Fortinet Inc

Previous 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;

Current wording

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

Previous 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;

Current wording

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

Previous wording

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

Current wording

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

Previous wording

•expected impact of plans and strategy for the acceleration of our points of presence (“PoP”) deployment;

Current wording

•expected impact of plans and strategy for the acceleration of our data center footprint and our PoPs deployment;

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. 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.

Current wording

Fortinet is a leader in cybersecurity, driving 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 (“SecOps”). As of March 31, 2025, our end-customers were located in over 100 countries and included enterprises across a wide variety of market verticals, including financial services, retail, healthcare and operational technology (“OT”) market verticals, communication and security service providers, and government organizations. As of March 31, 2025, we had approximately 80% of the Fortune 100 companies and approximately 72% 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 March 31, 2025, we held 1,045 U.S. patents and 1,381 global patents, including 271 AI-related patents. We have been recognized in over 140 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. 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.

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 SaaS solutions. When delivered through 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. Our network firewall offerings consist of a FortiGate data center, hyperscale and distributed firewalls, as well as encrypted applications (secure sockets layer inspection, virtual private network and Internet Protocol Security 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. Our 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 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.

Current wording

•Unified Secure Access Service Edge (SASE)—As applications move to the cloud and hybrid workforce is now the norm, enabling secure access for users with zero trust framework becomes important. The Fortinet Unified SASE solution includes a single-vendor SASE solution that includes firewall, SD-WAN, secure web gateway, cloud access services broker, DLP and zero trust network access to deliver flexible secure access for all users. We are 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 cloud-centric architecture powered by FortiOS. Our global and scalable cloud network includes over 150 PoPs to deliver the seamless secure access experience. Given this, we believe we are well positioned to support customers expanding from SD-WAN to a single-vendor SASE platform. Additionally, we offer a full suite of comprehensive, integrated cloud security solutions that enable customers to secure their applications from code to cloud. Our solutions include application security that includes our web application firewalls, cloud network security with virtualized firewalls and cloud-native firewalls, cloud-native application protection and code security. We deliver a holistic approach to cloud security, offering a single unified platform, consolidating protection across multiple disparate tools, including coding, deploying, and running applications across hybrid and multi-clouds. Additionally, we also offer flexible consumption licensing programs that enable organizations to dynamically optimize their cloud security needs and investments as well as readily meet their cloud minimum spend commitment obligations with Cloud Service Providers.

Previous wording

FortiGuard Labs is our cybersecurity threat intelligence and research organization comprised of experienced threat hunters, researchers, analysts, engineers and data scientists who develop and utilize machine learning and AI technologies to provide timely protection updates and actionable threat intelligence for the benefit of our customers. FortiGuard Security Services are a suite of AI-powered security capabilities that are natively integrated as part of the Fortinet Security Fabric to deliver coordinated detection and enforcement across the entire attack surface. The portfolio consists of FortiGuard application security services, content security services, device security services, NOC/SOC security services and web security services.

Current wording

FortiGuard and Other Security Services are a suite of AI-powered security capabilities that are natively integrated as part of the Fortinet Security Fabric to deliver coordinated detection and enforcement across the entire attack surface. The portfolio consists of FortiGuard application security services, content security services, device security services, NOC/SOC security services and web security services.

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 a 15-minute response time 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 service-level agreements and priority hardware replacement through in-country and local 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 Elite, FortiCare Premium and FortiCare Essential. The FortiCare Elite service aims to provide a 15-minute response time for key product families.

Previous 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.

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 two million certifications to date.

Previous wording

•Total gross profit was $1.24 billion and $3.45 billion during the three and nine months ended September 30, 2024, an increase of 22% and 16%, respectively, compared to $1.02 billion and $2.97 billion in the same periods last year.

Current wording

•Total gross profit was $1.25 billion during the three months ended March 31, 2025, an increase of 19%, compared to $1.05 billion in the same period last year.

Previous wording

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

Current wording

•Cash, cash equivalents, short-term and long-term investments were $4.82 billion as of March 31, 2025.

Previous wording

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

Current wording

•Deferred revenue was $6.42 billion, including short-term deferred revenue of $3.34 billion, as of March 31, 2025.

Previous 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.

Current wording

•Cash flows from operating activities were $863.3 million, which includes $14.0 million of proceeds from a legal victory around an IP matter, during the three months ended March 31, 2025, an increase of $32.9 million, or 4%, 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 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.

Current wording

Revenue continues to be diversified globally, which remains a key strength of our business. During the three months ended March 31, 2025, the Americas region, the Europe, Middle East and Africa region and the Asia Pacific region contributed 41%, 41% and 18% of our total revenue, respectively, and increased 13%, 16%, and 10% compared to the same period last year, respectively.

Previous 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.

Current wording

Service revenue growth during the three months ended March 31, 2025 was 14%, as compared to the same period last year, was primarily driven by the strength of our security subscription revenue, which grew 16%. 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 2025, with growth opportunities that include unified SASE and SecOps offerings as well as the year over year increase in current deferred revenue. While service revenue is expected to grow for the remainder of 2025, we anticipate that the growth rates will continue to decrease for the remainder of 2025 due to slowing short-term deferred revenue growth over thepast several quarters.

Previous 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.

Current wording

Our billings were diversified on a geographic basis. During the three months ended March 31, 2025, eight countries represented approximately 50% of our billings and the remaining approximately 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 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.

Current wording

Operating expenses as a percentage of revenue decreased 2.3 percentage points, during the three months ended March 31, 2025 compared to the same period last year, mainly because our revenue growth outpaced our personnel costs growth. Headcount increased to 14,556 employees as of March 31, 2025, an 8% increase compared to 13,522 as of March 31, 2024.

Previous wording

Operating margin has improved 8.5 and 6.6 percentage points, respectively, during the three and nine months ended September 30, 2024, as a result of improvement in gross margin and decrease in operating expenses as a percentage of revenue. We expect our operating margin to increase for full year 2024 compared to full year 2023.

Current wording

Operating margin increased 5.8 percentage points during the three months ended March 31, 2025, as a result of improvement in gross margin and decrease in operating expenses as a percentage of revenue. We expect our operating margin to decrease for the full year of 2025 compared to 2024 as we grow our sales and marketing and research and development workforce organically and through acquisitions, increase our product development investments, and expand our data center footprint and our colocation and cloud hosting capacity to support business growth.

Previous 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.

Current wording

Our overall performance depends in part on worldwide economic and geopolitical conditions, such as trade policies and tariffs, GDP growth or contraction (both domestically and internationally), geopolitical instability and uncertainty, the war in Ukraine or tensions between China and Taiwan, and their impact on customer behavior. Worsening economic conditions, including tariffs, inflation, changing interest rates and other trade disruptions, slower growth, any recession, fluctuations in foreign exchange rates and other changes in economic conditions, may result in decreased sales productivity, lower growth and adversely affect our results of operations and financial performance. We have seen, and could continue to see, 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. For example, earlier this year the United States announced tariffs on imported goods from most countries, some of which have been temporarily suspended or adjusted from time to time. U.S. tariffs, and any new or additional retaliatory tariffs that could be imposed by other countries in response to such U.S. tariffs could have a material adverse impact on global trade, supply chains worldwide, and other worldwide economic and geopolitical conditions, which could increase our product costs for the remainder of 2025 and beyond, and also affect customer sentiment in deciding whether to purchase our products. We continue to monitor the impact of tariffs on our business.

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 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.

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, systems integrators and large enterprises. We also sell our software licenses and cloud delivered 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 or users, depending on the end-customer’s size and security requirements.

Previous 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.

Current wording

Our customers purchase our hardware products, software licenses, SaaS subscriptions and cloud-delivered solutions, including our FortiGuard security subscriptions and FortiCare technical support services. Depending on the solution, these may be sold in a bundle or standalone as part of a solution sale. 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 large enterprises.

Previous 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.

Current wording

We offer our products hosted in our own data centers, PoPs, and through colocations and major cloud service providers, including Amazon Web Services, Microsoft Azure 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 $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.

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 $6.42 billion as of March 31, 2025, an increase of $57.5 million, or 1%, from December 31, 2024. Short-term deferred revenue was $3.34 billion as of March 31, 2025, an increase of $63.2 million, or 2%, from December 31, 2024.

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 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.

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 and cash flows. 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 $1.60 billion for the three months ended March 31, 2025, an increase of 14% compared to $1.41 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 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.

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.

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. 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:

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 and excluding any significant non-recurring items, such as proceeds from IP matters. 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 and net of proceeds from IP matters, 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 significant non-recurring items, such as proceeds from IP matters, investing activities other than capital expenditures and cash flows from financing activities. Management accounts for this limitation by providing information about our proceeds from IP matters, 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 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”).

Current wording

There were no material changes to our critical accounting policies and estimates as of and for the three months ended March 31, 2025, as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K filed with the SEC on February 21, 2025 (the “Form 10-K”).

Previous 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.

Current wording

Total revenue increased $186.4 million, or 14%, during the three months ended March 31, 2025 compared to the same period last year. We continued to experience diversification of revenue geographically, and across customer and indu stry verticals. 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 $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.

Current wording

Service revenue increased $136.2 million, or 14%, during the three months ended March 31, 2025 compared to the same period last year. Security subscription revenue increased $86.2 million, or 16%, and technical support and other services revenue increased $50.0 million, or 12%, during the three months ended March 31, 2025 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 nine months ended September 30, 2024, 77% was included in the deferred revenue balance as of December 31, 2023. Of the service revenue recognized during the nine months ended September 30, 2023, 73% was included in the deferred revenue balance as of December 31, 2022. We expect service revenue growth rates to ease for the remainder of 2024 due to slowing deferred revenue over the past several quarters, partially offset by increases in SaaS revenue.

Current wording

Of the service revenue recognized during the three months ended March 31, 2025,90%was included in the deferred revenue balance as of December 31, 2024. Of the service revenue recognized during thethree months ended March 31, 2024, 90% was included in the deferred revenue balance as of December 31, 2023. We expect service revenue growth rates to continue to decrease for the remainder of 2025 due to slowing short-term deferred revenue growth over the past several quarters.

Previous wording

Total gross margin increased 6.3 and 4.1 percentage points, respectively, during the three and nine months ended September 30, 2024 compared to the same periods last year, primarily driven by increased product and service gross margin and a shift in the revenue mix to higher margin service revenue. We expect our gross margin to increase for full year 2024 compared to full year 2023.

Current wording

Total gross margin increased 3.5 percentage points during the three months ended March 31, 2025 compared to the same period last year, primarily driven by increased product gross margin.

Previous wording

Product gross margin increased 3.9 percentage points during the nine months ended September 30, 2024 compared to the same period last year, primarily due to decrease in inventory related reserves expense, lower expedite fees, a shift in revenue mix from hardware to software and lower freight costs, partially offset by reduced prices on certain products. During the first quarter of 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 related to excess inventory and contractual delivery commitments.

Current wording

Product gross margin increased 12.0 percentage points during the three months ended March 31, 2025 compared to the same period last year, as inventory related reserves expense normalized from the elevated levels we saw in the first half of 2024. Cost of product revenue was comprised primarily of third-party contract manufacturers’ costs, and costs of materials used in production.

Previous 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.

Current wording

Research and development expense increased $25.6 million, or 15%, during the three months ended March 31, 2025 compared to the same period last year, primarily due to an increase of $20.7 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 recent acquisitions. In addition, non-personnel-related product development costs increased $7.2 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 2025.

Previous 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.

Current wording

Sales and marketing expense increased $41.6 million, or 8%, during the three months ended March 31, 2025 compared to the same period last year, primarily due to an increase of $28.4 million in personnel-related costs. In addition, marketing program and related expenses increased $5.6 million and amortization expense of certain intangible assets increased $4.2 million, partially offset by the favorable impact of foreign currency fluctuations. We currently intend to continue to make investments in sales and marketing resources, which are 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 2025.

Previous 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.

Current wording

General and administrative expense increased $3.4 million, or 6%, during the three months ended March 31, 2025 compared to the same period last year, primarily due to an increase of $3.1 million in personnel-related costs. We currently expect general and administrative expense to increase in absolute dollars year over year during the remainder of 2025.

Previous wording

We generated operating income of $1.23 billion during the nine months ended September 30, 2024, an increase of $373.6 million, or 44%, compared to $855.7 million in the same period last year. Operating margin was 28.6% during the nine months ended September 30, 2024, compared to 22.0% in the same period last year. The increase in operating margin was primarily due to 4.1 percentage points increase in gross margin and 3.2 percentage points decrease in sales and marketing expense as a percentage of revenue, partially offset by 0.4 percentage points and 0.3 percentage points increases in research and development expense and general and administrative expense as a percentage of revenue, respectively.

Current wording

We generated operating income of $453.8 million during the three months ended March 31, 2025, an increase of $132.6 million, or 41%, compared to $321.2 million in the same period last year. Operating margin was 29.5% during the three months ended March 31, 2025, compared to 23.7% in the same period last year. The 5.8 percentage points increase in operating margin was primarily due to 3.5 percentage points increase in gross margin and 1.8 percentage points decrease in sales and marketing expense and a gain on intellectual property matters.

Previous wording

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

Current wording

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

Previous 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.

Current wording

Interest income increased $12.1 million during the three months ended March 31, 2025 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 interest rates. Interest expense remained comparatively flat during the three months ended March 31, 2025 compared to the same period last year. The $29.0 million change in other income (expense)—net during the three months ended March 31, 2025 compared to the same period last year, was primarily due to a gain on bargain purchase of $39.9 million related to our acquisition of Linksys and a $4.5 million increase in foreign currency exchange gains, partially offset by an increase of $15.1 million loss on marketable equity securities.

Previous 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.

Current wording

Our effective tax rate was 19% for the three months ended March 31, 2025 compared to an effective tax rate of 11% for the same period last year. The provision for income taxes for the three months ended March 31, 2025 was primarily comprised of U.S. federal and state taxes, withholding taxes and foreign taxes totaling$128.5 million, which includeda tax provision of $30.6 million related to the derecognition of deferred tax assets from the business combination with Linksys, a tax benefit of $25.8 million from the foreign-derived intangible income deduction (the “FDII deduction”) and excess tax benefits from stock-based compensation expense of $36.8 million.