Fortinet Inc

Previous wording

•macroeconomic, geopolitical factors and other disruption on our manufacturing or sales, including public health issues, wars and natural disasters;

Current wording

•macroeconomic, geopolitical factors and other disruption on our manufacturing or sales, including public health issues, wars, natural disasters and economic growth;

Previous wording

•our ability to successfully anticipate market changes related to cloud-based solutions and to sell, support and meet service level agreements related to cloud-based solutions;

Current wording

•our ability to successfully anticipate market changes including those related to cloud-based solutions and to sell, support and meet service level agreements related to cloud-based solutions;

Previous wording

•the effect of backlog from prior quarters, including its effect on growth of in-quarter billings and revenue;

Current wording

•the effect of backlog from current or prior quarters, including its effect on growth of in-quarter billings and revenue;

Previous wording

•trends in revenue, cost of revenue and gross margin, including expectations regarding product revenue and service revenue growth;

Current wording

•trends in revenue, cost of revenue and gross margin, including expectations regarding product revenue, service revenue growth and inventory related charges;

Previous wording

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

Current wording

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

Previous wording

•expectations that our operating expenses will increase year over year in absolute dollars during the remainder of 2024;

Current wording

•expectations that our operating expense will increase year over year in absolute dollars during the remainder of 2024;

Previous wording

•expectations regarding spending related to real estate assets, acquisitions and development, including data center, office building and warehouse investments, as well as other capital expenditures and to the impact on free cash flow and expenses;

Current wording

•expectations regarding spending related to real estate assets, acquisitions and development, including data centers and points of presence, office building and warehouse investments, as well as other capital expenditures and to the impact on free cash flow and expenses;

Previous wording

Fortinet is a leader in cybersecurity and the convergence of networking and security. Our mission is to secure people, devices and data everywhere. Our integrated platform, the Fortinet Security Fabric, spans secure networking, unified SASE and AI-driven security operations to deliver cybersecurity where our customers need it. As of March 31, 2024, over a half million customers trusted our solutions, including enterprises such as in the financial services, retail, healthcare and operational technology market verticals, communication and security service providers, and government organizations. As a global company headquartered in Sunnyvale, California our research and development is centered in the United States and Canada with a global footprint of support and centers of excellence around the world. As of March 31, 2024, we held 978 U.S. patents and 1,318 global patents and we are recognized in over 100 enterprise analyst reports demonstrating both our vision and execution across security and networking products.

Current wording

Fortinet is a leader in cybersecurity and the convergence of networking and security. Our mission is to secure people, devices and data everywhere. Our integrated platform, the Fortinet Security Fabric, spans secure networking, unified SASE and AI-driven security operations to deliver cybersecurity where our customers need it. As of June 30, 2024, over a half million customers trusted our solutions, including enterprises such as in the financial services, retail, healthcare and operational technology market verticals, communication and security service providers, and government organizations. As a global company headquartered in Sunnyvale, California our research and development is centered in the United States and Canada with a global footprint of support and centers of excellence around the world. As of June 30, 2024, we held 985 U.S. patents and 1,323 global patents and we are recognized in over 100 enterprise analyst reports demonstrating both our vision and execution across security and networking products.

Previous wording

•Secure Networking—Our Secure Networking solutions focus on the convergence of networking and security via FortiOS, our networking and security operating system that is the foundation of our Fortinet Security Fabric platform and supports over 30 functions that can be delivered via a physical, virtual, cloud or SaaS solution. When delivered via our network firewall appliances, functionality is accelerated through our proprietary ASIC technology. These proprietary ASICs, allow our systems to scale, run multiple applications at higher performance, lower power consumption and perform more processor-intensive operations, such as inspecting encrypted traffic, including streaming video. The Network Firewall solution consists of FortiGate data centers, hyperscale and distributed firewalls, as well as encrypted applications (SSL inspection, Virtual Private Network and IPsec connectivity). Our ability to converge networking and security also enables the ethernet to become an extension of a company’s security infrastructure through FortiSwitch and FortiLink. Our wireless LAN solution leverages secure networking to provide secure wireless access for the enterprise LAN edge. FortiExtender secures 5G/LTE and remote ethernet extenders to connect and secure any branch environment. The Secure Connectivity solution includes FortiSwitch Secure Ethernet Switches, FortiAP Wireless Local Area Network Access Points and FortiExtender 5G Connectivity Gateways.

Current wording

•Secure Networking—Our Secure Networking solutions focus on the convergence of networking and security via FortiOS, our networking and security operating system that is the foundation of our Fortinet Security Fabric platform and supports over 30 functions that can be delivered via a physical, virtual, cloud or software as a service (“SaaS”) solution. When delivered via our network firewall appliances, functionality is accelerated through our proprietary ASIC technology. These proprietary ASICs, allow our systems to scale, run multiple applications at higher performance, lower power consumption and perform more processor-intensive operations, such as inspecting encrypted traffic, including streaming video. The Network Firewall solution consists of FortiGate data centers, hyperscale and distributed firewalls, as well as encrypted applications (SSL inspection, Virtual Private Network and IPsec connectivity). Our ability to converge networking and security also enables the ethernet to become an extension of a company’s security infrastructure through FortiSwitch and FortiLink. Our wireless LAN solution leverages secure networking to provide secure wireless access for the enterprise LAN edge. FortiExtender secures 5G/LTE and remote ethernet extenders to connect and secure any branch environment. The Secure Connectivity solution includes FortiSwitch Secure Ethernet Switches, FortiAP Wireless Local Area Network Access Points and FortiExtender 5G Connectivity Gateways.

Previous wording

Additionally, Fortinet is committed to addressing the cybersecurity skills shortage through training and certification programs for customers, partners and employees. The Fortinet Training Institute’s ecosystem of public and private partnerships around the world extend to industry, academia, government and nonprofits to ensure we are reaching and increasing access of our cybersecurity certifications and training to all populations. The Fortinet Training Institute has issued over 1.5 million certifications to date.

Current wording

Additionally, Fortinet is committed to addressing the cybersecurity skills shortage through training and certification programs for customers, partners and employees. The Fortinet Training Institute’s ecosystem of public and private partnerships around the world extend to industry, academia, government and nonprofits to ensure we are reaching and increasing access of our cybersecurity certifications and training to all populations. The Fortinet Training Institute has issued over 1 million certifications to date.

Previous wording

•Total revenue was $1.35 billion during the three months ended March 31, 2024, an increase of 7%, compared to $1.26 billion in the same period last year. Our revenue growth was driven by growth in service revenue. Product revenue was $408.9 million during the three months ended March 31, 2024, a decrease of 18%, compared to $500.7 million in the same period last year. Service revenue was $944.4 million during the three months ended March 31, 2024, an increase of 24%, compared to $761.6 million in the same period last year.

Current wording

•Total revenue was $1.43 billion and $2.79 billion during the three and six months ended June 30, 2024, an increase of 11% and 9%, respectively, compared to $1.29 billion and $2.56 billion in the same periods last year. Our revenue growth was driven by the growth in service revenue. Product revenue was $451.9 million and $860.8 million during the three and six months ended June 30, 2024, a decrease of 4% and 12%, respectively, compared to $472.6 million and $973.3 million in the same periods last year. Service revenue was $982.4 million and $1.93 billion during the three and six months ended June 30, 2024, an increase of 20% and 22%, respectively, compared to $820.2 million and $1.58 billion in the same periods last year.

Previous wording

•Cash, cash equivalents, short-term and long-term investments and marketable equity securities were $3.02 billion as of March 31, 2024.

Current wording

•Cash, cash equivalents, short-term and long-term investments and marketable equity securities were $3.34 billion as of June 30, 2024.

Previous wording

•Deferred revenue was $5.79 billion, including short-term deferred revenue of $2.91 billion, as of March 31, 2024.

Current wording

•Deferred revenue was $5.90 billion, including short-term deferred revenue of $2.98 billion, as of June 30, 2024.

Previous wording

•Cash flows from operating activities were $830.4 million during the three months ended March 31, 2024, an increase of $152.9 million, or 23%, compared to the same period last year.

Current wording

•Cash flows from operating activities were $1.17 billion during the six months ended June 30, 2024, a decrease of $20.2 million, or 2%, compared to the same period last year.

Previous wording

On a geographic basis, revenue continues to be diversified globally, which remains a key strength of our business. During the three months ended March 31, 2024, the Americas region, the Europe, Middle East and Africa (“EMEA”) region and the Asia Pacific (“APAC”) region contributed 41%, 40% and 19% of our total revenue, respectively. Americas region and EMEA region increased 6% and 13%, respectively, and APAC region decreased 1% during the three months ended March 31, 2024 compared to the same period last year.

Current wording

On a geographic basis, revenue continues to be diversified globally, which remains a key strength of our business. During the three months ended June 30, 2024, the Americas region, the Europe, Middle East and Africa (“EMEA”) region, and the Asia Pacific (“APAC”) region contributed 42%, 39% and 19% of our total revenue, respectively and increased 11%, 12%, and 10% compared to the same period last year, respectively. During the six months ended June 30, 2024, the Americas, EMEA, and APAC regions contributed 41%, 40% and 19% of our total revenue, respectively, and increased by 9%, 12% and 4% compared to the same period last year, respectively.

Previous wording

Product revenue decreased 18% during the three months ended March 31, 2024 compared to the same period last year, due to the decrease in hardware revenue, partially offset by the increase in software revenue. The decrease in hardware revenue was impacted by the backlog drawdown in the prior period, continued product digestion of previously placed orders, reduced net prices on certain products and macroeconomic conditions. When we fulfill, ship and bill during a quarter to satisfy backlog, this increases our aggregate billings and revenue during any particular quarter. As the supply chain challenges normalize, the growth comparisons versus prior quarters where backlog contributed more to billings become more challenging. For the remainder of 2024, we expect product revenue growth rates will continue to be impacted by drawdown of backlog in earlier periods and earlier pricing actions.

Current wording

Product revenue decreased 4% and 12%, respectively, during the three and six months ended June 30, 2024 compared to the same periods last year, due to the decrease in hardware revenue, partially offset by the increase in software revenue. The decrease in hardware revenue was impacted by the change in backlog from hardware shipped in the prior periods, reduced net prices on certain products and macroeconomic conditions. When we fulfill, ship and bill during a quarter to satisfy backlog, this increases our aggregate billings and revenue during any particular quarter. As the supply chain challenges normalize, our product revenue growth rate may be lower versus prior quarters where delivery from backlog contributed more to billings. For the remainder of 2024, we expect product revenue growth rates will continue to be impacted by drawdown of backlog and pricing actions in earlier periods.

Previous wording

Service revenue growth during the three months ended March 31, 2024 was 24%, as compared to the same period last year, was primarily driven by the strength of our security subscription revenue, which grew 27%. The increase was primarily due to the recognition of revenue from our growing deferred revenue balance related to FortiGuard and other security subscriptions delivered to on-premise and cloud-based environments and strength in unified SASE and SecOps. We expect our service revenue to continue to grow for the remainder of 2024, with growth opportunities that include unified SASE and SecOps offerings. While service revenue is expected to grow, we anticipate that the growth rates will ease for the remainder of 2024.

Current wording

Service revenue growth during the three and six months ended June 30, 2024 was 20% and 22%, respectively, as compared to the same periods last year, was primarily driven by the strength of our security subscription revenue, which grew 22% and 25%, respectively. The increase was primarily due to the recognition of service revenue from our growing deferred revenue balance related to FortiGuard and other security subscriptions delivered to on-premise and cloud-based environments and strength in unified SASE and SecOps. We expect our service revenue to continue to grow for the remainder of 2024, with growth opportunities that include unified SASE and SecOps offerings. While service revenue is expected to grow, we anticipate that the growth rates will ease for the remainder of 2024.

Previous wording

Our billings were diversified on a geographic basis. During the three months ended March 31, 2024, six countries represented approximately 50% of our billings and the remaining 50% in the aggregate were from over 100 countries that each individually contributed less than 3% of our billings.

Current wording

Our billings were diversified on a geographic basis. During the three months ended June 30, 2024, seven countries represented approximately 50% of our billings and the remaining 50% in the aggregate were from over 100 countries that each individually contributed less than 3% of our billings.

Previous wording

Operating expenses as a percentage of revenue decreased 0.1 percentage points during the three months ended March 31, 2024 compared to the same period last year, mainly driven by a decrease in marketing expense. Headcount decreased to 13,522 employees and contractors as of March 31, 2024, a 0.3% decrease compared to 13,568 as of December 31, 2023.

Current wording

Operating expenses as a percentage of revenue decreased 5.2 and 2.8 percentage points, respectively, during the three and six months ended June 30, 2024 compared to the same periods last year, mainly driven by a decrease in personnel-related costs in sales and marking and a decrease in marketing expenses. Headcount decreased to 13,527 employees and contractors as of June 30, 2024, comparatively flat compared to 13,568 as of December 31, 2023.

Previous wording

Our overall performance depends in part on worldwide economic and geopolitical conditions, such as the war in Ukraine and the Israel-Hamas war or tensions between China and Taiwan, and their impact on customer behavior. Worsening economic conditions, including inflation, higher interest rates, slower growth, any recession, fluctuations in foreign exchange rates and other changes in economic conditions, may result in decreased sales productivity and growth and adversely affect our results of operations and financial performance. We have seen certain impacts on our business, results of operations, financial condition, cash flows, liquidity and capital and financial resources such as longer sales cycles, delayed purchases and increased commitments with certain suppliers and increased inventory and inventory purchase commitment reserves.

Current wording

Our overall performance depends in part on worldwide economic and geopolitical conditions, such GDP growth, the war in Ukraine and the Israel-Hamas war or tensions between China and Taiwan, and their impact on customer behavior. Worsening economic conditions, including inflation, higher interest rates, slower growth, any recession, fluctuations in foreign exchange rates and other changes in economic conditions, may result in decreased sales productivity and growth and adversely affect our results of operations and financial performance. We have seen certain impacts on our business, results of operations, financial condition, cash flows, liquidity and capital and financial resources such as longer sales cycles, delayed purchases and increased commitments with certain suppliers and increased inventory and inventory purchase commitment reserves.

Previous wording

Our customers purchase our hardware products, software licenses and cloud-delivered solutions, as well as our FortiGuard and other security subscription and FortiCare technical support services. We generally invoice at the time of our sale for the total price of the products and services. Standard payment terms are generally no more than 60 days, though we may offer extended payment terms to certain distributors or related to certain transactions.

Current wording

Our customers purchase our hardware products, software licenses and cloud-delivered solutions, as well as our FortiGuard and other security subscription and FortiCare technical support services. We generally invoice at the time of our sale for the total price of the products and services. Standard payment terms are generally no more than 60 days, though we may offer extended payment terms to certain distributors or certain transactions.

Previous wording

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 unrecognized portion of service revenue from FortiGuard and other security subscriptions and FortiCare technical support service contracts, which is recognized as revenue ratably over the service term. We monitor our deferred revenue balance, short-term and total deferred revenue growth and the mix of short-term and long-term deferred revenue because deferred revenue represents a significant portion of free cash flow and of revenue to be recognized in future periods. Deferred revenue was $5.79 billion as of March 31, 2024, an increase of $54.9 million, or 1%, from December 31, 2023. Short term deferred revenue was $2.91 billion as of March 31, 2024, an increase of $63.3 million, or 2%, from December 31, 2023.

Current wording

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 unrecognized portion of service revenue from FortiGuard and other security subscriptions and FortiCare technical support service contracts, which is recognized as revenue ratably over the service term. We monitor our deferred revenue balance, short-term and total deferred revenue growth and the mix of short-term and long-term deferred revenue because deferred revenue represents a significant portion of free cash flow and of revenue to be recognized in future periods. Deferred revenue was $5.90 billion as of June 30, 2024, an increase of $161.2 million, or 3%, from December 31, 2023. Short term deferred revenue was $2.98 billion as of June 30, 2024, an increase of $126.6 million, or 4%, from December 31, 2023.

Previous wording

Billings (non-GAAP). We define billings as revenue recognized in accordance with GAAP 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. We consider billings to be a useful metric for management and investors because billings drive current and future revenue, which is an important indicator of the health and viability of our business. There are several limitations related to the use of billings instead of GAAP revenue. First, billings include amounts that have not yet been recognized as revenue and are impacted by the term of FortiGuard security subscription and FortiCare and other support agreements. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. Management accounts for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with GAAP revenue. Total billings were $1.41 billion for the three months ended March 31, 2024, a decrease of 6% compared to $1.50 billion in the same period last year.

Current wording

Billings (non-GAAP). We define billings as revenue recognized in accordance with GAAP plus the change in deferred revenue from the beginning to the end of the period. We consider billings to be a useful metric for management and investors because billings drive current and future revenue, which is an important indicator of the health and viability of our business. There are several limitations related to the use of billings instead of GAAP revenue. First, billings include amounts that have not yet been recognized as revenue and are impacted by the term of FortiGuard security subscription and FortiCare and other support agreements. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. Management accounts for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with GAAP revenue. Total billings were $1.54 billion for the three months ended June 30, 2024, remained flat compared to $1.54 billion in the same period last year.

Previous wording

There were no material changes to our critical accounting policies and estimates as of and for the three months ended March 31, 2024, as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K filed with the SEC on February 26, 2024 (the “Form 10-K”).

Current wording

There were no material changes to our critical accounting policies and estimates as of and for the three and six months ended June 30, 2024, as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K filed with the SEC on February 26, 2024 (the “Form 10-K”).

Previous wording

Total revenue increased $91.0 million, or 7%, during the three months ended March 31, 2024 compared to the same period last year. We continued to experience diversification of revenue geographically, and across customer and indu stry segments. Revenue from the Americas and EMEA grew, with EMEA contributing the larger portion of the increase on an absolute dollar basis andon a percentage basis.

Current wording

Total revenue increased $141.5 million, or 11%, during the three months ended June 30, 2024 compared to the same period last year. We continued to experience diversification of revenue geographically, and across customer and indu stry segments. Revenue from all regions grew, with the Americas and EMEA contributing the larger portion of the increase on an absolute dollar basis and EMEA, contributing the largest portion of the increaseon a percentage basis.

Previous wording

Product revenue decreased $91.8 million, or 18%, during the three months ended March 31, 2024 compared to the same period last year, due to the decrease in hardware revenue, partially offset by the increase in software revenue. The decrease in hardware revenue was impacted by the backlog drawdown in the prior period, continued product digestion of previously placed orders, reduced net prices on certain products and macroeconomic conditions. When we fulfill, ship and bill during a quarter to satisfy backlog, this increases our aggregate billings and revenue during any particular quarter. As the supply chain challenges normalize, the growth comparisons versus prior quarters where backlog contributed more to billings become more challenging. For the remainder of 2024, we expect product revenue growth rates will continue to be impacted by drawdown of backlog in earlier periods and earlier pricing actions.

Current wording

Product revenue decreased $20.7 million, or 4%, during the three months ended June 30, 2024 compared to the same period last year, due to the decrease in hardware revenue, partially offset by the increase in software revenue. The decrease in hardware revenue was impacted by the change in backlog from hardware shipped in the prior periods, reduced net prices on certain products and macroeconomic conditions. When we fulfill, ship and bill during a quarter to satisfy backlog, this increases our aggregate billings and revenue during any particular quarter. As the supply chain challenges normalize, our product revenue growth rate may be lower versus prior quarters where delivery from backlog contributed more to billings. For the remainder of 2024, we expect product revenue growth rates will continue to be impacted by drawdown of backlog in earlier periods and earlier pricing actions.

Previous wording

Service revenue increased $182.8 million, or 24%, during the three months ended March 31, 2024 compared to the same period last year. Security subscription revenue increased $115.2 million, or 27%, and technical support and other services revenue increased $67.6 million, or 20%, during the three months ended March 31, 2024 compared to the same period last year. The increase was primarily due to the recognition of revenue from our growing deferred revenue balance related to FortiGuard and other security subscriptions delivered to on-premise and cloud-based environments and strength in unified SASE and SecOps.

Current wording

Service revenue increased $162.2 million, or 20%, during the three months ended June 30, 2024 compared to the same period last year. Security subscription revenue increased $101.4 million, or 22%, and technical support and other services revenue increased $60.8 million, or 17%, during the three months ended June 30, 2024 compared to the same period last year. The increase was primarily due to the recognition of revenue from our growing deferred revenue balance related to FortiGuard and other security subscriptions delivered to on-premise and cloud-based environments and growth in SaaS solutions, including SASE and SecOps.

Previous wording

Of the service revenue recognized during the three months ended March 31, 2024,90%was included in the deferred revenue balance as of December 31, 2023. Of the service revenue recognized during thethree months ended March 31, 2023, 89% was included in the deferred revenue balance as of December 31, 2022. We expect service revenue growth rates to ease throughout the remainder of 2024 due to slowing deferred revenue and product revenue growth over the past several quarters.

Current wording

Of the service revenue recognized during the three months ended June 30, 2024,90%was included in the deferred revenue balance as of March 31, 2024. Of the service revenue recognized during thethree months ended June 30, 2023, 89% was included in the deferred revenue balance as of March 31, 2023. We expect service revenue growth rates to ease throughout the remainder of 2024 due to slowing deferred revenue and product revenue growth over thepast several quarters, partially offset by increases in SaaS revenue.

Previous wording

Product gross margin decreased 6.0 percentage points during the three months ended March 31, 2024 compared to the same period last year, primarily due to inventory related reserves expense and reduced net prices on certain products, partially offset by lower expedite fees and freight costs and a shift in revenue mix from hardware to software. During the first quarter, we lowered list prices on select products. Cost of product revenue was comprised primarily of third-party contract manufacturers’ costs, costs of materials used in production and inventory reserves.

Current wording

Product gross margin increased 2.6 percentage points during the three months ended June 30, 2024 compared to the same period last year, primarily due to lower expedite fees, a shift in revenue mix from hardware to software, lower freight costs and inventory related reserves expense, partially offset by reduced prices on certain products. During the first quarter 2024, we lowered list prices on select products. Cost of product revenue was comprised primarily of third-party contract manufacturers’ costs, costs of materials used in production and inventory reserves.

Previous wording

Research and development expense increased $21.9 million, or 14%, during the three months ended March 31, 2024 compared to the same period last year, primarily due to an increase of $15.8 million in personnel-related costs as a result of increased headcount and compensation rates to support the development of new products and continued enhancements to our existing products. In addition, depreciation expenses and other occupancy-related expenses increased $3.7 million. We currently intend to continue investing in our research and development organization, and expect research and development expenses to increase in absolute dollars year over year during the remainder of 2024.

Current wording

Research and development expense increased $12.1 million, or 8%, during the three months ended June 30, 2024 compared to the same period last year, primarily due to an increase of $8.8 million in personnel-related costs as a result of increased headcount and compensation rates to support the development of new products and continued enhancements to our existing products. In addition, depreciation expense and other occupancy-related expense increased $2.0 million and product development costs increased $1.1 million. We currently intend to continue investing in our research and development organization, and expect research and development expense to increase in absolute dollars year over year during the remainder of 2024.

Previous wording

Sales and marketing expense increased $22.8 million, or 5%, during the three months ended March 31, 2024 compared to the same period last year, primarily due to an increase of $21.7 million in personnel-related costs as we increased our sales capacity. The increase in headcount is expected to help drive global market revenue increases. In addition, travel expense increased $2.8 million. The increases were partially offset by a decrease of $5.3 million in marketing-related expenses. We currently intend to continue making investments in sales and marketing resources critical to support our future growth and expect our sales and marketing expenses to increase in absolute dollars year over year during the remainder of 2024.

Current wording

Sales and marketing expense decreased $14.6 million, or 3%, during the three months ended June 30, 2024 compared to the same period last year, primarily due to a decrease of $11.4 million in personnel-related costs, a decrease of $5.5 million in marketing expenses and the favorable impact of foreign currency fluctuations. The decreases were partially offset by an increase of $1.6 million in travel expense. We currently intend to continue making investments in sales and marketing resources critical to support our future growth and expect our sales and marketing expense to increase in absolute dollars year over year during the remainder of 2024.

Previous wording

General and administrative expense increased $1.6 million, or 3%, during the three months ended March 31, 2024 compared to the same period last year, primarily due to an increase of $3.7 million in professional services fees, an increase of $1.4 million in personnel-related costs and an increase of $1.2 million in depreciation expenses and other occupancy-related expenses, partially offset by a decrease of $4.3 million in provision for expected credit losses. We currently expect general and administrative expenses to increase in absolute dollars year over year during the remainder of 2024.

Current wording

General and administrative expense increased $6.7 million, or 13%, during the three months ended June 30, 2024 compared to the same period last year, primarily due to an increase of $6.3 million in legal related fees and other professional services fees. We currently expect general and administrative expense to increase in absolute dollars year over year during the remainder of 2024.

Previous wording

We generated operating income of $321.2 million during the three months ended March 31, 2024, an increase of $47.7 million, or 17%, compared to $273.5 million in the same period last year. Operating margin was 23.7% during the three months ended March 31, 2024, compared to 21.7% in the same period last year. The increase in operating margin was primarily due to 1.9 percentage points increase in gross margin, 0.9 percentage points decrease and 0.2 percentage points decrease in sales and marketing expenses and general and administrative expenses as a percentage of revenue, respectively, partially offset by 0.8 percentage points increase in research and development expense as a percentage of revenue.

Current wording

We generated operating income of $437.2 million during the three months ended June 30, 2024, an increase of $158.2 million, or 57%, compared to $279.0 million in the same period last year. Operating margin was 30.5% during the three months ended June 30, 2024, compared to 21.6% in the same period last year. The increase in operating margin was primarily due to 5.0 percentage points decrease in sales and marketing expense as a percentage of revenue, 3.7 percentage points increase in gross margin and 0.3 percentage points decrease in research and development expense as a percentage of revenue, partially offset by a 0.1 percentage point increase in general and administrative expense as a percentage of revenue.

Previous wording

Interest income, interest expense and other income (expense)—net

Current wording

Interest income, interest expense and other expense—net

Previous wording

Interest income increased $11.6 million during the three months ended March 31, 2024 compared to the same period last year, primarily as a result of higher interest rates and investment balances. Interest income varies depending on our average investment balances during the period, types and mix of investments, and market interest rates. Interest expense remained comparatively flat during the three months ended March 31, 2024 compared to the same period last year. The $4.9 million change in Other income (expense)—net during the three months ended March 31, 2024 compared to the same period last year, was primarily due to an increase of $4.4 million foreign currency exchange losses and a $0.3 million lower gain on marketable equity securities.

Current wording

Interest income increased $6.7 million during the three months ended June 30, 2024 compared to the same period last year, primarily as a result of higher interest rates and investment balances. Interest income varies depending on our average investment balances during the period, types and mix of investments, and market interest rates. Interest expense remained comparatively flat during the three months ended June 30, 2024 compared to the same period last year. The $4.0 million change in Other expense—net during the three months ended June 30, 2024 compared to the same period last year, was primarily due to a $3.8 million lower loss on marketable equity securities.

Previous wording

Our effective tax rate was 11% for the three months ended March 31, 2024 compared to an effective tax rate of 7% for the same period last year. The provision for income taxes for the three months ended March 31, 2024 was primarily comprised of U.S. federal and state taxes, withholding taxes and foreign taxes totaling$81.7 million, which were favorably affected by a tax benefit of $24.0 million from the foreign-derived intangible income deduction (the “FDII deduction”) and excess tax benefits from stock-based compensation expense of $18.2 million.

Current wording

Our effective tax rate was 16% for the three months ended June 30, 2024 compared to an effective tax rate of 9% for the same period last year. The provision for income taxes for the three months ended June 30, 2024 was primarily comprised of U.S. federal and state taxes, withholding taxes and foreign taxes totaling$109.9 million, which were favorably affected by a tax benefit of $27.2 million from the foreign-derived intangible income deduction (the “FDII deduction”) and excess tax benefits from stock-based compensation expense of $6.2 million.

Previous wording

The provision for income taxes for the three months ended March 31, 2023 was comprised of U.S. federal and state taxes, withholding taxes, and foreign taxes totaling$85.8 million, which were favorably affected by a tax benefit of$38.2 million from the FDII deduction and excess tax benefits from stock-based compensation expense of$26.3 million.

Current wording

The provision for income taxes for the three months ended June 30, 2023 was comprised of U.S. federal and state taxes, withholding taxes, and foreign taxes totaling$84.8 million, which were favorably affected by a tax benefit of$25.8 million from the FDII deduction, excess tax benefits from stock-based compensation expense of$13.3 million, and the release of reserves of $18.1 million on uncertain tax positions and the accrued interest thereon due to the expiration of statues of limitations.

Previous wording

Total gross margin increased 1.9 percentage points during the three months ended March 31, 2024 compared to the same period last year, primarily driven by a shift in the revenue mix and increased service gross margin, partially offset by decreased product gross margin. Revenue mix shifted by 9.5 percentage points from product revenue to service revenue, as a percentage of total revenue.

Current wording

Total gross margin increased 2.8 percentage points during the six months ended June 30, 2024 compared to the same period last year, primarily driven by a shift in the revenue mix to higher margin service revenue and increased service gross margin, partially offset by decreased product gross margin. Revenue mix shifted by 7.2 percentage points from product revenue to service revenue, as a percentage of total revenue.

Previous wording

Service gross margin increased 2.1 percentage points during the three months ended March 31, 2024 compared to the same period last year, primarily driven by pricing actions in earlier periods, a revenue mix shift towards higher margin security subscription services and slower labor cost growth. Cost of service revenue was comprised primarily of personnel-related costs, third-party repair and contract fulfillment, data center costs, colocation and cloud provider fees, supplies and facility-related costs.

Current wording

Service gross margin increased 2.4 percentage points during the six months ended June 30, 2024 compared to the same period last year, primarily driven by slower labor and other cost growth, pricing actions in earlier periods and a revenue mix shift towards higher margin security subscription services. Cost of service revenue was comprised primarily of personnel-related costs, third-party repair and contract fulfillment, data center costs, colocation and cloud provider fees, supplies and facility-related costs.

Previous wording

Loss from equity method investments decreased$15.5 million during the three months ended March 31, 2024 compared to the same period last year, primarily driven by our proportionate share of Linksys’ financial results including our share of the amortization of the basis differences improved over the same period last year.

Current wording

Loss from equity method investments decreased $8.8 million during the six months ended June 30, 2024 compared to the same period last year, primarily driven by our proportionate share of Linksys’ financial results including our share of the amortization of the basis differences improved over the same period last year, partially offset by the OTTI charge of $8.0 million recorded during the three months ended June 30, 2024.