FORTINET, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. These statements include, among other
things, statements concerning our expectations regarding:

•the effects of supply chain constraints and the global chip and component
shortages and other factors affecting our manufacturing capacity, delivery, cost
and inventory management;

• the duration and impact of the COVID-19 pandemic, including the different variants of COVID-19, and the establishment of “return to office” plans;

•continued growth and market share gains;

•the variability of sales of certain product categories from one year to another and from one quarter to another;

•the expected impact of the sales of certain products and services;

•the impact of macro-economic, geopolitical factors and other disruption on our
manufacturing or sales, including the impact of the COVID-19 pandemic and other
public health issues and natural disasters;

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

•the impact of our product innovation strategy;

•the effects of government regulation, tariffs and other policies;

•drivers of long-term growth and operating leverage, such as sales productivity and capacity, functionality and value of our subscription service offerings;

•growing our sales to businesses, service providers and government
organizations, our ability to execute these sales and the complexity of selling
to all segments (including the increased competition and unpredictability of
timing associated with sales to larger enterprises), the impact of sales to
these organizations on our long-term growth, expansion and operating results,
and the effectiveness of our sales organization;

• our ability to employ appropriately qualified and efficient sales, support and engineering employees;

•risks and expectations related to acquisitions and equity interests in private
and public companies, including integration issues related to product plans and
the acquired technology, and risks of negative impact by such acquisitions and
equity investments on our financial results;

•changes in sales, cost of sales and gross margin;

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

•the expectation that our operating expenses will increase in absolute dollars in 2022;

•expectations that proceeds from the exercise of stock options in future years
will be adversely impacted by the increased mix of restricted stock units versus
stock options granted;

• expectations regarding uncertain tax benefits and our effective domestic and global tax rates, and the impact of the Tax Cuts and Jobs Act and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”);

•expectations regarding expenditures related to real estate acquisitions and developments, investments in data centers, as well as other capital expenditures and the impact on free cash flow;

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•estimates of a range of 2022 spending on capital expenditures;

•competition in our markets;

•statements regarding expected results and responsibilities in the event of a dispute;

•our intentions regarding share repurchases and the sufficiency of our existing
cash, cash equivalents and investments to meet our cash needs, including our
debt servicing requirements, for at least the next 12 months;

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

•Adoption and impact of new accounting standards.

These forward-looking statements are subject to certain risks and uncertainties
that could cause our actual results to differ materially from those reflected in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this Annual
Report on Form 10-K and, in particular, the risks discussed under the heading
"Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K and those
discussed in other documents we file with the SEC. We undertake no obligation,
and specifically disclaim any obligation, to revise or publicly release the
results of any revision to these and any other forward-looking statements. Given
these risks and uncertainties, readers are cautioned not to place undue reliance
on such forward-looking statements.

Company Overview

Fortinet is a global leader in cybersecurity solutions provided to a wide
variety of organizations, including enterprises, communication service providers
and security service providers, government organizations and small businesses.
Our cybersecurity solutions are designed to provide broad visibility and
segmentation of the digital attack surface through our integrated Fortinet
Security Fabric cybersecurity mesh platform, which features automated
protection, detection and response along with consolidated visibility across
both Fortinet developed solutions and a broad ecosystem of third-party solutions
and technologies. The Fortinet Security Fabric cybersecurity mesh platform
leverages a common operating system or integration to this operating system
across our product offerings and helps organizations better secure their
environments and reduce their security and network complexities. The Fortinet
Security Fabric has an open architecture designed to connect Fortinet solutions
and third-party solutions in a single ecosystem, enabling holistic detection and
coordinated response across the attack cycle and surface through integration and
automation.

Our product offerings consist of our FortiGate network security physical and
virtual products and our non-FortiGate physical and virtual, software, and
cloud-hosted products. In addition to high performing security and networking
features, we offer a rich set of cloud-delivered security services that can be
added to different products across the Fortinet Security Fabric and customized
to the organization's use cases.

Our cloud- and hosted- products and services include sandboxing, endpoint
detection and response ("EDR"), email security, web application and API security
and cloud networking security as well as Fortinet Security Fabric management and
analytics.

Our FortiGuard security services are enabled by FortiGuard Labs, which provides
threat research and artificial intelligence capabilities from a cloud network to
deliver coordinated protection for the ever-expanding attack surface through
FortiGate appliance and virtual machine as well as all Fortinet Security Fabric
products that are registered by the end-customer.

Our proprietary Security Processing Units ("SPUs") are Application-Specific
Integrated Circuits that are implemented in our physical FortiGate appliances
and are designed to enhance the security processing capabilities implemented in
software by accelerating computationally intensive tasks such as firewall policy
enforcement, software-defined wide-area network ("SD-WAN"), network address
translation, Intrusion Prevention Systems ("IPS"), threat detection and
encryption. We also provide virtualized Security Processing Units ("vSPUs")
across our FortiGate virtual appliances to deliver similar accelerated
capabilities when run in virtualized environments.

Our FortiOS operating system provides the foundation for the operation of all
FortiGate network security appliances, whether physical, virtual, private- or
public-cloud based. FortiOS directs the operations of processors and SPUs and
provides system management functions. We make regular updates to FortiOS
available through our FortiCare support services.

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FortiOS, its associated security and networking functions and products that run
or are integrated with FortiOS are combined to form the Fortinet Security Fabric
cybersecurity mesh platform. This approach to security ties discrete security
solutions together into an integrated whole that provides centralized management
and visibility, automation and intelligence sharing to simplify network and
security operations and rapid response to threats.

The areas of intervention of our company consist of:

•Security-Driven Networking-Our Security-Driven Networking solutions enables the
convergence of networking and security across all edges to provide
next-generation firewall ("NGFW"), software-defined wide area network
("SD-WAN"), LAN Edge (Wi-Fi and switch) and secure access service edge ("SASE").
We derive a majority of product sales from our FortiGate network security
appliances. FortiGate network security appliances include a broad set of
built-in security and networking features and functionalities, including
firewall, next-generation firewall, secure web gateway, secure sockets layer
("SSL") inspection, software-defined wide area network ("SD-WAN"), Intrusion
Prevention system ("IPS"), sandboxing, data leak prevention, virtual private
network ("VPN"), switch and wireless controller and wide area network ("WAN")
edge. Our network security appliances are managed by our FortiOS network
operating system, which provides the foundation for FortiGate security
functions. We enhance the performance of our network security appliances from
branch to data center by designing and implementing Security Processing Units
("SPUs") technology within our appliances, enabling us to add security and
network functionality with minimal impact to network throughput performance.
Along with our secure Wi-fi access points and switches, Fortinet helps
organizations secure their networks across campuses, branches, and
work-from-home deployments.

•Zero Trust Access-The Fortinet Security Fabric cybersecurity mesh platform
extends beyond the network to cover other attack vectors. Our Zero Trust Access
solutions enable customers to know and control who and what is on their network,
in addition to providing security for work from anywhere ("WFA"). Zero Trust
Access solutions include FortiNAC, FortiAuthenticator, FortiClient and
FortiToken. Additionally, the proliferation of internet of things ("IoT") and
operational technology ("OT") devices has generated new opportunities for us to
grow our business. Our network access control solutions provide visibility,
control and automated event responses in order to secure IoT and OT devices.

•Adaptive Cloud Security-We help customers connect securely to and across their
individual, hybrid cloud, multi-cloud, and virtualized data center environments
by offering security through our virtual firewall and other software products
and through integrated capabilities with major cloud platforms. Our public and
private cloud security solutions, including virtual appliances and hosted
solutions, extend the core capabilities of the Fortinet Security Fabric
cybersecurity mesh platform in and across cloud environments, delivering
security that follows their applications and data. Our Secure SD-WAN for
Multi-Cloud solution automates deployment of an overlay network across different
cloud networks and offers visibility, control and centralized management that
integrates functionality across multiple cloud environments. Our Cloud Security
portfolio also includes securing applications, including email and web. Fortinet
cloud security offerings are available for deployment in major public and
private cloud environments, including Alibaba Cloud, Amazon Web Services, Google
Cloud, IBM Cloud, Microsoft Azure, Oracle Cloud and VMWare Cloud. We also offer
managed IPS and web application firewall ("WAF") rules delivered by FortiGuard
Labs as an overlay service to native security offerings offered by Amazon Web
Services.

•AI-Driven Security Operations-We develop and provide a range of products and
services that enable the security operations center ("SOC") teams to identify,
investigate and remediate potential incidents in which cybercriminals bypass
prevention-oriented controls. Given the breadth of the attack surface to
monitor, as well as the volume and sophistication of cyber threats, artificial
intelligence ("AI") is a key part of these offerings, which include: FortiGuard
and other security subscription services, modern endpoint security with EDR, a
range of breach-protection technologies plus our security information and event
management ("SIEM") and security orchestration, automation and response
("SOAR"), all of which can be applied across the entire Fortinet Security Fabric
cybersecurity mesh platform. These solutions automatically deliver security
intelligence and insights that enable organizations to protect against and
respond to threats faster through integration with Fortinet and third-party
controls.

•Security as a Service-Our customers purchase our natively integrated FortiGuard
security subscription services as an add-on to products and solutions across the
Fortinet Security Fabric with the goal of receiving real-time threat
intelligence and protection updates. The rich set of FortiGuard services is
built from the ground up to provide comprehensive protection for users and
applications, including market leading offerings for IPS, Web, video and DNS
filtering, AV and cloud sandbox as well as IoT and OT Security. The FortiGuard
security services are provided from our FortiGuard Labs and cloud-delivered to
provide real-time unified protection across network endpoint and cloud.
FortiCare technical support services and the support of technical account
managers, resident engineers and professional service consultants for
implementations or training services.

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•Support and Professional Services - Fortinet offers technical support, FortiOS
updates and extended product warranty through our FortiCare support services. In
addition to our technical support services, we offer a range of advanced
services, including premium support, professional services and expedited
warranty replacement. Our professional service offerings include resident
engineers and professional service consultants for implementations or trainings.

Financial Highlights

•Total revenue was $3.34 billion in 2021, an increase of 29% compared to $2.59
billion in 2020. Product revenue was $1.26 billion in 2021, an increase of 37%
compared to $916.4 million in 2020. Service revenue was $2.09 billion in 2021,
an increase of 24% compared to $1.68 billion in 2020.

• Total gross profit was $2.56 billion in 2021, an increase of 26% compared to
$2.02 billion in 2020.

•We generated operating income of $650.4 million in 2021, an increase of 22%
compared to $531.8 million in 2020. Operating income for 2021 included gains on
an IP matter of $4.6 million.

• Cash, cash equivalents, investments and marketable equity securities have been $2.99 ​​billion from December 31, 2021an augmentation of $1.04 billioni.e. 53%, of
December 31, 2020.

•In March 2021we issued $1.0 billion senior notes. Long-term debt, net of unamortized discount and debt issue costs, was $988.4 million from
December 31, 2021. There was no such debt outstanding at December 31, 2020.

• In 2021, we repurchased 2.6 million common shares under the buyback program for an aggregate purchase price of $741.8 million. In 2020, we repurchased 11.7 million common shares for a total purchase price of $1.08 billion.

•Deferred revenue was $3.45 billion as of December 31, 2021, an increase of
$847.6 million, or 33%, from December 31, 2020. Short-term deferred revenue was
$1.78 billion as of December 31, 2021, an increase of $384.6 million, or 28%,
from December 31, 2020.

•We generated cash flows from operating activities of $1.50 billion in 2021, an
increase of $416.0 million, or 38%, compared to 2020. We received $50.0 million
of proceeds from an IP matter in the first quarter of 2020.

• Total bookings were $4.33 billion for 2021, an increase of 40.2% compared to
$3.09 billion in 2020. We define reservations as the total value of all orders received during the fiscal year.

•Backlog was $161.9 million as of December 31, 2021, an increase of $149.7
million compared to $12.2 million as of December 31, 2020. Backlog represents
orders received but not fulfilled and excludes backlog related to Alaxala
Networks Corporation's ("Alaxala") products and services of $26.0 million.

•On August 31, 2021, we closed an acquisition of 75% of the equity interests in
Alaxala, a privately-held network hardware equipment company in Japan, to help
broaden our offering of secure switches integrated with FortiGate Firewalls and
Security Fabric functionality, and, over time, to innovate and rebrand certain
of Alaxala's switches to offer a broader suite of secure switches globally. From
September 1, 2021 to December 31, 2021, Alaxala's revenue was $44.4 million, or
1.3% of total revenue during the year ended December 31, 2021. During the first
quarter of 2021 and subsequently in the third quarter, we made an equity method
investment in Linksys which provides router connectivity solutions to the
consumer and small business markets.

Our revenue growth was driven by both product and service revenue. On a
geographic basis, revenue continues to be diversified globally, which remains a
key strength of our business. In 2021, the Americas region, the Europe, Middle
East and Africa ("EMEA") region and the Asia Pacific ("APAC") region contributed
41%, 38% and 21% of our total revenue, respectively, and increased by 26%, 29%
and 35% compared to 2020, respectively.

Product revenue grew 37% in 2021. Product revenue growth was consistent with an
elevated cyber threat landscape. FortiGate products accounted for more than half
of the product revenue growth in 2021. While Secure SD-WAN contributed to
product revenue growth, the main driver was the strong demand for the wide range
of other operating system capabilities embedded in the FortiGate products. We
experienced strong product revenue growth across many of our security fabric
platform products, including our OT solutions, secure access products and
software licenses. The impact of the increase in backlog was largely seen in
certain fabric platform products. Service revenue growth of 24% in 2021 was
driven by the strength
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Table of contents of our FortiGuard subscription revenue and other security services and FortiGate technical support and other services revenue, which grew 22% and 27%, respectively, in 2021.

Our billings were diversified on a geographic basis. In 2021, six countries accounted for approximately 50% of our billings and the remaining 50% in total came from over 100 countries that individually contributed less than 3% of our billings.

In 2021 and 2020, we recognized gains of $4.6 million and $40.2 million,
respectively, on an IP matter in connection with a mutual covenant-no-to-sue and
release agreement with a competitor in the network security industry. Excluding
the gains on the IP matter, operating expenses as a percentage of revenue
decreased by approximately 1.9 percentage points compared to 2020. Headcount
increased by 24% to 10,195 employees and contractors as of December 31, 2021, up
from 8,238 as of December 31, 2020.

Update on the COVID-19 pandemic

The United States and the global community we serve are facing unprecedented
challenges posed by the COVID-19 pandemic, including the various COVID-19
variants. In response to the pandemic, we undertook a number of actions to
protect our employees, including restricting travel and directing many of our
employees to work from home. In certain geographies, we have started to
transition back to an in-person working mode, allowing increasing numbers of
employees to work from our offices with reasonable precautions and, in all
cases, subject to abiding by local legal restrictions. We intend to continue to
monitor and abide by local employee health and safety protocols and other
regulations as applicable to each local office.

While the broader implications of the COVID-19 pandemic on our employees and
overall financial performance continue to evolve, we have seen certain impacts
on our business and operations, results of operations, financial condition, cash
flows, liquidity and capital and financial resources as of and during the year
ended December 31, 2021. Conversely, some aspects of our business do not appear
to have been significantly affected. During the year ended December 31, 2021, we
have observed the following:

•We have seen supply chain challenges increase, including chip and other
component shortages and increased costs for certain chips and other components
and shipping, and we do not have enough inventory to promptly meet all demand
for all products.

•In most countries, our employees' ability to travel has been reduced. In-person
sales and marketing events or meetings that would normally have been held were
canceled, postponed or converted into virtual events. However, as certain
country's restrictions start to ease, we have started to see an increase in
expenses related to travel and marketing events. Although we cannot predict if
or when such expenses will return to pre-pandemic levels, as of December 31,
2021, we have started to see an increase in such expenses as compared to the
same period last year.

•In order to mitigate supply chain disruption and other supply chain risks and
in anticipation of future demand, we worked to increase our on-hand stock of
certain products. We increased our commitments with certain suppliers to secure
capacity, and are meeting regularly with our contract manufacturers and
component suppliers to manage future commitments, address component shortages
and monitor delivery of finished goods. We have also transitioned primarily to
air shipping to avoid port congestion and extended ocean freight time.

•In accordance with the CARES Act, we have deferred the deposit and payment of
our employer's share of Social Security taxes. This did not materially affect
net cash provided by operating activities during the period.

Going forward, the situation remains uncertain, rapidly changing and hard to
predict, and the COVID-19 pandemic may have a material negative impact on our
future periods. If we experience greater component, shipping or inventory
challenges than we expect or significant changes in our billings growth rates,
it will negatively impact billings and product revenue in the current quarter
and FortiGuard and FortiCare service revenues in subsequent quarters, as we sell
annual and multi-year service contracts that are recognized ratably over the
contractual service term. In addition, the broader implications of the pandemic
on our business and operations and our financial results, including the extent
to which the effects of the pandemic will impact future results and growth in
the cybersecurity industry, remain uncertain. The extent of the impact of the
COVID-19 pandemic on our operational and financial performance will depend on
ongoing developments, including the duration and spread of the virus and its
variants, the impact on our end-customers' spending, the volume of sales and
length of our sales cycles, the impact on our partners, suppliers, and
employees, actions that may be taken by governmental authorities and other
factors identified in Part I, Item 1A "Risk Factors" in this Form 10-K. Given
the dynamic nature of these circumstances, the full impact of the COVID-19
pandemic on our business and operations, results of operations, financial
condition, cash flows, liquidity and capital and financial resources cannot be
reasonably estimated at this time.

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Business Model

We typically sell our security solutions to distributors that sell to networking
security focused resellers and to service providers and managed security service
providers ("MSSPs"), who, in turn, sell to end-customers or use our products and
services to provided hosted solutions to other enterprises. At times, we also
sell directly to large service providers and major systems integrators. 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 telecommunications, government, financial services,
retail, technology, education, manufacturing and healthcare. An end-customer
deployment may involve as few as one or as many as thousands of appliances and
other Fortinet Security Fabric cybersecurity mesh platform products, depending
on the end-customer's size and security requirements.

We also offer our products hosted in our own data centers and through major
cloud providers, and have recognized revenue on a usage basis from Alibaba
Cloud, Amazon Web Services, Google Cloud, IBM Cloud, Microsoft Azure and Oracle
Cloud. We have also recognized revenue from customers who deploy our products in
a bring-your-own-license ("BYOL") arrangement in private clouds or at cloud
providers. In a BYOL arrangement, a customer purchases a software license from
us through our channel partners and deploys the software in a cloud provider's
environment. Similarly, customers may purchase such a license from us and deploy
in third-party clouds or in their private cloud.

Our customers purchase our hardware products and software licenses, 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 security and technical support services. Standard payment terms
are generally no more than 60 days, though we continue to offer extended payment
terms to certain distributors.

Key indicators

We monitor a number of key metrics, including the key financial metrics set
forth below, in order to help us evaluate growth trends, establish budgets,
measure the effectiveness of our sales and marketing efforts, and assess
operational efficiencies. The following table summarizes revenue, deferred
revenue, billings (non-GAAP), net cash provided by operating activities, and
free cash flow (non-GAAP). We discuss revenue below under "-Components of
Operating Results," and we discuss net cash provided by operating activities
below under "-Liquidity and Capital Resources." Deferred revenue, billings
(non-GAAP), and free cash flow (non-GAAP) are discussed immediately below the
following table.
                                                      Year Ended or As of December 31,
                                                     2021               2020           2019

                                                                (in millions)
  Revenue                                     $    3,342.2           $ 2,594.4      $ 2,163.0
  Deferred revenue                            $    3,452.9           $ 2,605.3      $ 2,109.1
  Billings (non-GAAP)                         $    4,181.4           $ 3,090.0      $ 2,602.9
  Net cash provided by operating activities   $    1,499.7           $ 1,083.7      $   808.0
  Free cash flow (non-GAAP)                   $    1,203.8           $   907.8      $   715.8


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 subscription and FortiCare technical support
service contracts, which is recognized as revenue ratably over the contractual
service period. We monitor our deferred revenue balance, 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 $3.45 billion as of
December 31, 2021, an increase of $847.6 million, or 33%, from December 31,
2020.

Billings (non-GAAP). We define billings as revenue recognized in accordance with
generally accepted accounting principles in the United States ("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) and an
adjustment due to adoption of Accounting Standards Update ("ASU") 2021-08 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 FortiGuard security and FortiCare 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 $4.18
billion for 2021, an increase of 35% compared to $3.09 billion in 2020.
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Contents

A reconciliation of revenue, the most directly comparable financial measure
calculated and presented in accordance with GAAP, to billings is provided below:
                                                                      Year Ended December 31,
                                                           2021                2020                2019

                                                                           (in millions)
Billings:
Revenue                                                $  3,342.2          $  2,594.4          $  2,163.0
Add: Change in deferred revenue                             847.6               496.2               442.3

Less: Balance of deferred revenue acquired in business combinations

                                                 (4.1)               (0.6)               (2.4)
Less: Adjustment due to adoption of ASU 2021-08              (4.3)                  -                   -
Total billings (non-GAAP)                              $  4,181.4          

$3,090.0 $2,602.9



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 face of
the 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:
                                                               Year Ended December 31,
                                                          2021            2020           2019

                                                                    (in millions)
Free Cash Flow:
Net cash provided by operating activities             $  1,499.7      $  1,083.7      $  808.0
Less: Purchases of property and equipment                 (295.9)         (125.9)        (92.2)
Less: Proceeds from intellectual property matter               -           (50.0)            -
Free cash flow (non-GAAP)                             $  1,203.8      $    907.8      $  715.8
Net cash used in investing activities                 $ (1,325.1)     $    

(72.8) $(502.3)
Net cash provided by (used in) financing activities $82.8 $(1,171.6) $(195.6)

Components of operating results

Income. We generate the majority of our revenue from the sale of our hardware and software products and from the amortization of amounts included in deferred revenue related to previous sales of FortiGuard Security Subscription and FortiCare Technical Support Services. We also track revenue from cloud security solutions, professional services, and training.

Our total turnover is made up of the following:

•Product revenue. Product revenue is primarily generated from sales of our
physical and virtual machine appliances. The majority of our product revenue
continues to be generated by our FortiGate product line. Product revenue also
includes revenue derived from sales of Fabric appliance and software products.
As a percentage of total revenue, our product revenue has varied from quarter to
quarter.

•Revenue from services. Services revenue is primarily derived from FortiGuard Security Subscription Services and FortiCare Technical Support Services. We recognize FortiGuard security subscription revenue and

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FortiCare technical support services over the contractual service period. Our
typical contractual support and subscription term is one to five years. We also
generate a small portion of our revenue from other services, for which we
recognize revenue as the services are provided, and cloud-based services, for
which we recognize revenue as the services are delivered or on a monthly usage
basis. As a percentage of total revenue, we continue to expect service revenue
to be higher than product revenue. Our service revenue growth rate depends
significantly on the growth of our customer base, the expansion of our service
bundle offerings, the expansion and introduction of new service offerings, the
attach rate of service contracts to new product sales, and the renewal of
service contracts by our existing customers.

Our total cost of revenue includes the following:

•Cost of product revenue. The majority of the cost of product revenue consists
of third-party contract manufacturers' costs and the costs of materials used in
production. Our cost of product revenue also includes supplies, shipping costs,
personnel costs associated with logistics and quality control, facility-related
costs, excess and obsolete inventory costs, warranty costs and amortization of
intangible assets. Personnel costs include direct compensation benefits and
stock based compensation.

•Cost of service revenue. Cost of service revenue is primarily comprised of
personnel costs, third-party repair and contract fulfillment, data center costs,
colocation expenses and cloud hosting, supplies and facility-related costs.

Gross margin. Gross profit as a percentage of revenue, or gross margin, has been
and will continue to be affected by a variety of factors, including the average
sales price of our products, product costs, the mix of products sold and the mix
of revenue between hardware products, software licenses and services and any
excess inventory write-offs. Service revenue and software licenses have had a
positive effect on our total gross margin given the higher gross margins
compared to hardware product gross margins. During 2021, product gross margin
benefited from gains in average selling price, as well as lower direct and
indirect product costs as a percentage of product revenue. It also benefited
from product mix, software revenue growth and a stable product transition
environment. Service gross margin benefited from renewals and continued sales of
services and subscriptions, growing faster than related expenses. Overall gross
margin in 2022 will be impacted by service and product revenue mix.

Operating expenses. Our operating expenses consist of research and development,
sales and marketing and general and administrative expenses. Personnel costs are
the most significant component of operating expenses and consist primarily of
salaries, benefits, bonuses, sales commission and stock-based compensation. We
expect personnel costs to continue to increase in absolute dollars as we expand
our workforce.

•Research and development. Research and development expense consists primarily
of personnel costs. Additional research and development expenses include ASIC
and system prototypes and certification-related expenses, depreciation of
property and equipment and facility-related expenses. The majority of our
research and development is focused on software development and the ongoing
development of our hardware products. We record research and development
expenses as incurred. As of December 31, 2021, approximately 88% of our research
and development teams were located in Canada, the United States and India.

•Sales and marketing. Sales and marketing expense is the largest component of
our operating expenses and primarily consists of personnel costs. Additional
sales and marketing expenses include product marketing, public relations, field
marketing and channel marketing programs (e.g. partner cooperative marketing
arrangements), as well as travel, depreciation of property and equipment and
facility-related expenses. We intend to hire additional personnel focused on
sales and marketing and expand our sales and marketing efforts worldwide in
order to capture market share.

•General and administrative. General and administrative expense consists of
personnel costs, as well as professional fees, depreciation of property and
equipment and software and facility-related expenses. General and administrative
personnel include our executive, finance, human resources, information
technology and legal organizations. Our professional fees principally consist of
outside legal, auditing, tax, information technology and other consulting costs.

•Gain on intellectual property matter. Gain on intellectual property matter
consists of the amortization of the deferred component of an agreement with a
competitor in the network security industry, whereby, the
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competitor party paid us a lump sum of $50.0 million for a seven-year mutual
covenant-not-to-sue for patent claims.

Interest income-net. Interest income-net consists primarily of interest earned
on our cash equivalents and investments. Historically, our investments include
corporate debt securities, certificates of deposit and term deposits, commercial
paper, money market funds, and U.S. government and agency securities.

Other expense-net. Other expense-net consists primarily of foreign exchange
gains and losses related to foreign currency remeasurement, gains or losses due
to the changes in fair value of our marketable equity securities, as well as the
gain on the sale or the impairment charges of our investments in privately held
companies.

Provision for income taxes. We are subject to income taxes in the United States,
as well as other tax jurisdictions or countries in which we conduct business.
Earnings from our non-U.S. activities are subject to income taxes in local
countries and may be subject to U.S. income taxes. Our effective tax rate
differs from the U.S. statutory rate primarily due to foreign income subject to
different tax rates than in the U.S., nondeductible stock-based compensation
expense, federal research and development tax credit, state taxes, withholding
taxes, excess tax benefits related to stock-based compensation expense and the
tax impacts of the 2017 Tax Cuts and Jobs Act (the "2017 Tax Act"), including
the foreign-derived intangible income ("FDII") deduction.

Significant Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with GAAP. These principles require us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue, cost of revenue and
expenses, and related disclosures. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. To the extent that there are material differences
between these estimates and our actual results, our future financial statements
will be affected.

We believe that, of the significant accounting policies described in Note 1 to
our consolidated financial statements included in Part II, Item 8 of this Annual
Report on Form 10-K, the following accounting policies involve a greater degree
of judgment and complexity. Accordingly, we believe these are the most critical
to fully understand and evaluate our financial condition and results of
operations.

Revenue recognition

Revenues are recognized when control of goods or services is transferred to our
customers, in an amount that reflects the consideration we expect to be entitled
to in exchange for those goods or services.

We determine revenue recognition through the following steps:

•identification of a contract or contracts with a customer;
•identification of the performance obligations in a contract, including
evaluation of performance obligations as to being distinct goods or services in
a contract;
•determination of a transaction price;
•allocation of a transaction price to the performance obligations in a contract;
and
•recognition of revenue when, or as, we satisfy a performance obligation.

Our sales contracts typically contain multiple deliverables, such as hardware,
software license, security subscription, technical support services and other
services, which are generally capable of being distinct and accounted for as
separate performance obligations. Our hardware and software licenses have
significant standalone functionalities and capabilities. Accordingly, the
hardware and software licenses are distinct from the security subscription and
technical support services, as a customer can benefit from the product without
the services and the services are separately identifiable within a contract. We
allocate a transaction price to each performance obligation based on relative
standalone selling price. We establish standalone selling price using the prices
charged for a deliverable when sold separately. If not observable through past
transactions, we determine standalone selling price by considering multiple
historical factors including, but not limited to, cost of products, gross margin
objectives, pricing practices, geographies and the term of a service contract.

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Deferred Contract Costs and Commission Expense

We defer contract costs that are recoverable and incremental to obtaining
customer sales contracts. Contract costs, which primarily consist of sales
commissions, are amortized on a systematic basis that is consistent with the
transfer to the customer of the goods or services to which the asset relates.
Costs for initial contracts that are not commensurate with commissions on
renewal contracts are amortized on a straight-line basis over the period of
benefit of five years. Estimates, assumptions, and judgments in accounting for
deferred contract costs include, but are not limited to, identification of
contract costs, anticipated billings and the expected period of benefit.

Business combinations

We include the results of operations of the businesses that we acquire as of the
respective dates of acquisition. We allocate the fair value of the purchase
price of our business acquisitions to the tangible and intangible assets
acquired and liabilities assumed based on their estimated fair values. The
excess of the purchase price over the fair values of these identifiable assets
and liabilities is recorded as goodwill. We often continue to gather additional
information throughout the measurement period, and if we make changes to the
amounts recorded, such changes are recorded in the period in which they are
identified.

Contingent liabilities

From time to time, we are involved in disputes, litigation and other legal
actions. However, there are many uncertainties associated with any litigation,
and these actions or other third-party claims against us may cause us to incur
substantial settlement charges, which are inherently difficult to estimate and
could adversely affect our results of operations. We periodically review
significant claims and litigation matters for the probability of an adverse
outcome. We accrue for a loss contingency if a loss is probable and the amount
of the loss can be reasonably estimated. These accruals are generally based on a
range of possible outcomes that require significant judgement. Estimates can
change as individual claims develop. The actual liability in any such matters
may be materially different from our estimates, which could result in the need
to adjust our liability and record additional expenses.

Accounting for income taxes

We record income taxes using the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements or
tax returns. In addition, deferred tax assets are recorded for the future
benefit of utilizing net operating losses and research and development credit
carryforwards. Deferred tax assets and liabilities are measured using the
currently enacted tax rates that apply to taxable income in effect for the years
in which those tax assets and liabilities are expected to be realized or
settled. Valuation allowances are provided when necessary to reduce deferred tax
assets to the amount expected to be realized.

As part of the process of preparing our consolidated financial statements, we
are required to estimate our taxes in each of the jurisdictions in which we
operate. We estimate actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
accruals and allowances not currently deductible for tax purposes. These
differences result in deferred tax assets, which are included in our
consolidated balance sheets. In general, deferred tax assets represent future
tax benefits to be received when certain expenses previously recognized in our
consolidated statements of income become deductible expenses under applicable
income tax laws, or loss or credit carryforwards are utilized.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. We continue to assess the
need for a valuation allowance on the deferred tax assets by evaluating both
positive and negative evidence that may exist. Any adjustment to the valuation
allowance on deferred tax assets would be recorded in the consolidated
statements of income for the period that the adjustment is determined to be
required.

We recognize tax benefits from an uncertain tax position only if it is more
likely than not, based on the technical merits of the position that the tax
position will be sustained on examination by the tax authorities. The tax
benefits recognized in the financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement.

We have elected to recognize Global Intangible Low Tax Income (“GILTI”), which was introduced in the 2017 Tax Act, as a current period expense.

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Investments in privately held companies

Our investments in privately held companies primarily consist of investments in
common stock or in-substance common stock of entities that provide us with the
ability to exercise significant influence over the operating and financial
policies of the investee, but not an absolute controlling financial interest,
and are accounted for under the equity method of accounting. Determining that we
do not control but exercise significant influence over the operating and
financial policies of the investee requires significant judgement when
considering many factors, including but not limited to, the ownership interest
in the investee, board representation, participation in policy-making processes,
and participation rights in certain significant financial and operating
decisions of the investee in the ordinary course of business. Our investment in
Linksys is our only equity method investment. We record our proportionate share
of the net earnings or losses of Linksys based on the most recently available
financial statements of Linksys, which are provided to us on a three-month lag,
and our share of the amortization of any basis differences, in gain or loss from
equity method investment in our consolidated statements of income.

Operating results

The following tables present our results of operations for the periods presented and as a percentage of our total revenues for those periods. The comparison of financial results from one period to another is not necessarily indicative of the financial results to be achieved in future periods.

                                                                          Year Ended December 31,
                                                              2021                 2020                 2019

                                                                               (in millions)
Consolidated Statements of Income Data:
Revenue:
Product                                                   $  1,255.0          $     916.4          $     788.5
Service                                                      2,087.2              1,678.0              1,374.5
Total revenue                                                3,342.2              2,594.4              2,163.0
Cost of revenue:
Product                                                        487.7                352.4                324.6
Service                                                        295.3                217.6                181.3
Total cost of revenue                                          783.0                570.0                505.9
Gross profit:
Product                                                        767.3                564.0                463.9
Service                                                      1,791.9              1,460.4              1,193.2
Total gross profit                                           2,559.2              2,024.4              1,657.1
Operating expenses:
Research and development                                       424.2                341.4                277.1
Sales and marketing                                          1,345.7              1,071.9                926.9
General and administrative                                     143.5                119.5                102.1
Gain on intellectual property matter                            (4.6)               (40.2)                   -
Total operating expenses                                     1,908.8              1,492.6              1,306.1
Operating income                                               650.4                531.8                351.0
Interest income                                                  4.5                 17.7                 42.5
Interest expense                                               (14.9)                   -                    -
Other expense-net                                              (11.6)                (7.8)                (7.5)

Earnings before income taxes and loss on investment under the equity method

                                                     628.4                541.7                386.0
Provision for income taxes                                      14.1                 53.2                 54.3
Loss from equity method investment                              (7.6)                   -                    -
Net income including non-controlling interests                 606.7                488.5                331.7

Less: net loss attributable to non-controlling interests, net of tax

                                                      (0.1)                   -                    -
Net income attributable to Fortinet, Inc.                 $    606.8        

$488.5 $331.7

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                                                                              Year Ended December 31,
                                                                2021                    2020                   2019

                                                                            (as percentage of revenue)
Revenue:
Product                                                               38  %                  35  %                  36  %
Service                                                               62                     65                     64
Total revenue                                                        100                    100                    100
Cost of revenue:
Product                                                               15                     14                     15
Service                                                                9                      8                      8
Total cost of revenue                                                 23                     22                     23
Gross margin:
Product                                                               61                     62                     59
Service                                                               86                     87                     87
Total gross margin                                                    77                     78                     77
Operating expenses:
Research and development                                              13                     13                     13
Sales and marketing                                                   40                     41                     43
General and administrative                                             4                      5                      5
Gain on intellectual property matter                                   -                     (2)                     -
Total operating expenses                                              57                     58                     60
Operating margin                                                      19                     20                     16
Interest income                                                        -                      1                      2
Interest expense                                                       -                      -                      -
Other expense-net                                                      -                      -                      -

Earnings before income taxes and loss on investment under the equity method

                                                            19                     21                     18
Provision for income taxes                                             -                      2                      3
Loss from equity method investment                                     -                      -                      -
Net income including non-controlling interests                        18                     19                     15

Less: net loss attributable to non-controlling interests, net of tax

                                                             -                      -                      -
Net income attributable to Fortinet, Inc.                             18  %                  19  %                  15  %

Percentages have been rounded for presentation purposes and may differ from unrounded results.



Discussion regarding our financial condition and results of operations for
2020 as compared to 2019 can be found in Item 7 of our Annual Report on Form
10-K for the fiscal year ended December 31, 2020, filed with the SEC on February
19, 2021.

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2021 and 2020

Revenue
                                        Year Ended December 31,
                                   2021                          2020
                                            % of                        % of
                            Amount         Revenue       Amount        Revenue      Change       % Change

                                                (in millions, except percentages)
Revenue:
Product                 $    1,255.0          38  %    $   916.4          35  %    $ 338.6           37  %
Service                      2,087.2          62         1,678.0          65         409.2           24
Total revenue           $    3,342.2         100  %    $ 2,594.4         100  %    $ 747.8           29  %
Revenue by geography:
Americas                $    1,358.8          41  %    $ 1,077.2          42  %    $ 281.6           26  %
EMEA                         1,275.9          38           991.9          38         284.0           29
APAC                           707.5          21           525.3          20         182.2           35
Total revenue           $    3,342.2         100  %    $ 2,594.4         100  %    $ 747.8           29  %



Total revenue increased by $747.8 million, or 29%, in 2021 compared to 2020. We
continued to experience diversification of revenue globally, and across both
customer and industry segments. Revenue from all regions grew, with EMEA
contributing the largest portion of the increase on an absolute dollar basis and
APAC, which included Alaxala, contributing the fastest growth on a percentage
basis.

Product revenue increased by $338.6 million, or 37%, in 2021 compared to 2020.
We experienced revenue growth across many of our products due to an increase in
product revenue from our FortiGate products and security fabric platform
products, including our SD-WAN solutions, and software licenses.

Service revenue increased by $409.2 million, or 24%, in 2021 compared to 2020.
FortiGuard security subscription, FortiCare technical support and other revenues
increased by $206.3 million, or 22%, and $202.9 million, or 27%, respectively,
in 2021 compared to 2020. The increases were primarily due to the recognition of
revenue from our growing deferred revenue balance related to FortiGuard and
other security subscriptions and FortiCare technical support, including our
customers moving to higher-tier support offerings as well as growth from our
service bundles and professional services.

Of the service revenue recognized in 2021, 65% has been included in the deferred revenue balance in the December 31, 2020. Of the service revenue recognized in 2020, 68% was included in the deferred revenue balance in December 31, 2019.

Cost of sales and gross margin

                                      Year Ended December 31,
                                     2021                    2020        Change       % Change

                                               (in millions, except percentages)
        Cost of revenue:
        Product                 $     487.7               $ 352.4       $ 135.3           38  %
        Service                       295.3                 217.6          77.7           36
        Total cost of revenue   $     783.0               $ 570.0       $ 213.0           37  %
        Gross margin (%):
        Product                        61.1   %              61.5  %
        Service                        85.9   %              87.0  %
        Total gross margin             76.6   %              78.0  %



Total gross margin decreased by 1.4 percentage points in 2021 compared to 2020,
driven by shift in the revenue mix to lower margin product revenue from higher
margin service revenue. As a percentage of total revenue, the revenue mix
shifted by 2.3 percentage points to product revenue from service revenue.

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Product gross margin decreased by 0.4 percentage points in 2021 compared to
2020, driven by higher component costs related to supply constraints, higher
freight costs, and the impact of Alaxala's product gross margin. Cost of product
revenue was comprised primarily of third-party contract manufacturers' costs and
the costs of materials used in production.

Service gross margin decreased by 1.1 percentage points in 2021 compared to
2020. Cost of service revenue was comprised primarily of personnel costs,
third-party repair and contract fulfillment, data center costs, colocation
expenses, and cloud hosting, supplies and facility-related costs. The decrease
in service gross margin was primarily due to foreign currency fluctuation,
increased costs associated with an expansion in our data centers and the impact
of Alaxala's service gross margin.

Operating expenses
                                                                 Year Ended December 31,
                                                      2021                                       2020
                                                                 % of                                     % of
                                          Amount                Revenue              Amount              Revenue             Change             % Change

                                                                                (in millions, except percentages)
Operating expenses:
Research and development              $      424.2                    13  %       $   341.4                    13  %       $  82.8                     24  %
Sales and marketing                        1,345.7                    40            1,071.9                    41            273.8                     26
General and administrative                   143.5                     4              119.5                     5             24.0                     20
Gain on intellectual property matter          (4.6)                    -              (40.2)                   (2)            35.6                    (89)
Total operating expenses              $    1,908.8                    57  %       $ 1,492.6                    58  %       $ 416.2                     28  %

Percentages have been rounded for presentation purposes and may differ from unrounded results.



Research and development

Research and development expense increased by $82.8 million, or 24%, in 2021
compared to 2020, primarily due to an increase in personnel-related costs of
$69.5 million as a result of increased headcount to support the development of
new products and continued enhancements to our existing products and foreign
currency fluctuations. In addition, we incurred increases in depreciation and
other occupancy costs of $8.4 million and third party product development costs
of $8.3 million, such as third-party testing and prototypes, partially offset by
a decrease in other costs of $3.6 million. We currently intend to continue to
invest in our research and development organization, and expect research and
development expense to increase in absolute dollars in 2022.

Sales and Marketing

Sales and marketing expense increased by $273.8 million, or 26%, in 2021
compared to 2020, primarily due to an increase in personnel-related costs of
$213.7 million as a result of increases to sales and marketing headcount in
order to drive global market revenue increases and foreign currency
fluctuations. Marketing related expenses increased $32.9 million and included
expenses related to our sponsorship of the Fortinet Championship, a Professional
Golfers' Association tour event that we sponsored in September 2021. In
addition, we incurred increases in depreciation and other occupancy expense of
$9.4 million, marketing supplies expense of $5.8 million and travel expense of
$5.2 million. We currently intend to continue to make investments in sales and
marketing resources, which are critical to support our future growth, and expect
sales and marketing expense to increase in absolute dollars in 2022.

general and administrative

General and administrative expense increased by $24.0 million, or 20%, in 2021
compared to 2020, primarily due to an increase in personnel-related costs of
$12.8 million. Legal-related costs increased by $6.3 million and included
$5.6 million related to the settlement and dismissal of an existing patent
infringement lawsuit and a mutual covenant-not-to-sue for a defined duration of
time. Refer to Note 13. Commitments and contingencies in Part II, Item 8 of this
Annual Report on Form 10-K for additional information. In addition, professional
services fee increased by $5.2 million, partially offset by a decrease in
provision for expected credit losses of $2.0 million. We currently expect
general and administrative expense to increase in absolute dollars in 2022.

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Gain on IP matter

In January 2020, we entered into an agreement with a competitor in the network
security industry, whereby, in February 2020, the competitor party paid us a
lump sum of $50.0 million for a mutual covenant-not-to-sue for patent claims. Of
this amount, we recorded a $4.6 million gain on intellectual property matter in
our consolidated statements of income in 2021, compared to $40.2 million in
2020. Refer to Note 12 of the notes to consolidated financial statements
included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information regarding the gain on IP matter.

Operating result and margin

We generated operating income of $650.4 million in 2021, an increase of $118.6
million, or 22%, compared to $531.8 million in 2020. Operating income as a
percentage of revenue decreased to 19% in 2021 compared to 20% in 2020. We
recorded a $4.6 million gain on intellectual property matter in our consolidated
statements of income in 2021, compared to a $40.2 million gain in 2020, which
increased our operating margin by 1.5 percentage points in 2020. Excluding the
impact of these gains, our operating margin increased 0.4 percentage points
primarily due to 1.0 percentage point, 0.5 percentage point and 0.3 percentage
point decreases in sales and marketing expense, research and development expense
and general and administrative expense as percentage of revenue, respectively,
partially offset by a decrease in gross margin largely driven by the mix shift
from service revenue to product revenue.

Interest income, interest expense and other expenses – net

                                    Year Ended December 31,
                                        2021                 2020       Change       % Change

                                             (in millions, except percentages)
         Interest income     $        4.5                  $ 17.7      $ (13.2)         (75) %
         Interest expense           (14.9)                      -        (14.9)              *
         Other expense-net          (11.6)                   (7.8)        (3.8)          49  %


* Not meaningful

Interest income decreased by $13.2 million in 2021 as compared to 2020,
primarily as a result of lower interest rates. Interest income varies depending
on our average investment balances during the period, types and mix of
investments, and market interest rates. Interest expense increased by $14.9
million due to the senior notes issued in the first quarter of 2021. Other
expense-net increase by $3.8 million in 2021 as compared to 2020 was primarily
the result of an increase of $5.1 million in losses on marketable equity
securities and an increase of $2.7 million in foreign exchange losses in 2021
compared to 2020. In 2020, we recognized a $4.3 million impairment charge on an
investment in a privately held company and there were no such impairment charges
in 2021.

Provision for income taxes
                                         Year Ended December 31,
                                       2021                     2020        Change       % Change

                                                 (in millions, except percentages)
     Provision for income taxes   $      14.1                 $ 53.2      
$ (39.1)         (73) %
     Effective tax rate                     2   %                 10  %



Our provision for income taxes for 2021 reflects an effective tax rate of 2%,
compared to an effective tax rate of 10% for 2020. The provision for income
taxes for 2021 was comprised primarily of a $140.8 million tax expense related
to U.S. federal and state taxes, other foreign income taxes, foreign withholding
taxes and unrecognized tax benefits. The provision was partially offset by
excess tax benefits of $82.0 million from stock-based compensation expense, a
tax benefit of $33.6 million from the FDII deduction, and tax benefits of $11.1
million from federal research and development tax credits.

Our provision for income taxes for 2020 reflects an effective tax rate of 10%,
compared to an effective tax rate of 14% for 2019. The provision for income
taxes for 2020 was comprised primarily of a $146.8 million tax expense related
to U.S. federal and state taxes, other foreign income taxes, foreign withholding
taxes and unrecognized tax benefits. The provision was partially offset by a tax
benefit of $44.3 million from the FDII deduction, excess tax benefits of $42.0
million from stock-based compensation expense and tax benefits of $7.5 million
from federal research and development tax credits.



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Seasonality, Cyclicality and Quarterly Revenue Trends

Our quarterly results reflect a pattern of increased customer buying at
year-end, which has positively impacted billings and product revenue activity in
the fourth quarter. In the first quarter, we generally experience lower
sequential customer product buying, followed by an increase in buying in the
second and third quarters. Although these seasonal factors may be common in the
technology sector, historical patterns should not be considered a reliable
indicator of our future sales activity or performance. On a quarterly basis, we
have usually generated the majority of our product revenue in the final month of
each quarter and a significant amount in the last two weeks of each quarter. We
believe this is due to customer buying patterns typical in this industry.

Consistent with the seasonality note above, our total quarterly revenue over the
past two years has increased sequentially each year. Product revenue increased
year-over-year as compared to 2020, as we have continued product innovation and
launched new product models, expanded our solution sales, including SD-WAN and
WFA solutions and increased our investments in our sales and marketing
organizations.

Total gross margin has fluctuated on a quarterly basis primarily due to the
relative product and service mix as well as the timing of supplier cost
increases and our own price increases. Product gross margin varies based on the
types of products sold, their cost profile and their average selling prices. In
2021, product gross margin was impacted by new product introductions, the mix of
high-end, mid-range and entry-level FortiGate products and the mix of other
Fabric products, software sales and the timing and impact of supplier cost
increases and our own price list increases. In 2021, we experienced an unusual
level of component suppliers charging new expedite fees and increases in freight
costs. Historically, we have been able to improve our direct cost of appliances
and our product gross margin. Service gross margin is impacted by revenue growth
and our personnel-related costs, third-party repair and contract fulfillment,
data center, colocation fees, cloud hosting, supplies, facility-related costs
and foreign currency fluctuations.

Cash and capital resources

                                                                          As of December 31,
                                                              2021               2020               2019

                                                                            (in millions)
Cash and cash equivalents                                 $ 1,319.1          $ 1,061.8          $ 1,222.5
Short-term and long-term investments                        1,634.8              893.8              987.4
Marketable equity securities                                   38.6                  -                  -
Total cash, cash equivalents, investments and marketable
equity securities                                         $ 2,992.5          $ 1,955.6          $ 2,209.9
Working capital                                           $ 1,282.5          $   910.9          $ 1,313.2

                                                                       Year Ended December 31,
                                                              2021               2020               2019

                                                                            (in millions)
Net cash provided by operating activities                 $ 1,499.7          $ 1,083.7          $   808.0
Net cash used in investing activities                      (1,325.1)             (72.8)            (502.3)
Net cash provided by (used in) financing activities            82.8           (1,171.6)            (195.6)
Effect of exchange rate changes on cash and cash
equivalents                                                    (0.1)                 -                  -

Net increase (decrease) in cash and cash equivalents $257.3

 $  (160.7)         $   110.1




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Liquidity and capital resources are impacted by our operating activities,
proceeds from issuance of our investment grade debt and from exercise of stock
options issued to employees, as well as cash used on stock repurchases, real
estate purchases and other capital expenditures, investments in various
companies and business acquisitions.

In recent years, we have received significant capital resources from our
billings to customers, issuance of investment grade debt and, to some extent,
from the exercise of stock options by our employees. Additional increases in
billings may depend on a number of factors, including demand for our products
and services, competition, market or industry changes, macroeconomic events such
as the COVID-19 pandemic, supply chain capacity and disruptions, international
conflicts and our ability to execute. We expect proceeds from the exercise of
stock options in future years to be impacted by the increased mix of restricted
stock units versus stock options granted to our employees and to vary based on
our share price.

In October 2021, our board of directors authorized a $1.25 billion increase in
the authorized stock repurchase under the Repurchase Program and extended the
term of the Repurchase Program to February 28, 2023, bringing the aggregate
amount of authorized to be repurchased to $4.25 billion. In 2021, we repurchased
2.6 million shares of common stock under the Repurchase Program for an aggregate
purchase price of $741.8 million. As of December 31, 2021, $1.52 billion
remained available for future share repurchases under the Repurchase Program.

In March 2021, we issued $1.0 billion aggregate principal amount of senior
notes, consisting of $500.0 million aggregate principal amount of 1.0% notes due
March 15, 2026 and $500.0 million aggregate principal amount of 2.2% notes due
March 15, 2031, in an underwritten registered public offering (the "Notes"). We
do not currently intend to retire these Notes early. Refer to Note 11. Debt in
Part II, Item 8 of this Annual Report on Form 10-K for information on the Notes.

In February 2020we received a cash payment from $50.0 million under a mutual non-prosecution and release agreement with a competitor in the network security industry.

In 2021, we completed our new, net-zero building on our Sunnyvale headquarters
campus. We expect to continue to increase our office and warehouse capacity to
support growth. As we purchase new properties, we will work to incorporate these
properties into the environmental goals we have established. We estimate 2022
capital expenditures to be between $270 million and $300 million.

Our principal commitments consist of obligations under our Notes, inventory
purchase and other contractual commitments. As of December 31, 2021, the
long-term debt, net of unamortized discount and debt issuance costs, was $988.4
million. In addition, we enter into non-cancellable agreements with contract
manufacturers to procure inventory based on our requirements in order to reduce
manufacturing lead times, plan for adequate component supply or incentivize
suppliers to deliver. In 2021, we significantly increased these commitments as
contract manufacturers and component suppliers significantly increased their
pricing and lead times. Inventory purchase commitments as of December 31, 2021,
were $1.14 billion, an increase of $881.1 million compared to $259.4 million as
of December 31, 2020. We estimate payments of $1.08 billion due on or before
December 31, 2022 related to these commitments. We also have open purchase
orders and contractual obligations in the ordinary course of business for which
we have not received goods or services. As of December 31, 2021, we had $126.7
million in other contractual commitments having a remaining term in excess of
one year that are non-cancelable.

As of December 31, 2021, our cash, cash equivalents, investments and marketable
equity securities of $2.99 billion were invested primarily in deposit accounts,
commercial paper, corporate debt securities, U.S. government and agency
securities, certificates of deposit and term deposits, money market funds,
municipal bonds and marketable equity securities. It is our investment policy to
invest excess cash in a manner that preserves capital, provides liquidity and
generates return without significantly increasing risk. We do not enter into
investments for trading or speculative purposes.

The amount of cash, cash equivalents and investments held by our international
subsidiaries was $132.4 million and $119.8 million as of December 31, 2021 and
2020, respectively.

We believe that our existing cash and cash equivalents and cash flow from
operations will be sufficient for at least the next 12 months to meet our
requirements and plans for cash, including meeting our working capital
requirements and capital expenditure requirements. In the long term, our ability
to support our requirements and plans for cash, including our working capital
and capital expenditure requirements will depend on many factors, including our
growth rate, the timing and amount of our share repurchases, the expansion of
sales and marketing activities, the introduction of new and enhanced products
and services offerings, the continuing market acceptance of our products, the
timing and extent of spending to support development efforts, our investments in
purchasing or leasing real estate and macroeconomic impacts such as the COVID-19
pandemic. Historically, we have required capital principally to fund our working
capital needs, share repurchases, capital expenditures and acquisition
activities. In the event that additional financing is required from outside
sources, we may not be able to raise it on terms acceptable to us or at all.

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During 2021, 2020 and 2019, we did not have any relationships with
unconsolidated organizations or financial partnerships, such as structured
finance or special purpose entities that would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.

Operating Activities

Cash generated by operating activities is our primary source of liquidity. It is
primarily comprised of net income, as adjusted for non-cash items and changes in
operating assets and liabilities. Non-cash adjustments consist primarily of
stock-based compensation, amortization of deferred contract costs and
depreciation and amortization. Changes in operating assets and liabilities
consist primarily of changes in deferred revenue, deferred contract costs,
deferred tax assets, and accounts receivable.

Our operating activities during 2021 provided cash flows of $1.50 billion as a
result of the continued growth of our business and our ability to successfully
manage our working capital. Changes in operating assets and liabilities
primarily resulted from an increase in sales of our FortiGuard and other
security subscription services and FortiCare technical support services to new
and existing customers, as reflected by an increase in our deferred revenue. Our
total deferred revenue balance grew $847.6 million, or 33%, during 2021.

Investing activities

The changes in cash flows from investing activities primarily relate to timing
of purchases, maturities and sales of investments, purchases of property and
equipment, investments in various companies and business acquisitions.
Historically, in making a lease versus ownership decision related to our larger
facilities, we have considered various factors including financial metrics and
the impact on our engineers and other employees, and expected long-term growth
rates. In certain cases, we have elected to own the facility if we believed that
purchasing building or developing buildings rather than leasing is more in line
with our long-term strategy. We may make similar decisions in the future. We may
also make cash payments in connection with future business combinations.

During 2021, cash used in investing activities was primarily driven by $752.2
million spent for purchases of investments, net of maturities and sales of
investments, $295.9 million of purchases of property and equipment, a large
portion of which relates to our headquarters building construction, $160.0
million used for purchases of investment in a privately held company, and $74.9
million used for the acquisitions of Alaxala, ShieldX and other, net of cash and
$42.5 million used for purchases of marketable equity securities.

Fundraising activities

Changes in cash flow from financing activities are primarily related to the issuance of notes, repurchase and redemption of common shares, and taxes paid related to the net in-stock settlement of stock awards, net of proceeds of the issue of ordinary shares under the 2009 plan.

During 2021, cash provided by financing activities was $82.8 million, primarily
driven by $987.0 million in cash proceeds from long-term investment grade debt,
net of discount and underwriting fees, partially offset by $741.8 million used
to repurchase shares of our common stock and $141.9 million used to pay tax
withholding, net of proceeds from the issuance of common stock.

Recent accounting pronouncements

Refer to Note 1 of the notes to our consolidated financial statements in Part
II, Item 8 of this Annual Report on Form 10-K for a full description of recently
adopted accounting pronouncements.

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