Fortinet Inc

Previous wording

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

Current wording

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

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 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.

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. As of September 30, 2024, our end-customers were located in over 100 countries and included enterprises such as in the financial services, retail, healthcare and operational technology market verticals, communication and security service providers, and government organizations. We currently have approximately 77% of the Fortune 100 companies and approximately 71% of the Global 2000 companies as customers. 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 September 30, 2024, we held 1,027 U.S. patents and 1,371 global patents and we are recognized in over 130 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 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.

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. Fortinet’s network firewall offerings consist of a FortiGate data center, 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 our customers’ 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. Fortinet’s Secure Connectivity solution includes FortiSwitch secure ethernet switches, FortiAP wireless local area network access points and FortiExtender 5G connectivity gateways.

Previous wording

•Unified Secure Access Service Edge (SASE)—As applications move to the cloud and work from anywhere becomes established, cloud delivery enables secure access to applications on any cloud. The Fortinet Unified SASE solution is a single-vendor SASE solution that includes Firewall, SD-WAN, Secure Web Gateway, Cloud Access Services Broker, Data Loss Prevention, Zero Trust Network Access and cloud security, including Web Application Firewalls, Virtualized Firewalls and Cloud-Native Firewalls, among other products. These functions are delivered through our FortiOS operating systems, which can deploy the full SASE stack through the cloud or on our ASIC-driven appliances. All functions can be managed through a unified management console.

Current wording

•Unified Secure Access Service Edge (SASE)—As applications move to the cloud and work from anywhere is now the norm, cloud delivery enables secure access to applications on any cloud. The Fortinet Unified SASE solution includes an industry-leading single-vendor SASE solution that includes firewall, SD-WAN, secure web gateway, cloud access services broker, DLP, and zero trust network access. Fortinet is one of the few vendors to deliver consistent convergence and AI-powered security across Secure SD-WAN and SSE to enable a single-vendor SASE framework with a unique, cloud-centric architecture powered by FortiOS. Given this, Fortinet is well positioned to support customers transitioning from SD-WAN to a single-vendor SASE platform. Additionally, Fortinet offers a full suite of cloud security products that enable customers to secure their applications from code to cloud, including web application firewalls, virtualized firewalls and cloud-native firewalls, among other products.

Previous wording

•Security Operations (SecOps)—Fortinet’s Security Operations portfolio is comprised of cybersecurity solutions that identify, protect, detect, respond and recover, and are delivered as a platform that automates detection and response to accelerate discovery and remediation. The SecOps solution includes FortiAI generative AI assistant, FortiSIEM Security Information and Event Management, FortiSOAR Security Orchestration, Automation and Response, FortiEDR Endpoint Detection and Response, FortiXDR Extended Detection and Response, FortiMDR Managed Detection and Response Service, FortiNDR Network Detection and Response, FortiRecon Digital Risk Protection, FortiDeceptor Deception technology, FortiGuard SoCaaS, FortiSandbox Sandboxing Services and FortiGuard Incident Response Services, among other products.

Current wording

•AI-Driven Security Operations (SecOps)—Fortinet’s AI-Driven Security Operations portfolio offers a broad range of cybersecurity solutions that identify, protect, detect, respond, and recover from cyberthreats, all tightly integrated within the Fortinet Security Fabric. Fortinet’s SecOps solution includes FortiAnalyzer, FortiSIEM security information and event management, FortiSOAR security orchestration, automation and response, for SOC Analytics and Automation, FortiEDR endpoint detection and response, FortiXDR extended detection and response, FortiMDR managed detection and response service, FortiNDR network detection and response, FortiSandbox sandboxing, and FortiDeceptor deception technology for behavioral detection and response, FortiRecon as digital risk protection. FortiGuard services include SOCaaS, and Incident Response to effectively address staff shortages by providing expert oversight and rapid response. To further enhance operational efficiency, the FortiAI generative AI assistance ensures that organizations are well equipped to navigate the evolving threat landscape.

Previous wording

FortiCare Technical Support Service is a per-device technical support service, which provides customers access to experts to ensure efficient and effective operations and maintenance of their Fortinet capabilities. Global technical support is offered 24x7 with flexible add-ons, including enhanced SLAs and premium hardware replacement through in-country depots. Organizations have the flexibility to procure different levels of service for different devices based on their availability needs. We offer three per-device support options tailored to the needs of our enterprise customers: FortiCare Premium, FortiCare Elite and FortiCare Essential. The FortiCare Elite service aims to provide 15-minute response times for key product families.

Current wording

FortiCare Technical Support Service is a per-device technical support service, which provides customers access to experts to ensure efficient and effective operations and maintenance of their Fortinet capabilities. Global technical support is offered 24x7 with flexible add-ons, including enhanced SLAs and premium hardware replacement through in-country depots. Organizations have the flexibility to procure different levels of service for different devices based on their availability needs. We offer three per-device support options tailored to the needs of our enterprise customers: FortiCare Premium, FortiCare Elite and FortiCare Essential. The FortiCare Elite service aims to provide a 15-minute response time for key product families.

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 million certifications to date.

Current wording

Additionally, we are 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 $1.43 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.

Current wording

•Total revenue was $1.51 billion and $4.30 billion during the three and nine months ended September 30, 2024, an increase of 13% and 10%, respectively, compared to $1.33 billion and $3.89 billion in the same periods last year. Our revenue growth was driven by the growth in service revenue. Product revenue was $473.9 million and $1.33 billion during the three and nine months ended September 30, 2024, an increase of 2% and a decrease of 7%, respectively, compared to $465.9 million and $1.44 billion in the same periods last year. Service revenue was $1.03 billion and $2.96 billion during the three and nine months ended September 30, 2024, an increase of 19% and 21%, respectively, compared to $868.7 million and $2.45 billion in the same periods last year.

Previous wording

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

Current wording

•Cash, cash equivalents, short-term and long-term investments and marketable equity securities were $3.70 billion as of September 30, 2024.

Previous wording

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

Current wording

•Deferred revenue was $6.01 billion, including short-term deferred revenue of $3.08 billion, as of September 30, 2024.

Previous 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.

Current wording

•Cash flows from operating activities were $1.78 billion during the nine months ended September 30, 2024, an increase of $36.7 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 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.

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 September 30, 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 and increased 14%, 17%, and 3% compared to the same period last year, respectively. During the nine months ended September 30, 2024, the Americas, EMEA, and APAC regions contributed 41%, 40% and 19% of our total revenue, respectively, and increased by 11%, 14% and 4% compared to the same period last year, respectively.

Previous 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.

Current wording

Service revenue growth during the three and nine months ended September 30, 2024 was 19% and 21%, respectively, as compared to the same periods last year, was primarily driven by the strength of our security subscription revenue, which grew 20% and 23%, 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 due to slowing deferred revenue over thepast several quarters.

Previous 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.

Current wording

Our billings were diversified on a geographic basis. During the three months ended September 30, 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.

Previous 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.

Current wording

Operating expenses as a percentage of revenue decreased 2.2 and 2.5 percentage points, respectively, during the three and nine months ended September 30, 2024 compared to the same periods last year, mainly because our revenue growth outpaced our headcount growth. Headcount increased to 13,986 employees and contractors as of September 30, 2024, a 3% increase compared to 13,568 as of December 31, 2023. We expect our operating expenses as a percentage of revenue to decrease for full year 2024 compared to full year 2023.

Previous 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.

Current wording

Our overall performance depends in part on worldwide economic and geopolitical conditions, such as 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, changing 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

We typically sell our security solutions to distributors that sell to networking security focused resellers and to certain service providers and managed security service providers (“MSSPs”), who, in turn, sell to end-customers or use our products and services to provide hosted solutions to other enterprises. At times, we also sell directly to certain large enterprise customers, large service providers and major systems integrators. In addition, we sell our software licenses and services via different cloud service provider platforms, both directly and through our channel partners. Our end-customers are located in over 100 countries and include small, medium and large enterprises and government organizations across a wide range of industries, including financial services, government, healthcare, manufacturing, retail, technology and telecommunications. An end-customer deployment may involve as few as one or as many as thousands of secure networking, unified SASE and security operations technology products, depending on the end-customer’s size and security requirements.

Current wording

We typically sell our security solutions to distributors that sell to networking security focused resellers and to certain service providers and managed security service providers (“MSSPs”), who, in turn, sell to end-customers or use our products and services to provide hosted solutions to other enterprises. At times, we also sell directly to enterprise customers, service providers and systems integrators. In addition, we sell our software licenses and services via different cloud service provider platforms, both directly and through our channel partners. Our end-customers are located in over 100 countries and include small, medium and large enterprises and government organizations across a wide range of industries, including financial services, government, healthcare, manufacturing, retail, technology and telecommunications. An end-customer deployment may involve as few as one or as many as thousands of secure networking, unified SASE and security operations technology products, depending on the end-customer’s size and security requirements.

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 certain transactions.

Current wording

Our customers purchase our hardware products, software licenses and cloud-delivered solutions, including our FortiGuard security subscription, FortiCare technical support services, unified SASE and SecOps 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

We also offer our products hosted in our own data centers, PoPs and through co-locations and major cloud service providers, including Amazon Web Services, Microsoft Azure and Google Cloud. We have also recognized revenue from customers who deploy our products in a bring-your-own-license (“BYOL”) arrangements at cloud service providers or at private clouds. In a BYOL arrangement, a customer purchases a software license through our channel partners and deploys the software in a cloud provider’s environment, in third-party clouds or in their private cloud.

Current wording

We offer our products hosted in our own data centers, PoPs, and through co-locations and major cloud service providers, including Microsoft Azure, Amazon Web Services and Google Cloud.

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 $5.90 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.

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 $6.01 billion as of September 30, 2024, an increase of $276.7 million, or 5%, from December 31, 2023. Short term deferred revenue was $3.08 billion as of September 30, 2024, an increase of $232.5 million, or 8%, 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. 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.

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 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 a number of 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 security and 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 $1.58 billion for the three months ended September 30, 2024, an increase of 6% compared to $1.49 billion in the same period last year.

Previous wording

Our backlog may fluctuate over quarters. A reduction to backlog increases our aggregate billings and revenue during the quarter when delivered. If we experience supply chain shortages and cannot fulfill orders, our backlog may increase, which will negatively impact our aggregate billings and revenue in such quarter, and as the supply chain challenges normalized, our product revenue growth rate may be lower versus prior quarters where delivery from backlog contributed more to billings.

Current wording

Our backlog may fluctuate over quarters. A reduction to backlog increases our aggregate billings and revenue during the quarter when delivered. If we experience supply chain shortages and cannot fulfill orders or if customers cancel or delay delivery of orders, our backlog may be affected, which will negatively impact our aggregate backlog to billings conversion and revenue in such quarter, and as the supply chain challenges normalized, our product revenue growth rate may be lower versus prior quarters where delivery from backlog contributed more to billings.

Previous wording

Free cash flow (non-GAAP). We define free cash flow as net cash provided by operating activities minus purchases of property and equipment and excluding any significant non-recurring items. We believe 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 capital expenditures, can be used for strategic opportunities, including repurchasing outstanding common stock, investing in our business, making strategic acquisitions, and strengthening the balance sheet. A limitation of using free cash flow rather than the GAAP measures of cash provided by or used in operating activities, investing activities, and financing activities is that free cash flow does not represent the total increase or decrease in the cash and cash equivalents balance for the period because it excludes cash flows from investing activities other than capital expenditures and cash flows from financing activities. Management accounts for this limitation by providing information about our capital expenditures and other investing and financing activities on the condensed consolidated statements of cash flows and under “—Liquidity and Capital Resources” and by presenting cash flows from investing and financing activities in our reconciliation of free cash flow. In addition, it is important to note that other companies, including companies in our industry, may not use free cash flow, may calculate free cash flow in a different manner than we do or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a comparative measure. A reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, to free cash flow is provided below:

Current wording

Free cash flow (non-GAAP). We define free cash flow as net cash provided by operating activities minus purchases of property and equipment. We believe 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 capital expenditures, can be used for strategic opportunities, including repurchasing outstanding common stock, investing in our business, making strategic acquisitions and strengthening the balance sheet. A limitation of using free cash flow rather than the GAAP measures of cash provided by or used in operating activities, investing activities, and financing activities is that free cash flow does not represent the total increase or decrease in the cash and cash equivalents balance for the period because it excludes investing activities other than capital expenditures and cash flows from financing activities. Management accounts for this limitation by providing information about our capital expenditures and other investing and financing activities on the condensed consolidated statements of cash flows and under “—Liquidity and Capital Resources” and by presenting cash flows from investing and financing activities in our reconciliation of free cash flow. In addition, it is important to note that other companies, including companies in our industry, may not use free cash flow, may calculate free cash flow in a different manner than we do or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a comparative measure. A reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, to free cash flow is provided below:

Previous 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”).

Current wording

There were no material changes to our critical accounting policies and estimates as of and for the three and nine months ended September 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 $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.

Current wording

Total revenue increased $173.5 million, or 13%, during the three months ended September 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 EMEA contributing the largest portion of the increase on an absolute dollar basis andon a percentage basis.

Previous 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.

Current wording

Service revenue increased $165.5 million, or 19%, during the three months ended September 30, 2024 compared to the same period last year. Security subscription revenue increased $101.2 million, or 20%, and technical support and other services revenue increased $64.3 million, or 17%, during the three months ended September 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 unified SASE and SecOps.

Previous 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.

Current wording

Of the service revenue recognized during the three months ended September 30, 2024,88%was included in the deferred revenue balance as of June 30, 2024. Of the service revenue recognized during thethree months ended September 30, 2023, 88% was included in the deferred revenue balance as of June 30, 2023.

Previous 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.

Current wording

Total gross margin increased 6.3 percentage points during the three months ended September 30, 2024 compared to the same period last year, primarily driven by increased product and service gross margin and a shift in the revenue mix to higher margin service revenue, partially offset by the impact of the acquisitions in the current quarter. Revenue mix shifted by 3.5 percentage points from product revenue to service revenue, as a percentage of total revenue.

Previous 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.

Current wording

Product gross margin increased 13.9 percentage points during the three months ended September 30, 2024 compared to the same period last year, primarily due to a reduction in our liability related to renegotiation of supplier contractual commitments which resulted in a reduction to cost of sales during the period, lower expedite fees, a shift in revenue mix from hardware to software and lower freight costs, partially offset by increased direct cost. Cost of product revenue was comprised primarily of third-party contract manufacturers’ costs, costs of materials used in production and inventory reserves related to excess inventory and contractual delivery commitments.

Previous wording

Service gross margin increased 2.6 percentage points during the three months ended June 30, 2024 compared to the same period last year, primarily driven by slower labor and other cost growth 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.

Current wording

Service gross margin increased 1.4 percentage points during the three months ended September 30, 2024 compared to the same period last year, because service revenue growth outpaced labor cost increase and benefited from a revenue mix shift towards higher margin security subscription services, partially offset by the impact of the acquisitions in the current quarter. 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

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.

Current wording

Research and development expense increased $30.4 million, or 19%, during the three months ended September 30, 2024 compared to the same period last year, primarily due to an increase of $26.6 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 andthe impact of the acquisitions in the current quarter. 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 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.

Current wording

Sales and marketing expense increased $11.5 million, or 2%, during the three months ended September 30, 2024 compared to the same period last year, primarily due to an increase of $19.9 million in personnel-related costs and $2.6 million in cloud hosting services costs related to sales demonstrations. The increases were partially offset by a decrease of $10.4 million in marketing program and 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 expense to increase in absolute dollars year over year during the remainder of 2024.

Previous 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.

Current wording

General and administrative expense increased $18.2 million, or 34%, during the three months ended September 30, 2024 compared to the same period last year, primarily due to an increase of $12.0 million in legal related fees and other professional services fees and $3.8 million in personnel-related costs. 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 $758.4 million during the six months ended June 30, 2024, an increase of $205.9 million, or 37%, compared to $552.5 million in the same period last year. Operating margin was 27.2% during the six months ended June 30, 2024, compared to 21.6% in the same period last year. The increase in operating margin was primarily due to 3.0 percentage points decrease in sales and marketing expense as a percentage of revenue and 2.8 percentage points increase in gross margin, partially offset by a 0.2 percentage point increase in research and development expense as a percentage of revenue.

Current wording

We generated operating income of $470.9 million during the three months ended September 30, 2024, an increase of $167.7 million, or 55%, compared to $303.2 million in the same period last year. Operating margin was 31.2% during the three months ended September 30, 2024, compared to 22.7% in the same period last year. The increase in operating margin was primarily due to 6.3 percentage points increase in gross margin and 3.6 percentage points decrease in sales and marketing expense as a percentage of revenue, partially offset by 0.7 percentage points and 0.7 percentage points increases in general and administrative expense and research and development expense as a percentage of revenue, respectively. Excluding the acquisitions in the current quarter, operating margin was 33.6% during the three months ended September 30, 2024.

Previous wording

Interest income, interest expense and other expense—net

Current wording

Interest income, interest expense, gain on bargain purchase and other income (expense)—net

Previous 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.

Current wording

Interest income increased $5.4 million during the three months ended September 30, 2024 compared to the same period last year, primarily as a result of higher 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 September 30, 2024 compared to the same period last year. Gain on bargain purchase was $106.3 million during the three months ended September 30, 2024 and is related to our acquisition of Lacework. The $18.8 million change in other income (expense)—net during the three months ended September 30, 2024 compared to the same period last year, was primarily due to an increase of $13.4 million gain on marketable equity securities and a $5.7 million decrease in foreign currency exchange losses.

Previous 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.

Current wording

Our effective tax rate was 13% for the three months ended September 30, 2024 compared to an effective tax rate of 0% for the same period last year. The provision for income taxes for the three months ended September 30, 2024 was primarily comprised of U.S. federal and state taxes, withholding taxes and foreign taxes totaling$123.6 million, which were favorably affected by a tax benefit of $33.1 million from the foreign-derived intangible income deduction (the “FDII deduction”) and excess tax benefits from stock-based compensation expense of $9.3 million.

Previous 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.

Current wording

The provision for income taxes for the three months ended September 30, 2023 was comprised of U.S. federal and state taxes, withholding taxes, and foreign taxes totaling$50.2 million, which were favorably affected by a tax benefit of$41.9 million from the FDII deduction, excess tax benefits from stock-based compensation expense of$8.6 million.

Previous wording

Total revenue increased $232.5 million, or 9%, during the six months ended June 30, 2024 compared to the same period last year. We continued to experience diversification of revenue geographically, and across customer and industry segments. Revenue from all regions grew, with EMEA contributing the largest portion of the increase on an absolute dollar basis and on a percentage basis.

Current wording

Total revenue increased $406.0 million, or 10%, during the nine months ended September 30, 2024 compared to the same period last year. We continued to experience diversification of revenue geographically, and across customer and industry segments. Revenue from all regions grew, with EMEA contributing the largest portion of the increase on an absolute dollar basis and on a percentage basis.

Previous wording

Service revenue increased $345.0 million, or 22%, during the six months ended June 30, 2024 compared to the same period last year. Security subscription revenue increased $216.6 million, or 25%, and technical support and other services revenue increased $128.4 million, or 18%, during the six 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 toon-premise and cloud-based environments and growth in SaaS solutions, including SASE and SecOps.

Current wording

Service revenue increased $510.5 million, or 21%, during the nine months ended September 30, 2024 compared to the same period last year. Security subscription revenue increased $317.8 million, or 23%, and technical support and other services revenue increased $192.7 million, or 18%, during the nine months ended September 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 toon-premise and cloud-based environments and growth in SaaS solutions, including unified SASE and SecOps.