will be harmed.

Our URL database for our web filtering service may fail to keep pace with the rapid growth of URLs and may not categorize websites in accordance with our end-customers’ expectations.

The success of our web filtering service depends on the breadth and accuracy of our URL database. Although our URL database currently catalogs millions of unique URLs, it contains only a portion of the URLs for all of the websites that are available on the Internet. In addition, the total number of URLs and software applications is growing rapidly, and we expect

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this rapid growth to continue in the future. Accordingly, we must identify and categorize content for our security risk categories at an extremely rapid rate. Our database and technologies may not be able to keep pace with the growth in the number of websites, especially the growing amount of content utilizing foreign languages and the increasing sophistication of malicious code and the delivery mechanisms associated with spyware, phishing and other hazards associated with the Internet. Further, the ongoing evolution of the Internet and computing environments will require us to continually improve the functionality, features and reliability of our web filtering function. Any failure of our databases to keep pace with the rapid growth and technological change of the Internet could impair the market acceptance of our products, which in turn could harm our business, financial condition and results of operations.

In addition, our web filtering service may not be successful in accurately categorizing Internet and application content to meet our end-customers’ expectations. We rely upon a combination of automated filtering technology and human review to categorize websites and software applications in our proprietary databases. Our end-customers may not agree with our determinations that particular URLs should be included or not included in specific categories of our databases. In addition, it is possible that our filtering processes may place material that is objectionable or that presents a security risk in categories that are generally unrestricted by our customers’ Internet and computer access policies, which could result in such material not being blocked from the network. Conversely, we may miscategorize websites such that access is denied to websites containing information that is important or valuable to our customers. Any miscategorization could result in customer dissatisfaction and harm our reputation. Any failure to effectively categorize and filter websites according to our end-customers’ and channel partners’ expectations could impair the growth of our business.

If our new products and product enhancements do not achieve sufficient market acceptance, our results of operations and competitive position will suffer.

We spend substantial amounts of time and money to research and develop new products and enhanced versions of our existing products to incorporate additional features, improved functionality or other enhancements in order to meet our customers’ rapidly evolving demands for network security in our highly competitive industry. When we develop a new product or an enhanced version of an existing product, we typically incur expenses and expend resources upfront to market, promote and sell the new offering. Therefore, when we develop and introduce new or enhanced products, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market.

Our new products or product enhancements could fail to attain sufficient market acceptance for many reasons, including:

• delays in releasing our new products or enhancements to the market;

• failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand in a timely fashion;

• failure of our sales force and partners to focus on selling new products;

• inability to interoperate effectively with the networks or applications of our prospective end-customers;

• inability to protect against new types of attacks or techniques used by hackers;

• actual or perceived defects, vulnerabilities, errors or failures;

• negative publicity about their performance or effectiveness;

• introduction or anticipated introduction of competing products by our competitors;

• poor business conditions for our end-customers, causing them to delay IT purchases;

• easing of regulatory requirements around security; and

• reluctance of customers to purchase products incorporating open source software.

If our new products or enhancements do not achieve adequate acceptance in the market, our competitive position will be impaired, our revenue will be diminished and the effect on our operating results may be particularly acute because of the

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significant research, development, marketing, sales and other expenses we incurred in connection with the new product or enhancement.

Demand for our products may be limited by market perception that individual products from one vendor that provide multiple layers of security protection in one product are inferior to point solution network security solutions from multiple vendors.

Sales of most of our products depend on increased demand for incorporating broad security functionality in one appliance. If the market for these products fails to grow as we anticipate, our business will be seriously harmed. Target customers may view “all-in-one” network security solutions as inferior to security solutions from multiple vendors because of, among other things, their perception that such products of ours provide security functions from only a single vendor and do not allow users to choose “best-of-breed” defenses from among the wide range of dedicated security applications available. Target customers might also perceive that, by combining multiple security functions into a single platform, our solutions create a “single point of failure” in their networks, which means that an error, vulnerability or failure of our product may place the entire network at risk. In addition, the market perception that “all-in-one” solutions may be suitable only for small and medium sized businesses because such solution lacks the performance capabilities and functionality of other solutions may harm our sales to large enterprise, service provider, and government organization end-customers. If the foregoing concerns and perceptions become prevalent, even if there is no factual basis for these concerns and perceptions, or if other issues arise with our market in general, demand for multi-security functionality products could be severely limited, which would limit our growth and harm our business, financial condition and results of operations. Further, a successful and publicized targeted attack against us exposing a “single point of failure” could significantly increase these concerns and perceptions and may harm our business and results of operations.

We face intense competition in our market and we may lack sufficient financial or other resources to maintain or improve our competitive position.

The market for network security products is intensely competitive, and we expect competition to intensify in the future. Our competitors include companies such as Blue Coat, Check Point, Cisco/SourceFire, Dell/SonicWall, F5 Networks, FireEye, Intel/McAfee, Juniper, Palo Alto Networks, Sophos, and others.

Many of our existing and potential competitors enjoy substantial competitive advantages such as:

• greater name recognition and longer operating histories;

• larger sales and marketing budgets and resources;

• broader distribution and established relationships with distribution partners and end-customers;

• access to larger customer bases;

• greater customer support resources;

• greater resources to make acquisitions;

• lower labor and development costs; and

• substantially greater financial, technical and other resources.

In addition, some of our larger competitors have substantially broader product offerings and leverage their relationships based on other products or incorporate functionality into existing products in a manner that discourages customers from purchasing our products. These larger competitors often have broader product lines and market focus and are in a better position to withstand any significant reduction in capital spending by end-customers in these markets. Therefore, these competitors will not be as susceptible to downturns in a particular market. Also, many of our smaller competitors that specialize in providing protection from a single type of network security threat are often able to deliver these specialized network security products to the market more quickly than we can. Some of our smaller competitors are using third-party chips designed to accelerate performance. Conditions in our markets could change rapidly and significantly as a result of technological advancements or continuing market consolidation. Our competitors and potential competitors may also be able to develop products or services that are equal or superior to ours, achieve greater market acceptance of their products and services, and increase sales by utilizing different distribution channels than we do. Our current and potential competitors may also establish

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cooperative relationships among themselves or with third parties that may further enhance their resources. In addition, current or potential competitors may be acquired by third parties with greater available resources (such as Cisco’s acquisition of SourceFire, Juniper’s acquisition of NetScreen Technologies Inc., Intel’s acquisition of McAfee, McAfee’s acquisition of Stonesoft, Check Point’s acquisition of Nokia Corporations’ security appliance business and Dell’s acquisition of SonicWALL), and new competitors may arise pursuant to acquisitions of network security companies or divisions. As a result of such acquisitions, competition in our market may continue to increase and our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisition or other opportunities more readily or develop and expand their product and service offerings more quickly than we do. 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. Due to budget constraints or economic downturns, organizations may be more willing to incrementally add solutions to their existing network security infrastructure from competitors than to replace it with our solutions. These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer customer orders, reduced revenue and gross margins and loss of market share.

If functionality similar to that offered by our products is incorporated into existing network infrastructure products, organizations may decide against adding our appliances to their network, which would have an adverse effect on our business.

Large, well-established providers of networking equipment such as Cisco, F5 Networks, and Juniper offer, and may continue to introduce, network security features that compete with our products, either in stand-alone security products or as additional features in their network infrastructure products. The inclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by our security solutions in networking products that are already generally accepted as necessary components of network architecture may have an adverse effect on our ability to market and sell our products. Furthermore, even if the functionality offered by network infrastructure providers is more limited than our products, a significant number of customers may elect to accept such limited functionality in lieu of adding appliances from an additional vendor such as us. Many organizations have invested substantial personnel and financial resources to design and operate their networks and have established deep relationships with other providers of networking products, which may make them reluctant to add new components to their networks, particularly from other vendors such as us. In addition, an organization’s existing vendors or new vendors with a broad product offering may be able to offer concessions that we are not able to match because we currently offer only network security products and have fewer resources than many of our competitors. If organizations are reluctant to add additional network infrastructure from new vendors or otherwise decide to work with their existing vendors, our business, financial condition and results of operations will be adversely affected.

Risks Related to Intellectual Property

Our proprietary rights may be difficult to enforce, which could enable others to copy or use aspects of our products without compensating us.

We rely primarily on patent, trademark, copyright and trade secrets laws and confidentiality procedures and contractual provisions to protect our technology. Valid patents may not issue from our pending applications, and the claims eventually allowed on any patents may not be sufficiently broad to protect our technology or products. Any issued patents may be challenged, invalidated or circumvented, and any rights granted under these patents may not actually provide adequate defensive protection or competitive advantages to us. Patent applications in the United States are typically not published until at least 18 months after filing, or, in some cases, not at all, and publications of discoveries in industry-related literature lag behind actual discoveries. We cannot be certain that we were the first to make the inventions claimed in our pending patent applications or that we were the first to file for patent protection. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. In addition, recent changes to the patent laws in the United States may bring into question the validity of certain software patents and may make it more difficult and costly to prosecute patent applications. As a result, we may not be able to obtain adequate patent protection or effectively enforce our issued patents.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. We generally enter into confidentiality or license agreements with our employees, consultants, vendors and customers, and generally limit access to and distribution of our proprietary information. However, we cannot assure you that the steps taken by us will prevent misappropriation of our technology. Policing unauthorized use of our technology or products is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States. From time to time, legal action by us

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may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition. If we are unable to protect our proprietary rights (including aspects of our software and products protected other than by patent rights), we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to be successful to date.

Our products contain third-party open source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.

Our products contain software modules licensed to us by third-party authors under “open source” licenses, including the GNU Public License, the GNU Lesser Public License (LGPL), the BSD License, the Apache License the MIT X License, and the Mozilla Public License. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights in what we believe to be licensed open source software. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of product sales for us.

Although we monitor our use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In this event, we could be required to seek licenses from third parties to continue offering our products, to make generally available, in source code form, our proprietary code, to re-engineer our products, or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.

Claims by others that we infringe their proprietary technology or other litigation matters could harm our business.

Patent and other intellectual property disputes are common in the network security industry. Third parties are currently asserting, have asserted and may in the future assert claims of infringement of intellectual property rights against us. They may also assert such claims against our end-customers or channel partners whom we typically indemnify against claims that our products infringe the intellectual property rights of third parties. As the number of products and competitors in our market increases and overlaps occur, infringement claims may increase. Any claim of infringement by a third-party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business. In addition, litigation may involve patent holding companies, non-practicing entities, or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection.

Although third parties may offer a license to their technology, the terms of any offered license may not be acceptable, and the failure to obtain a license or the costs associated with any license could cause our business, financial condition and results of operations to be materially and adversely affected. In addition, some licenses may be non-exclusive, and therefore, our competitors may have access to the same technology licensed to us.

Alternatively, we may be required to develop non-infringing technology, which could require significant time, effort and expense and may ultimately not be successful. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from distributing certain products or performing certain services or that requires us to pay substantial damages (including treble damages if we are found to have willfully infringed such claimant’s patents or copyrights), royalties or other fees. Any of these events could seriously harm our business, financial condition and results of operations.

From time to time we are subject to lawsuits claiming patent infringement. We are also subject to other litigation in addition to patent infringement claims, such as employment-related litigation and disputes, general commercial litigation, and could become subject to other forms of litigation and disputes, including stockholder litigation. If we are unsuccessful in defending any such claims, our operating results and financial condition and results may be materially and adversely affected.

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For example, we may be required to pay substantial damages and could be prevented from selling certain of our products. Litigation, with or without merit, could negatively impact our business, reputation, and sales in a material fashion.

We have several on-going patent lawsuits and, several non-practicing entity patent holding companies have sent us letters proposing that we license certain of their patents. Given this and the proliferation of lawsuits in our industry and other similar industries by both non-practicing entities and operating entities, we expect that we will be sued for patent infringement in the future, regardless of the merits of any such lawsuits. The cost to defend such lawsuits and any adverse result in such lawsuits could have a material adverse effect on our results of operations and financial condition.

We rely on the availability of third-party licenses.

Many of our products include software or other intellectual property licensed from third parties. It may be necessary in the future to renew licenses relating to various aspects of these products or to seek new licenses for existing or new products. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in product releases until equivalent technology can be identified, licensed or developed, if at all, and integrated into our products and may have a material adverse effect on our business, operating results, and financial condition. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to differentiate our products from those of our competitors.

Risks Related to Ownership of our Common Stock

As a public company, we are subject to compliance initiatives that will require substantial time from our management and result in significantly increased costs that may adversely affect our operating results and financial condition.

The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as other rules implemented by the SEC and The NASDAQ Stock Market, impose various requirements on public companies, including requiring changes in corporate governance practices. These and proposed corporate governance laws and regulations under consideration may further increase our compliance costs. If compliance with these various legal and regulatory requirements diverts our management’s attention from other business concerns, it could have a material adverse effect on our business, financial condition and results of operations. The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. Although our most recent assessment, testing and evaluation resulted in our conclusion that as of December 31, 2014, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in 2015 or future periods. We may incur additional expenses and commitment of management’s time in connection with further evaluations, both of which could materially increase our operating expenses and accordingly reduce our operating results.

Changes in financial accounting standards may cause adverse unexpected fluctuations and affect our reported results of operations.

A change in accounting standards or practices and varying interpretations of existing accounting pronouncements, such as changes to standards related to revenue recognition which are effective for us beginning on January 1, 2018, the increased use of fair value measure, and financial instruments could have a significant effect on our reported financial results or the way we conduct our business. If we do not ensure that our systems and processes are aligned with the new standards, we could encounter difficulties generating quarterly and annual financial statements in a timely manner, which would have an adverse effect on our business and our ability to meet our reporting obligations.

If securities or industry analysts stop publishing research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If we do not maintain adequate research coverage or if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

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The trading price of our common stock may be volatile.

The market price of our common stock may be subject to wide fluctuations in response to, among other things, the risk factors described in this periodic report, and other factors such as rumors or fluctuations in the valuation of companies perceived by investors to be comparable to us or announcements regarding the Program and the timing and amount of shares we purchase under the Program. For example, during the three months ended June 30, 2015, the closing price of our common stock ranged from $33.72 to $43.74.

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

• providing for a classified board of directors whose members serve staggered three-year terms;

• authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

• limiting the liability of, and providing indemnification to, our directors and officers;

• limiting the ability of our stockholders to call and bring business before special meetings;

• requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

• providing that certain litigation matters may only be brought against us in state or federal courts in the State of Delaware;

• controlling the procedures for the conduct and scheduling of board and stockholder meetings; and

• providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of a substantial majority of all of our outstanding common stock.

Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Share Repurchase Program

During the three months ended June 30, 2015, there were no shares repurchased under the Program. As of June 30, 2015, $122.5 million remains available for future share repurchases under the Program.

ITEM 6.     Exhibits

The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 4, 2015

FORTINET, INC.
	By:	/s/    Andrew Del Matto
		Andrew Del Matto, Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)
	By:	/s/    Keith Jensen
		Keith Jensen, Chief Accounting Officer
		(Duly Authorized Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description	Incorporated by reference herein
		Form	Date	Exhibit Number
2.1	Agreement and Plan of Merger, dated May 27, 2015, by and among Fortinet, Inc., Malbrouck Acquisition Corp. and Meru Networks, Inc.	Current Report on Form 8-K (File No. 001-34511)	July 8, 2015	2.1
10.1*	Form of Change of Control Agreement between the Company and its Directors
31.1*	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.INS*	XBRL Instance Document

________________________________

* Filed herewith.

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EX-10.1

Exhibit 10.1

FORTINET, INC.

CHANGE OF CONTROL AGREEMENT

This Change of Control Agreement (the “Agreement”) is made and entered into by and between _____________________ (“Outside Director”) and Fortinet, Inc. (the “Company”), effective as of __________ _____, 2015 (the “Effective Date”).

RECITALS

1.It is expected that the Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the “Board”) recognizes that such consideration can be a distraction to Outside Director and has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of Outside Director, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of the Company.

2.The Board believes that it is in the best interests of the Company and its stockholders to provide Outside Director with an incentive to motivate Outside Director to maximize the value of the Company upon a Change of Control for the benefit of its stockholders.

3.The Board believes that it is imperative to provide Outside Director with certain benefits upon a Change of Control. These benefits will provide Outside Director with enhanced financial incentive and encouragement to remain with the Company.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:

1.    Term of Agreement. This Agreement will terminate upon earlier to occur of: (1) the date that Outside Director resigns from, was removed from, or fails to be reelected to, the Board, in each case, not in connection with a Change of Control (as defined below); and (2) the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied.

2.    Benefits upon a Change of Control.

(a)Equity Awards. If Outside Director holds unvested equity awards (“Awards”) at the time of a Change of Control, then one hundred percent (100%) of the then-unvested shares subject to such Awards will vest immediately prior to the consummation of a Change of Control. For the sake of clarity, Outside Director will fully vest in and have the right to exercise stock options and/or stock appreciation rights as to all of the shares underlying such Awards, including those shares which would not otherwise be vested or exercisable, all restrictions on restricted stock and restricted stock units will lapse, and, with respect to performance stock units and performance shares, all performance goals or other vesting criteria will be deemed to have been achieved at one hundred percent (100%) of target levels and all other terms and conditions met.

(b)Change of Control. For purposes of this Agreement, “Change of Control” of the Company is defined as:

(i)the acquisition by any one person, or more than one person acting as a group (for these purposes, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company), (“Person”) that or is or becomes the owner, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding securities (the “Voting Securities”); provided, however, that for purposes of this subsection (i), the acquisition of additional

securities by any one Person, who is considered to own more than fifty percent (50%) of the total voting power of the securities of the Company shall not be considered a Change of Control;

(ii)a change in the composition of the Board occurring within a twelve (12) month period, as a result of which fewer than a majority of the Outside Directors are Incumbent Outside Directors. “Incumbent Outside Directors” will mean Outside Directors who either (A) are Outside Directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Outside Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of Outside Directors to the Company);

(iii)the date of the consummation of a merger or consolidation of the Company with any other corporation that has been approved by the stockholders of the Company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) fifty percent (50%) or more of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company; or

(iv)a change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions; provided, however, that for purposes of this Section 2(b)(iv), the following shall not constitute a change in the ownership of a substantial portion of the Company’s assets: (1) a transfer to an entity that is controlled by the Company’s shareholders immediately after the transfer; or (2) a transfer of assets by the Company to: (A) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s securities; (B) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company; (C) a Person, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company; or (D) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in subsection (C). For purposes of this clause (2), gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

Notwithstanding the foregoing, a Company transaction that does not constitute a change in control event under Treasury Regulation 1.409A-3(i)(5)(v) or (vii) shall not be considered a Change of Control.

(c)Section 409A. The provisions of this Agreement are intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and any final regulations and official guidance promulgated thereunder (“Section 409A”) so that none of the benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Outside Director and the Company agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Outside Director under Section 409A. To the extent (i) any payments to which Outside Director becomes entitled under this Agreement, or any other agreement or plan with the Company, in connection with Outside Director’s termination of service with the Company constitute deferred compensation subject to Section 409A and (ii) Outside Director is deemed at the time of such termination to be a “specified” employee under Section 409A, then such payment or payments shall not be made or commence until the earlier of (i) the expiration of the six (6)-month period measured from the Outside Director’s termination; or (ii) the date of Outside Director’s death following such termination; provided, however, that such deferral shall only be effected to the extent required to avoid adverse tax treatment to Outside Director. Upon the expiration of the applicable deferral period, any payments which would have otherwise

been made during that period (whether in a single sum or in installments) in the absence of this paragraph shall be paid to Outside Director or Outside Director’s beneficiary in one lump sum (without interest). Any termination of Outside Director’s employment is intended to constitute a “separation from service” as such term is defined in Treasury Regulation Section 1.409A-1. To the extent any payment under this Agreement may be classified as a “short-term deferral” within the meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for an exemption from Section 409A under another provision of Section 409A. Payments pursuant to this Plan (or referenced in this Plan) are intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the regulations under Section 409A.

3.    Limitation on Payments. In the event that any payment or benefit received or to be received pursuant to this Agreement or otherwise (the “Payments”) (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for this Section 3, would be subject to the excise tax imposed by Section 4999 of the Code, any successor provisions, or any comparable federal, state, local or foreign excise tax then Outside Director’s Payments will be either:

(a)    delivered in full, or

(b)    delivered as to such lesser extent which would result in no portion of such Payments being subject to excise tax under Section 4999 of the Code,

whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Outside Director on an after-tax basis, of the greatest amount of Payments, notwithstanding that all or some portion of such Payments may be taxable under Section 4999 of the Code. Unless the Company and Outside Director otherwise agree in writing, any determination required under this Section 3 will be made in writing by an independent firm designated by the Company immediately prior to Change of Control (the “Firm”), whose determination will be conclusive and binding upon Outside Director and the Company for all purposes. For purposes of making the calculations required by this Section 3, the Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Outside Director will furnish to the Firm such information and documents as the Firm may reasonably request in order to make a determination under this Section. The Company will bear all costs the Firm may reasonably incur in connection with any calculations contemplated by this Section 3. If a reduction in Payments is necessary so that benefits are delivered to a lesser extent, reduction shall occur in the following order: reduction of cash payments; cancellation of awards granted “contingent on a change in ownership or control” (within the meaning of Code Section 280G); cancellation of accelerated vesting of equity awards; reduction of employee benefits. Within any such category of Payment, a reduction shall occur first with respect to amounts that are not “deferred compensation” within the meaning of Section 409A and then with respect to amounts that are, and to the extent any such payment is to be made over time (e.g., in installments, etc.), then the payments shall be waived in reverse chronological order.

4.    Successors.

(a)    The Company’s Successors. Any successor to the Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets will assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” will include any successor to the Company’s business and/or assets which executes and delivers the assumption agreement described in this Section 4(a) or which becomes bound by the terms of this Agreement by operation of law.

(b)    Outside Director’s Successors. The terms of this Agreement and all rights of Outside Director hereunder will inure to the benefit of, and be enforceable by, Outside Director’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

5.    Notice.

(a)    General. Notices and all other communications contemplated by this Agreement will be in writing and will be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of Outside Director, mailed notices will be addressed to him or her at the home address which he or she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to its corporate headquarters, and all notices will be directed to the attention of its President.

6.    Arbitration.

(a)    Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in Santa Clara County, California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association (the “Rules”), except that each of Company and Outside Director may, at its, his or her option, seek injunctive relief in a court of competent jurisdiction related to the improper use, disclosure or misappropriation of a party’s private, proprietary, confidential or trade secret information. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction.

(b)    The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. Outside Director hereby consents to the personal jurisdiction of the state and federal courts located in California for any action or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.

(c)    OUTSIDE DIRECTOR HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. OUTSIDE DIRECTOR UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF OUTSIDE DIRECTOR’S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING HERETO, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:

(i)ANY AND ALL CLAIMS FOR BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.

(ii)ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, et seq.

7.    Miscellaneous Provisions.

(a)    Waiver. No provision of this Agreement will be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Outside Director and by an authorized officer of the Company (other than Outside Director). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party will be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(b)    Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.

(c)    Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto. Outside Director acknowledges and agrees that this Agreement encompasses all the rights of Outside Director to any acceleration of Award vesting or the lapsing of restrictions thereto, and Outside Director hereby agrees that he or she has no such rights except as stated herein, and Outside Director agrees that any such rights, whether in a service agreement, stock option agreement, restricted stock purchase agreement, restricted stock unit agreement, stock plan or other agreement, are hereby waived.

(d)    Choice of Law. The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the State of California (with the exception of its conflict of laws provisions).

(e)    Severability. The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any other provision hereof, which will remain in full force and effect.

(f)    Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

[Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below.

COMPANY	FORTINET, INC
	By:
	Name:
	Title:

OUTSIDE DIRECTOR	By:
	Name:

Signature Page to Change of Control Agreement

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Ken Xie, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Fortinet, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 4, 2015

/s/ Ken Xie

Ken Xie

Chief Executive Officer and Chairman

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Andrew Del Matto, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Fortinet, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 4, 2015

/s/ Andrew Del Matto

Andrew Del Matto

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Ken Xie, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Fortinet, Inc. for the quarterly period ended June 30, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that information contained in this Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Fortinet, Inc.

		By:	/s/ Ken Xie
Date:	August 4, 2015	Name:	Ken Xie
		Title:	Chief Executive Officer and Chairman (Principal Executive Officer)

I, Andrew Del Matto, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Fortinet, Inc. for the quarterly period ended June 30, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that information contained in this Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Fortinet, Inc.

		By:	/s/ Andrew Del Matto
Date:	August 4, 2015	Name:	Andrew Del Matto
		Title:	Chief Financial Officer (Principal Financial Officer)

This certification is being furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and will not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. This certification will not be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

XML

Net Income Per Share , Calculation of Basic and Diluted (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Earnings Per Share [Line Items]
Net income	$ 792	$ 6,081	$ 2,352	$ 14,474
Basic shares:
Weighted-average common shares outstanding-basic (in shares)	169,930	163,161	169,009	162,778
Diluted shares:
Weighted-average common shares outstanding-basic (in shares)	169,930	163,161	169,009	162,778
Effect of potentially dilutive securities:
Weighted-average shares used to compute diluted net income per share (in shares)	176,234	168,345	174,983	168,015
Net income per share:
Basic (in dollars per share)	$ 0.00	$ 0.04	$ 0.01	$ 0.09
Diluted (in dollars per share)	$ 0.00	$ 0.04	$ 0.01	$ 0.09
Stock options [Member]
Effect of potentially dilutive securities:
Employee stock options and purchase rights (in shares)	3,720	4,583	3,779	4,753
RSUs (including PSUs) [Member]
Effect of potentially dilutive securities:
Employee stock options and purchase rights (in shares)	2,521	600	2,131	462
ESPP [Member]
Effect of potentially dilutive securities:
Employee stock options and purchase rights (in shares)	63	1	64	22

XML

Segment and Significant Customer Information Significant Customers (Details) - Customer Concentration Risk [Member]	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Sales Revenue [Member] | Exclusive Networks Group [Member]
Concentration Risk [Line Items]
Percentage from a single customer	17.00%	14.00%	17.00%	14.00%
Accounts Receivable [Member] | Exclusive Networks Group [Member]
Concentration Risk [Line Items]
Percentage from a single customer			20.00%	18.00%
Accounts Receivable [Member] | Fin Tec Computer [Member]
Concentration Risk [Line Items]
Percentage from a single customer			13.00%	0.00%

XML

Stockholders' Equity , ESPP Information (Details) - Employee Stock Purchase Plan [Member] - $ / shares	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term in years			5 months 27 days	6 months
Volatility			28.00%	36.00%
Risk-free interest rate			0.10%	0.10%
Dividend rate			0.00%	0.00%
Weighted-average fair value per share granted (in dollars per share)			$ 7.56	$ 5.35
Shares issued under the ESPP (in shares)	0	0	427,000	424,000
Weighted-average price per share issued (in dollars per share)			$ 21.34	$ 17.18

XML

Accumulated Other Comprehensive Loss (Changes in Accumulated Balances of Other Comprehensive Loss) (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2015 USD ($)
Accumulated Other Comprehensive Income (Loss) [Roll Forward]
Beginning balance	$ (349)
Other comprehensive income before reclassifications	45
Amounts reclassified from accumulated other comprehensive loss	(5)
Net current-period other comprehensive income	40
Ending balance	(309)
Tax Benefit (Provision) Related to Items of Other Comprehensive Income (Loss) [Roll Forward]
Beginning balance	191
Other comprehensive income before reclassifications	(24)
Amounts reclassified from accumulated other comprehensive loss	1
Net current-period other comprehensive income	(23)
Ending balance	168
Unrealized Gains (Losses) on Investments [Member]
Accumulated Other Comprehensive Income (Loss) [Roll Forward]
Beginning balance	(540)
Other comprehensive income before reclassifications	69
Amounts reclassified from accumulated other comprehensive loss	(6)
Net current-period other comprehensive income	63
Ending balance	$ (477)

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Stockholders' Equity , Restricted Stock Units Activity (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value [Roll Forward]
Tax withholding upon vesting of restricted stock awards			$ 11,362	$ 5,521
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Balance, beginning			6,291
Granted			3,149
Forfeited			(413)
Vested			(1,069)
Balance, ending	7,958		7,958
RSUs expected to vest—June 30, 2015	7,468		7,468
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value [Roll Forward]
Balance, weighted-average grant-date fair value per share (in dollars per share)—beginning			$ 22.93
Granted, weighted-average grant-date fair value per share (in dollars per share)			34.16
Forfeited, weighted-average grant-date fair value per share (in dollars per share)			26.01
Vested, weighted-average grant-date fair value per share (in dollars per share)			22.01
Balance, weighted-average grant-date fair value per share (in dollars per share)—ending	$ 27.62		27.62
RSUs expected to vest, weighted-average grant-date fair value per share (in dollars per share)—December 31, 2012	$ 27.41		$ 27.41
Compensation cost not yet recognized	$ 207,600		$ 207,600
Compensation cost not yet recognized period of recognition			3 years
Shares withheld for taxes	124	86	345	257
Tax withholding upon vesting of restricted stock awards	$ 4,762	$ 1,888	$ 11,362	$ 5,521

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Foreign Currency Derivatives (Tables)

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of Notional Amounts of Outstanding Derivative Positions

The notional amount of our forward exchange contract to hedge balance sheet accounts were (in thousands):

	Buy/Sell	Notional
Currency—As of June 30, 2015
CAD	Sell	$	6,743
Currency—As of December 31, 2014
CAD	Buy	$	6,879

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Foreign Currency Derivatives (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]
Notional amount of forward exchange contracts	$ 6,743	$ 6,879

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Inventory (Tables)

6 Months Ended

Jun. 30, 2015

Inventory Disclosure [Abstract]

Inventory

Inventory consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015		December 31, 2014
Raw materials	$	12,235	$	10,617
Finished goods	56,610		58,860
Total inventory	$	68,845	$	69,477

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Stockholders' Equity , Share Repurchase Program (Details) - Share Repurchase Program [Member] - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2015	Dec. 31, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock repurchase program, authorized amount			$ 200.0
Stock repurchased in the period, shares	0	0
Remaining authorized repurchase amount under the program	$ 122.5	$ 122.5

XML

Commitments and Contingencies (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Commitments and Contingencies Disclosure [Abstract]
Rent expense	$ 2,900	$ 2,400	$ 6,000	$ 5,100
Open purchase orders	74,322		74,322
Other contract commitments and open purchase orders	$ 33,944		$ 33,944

XML

Property and Equipment—Net (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Property, Plant and Equipment, Net, by Type [Abstract]
Total property and equipment	$ 137,783		$ 137,783		$ 114,352
Less: accumulated depreciation	(66,318)		(66,318)		(55,433)
Property and equipment - net	71,465		71,465		58,919
Depreciation expense	6,800	$ 6,000	12,800	$ 9,900
Land [Member]
Property, Plant and Equipment, Net, by Type [Abstract]
Total property and equipment	14,943		14,943		13,895
Building and building improvements [Member]
Property, Plant and Equipment, Net, by Type [Abstract]
Total property and equipment	20,298		20,298		20,166
Evaluation units [Member]
Property, Plant and Equipment, Net, by Type [Abstract]
Total property and equipment	38,140		38,140		31,474
Computer equipment and software [Member]
Property, Plant and Equipment, Net, by Type [Abstract]
Total property and equipment	40,616		40,616		31,821
Furniture and fixtures [Member]
Property, Plant and Equipment, Net, by Type [Abstract]
Total property and equipment	7,160		7,160		5,096
Construction-in-progress [Member]
Property, Plant and Equipment, Net, by Type [Abstract]
Total property and equipment	7,923		7,923		3,902
Leasehold improvements [Member]
Property, Plant and Equipment, Net, by Type [Abstract]
Total property and equipment	$ 8,703		$ 8,703		$ 7,998

XML

Defined Contribution Plans (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Compensation and Retirement Disclosure [Abstract]
Matching contribution on employee contributions, Percent			50.00%
Maximum contribtuion percentage of each employee's eligible earnings, Percent			4.00%
Matching contributions to the RRSP and 401(k) Plans	$ 0.9	$ 0.6	$ 1.8	$ 1.2

XML

Stockholders' Equity , Performance Stock Units (Details) - Performance Shares [Member] - USD ($) $ / shares in Units, shares in Thousands, $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Performance Share, Weighted Average Assumptions [Abstract]
Expected term in years		2 years 11 months 23 days	2 years 11 months 19 days	2 years 11 months 23 days
Volatility		46.00%	38.00%	47.00%
Risk-free interest rate		0.90%	1.10%	0.90%
Dividend rate		0.00%	0.00%	0.00%
Granted	0	95	206	120
Granted, weighted-average grant-date fair value per share (in dollars per share)		$ 21.05	$ 34.86	$ 21.21
Compensation cost not yet recognized	$ 8.0		$ 8.0
Compensation cost not yet recognized period of recognition			2 years 3 months 26 days
Market-based [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Performance share target range, percent			0.00%
Performance period			2 years
Market-based [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Performance share target range, percent			150.00%
Performance period			3 years
Performance-based [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Performance period			1 year
Performance-based [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Performance share target range, percent			50.00%
Performance-based [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Performance share target range, percent			150.00%

XML

Inventory

6 Months Ended

Jun. 30, 2015

Inventory Disclosure [Abstract]

INVENTORY

INVENTORY

Inventory consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015		December 31, 2014
Raw materials	$	12,235	$	10,617
Finished goods	56,610		58,860
Total inventory	$	68,845	$	69,477

Inventory includes finished goods held by distributors where revenue is recognized on a sell-through basis of $1.2 million as of June 30, 2015 and December 31, 2014. Inventory also includes raw materials at contract manufacturers of $4.2 million and $4.8 million as of June 30, 2015 and December 31, 2014, respectively.

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Commitments and Contingencies Other Contractual Commitments and Open Purchase Orders (Details) $ in Thousands	Jun. 30, 2015 USD ($)
Operating lease commitments:
Operating leases commitments, 2015 (remainder)	$ 7,064
Operating lease commitments, 2016	12,054
Operating lease commitments, 2017	8,536
Operating lease commitments, 2018	6,865
Operating lease commitments, 2019	5,684
Operating lease commitments, Thereafter	9,890
Operating lease commitments	50,093
Sublease rental income:
Sublease rental income, 2015 (remainder)	57
Sublease rental income, 2016	0
Sublease rental income, 2017	0
Sublease rental income, 2018	0
Sublease rental income, 2019	0
Sublease rental income, Thereafter	0
Sublease rental income	57
Operating lease commitments - net:
Operating lease commitments - net, 2015 (remainder)	7,007
Operating lease commitments - net, 2016	12,054
Operating lease commitments - net, 2017	8,536
Operating lease commitments - net, 2018	6,865
Operating lease commitments - net, 2019	5,684
Operating lease commitments - net, Thereafter	9,890
Operating lease commitments - net	50,036
Inventory purchase commitments:
Inventory purchase commitments, 2015 (remainder)	74,322
Inventory purchase commitments, 2016	0
Inventory purchase commitments, 2017	0
Inventory purchase commitments, 2018	0
Inventory purchase commitments, 2019	0
Inventory purchase commitments, Thereafter	0
Inventory purchase commitments	74,322
Other contractual commitments and open purchase orders:
Other contractual commitments and open purchase orders, 2015 (remainder)	28,729
Other contractual commitments and open purchase orders, 2016	3,675
Other contractual commitments and open purchase orders, 2017	978
Other contractual commitments and open purchase orders, 2018	305
Other contractual commitments and open purchase orders, 2019	193
Other contractual commitments and open purchase orders, Thereafter	64
Other contractual commitments and open purchase orders	33,944
Contractual Obligation	158,302
Contractual Obligation, 2015 (remainder)	110,058
Contractual Obligation, 2016	15,729
Contractual Obligation, 2017	9,514
Contractual Obligation, 2018	7,170
Contractual Obligation, 2019	5,877
Contractual Obligation, Thereafter	$ 9,954

XML

Commitments and Contingencies (Tables)

6 Months Ended

Jun. 30, 2015

Commitments and Contingencies Disclosure [Abstract]

Contractual Obligation, Fiscal Year Maturity Schedule

The following table summarizes our future principal contractual obligations as of June 30, 2015 (in thousands):

	Total		2015 (remainder)		2016		2017		2018		2019		Thereafter
Operating lease commitments	$	50,093	$	7,064	$	12,054	$	8,536	$	6,865	$	5,684	$	9,890
Less: sublease rental income	57		57		—		—		—		—		—
Operating lease commitments—net	50,036		7,007		12,054		8,536		6,865		5,684		9,890
Inventory purchase commitments	74,322		74,322		—		—		—		—		—
Other contractual commitments and open purchase orders	33,944		28,729		3,675		978		305		193		64
Total	$	158,302	$	110,058	$	15,729	$	9,514	$	7,170	$	5,877	$	9,954

Schedule of Product Warranty Liability

Accrued warranty activities are summarized as follows (in thousands):

	Six Months Ended
	June 30, 2015			June 30, 2014
Accrued warranty balance—beginning of the period	$	4,269		$	3,037
Warranty costs incurred	(2,059		)	(1,728		)
Provision for warranty for the period	2,294			2,560
Adjustment related to pre-existing warranties	171			(415		)
Accrued warranty balance—end of the period	$	4,675		$	3,454

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Deferred Revenue (Tables)

6 Months Ended

Jun. 30, 2015

Deferred Revenue Disclosure [Abstract]

Deferred Revenue, by Arrangement, Disclosure

Deferred revenue consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015		December 31, 2014
Product	$	4,461	$	4,642
Service	653,100		554,115
Total deferred revenue	$	657,561	$	558,757
Reported as:
Current	$	441,177	$	368,929
Non-current	216,384		189,828
Total deferred revenue	$	657,561	$	558,757

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Accumulated Other Comprehensive Loss (Reclassification Out of Accumulated Other Comprehensive Income) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
OTHER EXPENSE—net	$ (830)	$ (574)	$ (1,507)	$ (963)
Provision for income taxes	(2,694)	(5,806)	(2,777)	(11,172)
Net income	$ 792	$ 6,081	2,352	$ 14,474
Reclassification out of Accumulated Other Comprehensive Income [Member]
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Provision for income taxes			1
Net income			(5)
Unrealized gains on investments [Member] | Reclassification out of Accumulated Other Comprehensive Income [Member]
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
OTHER EXPENSE—net			$ (6)

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Commitments and Contingencies Warranties (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Movement in Standard Product Warranty Accrual [Roll Forward]
Accrued warranty balance—beginning of the period	$ 4,269	$ 3,037
Warranty costs incurred	(2,059)	(1,728)
Provision for warranty for the period	2,294	2,560
Adjustment related to pre-existing warranties	171	(415)
Accrued warranty balance—end of the period	$ 4,675	$ 3,454

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Stockholders' Equity (Tables)

6 Months Ended

Jun. 30, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Expected term in years	4.3		4.9		4.3		4.9
Volatility	38	%	43	%	38% - 40%		43% - 45%
Risk-free interest rate	1.5	%	1.7	%	1.5	%	1.7	%
Dividend rate	—	%	—	%	—	%	—	%

Schedule of Share-based Compensation, Stock Options, Activity

The following table summarizes the stock option activity and related information for the periods presented below (in thousands, 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, 2014	10,702		$	14.98
Granted	349		34.15
Forfeited	(88	)	24.70
Exercised	(2,860	)	11.95
Balance—June 30, 2015	8,103		$	16.78
Options vested and expected to vest—June 30, 2015	8,059		$	16.70	2.6	$	198,516
Options exercisable—June 30, 2015	6,935		$	15.03	2.2	$	182,363

Schedule of Share-based Payment Award, Stock Options, Additional Information

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Weighted-average fair value per share granted	$	12.75	$	8.18	$	11.54	$	8.58
Intrinsic value of options exercised	22,034		16,441		63,038		31,762
Fair value of options vested	2,718		4,209		6,510		8,771

Schedule of Share-based Compensation, Restricted Stock Units Award Activity

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

	Restricted Stock Units Outstanding
	Number of Shares		Weighted-Average Grant-Date-Fair Value per Share
Balance—December 31, 2014	6,291		$	22.93
Granted	3,149		34.16
Forfeited	(413	)	26.01
Vested	(1,069	)	22.01
Balance—June 30, 2015	7,958		$	27.62
RSUs expected to vest—June 30, 2015	7,468		$	27.41

Schedule of Share-based Compensation, Shares Withheld for Taxes

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Shares withheld for taxes	124		86		345		257
Amount withheld for taxes	$	4,762	$	1,888	$	11,362	$	5,521

Schedule of Share-based Payment Award, Equity Instruments Other than Options, Valuation Assumptions

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

	Three Months Ended		Six Months Ended
	June 30, 2014		June 30, 2015		June 30, 2014
Expected term in years	3.0		3.0		3.0
Volatility	46	%	38	%	47	%
Risk-free interest rate	0.9	%	1.1	%	0.9	%
Dividend rate	—	%	—	%	—	%

Share-based Compensation, Performance Shares Award Activity

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

	Three Months Ended		Six Months Ended
	June 30, 2014		June 30, 2015		June 30, 2014
Shares granted to executive officers and employees	95		206		120
Weighted-average fair value per share granted	$	21.05	$	34.86	$	21.21

Schedule of Share-based Payment Award, Employee Stock Purchase Plan, Valuation Assumptions

In determining the fair value of our ESPP, we use the Black-Scholes option pricing model that employs the following weighted-average assumptions:

	Six Months Ended
	June 30, 2015		June 30, 2014
Expected term in years	0.5		0.5
Volatility	28	%	36	%
Risk-free interest rate	0.1	%	0.1	%
Dividend rate	—	%	—	%

Schedule of Share-based Payment Award Employee Stock Purchase Plan Additional Information

Additional information related to the ESPP is provided below (in thousands, except per share amounts):

	Six Months Ended
	June 30, 2015		June 30, 2014
Weighted-average fair value per share granted	$	7.56	$	5.35
Shares issued under the ESPP	427		424
Weighted-average price per share issued	$	21.34	$	17.18

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs

Stock-based compensation expense is included in costs and expenses as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Cost of product revenue	$	210	$	178	$	350	$	291
Cost of service revenue	1,660		1,363		3,292		2,692
Research and development	5,541		4,171		10,698		8,053
Sales and marketing	11,271		5,747		20,578		11,493
General and administrative	3,078		3,257		5,764		5,117
Total stock-based compensation expense	$	21,760	$	14,716	$	40,682	$	27,646

Schedule of Employee Service Share based Compensation Allocation of Recognized Period Costs by Award Type

The following table summarizes stock-based compensation expense by award type (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Stock options	$	3,017	$	4,421	$	6,472	$	9,113
RSUs (including PSUs)	17,386		9,248		31,678		16,611
ESPP	1,357		1,047		2,532		1,922
Total stock-based compensation expense	$	21,760	$	14,716	$	40,682	$	27,646

Income Tax Benefit from Stock Option Plans

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Income tax benefit associated with stock-based compensation	$	4,266	$	4,247	$	7,643	$	7,813

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Segment and Significant Customer Information (Tables)

6 Months Ended

Jun. 30, 2015

Segment Reporting [Abstract]

Revenue from External Customers by Geographic Areas

Revenue by geographic region is based on the billing address of the customer. The following table sets forth revenue (in thousands):

	Three Months Ended				Six Months Ended
Revenue	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Americas:
United States	$	71,224	$	49,672	$	129,725	$	94,465
Canada	26,191		19,909		46,649		38,733
Other Americas	11,178		8,804		23,779		17,619
Total Americas	108,593		78,385		200,153		150,817
Europe, Middle East, and Africa (“EMEA”)	83,404		62,554		159,068		119,197
Asia Pacific (“APAC”)	47,788		43,159		93,450		83,033
Total revenue	$	239,785	$	184,098	$	452,671	$	353,047

Long-lived Assets by Geographic Areas

The following table sets forth property and equipment by geographic region as of June 30, 2015 and December 31, 2014 (in thousands):

Property and Equipment—net	June 30, 2015		December 31, 2014
Americas:
United States	$	50,328	$	46,116
Canada	7,902		6,054
Other Americas	764		875
Total Americas	58,994		53,045
EMEA	9,062		3,256
APAC	3,409		2,618
Total property and equipment—net	$	71,465	$	58,919

Schedule of revenue by major customers

The following customer, a distributor, accounted for 10% or more of our revenue:

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Exclusive Networks Group	17	%	14	%	17	%	14	%

Schedule of receivables by major customers

The following customers, each of which is a distributor, accounted for 10% or more of net accounts receivable:

	June 30, 2015		December 31, 2014
Exclusive Networks Group	20	%	18	%
Fine Tec Computer	13	%	—	%

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Financial Instruments and Fair Value Measurements

6 Months Ended

Jun. 30, 2015

Financial Instruments and Fair Value [Abstract]

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The following table summarizes our investments as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate debt securities	$	551,352	$	187	$	(635	)	$	550,904
Commercial paper	46,639		2		(4		)	46,637
Municipal bonds	58,705		21		(50		)	58,676
Certificates of deposit and term deposits (1)	7,760		—		—			7,760
U.S. government and agency securities	2,999		2		—			3,001
Total available-for-sale securities	$	667,455	$	212	$	(689	)	$	666,978

	December 31, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate debt securities	$	589,526	$	365	$	(875	)	$	589,016
Commercial paper	51,156		3		(4		)	51,155
Municipal bonds	39,745		15		(39		)	39,721
Certificates of deposit and term deposits (1)	22,854		—		—			22,854
U.S. government and agency securities	5,749		1		(6		)	5,744
Total available-for-sale securities	$	709,030	$	384	$	(924	)	$	708,490

⁽¹⁾ The majority of our certificates of deposit and term deposits are foreign deposits.

The following table shows the gross unrealized losses and the related fair values of our investments that have been in a continuous unrealized loss position as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	283,789	$	(522	)	$	41,362	$	(113	)	$	325,151	$	(635	)
Commercial paper	11,769		(4		)	—		—			11,769		(4		)
Municipal bonds	34,667		(46		)	1,576		(4		)	36,243		(50		)
Total available-for-sale securities	$	330,225	$	(572	)	$	42,938	$	(117	)	$	373,163	$	(689	)

	December 31, 2014
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	317,011	$	(858	)	$	6,011	$	(17	)	$	323,022	$	(875	)
Commercial paper	8,185		(4		)	—		—			8,185		(4		)
Municipal bonds	26,684		(39		)	—		—			26,684		(39		)
U.S. government and agency securities	4,745		(6		)	—		—			4,745		(6		)
Total available-for-sale securities	$	356,625	$	(907	)	$	6,011	$	(17	)	$	362,636	$	(924	)

The contractual maturities of our investments as of June 30, 2015 and December 31, 2014 were as follows (in thousands):

	June 30, 2015		December 31, 2014
Due within one year	$	391,634	$	436,766
Due within one to three years	275,344		271,724
Total	$	666,978	$	708,490

Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, included as a separate component of stockholders’ equity and in total comprehensive income. Realized gains and losses on available-for-sale securities are included in Other expense—net in our condensed consolidated statements of operations. Realized gains and losses from the sale of available-for-sale securities were not significant in any period presented.

The unrealized losses on our available-for-sale securities were caused by fluctuations in market value and interest rates as a result of the economic environment. As the decline in market value is attributable to changes in market conditions and not credit quality, and because we have concluded currently that we neither intend to sell nor is it more likely than not that we will be required to sell these investments prior to a recovery of par value, we do not consider these investments to be other-than temporarily impaired as of June 30, 2015.

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 as follows:

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 and certain U.S. government and agency 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.

Fair Value of Financial Instruments

Assets Measured at Fair Value on a Recurring Basis

The following table presents the fair value of our financial assets measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015						December 31, 2014
	Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs		Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs
			(Level 1)		(Level 2)				(Level 1)		(Level 2)
Assets:
Corporate debt securities	$	550,904	$	—	$	550,904	$	589,016	$	—	$	589,016
Commercial paper	58,634		—		58,634		51,155		—		51,155
Municipal bonds	58,676		—		58,676		39,721		—		39,721
Certificates of deposit and term deposits	7,760		—		7,760		22,854		—		22,854
Money market funds	31,193		31,193		—		13,311		13,311		—
U.S. government and agency securities	3,001		2,000		1,001		5,744		1,998		3,746
Total	$	710,168	$	33,193	$	676,975	$	721,801	$	15,309	$	706,492
Reported as:
Cash equivalents	$	43,190					$	13,311
Short-term investments	391,634						436,766
Long-term investments	275,344						271,724
Total	$	710,168					$	721,801

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the period ended June 30, 2015.

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Accumulated Other Comprehensive Loss (Tables)

6 Months Ended

Jun. 30, 2015

Other Comprehensive Income (Loss), Net of Tax [Abstract]

Schedule of Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated balances of other comprehensive loss (in thousands):

	Unrealized Gains (Losses) on Investments			Tax benefit (provision) related to items of other comprehensive income or loss			Total
Beginning balance as of December 31, 2014	$	(540	)	$	191		$	(349	)
Other comprehensive income before reclassifications	69			(24		)	45
Amounts reclassified from accumulated other comprehensive loss	(6		)	1			(5		)
Net current-period other comprehensive income	63			(23		)	40
Ending balance as of June 30, 2015	$	(477	)	$	168		$	(309	)

Reclassification out of Accumulated Other Comprehensive Loss

The following table provides details about the reclassification out of accumulated other comprehensive loss (in thousands):

Six Months Ended June 30, 2015
Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains on investments	$	(6	)	Other expense—net
Tax provision related to items of other comprehensive income	1			Provision for income taxes
Total reclassification for the period	$	(5	)

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Net Income Per Share , Anti Dilutive Securities (Details) - shares shares in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive securities (in shares)	713	4,794	1,231	6,455
Stock options [Member] | Stock Compensation Plan [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive securities (in shares)	299	4,201	274	4,323
RSUs (including PSUs) [Member] | Stock Compensation Plan [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive securities (in shares)	414	593	873	1,871
ESPP [Member] | Stock Compensation Plan [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive securities (in shares)	0	0	84	261

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Segment and Significant Customer Information (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015 USD ($)	Jun. 30, 2014 USD ($)	Jun. 30, 2015 USD ($) Segment_Managers reportable_segment business_activity operating_segment	Jun. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Segment Reporting Information [Line Items]
Business activity (in business activities) | business_activity			1
Segment managers responsible for operations (in segment managers) | Segment_Managers			0
Number of operating segments (in operating segments) | operating_segment			1
Number of reportable segments (in reportable segments) | reportable_segment			1
Revenue	$ 239,785	$ 184,098	$ 452,671	$ 353,047
Property and equipment - net	71,465		71,465		$ 58,919
Americas [Member]
Segment Reporting Information [Line Items]
Revenue	108,593	78,385	200,153	150,817
Property and equipment - net	58,994		58,994		53,045
United States
Segment Reporting Information [Line Items]
Revenue	71,224	49,672	129,725	94,465
Property and equipment - net	50,328		50,328		46,116
Canada [Member]
Segment Reporting Information [Line Items]
Revenue	26,191	19,909	46,649	38,733
Property and equipment - net	7,902		7,902		6,054
Other Americas [Member]
Segment Reporting Information [Line Items]
Revenue	11,178	8,804	23,779	17,619
Property and equipment - net	764		764		875
EMEA [Member]
Segment Reporting Information [Line Items]
Revenue	83,404	62,554	159,068	119,197
Property and equipment - net	9,062		9,062		3,256
APAC [Member]
Segment Reporting Information [Line Items]
Revenue	47,788	$ 43,159	93,450	$ 83,033
Property and equipment - net	$ 3,409		$ 3,409		$ 2,618

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Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
CURRENT ASSETS:
Cash and cash equivalents	$ 481,393	$ 283,254
Short-term investments	391,634	436,766
Accounts receivable—net of sales returns reserve and allowance for doubtful accounts of $5,834 and $6,204 as of June 30, 2015 and December 31, 2014, respectively	176,849	184,741
Inventory	68,845	69,477
Deferred tax assets	41,463	41,484
Prepaid expenses and other current assets	35,326	31,143
Total current assets	1,195,510	1,046,865
LONG-TERM INVESTMENTS	275,344	271,724
PROPERTY AND EQUIPMENT—net	71,465	58,919
DEFERRED TAX ASSETS	44,152	31,080
GOODWILL	2,824	2,824
OTHER INTANGIBLE ASSETS—net	693	2,832
OTHER ASSETS	14,888	10,530
TOTAL ASSETS	1,604,876	1,424,774
CURRENT LIABILITIES:
Accounts payable	42,336	49,947
Accrued liabilities	29,145	29,016
Accrued payroll and compensation	51,545	45,875
Income taxes payable	1,096	2,689
Deferred revenue	441,177	368,929
Total current liabilities	565,299	496,456
DEFERRED REVENUE	216,384	189,828
INCOME TAXES PAYABLE	56,765	45,139
OTHER LIABILITIES	15,601	17,385
Total liabilities	$ 854,049	$ 748,808
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value — 300,000 shares authorized; 170,449 and 166,443 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively	$ 170	$ 166
Additional paid-in capital	634,969	562,504
Accumulated other comprehensive loss	(309)	(349)
Retained earnings	115,997	113,645
Total stockholders’ equity	750,827	675,966
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$ 1,604,876	$ 1,424,774

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Stockholders' Equity (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Stock options [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions and Methodology [Abstract]
Expected term in years	4 years 3 months 26 days	4 years 10 months 17 days	4 years 3 months 26 days	4 years 10 months 17 days
Volatility	38.00%	43.00%
Risk-free interest rate	1.50%	1.70%	1.50%	1.70%
Dividend rate	0.00%	0.00%	0.00%	0.00%
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Balance - Beginning (in shares)			10,702,000
Granted (in shares)			349,000
Forfeited (in shares)			(88,000)
Exercised (in shares)			(2,860,000)
Balance - Ending (in shares)	8,103,000		8,103,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Roll Forward]
Balance - Beginning (in dollars per share)			$ 14.98
Granted (in dollars per share)			34.15
Forfeited (in dollars per share)			24.70
Exercised (in dollars per share)			11.95
Balance - Ending (in dollars per share)	$ 16.78		$ 16.78
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]
Options vested and expected to vest, Outstanding (in shares)	8,059,000		8,059,000
Options vested and expected to vest, Weighted average exercise price (in dollars per share)	$ 16.70		$ 16.70
Options vested and expected to vest, Weighted average remaining contractual life (in years)			2 years 7 months 21 days
Options vested and expected to vest, Aggregate intrinsic value	$ 198,516		$ 198,516
Options exercisable, Outstanding (in shares)	6,935,000		6,935,000
Options exercisable, Weighted average exercise price (in dollars per share)	$ 15.03		$ 15.03
Options exercisable, Weighted average remaining contractual life (in years)			2 years 2 months 25 days
Options exercisable, Aggregate intrinsic value	$ 182,363		$ 182,363
Compensation cost not yet recognized	$ 12,600		$ 12,600
Compensation cost not yet recognized period of recognition			2 years 1 day
Weighted-average fair value per share granted	$ 12.75	$ 8.18	$ 11.54	$ 8.58
Intrinsic value of options exercised	$ 22,034	$ 16,441	$ 63,038	$ 31,762
Total fair value of awards vested	$ 2,718	$ 4,209	$ 6,510	$ 8,771
Employee Stock Purchase Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions and Methodology [Abstract]
Expected term in years			5 months 27 days	6 months
Volatility			28.00%	36.00%
Risk-free interest rate			0.10%	0.10%
Dividend rate			0.00%	0.00%
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]
Shares issued under the ESPP (in shares)	0	0	427,000	424,000
Share-based Compensation Plans [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares available for grant (shares)	43,655,799		43,655,799
Minimum [Member] | Stock options [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions and Methodology [Abstract]
Volatility			38.00%	43.00%
Maximum [Member] | Stock options [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions and Methodology [Abstract]
Volatility			40.00%	45.00%
Share Repurchase Program [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]
Stock Repurchased and Retired During Period, Shares	0		0

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 2,352	$ 14,474
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,382	10,914
Amortization of investment premiums	3,881	4,752
Stock-based compensation	40,525	27,646
Excess tax benefit from stock-based compensation	0	(2,443)
Other non-cash items—net	1,891	3,549
Changes in operating assets and liabilities:
Accounts receivable—net	9,523	2,228
Inventory	(7,917)	(3,307)
Deferred tax assets	(13,072)	(6,470)
Prepaid expenses and other current assets	(3,492)	(4,523)
Other assets	(513)	159
Accounts payable	(8,383)	1,253
Accrued liabilities	(228)	1,544
Accrued payroll and compensation	5,670	8,665
Other liabilities	(1,884)	15,375
Deferred revenue	97,156	47,871
Income taxes payable	10,033	(16,987)
Net cash provided by operating activities	148,924	104,700
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments	(229,479)	(283,338)
Sales of investments	22,472	22,864
Maturities of investments	240,625	273,214
Purchases of property and equipment	(15,688)	(21,022)
Other	0	(17)
Net cash provided by (used in) investing activities	17,930	(8,299)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	42,647	22,518
Taxes paid related to net share settlement of equity awards	(11,362)	(5,521)
Excess tax benefit from stock-based compensation	0	2,443
Repurchase and retirement of common stock	0	(27,167)
Net cash provided by (used in) financing activities	31,285	(7,727)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS	0	(600)
NET INCREASE IN CASH AND CASH EQUIVALENTS	198,139	88,074
CASH AND CASH EQUIVALENTS—Beginning of period	283,254	115,873
CASH AND CASH EQUIVALENTS—End of period	481,393	203,947
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes—net	10,077	31,413
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units from inventory to property and equipment	8,923	5,668
Liability for purchase of property and equipment and asset retirement obligations	1,359	6,946
Liability incurred for repurchase of common stock	$ 0	$ 733

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Subsequent Event (Details) $ in Millions	1 Months Ended
	Jul. 31, 2015 USD ($)
Subsequent Event [Member]
Subsequent Event [Line Items]
Total consideration	$ 44.0

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Financial Instruments and Fair Value Measurements , Fair Value Measurements (Details) - USD ($)	6 Months Ended
	Jun. 30, 2015	Dec. 31, 2014
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Transfers between Level 1 and Level 2 of the fair value hierarchy during the period	$ 0
Estimate of Fair Value [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Assets, Fair Value Disclosure	710,168,000	$ 721,801,000
Estimate of Fair Value [Member] | Recurring [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Assets, Fair Value Disclosure	33,193,000	15,309,000
Estimate of Fair Value [Member] | Recurring [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Assets, Fair Value Disclosure	676,975,000	706,492,000
Estimate of Fair Value [Member] | Corporate debt securities [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	550,904,000	589,016,000
Estimate of Fair Value [Member] | Corporate debt securities [Member] | Recurring [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	0	0
Estimate of Fair Value [Member] | Corporate debt securities [Member] | Recurring [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	550,904,000	589,016,000
Estimate of Fair Value [Member] | Commercial paper [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	58,634,000	51,155,000
Estimate of Fair Value [Member] | Commercial paper [Member] | Recurring [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	0	0
Estimate of Fair Value [Member] | Commercial paper [Member] | Recurring [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	58,634,000	51,155,000
Estimate of Fair Value [Member] | Municipal bonds [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	58,676,000	39,721,000
Estimate of Fair Value [Member] | Municipal bonds [Member] | Recurring [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	0	0
Estimate of Fair Value [Member] | Municipal bonds [Member] | Recurring [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	58,676,000	39,721,000
Estimate of Fair Value [Member] | Certificates of deposit and term deposits [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	7,760,000	22,854,000
Estimate of Fair Value [Member] | Certificates of deposit and term deposits [Member] | Recurring [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	0	0
Estimate of Fair Value [Member] | Certificates of deposit and term deposits [Member] | Recurring [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	7,760,000	22,854,000
Estimate of Fair Value [Member] | Money market funds [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	31,193,000	13,311,000
Estimate of Fair Value [Member] | Money market funds [Member] | Recurring [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	31,193,000	13,311,000
Estimate of Fair Value [Member] | Money market funds [Member] | Recurring [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	0	0
Estimate of Fair Value [Member] | U.S. government and agency securities [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	3,001,000	5,744,000
Estimate of Fair Value [Member] | U.S. government and agency securities [Member] | Recurring [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	2,000,000	1,998,000
Estimate of Fair Value [Member] | U.S. government and agency securities [Member] | Recurring [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	1,001,000	3,746,000
Reported as [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Assets, Fair Value Disclosure	710,168,000	721,801,000
Reported as [Member] | Recurring [Member] | Cash equivalents [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	43,190,000	13,311,000
Reported as [Member] | Recurring [Member] | Short-term investments [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	391,634,000	436,766,000
Reported as [Member] | Recurring [Member] | Long-term investments [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, Fair Value Disclosure	$ 275,344,000	$ 271,724,000

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Subsequent Event

6 Months Ended

Jun. 30, 2015

Subsequent Events [Abstract]

SUBSEQUENT EVENT

SUBSEQUENT EVENT

In July 2015, we acquired Meru Networks, Inc. (“Meru”), which offers Wi-Fi networking solutions, for a total consideration of approximately $44.0 million. The acquisition expands on our secure wireless vision and enterprise growth focus, broadens our portfolio of solutions , and expands our opportunity to address the global enterprise Wi-Fi market with integrated secure wireless solutions. We are still in the process of evaluating the business combination accounting considerations, including the consideration transferred and the initial purchase price allocation.

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Inventory (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Inventory [Abstract]
Raw materials	$ 12,235	$ 10,617
Finished goods	56,610	58,860
Inventory	68,845	69,477
Finished goods held by distributors	1,200	1,200
Materials at contract manufacturers	$ 4,200	$ 4,800

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Financial Instruments and Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2015

Financial Instruments and Fair Value [Abstract]

Summary of Investments

The following table summarizes our investments as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate debt securities	$	551,352	$	187	$	(635	)	$	550,904
Commercial paper	46,639		2		(4		)	46,637
Municipal bonds	58,705		21		(50		)	58,676
Certificates of deposit and term deposits (1)	7,760		—		—			7,760
U.S. government and agency securities	2,999		2		—			3,001
Total available-for-sale securities	$	667,455	$	212	$	(689	)	$	666,978

	December 31, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate debt securities	$	589,526	$	365	$	(875	)	$	589,016
Commercial paper	51,156		3		(4		)	51,155
Municipal bonds	39,745		15		(39		)	39,721
Certificates of deposit and term deposits (1)	22,854		—		—			22,854
U.S. government and agency securities	5,749		1		(6		)	5,744
Total available-for-sale securities	$	709,030	$	384	$	(924	)	$	708,490

⁽¹⁾ The majority of our certificates of deposit and term deposits are foreign deposits.

Schedule of Unrealized Loss on Investments

The following table shows the gross unrealized losses and the related fair values of our investments that have been in a continuous unrealized loss position as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	283,789	$	(522	)	$	41,362	$	(113	)	$	325,151	$	(635	)
Commercial paper	11,769		(4		)	—		—			11,769		(4		)
Municipal bonds	34,667		(46		)	1,576		(4		)	36,243		(50		)
Total available-for-sale securities	$	330,225	$	(572	)	$	42,938	$	(117	)	$	373,163	$	(689	)

	December 31, 2014
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	317,011	$	(858	)	$	6,011	$	(17	)	$	323,022	$	(875	)
Commercial paper	8,185		(4		)	—		—			8,185		(4		)
Municipal bonds	26,684		(39		)	—		—			26,684		(39		)
U.S. government and agency securities	4,745		(6		)	—		—			4,745		(6		)
Total available-for-sale securities	$	356,625	$	(907	)	$	6,011	$	(17	)	$	362,636	$	(924	)

Investments Classified by Contractual Maturity Date

The contractual maturities of our investments as of June 30, 2015 and December 31, 2014 were as follows (in thousands):

	June 30, 2015		December 31, 2014
Due within one year	$	391,634	$	436,766
Due within one to three years	275,344		271,724
Total	$	666,978	$	708,490

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis

The following table presents the fair value of our financial assets measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015						December 31, 2014
	Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs		Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs
			(Level 1)		(Level 2)				(Level 1)		(Level 2)
Assets:
Corporate debt securities	$	550,904	$	—	$	550,904	$	589,016	$	—	$	589,016
Commercial paper	58,634		—		58,634		51,155		—		51,155
Municipal bonds	58,676		—		58,676		39,721		—		39,721
Certificates of deposit and term deposits	7,760		—		7,760		22,854		—		22,854
Money market funds	31,193		31,193		—		13,311		13,311		—
U.S. government and agency securities	3,001		2,000		1,001		5,744		1,998		3,746
Total	$	710,168	$	33,193	$	676,975	$	721,801	$	15,309	$	706,492
Reported as:
Cash equivalents	$	43,190					$	13,311
Short-term investments	391,634						436,766
Long-term investments	275,344						271,724
Total	$	710,168					$	721,801

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2015

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Preparation—The unaudited condensed consolidated financial statements of Fortinet, Inc. and its wholly-owned 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 (“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, 2014, contained in our Annual Report on Form 10-K (“Form 10-K”) filed with the SEC on March 2, 2015. In the opinion of management, all adjustments, which includes normal recurring adjustments, considered necessary for a fair presentation have been included. All intercompany balances, transactions and cash flows have been eliminated. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2014 is derived from the audited consolidated financial statements for the year ended December 31, 2014.

The preparation of 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 six months ended June 30, 2015.

In the third quarter of 2014, we reevaluated the selected functional currency of our international subsidiaries due to the nature of our business operations and recorded the cumulative impact of the reevaluation of the functional currency in the consolidated statement of operations. Subsequently, the remeasurement of the assets and liabilities of all international subsidiaries has been recorded in the consolidated statement of operations prospectively. The impact of this reevaluation was not material for 2014 or any of our previously issued financial statements.

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-11—Inventory—Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”). ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. It applies to entities that measure inventory using a method other than last-in, first-out or the retail inventory method (e.g., first-in first-out, average cost). ASU 2015-11 will be effective for us beginning on January 1, 2017. We are currently evaluating the impact of ASU 2015-11 on our consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09—Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) to create a single, joint revenue standard that is consistent across all industries and markets for companies that prepare their financial statements in accordance with GAAP. Under ASU 2014-09, an entity is required to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. As such, ASU 2014-09 will be effective for us beginning on January 1, 2018, with the option to adopt earlier on January 1, 2017. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements.

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Condensed Consolidated Balance Sheets Parenthetical (Unaudited) - USD ($) shares in Thousands, $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Sales returns reserve and allowance for doubtful accounts	$ 5,834	$ 6,204
Common Stock, par value (dollars per share)	$ 0.001	$ 0.001
Common Stock, shares authorized	300,000	300,000
Common Stock, shares issued	170,449	166,443
Common Stock, shares outstanding	170,449	166,443

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Defined Contribution Plans

6 Months Ended

Jun. 30, 2015

Compensation and Retirement Disclosure [Abstract]

DEFINED CONTRIBUTION PLANS

DEFINED CONTRIBUTION PLANS

Our tax-deferred savings plan under our 401(k) Plan, permits participating employees to defer a portion of their pre-tax earnings. In Canada, we have a Group Registered Retirement Savings Plan program (the “RRSP”) which permits participants to make tax deductible contributions. Our Board approved 50% matching contributions on employee contributions up to 4% of each employee’s eligible earnings. Our matching contributions to the 401(k) Plan and RRSP during the three months ended June 30, 2015 and June 30, 2014 were $0.9 million and $0.6 million, respectively. Our matching contributions to the 401(k) Plan and RRSP during the six months ended June 30, 2015 and June 30, 2014 were $1.8 million and $1.2 million, respectively.

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Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2015	Jul. 31, 2015
Document Information [Line Items]
Entity Registrant Name	FORTINET INC
Entity Central Index Key	0001262039
Document Type	10-Q
Document Period End Date	Jun. 30, 2015
Amendment Flag	false
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		171,151,438

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Segment and Significant Customer Information

6 Months Ended

Jun. 30, 2015

Segment Reporting [Abstract]

SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION

SEGMENT AND SIGNIFICANT CUSTOMER 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 the customer. The following table sets forth revenue (in thousands):

	Three Months Ended				Six Months Ended
Revenue	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Americas:
United States	$	71,224	$	49,672	$	129,725	$	94,465
Canada	26,191		19,909		46,649		38,733
Other Americas	11,178		8,804		23,779		17,619
Total Americas	108,593		78,385		200,153		150,817
Europe, Middle East, and Africa (“EMEA”)	83,404		62,554		159,068		119,197
Asia Pacific (“APAC”)	47,788		43,159		93,450		83,033
Total revenue	$	239,785	$	184,098	$	452,671	$	353,047

The following table sets forth property and equipment by geographic region as of June 30, 2015 and December 31, 2014 (in thousands):

Property and Equipment—net	June 30, 2015		December 31, 2014
Americas:
United States	$	50,328	$	46,116
Canada	7,902		6,054
Other Americas	764		875
Total Americas	58,994		53,045
EMEA	9,062		3,256
APAC	3,409		2,618
Total property and equipment—net	$	71,465	$	58,919

The following customer, a distributor, accounted for 10% or more of our revenue:

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Exclusive Networks Group	17	%	14	%	17	%	14	%

The following customers, each of which is a distributor, accounted for 10% or more of net accounts receivable:

	June 30, 2015		December 31, 2014
Exclusive Networks Group	20	%	18	%
Fine Tec Computer	13	%	—	%

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Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
REVENUE:
Product	$ 114,777	$ 85,384	$ 212,286	$ 162,149
Service	125,008	98,714	240,385	190,898
Total revenue	239,785	184,098	452,671	353,047
COST OF REVENUE:
Product	47,397	37,455	88,765	69,594
Service	22,101	20,302	44,335	38,906
Total cost of revenue	69,498	57,757	133,100	108,500
GROSS PROFIT:
Product	67,380	47,929	123,521	92,555
Service	102,907	78,412	196,050	151,992
Total gross profit	170,287	126,341	319,571	244,547
OPERATING EXPENSES:
Research and development	37,389	29,938	73,205	58,993
Sales and marketing	111,928	74,817	212,537	142,143
General and administrative	18,018	10,444	29,979	19,454
Total operating expenses	167,335	115,199	315,721	220,590
OPERATING INCOME	2,952	11,142	3,850	23,957
INTEREST INCOME	1,364	1,319	2,786	2,652
OTHER EXPENSE—net	(830)	(574)	(1,507)	(963)
INCOME BEFORE INCOME TAXES	3,486	11,887	5,129	25,646
PROVISION FOR INCOME TAXES	2,694	5,806	2,777	11,172
NET INCOME	$ 792	$ 6,081	$ 2,352	$ 14,474
Net income per share (Note 6):
Basic (in dollars per share)	$ 0.00	$ 0.04	$ 0.01	$ 0.09
Diluted (in dollars per share)	$ 0.00	$ 0.04	$ 0.01	$ 0.09
Weighted-average shares outstanding:
Basic (in shares)	169,930	163,161	169,009	162,778
Diluted (in shares)	176,234	168,345	174,983	168,015

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Net Income Per Share

6 Months Ended

Jun. 30, 2015

Earnings Per Share [Abstract]

NET INCOME PER SHARE

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, plus the dilutive effects of stock options, restricted stock units (“RSUs”) including performance stock units (“PSUs”), and the employee stock purchase plan (“ESPP”). 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 as follows (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Numerator:
Net income	$	792	$	6,081	$	2,352	$	14,474
Denominator:
Basic shares:
Weighted-average common stock outstanding—basic	169,930		163,161		169,009		162,778
Diluted shares:
Weighted-average common stock outstanding—basic	169,930		163,161		169,009		162,778
Effect of potentially dilutive securities:
Stock options	3,720		4,583		3,779		4,753
RSUs (including PSUs)	2,521		600		2,131		462
ESPP	63		1		64		22
Weighted-average shares used to compute diluted net income per share	176,234		168,345		174,983		168,015
Net income per share:
Basic	$	—	$	0.04	$	0.01	$	0.09
Diluted	$	—	$	0.04	$	0.01	$	0.09

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 anti-dilutive (in thousands):

	Three Months Ended		Six Months Ended
	June 30, 2015	June 30, 2014	June 30, 2015	June 30, 2014
Stock options	299	4,201	274	4,323
RSUs (including PSUs)	414	593	873	1,871
ESPP	—	—	84	261
	713	4,794	1,231	6,455

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Investments in Privately-Held Companies

6 Months Ended

Jun. 30, 2015

Investments, All Other Investments [Abstract]

INVESTMENTS IN PRIVATELY-HELD COMPANIES

INVESTMENTS IN PRIVATELY-HELD COMPANIES

As of June 30, 2015, we had invested a total of $10.3 million in the equity securities of three privately-held companies. Each of these investments is accounted for as a cost-basis investment, as we own less than 20% of the voting securities and do not have the ability to exercise significant influence over operating and financial policies of the respective entities. These investments are carried at historical cost and are recorded as Other assets on our condensed consolidated balance sheets and would be measured at fair value if indicators of impairment existed.

During the six months ended June 30, 2015, no events have occurred that would adversely affect the carrying value of these investments.

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2015

Accounting Policies [Abstract]

Basis of Presentation and Preparation

Basis of Presentation and Preparation—The unaudited condensed consolidated financial statements of Fortinet, Inc. and its wholly-owned 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 (“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, 2014, contained in our Annual Report on Form 10-K (“Form 10-K”) filed with the SEC on March 2, 2015. In the opinion of management, all adjustments, which includes normal recurring adjustments, considered necessary for a fair presentation have been included. All intercompany balances, transactions and cash flows have been eliminated. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2014 is derived from the audited consolidated financial statements for the year ended December 31, 2014.

Use of Estimates

The preparation of 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.

Foreign Currency Translation and Transaction Gains and Losses

In the third quarter of 2014, we reevaluated the selected functional currency of our international subsidiaries due to the nature of our business operations and recorded the cumulative impact of the reevaluation of the functional currency in the consolidated statement of operations. Subsequently, the remeasurement of the assets and liabilities of all international subsidiaries has been recorded in the consolidated statement of operations prospectively. The impact of this reevaluation was not material for 2014 or any of our previously issued financial statements.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-11—Inventory—Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”). ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. It applies to entities that measure inventory using a method other than last-in, first-out or the retail inventory method (e.g., first-in first-out, average cost). ASU 2015-11 will be effective for us beginning on January 1, 2017. We are currently evaluating the impact of ASU 2015-11 on our consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09—Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) to create a single, joint revenue standard that is consistent across all industries and markets for companies that prepare their financial statements in accordance with GAAP. Under ASU 2014-09, an entity is required to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. As such, ASU 2014-09 will be effective for us beginning on January 1, 2018, with the option to adopt earlier on January 1, 2017. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements.

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Accumulated Other Comprehensive Loss

6 Months Ended

Jun. 30, 2015

Other Comprehensive Income (Loss), Net of Tax [Abstract]

ACCUMULATED OTHER COMPREHENSIVE LOSS

ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the changes in accumulated balances of other comprehensive loss (in thousands):

	Unrealized Gains (Losses) on Investments			Tax benefit (provision) related to items of other comprehensive income or loss			Total
Beginning balance as of December 31, 2014	$	(540	)	$	191		$	(349	)
Other comprehensive income before reclassifications	69			(24		)	45
Amounts reclassified from accumulated other comprehensive loss	(6		)	1			(5		)
Net current-period other comprehensive income	63			(23		)	40
Ending balance as of June 30, 2015	$	(477	)	$	168		$	(309	)

The following table provides details about the reclassification out of accumulated other comprehensive loss (in thousands):

Six Months Ended June 30, 2015
Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains on investments	$	(6	)	Other expense—net
Tax provision related to items of other comprehensive income	1			Provision for income taxes
Total reclassification for the period	$	(5	)

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Stockholders' Equity

6 Months Ended

Jun. 30, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCKHOLDERS' EQUITY

STOCKHOLDERS’ EQUITY

Stock-Based Compensation Plans

We have stock-based compensation plans pursuant to which we have granted stock options and RSUs, including PSUs. The Company also has an ESPP for all eligible employees. As of June 30, 2015, there were a total of 43,655,799 shares of common stock available for grant under our stock-based compensation plans.

Employee Stock Options

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Expected term in years	4.3		4.9		4.3		4.9
Volatility	38	%	43	%	38% - 40%		43% - 45%
Risk-free interest rate	1.5	%	1.7	%	1.5	%	1.7	%
Dividend rate	—	%	—	%	—	%	—	%

The following table summarizes the stock option activity and related information for the periods presented below (in thousands, 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, 2014	10,702		$	14.98
Granted	349		34.15
Forfeited	(88	)	24.70
Exercised	(2,860	)	11.95
Balance—June 30, 2015	8,103		$	16.78
Options vested and expected to vest—June 30, 2015	8,059		$	16.70	2.6	$	198,516
Options exercisable—June 30, 2015	6,935		$	15.03	2.2	$	182,363

The aggregate intrinsic value represents the pre-tax difference between the exercise price of stock options and the quoted market price of our common stock on June 30, 2015, for all in-the-money options. As of June 30, 2015, total compensation expense related to unvested stock options granted to employees but not yet recognized was $12.6 million. This expense is expected to be amortized on a straight-line basis over a weighted-average period of 2.0 years.

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Weighted-average fair value per share granted	$	12.75	$	8.18	$	11.54	$	8.58
Intrinsic value of options exercised	22,034		16,441		63,038		31,762
Fair value of options vested	2,718		4,209		6,510		8,771

Restricted Stock Units

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

	Restricted Stock Units Outstanding
	Number of Shares		Weighted-Average Grant-Date-Fair Value per Share
Balance—December 31, 2014	6,291		$	22.93
Granted	3,149		34.16
Forfeited	(413	)	26.01
Vested	(1,069	)	22.01
Balance—June 30, 2015	7,958		$	27.62
RSUs expected to vest—June 30, 2015	7,468		$	27.41

As of June 30, 2015, total compensation expense related to unvested RSUs that were granted to employees and non-employees, but not yet recognized, was $207.6 million. This expense is expected to be amortized on a straight-line basis over a weighted-average vesting period of 3.0 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 minimum statutory employee withholding taxes. Total payment for the employees’ tax obligations to the taxing authorities is reflected as a financing activity within the condensed consolidated statements of cash flows.

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Shares withheld for taxes	124		86		345		257
Amount withheld for taxes	$	4,762	$	1,888	$	11,362	$	5,521

Performance Stock Units

We have granted PSUs to certain of our executive officers and employees. PSUs granted to executive officers are based on the achievement of the market-based vesting conditions during the performance period, the final settlement of the PSUs will range between 0% and 150% of the target shares underlying the PSUs based on a specified objective formula approved by our Compensation Committee. The PSUs entitle our executive officers to receive a number of shares of our common stock based on the performance of our stock price over a two- or three-year period as compared to the NASDAQ Composite index for the same periods. PSUs granted to our employees who are not executive officers are based on the achievement of personal- and company-based performance vesting conditions during the performance period. The final settlement of these PSUs will range between 50% to 150% of the target shares underlying the PSUs based on specified objective formula approved by our Compensation Committee. The PSUs entitle such employees to receive a number of shares of our common stock based on a one year performance period, and vest equally in the second and third years. There were no PSUs granted during the three months ended June 30, 2015.

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

	Three Months Ended		Six Months Ended
	June 30, 2014		June 30, 2015		June 30, 2014
Expected term in years	3.0		3.0		3.0
Volatility	46	%	38	%	47	%
Risk-free interest rate	0.9	%	1.1	%	0.9	%
Dividend rate	—	%	—	%	—	%

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

	Three Months Ended		Six Months Ended
	June 30, 2014		June 30, 2015		June 30, 2014
Shares granted to executive officers and employees	95		206		120
Weighted-average fair value per share granted	$	21.05	$	34.86	$	21.21

As of June 30, 2015, total compensation expense related to unvested PSUs that were granted to certain of our executive officers and employees, but not yet recognized, was $8.0 million. This expense is expected to be amortized on a straight-line basis over a weighted-average vesting period of 2.3 years.

Employee Stock Purchase Plan

In determining the fair value of our ESPP, we use the Black-Scholes option pricing model that employs the following weighted-average assumptions:

	Six Months Ended
	June 30, 2015		June 30, 2014
Expected term in years	0.5		0.5
Volatility	28	%	36	%
Risk-free interest rate	0.1	%	0.1	%
Dividend rate	—	%	—	%

Additional information related to the ESPP is provided below (in thousands, except per share amounts):

	Six Months Ended
	June 30, 2015		June 30, 2014
Weighted-average fair value per share granted	$	7.56	$	5.35
Shares issued under the ESPP	427		424
Weighted-average price per share issued	$	21.34	$	17.18

There were no shares granted or issued under the ESPP during the three months ended June 30, 2015 and June 30, 2014.

Stock-based Compensation Expense

Stock-based compensation expense is included in costs and expenses as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Cost of product revenue	$	210	$	178	$	350	$	291
Cost of service revenue	1,660		1,363		3,292		2,692
Research and development	5,541		4,171		10,698		8,053
Sales and marketing	11,271		5,747		20,578		11,493
General and administrative	3,078		3,257		5,764		5,117
Total stock-based compensation expense	$	21,760	$	14,716	$	40,682	$	27,646

The following table summarizes stock-based compensation expense by award type (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Stock options	$	3,017	$	4,421	$	6,472	$	9,113
RSUs (including PSUs)	17,386		9,248		31,678		16,611
ESPP	1,357		1,047		2,532		1,922
Total stock-based compensation expense	$	21,760	$	14,716	$	40,682	$	27,646

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Income tax benefit associated with stock-based compensation	$	4,266	$	4,247	$	7,643	$	7,813

Share Repurchase Program

In December 2013, our Board of Directors (“Board”) authorized a Share Repurchase Program (“Program”) to repurchase up to $200.0 million of our outstanding common stock through December 31, 2014. Under the Program, share repurchases may be made by us from time to time in privately negotiated transactions or in open market transactions. The 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. In October 2014, our Board extended the share repurchase authorization under the Program through December 31, 2015. During the three and six months ended June 30, 2015, there were no shares repurchased under the Program. As of June 30, 2015, $122.5 million remains available for future share repurchases under the Program.

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Deferred Revenue

6 Months Ended

Jun. 30, 2015

Deferred Revenue Disclosure [Abstract]

DEFERRED REVENUE

DEFERRED REVENUE

Deferred revenue consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015		December 31, 2014
Product	$	4,461	$	4,642
Service	653,100		554,115
Total deferred revenue	$	657,561	$	558,757
Reported as:
Current	$	441,177	$	368,929
Non-current	216,384		189,828
Total deferred revenue	$	657,561	$	558,757

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2015

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

The following table summarizes our future principal contractual obligations as of June 30, 2015 (in thousands):

	Total		2015 (remainder)		2016		2017		2018		2019		Thereafter
Operating lease commitments	$	50,093	$	7,064	$	12,054	$	8,536	$	6,865	$	5,684	$	9,890
Less: sublease rental income	57		57		—		—		—		—		—
Operating lease commitments—net	50,036		7,007		12,054		8,536		6,865		5,684		9,890
Inventory purchase commitments	74,322		74,322		—		—		—		—		—
Other contractual commitments and open purchase orders	33,944		28,729		3,675		978		305		193		64
Total	$	158,302	$	110,058	$	15,729	$	9,514	$	7,170	$	5,877	$	9,954

Operating Leases—We lease certain facilities under various non-cancelable operating leases, which expire through 2025. In addition to the amounts above, certain leases require us to pay variable costs such as taxes, maintenance, insurance, and asset retirement obligations. The terms of certain operating leases also provide for renewal options and escalation clauses. Rent expense was $2.9 million and $2.4 million during the three months ended June 30, 2015 and 2014, respectively. Rent expense was $6.0 million and $5.1 million during the six months ended June 30, 2015 and 2014, respectively. Rent expense is recognized using the straight-line method over the term of the lease.

Contract Manufacturer and Other Commitments—Our independent contract manufacturers procure components and build our products based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and analysis, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate component supply, we may issue purchase orders to some of our independent contract manufacturers which may not be cancelable. As of June 30, 2015, we had $74.3 million of open purchase orders with our independent contract manufacturers.

In addition to commitments with contract manufacturers, we have other contractual commitments and open purchase orders in the ordinary course of business for which we have not received goods or services. As of June 30, 2015, we had $33.9 million in other contractual commitments and open purchase orders.

Warranties—Accrued warranty activities are summarized as follows (in thousands):

	Six Months Ended
	June 30, 2015			June 30, 2014
Accrued warranty balance—beginning of the period	$	4,269		$	3,037
Warranty costs incurred	(2,059		)	(1,728		)
Provision for warranty for the period	2,294			2,560
Adjustment related to pre-existing warranties	171			(415		)
Accrued warranty balance—end of the period	$	4,675		$	3,454

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 these matters is currently not determinable, we currently believe that there are no existing claims or proceedings that 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 or substantial settlement charges. In addition, the resolution of any intellectual property 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. The actual liability in any such matters may be materially different from our estimates, if any, which could result in the need to adjust the liability and record additional expenses. We have not recorded any significant accrual for loss contingencies associated with such legal proceedings; determined that a significant unfavorable outcome is probable or reasonably possible; or determined that the amount or range of any possible loss is reasonably estimable.

Indemnification—Under the indemnification provisions of our standard sales contracts, we agree to defend our customers against third-party claims asserting various allegations such as damage resulting from product defects and infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Our exposure under these indemnification provisions is generally limited by the terms of our contracts to certain defined limits, such as the total amount paid by our customer under the agreement. However, certain agreements include covenants and indemnification provisions including and beyond indemnification for third-party claims of intellectual property infringement and 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. To date, there have been no awards under such indemnification provisions.

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Income Taxes

6 Months Ended

Jun. 30, 2015

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The effective tax rate was 77% for the three months ended June 30, 2015, compared to an effective tax rate of 49% for the same period last year. The effective tax rate was 54% for the six months ended June 30, 2015, compared to an effective tax rate of 44% for the same period last year. The provision for income taxes for the periods presented is comprised of U.S. federal and state taxes, Singapore and other foreign income taxes, withholding tax, and transfer pricing allocations which impact jurisdictional income taxed at various tax rates. During the three and six months ended June 30, 2015, there were additional unrecognized tax benefits and non-deductible stock-based compensation expense that adversely impacted the quarterly effective tax rate.

As of June 30, 2015 and December 31, 2014, unrecognized tax benefits were $52.4 million and $44.2 million, respectively. The total amount of $52.2 million in unrecognized tax benefits, if recognized, would favorably impact the effective tax rate. It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of June 30, 2015, we had accrued $5.2 million for estimated interest related to uncertain tax positions.

We file income tax returns in the U.S. federal jurisdiction, and various U.S. state and foreign jurisdictions. The statute of limitations is open for years that generated state net operating loss carryforwards and after 2009 for state jurisdictions. Additionally, we have foreign net operating losses that have an indefinite life. Generally, we are no longer subject to non-U.S. income tax examinations by tax authorities for tax years prior to 2008. We are no longer subject to examination by U.S federal income tax authorities for tax years prior to 2010.

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Financial Instruments and Fair Value Measurements , Investments (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 667,455	$ 709,030
Unrealized Gains	212	384
Unrealized Losses	(689)	(924)
Fair Value	666,978	708,490
Available-for-sale Securities, Continuous Unrealized Loss Position [Abstract]
Less Than 12 Months, Fair Value	330,225	356,625
Less Than 12 Months, Unrealized Losses	(572)	(907)
12 Months or Greater, Fair Value	42,938	6,011
12 Months or Greater, Unrealized Losses	(117)	(17)
Total, Fair Value	373,163	362,636
Total, Unrealized Losses	(689)	(924)
Available-for-sale Securities, Debt Maturities, Fair Value [Abstract]
Due within one year	391,634	436,766
Due within one to three years	275,344	271,724
Fair Value	666,978	708,490
Corporate debt securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	551,352	589,526
Unrealized Gains	187	365
Unrealized Losses	(635)	(875)
Fair Value	550,904	589,016
Available-for-sale Securities, Continuous Unrealized Loss Position [Abstract]
Less Than 12 Months, Fair Value	283,789	317,011
Less Than 12 Months, Unrealized Losses	(522)	(858)
12 Months or Greater, Fair Value	41,362	6,011
12 Months or Greater, Unrealized Losses	(113)	(17)
Total, Fair Value	325,151	323,022
Total, Unrealized Losses	(635)	(875)
Available-for-sale Securities, Debt Maturities, Fair Value [Abstract]
Fair Value	550,904	589,016
Commercial paper [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	46,639	51,156
Unrealized Gains	2	3
Unrealized Losses	(4)	(4)
Fair Value	46,637	51,155
Available-for-sale Securities, Continuous Unrealized Loss Position [Abstract]
Less Than 12 Months, Fair Value	11,769	8,185
Less Than 12 Months, Unrealized Losses	(4)	(4)
12 Months or Greater, Fair Value	0	0
12 Months or Greater, Unrealized Losses	0	0
Total, Fair Value	11,769	8,185
Total, Unrealized Losses	(4)	(4)
Available-for-sale Securities, Debt Maturities, Fair Value [Abstract]
Fair Value	46,637	51,155
Municipal bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	58,705	39,745
Unrealized Gains	21	15
Unrealized Losses	(50)	(39)
Fair Value	58,676	39,721
Available-for-sale Securities, Continuous Unrealized Loss Position [Abstract]
Less Than 12 Months, Fair Value	34,667	26,684
Less Than 12 Months, Unrealized Losses	(46)	(39)
12 Months or Greater, Fair Value	1,576	0
12 Months or Greater, Unrealized Losses	(4)	0
Total, Fair Value	36,243	26,684
Total, Unrealized Losses	(50)	(39)
Available-for-sale Securities, Debt Maturities, Fair Value [Abstract]
Fair Value	58,676	39,721
Certificates of deposit and term deposits [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	7,760	22,854
Unrealized Gains	0	0
Unrealized Losses	0	0
Fair Value	7,760	22,854
Available-for-sale Securities, Debt Maturities, Fair Value [Abstract]
Fair Value	7,760	22,854
U.S. government and agency securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	2,999	5,749
Unrealized Gains	2	1
Unrealized Losses	0	(6)
Fair Value	3,001	5,744
Available-for-sale Securities, Continuous Unrealized Loss Position [Abstract]
Less Than 12 Months, Fair Value		4,745
Less Than 12 Months, Unrealized Losses		(6)
12 Months or Greater, Fair Value		0
12 Months or Greater, Unrealized Losses		0
Total, Fair Value		4,745
Total, Unrealized Losses		(6)
Available-for-sale Securities, Debt Maturities, Fair Value [Abstract]
Fair Value	$ 3,001	$ 5,744

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Income Taxes (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Income Tax Disclosure [Abstract]
Effective income tax rate (percent)	77.00%	49.00%	54.00%	44.00%
Unrecognized tax benefits	$ 52.4		$ 52.4		$ 44.2
Unrecognized tax benefits that would favoraby affect effective tax rate	52.2		52.2
Accrued interest and penalties related to uncertain tax benefits	$ 5.2		$ 5.2

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Related Party Transactions

6 Months Ended

Jun. 30, 2015

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

The son of one member of our Board of Directors (“Board”) is a partner of an outside law firm that we utilize for certain complex litigation matters. Expenses for legal services provided by the law firm related to matters that arose subsequent to the member joining our Board were $0.9 million and $0.5 million for the three months ended June 30, 2015 and June 30, 2014, respectively. Expenses for legal services provided by the law firm related to matters that arose subsequent to the member joining our Board were $2.8 million and $0.7 million for the six months ended June 30, 2015 and June 30, 2014, respectively. Amounts due and payable to the law firm were $2.3 million and $1.3 million as of June 30, 2015 and December 31, 2014, respectively.

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Property and Equipment—Net (Tables)

6 Months Ended

Jun. 30, 2015

Property, Plant and Equipment [Abstract]

Property and Equipment - Net

Property and equipment—net consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015			December 31, 2014
Land	$	14,943		$	13,895
Building and building improvements	20,298			20,166
Evaluation units	38,140			31,474
Computer equipment and software	40,616			31,821
Furniture and fixtures	7,160			5,096
Construction-in-progress	7,923			3,902
Leasehold improvements	8,703			7,998
Total property and equipment	137,783			114,352
Less: accumulated depreciation	(66,318		)	(55,433		)
Property and equipment—net	$	71,465		$	58,919

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Stockholders' Equity , Allocation of Stock-Based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 21,760	$ 14,716	$ 40,682	$ 27,646
Income tax benefit from employee stock option plans	4,266	4,247	7,643	7,813
Cost of product revenue [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	210	178	350	291
Cost of services revenue [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	1,660	1,363	3,292	2,692
Research and development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	5,541	4,171	10,698	8,053
Sales and marketing [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	11,271	5,747	20,578	11,493
General and administrative [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	3,078	3,257	5,764	5,117
Stock options [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	3,017	4,421	6,472	9,113
RSUs (including PSUs) [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	17,386	9,248	31,678	16,611
ESPP [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 1,357	$ 1,047	$ 2,532	$ 1,922

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Deferred Revenue (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Deferred Revenue Arrangement [Line Items]
Short-term	$ 441,177	$ 368,929
Long-term	216,384	189,828
Total deferred revenue	657,561	558,757
Product [Member]
Deferred Revenue Arrangement [Line Items]
Total deferred revenue	4,461	4,642
Service [Member]
Deferred Revenue Arrangement [Line Items]
Total deferred revenue	$ 653,100	$ 554,115

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Condensed Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Consolidated Statements of Comprehensive Income [Abstract]
Net income	$ 792	$ 6,081	$ 2,352	$ 14,474
Other comprehensive income (loss)—net of taxes:
Foreign currency translation gains	0	1,118	0	101
Unrealized gains (losses) on investments	(822)	(21)	63	(19)
Tax benefit (provision) related to items of other comprehensive income or loss	287	7	(23)	7
Other comprehensive income (loss)—net of taxes	(535)	1,104	40	89
Comprehensive income	$ 257	$ 7,185	$ 2,392	$ 14,563

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Property and Equipment—Net

6 Months Ended

Jun. 30, 2015

Property, Plant and Equipment [Abstract]

PROPERTY AND EQUIPMENT—Net

PROPERTY AND EQUIPMENT—net

Property and equipment—net consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015			December 31, 2014
Land	$	14,943		$	13,895
Building and building improvements	20,298			20,166
Evaluation units	38,140			31,474
Computer equipment and software	40,616			31,821
Furniture and fixtures	7,160			5,096
Construction-in-progress	7,923			3,902
Leasehold improvements	8,703			7,998
Total property and equipment	137,783			114,352
Less: accumulated depreciation	(66,318		)	(55,433		)
Property and equipment—net	$	71,465		$	58,919

Depreciation expense was $6.8 million and $6.0 million during the three months ended June 30, 2015 and June 30, 2014, respectively. Depreciation expense was $12.8 million and $9.9 million during the six months ended June 30, 2015 and June 30, 2014, respectively.

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Related Party Transactions (Details) - Law Firm where Board Member's Son is a Partner [Member] - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Related Party Transaction [Line Items]
Expenses for legal services	$ 0.9	$ 0.5	$ 2.8	$ 0.7
Amounts due and payable to the law firm	$ 2.3		$ 2.3		$ 1.3

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Net Income Per Share (Tables)

6 Months Ended

Jun. 30, 2015

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

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

	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Numerator:
Net income	$	792	$	6,081	$	2,352	$	14,474
Denominator:
Basic shares:
Weighted-average common stock outstanding—basic	169,930		163,161		169,009		162,778
Diluted shares:
Weighted-average common stock outstanding—basic	169,930		163,161		169,009		162,778
Effect of potentially dilutive securities:
Stock options	3,720		4,583		3,779		4,753
RSUs (including PSUs)	2,521		600		2,131		462
ESPP	63		1		64		22
Weighted-average shares used to compute diluted net income per share	176,234		168,345		174,983		168,015
Net income per share:
Basic	$	—	$	0.04	$	0.01	$	0.09
Diluted	$	—	$	0.04	$	0.01	$	0.09

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

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 anti-dilutive (in thousands):

	Three Months Ended		Six Months Ended
	June 30, 2015	June 30, 2014	June 30, 2015	June 30, 2014
Stock options	299	4,201	274	4,323
RSUs (including PSUs)	414	593	873	1,871
ESPP	—	—	84	261
	713	4,794	1,231	6,455

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Investments in Privately-Held Companies (Details) - Jun. 30, 2015 $ in Millions	USD ($) privately_held_company
Investments, All Other Investments [Abstract]
Investments in equity securities of privately-held companies | $	$ 10.3
Number of privately-held companies	3

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Foreign Currency Derivatives

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

FOREIGN CURRENCY DERIVATIVES

FOREIGN CURRENCY DERIVATIVES

Our sales contracts are primarily denominated in U.S. dollars and therefore substantially all of our revenue is not subject to foreign currency translation risk. However, a substantial portion of our operating expenses incurred outside the U.S. 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 Euro (“EUR”), and the British Pound (“GBP”). To help protect against significant fluctuations in value and the volatility of future cash flows caused by changes in currency exchange rates, we engage in foreign currency risk management activities, including forward contracts, to hedge balance sheet items denominated in CAD. We do not use these contracts for speculative or trading purposes. All of the derivative instruments are with high quality financial institutions and we monitor the creditworthiness of these parties. These contracts typically have maturities of one month. We record changes in the fair value of forward exchange contracts related to balance sheet accounts as Other expense—net in the condensed consolidated statement of operations.

Additionally, independent of any hedging activities, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in Other expense—net in our condensed consolidated statements of operations. Our hedging activities are intended to reduce, but not eliminate, the impact of currency exchange rate movements. As our hedging activities are relatively short-term in nature and are focused on CAD, long-term material changes in the value of the U.S. dollar against other foreign currencies, such as the EUR and GBP could adversely impact our operating expenses in the future.

The notional amount of our forward exchange contract to hedge balance sheet accounts were (in thousands):

	Buy/Sell	Notional
Currency—As of June 30, 2015
CAD	Sell	$	6,743
Currency—As of December 31, 2014
CAD	Buy	$	6,879

As of June 30, 2015, the fair value of the forward exchange contract was not material.