Fortinet
Annual Report 2015

Plain-text annual report

FORTINET INC FORM 10-K (Annual Report) Filed 02/26/16 for the Period Ending 12/31/15 Address Telephone 899 KIFER ROAD SUNNYVALE, CA 94086 408-235-7700 CIK 0001262039 FTNT 3577 - Computer Peripheral Equipment, Not Elsewhere Classified Symbol SIC Code Industry Software & Programming Sector Fiscal Year Technology 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-34511______________________________________ FORTINET, INC.(Exact name of registrant as specified in its charter)______________________________________Delaware77-0560389(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)899 Kifer RoadSunnyvale, California94086(Address of principal executive offices)(Zip Code)(408) 235-7700(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.001 Par Value The NASDAQ Stock Market LLC (Title of each class) (Name of exchange on which registered)Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No xTable of ContentsIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934(“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filerx Accelerated fileroNon-accelerated filero(Do not check if smaller reportingcompany) Smaller reporting companyoIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No xThe aggregate market value of voting stock held by non-affiliates of the registrant, as of June 30, 2015 , the last business day of the registrant’s most recentlycompleted second quarter, was $5,300,165,895 (based on the closing price for shares of the registrant’s common stock as reported by The NASDAQ Global SelectMarket on that date). Shares of common stock held by each executive officer, director, and holder of 5% or more of the registrant’s outstanding common stockhave been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for otherpurposes.As of February 19, 2016 , there were 171,603,611 shares of the registrant’s common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive Proxy Statement relating to its 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of thisAnnual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the United States Securities and Exchange Commission (“SEC”) within120 days after the end of the fiscal year to which this report relates.FORTINET, INC.ANNUAL REPORT ON FORM 10-KFor the Year Ended December 31, 2015Table of Contents Page Part I Item 1.Business1Item 1A.Risk Factors8Item 1B.Unresolved Staff Comments29Item 2.Properties29Item 3.Legal Proceedings30Item 4.Mine Safety Disclosures30 Part II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities31Item 6.Selected Financial Data33Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations34Item 7A.Quantitative and Qualitative Disclosures about Market Risk55Item 8.Financial Statements and Supplementary Data57Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure94Item 9A.Controls and Procedures94Item 9B.Other Information96 Part III Item 10.Directors, Executive Officers and Corporate Governance97Item 11.Executive Compensation97Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters97Item 13.Certain Relationships and Related Transactions, and Director Independence97Item 14.Principal Accounting Fees and Services97 Part IV Item 15.Exhibits, Financial Statement Schedules98 Signatures100 Table of ContentsPart IITEM 1. Business OverviewFortinet is a global leader and innovator in network security. We provide high performance cybersecurity solutions to a wide variety of enterprises,service providers and government organizations of all sizes across the globe, including a majority of the 2015 Fortune 100. We provide protection againstcyberattacks and the technology to take on increasing security performance requirements of the network. We offer a broad range of security products and solutions,providing customers with an end-to-end platform and a single source of threat intelligence to minimize security gaps.The cyber threat environment is unprecedented both in terms of volume and sophistication of attacks. As a result, cyber security has increased in priorityand management complexity for enterprises. Fortinet offers an end-to-end solution, which ensures ongoing security efficacy through a single source of threatintelligence and minimizes complexity and risk. Our cyber security platform provides a broad range of security products and solutions focused on the needs aroundenterprise firewall, advanced threat protection, data center security, cloud security, secure access and connected unified threat management (“UTM”).Our flagship integrated network security solution consists of our FortiGate physical, virtual machine and cloud platforms, which are deployable in thebusiness environments of large and medium-sized enterprise, service providers and small and medium-sized businesses, as well as government organizations.These platforms provide a broad array of integrated security and networking functions to help protect data, applications and users from network- and content-levelsecurity threats. These functions, which can be integrated in a variety of ways, include firewall, intrusion prevention (“IPS”) anti-malware, application control,virtual private network (“VPN”), web-filtering, vulnerability management, anti-spam, mobile security, wireless controller and wide area network (“WAN”)acceleration. Our FortiGate appliance platform may be deployed as core firewalls, internal segmentation firewalls, next generation firewalls (“NGFW”), distributedfirewalls, virtual firewalls, cloud firewalls, carrier class firewalls, data center firewalls (“DCFW”) and connected UTM systems. For access networks, we offer ourwireless access points and switch appliances, which integrate secure wireless and wired access capabilities into the FortiGate network security platform. TheFortiGate products integrate our FortiASICs, which are specifically designed for accelerated processing of security and networking functions, and our FortiOSoperating system, which provide a feature-rich foundation for all FortiGate security functions. Our FortiManager and FortiAnalyzer products work in conjunctionwith our FortiGate virtual and physical appliances. FortiManager provides customers with centralized management of multiple FortiGates, and FortiAnalyzerprovides a single point of network log data collection. These products enable customers to implement security policies across large networks.Fortinet’s cybersecurity platform also includes an array of products that further complement our FortiGate products to offer additional protection fromsecurity threats across networks. These products include our FortiMail email security, FortiSandbox advanced threat protection (“ATP”), FortiWeb web applicationfirewall, FortiDDos, and FortiDB database security appliances, as well as our FortiClient endpoint security software, FortiAP secure wireless access points andFortiSwitch secure switch connectivity products.Supporting virtual and cloud-based deployments, we offer virtual appliances for the FortiGate, FortiManager, FortiAnalyzer, FortiWeb, FortiMail,FortiSandbox, FortiCache and FortiADC product lines that can be used in conjunction with traditional Fortinet physical appliances to help ensure the visibility,management and protection of physical and virtual environments. We also offer on-demand cloud-based versions of FortiGate and FortiWeb.In addition, we complement our cybersecurity platform with subscription, customer support, and training services. Our FortiGuard security subscriptionuses global threat feeds to create real time threat intelligence and security updates to complement Fortinet products. Our global FortiCare customer support teamprovides global technical support for all Fortinet products. We also provide a range of technical training for customers and partners under the Network SecurityExpert Program.We typically sell our security solutions to channel partners, who in turn sell to end-customers. We also sell directly to end users. Our end users includebusinesses and enterprises, government organizations, and service providers, across a wide range of industries, including telecommunications, technology,government, financial services, education, retail, manufacturing and healthcare.During our year ended December 31, 2015 , we generated total revenue of $1.01 billion and net income of $8.0 million . See Part II, Item 8 of this AnnualReport on Form 10-K for more information on our consolidated balance sheets as of December 31, 2015 and 2014 and our consolidated statements of operations,comprehensive income, stockholders’ equity, and cash flows for each of the three years ended December 31, 2015, 2014, and 2013.1Table of ContentsWe were incorporated in Delaware in November 2000. Our principal executive office is located at 899 Kifer Road, Sunnyvale, California 94086 and ourtelephone number at that location is (408) 235-7700.Technology and ArchitectureOur proprietary FortiASIC hardware architecture, FortiOS operating system and associated security and networking functions combine to form a platformthat integrates security features and enables our products to perform sophisticated security processing for networks with high throughput requirements.FortiASICOur proprietary FortiASIC family of Application-Specific Integrated Circuits (“ASICs”) is comprised of three main lines of processors: (i) the FortiASICcontent processor (“CP”), (ii) the FortiASIC network processor (“NP”), and (iii) the FortiASIC system-on-a-chip (“SOC”). Our proprietary ASICs are designed toenhance the sophisticated security processing capabilities implemented in software by accelerating computationally intensive tasks such as firewall policyenforcement or IPS threat detection. This architecture provides the flexibility of implementing accelerated processing of new threat detection without requiring anew ASIC. The FortiASIC CP is currently included in most of our entry-level and all of our mid-range and high-end FortiGate appliances. The FortiASIC NP iscurrently included in some of our mid-range and high-end FortiGate appliances, delivering additional accelerated firewall and VPN performance. Entry-levelFortiGate products (FortiGate 20 to 100 series) often use the SOC2. Mid-range FortiGate products (FortiGate 200 to 900 series) use a central processing unit(“CPU”) and include the NP and CP. The high-end FortiGate products (FortiGate 1000 to 5000 series) use multiple CPUs, CPs and NPs. FortiOSOur proprietary FortiOS operating system provides the foundation for the operation of all FortiGate appliances, from the core kernel functions to thesecurity processing feature sets. FortiOS provides (i) multiple layers of security including a hardened kernel layer providing protection for the FortiGate system,(ii) a network security layer providing security for end-customers’ network infrastructures and (iii) application content protection providing security for end-customers’ workstations and applications. FortiOS directs the operations of processors and ASICs and provides system management functions such as command-line and graphical user interfaces.Key high-level functions and capabilities of FortiOS include:•helping enable FortiGate appliances to be configured into different security environments such as our Internal Network Firewall, NextGeneration Firewall and the Data Center Firewall;•configuration of the physical aspects of the appliance such as ports, Wi-Fi and switching;•key network functions such as routing and deployment modes (network routing, transparent, sniffer, etc.);•implementation of security updates delivering advanced threat protection, such as IPS, antivirus, and application control;•access to cloud-based web and email filtering databases;•direct integration with both cloud and on premises FortiSandbox technology•security policy objects and enforcement;•data leak prevention and document finger printing; and•real-time reporting and logging.We make updates to FortiOS available through our FortiCare technical support services. FortiOS also enables advanced, integrated routing and switching,allowing end-customers to deploy FortiGate devices within a wide variety of networks, as well as providing a direct replacement solution option for legacyswitching and routing equipment. FortiOS implements a suite of commonly used standards-based routing protocols as well as address translation technologies,allowing the FortiGate appliance to integrate and operate in a wide variety of network environments. Additional features include Virtual Domain (“VDOM”),capabilities and traffic queuing and shaping. These features enable administrators to set the appropriate configurations and policies that meet their infrastructureneeds. FortiOS also provides capabilities for logging of traffic for forensic analysis purposes which are particularly important for regulatory compliance initiativeslike payment card industry data security standard (“PCI DSS”). FortiOS is designed to help control network traffic in order to optimize performance by includingfunctionality such as packet classification, queue disciplines, policy enforcement, congestion management, WAN optimization and caching.2Table of ContentsProductsOur core product offerings consist of our FortiGate product family, along with our FortiManager central management and FortiAnalyzer central loggingand reporting product families, both of which are typically purchased to complement commercial and enterprise deployments. Our FortiGate physical and virtualappliance ships with a set of broad security services. These security services are enabled by FortiGuard which provides extensive threat research and a global cloudnetwork to deliver protection services to each FortiGate appliance.FortiGateOur flagship FortiGate physical and virtual appliances offer a broad set of security and networking functions, including firewall, intrusion prevention,anti-malware, VPN, application control, web filtering, anti-spam and WAN acceleration. All FortiGate models run on our FortiOS operating system. Typically, theFortiGate physical appliances include our FortiASICs to accelerate content and network security features implemented within FortiOS. FortiGate platforms can becentrally managed through both embedded web-based and command line interfaces, as well as through FortiManager, which provides central managementarchitecture for thousands of FortiGate physical and virtual appliances across a range of hypervisor platforms.By combining multiple network security functions in our purpose-built security platform, the FortiGate appliances provide broad, high quality protectioncapabilities and deployment flexibility while reducing the operational burden and costs associated with managing multiple point products. With over 30 models inthe FortiGate product line, FortiGate is designed to address security requirements for small- to medium-sized businesses, large enterprises, service providers andgovernment organizations worldwide.All FortiGate models run on our FortiOS operating system. Typically, all FortiGate physical appliances include our FortiASICs to accelerate content andnetwork security features implemented within FortiOS. The significant differences between each model are the performance and scalability targets each model isdesigned to meet, while the security features and associated services offered are common throughout all models. The FortiGate-20 through -100 series models aredesigned for perimeter protection for small- to medium-sized businesses. The FortiGate-200 through -900 series models are designed for perimeter deployment inmedium-sized to large enterprise networks. The FortiGate-1000 through -5000 series models deliver high performance and scalable network security functionalityfor perimeter, data center and core deployment in large enterprise and service provider networks.We also incorporate additional technologies within FortiGate appliances that differentiate our solutions, including data leakage protection (“DLP”), trafficoptimization, SSL inspection, threat vulnerability management and wireless controller technology. In addition to these in-built features, we offer a full range ofwireless access points and controllers, complementing FortiGate with the flexibility of wireless LAN access.Fortinet Management and Analysis ProductsOur FortiManager and FortiAnalyzer physical and virtual products are typically sold in conjunction with most commercial and enterprise deployments.FortiManager. Our FortiManager family of products provides a central and scalable management solution for our FortiGate products, including softwareupdates, configuration, policy settings and security updates. One FortiManager product is capable of managing thousands of FortiGate units, and also providescentral management for FortiClient software. FortiManager facilitates the coordination of policy-based provisioning, device configuration and operating systemrevision management, as well as network security monitoring and device control.FortiAnalyzer. Our FortiAnalyzer family of products provides centralized network logging, analyzing and reporting solutions that securely aggregatecontent and log data from our FortiGate devices and other Fortinet products as well as third-party devices to enable network logging, analysis and reporting.We also offer other physical and virtual appliances and software products that protect our end-customers from security threats to other critical areas in theenterprise, such as messaging, web-based applications and databases, and employees’ computers or mobile devices.3Table of ContentsServicesFortiGuard Security Subscription ServicesSecurity requirements are dynamic due to the constantly changing nature of threats. Our FortiGuard Labs global threat research team uses automated andmanual processes to identify emerging threats, collects threat samples, and replicates, reviews, characterizes and collates attack data. Based on this research, wedevelop updates for virus signatures, attack definitions, scanning engines and other security solution components to distribute to end-customers. Our FortiGuardsecurity subscription services are designed to allow us to quickly deliver new threat detection capabilities to end-customers worldwide as new threats evolve. End-customers purchase FortiGuard security subscription services in advance, typically with terms of one to three years, to obtain access to regular updates forapplication control, antivirus, intrusion prevention, web filtering and anti-spam functions for our FortiGate products; antivirus, web filtering and VPN functions forour FortiClient software; antivirus and anti-spam functions for our FortiMail products; vulnerability management for our FortiGate, FortiAnalyzer andFortiMonitor products; database functions for our FortiDB appliance; web functions for our FortiWeb appliances; and advanced threat protection for ourFortiSandbox on premise and cloud products. FortiSandbox is a key part of Fortinet’s integrated and automated advanced threat protection solution and offersinspection of all protocols and functions in one appliance. It is designed to detect and analyze advanced attacks designed to bypass traditional security defenses.We provide FortiGuard security subscription services 24 hours a day, seven days a week. FortiCare Technical Support ServicesOur FortiCare services include technical support as well as an extended product warranty. In addition to our standard support service offering, we offer apremium service that offers enhanced technical support and warranty response times and semi-dedicated support oriented towards mission-critical applications.For our standard technical support , channel partners often provide first level support to the end-customer, especially for small- and medium-sized end-customers. Fortinet also provides all levels of support to our end-customers, as well as second- and third-level support to our partners where appropriate. We alsoprovide knowledge management tools and customer self-help portals to help augment our support capabilities in an efficient and scalable manner. We delivertechnical support to partners and end-customers 24 hours a day, seven days a week through regional technical support centers located worldwide.Professional ServicesWe offer professional services to end-customers primarily for large implementations where expert technical resources are required. Our professionalservices consultants help in the design of deployments of our products and work closely with end-customer engineers, managers and other project team members toimplement our products according to design, utilizing network analysis tools, attack simulation software and scripts.Dedicated support engineers are available to help identify and eliminate issues before problems arise. These Technical Account Managers (“TAMs”) areseasoned professionals with broad and deep experience in the security and networking arena. Each TAM acts as a single point of contact and customer advocatewithin Fortinet, and is focused on building and maintaining a deep understanding of the customer business and their security requirementsTraining ServicesWe offer training services to our end-customers and channel partners through our training department and authorized training partners. We have alsoimplemented a training certification program, Network Security Expert, to help ensure an understanding of our products and services.CustomersWe typically sell our security solutions to channel partners, who in turn sell to end-customers of various sizes and, at times, we also sell directly to endusers. Our end users include small businesses, large enterprises, government organizations, and service providers, across a wide range of industries, includingtelecommunications, technology, government, financial services, education, retail, manufacturing and healthcare. An end-customer deployment may involve one ofour appliances or thousands, depending on our end-customer’s size and security requirements. We also offer access to our products via the cloud through certaincloud providers. Many of our customers also purchase our FortiGuard security subscription services and FortiCare technical support services. For informationregarding our revenue by customer based on billing address, see Note 14 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form10-K.4Table of ContentsOne distributor, Exclusive Networks Group, which distributed our solutions to a large group of resellers and end-customers, accounted for 18% , 15% and12% of total revenue during 2015, 2014 and 2013, respectively.Sales and MarketingWe primarily sell our products and services through a distribution model. We sell to distributors that sell to networking security and enterprise-focusedresellers and service providers, who, in turn, sell to our end-customers. In certain cases, we sell directly to government-focused resellers, as well as to very largeservice providers who have large purchasing power and unique customer deployment demands. We work with many technology distributors, including ExclusiveNetworks Group, Fine Tec Computer, Ingram Micro Inc. and Arrow Electronics, Inc., and enterprise security-focused resellers including Westcon and Tech Data.We support our channel partners with a dedicated team of experienced channel account managers, sales professionals and sales engineers who providebusiness planning, joint marketing strategy, and pre-sales and operational sales support. Additionally, our sales team often helps drive and support large enterpriseand service provider sales through a direct touch model. Our sales professionals and engineers typically work closely with our channel partners and directly engagewith large end-customers to help address their unique security and deployment requirements. Our sales cycle for an initial end-customer purchase may requireapproximately six months but can be longer for large enterprises, service providers and government organizations. To support our broadly dispersed global channeland end-customer base, we have sales offices in over 70 countries around the world.Our marketing strategy is focused on building our brand and driving end-customer demand for our security solutions. We use a combination of internalmarketing professionals and a network of regional and global channel partners. Our internal marketing organization is responsible for messaging, branding, productmarketing, channel marketing, event marketing, communications and sales support programs. We focus our resources on programs, tools and activities that can beleveraged by partners worldwide to extend our marketing reach, such as sales tools and collateral, product awards and technical certifications, media engagement,training, regional seminars and conferences, webinars and various other demand-generation activities.In 2015, we continued to invest in sales and marketing to capture market share, particularly in the enterprise market where enterprise customers tend tohave a higher lifetime value, and to accelerate our growth. We intend to continue investing in sales and marketing in order to capture additional market share in theenterprise market. Manufacturing and SuppliersWe outsource the manufacturing of our security appliance products to a variety of contract manufacturers and original design manufacturers. Our currentmanufacturing partners include Flextronics International Ltd., Micro-Star International Co., Ltd., Adlink Technology, Inc., Senao Networks, Inc., and a number ofTaiwan-based manufacturers. We submit purchase orders to our contract manufacturers that describe the type and quantities of our products to be manufactured,the delivery date and other delivery terms. Once our products are manufactured, they are sent to either our warehouse in California, or to our logistics partner inTaoyuan City, Taiwan, where accessory packaging and quality-control testing are performed. We believe that outsourcing our manufacturing and a substantialportion of our logistics enables us to focus resources on our core competencies. Our proprietary FortiASICs, which are the key to the performance of ourappliances, are built by contract manufacturers including Faraday Technology Corporation, Kawasaki Microelectronics America, Inc. (“K-Micro”), and RenesasElectronics Corporation (“Renesas”). These contract manufacturers use foundries operated by either United Microelectronics Corporation (“UMC”) or TaiwanSemiconductor Manufacturing Company Limited (“TSMC”).The components included in our products are sourced from various suppliers by us or more frequently by our contract manufacturers. Some of thecomponents important to our business, including specific types of CPUs from Intel Corporation (“Intel”), network chips from Broadcom Corporation(“Broadcom”), Marvell Technology Group Ltd. (“Marvell”) and Intel, and solid-state drives (silicon-based storage devices) from OCZ Technology Group, Inc. andSamsung Electronics Co., Ltd., are available from a limited or sole source of supply.We have no long-term contracts related to the manufacturing of our ASICs or other components that guarantee any capacity or pricing terms.Research and DevelopmentWe focus our research and development efforts on developing new products and systems, and adding new features to existing products and systems. Ourdevelopment strategy is to identify features, products and systems for both software and hardware that are, or are expected to be, important to our end-customers.Our success in designing, developing, manufacturing and5Table of Contentsselling new or enhanced products will depend on a variety of factors, including the identification of market demand for new products, product selection, timelyimplementation of product design and development, product performance, effective manufacturing and assembly processes and sales and marketing.Intellectual PropertyWe rely primarily on patent, trademark, copyright and trade secrets laws, confidentiality procedures and contractual provisions to protect our technology.As of December 31, 2015 , we had 278 issued U.S. and foreign patents and 236 pending U.S. and foreign patent applications. We also license software from thirdparties for inclusion in our products, including open source software and other software available on commercially reasonable terms.Despite our efforts to protect our rights in our technology, unauthorized parties may attempt to copy aspects of our products or obtain and use informationthat we regard as proprietary. We generally enter into confidentiality agreements with our employees, consultants, vendors and customers, and generally limitaccess to and distribution of our proprietary information. However, we cannot provide assurance that the steps we take will prevent misappropriation of ourtechnology. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and manyforeign countries do not enforce these laws as diligently as government agencies and private parties in the United States.Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and otherintellectual property rights. Third parties have asserted, are currently asserting and may in the future assert patent, copyright, trademark or other intellectualproperty rights against us, our channel partners or our end-customers. Successful claims of infringement by a third party could prevent us from distributing certainproducts or performing certain services or require us to pay substantial damages (including treble damages if we are found to have willfully infringed patents orcopyrights), royalties or other fees. Even if third parties may offer a license to their technology, the terms of any offered license may not be acceptable and thefailure to obtain a license or the costs associated with any license could cause our business, operating results or financial condition to be materially and adverselyaffected. We typically indemnify our end-customers, distributors and certain resellers against claims that our products infringe the intellectual property of thirdparties.SeasonalityFor information regarding seasonality in our sales, see the section entitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Quarterly Results of Operations—Seasonality, Cyclicality and Quarterly Revenue Trends” in Part II, Item 7 of this Annual Report on Form10-K.CompetitionThe markets for our products are extremely competitive and are characterized by rapid technological change. The principal competitive factors in ourmarkets include the following: • product performance, features, effectiveness, interoperability and reliability;• our ability to add and integrate new networking and security features and technological expertise;• compliance with industry standards and certifications;• price of products and services and total cost of ownership;• brand recognition;• customer service and support;• sales and distribution capabilities;• size and financial stability of operations; and• breadth of product line.Among others, our competitors include BlueCoat Systems, Inc. (“BlueCoat”), Check Point Software Technologies Ltd. (“Check Point”), Cisco Systems,Inc. (“Cisco”) (through its acquisition of SourceFire, Inc. (“SourceFire”)), Dell Inc. (through its acquisition of SonicWALL, Inc. (“SonicWALL”)), F5 Networks,Inc. (“F5 Networks”), FireEye, Inc. (“FireEye”), Intel (through its acquisition of McAfee, Inc. (“McAfee”)), Juniper Networks, Inc. (“Juniper”), Palo AltoNetworks, Inc. (“Palo Alto Networks”) and Sophos Group Plc (“Sophos”).We believe we compete favorably based on our products’ performance, reliability and breadth, our ability to add and integrate new networking andsecurity features and our technological expertise. Several competitors are significantly larger, have greater financial, technical, marketing, distribution, customersupport and other resources, are more established than we are and have significantly better brand recognition. Some of these larger competitors have substantiallybroader product offerings and6Table of Contentsleverage their relationships based on other products or incorporate functionality into existing products in a manner that discourages users from purchasing ourproducts. Based in part on these competitive pressures, we may lower prices or attempt to add incremental features and functionality.Conditions in our markets could change rapidly and significantly as a result of technological advancements or continuing market consolidation. Thedevelopment and market acceptance of alternative technologies could decrease the demand for our products or render them obsolete. Our competitors mayintroduce products that are less costly, provide superior performance, market their products better, or achieve greater market acceptance than us. In addition, ourlarger competitors often have broader product lines and are in a better position to withstand any significant reduction in capital spending by end-customers in thesemarkets, and will therefore not be as susceptible to downturns in a particular market. The above competitive pressures are likely to continue to impact our business.We may not be able to compete successfully in the future, and competition may harm our business.EmployeesAs of December 31, 2015 , our total headcount was 4,018 employees and contractors. None of our U.S. employees are represented by a labor union;however, our employees in certain European countries have the right to be represented by external labor organizations if they maintain up-to-date unionmembership. We have not experienced any work stoppages, and we consider our relations with our employees to be good.Available InformationOur web site is located at www.fortinet.com, and our investor relations web site is located at http://investor.fortinet.com. The information posted on ourwebsite is not incorporated by reference into this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Act, are available free of charge on ourinvestor relations web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may also access all of ourpublic filings through the SEC’s website at www.sec.gov. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations web site.Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earningsreleases, as part of our investor relations web site. The contents of these web sites are not intended to be incorporated by reference into this report or in any otherreport or document we file.7Table of ContentsITEM 1A. Risk FactorsInvesting in our common stock involves a high degree of risk. Investors should carefully consider the following risks and all other information containedin this Annual Report on Form 10-K, including our consolidated financial statements and the related notes, before investing in our common stock. The risks anduncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are notmaterial, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operationscould be materially harmed. In that case, the trading price of our common stock could decline substantially, and investors may lose some or all of their investment.Risks Related to Our BusinessOur operating results are likely to vary significantly and be unpredictable. Our operating results have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors,many of which are outside of our control or may be difficult to predict, including: •the level of demand for our products and services, which may render forecasts inaccurate; •the timing of channel partner and end-customer orders and our reliance on a concentration of shipments at the end of each quarter; •the timing of shipments, which may depend on many factors such as inventory levels, logistics, shipping delays, our ability to ship new productson schedule and to accurately forecast inventory requirements, and potential delays in the manufacturing process;•inventory management; •the mix of products sold, the mix of revenue between products and services and the degree to which products and services are bundled and soldtogether for a package price;•the purchasing practices and budgeting cycles of our channel partners and end-customers; •seasonal buying patterns of our end-customers;•timing and level of our investments in sales and marketing; •the timing of revenue recognition for our sales, which may be affected by both the mix of sales by our “sell-in” versus our “sell-through”channel partners, and the accuracy and timing of point-of-sale reporting by our “sell-through” channel partners, which impacts our ability torecognize revenue; •the level of perceived threats to network security, which may fluctuate from period to period; •changes in the requirements, market needs or buying practices and patterns of distributors, resellers or end-customers; •changes in the growth rate of the network security markets; •the timing and success of new product and service introductions by us or our competitors, or any other change in the competitive landscape ofour industry, including consolidation among our competitors, partners, or end-customers; •deferral of orders from distributors, resellers or end-customers in anticipation of new products or product enhancements announced by us or ourcompetitors; •increases or decreases in our billings, revenues and expenses caused by fluctuations in foreign currency exchange rates, as a significant portionof our expenses are incurred and paid in currencies other than the U.S. dollar, and fluctuations may impact the actual prices that partners andcustomers are willing to pay for our products and services;8Table of Contents •decisions by potential end-customers to purchase network security solutions from newer technology providers, from larger, more establishedsecurity vendors or from their primary network equipment vendors; •price competition and increased competitiveness in our market; •changes in customer renewal rates for our services; •changes in the payment terms of services contracts or the length of services contracts sold;•changes in our estimated annual effective tax rates;•changes in circumstances and challenges in business conditions, including decreased demand, which may negatively impact our channelpartners’ ability to sell the current inventory they hold and negatively impact their future purchases of products from us;•increased expenses, unforeseen liabilities or write-downs and any impact on results of operations from any acquisition consummated; •our channel partners may have insufficient financial resources and may not be able to withstand changes and challenges in business conditions; •disruptions in our channel or termination of our relationship with important channel partners; •insolvency, credit or other difficulties confronting our key suppliers and channel partners, which could affect their ability to purchase or pay forproducts and services and which could disrupt our supply or distribution chain; •general economic conditions, both in our domestic and foreign markets;•future accounting pronouncements or changes in our accounting policies; and•legislative or regulatory changes, such as with respect to privacy, information and cyber security, exports, the environment, and accountingstandards.Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterlyfinancial and other operating results. This variability and unpredictability could result in our failing to meet our internal operating plan or the expectations ofsecurities analysts or investors for any period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fallsubstantially and we could face costly lawsuits, including securities class action suits. In addition, a significant percentage of our operating expenses are fixed innature and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on marginsin the short term.Adverse economic conditions or reduced information technology spending may adversely impact our business. Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers. Inaddition, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. Weak global economicconditions, weak economic conditions in certain geographies, or a reduction in information technology spending regardless of macro-economic conditions, couldadversely impact our business, financial condition and results of operations in a number of ways, including longer sales cycles, lower prices for our products andservices, higher default rates among our channel partners, reduced unit sales and slower or declining growth.Our billings and revenue growth may slow or may not continue. Billings and revenue growth may slow, or we may experience a decrease in billings and revenue, for a number of reasons, including a slowdown indemand for our products or services, increased competition, a decrease in the growth of our overall market, softness in demand in certain geographies or industryverticals, such as the service provider industry, if we fail for any reason to continue to capitalize on growth opportunities, and due to other risks identified in the“Risk Factors.” Our9Table of Contentsexpenses as a percentage of total revenue may be higher than expected if our revenue is lower than expected and if our investments in sales and marketing andother functional areas do not result in expected billings and revenue growth, and we may not be able to sustain profitability in future periods if we fail to increasebillings, revenue or deferred revenue, do not appropriately manage our cost structure, or encounter unanticipated liabilities. Any failure by us to maintainprofitability and continue our billings and revenue growth could cause the price of our common stock to materially decline.We rely significantly on revenue from FortiGuard security subscription and FortiCare technical support services which may decline, and because we recognizerevenue from FortiGuard security subscription and FortiCare technical support services over the term of the relevant service period, downturns or upturns insales of FortiGuard security subscription and FortiCare technical support services are not immediately reflected in full in our operating results.Our FortiGuard security subscription and FortiCare technical support services revenue has historically accounted for a significant percentage of our totalrevenue. Sales of new, or renewals of existing, FortiGuard security subscription and FortiCare technical support services contracts may decline and fluctuate as aresult of a number of factors, including fluctuations in purchases of FortiGate appliances, end-customers’ level of satisfaction with our products and services, theprices of our products and services, the prices of products and services offered by our competitors or reductions in our customers’ spending levels. If our sales ofnew, or renewals of existing FortiGuard security subscription and FortiCare technical support services contracts decline, our revenue and revenue growth maydecline and our business could suffer. In addition, in the event significant customers require payment terms for FortiGuard security subscription or FortiCaretechnical support services in arrears or for shorter periods of time than annually, such as monthly or quarterly, this may negatively impact our billings and revenue.Furthermore, we recognize FortiGuard security subscription and FortiCare technical support services revenue monthly over the term of the relevant service period,which is typically from one to three years, and in some instances has been as long as five years. As a result, much of the FortiGuard security subscription andFortiCare technical support services revenue we report each quarter is the recognition of deferred revenue from FortiGuard security subscription and FortiCaretechnical support services contracts entered into during previous quarters. Consequently, a decline in new or renewed FortiGuard security subscription or FortiCaretechnical support services contracts in any one quarter will not be fully reflected in revenue in that quarter but will negatively affect our revenue in future quarters.Accordingly, the effect of significant downturns in sales of new, or renewals of existing, FortiGuard security subscription or FortiCare technical support services isnot reflected in full in our statements of operations until future periods. Our FortiGuard security subscription and FortiCare technical support services revenue alsomakes it difficult for us to rapidly increase our revenue through additional service sales in any period, as revenue from new and renewal support services contractsmust be recognized over the applicable service period. We generate a majority of revenue from sales to distributors, resellers and end-customers outside of the United States, and we are therefore subject to anumber of risks associated with international sales and operations. We market and sell our products throughout the world and have established sales offices in many parts of the world. Therefore, we are subject to risksassociated with having worldwide operations. We are also subject to a number of risks typically associated with international sales and operations, including: •economic or political instability in foreign markets; •greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods; •changes in regulatory requirements; •difficulties and costs of staffing and managing foreign operations; •the uncertainty of protection for intellectual property rights in some countries; •costs of compliance with foreign policies, laws and regulations and the risks and costs of non-compliance with such policies, laws andregulations;•protectionist policies and penalties, and local laws, requirements, policies and perceptions that may adversely impact U.S. headquarteredbusiness’ sales in certain countries outside of the United States; •costs of complying with U.S. or other foreign laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act, theU.K. Bribery Act 2010, import and export control laws, tariffs, trade barriers and economic sanctions; 10Table of Contents•other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance;•heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales or sales-related arrangementsthat could disrupt the sales team through terminations of employment or otherwise, and may adversely impact financial results as compared tothose already reported or forecasted and result in restatements of financial statements and irregularities in financial statements;•our ability to effectively implement and maintain adequate internal controls to properly manage our international sales and operations;•the potential for political unrest, terrorism, hostilities, war or natural disasters;•changes in foreign currency exchange rates; •management communication and integration problems resulting from cultural differences and geographic dispersion; and•changes in tax, employment and other laws Product and service sales and employee and contractor matters may be subject to foreign governmental regulations, which vary substantially from countryto country. Further, we may be unable to keep up-to-date with changes in government requirements as they change over time. Failure to comply with theseregulations could result in adverse effects to our business. In many foreign countries, it is common for others to engage in business practices that are prohibited byour internal policies and procedures or U.S. regulations applicable to us. Although we implemented policies and procedures designed to ensure compliance withthese laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents will comply with these laws and policies.Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in litigation, regulatory action, costs ofinvestigation, delays in revenue recognition, delays in financial reporting, financial reporting misstatements, fines, penalties, or the prohibition of the importationor exportation of our products and services, any of which could have a material adverse effect on our business and results of operations.If we are not successful in continuing to execute our strategy to increase our sales to large and medium-sized end-customers, our results of operations maysuffer. An important part of our growth strategy is to increase sales of our products to large and medium-sized enterprises, service providers and governmentorganizations. While we have increased sales in recent periods to large enterprises and service providers, we have experienced less traction selling to certaingovernment organizations and there can be no assurance that we will be successful selling to these customers. Sales to these organizations involve risks that maynot be present (or that are present to a lesser extent) with sales to smaller entities. These risks include: •increased competition from competitors that traditionally target large and medium-sized enterprises, service providers and governmentorganizations and that may already have purchase commitments from those end-customers; •increased purchasing power and leverage held by large end-customers in negotiating contractual arrangements;•unanticipated changes in the capital resources or purchasing behavior of large end-customers, including changes in the volume and frequency oftheir purchases; •more stringent support requirements in our support service contracts, including stricter support response times, more complex requirements andincreased penalties for any failure to meet support requirements; and•longer sales cycles and the associated risk that substantial time and resources may be spent on a potential end-customer that elects not topurchase our products and services. Large and medium-sized enterprises, service providers and government organizations often undertake a significant evaluation process that results in alengthy sales cycle, in some cases over 12 months. Although we have a channel sales model,11Table of Contentsour sales representatives typically engage in direct interaction with end-customers, along with our distributors and resellers, in connection with sales to large andmedium-sized end-customers. We may spend substantial time, effort and money in our sales efforts without being successful in producing any sales. In addition,product purchases by large and medium-sized enterprises, service providers and government organizations are frequently subject to budget constraints, multipleapprovals and unplanned administrative, processing and other delays. Furthermore, service providers represent our largest industry vertical and consolidation orchanges in buying behavior by larger customers within this industry could negatively impact our business. Large and medium-sized enterprises, service providersand government organizations typically have longer implementation cycles, require greater product functionality and scalability, expect a broader range of services,including design services, demand that vendors take on a larger share of risks, require acceptance provisions that can lead to a delay in revenue recognition, andexpect greater payment flexibility from vendors. All these factors can add further risk to business conducted with these customers. In addition, if sales expectedfrom a large and medium-sized end-customer for a particular quarter are not realized in that quarter or at all, our business, operating results and financial conditioncould be materially and adversely affected.Managing inventory of our products and product components is complex. Insufficient inventory may result in lost sales opportunities or delayed revenue, whileexcess inventory may harm our gross margins.Managing our inventory is complex. Our channel partners may increase orders during periods of product shortages, cancel orders or not place orderscommensurate with our expectations if their inventory is too high, return products or take advantage of price protection (if any is available to the particular partner)or delay orders in anticipation of new products. They also may adjust their orders in response to the supply of our products and the products of our competitors thatare available to them and in response to seasonal fluctuations in end-customer demand. Furthermore, if the time required to manufacture or ship certain productsincreases for any reason, inventory shortfalls could result. Management of our inventory is further complicated by the significant number of different products andmodels that we sell. In addition, for those channel partners that have rights of return, inventory held by such channel partners affects our results of operations. Our inventorymanagement systems and related supply chain visibility tools may be inadequate to enable us to effectively manage inventory. Inventory management remains anarea of focus as we balance the need to maintain inventory levels that are sufficient to ensure competitive lead times against the risk of inventory obsolescencebecause of rapidly changing technology and customer requirements. If we ultimately determine that we have excess inventory, we may have to reduce our pricesand write-down inventory, which in turn could result in lower gross margins. Alternatively, insufficient inventory levels may lead to shortages that result indelayed revenue or loss of sales opportunities altogether as potential end-customers turn to competitors’ products that are readily available. For example, we havein the past experienced inventory shortages due to more demand for certain products than we had forecasted. If we are unable to effectively manage our inventoryand that of our channel partners, our results of operations could be adversely affected.We are dependent on the continued services and performance of our senior management, the loss of any of whom could adversely affect our business,operating results and financial condition. Our future performance depends on the continued services and continuing contributions of our senior management to execute on our business plan, and toidentify and pursue new opportunities and product innovations. The loss of services of members of senior management, particularly Ken Xie, our Co-Founder,Chairman and Chief Executive Officer and Michael Xie, our Co-Founder, President and Chief Technology Officer, and any of our senior sales leaders or functionalarea leaders, could significantly delay or prevent the achievement of our development and strategic objectives. The loss of the services, or distraction, of our seniormanagement for any reason could adversely affect our business, financial condition and results of operations.If we are unable to hire, retain and motivate qualified personnel, our business will suffer. Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our keypersonnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales, may seriously harm ourbusiness, financial condition and results of operations. From time to time, we experience turnover in our management-level personnel. None of our key employeeshas an employment agreement for a specific term, and any of our employees may terminate their employment at any time. Our ability to continue to attract andretain highly skilled personnel will be critical to our future success. Competition for highly-skilled personnel is frequently intense, especially for qualifiedemployees in network security and especially in the locations where we have a substantial presence and need for highly-skilled personnel, such as the SanFrancisco Bay Area and Vancouver, Canada. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or futureneeds. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or12Table of Contentsdivulged proprietary or other confidential information.The average sales prices of our products may decrease, which may reduce our gross profits and adversely impact our financial results and the trading price ofour common stock. The average sales prices for our products may decline for a variety of reasons, including competitive pricing pressures, discounts or promotional programswe offer, a change in our mix of products and anticipation of the introduction of new products. Competition continues to increase in the market segments in whichwe participate, and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverseproduct offerings may reduce the price of products that compete with ours in order to promote the sale of other products or may bundle them with other products.Additionally, although we price our products and services worldwide in U.S. dollars, currency fluctuations in certain countries and regions have in the past andmay in the future negatively impact actual prices that partners and customers are willing to pay in those countries and regions. Furthermore, we anticipate that theaverage sales prices and gross profits for our products will decrease over product life cycles. We cannot ensure that we will be successful in developing andintroducing new offerings with enhanced functionality on a timely basis, or that our product offerings, if introduced, will enable us to maintain our prices and grossprofits at levels that will allow us to maintain profitability. Reliance on a concentration of shipments at the end of the quarter could cause our billings and revenue to fall below expected levels. As a result of customer-buying patterns and the efforts of our sales force and channel partners to meet or exceed quarterly quotas, we have historicallyreceived a substantial portion of each quarter’s sales orders and generated a substantial portion of each quarter’s billings and revenue during the last two weeks ofthe quarter. For example, on average over the past eight quarters, our shipments during the last two weeks of each quarter accounted for 31% of aggregate billingsfor each quarter. If expected orders at the end of any quarter are delayed for any reason, including the failure of anticipated purchase orders to materialize, ourlogistics partners’ inability to ship products prior to quarter-end to fulfill purchase orders received near the end of the quarter, our failure to manage inventory tomeet demand, our inability to release new products on schedule, any failure of our systems related to order review and processing, any delays in shipments due totrade compliance requirements, labor disputes or logistics changes at shipping ports or otherwise, our billings and revenue for that quarter could fall below ourexpectations or those of securities analysts and investors, resulting in a decline in our stock price.Unless we continue to develop better market awareness of our company and our products, and to improve lead generation and sales enablement, our revenuemay not continue to grow.Increased market awareness of our capabilities and products and increased lead generation are essential to our continued growth and our success in all ofour markets, particularly for the large enterprise, service provider and government organization market. We have historically had relatively low spending onmarketing activities. While we have increased our investments in sales and marketing, it is not clear that these investments will continue to result in increasedrevenue. If our investments in additional sales personnel or if our marketing programs are not successful in continuing to create market awareness of our companyand products and increased lead generation, we will not be able to achieve sustained growth, and our business, financial condition and results of operations will beadversely affected.We rely on third-party channel partners to generate substantially all of our revenue. If our partners fail to perform, our ability to sell our products and serviceswill be limited, and if we fail to optimize our channel partner model going forward, our operating results will be harmed. Substantially all of our revenue is generated through sales by our channel partners, which include distributors and resellers. We depend upon our channelpartners to generate sales opportunities and manage the sales process. To the extent our channel partners are unsuccessful in selling our products, or we are unableto enter into arrangements with, and retain, a sufficient number of high quality channel partners in each of the regions in which we sell products, and keep themmotivated to sell our products, our ability to sell our products and operating results will be harmed. The termination of our relationship with any significant channelpartner may adversely impact our sales and operating results. We provide sales channel partners with specific programs to assist them in selling our products and incentivize them to sell our products, but there can beno assurance that these programs will be effective. In addition, our channel partners may be unsuccessful in marketing, selling and supporting our products andservices and may purchase more inventory than they can sell. Our channel partners generally do not have minimum purchase requirements. Some of our channelpartners may have insufficient financial resources to withstand changes and challenges in business conditions. In addition, if our channel partners’ financialcondition or operations weaken it could negatively impact their ability to sell our product and services. They may also13Table of Contentsmarket, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales and support of such products.They may also have incentives to promote our competitors’ products to the detriment of our own, or they may cease selling our products altogether. We cannotensure that we will retain these channel partners or that we will be able to secure additional or replacement partners or that existing channel partners will continueto perform. The loss of one or more of our significant channel partners or the failure to obtain and ship a number of large orders each quarter through them couldharm our operating results. During 2015, 2014 and 2013, Exclusive Networks Group, which distributed our solutions to a large group of resellers and end-customers, accounted for 18% , 15% and 12% of our total revenue, respectively. In addition, any new sales channel partner will require extensive training and maytake several months or more to achieve productivity. Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, forexample, any of our channel partners misrepresent the functionality of our products or services to end-customers or our channel partners violate laws or ourcorporate policies. We depend on our global channel partners to comply with applicable legal and regulatory requirements. To the extent that they fail to do so, thatcould have a material adverse effect on our business, operating results and financial condition. If we fail to optimize our channel partner model or fail to manageexisting sales channels, our business will be seriously harmed.Actual, possible or perceived defects or vulnerabilities in our products or services, the failure of our products or services to prevent a virus or security breach,or misuse of our products could harm our reputation and divert resources. Because our products and services are complex, they have contained and may contain defects or errors that are not detected until after their commercialrelease and deployment by our customers. Defects or vulnerabilities may impede or block network traffic, cause our products or services to be vulnerable toelectronic break-ins or cause them to fail to help secure networks. Different customers deploy and use our products in different ways, and certain deployments andusages may subject our products to adverse conditions that may negatively impact the effectiveness and useful lifetime of our products. We cannot ensure that ourproducts will prevent all security threats. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are notrecognized until launched against a target, we may be unable to anticipate these techniques. In addition, defects or errors in our FortiGuard security subscriptionupdates or our FortiGate appliances could result in a failure of our FortiGuard security subscription services to effectively update end-customers’ FortiGateappliances and thereby leave customers vulnerable to attacks. Furthermore, our solutions may also fail to detect or prevent viruses, worms or similar threats due toa number of reasons such as the evolving nature of such threats and the continual emergence of new threats that we may fail to add to our FortiGuard databases intime to protect our end-customers’ networks. Our FortiGuard or FortiCare data centers and networks may also experience technical failures and downtime, andmay fail to distribute appropriate updates, or fail to meet the increased requirements of our customer base. Any such technical failure, downtime, or failures ingeneral may temporarily or permanently expose our end-customers’ networks, leaving their networks unprotected against the latest security threats. An actual, possible or perceived security breach or infection of the network of one of our end-customers, regardless of whether the breach is attributableto the failure of our products or services to prevent the security breach, could adversely affect the market’s perception of our security products and services and, insome instances, subject us to potential liability that is not contractually limited. We may not be able to correct any security flaws or vulnerabilities promptly, or atall. Our products may also be misused by end-customers or third parties who obtain access to our products. For example, our products could be used to censorprivate access to certain information on the Internet. Such use of our products for censorship could result in negative press coverage and negatively affect ourreputation, even if we take reasonable measures to prevent any improper shipment of our products or if our products are provided by an unauthorized third-party.Any actual, possible, or perceived defects, errors or vulnerabilities in our products, or misuse of our products, could result in: •expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work-around errors or defectsor to address and eliminate vulnerabilities; •loss of existing or potential end-customers or channel partners; •delayed or lost revenue; •delay or failure to attain market acceptance; •negative publicity, which will harm our reputation; and •litigation, regulatory inquiries or investigations that may be costly and harm our reputation and, in some instances, subject us to potential liabilitythat is not contractually limited. 14Table of ContentsOur business and operations have experienced growth, and if we do not appropriately manage any future growth, or are unable to improve our systems andprocesses, our operating results will be negatively affected. Our business has grown over the last several years. We rely heavily on information technology and accounting systems to help manage critical functionssuch as order processing, revenue recognition, financial forecasts, inventory and supply chain management and trade compliance reviews. Certain of these systemswere developed by us for our internal use and as such may have a higher risk of failure or not receive the same level of support as systems purchased from andsupported by external technology companies. In addition, we have been slow to adopt and implement certain automated functions, which could have a negativeimpact on our business. For example, a large part of our order processing relies on the manual processing of emails internally and receipt of customer purchaseorders through email and, to a lesser extent, through electronic data interchange from our customers. Combined with the fact that we may receive a majority of ourorders in the last few weeks of any given quarter, a significant interruption in our email service or other systems could result in delayed order fulfillment anddecreased billings and revenue for that quarter. To manage any future growth effectively, we must continue to improve and expand our information technology andfinancial, operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be ableto successfully implement requisite improvements to these systems, controls and processes, such as system access and change management controls, in a timely orefficient manner. Our failure to improve our systems and processes, or their failure to operate in the intended manner, whether as a result of the significant growthof our business or otherwise, may result in our inability to manage the growth of our business and to accurately forecast our revenue, expenses and earnings, or toprevent certain losses. Moreover, the failure of our systems and processes could undermine our ability to provide accurate, timely and reliable reports on ourfinancial and operating results and could impact the effectiveness of our internal control over financial reporting. In addition, our systems and processes may notprevent or detect all errors, omissions or fraud. Our productivity and the quality of our products and services may also be adversely affected if we do not integrateand train our new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination throughoutour organization. Failure to manage any future growth effectively could result in increased costs and harm our results of operations. We may experience difficulties implementing and maintaining our new enterprise resource planning system. We purchased a new enterprise resource planning (“ERP”) system and are currently implementing the new system. ERP implementations are complexand time-consuming, and involve substantial expenditures on system software and implementation activities. The ERP system will be critical to our ability toprovide important information to our management, obtain and deliver products, provide services and customer support, send invoices and track payments, fulfillcontractual obligations, accurately maintain books and records, provide accurate, timely and reliable reports on our financial and operating results or otherwiseoperate our business. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system; anysuch transformation involves risks inherent in the conversion to a new computer system, including loss of information and potential disruption to our normaloperations. The implementation and maintenance of the new ERP system has required, and will continue to require, the investment of significant financial andhuman resources and the implementation may be subject to delays and cost overruns. In addition, we may not be able to successfully complete the implementationof the new ERP system without experiencing difficulties. Any disruptions, delays or deficiencies in the design and implementation or the ongoing maintenance ofthe new ERP system could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments,fulfill contractual obligations, accurately maintain books and records, provide accurate, timely and reliable reports on our financial and operating results, orotherwise operate our business. Additionally, if we do not effectively implement the ERP system as planned or the system does not operate as intended, theeffectiveness of our internal control over financial reporting could be adversely affected or our ability to assess it adequately could be delayed.If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating resultscould fall below expectations of securities analysts and investors, resulting in a decline in our stock price. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience andon various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in this Annual Report on Form 10-K, the results of which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actualcircumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors,resulting in a decline in our stock price.15Table of ContentsSignificant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition and sales returnreserves, stock-based compensation expense, valuation of inventory, warranty liabilities, investments, accounting for business combination, goodwill and otherlong-lived assets, restructuring, accounting for income taxes, and litigation and settlement costs.We offer retroactive price protection to certain of our major distributors, and if we fail to balance their inventory with end-customer demand for our products,our allowance for price protection may be inadequate, which could adversely affect our results of operations.We provide certain of our major distributors with price protection rights for inventories of our products held by them. If we reduce the list price of ourproducts, certain distributors receive refunds or credits from us that reduce the price of such products held in their inventory based upon the new list price. Futurecredits for price protection will depend on the percentage of our price reductions for the products in inventory and our ability to manage the levels of our majordistributors’ inventories. If future price protection adjustments are higher than expected, our future results of operations could be materially and adversely affected. Because we depend on several third-party manufacturers to build our products, we are susceptible to manufacturing delays that could prevent us fromshipping customer orders on time, if at all, and may result in the loss of sales and customers, and third-party manufacturing cost increases could result inlower gross margins.We outsource the manufacturing of our security appliance products to contract manufacturing partners and original design manufacturing partnersincluding Faraday, K-Micro and Renesas. Our reliance on our third-party manufacturers in Asia and elsewhere reduces our control over the manufacturing process,exposing us to risks, including reduced control over quality assurance and product costs, supply and timing. Any manufacturing disruption by our third-partymanufacturers could impair our ability to fulfill orders. If we are unable to manage our relationships with these third-party manufacturers effectively, or if thesethird-party manufacturers experience delays, increased manufacturing lead-times, disruptions, capacity constraints or quality control problems in theirmanufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products to our customers could be impaired and ourbusiness would be seriously harmed. These manufacturers fulfill our supply requirements on the basis of individual purchase orders. We have no long-term contracts or arrangements withcertain of our third-party manufacturers that guarantee capacity, the continuation of particular payment terms or the extension of credit limits. Accordingly, theyare not obligated to continue to fulfill our supply requirements, and the prices we are charged for manufacturing services could be increased on short notice. If weare required to change third-party manufacturers, our ability to meet our scheduled product deliveries to our customers would be adversely affected, which couldcause the loss of sales and existing or potential customers, delayed revenue or an increase in our costs, which could adversely affect our gross margins. Ourindividual product lines are generally manufactured by only one manufacturing partner. Any production or shipping interruptions for any reason, such as a naturaldisaster, epidemic, capacity shortages, quality problems, or strike or other labor disruption at one of our manufacturing partners or locations or at shipping ports orlocations, would severely affect sales of our product lines manufactured by that manufacturing partner. Furthermore, manufacturing cost increases for any reasoncould result in lower gross margins. Our proprietary FortiASIC, which is the key to the performance of our appliances, is fabricated by contract manufacturers in foundries operated by UMCand TSMC on a purchase order basis, and UMC and TSMC do not guarantee any capacity and could reject orders or could try to increase pricing. Accordingly, thefoundries are not obligated to continue to fulfill our supply requirements, and due to the long lead time that a new foundry would require, we could suffertemporary or long term inventory shortages of our FortiASIC as well as increased costs. Our suppliers may also prioritize orders by other companies that orderhigher volumes or more profitable products. If any of these manufacturers materially delays its supply of ASICs or specific product models to us, or requires us tofind an alternate supplier and we are not able to do so on a timely and reasonable basis, or if these foundries materially increase their prices for fabrication of ourASICs, our business would be harmed. In addition, our reliance on third-party manufacturers and foundries limits our control over environmental regulatory requirements such as the hazardoussubstance content of our products and therefore our ability to ensure compliance with the European Union’s (“EU”) Restriction of Hazardous Substances Directive(“RoHS”) and other similar laws. It also exposes us to the risk that certain minerals and metals, known as “conflict minerals,” that are contained in our productshave originated in the Democratic Republic of the Congo or an adjoining country. As a result of the passage of the Dodd-Frank Wall Street Reform and ConsumerProtection Act of 2010, the SEC adopted disclosure requirements for public companies whose products contain conflict minerals that are necessary to thefunctionality or production of such products. Under these rules, we are required to obtain sourcing data from suppliers, perform supply chain due diligence, and fileannually with the SEC a16Table of Contentsspecialized disclosure report on Form SD covering the prior calendar year. We have incurred and expect to incur additional costs to comply with the rules,including costs related to the determination of the origin, source and chain of custody of the conflict minerals used in our products and the adoption of conflictminerals-related governance policies, processes and controls. Moreover, the implementation of these compliance measures could adversely affect the sourcing,availability and pricing of materials used in the manufacture of our products to the extent that there may be only a limited number of suppliers that are able to meetour sourcing requirements. There can be no assurance that we will be able to obtain such materials in sufficient quantities or at competitive prices. We may alsoencounter customers who require that all of the components of our products be certified as conflict-free. If we are not able to meet customer requirements, suchcustomers may choose to not purchase our products, which could impact our sales and the value of portions of our inventory.Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages, long lead times forcomponents, and supply changes, each of which could disrupt or delay our scheduled product deliveries to our customers, result in inventory shortage, or lossof sales and customers, or increase component costs resulting in lower gross margins. We and our contract manufacturers currently purchase several key parts and components used in the manufacture of our products from limited sources ofsupply. We are therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that component suppliers discontinue ormodify components used in our products. We have in the past experienced, and are currently experiencing, shortages and long lead times for certain components.Certain of our limited source components for particular appliances and suppliers of those components include: specific types of central processing units from Intel,network chips from Broadcom Corporation, Marvell Technology Group Ltd. and Intel, and hard drives from Western Digital Technologies, Inc. The introductionby component suppliers of new versions of their products, particularly if not anticipated by us or our contract manufacturers, could require us to expend significantresources to incorporate these new components into our products. In addition, if these suppliers were to discontinue production of a necessary part or component,we would be required to expend significant resources and time in locating and integrating replacement parts or components from another vendor. Qualifyingadditional suppliers for limited source parts or components can be time-consuming and expensive. Our manufacturing partners have experienced long lead times for the purchase of components incorporated into our products. Lead times for componentsmay be adversely impacted by factors outside of our control, such as natural disasters and other factors. Our reliance on a limited number of suppliers involvesseveral additional risks, including:•a potential inability to obtain an adequate supply of required parts or components when required; •financial or other difficulties faced by our suppliers; •infringement or misappropriation of our intellectual property; •price increases; •failure of a component to meet environmental or other regulatory requirements; •failure to meet delivery obligations in a timely fashion; and •failure in component quality. The occurrence of any of these events would be disruptive to us and could seriously harm our business. Any interruption or delay in the supply of any ofthese parts or components, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time,would harm our ability to meet our scheduled product deliveries to our distributors, resellers and end-customers. This could harm our relationships with ourchannel partners and end-customers and could cause delays in shipment of our products and adversely affect our results of operations. In addition, increasedcomponent costs could result in lower gross margins.We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations. A significant portion of our operating expenses are incurred outside the United States. These expenses are denominated in foreign currencies and aresubject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and Canadian dollar. While we are not currently engagedin material hedging activities, we17Table of Contentshave been hedging currency exposures relating to certain balance sheet accounts and, if we stop hedging against any of these risks or if our attempts to hedgeagainst these currency exposures are not successful, our financial condition and results of operations could be adversely affected. In addition, our sales contractsare primarily denominated in U.S. dollars and therefore, while substantially all of our revenue is not subject to foreign currency risk, it does not serve as a hedge toour foreign currency-denominated operating expenses. In addition, a strengthening of the U.S. dollar could increase the real cost of our products to our customersoutside of the United States, which could also adversely affect our financial condition and results of operations. We are subject to governmental export and import controls that could subject us to liability or restrictions on sales, and could impair our ability to compete ininternational markets. Because we incorporate encryption technology into our products, certain of our products are subject to U.S. export controls and may be exported outsidethe United States only with the required export license or through an export license exception, and may be prohibited altogether from export to certain countries. Ifwe were to fail to comply with U.S. export laws, U.S. Customs regulations and import regulations, U.S. economic sanctions and other countries’ import and exportlaws, we could be subject to substantial civil and criminal penalties, including fines for the company and incarceration for responsible employees and managers,and the possible loss of export or import privileges. In addition, if our channel partners fail to obtain appropriate import, export or re-export licenses or permits,(for example, for stocking orders placed by our partners), we may also be adversely affected through reputational harm and penalties and we may not be able toprovide support related to appliances shipped pursuant to such orders. Obtaining the necessary export license for a particular sale may be time-consuming and mayresult in the delay or loss of sales opportunities. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries,governments and persons. Even though we take precautions to prevent our product from being shipped to U.S. sanctions targets, our products could be shipped tothose targets by our channel partners, despite such precautions. Any such shipment could have negative consequences including government investigations andpenalties and reputational harm. In addition, various countries regulate the import of certain encryption technology, including import permitting and licensingrequirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in thosecountries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets,prevent our customers with international operations from deploying our products globally or, in some cases, prevent the export or import of our products to certaincountries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement orscope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of ourproducts by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of ourproducts or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations. If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected. We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relatingto the recycling of electrical and electronic equipment. The laws and regulations to which we are subject include the EU RoHS and the EU Waste Electrical andElectronic Equipment Directive (“WEEE Directive”), as well as the implementing legislation of the EU member states. Similar laws and regulations have beenpassed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in thefuture be, subject to these laws and regulations. The EU RoHS and the similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in themanufacture of electrical equipment, including our products. We have incurred costs to comply with these laws, including research and development costs, costsassociated with assuring the supply of compliant components and costs associated with writing off noncompliant inventory. We expect to continue to incur costsrelated to environmental laws and regulations in the future. With respect to the EU RoHS, we and our competitors rely on an exemption for lead in networkinfrastructure equipment. It is possible this exemption will be revoked in the near future. If this exemption is revoked, if there are other changes to these laws (ortheir interpretation) or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products to use components compatible withthese regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics. 18Table of ContentsThe EU has also adopted the WEEE Directive, which requires electronic goods producers to be responsible for the collection, recycling and treatment ofsuch products. Although currently our EU international channel partners are responsible for the requirements of this directive as the importer of record in most ofthe European countries in which we sell our products, changes in interpretation of the regulations may cause us to incur costs or have additional regulatoryrequirements in the future to meet in order to comply with this directive, or with any similar laws adopted in other jurisdictions. Our failure to comply with these and future environmental rules and regulations could result in reduced sales of our products, increased costs, substantialproduct inventory write-offs, reputational damage, penalties and other sanctions. A portion of our revenue is generated by sales to government organizations, which are subject to a number of challenges and risks. Sales to U.S. and foreign federal, state and local governmental agency end-customers have accounted for a portion of our revenue in past periods, and wemay in the future increase sales to government organizations. Sales to government organizations are subject to a number of risks. Selling to governmentorganizations can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense, with long sales cycles and withoutany assurance of winning a sale.Government demand, sales and payment for our products and services may be negatively impacted by numerous factors and requirements unique toselling to government agencies, such as:•public sector budgetary cycles,•funding authorizations and requirements unique to government agencies, with funding or purchasing reductions or delays adversely affectingpublic sector demand for our products,•geopolitical matters, and•rules and regulations applicable to certain government sales.The rules and regulations applicable to sales to government organizations may also negatively impact sales to other organizations. To date, we have hadlimited traction in sales to U.S. federal government agencies, and any future sales to government organizations is uncertain. Government organizations may havecontractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination mayadversely impact our future results of operations. For example, if the distributor receives a significant portion of its revenue from sales to such governmentorganization, the financial health of the distributor could be substantially harmed, which could negatively affect our future sales to such distributor. Governmentsroutinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continuebuying our products and services, a reduction of revenue or fines or civil or criminal liability if the audit uncovers improper or illegal activities. Any such penaltiescould adversely impact our results of operations in a material way. Finally, purchases by the U.S. government may require certain products to be manufactured inthe United States and other high cost manufacturing locations, and we may not manufacture all products in locations that meet the requirements of the U.S.government. False detection of vulnerabilities, viruses or security breaches or false identification of spam or spyware could adversely affect our business. Our antivirus and our intrusion prevention services may falsely detect viruses or other threats that do not actually exist. This risk is heightened by theinclusion of a “heuristics” feature in our products, which attempts to identify viruses and other threats not based on any known signatures but based oncharacteristics or anomalies that may indicate that a particular item is a threat. When our end-customers enable the heuristics feature in our products, the risk offalsely identifying viruses and other threats significantly increases. These false positives, while typical in the industry, may impair the perceived reliability of ourproducts and may therefore adversely impact market acceptance of our products. Also, our anti-spam and anti-malware services may falsely identify emails orprograms as unwanted spam or potentially unwanted programs, or alternatively fail to properly identify unwanted emails or programs, particularly as spam emailsor spyware are often designed to circumvent anti-spam or spyware products. Parties whose emails or programs are blocked by our products may seek redressagainst us for labeling them as spammers or spyware, or for interfering with their business. In addition, false identification of emails or programs as unwantedspam or potentially unwanted programs may reduce the adoption of our products. If our system restricts important files or applications based on falsely identifyingthem as malware or some other item that should be restricted, this could adversely affect end-customers’ systems and cause material system failures. In addition,our threat researchers19Table of Contentsperiodically identify vulnerabilities in various third-party products, and, if these identifications are perceived to be incorrect or are in fact incorrect, this could harmour business. Any such false identification or perceived false identification of important files, applications or vulnerabilities could result in negative publicity, lossof end-customers and sales, increased costs to remedy any problem and costly litigation. If our internal network system or our website is compromised, public perception of our products and services will be harmed, we may become subject toliability, and our business, operating results and stock price may be adversely impacted.We will not succeed unless the marketplace is confident that we provide effective network security protection. Despite our efforts and processes toprevent breaches of our internal network system and website, we are still vulnerable to computer viruses, break-ins, phishing attacks, attempts to overload ourservers with denial-of-service and other cyber-attacks and similar disruptions from unauthorized access to our internal network system or our website. Our securitymeasures may also be breached due to employee error, malfeasance or otherwise, and third parties may attempt to fraudulently induce our employees to discloseinformation in order to gain access to our network. We cannot assure you that the measures we have taken to protect our network and website will provide absolutesecurity. Moreover, because we provide network security products, we may be a more attractive target for attacks by computer hackers. Although we have not yetexperienced significant damages from unauthorized access by a third party of our internal network or website, an actual or perceived breach of network securityoccurs in our internal systems or website could adversely affect the market perception of our products and services and investor confidence in our company. Anybreach of our network system or website could impair our ability to operate our business, including our ability to provide FortiGuard security subscription andFortiCare technical support services to our end-customers, lead to interruptions or system slowdowns, cause loss of critical data, or lead to the unauthorizeddisclosure or use of confidential, proprietary or sensitive information. We could also be subject to liability and litigation and reputational harm and our channelpartners and end-customers may be harmed, lose confidence in us and decrease or cease using our products and services. Any breach of our internal networksystem or our website could have an adverse effect on our business, operating results and stock price. Our ability to sell our products is dependent on the quality of our technical support services, and our failure to offer high quality technical support serviceswould have a material adverse effect on our sales and results of operations. Once our products are deployed within our end-customers’ networks, our end-customers depend on our technical support services, as well as the supportof our channel partners, to resolve any issues relating to our products. If we or our channel partners do not effectively assist our customers in deploying ourproducts, succeed in helping our customers quickly resolve post-deployment issues and provide effective ongoing support, our ability to sell additional productsand services to existing customers would be adversely affected and our reputation with potential customers could be damaged. Many large end-customers, serviceprovider and government organization end-customers require higher levels of support than smaller end-customers because of their more complex deployments. Ifwe fail to meet the requirements of our larger end-customers, it may be more difficult to execute on our strategy to increase our penetration with large enterprises,service providers and government organizations. As a result, our failure to maintain high quality support services would have a material adverse effect on ourbusiness, financial condition and results of operations.We could be subject to changes in our tax rates, the adoption of new U.S. or international tax legislation, or exposure to additional tax liabilities.We are subject to taxes in the United States and numerous foreign jurisdictions, where a number of our subsidiaries are organized. Our provision forincome taxes is subject to volatility and could be adversely affected by several factors, many of which are outside of our control, including: •earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;•the mix of earnings in countries with differing statutory tax rates or withholding taxes; •changes in the valuation of our deferred tax assets and liabilities; •transfer pricing adjustments; •an increase in non-deductible expenses for tax purposes, including certain stock-based compensation expense, write-offs of acquired in-processresearch and development, and impairment of goodwill;20Table of Contents•tax costs related to intercompany realignments; •tax assessments resulting from income tax audits or any related tax interest or penalties that could significantly affect our provision for incometaxes for the period in which the settlement takes place; •a change in our decision to indefinitely reinvest foreign earnings; •changes in accounting principles;•court decisions, tax rulings and interpretations of tax laws, and regulations by international, federal or local governmental authorities; or •changes in tax laws and regulations, including possible changes in the United States to the taxation of earnings of our foreign subsidiaries, thedeductibility of expenses attributable to foreign income or the foreign tax credit rules, or changes to the U.S. income tax rate, which wouldnecessitate a revaluation of our deferred tax assets and liabilities. Significant judgment is required to determine the recognition and measurement attribute prescribed in the Financial Accounting Standards Boardstandard. In addition, the standard applies to all income tax positions, including the potential recovery of previously paid taxes, which, if settled unfavorably, couldadversely impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing employment and capital investmentactions and commitments, our income in certain foreign countries is subject to reduced tax rates and, in some cases, is wholly exempt from tax. Our failure to meetthese commitments could adversely impact our provision for income taxes. In addition, we are subject to the examination of our income tax returns by the InternalRevenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from such examinations to determine theadequacy of our provision for income taxes.Although we currently do not have a valuation allowance, we may in the future be required to establish one. We will continue to assess the need for avaluation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist.In addition, we hold a significant portion of our cash and investments outside of the United States. Potential legislation could result in our transferring thiscash and investments back to the United States, and potentially incurring an additional tax obligation. Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted andactual tax rates. Forecasts of our income tax position and effective tax rate are complex, subject to uncertainty and periodic updates because our income tax position foreach year combines the effects of a mix of profits earned and losses incurred by us in various tax jurisdictions with a broad range of income tax rates, as well aschanges in the valuation of deferred tax assets and liabilities, the impact of various accounting rules and changes to these rules and tax laws, the results ofexaminations by various tax authorities, and the impact of any acquisition, business combination or other reorganization or financing transaction. To forecast ourglobal tax rate, we estimate our pre-tax profits and losses by jurisdiction and forecast our tax expense by jurisdiction. If the mix of profits and losses, our ability touse tax credits or effective tax rates in a given jurisdiction differs from our estimate, our actual tax rate could be materially different than forecasted, which couldhave a material impact on our results of business, financial condition and results of operations. As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our businessis subject to the application of multiple and sometimes conflicting tax laws and regulations, as well as multinational tax conventions. Our effective tax rate ishighly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, theavailability of tax credits and carryforwards, and the effectiveness of our tax planning strategies. The application of tax laws and regulations is subject to legal andfactual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and theevolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact ourtax liability and/or our effective income tax rate. 21Table of ContentsIn addition, we are subject to examination of our income tax returns by the IRS and other tax authorities. If tax authorities challenge the relative mix ofU.S. and international income, our future effective income tax rates could be adversely affected. While we regularly assess the likelihood of adverse outcomesfrom such examinations and the adequacy of our provision for income taxes, there can be no assurance that such provision is sufficient and that a determination bya tax authority will not have an adverse effect on our business, financial condition and results of operations.Our inability to acquire and integrate other businesses, products or technologies could seriously harm our competitive position. In order to remain competitive, we may seek to acquire additional businesses, products, or technologies and intellectual property, such as patents. Forexample, we recently closed our acquisition of Meru. For any past acquisition or possible future acquisition, we may not be successful in negotiating the terms ofthe acquisition, financing the acquisition, or effectively integrating the acquired business, product, technology or intellectual property into our existing businessand operations. We may have difficulty incorporating acquired technologies, intellectual property or products with our existing product lines, integrating reportingsystems and procedures, and maintaining uniform standards, controls, procedures and policies. For example, we may experience difficulties integrating Meru’sERP system or sales and support processes and systems with our current ERP system or our sales and support processes and systems. Our due diligence may fail toidentify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues with intellectualproperty, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or customerissues, and we may not accurately forecast the financial impact of an acquisition. In addition, any acquisitions we are able to complete, including our acquisition ofMeru, may be dilutive to revenue growth and earnings and may not result in any synergies or other benefits we had expected to achieve, which could result inimpairment charges that could be substantial. We may have to pay cash, incur debt, or issue equity securities to pay for any acquisition, each of which could affectour financial condition or the value of our capital stock and could result in dilution to our stockholders. Acquisitions during a quarter may result in increasedoperating expenses and adversely affect our results of operations for that period or future periods compared to the results that we have previously forecasted orachieved. Further, completing a potential acquisition and integrating acquired businesses, products, technologies or intellectual property could significantly divertmanagement time and resources.Our business is subject to the risks of warranty claims, product returns, product liability and product defects. Our products are very complex and, despite testing prior to their release, have contained and may contain undetected defects or errors, especially whenfirst introduced or when new versions are released. Product errors have affected the performance of our products and could delay the development or release ofnew products or new versions of products, adversely affect our reputation and our end-customers’ willingness to buy products from us, and adversely affect marketacceptance or perception of our products. Any such errors or delays in releasing new products or new versions of products or allegations of unsatisfactoryperformance could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in redesigning the products, cause us tolose significant end-customers, subject us to liability for damages and divert our resources from other tasks, any one of which could materially and adversely affectour business, results of operations and financial condition. Our products must successfully interoperate with products from other vendors. As a result, whenproblems occur in a network, it may be difficult to identify the sources of these problems. The occurrence of hardware and software errors, whether or not causedby our products, could delay or reduce market acceptance of our products, and have an adverse effect on our business and financial performance, and any necessaryrevisions may cause us to incur significant expenses. The occurrence of any such problems could harm our business, financial condition and results of operations. Although we generally have limitation of liability provisions in our standard terms and conditions of sale, they may not fully or effectively protect us fromclaims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries, and in some circumstanceswe may be required to indemnify a customer in full, without a limitation on liability, for certain liabilities, including potential liabilities that are not contractuallylimited. The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain claims associated withthe use of our products, but our insurance coverage may not cover such claim at all or may not adequately cover any claim asserted against us, and in someinstances may subject us to potential liability that is not contractually limited. In addition, even claims that ultimately are unsuccessful could result in ourexpenditure of funds in litigation and divert management’s time and other resources. 22Table of ContentsOur business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such ascivil unrest, labor disruption, and terrorism. A significant natural disaster, such as an earthquake, fire, power outage, flood, or other catastrophic event could have a material adverse impact on ourbusiness, operating results and financial condition. Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity, andour research and development and data office center in Vancouver, Canada is subject to the risk of flooding. In addition, natural disasters could affect ourmanufacturing vendors, suppliers or logistics providers’ ability to perform services such as obtaining product components and manufacturing products on a timelybasis and assisting with shipments on a timely basis. In the event our or our service providers’ information technology systems or manufacturing or logisticsabilities are hindered by any of the events discussed above, shipments could be delayed, resulting in our missing financial targets, such as revenue and shipmenttargets, for a particular quarter. In addition, regional instability, civil unrest, labor disruptions, acts of terrorism and other geo-political unrest could causedisruptions in our business or the business of our manufacturers, logistics providers, partners or end-customers, or of the economy as a whole. Given our typicalconcentration of sales at the end of each quarter, any disruption in the business of our manufacturers, logistics providers, partners or end-customers that impactssales at the end of our quarter could have a significant adverse impact on our quarterly results. To the extent that any of the above results in delays or cancellationsof customer orders, or in the delay of the manufacture, deployment or shipment of our products, our business, financial condition and results of operations wouldbe adversely affected.Risks Related to Our IndustryThe network security market is rapidly evolving and the complex technology incorporated in our products makes them difficult to develop. If we do notaccurately predict, prepare for and respond promptly to technological and market developments and changing end-customer needs, our competitive positionand prospects will be harmed. The network security market is expected to continue to evolve rapidly. Moreover, many of our end-customers operate in markets characterized by rapidlychanging technologies and business plans, which require them to add numerous network access points and adapt increasingly complex enterprise networks,incorporating a variety of hardware, software applications, operating systems and networking protocols. In addition, computer hackers and others who try to attacknetworks employ increasingly sophisticated techniques to gain access to and attack systems and networks. The technology in our products is especially complexbecause it needs to effectively identify and respond to new and increasingly sophisticated methods of attack, while minimizing the impact on network performance.Additionally, some of our new products and enhancements may require us to develop new hardware architectures and ASICs that involve complex, expensive andtime consuming research and development processes. Although the market expects rapid introduction of new products or product enhancements to respond to newthreats, the development of these products is difficult and the timetable for commercial release and availability is uncertain and there can be long time periodsbetween releases and availability of new products. We have in the past and may in the future experience unanticipated delays in the availability of new productsand services and fail to meet previously announced timetables for such availability. If we do not quickly respond to the rapidly changing and rigorous needs of ourend-customers by developing and releasing and making available on a timely basis new products and services or enhancements that can respond adequately to newsecurity threats, our competitive position and business prospects will be harmed. Our URL database for our web filtering service may fail to keep pace with the rapid growth of URLs and may not categorize websites in accordance with ourend-customers ’ expectations. The success of our web filtering service depends on the breadth and accuracy of our URL database. Although our URL database currently catalogsmillions of unique URLs, it contains only a portion of the URLs for all of the websites that are available on the Internet. In addition, the total number of URLs andsoftware applications is growing rapidly, and we expect this rapid growth to continue in the future. Accordingly, we must identify and categorize content for oursecurity risk categories at an extremely rapid rate. Our database and technologies may not be able to keep pace with the growth in the number of websites,especially the growing amount of content utilizing foreign languages and the increasing sophistication of malicious code and the delivery mechanisms associatedwith spyware, phishing and other hazards associated with the Internet. Further, the ongoing evolution of the Internet and computing environments will require us tocontinually improve the functionality, features and reliability of our web filtering function. Any failure of our databases to keep pace with the rapid growth andtechnological change of the Internet could impair the market acceptance of our products, which in turn could harm our business, financial condition and results ofoperations. In addition, our web filtering service may not be successful in accurately categorizing Internet and application content to meet our end-customers’expectations. We rely upon a combination of automated filtering technology and human review to categorize websites and software applications in our proprietarydatabases. Our end-customers may not agree with our23Table of Contentsdeterminations that particular URLs should be included or not included in specific categories of our databases. In addition, it is possible that our filtering processesmay place material that is objectionable or that presents a security risk in categories that are generally unrestricted by our customers’ Internet and computer accesspolicies, which could result in such material not being blocked from the network. Conversely, we may miscategorize websites such that access is denied towebsites containing information that is important or valuable to our customers. Any miscategorization could result in customer dissatisfaction and harm ourreputation. Any failure to effectively categorize and filter websites according to our end-customers’ and channel partners’ expectations could impair the growth ofour business.If our new products and product enhancements do not achieve sufficient market acceptance, our results of operations and competitive position will suffer. We spend substantial amounts of time and money to research and develop new products and enhanced versions of our existing products to incorporateadditional features, improved functionality or other enhancements in order to meet our customers’ rapidly evolving demands for network security in our highlycompetitive industry. When we develop a new product or an enhanced version of an existing product, we typically incur expenses and expend resources upfront tomarket, promote and sell the new offering. Therefore, when we develop and introduce new or enhanced products, they must achieve high levels of marketacceptance in order to justify the amount of our investment in developing and bringing them to market. Our new products or product enhancements could fail to attain sufficient market acceptance for many reasons, including: •delays in releasing our new products or enhancements to the market; •failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand in a timely fashion; •failure of our sales force and partners to focus on selling new products; •inability to interoperate effectively with the networks or applications of our prospective end-customers; •inability to protect against new types of attacks or techniques used by hackers; •actual or perceived defects, vulnerabilities, errors or failures; •negative publicity about their performance or effectiveness; •introduction or anticipated introduction of competing products by our competitors; •poor business conditions for our end-customers, causing them to delay IT purchases; •easing of regulatory requirements around security; and •reluctance of customers to purchase products incorporating open source software. If our new products or enhancements do not achieve adequate acceptance in the market, our competitive position will be impaired, our revenue will bediminished and the effect on our operating results may be particularly acute because of the significant research, development, marketing, sales and other expenseswe incurred in connection with the new product or enhancement. Demand for our products may be limited by market perception that individual products from one vendor that provide multiple layers of security protection inone product are inferior to point solution network security solutions from multiple vendors. Sales of most of our products depend on increased demand for incorporating broad security functionality in one appliance. If the market for these productsfails to grow as we anticipate, our business will be seriously harmed. Target customers may view “all-in-one” network security solutions as inferior to securitysolutions from multiple vendors because of, among other things, their perception that such products of ours provide security functions from only a single vendorand do not allow users to choose “best-of-breed” defenses from among the wide range of dedicated security applications available. Target customers might alsoperceive that, by combining multiple security functions into a single platform, our solutions create a24Table of Contents“single point of failure” in their networks, which means that an error, vulnerability or failure of our product may place the entire network at risk. In addition, themarket perception that “all-in-one” solutions may be suitable only for small- and medium-sized businesses because such solution lacks the performancecapabilities and functionality of other solutions may harm our sales to large enterprise, service provider and government organization end-customers. If theforegoing concerns and perceptions become prevalent, even if there is no factual basis for these concerns and perceptions, or if other issues arise with our market ingeneral, demand for multi-security functionality products could be severely limited, which would limit our growth and harm our business, financial condition andresults of operations. Further, a successful and publicized targeted attack against us, exposing a “single point of failure,” could significantly increase these concernsand perceptions and may harm our business and results of operations. We face intense competition in our market and we may lack sufficient financial or other resources to maintain or improve our competitive position. The market for network security products is intensely competitive, and we expect competition to intensify in the future. Our competitors includecompanies such as Blue Coat, Check Point, Cisco/SourceFire, Dell/SonicWall, F5 Networks, FireEye, Intel/McAfee, Juniper, Palo Alto Networks and Sophos. Many of our existing and potential competitors enjoy substantial competitive advantages such as: •greater name recognition and longer operating histories; •larger sales and marketing budgets and resources; •broader distribution and established relationships with distribution partners and end-customers; •access to larger customer bases; •greater customer support resources; •greater resources to make acquisitions; •lower labor and development costs; and •substantially greater financial, technical and other resources. In addition, some of our larger competitors have substantially broader product offerings, and leverage their relationships based on other products orincorporate functionality into existing products in a manner that discourages customers from purchasing our products. These larger competitors often have broaderproduct lines and market focus, and are in a better position to withstand any significant reduction in capital spending by end-customers in these markets. Therefore,these competitors will not be as susceptible to downturns in a particular market. Also, many of our smaller competitors that specialize in providing protection froma single type of network security threat are often able to deliver these specialized network security products to the market more quickly than we can. Some of oursmaller competitors are using third-party chips designed to accelerate performance. Conditions in our markets could change rapidly and significantly as a result oftechnological advancements or continuing market consolidation. Our competitors and potential competitors may also be able to develop products or services thatare equal or superior to ours, achieve greater market acceptance of their products and services, and increase sales by utilizing different distribution channels thanwe do. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance theirresources. In addition, current or potential competitors may be acquired by third parties with greater available resources (such as Cisco’s acquisition of SourceFire,Juniper’s acquisition of NetScreen Technologies Inc., Intel’s acquisition of McAfee, Check Point’s acquisition of Nokia Corporations’ security appliance businessand Dell’s acquisition of SonicWALL), and new competitors may arise pursuant to acquisitions of network security companies or divisions. As a result of suchacquisitions, competition in our market may continue to increase and our current or potential competitors might be able to adapt more quickly to new technologiesand customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, takeadvantage of acquisition or other opportunities more readily, or develop and expand their product and service offerings more quickly than we do. In addition, ourcompetitors may bundle products and services competitive with ours with other products and services. Customers may accept these bundled products and servicesrather than separately purchasing our products and services. Due to budget constraints or economic downturns, organizations may be more willing to incrementallyadd solutions to their existing network security infrastructure from competitors than to replace it with25Table of Contentsour solutions. These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer customer orders, reducedrevenue and gross margins and loss of market share. If functionality similar to that offered by our products is incorporated into existing network infrastructure products, organizations may decide against addingour appliances to their network, which would have an adverse effect on our business. Large, well-established providers of networking equipment such as Cisco, F5 Networks and Juniper offer, and may continue to introduce, networksecurity features that compete with our products, either in standalone security products or as additional features in their network infrastructure products. Theinclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by our security solutions in networking products thatare already generally accepted as necessary components of network architecture may have an adverse effect on our ability to market and sell our products.Furthermore, even if the functionality offered by network infrastructure providers is more limited than our products, a significant number of customers may elect toaccept such limited functionality in lieu of adding appliances from an additional vendor such as us. Many organizations have invested substantial personnel andfinancial resources to design and operate their networks and have established deep relationships with other providers of networking products, which may makethem reluctant to add new components to their networks, particularly from other vendors such as us. In addition, an organization’s existing vendors or new vendorswith a broad product offering may be able to offer concessions that we are not able to match because we currently offer only network security products and havefewer resources than many of our competitors. If organizations are reluctant to add additional network infrastructure from new vendors or otherwise decide to workwith their existing vendors, our business, financial condition and results of operations will be adversely affected.Risks Related to Intellectual PropertyOur proprietary rights may be difficult to enforce, which could enable others to copy or use aspects of our products without compensating us. We rely primarily on patent, trademark, copyright and trade secrets laws and confidentiality procedures and contractual provisions to protect ourtechnology. Valid patents may not issue from our pending applications, and the claims eventually allowed on any patents may not be sufficiently broad to protectour technology or products. Any issued patents may be challenged, invalidated or circumvented, and any rights granted under these patents may not actuallyprovide adequate defensive protection or competitive advantages to us. Patent applications in the United States are typically not published until at least 18 monthsafter filing, or, in some cases, not at all, and publications of discoveries in industry-related literature lag behind actual discoveries. We cannot be certain that wewere the first to make the inventions claimed in our pending patent applications or that we were the first to file for patent protection. Additionally, the process ofobtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonablecost or in a timely manner. In addition, recent changes to the patent laws in the United States may bring into question the validity of certain software patents andmay make it more difficult and costly to prosecute patent applications. As a result, we may not be able to obtain adequate patent protection or effectively enforceour issued patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information thatwe regard as proprietary. We generally enter into confidentiality or license agreements with our employees, consultants, vendors and customers, and generally limitaccess to and distribution of our proprietary information. However, we cannot assure you that the steps taken by us will prevent misappropriation of ourtechnology. Policing unauthorized use of our technology or products is difficult. In addition, the laws of some foreign countries do not protect our proprietaryrights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and privateparties in the United States. From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our tradesecrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation could resultin substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition. If we are unable to protect ourproprietary rights (including aspects of our software and products protected other than by patent rights), we may find ourselves at a competitive disadvantage toothers who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to be successful to date.Our products contain third-party open source software components, and failure to comply with the terms of the underlying open source software licenses couldrestrict our ability to sell our products. Our products contain software modules licensed to us by third-party authors under “open source” licenses, including the GNU Public License, the GNULesser Public License (LGPL), the BSD License, the Apache License the MIT X License26Table of Contentsand the Mozilla Public License. From time to time, there have been claims against companies that distribute or use open source software in their products andservices, asserting that open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming infringement ofintellectual property rights in what we believe to be licensed open source software. Use and distribution of open source software may entail greater risks than useof third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims orthe quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create basedupon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain opensource licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products withlower development effort and time and ultimately could result in a loss of product sales for us. Although we monitor our use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open sourcelicenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipatedconditions or restrictions on our ability to commercialize our products. In this event, we could be required to seek licenses from third parties to continue offeringour products, to make our proprietary code generally available in source code form, to re-engineer our products or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which requirements could adversely affect our business, operating results and financial condition. Claims by others that we infringe their proprietary technology or other litigation matters could harm our business. Patent and other intellectual property disputes are common in the network security industry. Third parties are currently asserting, have asserted and mayin the future assert claims of infringement of intellectual property rights against us. They may also assert such claims against our end-customers or channel partnerswhom we typically indemnify against claims that our products infringe the intellectual property rights of third parties. As the number of products and competitorsin our market increases and overlaps occur, infringement claims may increase. Any claim of infringement by a third-party, even those without merit, could cause usto incur substantial costs defending against the claim and could distract our management from our business. In addition, litigation may involve patent holdingcompanies, non-practicing entities or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore providelittle or no deterrence or protection. Although third parties may offer a license to their technology, the terms of any offered license may not be acceptable, and the failure to obtain a license orthe costs associated with any license could cause our business, financial condition and results of operations to be materially and adversely affected. In addition,some licenses may be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. Alternatively, we may be required to develop non-infringing technology, which could require significant time, effort and expense, and may ultimately notbe successful. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from distributing certain products orperforming certain services or that requires us to pay substantial damages (including treble damages if we are found to have willfully infringed such claimant’spatents or copyrights), royalties or other fees. Any of these events could seriously harm our business, financial condition and results of operations.From time to time we are subject to lawsuits claiming patent infringement. We are also subject to other litigation in addition to patent infringementclaims, such as employment-related litigation and disputes, as well as general commercial litigation, and could become subject to other forms of litigation anddisputes, including stockholder litigation. If we are unsuccessful in defending any such claims, our operating results and financial condition and results may bematerially and adversely affected. For example, we may be required to pay substantial damages and could be prevented from selling certain of our products.Litigation, with or without merit, could negatively impact our business, reputation and sales in a material fashion.We have several on-going patent lawsuits and several non-practicing entity patent holding companies have sent us letters proposing that we license certainof their patents. Given this and the proliferation of lawsuits in our industry and other similar industries by both non-practicing entities and operating entities, weexpect that we will be sued for patent infringement in the future, regardless of the merits of any such lawsuits. The cost to defend such lawsuits and any adverseresult in such lawsuits could have a material adverse effect on our results of operations and financial condition.27Table of ContentsWe rely on the availability of third-party licenses. Many of our products include software or other intellectual property licensed from third parties. It may be necessary in the future to renew licensesrelating to various aspects of these products or to seek new licenses for existing or new products. There can be no assurance that the necessary licenses would beavailable on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need toengage in litigation regarding these matters, could result in delays in product releases until equivalent technology can be identified, licensed or developed, if at all,and integrated into our products and may have a material adverse effect on our business, operating results, and financial condition. Moreover, the inclusion in ourproducts of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to differentiate our products from thoseof our competitors.Risks Related to Ownership of our Common StockAs a public company, we are subject to compliance initiatives that will require substantial time from our management and result in significantly increasedcosts that may adversely affect our operating results and financial condition. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and other rules implemented by the SEC andThe NASDAQ Stock Market impose various requirements on public companies, including requiring changes in corporate governance practices. Theserequirements, as well as proposed corporate governance laws and regulations under consideration, may further increase our compliance costs. If compliance withthese various legal and regulatory requirements diverts our management’s attention from other business concerns, it could have a material adverse effect on ourbusiness, financial condition and results of operations. The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internalcontrol over financial reporting annually, and of our disclosure controls and procedures quarterly. Although our most recent assessment, testing and evaluationresulted in our conclusion that as of December 31, 2015, our internal controls over financial reporting were effective, we cannot predict the outcome of our testingin 2016 or future periods. We may incur additional expenses and commitment of management’s time in connection with further evaluations, both of which couldmaterially increase our operating expenses and accordingly reduce our operating results. Changes in financial accounting standards may cause adverse unexpected fluctuations and affect our reported results of operations. A change in accounting standards or practices, and varying interpretations of existing accounting pronouncements, such as changes to standards related torevenue recognition (which are effective for us beginning on January 1, 2018), the increased use of fair value measure, and financial instruments could have asignificant effect on our reported financial results or the way we conduct our business. If we do not ensure that our systems and processes are aligned with the newstandards, we could encounter difficulties generating quarterly and annual financial statements in a timely manner, which would have an adverse effect on ourbusiness and our ability to meet our reporting obligations.If securities or industry analysts stop publishing research or publish inaccurate or unfavorable research about our business, our stock price and tradingvolume could decline. The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or ourbusiness. If we do not maintain adequate research coverage or if one or more of the analysts who cover us downgrades our stock or publishes inaccurate orunfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of our company or fails to publish reportson us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline. The trading price of our common stock may be volatile. The market price of our common stock may be subject to wide fluctuations in response to, among other things, the risk factors described in this periodicreport, news about Fortinet and our financial results, news about our competitors and their results, and other factors such as rumors or fluctuations in the valuationof companies perceived by investors to be comparable to us, or announcements regarding any stock repurchase programs and the timing and amount of shares wepurchase under such programs. For example, over the past twelve months through the filing of this Report, the closing price of our common stock ranged from$23.83 to $48.83. Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equitysecurities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broadmarket and industry fluctuations, as well as general economic,28Table of Contentspolitical and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of ourcommon stock. In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. Wemay be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention fromother business concerns, which could seriously harm our business.Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt. Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult, delaying or preventingan acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions: •providing for a classified board of directors whose members serve staggered three-year terms; •authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation,dividend and other rights superior to our common stock; •limiting the liability of, and providing indemnification to, our directors and officers; •limiting the ability of our stockholders to call and bring business before special meetings; •requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations ofcandidates for election to our board of directors;•providing that certain litigation matters may only be brought against us in state or federal courts in the State of Delaware; •controlling the procedures for the conduct and scheduling of board and stockholder meetings; and •providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduledspecial meetings. These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, whichprevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of theholders of a substantial majority of all of our outstanding common stock. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit theopportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to payfor our common stock.ITEM 1B. Unresolved Staff CommentsNot applicable.ITEM 2. PropertiesOur corporate headquarters is located in Sunnyvale, California and comprises approximately 164,000 square feet of office and building space. In addition,during 2015, we purchased certain land and buildings adjacent to our corporate headquarters, totaling approximately 96,000 square feet and in Sophia, Francetotaling approximately 38,000 square feet, to support growth in our business operations. In February 2016, we purchased certain property in Union City, Californiatotaling approximately 200,000 square feet.29Table of ContentsWe also lease approximately 130,000 square feet of space in Burnaby, Canada under lease agreements that expire at various dates through 2020 to supportour research and development and operations. We maintain additional offices throughout the United States and various international locations, including France,the United Kingdom, China, Mexico, Germany, Japan and the Czech Republic. We believe that our existing properties are sufficient and suitable to meet ourcurrent needs. We intend to expand our facilities or add new facilities as we add employees and enter new geographic markets, and we believe that suitableadditional or alternative space will be available as needed to accommodate ongoing operations and any such growth. However, we expect to incur additionalexpenses in connection with such new or expanded facilities.For information regarding the geographical location of our property and equipment, see Note 14 to our consolidated financial statements in Part II, Item 8of this Annual Report on Form 10-K.ITEM 3. Legal ProceedingsWe are subject to various claims, complaints and legal actions that arise from time to time in the normal course of business. We believe that thepossibility that any of the current pending claims, complaints or legal proceedings will result in a material loss is remote. There can be no assurance that existing orfuture legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financialposition, results of operations or cash flows.ITEM 4. Mine Safety DisclosureNot applicable.30Table of ContentsPart IIITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is traded on The NASDAQ Global Select Market under the symbol “FTNT.” The following table sets forth, for the time periodsindicated, the high and low closing sales price of our common stock, as reported on the NASDAQ Global Select Market. 2015 2014 High Low High LowFourth Quarter$44.19 $30.42 $31.31 $23.44Third Quarter$48.83 $39.97 $26.78 $23.69Second Quarter$43.74 $33.72 $25.13 $20.36First Quarter$35.48 $29.22 $23.86 $19.02Holders of RecordAs of February 19, 2016 , there were 62 holders of record of our common stock. A substantially greater number of holders of our common stock are“street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions.DividendsWe have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends in the foreseeable future. Any futuredetermination to declare cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capitalrequirements, general business conditions and other factors that our board of directors may deem relevant.Stock Performance GraphThis performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing ofFortinet under the Securities Act of 1933, as amended (the “Securities Act ” ), or the Exchange Act, except as shall be expressly set forth by specific reference insuch filing.The following graph compares the cumulative five-year total return for our common stock, the NASDAQ Composite Index and the NASDAQ ComputerIndex. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the NASDAQComputer Index assume reinvestment of dividends. We have never declared or paid cash dividends on our capital stock, nor do we anticipate paying any such cashdividends in the foreseeable future.31Table of ContentsCOMPARISON OF CUMULATIVE TOTAL RETURN*Among Fortinet, Inc., The NASDAQ Composite Index andThe NASDAQ Computer Index_______ December 2010* December 2011 December 2012 December 2013 December 2014 December 2015Fortinet, Inc. $100 $135 $130 $118 $189 $193NASDAQ Composite $100 $98 $114 $157 $179 $189NASDAQ Computer $100 $100 $113 $149 $179 $190________________* Assumes that $100 was invested on December 31, 2010 in stock or index, including reinvestment of dividends. Stockholder returns over the indicated periodshould not be considered indicative of future stockholder returns. Sales of Unregistered SecuritiesNone.Purchases of Equity Securities by the Issuer and Affiliated PurchasersShare Repurchase ProgramOn December 6, 2013, our board of directors authorized a Share Repurchase Program (the “Program”), to repurchase up to $200.0 million of ouroutstanding common stock. Under the Program, share repurchases may be made by us from time to time in privately negotiated transactions or in open markettransactions. The Program does not require us to purchase a minimum number of shares, and may be suspended, modified or discontinued at any time without priornotice. In 2015 , we repurchased 1.8 million shares of common stock under the Program in open market transactions for an aggregate purchase price of $60.0million . The timing and amounts of these purchases were based on factors such as market conditions, price and regulatory requirements. The share repurchaseswere financed by available cash balances. The Program expired on December 31, 2015 with an unused balance under the Program of $62.5 million.The following table provides information with respect to the shares of common stock we repurchased during the three months ended December 31, 2015(in thousands, except share and per share amounts):32Table of ContentsPeriod Total Number of SharesPurchased Average PricePaid per Share Total Number of SharesPurchased as Part of PubliclyAnnounced Plan or Program Approximate Dollar Value ofShares that May Yet BePurchased Under the Plans orProgramsOctober 1 - October 31, 2015 281,558 $34.42 281,558 $112,803November 1 - November 30, 2015 1,348,450 $34.00 1,348,450 $66,950December 1 - December 31, 2015 128,613 $34.64 128,613 $—In January 2016, our board of directors approved a new Share Repurchase Program (the “New Program”), which authorizes the repurchase of up to$200.0 million of our outstanding common stock through December 31, 2017. Subsequent to December 31, 2015, through the filing of this Report, we haverepurchased 2.0 million shares of our common stock under the New Program at an average price of $24.97 per share, for an aggregate purchase price of $50.0million. We have $150.0 million in authorized funds remaining under the New Program as of the filing date.ITEM 6. Selected Financial DataThe following selected consolidated financial data set forth below was derived from our historical audited consolidated financial statements and should beread in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statementsand Supplementary Data,” and other financial data included elsewhere in this Annual Report on Form 10-K. Our historical results of operations are not indicativeof our future results of operations. Year Ended December 31, 2015 2014 2013 2012 2011 (in thousands, except per share amounts)Consolidated Statement of Operations Data: Total revenue$1,009,268 $770,364 $615,297 $533,639 $433,576Operating income$14,877 $59,324 $72,090 $100,475 $88,904Net income$7,987 $25,343 $44,273 $66,836 $62,492Net income per share : Basic$0.05 $0.15 $0.27 $0.42 $0.41Diluted$0.05 $0.15 $0.26 $0.40 $0.38Weighted-average shares outstanding: Basic170,385 163,831 162,435 158,074 152,581Diluted176,141 169,289 168,183 166,329 163,781 As of December 31,2015 2014 2013 2012 2011(in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and investments$1,164,310 $991,744 $843,045 $739,586 $538,687Total assets$1,790,510 $1,424,774 $1,168,464 $975,497 $734,747Total stockholders’ equity$755,377 $675,966 $585,760 $510,934 $358,35433Table of ContentsITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsIn addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of theSecurities Act and Section 21E of the Exchange Act. These statements include, among other things, statements concerning our expectations regarding:•continued growth and market share gains;•variability in sales in certain product categories from year to year and between quarters;•expected impact of sales of certain products;•the proportion of our revenue that consists of our product and service and other revenue, and the mix of billings between products and services; •the impact of our product innovation strategy;•growing our sales to enterprise, service provider and government organizations, and the impact of sales to these organizations on our long-termgrowth, expansion, and operating results;•growing our channel partner relationships, especially with enterprise resellers;•trends in revenue, costs of revenue, and gross margin; •trends in our operating expenses, including research and development expense, sales and marketing expense, general and administrativeexpense, and expectations regarding these expenses as a percentage of revenue;•continued investments in research and development;•continued investments in sales and marketing, and the impact of those investments;•expectations regarding uncertain tax benefits and our effective tax rate;•expectations regarding spending related to capital expenditures;•competition in our markets;•integration of acquired companies and technologies;•implementation of a new enterprise resource planning (“ERP”) system;•our intentions regarding repatriation of cash, cash equivalents and investments held by our international subsidiaries and the sufficiency of ourexisting cash, cash equivalents and investments to meet our cash needs for at least the next 12 months; and•other statements regarding our future operations, financial condition and prospects and business strategies.These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from thosereflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in thisAnnual 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 andthose discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.Business OverviewWe provide high performance cybersecurity solutions to a wide variety of enterprises, service providers and government organizations of all sizes acrossthe globe, including a majority of the 2015 Fortune 100. Our cybersecurity34Table of Contentssolutions are fast, secure and designed to provide broad, rapid protection against dynamic security threats while simplifying the IT infrastructure of our end-customers worldwide.Our core product platform is the FortiGate physical and virtual appliance, which ships with a set of broad security services, including firewall, VPN,application control, intrusion prevention, web filtering and advanced threat protection (“ATP”). These security services are enabled by FortiGuard which providesextensive threat research and a global cloud network to deliver protection services to each FortiGate appliance. FortiGate also has extensive networking capabilitysuch as switching, routing, native internet protocol version 6 and different modes of deployment. FortiManager provides central management and FortiAnalyzerprovides reporting and analytics. The FortiGate platform can be extended to provide enhanced capabilities. For example, it can be used as a wireless controller foraccess points. An external sandbox can also be attached for local ATP analysis.Customers select the functions or combination of functions that best meet their specific security requirements such as a high-speed DCFW at the networkcore, a NGFW at the edge or a broad UTM solution at branch sites. We derive a substantial majority of product sales from our FortiGate appliances, which rangefrom the FortiGate-20 to -100 series, designed for small businesses, FortiGate-200 to -900 series for mid-sized enterprises, to the FortiGate-1000 to -5000 series forlarge enterprises and service providers. Our network security platform also includes our FortiGuard security subscription services, to which end-customers cansubscribe in order to obtain access to dynamic updates to application control, anti-virus, intrusion prevention, web filtering, and anti-spam functionality. End-customers can also choose to purchase FortiCare technical support services for our products. End-customers also often use FortiManager and FortiAnalyzerproducts in conjunction with a FortiGate deployment to provide centralized management and analysis and reporting capabilities.We complement our core FortiGate product line with other appliances and software licenses that offer additional protection from security threats to othercritical areas of the enterprise, such as our secure wireless and access technologies, advanced threat protection, secure email gateway, web application firewalls,application delivery controllers, databases security product, DDoS security product, and endpoint security product for employee computers and mobile devices.Sales of these complementary products have grown in recent quarters.Financial Highlights•We recorded total revenue of $1.01 billion in 2015 , an increase of 31% compared to 2014 . Product revenue was $476.8 million in 2015, an increase of32% compared to 2014 . Service revenue was $532.5 million in 2015 , an increase of 30% compared to 2014 .•Cash, cash equivalents and investments were $1.16 billion as of December 31, 2015 , an increase of $172.6 million , or 17% , from December 31, 2014 .•Deferred revenue was $791.3 million as of December 31, 2015 , an increase of $232.5 million , or 42% , from December 31, 2014 .•We generated cash flows from operating activities of $282.5 million in 2015 , an increase of $86.0 million , or 44% , compared to 2014 .•In July 2015, we acquired Meru, a provider of Wi-Fi networking products and services, for total consideration of $41.8 million. In connection with thebusiness acquisition of Meru, we initiated planned cost reduction and restructuring activities to improve our cost structure and operational efficiencies,resulting in workforce reductions, consolidation of certain real estate facilities, asset write-downs, contract terminations and other charges. Restructuringcharges for the year ended December 31, 2015 were $7.6 million .•We repurchased 1.8 million shares of common stock under our previously-announced Share Repurchase Program for an aggregate purchase price of $60.0million in 2015.Revenue grew in 2015 as our integrated security platform products put us in a strong competitive position in a robust security market. We continue tostrengthen partnerships with enterprise resellers and gain from our prior sales investments. In addition, we continue to execute our strategy of selling to enterprisecustomers and landing large deals with some of these customers. Enterprise customers have vast infrastructures and we believe this will provide expansionopportunities for us in the future. Our strategy has enabled us to gain market share, win new customers, and expand within existing customer accounts, especiallyin the large enterprise market which is key to our long-term growth and profitability strategy. Large enterprises represent significant opportunity for cross-sell andupsell as they tend to purchase more products and services over time,35Table of Contentsyielding substantial lifetime value. Aside from obtaining new customers, other levers to drive long-term growth and operating leverage include adding morefunctionality and value in our security subscription and support service offerings to customers.In 2015, sales of high-end FortiGate products (FortiGate-1000 to -5000 series) increased due to enterprise adoption of our high-end appliances such as theFortiGate-1500D, -3700D, and -5000 series. The percentage of our FortiGate related billings from high-end products increased from 38% in 2014 to 41% in 2015,while the mid-range products decreased from 26% in 2014 to 25% in 2015 and the entry-level products decreased from 36% in 2014 to 34% in 2015.In 2015 , operating expenses increased by $227.6 million , or 47% , as compared to 2014 . The increase was primarily driven by our accelerated pace ofhiring and continued investments to expand our sales coverage, grow our marketing capabilities, develop new products and scale our customer support. We alsocontinue to invest in research and development to strengthen our technology leadership position. We believe that continued product innovation has strengthenedour technology and resulted in market share gains. In addition, we incurred costs from the integration of Meru and the implementation of restructuring activitiesand expenses related to business design and reengineering in preparation of an ERP system implementation. Headcount increased by 41% to 4,018 employees andcontractors as of December 31, 2015, up from 2,854 as of December 31, 2014.Business ModelOur sales strategy is based on a distribution model whereby we primarily sell our products and services directly to distributors which sell to resellers andservice providers, which, in turn, sell to our end-customers. In certain cases, we sell directly to government-focused resellers, large service providers and majorsystems integrators, which have significant purchasing power and unique customer deployment requirements. Typically, FortiGuard security subscription servicesand FortiCare technical support services are purchased along with our physical and virtual appliances, most frequently as part of a bundle offering that includeshardware and services. We invoice at the time of our sale for the total price of the products and subscription and technical support services, and the invoicegenerally becomes payable within 30 to 90 days. We generally recognize product revenue up-front and defer revenue for the sale of new, and renewal of existing,FortiGuard security subscription and FortiCare technical support services contracts. We recognize the related service revenue over the service period, which istypically one to three years, although it can be as long as five years. Sales of new and renewal services are a source of recurring revenue and increase our deferredrevenue balance, which contributes significantly to our positive cash flow from operations.Key MetricsWe monitor a number of financial and operating 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), cash, cash equivalents and investments, net cash provided by operating activities, and free cash flow (non-GAAP). Wediscuss revenue below under “—Components of Operating Results,” and we discuss our cash, cash equivalents, and investments, and net cash provided byoperating activities below under “—Liquidity and Capital Resources.” Deferred revenue, billings (non-GAAP), and free cash flow (non-GAAP) are discussedimmediately below the following table. Year Ended or As of December 31, 2015 2014 2013 (in thousands)Revenue$1,009,268 $770,364 $615,297Deferred revenue$791,303 $558,757 $432,628Billings (non-GAAP)$1,232,014 $896,493 $684,190Cash, cash equivalents and investments$1,164,310 $991,744 $843,045Net cash provided by operating activities$282,547 $196,582 $147,384Free cash flow (non-GAAP)$245,189 $164,385 $133,507 Deferred revenue. Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. Deferred revenueis amortized as revenue ratably over the contractual service period. The majority of our deferred revenue balance consists of the unrecognized portion of servicerevenue from FortiGuard security subscription and FortiCare technical support service contracts. We monitor our deferred revenue balance because it represents asignificant36Table of Contentsportion of revenue to be recognized in future periods. Total deferred revenue as of December 31, 2015 increased by $232.5 million or 42% compared to a year ago.Total deferred revenue as of December 31, 2015 of $791.3 million included deferred revenue relating to Meru of $14.5 million, or 2% of total deferred revenue. Excluding Meru’s deferred revenue, our deferred revenue as of December 31, 2015 was $776.8 million, an increase of $218.0 million or 39% compared to a yearago.Billings (Non-GAAP). We define billings as revenue recognized in accordance with GAAP plus the change in deferred revenue from the beginning to theend of the period less any deferred revenue balances acquired from business combination(s) during the period. We consider billings to be a useful metric formanagement and investors because billings drives deferred revenue, which is an important indicator of the health and viability of our business. There are a numberof limitations related to the use of billings instead of GAAP revenue. First, billings include amounts that have not yet been recognized as revenue. Second, we maycalculate billings in a manner that is different from peer companies that report similar financial measures. Management compensates for these limitations byproviding specific information regarding GAAP revenue and evaluating billings together with GAAP revenue.Total billings for the year ended December 31, 2015 increased by $335.5 million, or 37%, compared to the year ended December 31, 2014. Total billingsfor the year ended December 31, 2015 of $1.23 billion included Meru’s billings from July 8, 2015 to December 31, 2015 of $32.8 million , or 3% of total billings. Excluding Meru, our billings for the year ended December 31, 2015 were $1.20 billion, an increase of 34% compared to the year ended December 31, 2014.A reconciliation of billings to revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP, is providedbelow:Reconciliation of total consolidated GAAP revenue to billings Year Ended December 31,2015 2014 2013(in thousands)Billings: Revenue$1,009,268 $770,364 $615,297Add increase in deferred revenue232,546 126,129 69,443Less deferred revenue balance acquired in business combination(9,800) — (550)Total billings (Non-GAAP)$1,232,014 $896,493 $684,190Reconciliation of Meru ’ s GAAP revenue to billings For the periodJuly 8, 2015 throughDecember 31, 2015(in thousands)Billings: Revenue$28,050Add increase in deferred revenue4,706Total billings (Non-GAAP)$32,756Free cash flow (Non-GAAP). We define free cash flow as net cash provided by operating activities minus capital expenditures such as purchases ofproperty and equipment. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount ofcash generated by the business that, after the acquisition of property and equipment, can be used for strategic opportunities, including investing in our business,making strategic acquisitions, repurchasing outstanding common stock and strengthening the balance sheet. Analysis of free cash flow facilitates management’scomparison of our operating results to those of our peer companies. A limitation of using free cash flow rather than the GAAP measure of net cash provided byoperating activities as a means for evaluating liquidity is that free cash flow does not represent the total increase or decrease in the cash, cash equivalents andinvestments balance for the period because it excludes cash provided by or used for other investing and financing activities. Management accounts for thislimitation by providing information about our capital expenditures and other investing and financing activities on the face of the cash flow statement and under “—Liquidity and Capital Resources.” A reconciliation of free cash flow to net cash provided by operating37Table of Contentsactivities, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below: Year Ended December 31,2015 2014 2013(in thousands)Free Cash Flow: Net cash provided by operating activities$282,547 $196,582 $147,384Less purchases of property and equipment(37,358) (32,197) (13,877)Free cash flow (Non-GAAP)$245,189 $164,385 $133,507Components of Operating ResultsRevenueWe generate the majority of our revenue from sales of our products and amortization of amounts included in deferred revenue related to previous sales ofFortiGuard security subscription and FortiCare technical support services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery hasoccurred or services have been rendered, the sales price is fixed or determinable and collectability is reasonably assured.Our total revenue is comprised of the following: •Product revenue . Product revenue is generated from sales of our appliances. The substantial majority of our product revenue has been generatedby our FortiGate line of appliances, and we do not expect this to change in the foreseeable future. Product revenue also includes revenue derivedfrom sales of appliances, as well as from sales of our FortiClient and VDOM software. As a percentage of total revenue, we expect that ourproduct revenue may vary from quarter-to-quarter based on seasonal and cyclical factors, as discussed below under “—Quarterly Results ofOperations” but will remain at a relatively comparable level in 2016.•Service revenue . Service revenue is generated primarily from FortiGuard security subscription services related to application control, antivirus,intrusion prevention, web filtering, anti-spam, ATP and vulnerability management updates, and from FortiCare technical support services forsoftware updates, maintenance releases and patches, Internet access to technical content, telephone and Internet access to technical supportpersonnel and hardware support. We recognize revenue from FortiGuard security subscription and FortiCare technical support services over thecontractual service period. Our typical contractual support and subscription term is one to three years. We also generate a small portion of ourrevenue from professional services and training services, and we recognize this revenue as the services are provided. As a percentage of totalrevenue, we expect our service revenue to remain at a relatively comparable level in 2016. Our service revenue growth rate depends significantlyon the growth of our customer base, the expansion and introduction of new service offerings, and the renewal of service contracts by ourcustomers.Our total cost of revenue is comprised of the following:•Cost of product revenue . A substantial majority of the cost of product revenue consists of third-party contract manufacturers' costs, as well asother costs of materials used in production. Our cost of product revenue also includes supplies, shipping costs, personnel costs associated withlogistics and quality control, facility-related costs, excess and obsolete inventory costs, warranty costs, and amortization and impairment ofintangible assets, if applicable. Personnel costs include salaries, benefits and bonuses, as well as stock-based compensation.•Cost of service revenue . Cost of service revenue is primarily comprised of salaries, benefits and bonuses, as well as stock-based compensation.Cost of service revenue also includes 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 theaverage sales price of our products, any excess inventory write-offs, product costs, the mix of products sold and the mix of revenue between products and services.In 2015, service revenue had a positive effect on our total38Table of Contentsgross margin given the higher service gross margins compared to product gross margins. During 2015 , service gross margins increased compared to 2014. Webelieve our overall gross margin will remain at a relatively comparable level in 2016. Operating expenses . Our operating expenses consist of research and development, sales and marketing, general and administrative expenses, andrestructuring charges. Personnel costs are the most significant component of operating expenses and consist primarily of salaries, benefits, bonuses, stock-basedcompensation, and sales commissions, as applicable. 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 developmentexpenses include ASIC and system prototypes and certification-related expenses, depreciation of capital equipment and facility-related expenses.The majority of our research and development is focused on both software development and the ongoing development of our hardware platform.We record all research and development expenses as incurred. Our research and development teams are primarily located in Canada and theUnited States.•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 promotional lead generation and other marketing expenses, travel, depreciation of capitalequipment and facility-related expenses. We intend to hire additional personnel focused on sales and marketing and expand our sales andmarketing efforts worldwide in order to capture additional market share in the high-return enterprise market, where customers tend to provide ahigher lifetime value.•General and administrative . General and administrative expense consists of personnel costs, as well as professional fees, depreciation of capitalequipment and software, facility-related expenses, charges associated with the ERP system implementation, and in 2015, business acquisitioncosts relating to Meru. General and administrative personnel include our executive, finance, human resources, information technology and legalorganizations. Our professional fees principally consist of outside legal, auditing, accounting, tax, information technology and other consultingcosts.•Restructuring charges . Restructuring charges relate to the alignment activities in connection with the Meru acquisition to reduce our coststructure and improve operational efficiencies. We initiated planned cost reduction and restructuring activities to improve our cost structure andoperational efficiencies, resulting in workforce reductions, contract terminations and other charges.Interest income. Interest income consists of income earned on our cash, cash equivalents and investments. We have historically invested our cash inmoney market funds, commercial paper, corporate debt securities, municipal bonds, certificates of deposit and term deposits, and U.S. government and agencysecurities.Other expense, net . Other expense, net consists primarily of foreign exchange and related hedging gains and losses. Foreign exchange gains and lossesrelate to foreign currency exchange re-measurement. The hedging gains and losses are related to our settled balance sheet hedges.Provision for income taxes. We are subject to tax 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 the local country which are generally lower than U.S. tax rates, 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 the U.S., research anddevelopment tax credits, withholding taxes, nondeductible stock-based compensation expense and adjustments related to our intercompany transfer pricing.The income tax provision for 2015 was comprised of domestic income taxes, foreign income taxes and foreign withholding taxes. Our effective tax rateapproximates the U.S. federal statutory tax rates plus the impact of state taxes, research and development tax credits, foreign withholding tax, nondeductible stock-based compensation expense, and foreign income subject to lower tax rates than income earned in the United States.Critical Accounting Policies and EstimatesOur discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared inaccordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenueand expenses, and related disclosures. We base39Table of Contentsour estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. To the extent that there arematerial 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 thisAnnual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe these are the mostcritical to fully understand and evaluate our financial condition and results of operations.Revenue RecognitionWe derive the majority of our revenue from sales of our hardware, software, FortiGuard security subscription and FortiCare technical support services,and other services through our channel partners and a direct sales force.Revenue is recognized when all of the following criteria have been met: •Persuasive evidence of an arrangement exists. Binding contracts or purchase orders are generally used to determine the existence of anarrangement. •Delivery has occurred or services have been rendered. Delivery occurs when we fulfill an order and title and risk of loss has been transferred.Service revenue is deferred and recognized ratably over the contractual service period, which is typically from one to three years and is generallyrecognized upon delivery or completion of service. •Sales price is fixed or determinable. We assess whether the sales price is fixed or determinable based on the payment terms associated with thetransaction and when the sales price is deemed final.•Collectability is reasonably assured . We assess collectability based primarily on creditworthiness as determined by credit checks, analysis, andpayment history.We recognize product revenue for sales to distributors that have no general right of return and direct sales to end-customers upon shipment, based ongeneral revenue recognition accounting guidance once all other revenue recognition criteria have been met. Certain distributors are granted stock rotation rights,limited rights of return and rebates for sales of our products. The arrangement fee for this group of distributors is not typically fixed or determinable when productsare shipped and revenue is therefore deferred and recognized upon sell-through. For sales that include end-customer acceptance criteria, revenue is recognizedupon acceptance. Substantially all of our products have been sold in combination with services, which consist of security subscriptions and technical support services.Security services provide access to our antivirus, intrusion prevention, web filtering, and anti-spam functionality. Support services include rights to unspecifiedsoftware upgrades, maintenance releases and patches, telephone and Internet access to technical support personnel, and hardware support. We recognize revenuefrom these services ratably over the contractual service period. Revenue related to subsequent renewals of these services is recognized over the term of the renewalagreement.We reduce revenue for estimates of sales returns and allowances and record reductions to revenue for rebates and estimated commitments related to priceprotection and other customer incentive programs. Additionally, in limited circumstances, we may permit end-customers, distributors and resellers to return ourproducts, subject to varying limitations, for a refund within a reasonably short period from the date of purchase. We estimate and record reserves for salesincentives and sales returns based on historical experience.Our sales arrangements typically contain multiple elements, such as hardware, security subscription, technical support services and other services. Themajority of our hardware appliance products contain our operating system software that together function to deliver the essential functionality of the product. Ourproducts and services generally qualify as separate units of accounting. We allocate revenue to each unit of accounting based on an estimated selling price usingvendor-specific objective evidence (“VSOE”) of selling price, if it exists, or third-party evidence (“TPE”) of selling price. If neither VSOE nor TPE of selling priceexist for a deliverable, we use our best estimate of selling price (“BESP”) for that deliverable. Revenue allocated to each element is then recognized when the basicrevenue recognition criteria are met for each element. 40Table of ContentsFor our hardware appliances, we use BESP as our selling price estimate. For our support and other services, we generally use VSOE as our selling priceestimate. We determine VSOE of fair value for elements of an arrangement based on the historical pricing and discounting practices for those services when soldseparately. In establishing VSOE, we require that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, generallyevidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range as a percentage of list price. When we areunable to establish a selling price using VSOE for our support and other services, we use BESP in our allocation of arrangement consideration. We determineBESP for a product or service by considering multiple historical factors including, but not limited to, cost of products, gross margin objectives, pricing practices,geographies, customer classes and distribution channels that fall within a reasonably narrow range as a percentage of list price.For multiple-element arrangements where software deliverables are included, revenue is allocated to the non-software deliverables and to the softwaredeliverables as a group using the relative estimated selling prices of each of the deliverables in the arrangement based on the estimated selling price hierarchy. Theamount allocated to the software deliverables is then allocated to each software deliverable using the residual method when VSOE of fair value exists. If evidenceof VSOE of fair value of one or more undelivered elements does not exist, all software allocated revenue is deferred and recognized when delivery of thoseelements occurs or when fair value can be established. When the undelivered element for which we do not have VSOE of fair value is support, revenue for theentire arrangement is recognized ratably over the support period. The same residual method and VSOE of fair value principles apply for our multiple elementarrangements that contain only software elements.Stock-Based CompensationEmployee Stock Options. We estimate the fair value of employee stock options awarded to our employees using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, we recognize expense, net of estimated forfeitures, over the requisite service period using the straight-linemethod. Our option pricing model requires the input of subjective assumptions, including the expected stock price volatility, expected term, risk-free interest rates,expected dividend yield of our common stock and forfeiture rate. The assumptions used in our option pricing model represent management’s best estimates. Theseestimates involve inherent uncertainties and the application of management’s judgment. A 10% change in any of these assumptions would not have a significantimpact on our stock-based compensation expense.Employee Stock Purchase Plan. We estimate the fair value of the rights to acquire stock under our employee stock purchase plan (“ESPP”) using theBlack-Scholes pricing model and we recognize expense over the requisite service period using the straight-line method. The pricing model requires the input of thefair value of our common stock and subjective assumptions, including the expected term of the award, the expected volatility of the price of our common stock,risk-free interest rates and the expected dividend yield of our common stock. Our ESPP provides for consecutive six-month offering periods and we use our ownhistorical volatility data in the valuation of ESPP shares. A 10% change in any of these assumptions would not have a significant impact on our stock-basedcompensation expense.Restricted Stock Units. We account for the fair value of restricted stock units (“RSUs”) awarded to employees and members of our board of directorsusing the closing market price of our common stock on the date of grant. RSUs are payable in shares of our common stock as the periodic vesting requirements aresatisfied. RSUs generally vest over a four-year period if the employees, contractors, or directors, as applicable, remain with us for the duration of the vestingperiod. For all RSUs, we recognize expense, net of estimated forfeitures, over the requisite service period using the straight-line method.Performance Stock Units. We grant performance stock units (“PSUs”) to certain of our executive officers. RSUs granted to executive officers containboth service-based and market-based vesting conditions. PSUs vest over a specified service period upon the satisfaction of certain market-based vesting conditions,and settle into shares of our common stock upon vesting over a two- or three-year period. The fair value of a PSU is calculated using the Monte Carlo simulationmodel on the date of grant and is based on the market price of our common stock on the date of grant modified to reflect the impact of the market-based vestingcondition, including the estimated payout level based on that condition. We do not adjust compensation cost for subsequent changes in the expected outcome of themarket-based vesting conditions.Valuation of InventoryInventory is recorded at the lower of cost (using the first-in, first-out method) or market, after we give appropriate consideration to obsolescence andinventory in excess of anticipated future demand. In assessing the ultimate recoverability of inventory, we make estimates regarding future customer demand, thetiming of new product introductions, economic trends and market conditions. If the actual product demand is significantly lower than forecasted, we could berequired to record41Table of Contentsadditional inventory write-downs which would be charged to cost of product revenue. Any write-downs could have an adverse impact on our gross margins andprofitability.Business CombinationsWe 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 purchaseprice of our business acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired, based on their estimated fair values. The excessof the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Additional information existing as of the acquisitiondate, but unknown to us at that time, may become known during the remainder of the measurement period, not to exceed 12 months from the acquisition date,which may result in changes to the amounts and allocations recorded.Restructuring ChargesWe recognize liability for exit and disposal activities when the liability is incurred. Our restructuring charges consist of severance and other one-timebenefits, contract terminations and other charges. Liabilities for costs associated with a restructuring activity are measured at fair value and are recognized whenthe liability is incurred. One-time termination benefits are expensed at the date we notify the employee, unless the employee must provide future service, in whichcase the benefits are expensed ratably over the future service period. A liability for contract-termination costs represents a liability for costs to terminate a contractbefore the end of its term and is recognized at fair value when we terminate the contract in accordance with the contract terms, which is usually done by givingwritten notice to the counterparty within the notification period specified by the contract or by otherwise negotiating a termination with the counterparty. A liabilityfor costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity is recognized at the cease-use date. Costs toterminate a lease before the end of its term are recognized when the property is vacated. Other costs primarily consist of asset write-offs, which are expensed whenincurred.We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accuratelyreflect the costs of our restructuring plan, actual results may differ and thereby require us to record an additional provision or reverse a portion of such a provision.Accounting for Income TaxesWe record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected futuretax 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 ofutilizing net operating losses and research and development credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted taxrates 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 areprovided when necessary to reduce deferred tax assets to the amount expected to be realized.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 taxposition will be sustained on examination by the taxing authorities. The tax benefits recognized in the financial statements from such positions are then measuredbased on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.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 weoperate. We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals andallowances not currently deductible for tax purposes. These differences result in deferred tax assets, which are included in our consolidated balance sheets. Ingeneral, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operationsbecome 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 taxassets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which thosetemporary differences become deductible. We continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive andnegative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the consolidated statements of operationsfor the period that the adjustment is determined to be required.42Table of ContentsWe make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Shouldthe actual amounts differ from our estimates, the amount of our tax expense and liabilities could be materially impacted.43Table of ContentsResults of OperationsThe following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. Year Ended December 31, 2015 2014 2013 (in thousands)Consolidated Statement of Operations Data: Revenue: Product$476,782 $360,558 $278,046Service532,486 409,806 337,251Total revenue1,009,268 770,364 615,297Cost of revenue: Product190,398 151,300 114,611Service96,379 79,709 66,032Total cost of revenue286,777 231,009 180,643Gross profit: Product286,384 209,258 163,435Service436,107 330,097 271,219Total gross profit722,491 539,355 434,654Operating expenses: Research and development158,129 122,880 102,660Sales and marketing470,371 315,804 224,991General and administrative71,514 41,347 34,913Restructuring charges7,600 — —Total operating expenses707,614 480,031 362,564Operating income14,877 59,324 72,090Interest income5,295 5,393 5,306Other expense—net(3,167) (3,168) (1,455)Income before income taxes17,005 61,549 75,941Provision for income taxes9,018 36,206 31,668Net income$7,987 $25,343 $44,27344Table of Contents Year Ended December 31,2015 2014 2013(as percentage of total revenue)Revenue: Product47 % 47 % 45 %Service53 53 55Total revenue100 100 100Cost of revenue: Product19 20 19Service10 10 11Total cost of revenue28 30 29Gross profit: Product60 58 59Service82 81 80Total gross profit72 70 71Operating expenses: Research and development16 16 17Sales and marketing47 41 36General and administrative7 5 6Restructuring charges1 — —Total operating expenses70 62 59Operating income1 8 12Interest income1 1 —Other expense—net— — —Income before income taxes2 8 12Provision for income taxes1 5 5Net income1 % 3 % 7 %2015 and 2014Revenue Year Ended December 31, 2015 2014 Amount % ofRevenue Amount % ofRevenue Change % Change(in thousands, except percentages)Revenue: Product$476,782 47% $360,558 47% $116,224 32%Service532,486 53 409,806 53 122,680 30Total revenue$1,009,268 100% $770,364 100% $238,904 31%Revenue by geography: Americas$435,282 43% $324,659 42% $110,623 34%Europe, Middle East and Africa(“EMEA”)366,018 36 270,537 35 95,481 35Asia Pacific (“APAC”)207,968 21 175,168 23 32,800 19Total revenue$1,009,268 100% $770,364 100% $238,904 31%Total revenue increased by $238.9 million , or 31% , in 2015 compared to 2014 . Total revenue in 2015 of $1.01 billion included Meru’s revenuefrom July 8, 2015 to December 31, 2015 of $28.1 million, or 3% of total revenue. Excluding Meru’s revenue, our revenue was $981.2 million, an increase of 27%compared to the same period last year. We experienced continued45Table of Contentsglobal diversification of revenue in 2015. The Americas region contributed the largest portion of our revenue growth on an absolute dollar basis and all threeregions showed growth on a percentage basis. Product revenue increased by $116.2 million , or 32% , in 2015 compared to 2014 . Product revenue in 2015included revenue from Meru of $22.2 million. The increase in product revenue was primarily driven by greater sales volume in our FortiGate product family acrossall product categories and in particular for our high-end products for large enterprise customers. Service revenue increased by $122.7 million , or 30% , in 2015compared to 2014 . The increase in service revenue was primarily due to the recognition of revenue from our growing deferred revenue balance consisting ofFortiGuard security subscription and FortiCare technical support contracts sold to a larger customer base as well as the renewals of similar contracts sold in earlierperiods. Service revenue in 2015 included revenue from Meru of $5.8 million.Cost of revenue and gross margin Year Ended December 31, 2015 2014 Change % Change(in thousands, except percentages)Cost of revenue: Product$190,398 $151,300 $39,098 26%Service96,379 79,709 16,670 21Total cost of revenue$286,777 $231,009 $55,768 24%Gross margin: Product60.1% 58.0% 2.1% Service81.9 80.5 1.4 Total gross margin71.6% 70.0% 1.6% Total gross margin increased by 1.6 percentage points in 2015 compared to 2014 , as both product and service gross margins increased. Product grossmargin increased by 2.1 percentage points in 2015 compared to 2014 primarily due to a greater mix of high-end FortiGate product sales compared to the sameperiod last year, such as our FortiGate-5000 series. In addition, product gross margin was positively impacted by higher sales of software products such as certainof our virtualized security solutions, as well as inventory management efficiencies.Service gross margin increased during 2015 as compared to 2014 as we scaled efficiencies resulting from our ability to add and charge for morefunctionality and value to our FortiGuard security subscription and FortiCare technical support offerings, which yielded more value to our customers and whichtranslated into improved service margins. Cost of service revenue increased by $16.7 million primarily due to an $11.6 million increase in personnel costs relatedto headcount increases.Operating expenses Year Ended December 31, Change % Change2015 2014 Amount % ofRevenue Amount % ofRevenue (in thousands, except percentages)Operating expenses: Research and development$158,129 16% $122,880 16% $35,249 29%Sales and marketing470,371 47 315,804 41 154,567 49General and administrative71,514 7 41,347 5 30,167 73Restructuring charges7,600 1 — — 7,600 100Total operating expenses$707,614 70% $480,031 62% $227,583 47%Research and developmentResearch and development expense increased by $35.2 million , or 29% , in 2015 compared to 2014 primarily due to an increase of $25.8 million inpersonnel costs as a result of increased headcount to support the development of new products and continued enhancements of our existing products. Depreciationand other occupancy-related costs increased by $3.6 million. In46Table of Contentsaddition, during 2014, we had a reversal of $3.0 million related to a previously recorded liability for estimated contingent consideration. We intend to continue toinvest in our research and development organization and integrate personnel from our acquisition of Meru, but expect research and development expense as apercentage of total revenue to remain at a relatively comparable level in 2016.Sales and marketingSales and marketing expense increased by $154.6 million , or 49% , in 2015 compared to 2014 , primarily due to an increase of $108.0 million inpersonnel costs as we continued to increase our sales and marketing headcount. Marketing-related expenses increased by $16.9 million as we invested significantlyin marketing investments to drive broader market awareness, create a global marketing engine, build broad market lead generation and nurture programs andaccelerate pipeline. In addition, we incurred increases in travel expenses of $9.1 million, and depreciation and occupancy-related costs of $9.3 million. As apercentage of total revenue, sales and marketing expense increased as we accelerated the investment in our sales force and marketing programs to drive futuregrowth. We intend to continue to make investments in our sales resources and infrastructure and marketing strategy, which are critical to support growth, butexpect sales and marketing expense as a percentage of total revenue to remain at a relatively comparable level in 2016.General and administrativeGeneral and administrative expense increased by $30.2 million , or 73% , in 2015 compared to 2014 . Personnel costs increased by $14.6 million as wecontinued to increase headcount in order to support our expanding business. In addition, professional fees increased by $6.9 million, primarily due to legal servicesrelated to the assertion of our intellectual property and other rights. In 2015, we also incurred $5.4 million in expenses related to business process design andreengineering in preparation of an ERP system implementation and $1.7 million of costs related to the Meru acquisition. As a percentage of total revenue, weexpect general and administrative expense to remain at a relatively comparable level in 2016. Restructuring chargesRestructuring charges of $7.6 million in 2015 primarily relate to the restructuring activities in connection with the Meru acquisition to reduce our coststructure and improve operational efficiencies. See Note 9 to the consolidated financial statements for additional details, including types of expenses incurred andthe timing of future expenses and cash payments. See also the “Liquidity and Capital Resources” section of this Part II, Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”Interest income and other expense — net Year Ended December 31, 2015 2014 Change % Change(in thousands, except percentages)Interest income$5,295 $5,393 $(98) (2)%Other expense—net(3,167) (3,168) 1 —Interest income and other expense—net remained relatively consistent in 2015 compared to 2014 . Interest income varies depending on our averageinvestment balances during the period, types and mix of investments, and market interest rates. Other expense—net consisted primarily of foreign exchange andrelated hedging gains and losses.Provision for income taxes Year Ended December 31, Change % Change2015 2014 (in thousands, except percentages)Provision for income taxes$9,018 $36,206 $(27,188) (75)%Effective tax rate (%)53% 59% (6)% — Our effective tax rate was 53% for 2015 , compared with an effective tax rate of 59% for 2014 . The provision for income taxes for 2015 was comprisedprimarily of U.S. federal and state taxes, other foreign income taxes, foreign withholding47Table of Contentstaxes, an increase in tax reserves, as well as the inclusion of stock-based compensation benefits and transfer pricing allocations which impact jurisdictional incometaxed at various tax rates. The decrease in the effective tax rate in 2015 was primarily due to higher research and development credits, additional tax benefitsrelated to stock-based compensation expense and lower foreign withholding taxes.It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2015,we had accrued $5.5 million for estimated interest related to uncertain tax provisions compared to an accrual of $1.7 million as of December 31, 2014.Within the next twelve months, we do not believe there will be a decrease in uncertain tax benefits that could significantly impact our effective tax rate.2014 and 2013Revenue Year Ended December 31, Change % Change2014 2013 Amount % ofRevenue Amount % ofRevenue (in thousands, except percentages)Revenue: Product$360,558 47% $278,046 45% $82,512 30%Service409,806 53 337,251 55 72,555 22Total revenue$770,364 100% $615,297 100% $155,067 25%Revenue by geography: Americas$324,659 42% $252,786 41% $71,873 28%EMEA270,537 35 208,979 34 61,558 29APAC175,168 23 153,532 25 21,636 14Total revenue$770,364 100% $615,297 100% $155,067 25%Total revenue increased by $155.1 million, or 25%, in 2014 compared to 2013. The Americas region contributed the largest portion of our revenue growthon an absolute dollar basis and all three regions showed growth on a percentage basis. Product revenue increased by $82.5 million, or 30%, compared to 2013. Theincrease in product revenue was primarily driven by greater sales volume in our FortiGate product due to increased demand for our high-end products from largeenterprise and service provider customers. Service revenue increased by $72.6 million, or 22%, in 2014 compared to 2013 due to the recognition of revenue from our growing deferred revenuebalance consisting of FortiGuard security subscription and FortiCare technical support contracts sold to a larger customer base as well as the renewals of similarcontracts sold in earlier periods.48Table of ContentsCost of revenue and gross margin Year Ended December 31, Change % Change2014 2013 (in thousands, except percentages)Cost of revenue: Product$151,300 $114,611 $36,689 32%Service79,709 66,032 13,677 21Total cost of revenue$231,009 $180,643 $50,366 28%Gross margin (%): Product58.0% 58.8% (0.8)% Service80.5 80.4 0.1 Total gross margin70.0% 70.6% (0.6)% Total gross margin decreased by 0.6 percentage points in 2014 compared to 2013, as product gross margins declined. Product gross margin decreased by0.8 percentage points in 2014 compared to 2013 due to an increase in warranty-related costs of $3.2 million and impairment charges related to certain intangibleassets of $2.4 million. We also experienced increased freight costs of $2.0 million, higher excess inventory write-offs of $1.4 million, increased personnel-relatedcosts of $0.9 million, and increased occupancy-related costs of $0.8 million.Service gross margin remained relatively consistent during 2014 as compared to 2013. Cost of service revenue increased by $13.7 million primarily dueto a $9.5 million increase in personnel costs, including stock-based compensation, related to headcount increases, a $1.4 million increase in depreciation, a $1.1million increase in occupancy-related costs, and a $0.8 million increase in professional services.Operating expenses Year Ended December 31, Change % Change2014 2013 Amount % ofRevenue Amount % ofRevenue (in thousands, except percentages)Operating expenses: Research and development$122,880 16% $102,660 17% $20,220 20%Sales and marketing315,804 41 224,991 36 90,813 40General and administrative41,347 5 34,913 6 6,434 18Total operating expenses$480,031 62% $362,564 59% $117,467 32%Research and developmentResearch and development expense increased by $20.2 million, or 20%, in 2014 compared to 2013 primarily due to an increase of $12.0 million inpersonnel costs as a result of increased headcount to support the development of new products and continued enhancements of our existing products. In addition,stock-based compensation increased by $4.0 million, product development expenses, such as supplies and third-party testing and prototypes, increased by $3.4million, occupancy-related costs and depreciation expense increased by $2.8 million, and professional services costs increased by $1.0 million. These increaseswere partially offset by a $3.0 million decrease in estimated contingent consideration.Sales and marketingSales and marketing expense increased by $90.8 million, or 40%, in 2014 compared to 2013, primarily due to an increase of $58.8 million in personnelcosts as we continued to increase our sales headcount in order to drive continued market share gains globally. Marketing-related expenses increased by $12.9million as we invested significantly in marketing to capture market share, particularly in the enterprise market, including costs related to tradeshows and leadgeneration campaigns. In addition, we incurred increases in stock-based compensation expense of $7.2 million, depreciation and other expenses of $4.4 million,travel expenses of $4.2 million, supplies of $2.2 million and occupancy-related cost of $1.0 million.49Table of ContentsAs a percentage of total revenue, sales and marketing expenses increased as we accelerated the investment in our sales force and marketing campaigns to drivefuture growth.General and administrativeGeneral and administrative expense increased by $6.4 million, or 18%, in 2014 compared to 2013. Personnel costs, including stock-based compensation,increased by $6.8 million, as we continued to increase our headcount in order to support our expanding business. In addition, professional services fees increased$0.8 million, partially offset by a decrease of $1.3 million in occupancy-related costs including depreciation and supplies.Interest income and other expense — net Year Ended December 31, Change % Change2014 2013 (in thousands, except percentages)Interest income$5,393 $5,306 $87 2%Other expense—net(3,168) (1,455) (1,713) 118The $0.1 million increase in interest income in 2014 compared to 2013 was primarily due to interest earned on higher invested balances of cash, cashequivalents and investments. The change in other expense—net, for 2014 when compared to 2013, was the result of higher foreign exchange losses and the impactof a reevaluation of the functional currency selection of certain of our international subsidiaries.Provision for income taxes Year Ended December 31, Change % Change2014 2013 (in thousands, except percentages)Provision for income taxes$36,206 $31,668 $4,538 14%Effective tax rate (%)59% 42% 17% — Our effective tax rate was 59% for 2014, compared with an effective tax rate of 42% for 2013. The provision for income taxes for 2014 was comprisedprimarily of U.S. federal and state taxes, other foreign income taxes, foreign withholding taxes, discrete events resulting from an increase in tax reserves, as well asthe inclusion of stock-based compensation benefits and transfer pricing allocations which impact jurisdictional income taxed at various tax rates. The increase inthe effective tax rate in 2014 was primarily due to an increase in estimated tax liability related to foreign operations, an increase in tax reserves, an increase in non-tax deductible stock-based compensation expense, and limitations on utilizing foreign withholding tax credits.As of December 31, 2014, we had accrued $1.7 million for estimated interest related to uncertain tax provisions compared to an accrual of $1.0 million asof December 31, 2013.50Table of ContentsQuarterly Results of OperationsThe following table sets forth our unaudited quarterly statements of operations data for the last eight quarters. The information for each of these quartershas been prepared on the same basis as the audited annual financial statements included elsewhere in this Annual Report and, in the opinion of management,includes all adjustments, which includes only normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. Thisdata should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this annual report. These quarterlyoperating results are not necessarily indicative of our operating results for any future period. Three Months Ended Dec 31, 2015 Sept 30, 2015 Jun 30, 2015 Mar 31, 2015 Dec 31, 2014 Sept 30, 2014 Jun 30, 2014 Mar 31, 2014 (in thousands, except per share amounts)Consolidated Statements ofOperations Data: Revenue: Product$144,759 $119,737 $114,777 $97,509 $110,678 $87,731 $85,384 $76,765Service151,770 140,331 125,008 115,377 113,291 105,617 98,714 92,184Total revenue296,529 260,068 239,785 212,886 223,969 193,348 184,098 168,949Cost of revenue: Product (1)(2)55,466 46,167 47,397 41,368 46,070 35,636 37,455 32,139Service (1)26,510 25,534 22,101 22,234 19,554 21,249 20,302 18,604Total cost of revenue81,976 71,701 69,498 63,602 65,624 56,885 57,757 50,743Total gross profit214,553 188,367 170,287 149,284 158,345 136,463 126,341 118,206Operating expenses: Research and development(1)42,814 42,110 37,389 35,816 33,097 30,790 29,938 29,055Sales and marketing (1)(2)136,840 120,994 111,928 100,609 93,228 80,433 74,817 67,326General and administrative(1)20,315 21,220 18,018 11,961 12,104 9,789 10,444 9,010Restructuring charges1,717 5,883 — — — — — —Total operatingexpenses201,686 190,207 167,335 148,386 138,429 121,012 115,199 105,391Operating income (loss)12,867 (1,840) 2,952 898 19,916 15,451 11,142 12,815Interest income1,176 1,333 1,364 1,422 1,402 1,339 1,319 1,333Other expense—net(1,007) (653) (830) (677) (1,200) (1,005) (574) (389)Income (loss) before incometaxes13,036 (1,160) 3,486 1,643 20,118 15,785 11,887 13,759Provision for (benefit from)income taxes15,570 (9,329) 2,694 83 13,305 11,729 5,806 5,366Net income (loss)$(2,534) $8,169 $792 $1,560 $6,813 $4,056 $6,081 $8,393Net income (loss) per share : Basic$(0.01) $0.05 $— 0.01 $0.04 $0.02 $0.04 $0.05Diluted$(0.01) $0.05 $— $0.01 $0.04 $0.02 $0.04 $0.05__________________________51Table of Contents(1) Includes stock-based compensation as follows: Three Months Ended Dec 31, 2015 Sept 30, 2015 Jun 30, 2015 Mar 31, 2015 Dec 31, 2014 Sept 30, 2014 Jun 30, 2014 Mar 31, 2014 (in thousands)Cost of product revenue$332 $291 $210 $140 $132 $60 $178 $113Cost of service revenue1,980 1,849 1,660 1,632 1,612 1,522 1,363 1,329Research and development7,194 6,663 5,541 5,157 4,706 4,505 4,171 3,882Sales and marketing14,954 13,904 11,271 9,307 7,854 7,397 5,747 5,746General and administrative3,627 3,612 3,078 2,686 2,377 1,183 3,257 1,860Total stock-basedcompensation expense$28,087 $26,319 $21,760 $18,922 $16,681 $14,667 $14,716 $12,930_______________________________________________(2) Includes amortization and impairment of intangible assets as follows: Three Months Ended Dec 31, 2015 Sept 30, 2015 Jun 30, 2015 Mar 31, 2015 Dec 31, 2014 Sept 30, 2014 Jun 30, 2014 Mar 31, 2014 (in thousands)Amortization of intangibleassets$1,319 $1,319 $244 $244 $244 $244 $408 $511Impairment of intangible assets— — 1,593 — — — 2,404 —Total amortization andimpairment of intangibleassets$1,319 $1,319 $1,837 $244 $244 $244 $2,812 $511Seasonality, Cyclicality and Quarterly Revenue TrendsOur quarterly results reflect a pattern of increased customer buying at year-end, which has positively impacted billings and product revenue activity in thefourth quarter. In the first quarter, we generally experience lower sequential customer buying, which results in lower billings and product revenue. Although theseseasonal factors are 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 twoweeks of each quarter. We believe this is due to customer buying patterns typical in this industry.Our total quarterly revenue over the past eight quarters has generally increased sequentially in each quarter, except in the first quarter of 2015. Productrevenue in all of the quarters of 2015 was higher as compared to the same quarters in 2014 , which we believe was due in part to the investments made in our salesand marketing organizations, to a robust security market and to continued product innovation.Total gross margin has fluctuated on a quarterly basis primarily due to shifts in the mix of sales between products and services and between products.Product gross margins, on average throughout the year, increased in 2015 primarily due to a greater mix of high-end FortiGate product sales compared to 2014.Product gross margin varies based on the types of products sold and the average selling prices of our products. In addition, product gross margin was positivelyimpacted by higher sales of software products such as certain of our virtualized security solutions, as well as inventory management efficiencies. Service grossmargins, on average throughout the year, increased in 2015 compared to 2014 as we scaled efficiencies resulting from our ability to add and charge for morefunctionality and value to our FortiGuard security subscription and FortiCare technical support offerings, which yielded more value to our customers and whichtranslated into improved service margins.52Table of ContentsLiquidity and Capital Resources As of December 31, 2015 2014 2013 (in thousands)Cash and cash equivalents$543,277 $283,254 $115,873Investments621,033 708,490 727,172Total cash, cash equivalents and investments$1,164,310 $991,744 $843,045Working capital$591,873 $508,925 $271,505 Year Ended December 31, 2015 2014 2013 (in thousands)Cash provided by operating activities$282,547 $196,582 $147,384Cash used in investing activities(967) (29,350) (146,734)Cash provided by (used in) financing activities(21,557) 749 (6,423)Effect of exchange rates on cash and cash equivalents— (600) (1,329)Net increase (decrease) in cash and cash equivalents$260,023 $167,381 $(7,102)Liquidity and capital resources may be impacted by our operating activities, as well as by our business acquisitions, capital expenditures, stockrepurchases, proceeds associated with stock option exercises and issuances of common stock under the employee stock purchase plan (“ESPP”), payment of taxesin connection with the net settlement of equity awards, and investments in strategic relationships that we have made or may make in the future. Our previous stockrepurchase program expired on December 31, 2015 with an unused balance under the Program of $62.5 million. In January 2016, our board of directors approved anew share repurchase program, which authorizes the repurchase of up to $200.0 million of our outstanding common stock through December 31, 2017. In recentyears we have received significant capital resources as a result of the exercise of stock options and purchases under our ESPP. We expect proceeds in future yearsto be impacted by our share price and the mix of stock options and RSUs granted. We expect to spend $35.0 million to $45.0 million in capital expendituresprimarily related to expansion of our offices to support worldwide growth and the implementation of our ERP system.In December 2015, we received $9.0 million from a third-party for a release of claims. In addition, we agreed to a three-year covenant-not-to-sue. Of the$9.0 million of consideration received, $2.0 million was used to offset contingent legal fees incurred in connection with the litigation and the remaining $7.0million was deferred, with the short-term portion recorded as accrued liabilities and the long-term portion recorded as other liabilities in the consolidated balancesheet. The deferral will be recognized ratably through 2018 as an offset to general and administrative expenses in the consolidated statement of operations.As of December 31, 2015 , our cash, cash equivalents, and investments of $1.16 billion were invested primarily in corporate debt securities, commercialpaper, municipal bonds, certificates of deposit and term deposits, money market funds, and U.S. government and agency securities. It is our investment policy toinvest excess cash in a manner that preserves capital, provides liquidity and maximizes return without significantly increasing risk.As of December 31, 2015 , $375.7 million of our cash and investments were held by our international subsidiaries and are therefore not immediatelyavailable to fund domestic operations unless the cash is repatriated. While we do not intend to do so, should this amount be repatriated, most of it would be subjectto U.S. federal income tax that would be partially offset by foreign tax credits. We do not enter into investments for trading or speculative purposes. We believethat our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements willdepend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketingactivities, the introduction of new and enhanced products and services offerings, the costs to ensure access to adequate manufacturing capacity and the continuingmarket acceptance of our products. Historically, we have required capital principally to fund our working capital needs, capital expenditures, share repurchases andacquisition activities. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If weare unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.53Table of ContentsOperating ActivitiesCash generated by operating activities is our primary source of liquidity. It is primarily comprised of net income, as adjusted for non-cash items, andchanges in operating assets and liabilities. Non-cash adjustments consist primarily of stock-based compensation, depreciation of property and equipment,amortization of intangible assets, excess tax benefit from stock-based compensation, and amortization of investment premiums. Our operating activities during 2015 provided $282.5 million in cash as a result of our continued growth in billings and the ability to successfully manageour working capital. Additionally, in 2015, we received $9.0 million related to a mutual three-year covenant-not-to-sue agreement. Changes in operating assets andliabilities primarily resulted from an increase in payments received from customers, partially offset by an increase in payments to vendors.Our operating activities during 2014 provided $196.6 million in cash as a result of profitability, timing of billings and collections, and the ability tosuccessfully manage our working capital. The primary sources of cash from operating activities during 2014 consisted of net income of $25.3 million, increased bynon-cash adjustments of $93.9 million and changes in operating assets and liabilities of $77.4 million. In 2014, we received $20.0 million pursuant to a six-yearmutual covenant-not-to-sue and release agreement with Palo Alto Networks, Inc. Changes in operating assets and liabilities primarily included an increase inpayments received from customers and a receipt of cash related to the mutual covenant-not-to-sue and release agreement, partially offset by payments for inventorypurchases, prepayment of certain expenses and payments of income taxes during the period.Our operating activities during 2013 provided $147.4 million in cash as a result of profitability, timing of billings and collections, and the ability tosuccessfully manage our working capital. The primary sources of cash from operating activities during 2013 consisted of net income of $44.3 million increased bynon-cash adjustments of $69.2 million and changes in operating assets and liabilities of $33.9 million. Changes in operating assets and liabilities primarily includedan increase in payments received from customers, partially offset by payments for inventory purchases.Investing ActivitiesThe changes in cash flows from investing activities primarily relate to timing of purchases, maturities and sales of investments, purchases of property andequipment, and payments made in connection with business acquisitions.During 2015, cash used for investing activities was primarily due to $38.0 million used for the acquisition of Meru, In addition we spent $37.4 million oncapital expenditures, including our purchases of certain real properties in Sunnyvale, California and Sophia, France for total cash of $13.9 million . The outflow ofcash was partially offset by positive cash flow due to maturities, net of purchases, from our investments of $74.4 million .During 2014, cash used for investing activities was primarily due to $32.2 million spent on capital expenditures, partially offset by positive cash flow dueto maturities, net of purchases, from our investments of $2.9 million.During 2013, cash used for investing activities was primarily due to $125.2 million of net purchases of investments, $13.9 million for the purchases ofproperty and equipment, and $7.6 million for acquisitions.Financing ActivitiesThe changes in cash flows from financing activities primarily relate to proceeds from the issuance of common stock under our equity incentive plan andESPP, taxes paid related to net share settlement of equity awards, excess tax benefit from stock-based compensation, and repurchase and retirement of commonstock.During 2015, cash used for financing activities was $21.6 million primarily due to $60.0 million used to repurchase our common stock. This was partiallyoffset by $38.4 million of proceeds from the issuance of common stock, net of taxes paid related to withholding upon issuance of RSUs.During 2014, cash provided by financing activities was $0.7 million as a result of proceeds of $55.3 million from the issuance of common stock under ourstock plans. This cash inflow was partially offset by $44.0 million used to repurchase our common stock and $10.6 million of taxes payment related to withholdingupon the issuance of RSUs.During 2013, cash used in financing activities was $6.4 million as a result of our repurchase of $33.5 million of common stock and our net-sharesettlement of RSUs of $1.5 million. This was offset by receiving proceeds of $12.9 million54Table of Contentsand $12.7 million from the issuance of common stock under our stock option plans and ESPP, respectively, and an excess tax benefit from employee stock optionexercises of $3.0 million.Contractual Obligations and CommitmentsThe following summarizes our contractual obligations as of December 31, 2015 : Payments Due by Period Total Less than 1 year 1 - 3 years 3 - 5 years More than 5years (in thousands)Operating lease commitments (1)$61,013 $17,052 $30,046 $7,527 $6,388Inventory purchase commitments (2)70,018 70,018 — — —Other contractual commitments and open purchase orders (3)37,346 33,375 3,578 393 —Total$168,377 $120,445 $33,624 $7,920 $6,388________________________(1) Consists of contractual obligations from non-cancelable office space under operating leases.(2) Consists of minimum purchase commitments with independent contract manufacturers.(3) Consists of an estimate of open purchase orders and contractual obligations in the ordinary course of business, other than commitments with contract manufacturers and suppliers, forwhich we have not received the goods or services. No tax liabilities related to uncertain tax positions have been included in the table. As of December 31, 2015 , we had $60.6 millionof long-term tax liabilities, including interest, related to uncertain tax positions. Because of the high degree of uncertainty regarding the settlement of these liabilities, we are unable toestimate the years in which future cash outflows may occur.Off-Balance Sheet ArrangementsDuring 2015 , 2014 and 2013 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance orspecial purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limitedpurposes.Recent Accounting PronouncementSee 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 recentlyadopted accounting pronouncements.ITEM 7A. Quantitative and Qualitative Disclosures about Market RiskInterest Rate Fluctuation RiskThe primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing risk.Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of theinvestment to fluctuate. To minimize this risk, we maintain our portfolio of cash, cash equivalents and investments in a variety of securities, including corporatedebt securities, money market funds, commercial paper, municipal bonds, U.S. government and agency securities, and certificates of deposit and term deposits.The risk associated with fluctuating interest rates is limited to our investment portfolio. A 10% decrease in interest rates in 2015 , 2014 and 2013 would haveresulted in an insignificant decrease in our interest income in each of these periods.Foreign Currency Exchange RiskOur sales contracts are primarily denominated in U.S. dollars and therefore substantially all of our revenue is not subject to foreign currency translationrisk. However, a substantial portion of our operating expenses incurred outside the U.S. are denominated in foreign currencies and are subject to fluctuations due tochanges in foreign currency exchange rates, particularly changes in the Canadian dollar (“CAD”) and Euro (“EUR”). To help protect against significantfluctuations in value and the volatility of future cash flows caused by changes in currency exchange rates, we engage in foreign currency risk managementactivities to hedge balance sheet items denominated in CAD. We do not use these contracts for speculative or trading purposes. All of the derivative instrumentsare with high quality financial institutions. These contracts typically have maturities between one and three months. We record changes in the fair value of forwardexchange contracts related to balance55Table of Contentssheet accounts as other expense, net in the consolidated statement of operations. We recognized an expense of $3.2 million in Other expense—net, in 2015 due toforeign currency transaction losses.Our hedging activities are intended to reduce, but not eliminate, the impact of currency exchange rate movements. As our hedging activities are relativelyshort-term in nature and are focused on the CAD, long-term material changes in the value of the U.S. dollar against other foreign currencies, such as the EUR,British pound (“GBP”), and Chinese Renminbi (“CNY”) could adversely impact our operating expenses in the future. We assessed the risk of loss in fair valuesfrom the impact of hypothetical changes in foreign currency exchange rates. For foreign currency exchange rate risk, a 10% increase or decrease of foreigncurrency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $2.5 million change in the value of our foreigncurrency cash balances as of December 31, 2015.Inflation RiskOur monetary assets, consisting primarily of cash, cash equivalents and short-term investments, are not affected significantly by inflation because they areshort-term. We believe the impact of inflation on replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations.The rate of inflation, however, affects our cost of revenue and expenses, such as those for employee compensation, which may not be readily recoverable in theprice of products and services offered by us.56Table of ContentsITEM 8.Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2015, 2014, and 2013 Page Report of Independent Registered Public Accounting Firm58Consolidated Balance Sheets59Consolidated Statements of Operations60Consolidated Statements of Comprehensive Income61Consolidated Statements of Stockholders’ Equity62Consolidated Statements of Cash Flows63Notes to Consolidated Financial Statements64The supplementary financial information required by this Item 8 is included in Part II, Item 7 of this Annual Report on Form 10-K under the caption“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Results of Operations.”57Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofFortinet, Inc.Sunnyvale, CaliforniaWe have audited the accompanying consolidated balance sheets of Fortinet, Inc. and subsidiaries (the "Company") as of December 31, 2015 and 2014, and therelated consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period endedDecember 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statementschedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statementschedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basisfor our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fortinet, Inc. and subsidiaries as of December31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity withaccounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation tothe basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control overfinancial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated February 26, 2016 expressed an unqualified opinion on the Company's internalcontrol over financial reporting./s/ DELOITTE & TOUCHE LLPSan Jose, CaliforniaFebruary 26, 201658Table of ContentsFORTINET, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except per share amounts) December 31, 2015 December 31, 2014ASSETS CURRENT ASSETS: Cash and cash equivalents$543,277 $283,254Short-term investments348,074 436,766Accounts receivable—Net of reserves for sales returns and doubtful accounts of $6,228 and $6,204 atDecember 31, 2015 and 2014, respectively259,563 184,741Inventory83,868 69,477Prepaid expenses and other current assets35,761 31,143Total current assets1,270,543 1,005,381LONG-TERM INVESTMENTS272,959 271,724DEFERRED TAX ASSETS119,216 72,564PROPERTY AND EQUIPMENT—Net91,067 58,919OTHER INTANGIBLE ASSETS—Net17,640 2,832GOODWILL4,692 2,824OTHER ASSETS14,393 10,530TOTAL ASSETS$1,790,510 $1,424,774 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable$61,500 $49,947Accrued liabilities33,028 29,016Accrued payroll and compensation61,111 45,875Income taxes payable8,379 2,689Deferred revenue514,652 368,929Total current liabilities678,670 496,456DEFERRED REVENUE276,651 189,828INCOME TAX LIABILITIES60,624 45,139OTHER LIABILITIES19,188 17,385Total liabilities1,035,133 748,808COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS’ EQUITY: Common stock, $0.001 par value—300,000 shares authorized; 171,399 and 166,443 shares issued andoutstanding at December 31, 2015 and 2014, respectively171 166Additional paid-in capital687,658 562,504Accumulated other comprehensive loss(933) (349)Retained earnings68,481 113,645Total stockholders’ equity755,377 675,966TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,790,510 $1,424,774See notes to consolidated financial statements.59Table of ContentsFORTINET, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Year Ended December 31,2015 2014 2013REVENUE: Product$476,782 $360,558 $278,046Service532,486 409,806 337,251Total revenue1,009,268 770,364 615,297COST OF REVENUE: Product190,398 151,300 114,611Service96,379 79,709 66,032Total cost of revenue286,777 231,009 180,643GROSS PROFIT: Product286,384 209,258 163,435Service436,107 330,097 271,219Total gross profit722,491 539,355 434,654OPERATING EXPENSES: Research and development158,129 122,880 102,660Sales and marketing470,371 315,804 224,991General and administrative71,514 41,347 34,913Restructuring charges7,600 — —Total operating expenses707,614 480,031 362,564OPERATING INCOME14,877 59,324 72,090INTEREST INCOME5,295 5,393 5,306OTHER EXPENSE—Net(3,167) (3,168) (1,455)INCOME BEFORE INCOME TAXES17,005 61,549 75,941PROVISION FOR INCOME TAXES9,018 36,206 31,668NET INCOME$7,987 $25,343 $44,273Net income per share (Note 8): Basic$0.05 $0.15 $0.27Diluted$0.05 $0.15 $0.26Weighted-average shares outstanding: Basic170,385 163,831 162,435Diluted176,141 169,289 168,183See notes to consolidated financial statements.60Table of ContentsFORTINET, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Year Ended December 31, 2015 2014 2013Net income$7,987 $25,343 $44,273Other comprehensive loss: Foreign currency translation losses— (333) (1,617)Unrealized losses on investments(897) (1,708) (587)Tax provision related to unrealized losses on investments313 600 205Other comprehensive loss—net of taxes(584) (1,441) (1,999)Comprehensive income$7,403 $23,902 $42,274See notes to consolidated financial statements.61Table of ContentsFORTINET, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands) Common Stock Treasury Stock AdditionalPaid-InCapital AccumulatedOtherComprehensive(Loss)Income RetainedEarnings TotalStockholders’EquityShares Amount Shares Amount BALANCE—December 31, 2012161,757 $162 (1,409) $(2,995) $400,075 $3,091 $110,601 $510,934Issuance of common stock in connection with equity incentive plans - netof tax withholding upon vesting of restricted stock awards3,318 3 — — 24,129 — — 24,132Repurchase and retirement of common stock(3,540) (4) 1,409 2,995 (8,929) — (33,011) (38,949)Stock-based compensation expense— — — — 43,909 — — 43,909Income tax benefit associated with stock-based compensation— — — — 3,460 — — 3,460Net unrealized loss on investments - net of taxes— — — — — (382) — (382)Net change in cumulative translation adjustments— — — — — (1,617) — (1,617)Net income— — — — — — 44,273 44,273BALANCE—December 31, 2013161,535 161 — — 462,644 1,092 121,863 585,760Issuance of common stock in connection with equity incentive plans - netof tax withholding upon vesting of restricted stock awards6,555 7 — — 45,817 — — 45,824Repurchase and retirement of common stock(1,647) (2) — — (4,994) — (33,561) (38,557)Stock-based compensation expense— — — — 58,994 — — 58,994Income tax benefit associated with stock-based compensation— — — — 43 — — 43Net unrealized loss on investments - net of taxes— — — — — (1,108) — (1,108)Net change in cumulative translation adjustments— — — — — (333) — (333)Net income— — — — — — 25,343 25,343BALANCE—December 31, 2014166,443 166 — — 562,504 (349) 113,645 675,966Issuance of common stock in connection with equity incentive plans - netof tax withholding upon vesting of restricted stock awards6,715 7 — — 39,011 — — 39,018Repurchase and retirement of common stock(1,759) (2) — — (6,847) — (53,151) (60,000)Stock-based compensation expense— — — — 95,088 — — 95,088Tax shortfalls, net of excess tax benefits, on stock-based compensationawards— — — — (2,098) — — (2,098)Net unrealized loss on investments - net of tax— — — — — (584) — (584)Net income— — — — — — 7,987 7,987BALANCE—December 31, 2015171,399 $171 — $— $687,658 $(933) $68,481 $755,377See notes to consolidated financial statements.62Table of ContentsFORTINET, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2015 2014 2013CASH FLOWS FROM OPERATING ACTIVITIES: Net income$7,987 $25,343 $44,273Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization31,589 22,028 15,623Amortization of investment premiums7,457 8,703 11,634Stock-based compensation95,088 58,994 43,909Excess tax benefit from stock-based compensation— — (2,974)Other non-cash items—net3,391 4,140 961Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in businessacquisition: Accounts receivable—net(66,464) (55,888) (22,080)Inventory(19,088) (32,459) (35,093)Deferred tax assets(29,851) 9,072 (18,750)Prepaid expenses and other current assets(2,630) (16,000) (907)Other assets667 (1,302) 1,243Accounts payable(2,517) 18,033 10,485Accrued liabilities883 7,120 3,602Accrued payroll and compensation11,301 10,835 6,013Other liabilities2,016 14,318 (1,948)Deferred revenue222,346 127,416 68,871Income taxes payable20,372 (3,771) 22,522Net cash provided by operating activities282,547 196,582 147,384CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments(459,903) (497,084) (552,778)Sales of investments47,900 41,755 57,897Maturities of investments486,419 458,193 369,659Purchases of property and equipment(37,358) (32,197) (13,877)Payments made in connection with business acquisition—net of cash acquired(38,025) (17) (7,635)Net cash used in investing activities(967) (29,350) (146,734)CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock67,314 55,324 25,584Taxes paid related to net share settlement of equity awards(28,871) (10,598) (1,452)Excess tax benefit from stock-based compensation— — 2,974Repurchase and retirement of common stock(60,000) (43,977) (33,529)Net cash provided by (used in) financing activities(21,557) 749 (6,423)EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS— (600) (1,329)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS260,023 167,381 (7,102)CASH AND CASH EQUIVALENTS—Beginning of year283,254 115,873 122,975CASH AND CASH EQUIVALENTS—End of year$543,277 $283,254 $115,873SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for income taxes—net$18,893 $40,551 $25,445NON-CASH INVESTING AND FINANCING ACTIVITIES: Transfers of evaluation units from inventory to property and equipment$17,395 $12,733 $8,303Liability for purchase of property and equipment and asset retirement obligations$9,870 $3,275 $4,253Liability incurred in connection with business acquisition$— $— $100Liability incurred for repurchase of common stock$— $— $5,420Equity awards assumed in connection with business acquisition$471 $— $—See notes to consolidated financial statements.63Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBusiness —Fortinet, Inc. (“Fortinet”) was incorporated in Delaware in November 2000 and is a leading provider of network security appliances toenterprises, service providers and government organizations worldwide. Fortinet’s solutions are designed to integrate multiple levels of security protection,including firewall, virtual private networking, application control, anti-malware, intrusion prevention, web filtering, vulnerability management, anti-spam, wirelesscontroller and WAN acceleration. Our security solutions are fast, secure and designed to provide broad, rapid protection against dynamic security threats whilesimplifying the IT infrastructure of our end-customers worldwide.Basis of Presentation and Preparation —The consolidated financial statements of Fortinet and its wholly-owned subsidiaries (collectively, the“Company,” “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Allintercompany transactions and balances have been eliminated in consolidation.Use of Estimates —The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates andassumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such management estimates include, but are notlimited to, the best estimate of selling price for our products and services, stock-based compensation, inventory valuation and warranty reserve, fair value of assetsacquired and liabilities assumed in business combinations, measurement of liabilities for uncertain tax positions and deferred tax assets, assessment ofrecoverability of our goodwill and other long-lived assets, sales returns reserve and allowance for doubtful accounts, restructuring charges, and other losscontingencies. We base our estimates on historical experience and also on assumptions that we believe are reasonable. Actual results could differ from thoseestimates.Concentration of Credit Risk —Financial instruments that subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term and long-term investments and accounts receivable. We maintain our cash, cash equivalents and investments in fixed income securities with major financialinstitutions in order to limit the exposure of each investment. Deposits held with banks may exceed the amount of insurance provided on such deposits.Our accounts receivables are primarily derived from our channel partners in various geographical locations. We perform ongoing credit evaluations of ourcustomers. We generally do not require collateral on accounts receivable and we maintain reserves for estimated potential credit losses. As of December 31, 2015and December 31, 2014, one distributor, Exclusive Networks Group, accounted for 23% and 18% of total net accounts receivable, respectively.During 2015 , 2014 and 2013, this same distributor accounted for 18% , 15% and 12% of total revenue, respectively.Financial Instruments and Fair Value —We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilitiesthat are recognized or disclosed at fair value in the financial statements on a recurring basis. Due to their short-term nature, the carrying amounts reported in theconsolidated financial statements approximate the fair value for accounts receivable, accounts payable, accrued liabilities, and accrued payroll and compensation.Comprehensive Income —Comprehensive income includes certain changes in equity from non-owner sources that are excluded from net income,specifically, unrealized gains and losses on available-for-sale investments.Foreign Currency Translation and Transaction Gains and Losses —Prior to the third quarter of 2014, the assets and liabilities of our internationalsubsidiaries were translated into U.S. dollars using the applicable exchange rates. The resulting foreign translation adjustments were included in the consolidatedbalance sheets as a component of accumulated other comprehensive income (loss) and in the consolidated statements of comprehensive income.In the third quarter of 2014, we reevaluated the selected functional currency of our international subsidiaries due to the nature of our business operationsand recorded the cumulative impact of the reevaluation of the functional currency in the consolidated statement of operations. Subsequently, the remeasurement ofthe assets and liabilities of all international subsidiaries was recorded in the consolidated statement of operations prospectively. The impact of this reevaluation wasnot material in 2014 or any of our previously issued financial statements.64Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)As of December 31, 2015 and 2014, the functional currency of our foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities denominated inforeign currencies have been remeasured into U.S. dollars using the exchange rates in effect at the balance sheet dates. Foreign currency denominated income andexpenses have been remeasured using the average exchange rates in effect during each period. Foreign currency remeasurement losses of $3.2 million , $3.2million and $1.5 million , are included in other expense—net for 2015, 2014 and 2013 , respectively.Cash, Cash Equivalents and Available-for-sale Investments —We consider all highly liquid investments, purchased with original maturities of threemonths or less, to be cash equivalents. Cash and cash equivalents consist of balances with banks and highly liquid investments in money market funds andcommercial paper.We classify our investments as available-for-sale at the time of purchase, since it is our intent that these investments are available for current operations.Investments with original maturities greater than three months that mature less than one year from the consolidated balance sheet date are classified as short-terminvestments. Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments.Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. We consult with our investment managersand consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis. If the cost of an individualinvestment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, andour intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a newcost basis in the investment is established.For debt securities in an unrealized loss position which is deemed to be other-than-temporary, the difference between the security’s then-currentamortized cost basis and fair value is separated into (i) the amount of the impairment related to the credit loss (i.e., the credit loss component) and (ii) the amountof the impairment related to all other factors (i.e., the non-credit loss component). The credit loss component is recognized in earnings. The non-credit losscomponent is recognized in accumulated other comprehensive loss.Inventory —Inventory is recorded at the lower of cost (using the first-in, first-out method) or market, after we give appropriate consideration toobsolescence and inventory in excess of anticipated future demand. In assessing the ultimate recoverability of inventory, we make estimates regarding futurecustomer demand, the timing of new product introductions, economic trends and market conditions. If the actual product demand is significantly lower thanforecasted, we could be required to record additional inventory write-downs which would be charged to cost product revenue. Any write-downs could have anadverse impact on our gross margins and profitability.Property and Equipment —Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-linemethod over the estimated useful lives of the assets as follows: Estimated Useful LivesBuilding and building improvements20 yearsEvaluation units1 yearComputer equipment and software1 - 5 yearsFurniture and fixtures3 - 5 yearsLeasehold improvementsShorter of useful life or lease termOther Investments —Investments in privately-held companies where we own less than 20% of the voting stock and have no indicators of significantinfluence over operating and financial policies of those companies are included in other assets in the consolidated balance sheets and are accounted for under thecost method. For these non-quoted investments, we regularly review the assumptions underlying the operating performance and cash flow forecasts based oninformation provided by these privately-held companies. If it is determined that an other-than-temporary decline exists in an equity security, we write down theinvestment to its fair value and record the related impairment as an investment loss in our consolidated statements of operations.65Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Consolidation of Variable Interest Entities —We use a qualitative approach in assessing the consolidation requirement for variable interest entities(“VIEs”). This approach focuses on determining whether we have the power to direct the activities of the VIE that most significantly affect the VIE’s economicperformance and whether we have the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. For all periodspresented in the accompanying consolidated financial statements, we have determined that we are not the primary beneficiary of any VIEs.Business Combinations —We include the results of operations of the businesses that we acquire as of the respective dates of acquisition. We allocate thefair value of the purchase price of our business acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired, based on theirestimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Additional informationexisting as of the acquisition date but unknown to us may become known during the remainder of the measurement period, not to exceed 12 months from theacquisition date, which may result in changes to the amounts and allocations recorded.Impairment of Long-Lived Assets —We evaluate events and changes in circumstances that could indicate carrying amounts of long-lived assets,including intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets bydetermining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future undiscountedcash flows is less than the carrying amount of those assets, we record an impairment charge in the period in which we make the determination. If such assets areconsidered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of theassets.Restructuring Charges —We recognize a liability for exit and disposal activities when the liability is incurred. Our restructuring charges consist ofseverance and other one-time benefits, contract terminations and other charges. Liabilities for costs associated with a restructuring activity are measured at fairvalue and are recognized when the liability is incurred. One-time termination benefits are expensed at the date we notify the employee, unless the employee mustprovide future service, in which case the benefits are expensed ratably over the future service period. A liability for contract termination costs represents a liabilityfor costs to terminate a contract before the end of its term and is recognized at fair value when we terminate the contract in accordance with the contract terms,which is usually done by giving written notice to the counterparty within the notification period specified by the contract or by otherwise negotiating a terminationwith the counterparty. A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity isrecognized at the cease-use date. Costs to terminate a lease before the end of its term are recognized when the property is vacated. Other costs primarily consist ofasset write-offs, which are expensed when incurred.We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accuratelyreflect the costs of our restructuring plan, actual results may differ and thereby require us to record an additional provision or reverse a portion of such a provision.Goodwill —Goodwill represents the excess of purchase consideration over the estimated fair value of net assets of businesses acquired in a businesscombination. Goodwill acquired in a business combination are not amortized, but instead tested for impairment at least annually during the fourth quarter. Weperform our annual goodwill impairment analysis at the reporting unit level. As of December 31, 2015, we had one reporting unit.In reviewing goodwill for impairment we have the option to (i) assess qualitative factors to determine whether it is more-likely-than-not that the fair valueof the reporting unit is less than its carrying amount or (ii) bypass the qualitative assessment and proceed directly to a quantitative assessment. If we opt to performa qualitative assessment, the factors we may review include, but are not limited to (a) macroeconomic conditions; (b) industry and market considerations; (c) costfactors; (d) overall financial performance; (e) other relevant entity-specific events such as changes in management, strategy, customers or litigation; (f) eventsaffecting the reporting unit; or (g) or sustained decrease in share price. If we believe, as a result of the qualitative assessment, that it is more-likely-than-not that thefair value of the reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required. Aquantitative assessment utilizes a two-step process. In the first step, the fair value of the reporting unit is determined, and is compared against its carrying amount,including goodwill. We consider a combination of an income-based approach using projected discounted cash flows and a market-based approach using multiplesof comparable companies to determine the fair value. The fair value of the reporting unit is estimated using significant judgment based on a combination of theincome and the market approaches. Under the income approach, we estimate fair value of the reporting unit based on the present value of forecasted future cashflows that the reporting unit is expected to generate over its remaining life. Under the market approach, we estimate fair value of our66Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)reporting unit based on an analysis that compares the value of the reporting unit to values of other companies in similar lines of business. If the fair value of thereporting unit is less than its carrying value, then we perform the second step to measure the amount of impairment loss. The amount of impairment is determinedby comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill. When the carrying value of the reporting unit’s goodwillexceeds its implied fair value, we record an impairment loss equal to the difference. We have not been required to perform this second step of the process becausethe fair value of our reporting unit exceeded the net book value as of December 31, 2015 .Determining the fair value of the reporting unit requires us to make judgments and involves the use of significant estimates and assumptions. Theseestimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, operating trends, risk-adjusteddiscount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions webelieve to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We may also test goodwill forimpairment between annual tests in the presence of impairment indicators.Other Intangible Assets —Intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed using thestraight-line method over the estimated economic lives of the assets, which range from one to five years.Deferred Revenue —Deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority ofdeferred revenue is comprised of security subscription and technical support services which are invoiced upfront and delivered over twelve months or longer.Income Taxes —We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been recognized in our financial statements or tax returns. In addition, deferred tax assets are recorded for thefuture benefit of utilizing net operating losses and research and development credit carryforwards. Deferred tax assets and liabilities are measured using thecurrently 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.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 taxposition will be sustained on examination by the taxing authorities. The tax benefits recognized in the financial statements from such positions are then measuredbased on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.Stock-Based Compensation —We have elected to use the Black-Scholes option pricing model to determine the fair value of our employee stock optionsand employee stock purchase plans (“ESPP”). The fair value of restricted stock units (“RSU”) is based on the closing market price of our common stock on thedate of grant. Stock-based compensation expense, net of estimated forfeitures, is amortized on a straight-line basis. Preferred stock units (“PSU”) are RSUs thatcontain both service-based and market-based vesting conditions. PSUs vest over a specified service period upon the satisfaction of certain market-based vestingconditions, and settle into shares of our common stock upon vesting over a two - or three -year period. The fair value of a PSU is calculated using the Monte Carlosimulation model on the date of grant and is based on the market price of our common stock on the date of grant modified to reflect the impact of the market-basedvesting condition, including the estimated payout level based on that condition. We do not adjust compensation cost for subsequent changes in the expectedoutcome of the market-based vesting conditions.Leases —We rent our facilities under operating lease agreements and recognize related rent expense on a straight-line basis over the term of the lease.Some of our lease agreements contain rent holidays, scheduled rent increases, lease incentives and renewal options. Rent holidays and scheduled rent increases areincluded in the determination of rent expense to be recorded over the lease term. Lease incentives are recognized as a reduction of rent expense on a straight-linebasis over the term of the lease. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inceptionof the lease. We begin recognizing rent expense on the date that we obtain the legal right to use and control the leased space.Advertising Expense —Advertising costs are expensed when incurred and are included in operating expenses in the accompanying consolidatedstatements of operations. Our advertising expenses were not significant for any periods presented.67Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Research and Development Costs —Research and development costs are expensed as incurred.Software Development Costs —The costs to develop software that is marketed have not been capitalized as we believe our current softwaredevelopment process is essentially completed concurrently with the establishment of technological feasibility. Such costs are expensed as incurred and included inresearch and development in our consolidated statements of operations.The costs to obtain or develop software for internal use are capitalized based on qualifying criteria, which includes a determination of whether such costsare incurred during the application development stage. Such costs are amortized over the software’s estimated useful life.Revenue Recognition —We derive the majority of our revenue from sales of our hardware, software, FortiGuard security subscription and FortiCaretechnical support services, and other services through our channel partners and a direct sales force. Revenue is recognized when all of the following criteria have been met: •Persuasive evidence of an arrangement exists. Binding contracts or purchase orders are generally used to determine the existence of anarrangement. •Delivery has occurred or services have been rendered. Delivery occurs when we fulfill an order and title and risk of loss has been transferred.Service revenue is deferred and recognized ratably over the contractual service period, which is typically from one to three years and isgenerally recognized upon delivery or completion of service. •Sales price is fixed or determinable. We assess whether the sales price is fixed or determinable based on the payment terms associated with thetransaction and when the sales price is deemed final. •Collectability is reasonably assured. We assess collectability based primarily on creditworthiness as determined by credit checks, analysis, andpayment history.We recognize product revenue for sales to distributors that have no general right of return and direct sales to end-customers upon shipment, based ongeneral revenue recognition accounting guidance once all other revenue recognition criteria have been met. Certain distributors are granted stock rotation rights,limited rights of return and rebates for sales of our products. The arrangement fee for this group of distributors is not typically fixed or determinable when productsare shipped and revenue is therefore deferred and recognized upon sell-through. For sales that include end-customer acceptance criteria, revenue is recognizedupon acceptance.Substantially all of our products have been sold in combination with services, which consist of security subscriptions and technical support services.Security services provide access to our antivirus, intrusion prevention, web filtering and anti-spam functionality. Support services include rights to unspecifiedsoftware upgrades, maintenance releases and patches, telephone and Internet access to technical support personnel, and hardware support. We recognize revenuefrom these services ratably over the contractual service period. Revenue related to subsequent renewals of these services are recognized over the term of therenewal agreement.We reduce revenue for estimates of sales returns and allowances and record reductions to revenue for rebates and estimated commitments related to priceprotection and other customer incentive programs. Additionally, in limited circumstances, we may permit end-customers, distributors and resellers to return ourproducts, subject to varying limitations, for a refund within a reasonably short period from the date of purchase. We estimate and record reserves for salesincentives and sales returns based on historical experience.Our sales arrangements typically contain multiple elements, such as hardware, security subscription, technical support services and other services. Themajority of our hardware appliance products contain our operating system software that together function to deliver the essential functionality of the product. Ourproducts and services generally qualify as separate units of accounting. We allocate revenue to each unit of accounting based on an estimated selling price usingvendor-specific objective evidence (“VSOE”) of selling price, if it exists, or third-party evidence (“TPE”) of selling price. If neither VSOE nor68Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)TPE of selling price exist for a deliverable, we use our best estimate of selling price (“BESP”) for that deliverable. Revenue allocated to each element is thenrecognized when the basic revenue recognition criteria are met for each element.For our hardware appliances, we use BESP as our selling price. For our support and other services, we generally use VSOE as our selling price estimate.We determine VSOE of fair value for elements of an arrangement based on the historical pricing and discounting practices for those services when sold separately.In establishing VSOE, we require that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, generally evidenced bya substantial majority of such historical stand-alone transactions falling within a reasonably narrow range as a percentage of list price. When we are unable toestablish a selling price using VSOE for our support and other services, we use BESP in our allocation of arrangement consideration. We determine BESP for aproduct or service by considering multiple historical factors including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies,customer classes and distribution channels that fall within a reasonably narrow range as a percentage of list price.For multiple-element arrangements where software deliverables are included, revenue is allocated to the non-software deliverables and to the softwaredeliverables as a group using the relative estimated selling prices of each of the deliverables in the arrangement based on the estimated selling price hierarchy. Theamount allocated to the software deliverables is then allocated to each software deliverable using the residual method when VSOE of fair value exists. If evidenceof VSOE of fair value of one or more undelivered elements does not exist, all software allocated revenue is deferred and recognized when delivery of thoseelements occurs or when fair value can be established. When the undelivered element for which we do not have VSOE of fair value is support, revenue for theentire arrangement is recognized ratably over the support period. The same residual method and VSOE of fair value principles apply for our multiple elementarrangements that contain only software elements.Shipping and Handling —Shipping and handling fees charged to our customers are recognized as product revenue in the period shipped and the relatedcosts for providing these services are recorded as a cost of sale.Accounts Receivable —Trade accounts receivable are recorded at the invoiced amount, net of sales returns reserve and allowances for doubtful accounts.The sales returns reserve is determined based on specific criteria including agreements to provide rebates and other factors known at the time, as well as estimatesof the amount of goods shipped that will be returned. To determine the adequacy of the sales returns reserve, we analyze historical experience of actual rebates andreturns. The sales returns reserve was $5.5 million and $5.8 million as of December 31, 2015 and 2014, respectively. The allowance for doubtful accounts isdetermined based on our assessment of the collectability of customer accounts. The allowance for doubtful accounts was $0.7 million and $0.4 million as ofDecember 31, 2015 and 2014.Warranties —We generally provide a 1 -year warranty on hardware products and a 90 -day warranty on software. A provision for estimated future costsrelated to warranty activities is recorded as a component of cost of product revenues when the product revenue is recognized, based upon historical product failurerates and historical costs incurred in correcting product failures. In the event we change our warranty reserve estimates, the resulting charge against future cost ofsales or reversal of previously recorded charges may materially affect our gross margins and operating results.Accrued warranty activities are summarized as follows (in thousands): Year Ended December 31, 2015 2014 2013Accrued warranty balance—beginning of the period$4,269 $3,037 $2,309Warranty costs incurred(4,534) (3,653) (3,444)Provision for warranty for the year, including warranty liabilities assumed in connection with abusiness acquisition4,890 5,209 3,965Adjustment related to pre-existing warranties(1,481) (324) 207Accrued warranty balance—end of the period$3,144 $4,269 $3,037Foreign Currency Derivatives —Our sales contracts are primarily denominated in U.S. dollars and therefore substantially all of our revenue is notsubject to foreign currency translation risk. However, a substantial portion of our operating expenses incurred outside the U.S. are denominated in foreigncurrencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the CAD and the EUR. To help protect againstsignificant69Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)fluctuations in value and the volatility of future cash flows caused by changes in currency exchange rates, we engage in foreign currency risk managementactivities to hedge balance sheet items denominated in CAD. We do not use these contracts for speculative or trading purposes. All of the derivative instrumentsare with high quality financial institutions and we monitor the creditworthiness of these parties. These contracts typically have maturities between one and threemonths. Changes in the fair value of forward exchange contracts related to balance sheet accounts are insignificant and are included in Other expense—net in theconsolidated statement of operations. As of December 31, 2015, the fair value of the forward exchange contracts was not material.Additionally, independent of any hedging activities, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains andlosses in our consolidated statements of operations. Our hedging activities are intended to reduce, but not eliminate, the impact of currency exchange ratemovements. As our hedging activities are relatively short-term in nature and are focused on CAD, long-term material changes in the value of the U.S. dollaragainst other foreign currencies, such as the EUR, GBP and CNY could adversely impact our operating expenses in the future.The notional amount of forward exchange contracts to hedge balance sheet accounts as of December 31, 2015 and 2014 were (in thousands): Buy/Sell NotionalBalance Sheet Contracts: Currency—As of December 31, 2015 CADSell $7,011 Currency—As of December 31, 2014 CADSell $6,879Recent Accounting PronouncementsIn February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2016-02—Leases. The FASBamended lease accounting requirements to begin recording assets and liabilities arising from leases on the balance sheet. The new guidance will also requiresignificant additional disclosures about the amount, timing and uncertainty of cash flows from leases. This new guidance will be effective for us beginning onJanuary 1, 2019 using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities mayelect to apply. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.In January 2016, the FASB issued ASU 2016-01—Financial Instruments-Overall: Recognition and Measurement of Financial Assets and FinancialLiabilities. ASU 2016-01 modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance,entities will have to measure equity investments that do not result in consolidation and are not accounted under the equity method at fair value and recognize anychanges in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equityinvestments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value, and as such these investmentsmay be measured at cost. ASU 2016-01 will be effective for us beginning on January 1, 2018. We do not expect the impact of ASU 2016-01 on our consolidatedfinancial statements to be significant. In November 2015, the FASB issued ASU 2015-17—Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferredincome taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent assets or noncurrent liabilities. We early adopted thisstandard effective December 31, 2015 on a retrospective basis. The adoption of this standard resulted in the reclassification of $41.8 million from Deferred taxassets—current in the consolidated balance sheet as of December 31, 2014 to Deferred tax assets—noncurrent.In September 2015, the FASB issued ASU 2015-16—Simplifying the Accounting for Measurement-Period Adjustments, which eliminates therequirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognizemeasurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would haverecorded in previous periods if the70Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)accounting had been completed at the acquisition date. ASU 2015-16 will be effective for us beginning on January 1, 2016. We do not expect the impact of ASU2015-16 on our consolidated financial statements to be significant.In July 2015, the FASB issued ASU 2015-11—Inventory—Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 changes themeasurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. It applies to entities that measure inventory using amethod other than last-in, first-out or the retail inventory method (e.g., first-in first-out, average cost). ASU 2015-11 will be effective for us beginning on January1, 2017. We do not expect the impact of ASU 2015-11 on our consolidated financial statements to be significant.In May 2014, the FASB issued ASU 2014-09—Revenue from Contracts with Customers (Topic 606) to create a single, joint revenue standard that isconsistent across all industries and markets for companies that prepare their financial statements in accordance with GAAP. Under ASU 2014-09, an entity isrequired to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to beentitled to receive in exchange for those goods or services. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. Assuch, ASU 2014-09 is effective for us beginning on January 1, 2018, with the option to adopt earlier on January 1, 2017. We are currently evaluating the impactASU 2014-09 will have on our consolidated financial statements.In April 2015, the FASB issued ASU 2015-05—Intangibles—Goodwill and Other-Internal-Use Software: Customer’s Accounting for Fees Paid in aCloud Computing Arrangement, which provides guidance on determining whether a cloud computing arrangement contains a software license. If a cloudcomputing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with theacquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as aservice contract. ASU 2015-05 will be effective for us beginning on January 1, 2016. We are currently evaluating the impact of ASU 2015-05 will have on ourconsolidated financial statements.2. FINANCIAL INSTRUMENTS AND FAIR VALUEThe following table summarizes our investments (in thousands): December 31, 2015 AmortizedCost UnrealizedGains UnrealizedLosses FairValueCorporate debt securities$438,533 $30 $(1,369) $437,194Commercial paper66,263 3 (34) 66,232Municipal bonds61,050 12 (40) 61,022Certificates of deposit and term deposits (1)14,897 — — 14,897U.S. government and agency securities41,727 3 (42) 41,688Total available-for-sale securities$622,470 $48 $(1,485) $621,033 December 31, 2014 AmortizedCost UnrealizedGains UnrealizedLosses FairValueCorporate debt securities$589,526 $365 $(875) $589,016Commercial paper51,156 3 (4) 51,155Municipal bonds39,745 15 (39) 39,721Certificates of deposit and term deposits (1)22,854 — — 22,854U.S. government and agency securities5,749 1 (6) 5,744Total available-for-sale securities$709,030 $384 $(924) $708,490 (1) The majority of our certificates of deposit and term deposits are foreign deposits.71Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The following table shows the gross unrealized losses and the related fair values of our investments that have been in a continuous unrealized lossposition (in thousands): December 31, 2015 Less Than 12 Months 12 Months or Greater Total FairValue UnrealizedLosses FairValue UnrealizedLosses FairValue UnrealizedLossesCorporate debt securities$348,534 $(1,187) $42,033 $(182) $390,567 $(1,369)Commercial paper31,977 (34) — — 31,977 (34)Municipal bonds41,677 (36) 1,008 (4) 42,685 (40)U.S. government and agency securities34,703 (42) — — 34,703 (42)Total available-for-sale securities$456,891 $(1,299) $43,041 $(186) $499,932 $(1,485)The following table shows the gross unrealized losses and the related fair values of our investments that have been in a continuous unrealized lossposition (in thousands): December 31, 2014 Less Than 12 Months 12 Months or Greater Total FairValue UnrealizedLosses FairValue UnrealizedLosses FairValue UnrealizedLossesCorporate debt securities$317,011 $(858) $6,011 $(17) $323,022 $(875)Commercial paper8,185 (4) — — 8,185 (4)Municipal bonds26,684 (39) — — 26,684 (39)U.S. government and agency securities$4,745 $(6) — $— 4,745 (6)Total available-for-sale securities$356,625 $(907) $6,011 $(17) $362,636 $(924)The contractual maturities of our investments are as follows (in thousands): December 31, 2015 December 31, 2014Due within one year$348,074 $436,766Due within one to three years272,959 271,724Total$621,033 $708,490Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, included as a separate component of stockholders’equity and in total comprehensive income. Realized gains and losses on available-for-sale securities are insignificant in the periods presented and are included inOther expense—net in our consolidated statements of operations. We use the specific identification method to determine the cost basis of investments sold.The unrealized losses on our available-for-sale securities were caused by fluctuations in market value and interest rates as a result of the economicenvironment. As the decline in market value are attributable to changes in market conditions and not credit quality, and because we have concluded currently thatwe neither intend to sell nor is it more likely than not that we will be required to sell these investments prior to a recovery of par value, we do not consider theseinvestments to be other-than temporarily impaired as of December 31, 2015.Fair Value Accounting—We apply the following fair value hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes theinputs into three broad levels as follows:Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.72Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directlyor indirectly through market corroboration, for substantially the full term of the financial instruments.Level 3—Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significantmanagement judgment or estimation.We measure the fair value of money market funds and certain U.S. government and agency securities using quoted prices in active markets for identicalassets. The fair value of all other financial instruments was based on quoted prices for similar assets in active markets, or model driven valuations using significantinputs derived from or corroborated by observable market data. We classify investments within Level 1 if quoted prices are available in active markets for identical securities. We classify items within Level 2 if the investments are valued using model driven valuations using observable inputs such as quoted market prices,benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Investments are held bycustodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.Fair Value of Financial InstrumentsAssets Measured at Fair Value on a Recurring BasisThe following table presents the fair value of our financial assets measured at fair value on a recurring basis as of December 31, 2015 and December 31,2014 (in thousands): December 31, 2015 December 31, 2014 AggregateFairValue QuotedPrices inActiveMarkets ForIdenticalAssets SignificantOtherObservableRemainingInputs SignificantOtherUnobservableRemainingInputs AggregateFairValue QuotedPrices inActiveMarkets ForIdenticalAssets SignificantOtherObservableRemainingInputs SignificantOtherUnobservableRemainingInputs (Level 1) (Level 2) (Level 3) (Level 1) (Level 2) (Level 3)Assets: Corporate debt securities$437,194 $— $437,194 $— $589,016 $— $589,016 $—Commercial paper69,231 — 69,231 — 51,155 — 51,155 —Municipal bonds61,022 — 61,022 — 39,721 — 39,721 —Certificates of deposit and termdeposits14,897 — 14,897 — 22,854 — 22,854 —Money market funds50,030 50,030 — — 13,311 13,311 — —U.S. government and agencysecurities41,688 25,693 15,995 — 5,744 1,998 3,746 —Total$674,062 $75,723 $598,339 $— $721,801 $15,309 $706,492 $— Reported as: Cash equivalents$53,029 $13,311 Short-term investments348,074 436,766 Long-term investments272,959 271,724 Total$674,062 $721,801 There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2015 and December 31, 2014 .73Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Assets Measured at Fair Value on a Nonrecurring BasisWe measure certain assets, including goodwill, other intangible assets—net, and investments in privately-held companies at fair value on a nonrecurringbasis when there are identifiable events or changes in circumstances that may have a significant adverse impact on the fair value of these assets.During the second quarter of 2015, we reassessed the fair value and the remaining useful life of the developed technologies and customer relationshipacquired from the Coyote Point Systems (“Coyote”) business acquisition. Based on this reassessment, we determined a decrease in the projected cash flow and thatthe remaining net book value of the developed technologies and customer relationships were impaired. As a result, we recorded an impairment charge of $1.6million associated with these assets. The impairment charge is included within cost of product revenue and sales and marketing in the consolidated statements ofoperations.During 2014, a decrease in the projected cash flow of the other intangible assets acquired from Coyote resulted in an impairment charge of $2.4 million toadjust the total fair value of the other intangible assets acquired from Coyote to $2.0 million . The impairment charge is included within Cost of product revenue inthe consolidated statements of operations.3. INVENTORYInventory consisted of the following (in thousands): December 31, 2015 December 31, 2014Raw materials$15,425 $10,617Finished goods68,443 58,860Inventory$83,868 $69,477Inventory includes finished goods held by distributors where revenue is recognized on a sell-through basis of $1.1 million and $1.2 million as ofDecember 31, 2015 and 2014, respectively. Inventory also includes materials at contract manufacturers of $4.9 million and $4.8 million as of December 31, 2015and 2014, respectively. 4. PROPERTY AND EQUIPMENT—NetProperty and equipment—net consisted of the following (in thousands): December 31, 2015 December 31, 2014Land$21,683 $13,895Building and building improvements28,841 20,166Evaluation units15,784 11,773Computer equipment and software45,632 31,821Furniture and fixtures8,901 5,096Construction-in-progress8,106 3,902Leasehold improvements11,179 7,998Total property and equipment140,126 94,651Less: accumulated depreciation(49,059) (35,732)Property and equipment—net$91,067 $58,919Depreciation expense was $28.4 million , $20.5 million and $13.9 million in 2015 , 2014 and 2013 , respectively.In 2015, we purchased certain real properties, including land and buildings in Sunnyvale, California and Sophia, France, for cash of $13.9 million tosupport the growth in our business operations. Of the total cost, we allocated $7.874Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)million to land and $6.1 million to building. During 2015, construction-in-progress increased primarily due to $2.6 million related to our enterprise resourceplanning software capitalization and $1.0 million related to assets not yet placed in service due to ongoing building improvements at the newly purchased Sophiaproperty. Fully depreciated evaluation units amounting to $27.2 million and $19.7 million as of December 31, 2015 and 2014, respectively, were written-off.5. INVESTMENTS IN PRIVATELY-HELD COMPANIESOur investments in the equity securities of three privately-held companies totaled $10.3 million and $6.4 million as of December 31, 2015 and 2014,respectively. Each of these investments are accounted for as cost-basis investments, as we own less than 20% of the voting securities and do not have the ability toexercise significant influence over operating and financial policies of the respective entities. These investments are carried at historical cost and are recorded asOther assets on our consolidated balance sheet and would be measured at fair value if indicators of impairment exist. As of December 31, 2015, no events haveoccurred that would adversely affect the carrying value of these investments.We determined that we had a variable interest in these privately-held companies. However, we determined that we were not the primary beneficiary as wedid not have the power to direct their activities that most significantly affect their economic performance. The variable interest entities were not required to beconsolidated in our consolidated financial statements.6. BUSINESS COMBINATIONSOn July 8, 2015, we completed our acquisition of all of the outstanding shares of Meru Networks, Inc. (“Meru”), a provider of Wi-Fi networking productsand services. With this acquisition, we expect to expand on our secure wireless vision and enterprise growth focus, broaden our solutions portfolio, and enhanceour opportunity to address the global enterprise Wi-Fi market with integrated and intelligent secure wireless solutions.In connection with the acquisition, we paid total cash consideration of $40.9 million and incurred $0.4 million of withholding tax liability. In addition, allof the outstanding RSUs of Meru were converted into RSUs for 53,401 shares of our common stock. The cash payment, along with the estimated fair value of theearned RSUs assumed, resulted in a purchase price of $41.8 million . The total purchase price was as follows (in thousands):Purchase Price: Cash$40,914Estimated fair value of shares withheld for taxes379Estimated fair value of earned equity awards assumed by Fortinet471Total purchase price$41,764We accounted for this transaction as a business combination. We expensed acquisition-related costs of $1.7 million in general and administrativeexpenses in the consolidated statement of operations. The total purchase price was allocated to Meru’s identifiable tangible and intangible assets acquired andliabilities assumed based on their estimated fair values as of the acquisition date.75Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Total allocation of the purchase price was as follows (in thousands):Cash and cash equivalents$3,268Accounts receivable8,191Inventory11,610Prepaid expenses and other assets2,409Property and equipment920Deferred tax assets18,585Identifiable intangible assets19,600Goodwill1,868Total assets acquired66,451Deferred revenue9,800Accounts payable and accrued liabilities14,887Total liabilities assumed24,687Total purchase price allocation$41,764The goodwill of $1.9 million represents the premium we paid over the fair value of the net tangible liabilities assumed and identified intangible assetsacquired, due primarily to Meru’s assembled workforce. The goodwill recorded as part of the Meru acquisition is not deductible for U.S. federal income taxpurposes.Intangible assets consist primarily of customer relationships and developed technologies. Customer relationships represent Meru’s installed base and theability to sell existing, in-process and future versions of our products and services to its existing customers. Developed technologies represent the virtualizedwireless local area network solutions offering centralized coordination and control of various access points on the network. This includes patented and unpatentedtechnology, know-how, processes, designs and computer software. The estimated useful life and fair values of the acquired identifiable intangible assets were asfollows (in thousands, except for estimated useful life): Estimated Useful Life(in years) Fair ValuesCustomer relationships5 $12,200Developed technologies4 7,200Trade name0.5 200Total $19,600Customer relationships and trade name are amortized on a straight-line basis and the amortization expense is recorded in sales and marketing expenses inthe consolidated statement of operations. Developed technologies is amortized on a straight-line basis and the amortization expense is recorded in cost of productrevenue in the consolidated statement of operations.Upon the acquisition, Meru became our wholly-owned subsidiary. The results of operations of Meru have been included in our consolidated statement ofoperations for 2015 from the acquisition date. Revenue and net loss of Meru from July 8, 2015 through December 31, 2015 were $28.1 million and $14.0 million ,respectively.The unaudited financial information below summarizes the combined results of Fortinet and Meru on a pro forma basis, after giving effect to theacquisition of Meru on July 8, 2015, as though the business combination occurred on January 1, 2014. The pro forma financial information is presented forinformational purposes and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each ofthe periods presented. The following pro forma financial information for all periods presented includes purchase accounting adjustments for amortization chargesfrom acquired intangible assets, depreciation of acquired property, plant and equipment, stock-based compensation and related tax effects (in thousands):76Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Years Ended December 31, 2015 2014Pro forma revenue$1,046,972 $861,255Pro forma income (loss) from operations$(1,983) $34,105Pro forma net income (loss)$(4,634) $5,968Pro forma net income (loss) per share: Basic$(0.03) $0.04Diluted$(0.03) $0.042013 AcquisitionsIn March 2013, we acquired all of the outstanding equity securities of Coyote, a provider of application delivery, load balancing and accelerationsolutions, for $6.0 million in cash. In connection with this acquisition, we acquired intangible assets of $8.2 million , which included $2.8 million of goodwill. Wealso assumed net tangible liabilities of $2.2 million . The acquisition included a contingent obligation that required payment if certain future operational objectiveswere met. The operational objectives that would require payment were not met. In September 2013, we acquired certain assets of Xtera Communications, Inc., including certain load balancing solutions and certain patents, for a totalconsideration of $1.8 million .The financial results of these acquisitions were not considered material for purposes of pro-forma financial disclosures. The results of operations of our2013 acquisitions were in our consolidated statements of operations from their respective acquisition dates.7. GOODWILL AND OTHER INTANGIBLE ASSETS—NetGoodwillThere were no impairments to goodwill during 2015. The following table presents the changes in the carrying amount of goodwill (in thousands): AmountBalance—December 31, 2014$2,824Addition due to business acquisition1,868Balance—December 31, 2015$4,69277Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Other Intangible Assets—netThe following tables present other intangible assets—net (in thousands): December 31, 2015 Weighted-AverageUseful Life (inYears) Gross AccumulatedAmortization NetOther intangible assets—net: Customer relationships5.0 $12,200 $1,220 $10,980Developed technologies and other3.6 11,384 4,724 6,660Total other intangible assets—net $23,584 $5,944 $17,640 December 31, 2014 Weighted-AverageUseful Life (inYears) Gross AccumulatedAmortization NetOther intangible assets—net: Developed technology3.6 $5,606 $3,128 $2,478Customer relationships6.0 500 146 354Total other intangible assets—net $6,106 $3,274 $2,832During 2015 and 2014, we reassessed the fair value and the remaining useful life of the developed technologies and customer relationships acquired fromthe Coyote business acquisition. Based on this reassessment, we determined a decrease in the projected cash flow and that the remaining net book value of thedeveloped technologies and customer relationships were impaired. As a result, we recorded an impairment charge of $1.6 million and $2.4 million in 2015 and2014, respectively. The impairment charge is included within cost of product revenue and sales and marketing in the consolidated statements of operations.Amortization expense was $3.2 million , $1.5 million , and $1.7 million in 2015 , 2014 and 2013 , respectively. The following table summarizes estimatedfuture amortization expense of Other intangible assets—net (in thousands): AmountYears: 2016$4,60020174,24020184,24020193,34020201,220Total$17,6408. NET INCOME PER SHAREBasic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during theperiod. Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding, plus the dilutiveeffects of stock options, RSUs including PSUs, and ESPP. Dilutive shares of common stock are determined by applying the treasury stock method.78Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is as follows (in thousands, except pershare amounts): Year Ended December 31, 2015 2014 2013Numerator: Net income$7,987 $25,343 $44,273 Denominator: Basic shares: Weighted-average common stock outstanding-basic170,385 163,831 162,435Diluted shares: Weighted-average common stock outstanding-basic170,385 163,831 162,435Effect of potentially dilutive securities: Stock options3,427 4,583 5,685RSUs (including PSUs)2,260 844 35ESPP69 31 28Weighted-average shares used to compute diluted net income per share176,141 169,289 168,183Net income per share: Basic$0.05 $0.15 $0.27Diluted$0.05 $0.15 $0.26The following weighted-average shares of common stock were excluded from the computation of diluted net income per share for the periods presented,as their effect would have been antidilutive (in thousands): Year Ended December 31, 2015 2014 2013Stock options382 3,469 7,397RSUs (including PSUs)1,393 768 2,774ESPP94 99 419 1,869 4,336 10,5909. RESTRUCTURING CHARGESIn connection with the acquisition of Meru, we initiated planned cost reduction and restructuring activities to improve our cost structure and operationalefficiencies. We estimate that we will incur $8.0 million of restructuring charges, consisting of severance and other one-time benefits, contract terminations andother charges. We incurred $7.6 million of restructuring charges during 2015, which are included in operating expense in the consolidated statements of operations.These charges are primarily related to severance and other one-time benefits to be paid in cash. We expect the remainder of the amount to be incurred in 2016.79Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The following table provides a summary of restructuring activity as of December 31, 2015 (in thousands): Employee Severance andOther Benefits Contract Terminations andOther Charges TotalBalance as of December 31, 2014$— $— $—Costs incurred7,109 491 7,600Less cash payments(3,104) (71) (3,175)Less non-cash charges(316) (191) (507)Balance as of December 31, 2015$3,689 $229 $3,918Cash payments for the restructuring activities are expected to be made through 2017, primarily relating to severance and other one-time benefits. Theshort-term portion of the restructuring reserve of $3.4 million is included in accrued liabilities and the remaining long-term portion of $0.5 million is included inother liabilities on the consolidated balance sheet as of December 31, 2015.10. COMMITMENTS AND CONTINGENCIESThe following table summarizes our future principal contractual obligations as of December 31, 2015 (in thousands): Total 2016 2017 2018 2019 2020 ThereafterOperating lease commitments$61,013 $17,052 $11,922 $10,018 $8,106 $5,659 $8,256Inventory purchase commitments70,018 70,018 — — — — —Other contractual commitments andopen purchase orders37,346 33,375 2,138 847 593 393 —Total$168,377 $120,445 $14,060$10,865$8,699$6,052$8,256Operating Leases —We lease certain facilities under various non-cancelable operating leases, which expire through 2024. Certain leases require us topay variable costs such as taxes, maintenance, and insurance. The terms of certain operating leases also provide for renewal options and escalation clauses. Rentexpense was $13.8 million , $10.6 million and $9.8 million for 2015 , 2014 and 2013 , respectively. Rent expense is recognized using the straight-line method overthe term of the lease. Inventory Purchase Commitments —Our independent contract manufacturers procure components and build our products based on our forecasts. Theseforecasts are based on estimates of future demand for our products, which are in turn based on historical trends and an analysis from our sales and marketingorganizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate component supply, we may issue purchaseorders to some of our independent contract manufacturers which may not be cancelable. As of December 31, 2015 , we had $70.0 million of open purchase orderswith our independent contract manufacturers that may not be cancelable. Other Contractual Commitments and Open Purchase Orders —In addition to commitments with contract manufacturers, we have open purchaseorders and contractual obligations in the ordinary course of business for which we have not received goods or services. As of December 31, 2015 , we had $37.3million in other contractual commitments that may not be cancelable.Litigation —We are involved in disputes, litigation, and other legal actions. For lawsuits where we are the defendant, we are in the process of defendingthese litigation matters, and while there can be no assurances and the outcome of these matters is currently not determinable, we currently believe that there are noexisting claims or proceedings that are likely to have a material adverse effect on our financial position. There are many uncertainties associated with any litigationand these actions or other third-party claims against us may cause us to incur costly litigation fees, including contingent legal fees with related parties, costs andsubstantial settlement charges, and possibly subject us to damages and other penalties. In addition, the resolution of any intellectual property litigation may requireus to make royalty payments, which could adversely affect our gross margins in future periods. If any of those events were to occur, our business, financialcondition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from our estimates,if any, which could result in the need to adjust the liability and record additional expenses. We have not recorded any80Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)significant accrual for loss contingencies associated with such legal proceedings; determined that a significant unfavorable outcome is probable or reasonablypossible; or determined that the amount or range of any possible loss is reasonably estimable.In December 2015, we received $9.0 million from a third-party for a release of claims. In addition, we agreed to a three -year covenant-not-to-sue. Of the$9.0 million consideration received, $2.0 million was used to offset contingent legal fees incurred in connection with the litigation and the remaining $7.0 millionwas deferred, with the short-term portion recorded as accrued liabilities and the long-term portion recorded as other liabilities in the consolidated balance sheet.The deferral will be recognized ratably through 2018 as an offset to general and administrative expenses in the consolidated statement of operations.In January 2014, we received $20.0 million pursuant to a six -year mutual covenant-not-to-sue and release agreement with Palo Alto Networks, Inc. The$20.0 million was deferred, with the short-term portion recorded as accrued liabilities and the long-term portion recorded as other liabilities in the consolidatedbalance sheet. The deferral will be recognized ratably through 2020 as an offset to general and administrative expenses in the consolidated statement of operations.Indemnification —Under the indemnification provisions of our standard sales contracts, we agree to defend our customers against third-party claimsasserting various allegations such as product defects and infringement of certain intellectual property rights, which may include patents, copyrights, trademarks ortrade secrets, and to pay judgments entered on such claims. In some contracts, our exposure under these indemnification provisions is limited by the terms of thecontracts to certain defined limits, such as the total amount paid by our customer under the agreement. However, certain agreements include covenants, penaltiesand indemnification provisions including and beyond indemnification for third-party claims of intellectual property infringement and that could potentially exposeus to losses in excess of the amount received under the agreement, and in some instances to potential liability that is not contractually limited. To date, there havebeen no awards under such indemnification provisions.11. STOCKHOLDERS’ EQUITYStock-Based Compensation PlansOur stock-based compensation plans include the 2000 Stock Plan (the “2000 Plan”), the 2008 Stock Plan (the “2008 Plan”), the 2009 Equity IncentivePlan (the “2009 Plan”), and the 2011 Employee Stock Purchase Plan (the “ESPP”) and equity plans assumed through the Meru acquisition. Under these plans, wehave granted (or, in the case of acquired plan, assumed) stock options and RSUs, including PSUs.Stock Plans —Our board of directors adopted the 2000 Plan in 2000 and the 2008 Plan in 2008. The plans include both incentive and non-statutory stockoptions, which allowed us to grant options to purchase common stock to employees, directors, and other service providers. During 2015, 2014 and 2013, we issuedno stock options under these plans. As of December 31, 2015, no shares remain available for grant under these plans.2009 Equity Incentive Plan —In 2009, our board of directors approved the 2009 Plan, which includes awards of stock options, stock appreciation rights,restricted stock, RSUs, PSUs. The maximum aggregate number of shares that may be issued under the 2009 Plan is 9.0 million shares, plus any shares subject tostock options or similar awards granted under the 2008 Plan and the 2000 Plan that expire or otherwise terminate without having been exercised in full and sharesissued pursuant to awards granted under the 2008 Plan and the 2000 Plan that are forfeited to or repurchased by us, with the maximum number of shares to beadded to the 2009 Plan pursuant to such terminations, forfeitures and repurchases not to exceed 21.0 million shares. The shares may be authorized, but unissued orreacquired common stock. The number of shares available for issuance under the 2009 Plan will be increased on the first day of each year beginning with 2011, inan amount equal to the lesser of (i) 14.0 million shares (as adjusted in connection with the stock split effected in June 2011), (ii) 5% of the outstanding shares onthe last day of the immediately preceding year or (iii) such number of shares determined by our board of directors. Under the 2009 Plan, we may grant awards toemployees, directors and other service providers. In the case of an incentive stock option granted to an employee who, at the time of the grant, owns stockrepresenting more than 10% of the voting power of all classes of stock, the exercise price shall be no less than 110% of the fair market value per share on the dateof grant and expire five years from the date of grant, and options granted to any other employee, the per share exercise price shall be no less than 100% of the fairmarket value per share on the date of grant. In the case of a non-statutory stock option and options granted to other service providers, the per share exercise priceshall be no less than 100% of the fair market value per share on the date of grant.81Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Options granted to individuals owning less than 10% of the total combined voting power of all classes of stock generally have a contractual term of seven yearsand options generally vest over four years.2011 Employee Stock Purchase Plan —In June 2011, our stockholders approved the ESPP. The ESPP permits eligible employees to purchase commonstock through regular, systematic payroll deductions, up to a maximum of 15% of employees’ compensation for each purchase period at purchase prices equal to85% of the lesser of the fair market value of our common stock at the first trading date of the applicable offering period or the purchase date, subject to purchaselimits of 4,000 shares for each purchase period or $25,000 worth of stock for each calendar year.Meru 2010 Equity Incentive Plan —In connection with the Meru acquisition, we assumed and exchanged Meru’s outstanding RSUs with an estimatedfair value of $2.0 million . Of the total estimated fair value, $0.5 million relating to earned equity awards was allocated to the purchase price and the remainderrelating to future services is being recognized over the remaining service period. No new equity awards can be granted under the assumed plan. As of December31, 2015, RSUs representing 34,571 shares of common stock were outstanding under the awards assumed through the acquisition of Meru.As of December 31, 2015, there were a total of 40,827,422 shares of common stock available for grant under our stock-based compensation plans.Employee Stock OptionsIn determining the fair value of our employee stock options, we use the Black-Scholes option pricing model, which employs the following assumptions.Valuation method —We estimate the fair value of stock options granted.Expected Term —The expected term represents the period that our stock-based awards are expected to be outstanding. Beginning in the first quarter of2014, we changed the methodology of calculating the expected term. We believe that we have sufficient historical experience for determining the expected term ofthe stock option award, and therefore, we calculated our expected term based on historical experience instead of using the simplified method.Expected Volatility —The expected volatility of our common stock is based on our weighted-average implied and historical volatility.Fair Value of Common Stock —The fair value of our common stock is the closing sales price of the common stock (or the closing bid, if no sales werereported) effective on the date of grant.Risk-Free Interest Rate —We base the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on U.S. Treasuryzero-coupon issues with an equivalent remaining term.Expected Dividend —The expected dividend weighted-average assumption is zero.The following table summarizes the weighted-average assumptions relating to our employee stock options: Year Ended December 31, 2015 2014 2013Expected term in years4.3 4.8 4.6Volatility37% – 41% 41% – 45% 45% – 48%Risk-free interest rate1.5% – 1.6% 1.6% – 1.7% 1.2%Dividend rate—% —% —%82Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The following table summarizes the stock option activity and related information for the periods presented below (in thousands, except exercise pricesand contractual life): Options Outstanding Numberof Shares Weighted-AverageExercisePrice Weighted-AverageRemainingContractualLife (Years) AggregateIntrinsicValueBalance—December 31, 201218,571 $12.40 Granted258 20.89 Forfeited(820) 22.14 Exercised(2,488) 5.18 Balance—December 31, 201315,521 13.18 Granted387 23.08 Forfeited(443) 24.21 Exercised(4,763) 8.91 Balance—December 31, 201410,702 14.98 Granted819 39.50 Forfeited(150) 28.67 Exercised(4,403) 11.10 Balance—December 31, 20156,968 $20.03 Options vested and expected to vest—December 31, 20156,891 $19.82 2.67 $83,992Options exercisable—December 31, 20155,818 $17.24 2.09 $81,037The aggregate intrinsic value represents the pre-tax difference between the exercise price of stock options and the quoted market price of our commonstock on December 31, 2015 , for all in-the-money options. As of December 31, 2015 , total compensation expense related to unvested stock options granted toemployees but not yet recognized was $10.0 million . This expense is expected to be amortized on a straight-line basis over a weighted-average period of 2.8 years. Additional information related to our stock options is summarized below (in thousands, except per share amounts): Year Ended December 31, 2015 2014 2013Weighted-average fair value per share granted$13.20 $8.90 $8.42Intrinsic value of options exercised113,786 76,731 41,484Fair value of options vested10,943 17,098 26,41183Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The following table summarizes information about outstanding and exercisable stock options as of December 31, 2015 , as follows (in thousands, exceptexercise prices and contractual life): Options Outstanding Options ExercisableRange of ExercisePrices NumberOutstanding Weighted-AverageRemainingContractualLife (Years) Weighted-AverageExercisePrice NumberExercisable Weighted-AverageExercisePrice$0.98–$1.20 302 0.45 $1.07 302 $1.073.74–4.65 720 0.10 3.78 720 3.785.50–6.25 36 0.82 5.59 36 5.598.43–8.99 851 1.19 8.51 851 8.5115.28–19.94 136 2.65 16.52 115 15.8920.13–24.92 2,647 2.83 21.23 2,392 21.1226.49–26.70 1,494 3.18 26.69 1,394 26.7032.79–33.31 416 6.33 32.99 8 32.7938.73–48.83 366 6.52 46.80 — — 6,968 5,818 Restricted Stock UnitsThe following table summarizes the activity and related information for RSUs for the periods presented below (in thousands, except per share amounts): Restricted Stock Units Outstanding Number of Shares Weighted-Average GrantDate Fair Value perShareBalance—December 31, 2012830 $23.73Granted4,104 21.75Forfeited(507) 21.48Vested(228) 23.89Balance—December 31, 20134,199 22.00Granted4,047 23.13Forfeited(472) 21.92Vested(1,483) 22.23Balance—December 31, 20146,291 22.93Granted6,303 39.04Forfeited(1,029) 31.78Vested(2,308) 22.74Balance—December 31, 20159,257 $32.97RSUs expected to vest—December 31, 20158,645 $32.47As of December 31, 2015 , total compensation expense related to unvested RSUs that were granted to employees and non-employees under the 2009 Plan,but not yet recognized, was $258.4 million . This expense is expected to be amortized on a straight-line basis over a weighted-average vesting period of 3.06 years.84Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)RSUs settle into shares of common stock upon vesting. Upon the vesting of the RSUs, we net-settle the RSUs and withhold a portion of the shares tosatisfy minimum statutory employee withholding taxes. Total payment for the employees’ tax obligations to the taxing authorities is reflected as a financingactivity within the consolidated statements of cash flows.The following summarizes the number and value of the shares withheld for employee taxes (in thousands): Year Ended December 31, 2015 2014 2013Shares withheld for taxes761 461 70Amount withheld for taxes$28,871 $10,598 $1,452Performance Stock UnitsWe have granted PSUs to certain of our executive officers. PSUs granted to executive officers are based on the achievement of the market-based vestingconditions during the performance period. The final settlement of the PSUs will range between 0% and 150% of the target shares underlying the PSUs based on aspecified objective formula approved by our Compensation Committee. The PSUs entitle our executive officers to receive a number of shares of our common stockbased on the performance of our stock price over a two - or three -year period as compared to the NASDAQ Composite index for the same periods.The following table summarizes the weighted-average assumptions relating to the PSUs granted to executive officers: Year Ended December 31, 2015 2014 2013Expected term in years3.0 3.0 3.0Volatility38% 46% 50%Risk-free interest rate1.1% 0.9% 0.7%Dividend rate—% —% —%During 2015, we also granted PSUs to employees who are not executive officers. These PSUs are based on the achievement of personal- and company-based performance vesting conditions during the performance period. The final settlement of these PSUs will range from 50% to 150% of the target sharesunderlying the PSUs, based on specified objective formulas approved by our Compensation Committee. The PSUs entitle such employees to receive a number ofshares of our common stock based on a one -year performance period, and vest equally in the second and third years. The share-based compensation expensesrelated to these awards are not considered material. The following table summarizes the activity and related information for PSUs granted to executive officers and other employees for the periods presentedbelow (in thousands, except per share amounts): Year Ended December 31, 2015 2014 2013Shares granted to executive officers and employees206 120 213Weighted-average fair value per share granted$34.86 $21.21 $22.06As of December 31, 2015, total compensation expense related to unvested PSUs that were granted to certain of our executive officers, but not yetrecognized, was $5.0 million . This expense is expected to be amortized on a straight-line basis over a weighted-average vesting period of 1.87 years .85Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Employee Stock Purchase PlanIn determining the fair value of our ESPP, we use the Black-Scholes option pricing model that employs the following weighted-average assumptions: Year Ended December 31, 2015 2014 2013Expected term in years0.5 0.5 0.5Volatility30% 34% 44%Risk-free interest rate0.2% 0.1% 0.1%Dividend rate—% —% —%Additional information related to the ESPP is provided below (in thousands, except per share amounts): Year Ended December 31, 2015 2014 2013Weighted-average fair value per share granted$9.56 $5.91 $6.11Shares issued under the ESPP764 770 672Weighted-average price per share issued$24.30 $18.17 $18.88Shares Reserved for Future IssuancesThe following table presents the common stock reserved for future issuance (in thousands): December 31, 2015Outstanding stock options and RSUs16,225Reserved for future stock option, RSU and other equity award grants35,613Reserved for future ESPP issuances5,217Total common stock reserved for future issuances57,055Stock-based Compensation ExpenseStock-based compensation expense is included in costs and expenses as follows (in thousands): Year Ended December 31, 2015 2014 2013Cost of product revenue$973 $483 $383Cost of service revenue7,121 5,826 4,841Research and development24,555 17,264 13,271Sales and marketing49,436 26,744 19,526General and administrative13,003 8,677 6,450Total stock-based compensation expense$95,088 $58,994 $44,47186Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The following table summarizes stock-based compensation expense by award type (in thousands): Year Ended December 31, 2015 2014 2013Stock options$11,425 $17,555 $20,806RSUs77,262 37,068 18,968ESPP6,401 4,371 4,697Total stock-based compensation expense$95,088 $58,994 $44,471Total income tax benefit associated with stock-based compensation that is recognized in the consolidated statements of operations is as follows (inthousands): Year Ended December 31, 2015 2014 2013Income tax benefit associated with stock-based compensation$25,189 $11,086 $8,331Share Repurchase ProgramOn December 6, 2013, our board of directors authorized a Share Repurchase Program (“the Program”) to repurchase up to $200.0 million of ouroutstanding common stock through December 31, 2014. Under the Program, share repurchases may be made by us from time to time in privately negotiatedtransactions or in open market transactions. The Program does not require us to purchase a minimum number of shares, and may be suspended, modified ordiscontinued at any time without prior notice. On October 17, 2014, our board of directors extended the share repurchase authorization under the Program throughDecember 31, 2015. In 2015, we repurchased 1.8 million shares of common stock under the Program in open market transactions for an aggregate purchase priceof $60.0 million . The Program expired on December 31, 2015 with an unused balance under the Program of $62.5 million .12. INCOME TAXESIncome before income taxes consisted of the following (in thousands): Year Ended December 31, 2015 2014 2013Domestic$(37,437) $35,778 $83,076Foreign54,442 25,771 (7,135)Total income before income taxes$17,005 $61,549 $75,94187Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The provision for income taxes consisted of the following (in thousands): Year Ended December 31, 2015 2014 2013Current: Federal$9,864 $17,717 $43,384State(136) 1,110 2,490Foreign13,683 8,921 4,175Total current$23,411 $27,748 $50,049Deferred: Federal$(9,383) $6,742 $(17,149)State(2,988) (36) (1,232)Foreign(2,022) 1,752 —Total deferred(14,393) 8,458 (18,381)Provision for income taxes$9,018 $36,206 $31,668 The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate as follows (in thousands): Year Ended December 31, 2015 2014 2013Tax at federal statutory tax rate$5,951 $21,542 $26,579Stock-based compensation expense6,369 7,367 4,571State taxes—net of federal benefit(2,454) 975 419Domestic production activities deduction— — (3,256)Foreign tax credit(6,901) (4,433) (2,853)Research and development credit(3,529) (880) (1,650)Foreign income taxed at different rates(11,225) (406) 2,927Foreign withholding taxes10,962 9,085 6,622Canadian deemed dividend distribution9,647 — —Other198 2,956 (1,691)Total provision for income taxes$9,018 $36,206 $31,668Significant permanent differences arise from the portion of stock-based compensation expense that is not expected to generate a tax deduction, such asstock-based compensation expense on stock option grants to certain foreign employees, offset by the actual tax benefits in the current periods from disqualifyingdispositions of shares held by our U.S. employees. For stock options exercised by our U.S. employees, we receive an income tax benefit calculated as thedifference between the fair market value of the stock issued at the time of the exercise and the option price, tax effected. For 2015, income tax payable was reducedby excess tax benefits from the exercise or vesting of stock-based awards of $1.3 million . For 2014, income tax payable was not reduced by excess tax benefitsfrom the exercise or vesting of stock-based awards, therefore we did not recognize a significant benefit in additional paid-in-capital. The income tax benefits for2013 associated with dispositions from employee stock transactions of $3.5 million was recognized as additional paid-in capital because it reduced income taxespayable.As of December 31, 2015 , there was additional Federal deferred tax assets related to stock-based compensation excess tax benefits of $29.7 million thatwe did not recognize. Unrecognized excess tax benefits will be accounted for as a credit to additional paid-in capital when realized through a reduction in incometaxes payable.Our 2015 income tax provision reflected a $1.2 million tax benefit due to a recent U.S. Tax Court opinion involving an independent third party filed onJuly 27, 2015. Based on the findings of the U.S. Tax Court, we recognized the tax benefit for excluding the share-based compensation from intercompany chargesin prior periods.88Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)During 2015, we completed a corporate reorganization to convert our Canadian company to a branch of our U.S. company resulting on a $27.6 milliondeemed dividend distribution. The tax impact of the Canadian deemed dividend distribution of $9.6 million was partially offset by an additional tax benefit of $6.4million due to the deferred tax benefit of the Canadian stock based compensation expense.The tax effects of temporary differences that give rise to significant portions of the deferred tax assets as of the years ended are presented below (inthousands): December 31, 2015 December 31, 2014Deferred tax assets: Net operating loss carryforward$9,757 $1,293Deferred revenue39,509 31,545Nondeductible reserves and accruals22,240 20,904Depreciation and amortization2,873 193General business credit carryforward22,121 2,155Stock-based compensation expense22,714 16,463Other2 11Total deferred tax assets$119,216 $72,564In assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some portion or all of our deferred tax assets willbe realized. This realization is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.We concluded that it is more likely than not that we would be able to realize the benefits of our deferred tax assets in the future.As of December 31, 2015 , we had $84.9 million in federal net operating loss carryforwards to offset future income that will not expire until 2035, whichis not limited by section 382. With the acquisition of Meru, we also had $22.9 million in federal net operating loss carryforwards which is limited by section 382available from year 2019 with an annual limitation of $1.1 million . We had $17.4 million federal tax credits with certain amount available to carryback and claimfederal tax refunds from prior year and the rest available to offset future federal taxes. As of December 31, 2015 , we had $16.2 million in California net operatingloss carryforwards to offset future income that will not expire until 2031. With the acquisition of Meru, we also had $22.1 million in California net operating losscarryforwards which is subject to section 382 limitation. We had state tax credit carryforwards of $12.3 million available to offset our future state taxes. The statecredits carry forward indefinitely.Our policy with respect to undistributed foreign subsidiaries’ earnings is to consider those earnings to be indefinitely reinvested and, accordingly, norelated provision of U.S. federal and state income taxes has been provided on such earnings. Upon distribution of those earnings in the form of dividends orotherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes in the various foreign countries.As of December 31, 2015 , we have not recorded U.S. income tax on $47.4 million of foreign earnings that are deemed to be permanently reinvested overseas.We operate under a tax incentive agreement in Singapore, which is effective through December 31, 2023, and may be extended if certain additionalrequirements are satisfied. The tax incentive agreement is conditional upon our meeting certain employment and investment thresholds.As of December 31, 2015 , we had $59.7 million of unrecognized tax benefits, of which, if recognized, $58.4 million would favorably affect our effectivetax rate. Our policy is to include accrued interest and penalties related to uncertain tax benefits in income tax expense. As of December 31, 2015 , 2014 and 2013,accrued interest and penalties were $5.5 million , $1.7 million and $1.0 million , respectively.89Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The aggregate changes in the balance of unrecognized tax benefits are as follows (in thousands): Year Ended December 31, 2015 2014 2013Unrecognized tax benefits, beginning of year$44,151 $29,604 $27,808Gross increases for tax positions related to the current year17,478 14,547 4,713Gross increases for tax positions related to the prior year8,319 — 405Gross decreases for tax positions related to prior year(9,207) — (3,322)Gross decreases for tax positions related to expiration of statute of limitations(1,069) — —Unrecognized tax benefits, end of year$59,672 $44,151 $29,604As of December 31, 2015 , 2014 and 2013, $60.6 million , $45.1 million and $30.2 million , respectively, of the amounts reflected above were recorded asIncome tax liabilities—non-current in our consolidated balance sheet. As of December 31, 2015 , there was no unrecognized tax benefits that we expect would change significantly over the next 12 months.We file income tax returns in the U.S. federal jurisdiction, and various U.S. state and foreign jurisdictions. The statute of limitations is open for years thatgenerated state net operating loss carryforwards and after 2009 for state jurisdictions. Additionally, we have foreign net operating losses that have an indefinitelife. Generally, we are no longer subject to non-U.S. income tax examinations by tax authorities for tax years prior to 2009. We are no longer subjectto examination by U.S federal income tax authorities for tax years prior to 2012. We are currently under examination by U.S federal income tax authorities for taxyear 2014, 2013 and 2012.13. DEFINED CONTRIBUTION PLANSOur tax-deferred savings plan under our 401(k) Plan, permits participating employees to defer a portion of their pre-tax earnings. In Canada, we have aGroup Registered Retirement Savings Plan program (the “RRSP”), which permits participants to make tax deductible contributions. Our board of directorsapproved 50% matching contributions on employee contributions up to 4% of each employee’s eligible earnings. Our matching contributions to the 401(k) Plansand RRSP for 2015 , 2014 and 2013 were $3.5 million , $2.5 million and $2.1 million , respectively.14. SEGMENT INFORMATIONOperating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by thechief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executiveofficer. Our chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographicregion for purposes of allocating resources and evaluating financial performance. We have one business activity, and there are no segment managers who are heldaccountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, we have determined that we haveone operating segment, and therefore, one reportable segment.90Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Revenue by geographic region is based on the billing address of the customer. The following tables set forth revenue and property and equipment bygeographic region (in thousands): Year Ended December 31,Revenue2015 2014 2013Americas: United States$279,564 $200,294 $162,327Canada101,594 81,968 58,708Other Americas54,124 42,397 31,751Total Americas435,282 324,659 252,786Europe, Middle East, and Africa (“EMEA”)366,018 270,537 208,979Asia Pacific (“APAC”)207,968 175,168 153,532Total revenue$1,009,268 $770,364 $615,297Property and Equipment — netDecember 31, 2015 December 31, 2014Americas: United States$61,064 $46,116Canada8,224 6,054Other Americas748 875Total Americas70,036 53,045EMEA: France13,201 2,052Other EMEA3,977 1,204Total EMEA17,178 3,256APAC3,853 2,618Total property and equipment—net$91,067 $58,91915. ACCUMULATED OTHER COMPREHENSIVE LOSSThe following table summarizes the changes in accumulated balances of other comprehensive income for 2015 and 2014 (in thousands): December 31, 2015 Unrealized Losses onInvestments Tax benefit related toitems of othercomprehensive incomeor loss TotalBeginning balance$(540) $191 $(349)Other comprehensive loss before reclassifications(896) 313 (583)Amounts reclassified from accumulated other comprehensive loss(1) — (1)Net current-period other comprehensive loss(897) 313 (584)Ending balance$(1,437) $504 $(933)91Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2014 Foreign CurrencyTranslation Gains andLosses Unrealized Gains andLosses on Investments Tax benefit or provisionrelated to items of othercomprehensive incomeor loss TotalBeginning balance$333 $1,168 $(409) $1,092Other comprehensive loss before reclassifications— (1,694) 595 (1,099)Amounts reclassified from accumulated othercomprehensive loss(333) (14) 5 (342)Net current-period other comprehensive loss(333) (1,708) 600 (1,441)Ending balance$— $(540) $191 $(349)The following table provides details about the reclassification out of accumulated other comprehensive loss for 2015 and 2014 (in thousands):Year Ended December 31, 2015Details about Accumulated Other Comprehensive Income Components Amount Reclassified fromAccumulated Other ComprehensiveLoss Affected Line Item in the StatementWhere Net Income is PresentedUnrealized losses on investments $(1) Other expense—netTax provision related to items of other comprehensive loss — Provision for income taxesTotal reclassification for the period $(1) Year Ended December 31, 2014Details about Accumulated Other Comprehensive Income Components Amount Reclassified fromAccumulated OtherComprehensive Income Affected Line Item in the StatementWhere Net Income is PresentedForeign currency translation losses $(333) Other expense—netUnrealized losses on investments (14) Other expense—netTax provision related to items of other comprehensive loss 5 Provision for income taxesTotal reclassification for the period $(342) 16. RELATED PARTY TRANSACTIONSThe son of one member of our board of directors is a partner of an outside law firm that we utilize for certain complex litigation matters. Expenses forlegal services provided by the law firm related to matters that arose subsequent to the member joining our board of directors were $7.2 million , $1.7 million and$0.1 million in 2015, 2014 and 2013, respectively. Of such amounts, $2.5 million was incurred under contingent fee arrangements in 2015. There was nocontingent fee arrangement in 2014 and 2013. Amounts due and payable to the law firm were $5.3 million and $1.3 million as of December 31, 2015 andDecember 31, 2014, respectively.92Table of ContentsFORTINET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)17. SUBSEQUENT EVENTSNew Share Repurchase ProgramIn January 2016, our board of directors approved a new Share Repurchase Program (the “New Program”), which authorizes the repurchase of up to$200.0 million of our outstanding common stock through December 31, 2017. Under the program, share repurchases may be made by us from time to time inprivately negotiated transactions or in open market transactions. The program does not require us to purchase a minimum number of shares, and may be suspended,modified or discontinued at any time without prior notice. Subsequent to December 31, 2015, through the filing of this Report, we have repurchased 2.0 millionshares of our common stock under the new program at an average price of $24.97 per share, for $50.0 million . We have $150.0 million authorized funds remainingunder the new program as of the filing date.Building PurchaseIn February 2016, we purchased certain property in Union City, California totaling approximately 200,000 square feet for a total cash payment of $18.5million .93Table of ContentsITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNone.ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and ProceduresOur management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controlsand procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Indesigning and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures mustreflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls andprocedures relative to their costs.Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as ofDecember 31, 2015 to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated andcommunicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding requireddisclosure.Management ’ s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control—Integrated Framework (2013) set forth by the Committee of Sponsoring Organizations of the Treadway Commission.In accordance with guidance issued by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their finalassessment of internal control over financial reporting for the first fiscal year in which the acquisition occurred. Our management’s evaluation of internal controlover financial reporting excluded the internal control activities of Meru, which we acquired in July 2015. We have included the financial results of Meru in theconsolidated financial statements from the date of acquisition. Total revenue subject to Meru’s internal control over financial reporting represented approximately3% of our consolidated total revenues for the year ended December 31, 2015. Total assets subject to Meru’s internal control over financial reporting representedapproximately 1% of our consolidated total assets as of December 31, 2015.Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2015 . Managementreviewed the results of its assessment with our Audit Committee. The effectiveness of our internal control over financial reporting as of December 31, 2015 hasbeen audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report, which appears in this Item under the heading“Report of Independent Registered Public Accounting Firm.”Changes in Internal Control over Financial ReportingIn July 2015, we completed the acquisition of Meru. We are in the process of integrating Meru into our systems and control environment as of December31, 2015. We believe that we have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during this integration.There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fourthquarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.94Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders ofFortinet, Inc.Sunnyvale, CaliforniaWe have audited the internal control over financial reporting of Fortinet, Inc. and subsidiaries (the "Company") as of December 31, 2015, based on criteriaestablished in Internal Control - Integrated Framework (2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described inManagement's Report on Internal Control over Financial Reporting management excluded from its assessment the internal control over financial reporting at MeruNetworks, Inc. (“Meru”), which was acquired on July 8, 2015 and whose financial statements represent approximately 1% of total consolidated assets, 3% of totalconsolidated revenues, of the consolidated financial statement amounts as of and for the year ended December 31, 2015. Accordingly, our audit did not include theinternal control over financial reporting at Meru. The Company's management is responsible for maintaining effective internal control over financial reporting andfor its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principalfinancial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receiptsand expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on thefinancial statements.Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of theinternal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteriaestablished in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statementsand financial statement schedule as of and for the year ended December 31, 2015 of the Company and our report dated February 26, 2016 expressed an unqualifiedopinion on those financial statements and financial statement schedule./s/ DELOITTE & TOUCHE LLPSan Jose, CaliforniaFebruary 26, 201695Table of ContentsITEM 9B. Other InformationNone.96Table of ContentsPart IIIITEM 10. Directors, Executive Officers and Corporate GovernanceInformation responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2016 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.As part of our system of corporate governance, our board of directors has adopted a code of business conduct and ethics. The code applies to all of ouremployees, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similarfunctions), agents and representatives, including our independent directors and consultants, who are not our employees, with regard to their Fortinet-relatedactivities. Our code of business conduct and ethics is available on our website at www.fortinet.com under “Corporate—Investor Relations—CorporateGovernance.” We will post on this section of our website any amendment to our code of business conduct and ethics, as well as any waivers of our code ofbusiness conduct and ethics, that are required to be disclosed by the rules of the SEC or the NASDAQ Stock Market.ITEM 11. Executive CompensationInformation responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2016 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2016 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.ITEM 13. Certain Relationships and Related Transactions, and Director IndependenceInformation responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2016 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.ITEM 14. Principal Accounting Fees and ServicesInformation responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2016 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.97Table of ContentsPart IVITEM 15. Exhibits, Financial Statement Schedules(a) The following documents are filed as part of this Annual Report on Form 10-K:1.Financial Statements : The information concerning Fortinet’s financial statements and the Report of Independent Registered Public AccountingFirm required by this Item 15(a)(1) is incorporated by reference herein to the section of this Annual Report on Form 10-K in Part II, Item 8,titled “Financial Statements and Supplementary Data.”2.Financial Statement Schedule: The following financial statement schedule of Fortinet, Inc., for the fiscal years ended December 31, 2015, 2014and 2013, is filed as part of this Annual Report on Form 10-K and should be read in conjunction with our consolidated financial statements.98Table of ContentsSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS Year Ended December 31, 2015 2014 2013 (in thousands)Sales Returns Reserve: Beginning balance$5,842 $4,573 $2,267Charged (credited) to costs and expenses, net of deductions(360) 1,269 2,306Ending balance$5,482 $5,842 $4,573 Allowance for Doubtful Accounts: Beginning balance$362 $32 $115Charged (credited) to costs and expenses, net of write-offs384 330 (83)Ending balance$746 $362 $32 Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein isincluded in the consolidated financial statements or notes thereto.3.Exhibits : See Item 15(b) below. We have filed, or incorporated into this Annual Report on Form 10-K by reference, the exhibits listed on theaccompanying Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.(b) Exhibits:The exhibit list in the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K is incorporated herein by reference asthe list of exhibits required by this Item 15(b).(c) Financial Statement Schedules: See Item 15(a) above.99Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on February 26, 2016 . FORTINET, INC. By:/s/ Andrew Del Matto Andrew Del Matto, Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)FORTINET, INC. By:/s/ Keith Jensen Keith Jensen, Chief Accounting Officer (Duly Authorized Officer and Principal Accounting Officer)POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ken Xie and Andrew DelMatto, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to thisAnnual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and ExchangeCommission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. 100Table of Contents Signature Title Date /s/ Ken Xie Chief Executive Officer and Chairman February 26, 2016Ken Xie (Principal Executive Officer) /s/ Andrew Del Matto Chief Financial Officer February 26, 2016Andrew Del Matto (Principal Financial Officer) /s/ Keith Jensen Chief Accounting Officer February 26, 2016Keith Jensen (Principal Accounting Officer) /s/ Michael Xie President, Chief Technology Officer and Director February 26, 2016Michael Xie /s/ Ming Hsieh Director February 26, 2016Ming Hsieh /s/ Gary Locke Director February 26, 2016Gary Locke /s/ William H. Neukom Director February 26, 2016William H. Neukom /s/ Christopher B. Paisley Director February 26, 2016Christopher B. Paisley /s/ Judith Sim Director February 26, 2016Judith Sim 101Table of ContentsEXHIBIT INDEXExhibitNumber Description Incorporated by reference herein Form Date ExhibitNumber 2.1 Agreement and Plan of Merger, dated May 27, 2015, by andamong Fortinet, Inc., Malbrouck Acquisition Corp. and MeruNetworks, Inc. Current Report on Form 8-K (File No. 001-34511) July 8, 2015 2.1 3.1 Amended and Restated Certificate of Incorporation Registration Statement on Form S-l (File No. 333-161190) August 10, 2009 3.2 3.2 Bylaws Current Report on Form 8-K (File No. 001-34511) April 21, 2014 3.4 4.1 Specimen common stock certificate of the Company Registration Statement on Form S-l, as amended (File No. 333-161190) November 2, 2009 4.1 10.1 † Forms of Indemnification Agreement between the Company andits directors and officers Registration Statement on Form S-l (File No. 333-161190) August 10, 2009 10.1 10.2 † 2000 Stock Plan and forms of agreement thereunder Registration Statement on Form S-l (File No. 333-161190) August 10, 2009 10.2 10.3 † 2008 Stock Plan and forms of agreement thereunder Registration Statement on Form S-l (File No. 333-161190) August 10, 2009 10.3 10.4 † 2009 Equity Incentive Plan and forms of restricted stock unitaward and restricted stock agreement thereunder Registration Statement on Form S-l (File No. 333-161190) August 10, 2009 10.4 10.5 † Forms of stock option agreement under 2009 Equity IncentivePlan Annual Report on Form 10-K (File No. 001-34511) February 28, 2012 10.5 10.6 † Form of performance stock unit award agreement under 2009Equity Incentive Plan Quarterly Report on Form 10-Q (File No. 001-34511) August 6, 2013 99.1 10.7 † Forms of restricted stock unit award and performance stock unitaward agreement under 2009 Equity Incentive Plan (AdditionalForms) Annual Report on Form 10-K (File No. 001-34511) March 2, 2015 10.7 10.8 † Fortinet, Inc. 2011 Employee Stock Purchase Plan Current Report on Form 8-K (File No. 001-34511) June 27, 2011 10.1 10.9 † Meru Networks, Inc. 2010 Equity Incentive Plan Registration Statement on Form S-8 (File No. 333-205958) July 30, 2015 99.1 10.10 † Meru Networks, Inc. 2013 New Employee Stock InducementPlan Registration Statement on Form S-8 (File No. 333-205958) July 30, 2015 99.2 10.11 † Forms of Fortinet, Inc. Restricted Stock Unit AssumptionAgreement Registration Statement on Form S-8 (File No. 333-205958) July 30, 2015 99.2 10.12 † Fortinet, Inc. Bonus Plan Current Report on Form 8-K (File No. 001-34511) January 26, 2010 10.1 10.13 † Fortinet, Inc. Cash and Equity Incentive Plan Quarterly Report on Form 10-Q (File No. 001-34511) November 5, 2013 10.1 10.14 † Form of Change of Control Agreement between the Companyand its directors Quarterly Report on Form 10-Q (File No. 001-34511) August 4, 2015 10.1 10.15 † * Amended and Restated Change of Control Agreement, dated asof February 4, 2016, between the Company and Ken Xie 10.16 † * Amended and Restated Change of Control Agreement, dated asof February 4, 2016, between the Company and Michael Xie 10.17 † * Amended and Restated Change of Control Agreement, dated asof February 4, 2016, between the Company and John Whittle 102Table of Contents10.18 † * Amended and Restated Change of Control Agreement, dated asof February 4, 2016, between the Company and Andrew DelMatto 10.19 † Offer Letter, dated as of August 31, 2007, by and between theCompany and John Whittle Registration Statement on Form S-l, as amended (File No. 333-161190) August 10, 2009 10.10 10.20 † Offer Letter, dated as of December 17, 2013, by and between theCompany and Andrew Del Matto Current Report on Form 8-K (File No. 001-34511) December 20, 2013 99.1 10.21 † Letter regarding stock grants, dated as of December 17, 2013,between the Company and Andrew Del Matto Current Report on Form 8-K (File No. 001-34511) December 20, 2013 99.2 21.1* List of subsidiaries 23.1* Consent of Independent Registered Public Accounting Firm 24.1* Power of Attorney (incorporated by reference to the signaturepage of this Annual Report on Form 10-K) 31.1* Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.INS* XBRL Instance Document________________________________† Indicates management compensatory plan, contract or arrangement.* Filed herewith. 103Exhibit 10.15FORTINET, INC.AMENDED AND RESTATEDCHANGE OF CONTROL SEVERANCE AGREEMENTThis Amended and Restated Change of Control Severance Agreement (the “Agreement”) is made and entered into by andbetween Ken Xie (“Executive”) and Fortinet, Inc. (the “Company”), effective as of February 4, 2016 (the “Effective Date”) andsupersedes the Change of Control Severance Agreement, between Executive and the Company (the “Prior Agreement”), effective asof August 7, 2009 (the “Prior Effective Date”).RECITALS1. It is expected that the Company from time to time will consider the possibility of an acquisition by another company orother change of control. The Board of Directors of the Company (the “Board”) recognizes that such consideration can be adistraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that itis in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication andobjectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of theCompany.2. The Board believes that it is in the best interests of the Company and its stockholders to provide Executive with anincentive to continue his or her employment and to motivate Executive to maximize the value of the Company upon a Change ofControl for the benefit of its stockholders.3. The Board believes that it is imperative to provide Executive with certain benefits upon termination of employment priorto and following a Change of Control. These benefits will provide Executive with enhanced financial security and incentive andencouragement to remain with the Company.AGREEMENTNOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:1. Term of Agreement . This Agreement will terminate upon the earlier to occur of: (a) the Agreement’s terminationdate as provided in Section 8 below, and (b) the date that all of the obligations of the parties hereto with respect to this Agreementhave been satisfied.2. At-Will Employment . The Company and Executive acknowledge that Executive’s employment is and will continue tobe at-will, as defined under applicable law. If Executive’s employment terminates for any reason, including (without limitation) anytermination prior to or following a Change of Control, Executive will not be entitled to anyacceleration of Award vesting or severance pay based on termination of employment other than as provided by this Agreement.3. Severance Benefits .(a) Involuntary Termination Prior to, or Absent, a Change of Control or After 12 Months Following a Change ofControl . If prior to, or absent, a Change of Control or after twelve (12) months following a Change of Control, (i) the Company (orany parent or subsidiary of the Company) terminates Executive’s employment without Cause or (ii) Executive terminatesExecutive’s employment with the Company (or any parent or subsidiary of the Company) for Good Reason, then, subject to Sections3(c) and (d) below, Executive will receive the following severance from the Company:(i) Severance Payment . Executive will receive continuing payments of severance pay for a period of twelve (12)months from the date of such termination equal to Executive’s base salary rate as in effect immediately prior to Executive’stermination.(ii) Continued Employee Benefits . Executive will receive Company-paid coverage for a period of twelve (12)months for Executive and Executive’s eligible dependents under the Company’s Benefit Plans.(b) Involuntary Termination within 12 Months Following a Change of Control . If within twelve (12) months followinga Change of Control, (i) the Company (or any parent or subsidiary of the Company) terminates Executive’s employment withoutCause or (ii) Executive terminates Executive’s employment with the Company (or any parent or subsidiary of the Company) forGood Reason, then, subject to Section 3(c) and Section 3(d) below, Executive will receive the following severance from theCompany:(i) Severance Payment . Executive will receive continuing payments of severance pay for a period of twelve (12)months from the date of such termination equal to Executive’s base salary rate as in effect immediately prior to (A) the Change ofControl, or (B) Executive’s termination, whichever is greater.(ii) Equity Awards . If Executive holds unvested equity awards (“Awards”) at the time of Executive’s termination,then one hundred percent (100%) of the then- unvested shares subject to such Awards will immediately vest as of Executive’stermination date. For the sake of clarity, Executive will fully vest in and have the right to exercise stock options and/or stockappreciation rights as to all of the shares underlying such Awards, including those shares which would not otherwise be vested orexercisable, all restrictions on restricted stock and restricted stock units will lapse, and, with respect to performance stock units andperformance shares, all performance goals or other vesting criteria will be deemed to have been achieved at one hundred percent(100%) of target levels and all other terms and conditions met. The Awards will remain exercisable, to the extent applicable,following the termination for the period prescribed in the respective stock plan and agreement for each Award.(iii) Continued Employee Benefits . Executive will receive Company-paid coverage for a period of twelve (12)months for Executive and Executive’s eligible dependents under the Company’s Benefit Plans.(c) Release of Claims Agreement . The receipt of any severance pay or other benefits pursuant to Sections 3(a) and (b)above will be subject to Executive signing and not revoking a release of claims agreement with the Company in a form reasonablyacceptable to the Company (provided the Company will work in good faith with Executive to reach agreement on the form ofrelease) that is effective and irrevocable no later than the later of (i) the fifteenth day of the third month after the end of theCompany’s fiscal year in which such termination of employment occurs, or (ii) March 15 of the calendar year following the calendaryear in which such termination of employment occurs. No severance pay or other benefits will be paid or provided until the releaseof claims agreement becomes effective, and any severance amounts or benefits otherwise payable between the date of Executive’stermination and the date of such release becomes effective and irrevocable shall be paid on the effective date of such release.(d) Non-solicitation and Non-competition . Executive agrees, to the extent permitted by applicable law, that in theevent Executive receives severance pay or other benefits pursuant to Sections 3(a) and (b) above, for the twelve (12) consecutivemonth period immediately following the date of Executive’s termination, Executive, as a condition to receipt of severance pay andbenefits under Sections 3(a) and (b), will not (i) either directly or indirectly, solicit, induce, recruit, encourage any employee of theCompany to leave his employment either for Executive or for any other entity or person, or (ii) without the express written consentof the Company, directly or indirectly engage in, enter the employ, have any ownership interest in, or participate in any entity that asof the date of involuntary termination, engages in the design, development, manufacture, production, marketing, sale or servicing ofany product or the provision of any service that competes with any service offered by the Company or any product sold by theCompany or under development by the Company; provided, however, that ownership of less than one percent (1%) of theoutstanding stock of any publicly traded corporation will not be deemed to be violative of the restrictive covenant set forth in thisparagraph. The provisions of clause (ii) will not apply to Executive to the extent Executive is providing services or residing in theState of California.The covenants contained in this Section 3(d) hereof shall be construed as a series of separate covenants, one for each country,province, state, city or other political subdivision in which the Company currently engages in its business or, during the term of thisAgreement, becomes engaged in its business. Except for geographic coverage, each such separate covenant shall be deemed identicalin terms to the covenant contained in this Section 3(d). If, in any judicial proceeding, a court refuses to enforce any of such separatecovenants (or any part thereof), then such unenforceable covenant (or such part) shall be eliminated from this Agreement to theextent necessary to permit the remaining separate covenants (or portions thereof) to be enforced. In the event that the provisions ofthis Section 3(d) are deemed to exceed the time, geographic or scope limitations permitted by applicable law, then such provisionsshall be reformed to the maximum time, geographic or scope limitations, as the case may be, permitted by applicable law.(e) Timing of Severance Payments . Subject to Section 3(c), the Company will pay the severance payments to whichExecutive is entitled as salary continuation with the same timing as in effect immediately prior to Executive’s termination ofemployment. If Executive should die before all amounts have been paid, such unpaid amounts will be paid in a lump-sum payment(less any withholding taxes) to Executive’s designated beneficiary, if living, or otherwise to the personal representative ofExecutive’s estate.(f) Voluntary Resignation; Termination For Cause . If Executive’s employment with the Company terminates (i)voluntarily by Executive (except upon a termination for Good Reason within twelve (12) months following a Change of Control) or(ii) for Cause by the Company (or any parent or subsidiary of the Company), then Executive will not be entitled to receive severanceor other benefits except for those benefits (if any) which do not concern acceleration of Award vesting or severance pay based ontermination of employment as may then be established under other Company policies or programs, if any.(g) Disability; Death . If the Company terminates Executive’s employment as a result of Executive’s Disability, orExecutive’s employment terminates due to his or her death, then Executive will not be entitled to receive severance or other benefitsexcept for those benefits (if any) which do not concern acceleration of Award vesting or severance pay based on termination ofemployment as may then be established under other Company policies or programs, if any.(h) Exclusive Remedy . In the event of a termination of Executive’s employment with the Company (or any parent orsubsidiary of the Company), the provisions of this Section 3 are intended to be and are exclusive and in lieu of any other rights orremedies to which Executive or the Company may otherwise be entitled, whether at law, tort or contract, in equity, or under thisAgreement. Executive will be entitled to no severance or other benefits upon termination of employment with respect to accelerationof Award vesting or severance pay other than those benefits expressly set forth in this Section 3.(i) Section 409A . Notwithstanding anything to the contrary in this Agreement, no severance pay or benefits to be paidor provided to Executive, if any, pursuant to this Agreement, when considered together with any other severance payments orseparation benefits that are considered deferred compensation under Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”) and any final regulations and official guidance promulgated thereunder (“Section 409A”) (together, the“Deferred Compensation Separation Benefits”) will be paid or otherwise provided until Executive has a “separation from service”within the meaning of Section 409A. Similarly, no severance payments or separation benefits payable to Executive, if any, pursuantto this Agreement that otherwise would be exempt from Section 409A pursuant to Section 1.409A-1(b)(9) of the TreasuryRegulations will be payable until Executive has a “separation from service” within the meaning of Section 409A. In addition, ifExecutive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due todeath), then the Deferred Compensation Separation Benefits that are payable within the first six (6) months following Executive’sseparation from service, will become payable in a lump sum (without interest) on the first payroll date that occurs on or after the datesix (6) months and one (1) day following the date of Executive’s separation from service. Allsubsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicableto each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following Executive’s separation fromservice, but prior to the six (6) month anniversary of the separation from service, then any payments delayed in accordance with thisparagraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all otherDeferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment orbenefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section1.409A-2(b)(2) of the Treasury Regulations. To the extent any payment under this Agreement may be classified as a “short-termdeferral” within the meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for anexemption from Section 409A under another provision of Section 409A. The foregoing provisions are intended to comply with therequirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to theadditional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Executive and theCompany agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions whichare necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment toExecutive under Section 409A.4. Limitation on Payments . In the event that the severance and other benefits provided for in this Agreement or otherwisepayable to Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for thisSection 4, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive’s severance benefits underSection 4(a)(i) will be either:(a) delivered in full, or(b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject toexcise tax under Section 4999 of the Code,whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise taximposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits,notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. If a reduction inseverance and other benefits constituting “parachute payments” is necessary so that benefits are delivered to a lesser extent,reduction shall occur in the following order: reduction of cash payments; cancellation of awards granted “contingent on a change inownership or control” (within the meaning of Code Section 280G); cancellation of accelerated vesting of equity awards; reduction ofemployee benefits. Within any such category of “parachute payment”, a reduction shall occur first with respect to amounts that arenot “deferred compensation” within the meaning of Section 409A and then with respect to amounts that are, and to the extent anysuch payment is to be made over time (e.g., in installments, etc.), then the payments shall be waived in reverse chronological order.In the event that acceleration of vesting of equity award compensation is to be reduced, such acceleration of vesting shall becancelled in the reverse order of the date of grant of Executive’s equity awards. Unless the Company and Executive otherwise agreein writing, any determination required under this Section 4 will be made in writing by an independent firm immediately prior toChange of Control (the “Firm”), whose determination will be conclusive and binding upon Executive and the Company for allpurposes. For purposes of making the calculations required by this Section 4, the Firm may make reasonable assumptions andapproximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application ofSections 280G and 4999 of the Code. The Company and Executive will furnish to the Firm such information and documents as theFirm may reasonably request in order to make a determination under this Section. The Company will bear all costs the Firm mayreasonably incur in connection with any calculations contemplated by this Section 4.5. Definition of Terms . The following terms referred to in this Agreement will have the following meanings:(a) Benefit Plans . For purposes of this Agreement, “Benefit Plans” means plans, policies or arrangements that theCompany sponsors (or participates in) and that immediately prior to Executive’s termination of employment provide Executiveand/or Executive’s eligible dependents with medical, dental, and/or vision benefits. Benefit Plans do not include any other type ofbenefit (including, but not by way of limitation, disability, life insurance or retirement benefits). A requirement that the Companyprovide Executive and Executive’s eligible dependents with coverage under the Benefit Plans will not be satisfied unless thecoverage is no less favorable than that provided to senior executives of the Company at any applicable time during the periodExecutive is entitled to receive severance pursuant to Section 3. The Company may, at its option, satisfy any requirement that theCompany provide coverage under any Benefit Plan by (i) reimbursing Executive’s premiums under Title X of the ConsolidatedBudget Reconciliation Act of 1985, as amended (“COBRA”) after Executive has properly elected continuation coverage underCOBRA (in which case Executive will be solely responsible for electing such coverage for his eligible dependents), or (ii) providingcoverage under a separate plan or plans providing coverage that is no less favorable or by paying Executive a lump-sum paymentwhich is, on an after-tax basis, sufficient to provide Executive and Executive’s eligible dependents with equivalent coverage under athird party plan that is reasonably available to Executive and Executive’s eligible dependents.(b) Cause . “Cause” is defined as (i) an act of dishonesty made by Executive in connection with Executive’sresponsibilities as an employee that materially adversely affects the Company, (ii) Executive’s conviction of, or plea of nolocontendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude, (iii) Executive’s grossmisconduct that materially and adversely affects the Company’s reputation or business, or (iv) Executive’s continued intentionalrefusal to perform his employment duties in a material fashion that materially and adversely affects the Company’s reputation orbusiness, after Executive has received a written demand of performance from the Company which specifically sets forth the factualbasis for the Company’s belief that Executive has not substantially performed his duties and Executive continues to refuse to curesuch non-performance within thirty (30) days after receiving such notice.(c) Change of Control . “Change of Control” of the Company is defined as:(i) the acquisition by any one person, or more than one person acting as a group (for these purposes, persons will beconsidered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisitionof stock, or similar business transaction with the Company), (“Person”) that or is or becomes the owner, directly or indirectly, ofsecurities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s thenoutstanding securities (the “Voting Securities”); provided, however, that for purposes of this subsection (i), the acquisition ofadditional securities by any one Person, who is considered to own more than fifty percent (50%) of the total voting power of thesecurities of the Company shall not be considered a Change of Control;(ii) a change in the composition of the Board occurring within a twelve (12)-month period, as a result of whichfewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” will mean directors who either (A) aredirectors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votesof at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whoseelection or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to theCompany);(iii) the date of the consummation of a merger or consolidation of the Company with any other corporation that hasbeen approved by the stockholders of the Company, other than a merger or consolidation which would result in the voting securitiesof the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by beingconverted into voting securities of the surviving entity) fifty percent (50%) or more of the total voting power represented by thevoting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or thestockholders of the Company approve a plan of complete liquidation of the Company; or(iv) a change in the ownership of a substantial portion of the Company’s assets which occurs on the date that anyPerson acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person orpersons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total fairmarket value of all of the assets of the Company immediately prior to such acquisition or acquisitions; provided, however, that forpurposes of this Section 5.(c)(iv), the following shall not constitute a change in the ownership of a substantial portion of theCompany’s assets: (1) a transfer to an entity that is controlled by the Company’s shareholders immediately after the transfer; or (2) atransfer of assets by the Company to: (A) a shareholder of the Company (immediately before the asset transfer) in exchange for orwith respect to the Company’s securities; (B) an entity, fifty percent (50%) or more of the total value or voting power of which isowned, directly or indirectly, by the Company; (C) a Person, that owns, directly or indirectly, fifty percent (50%) or more of the totalvalue or voting power of all the outstanding stock of the Company; or (D) an entity, at least fifty percent (50%) of the total value orvoting power of which is owned, directly or indirectly, by a Person described in subsection(C). For purposes of this clause (2), gross fair market value means the value of the assets of the Company, or the value of the assetsbeing disposed of, determined without regard to any liabilities associated with such assets.Notwithstanding the foregoing, a Company transaction that does not constitute a change in control event under Treasury Regulation1.409A-3(i)(5)(v) or (vii) shall be not be considered a Change of Control.(d) Disability . “Disability” will mean that Executive has been unable to perform his Company duties as the result ofhis incapacity due to physical or mental illness, and such inability, at least twenty-six (26) weeks after its commencement, isdetermined to be total and permanent by a physician selected by the Company or its insurers and acceptable to Executive orExecutive’s legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting fromDisability may only be effected after at least thirty (30) days’ written notice by the Company of its intention to terminate Executive’semployment. In the event that Executive resumes the performance of substantially all of his duties hereunder before the terminationof his employment becomes effective, the notice of intent to terminate will automatically be deemed to have been revoked.(e) Good Reason . “Good Reason” means the occurrence of one or more of the following events without Executive’sexpress written consent: (i) the assignment to Executive of any duties or the reduction of Executive’s duties, either of which resultsin a material diminution in Executive’s position or responsibilities with the Company in effect immediately prior to such assignment,or the removal of Executive from such position and responsibilities, unless Executive is provided with comparable duties, positionand responsibilities; provided, however, it being understood that a new position with a larger combined company does not aloneconstitute “Good Reason” if it is in the same area of operations and involves substantially the same duties and scope ofresponsibilities and management responsibility notwithstanding that Executive may not retain as senior of a title within the largercombined company as Executive’s prior title; (ii) a material reduction by the Company in the base salary of Executive; providedthat, it being understood that a reduction by the Company by five percent (5%) or more in the base salary or bonus opportunity ofExecutive as in effect immediately prior to such reduction shall be deemed Good Reason within the meaning of this clause (ii); (iii) amaterial change in the geographic location at which Executive must perform services (for purposes of this Agreement, the relocationof Executive to a facility or a location less than twenty-five (25) miles from Executive’s then-present location shall not be considereda material change in geographic location); (iv) any material breach by the Company of any material provision of this Agreement, or(vi) the failure of the Company to obtain the assumption of this Agreement by any successor. Executive will not resign for GoodReason without first providing the Company with written notice of the acts or omissions constituting the grounds for “Good Reason”within ninety (90) days of the initial existence of the grounds for “Good Reason” and a reasonable cure period of not less than thirty(30) days following the date of such notice.6. Successors .(a) The Company’s Successors . Any successor to the Company (whether direct or indirect and whether by purchase,merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets will assume theobligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to thesame extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes underthis Agreement, the term “Company” will include any successor to the Company’s business and/or assets which executes anddelivers the assumption agreement described in this Section 6(a) or which becomes bound by the terms of this Agreement byoperation of law.(b) Executive’s Successors . The terms of this Agreement and all rights of Executive hereunder will inure to the benefitof, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees,devisees and legatees.7. Notice .(a) General . Notices and all other communications contemplated by this Agreement will be in writing and will bedeemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receiptrequested and postage prepaid. In the case of Executive, mailed notices will be addressed to him or her at the home address which heor she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to itscorporate headquarters, and all notices will be directed to the attention of its President.(b) Notice of Termination . Any termination by the Company for Cause or by Executive for Good Reason or as a resultof a voluntary resignation by Executive will be communicated by a notice of termination to the other party hereto given inaccordance with Section 7(a) of this Agreement. Such notice will indicate the specific termination provision in this Agreement reliedupon, will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision soindicated, and will specify the termination date (which will be not more than thirty (30) days after the giving of such notice). Thefailure by Executive to include in the notice any fact or circumstance which contributes to a showing of Good Reason will not waiveany right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his or her rightshereunder.8. Term of Agreement . This Agreement will have a term of ten (10) years commencing on the Prior Effective Date, whichshall not be subject to renewal, unless a Change of Control occurs during such ten (10)-year period, in which case this Agreementwill continue until all payments and benefits, if any, have been made to Executive.9. Arbitration .(a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation,validity, construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in Santa ClaraCounty, California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect ofthe American Arbitration Association (the “Rules”), except that each of Company and Executive may, at its, his or her option, seekinjunctive relief in a court of competent jurisdiction related to the improper use, disclosure or misappropriation of a party’s private,proprietary, confidential or trade secret information. The arbitrator may grant injunctions or other relief in such dispute orcontroversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may beentered on the arbitrator’s decision in any court having jurisdiction.(b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to conflicts oflaw rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to statearbitration law. Executive hereby consents to the personal jurisdiction of the state and federal courts located in California for anyaction or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.(c) Executive understands that nothing in this Section modifies Executive’s at-will employment status. EitherExecutive or the Company can terminate the employment relationship at any time, with or without Cause.(d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION.EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR INCONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVE’SRIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OFTHE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OFCONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING,BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS;NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITHCONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL STATUTE,INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991,THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990,THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABORCODE SECTION 201, et seq;(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATINGTO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.10. Miscellaneous Provisions .(a) No Duty to Mitigate . Executive will not be required to mitigate the amount of any payment contemplated by thisAgreement, nor will any such payment be reduced by any earnings that Executive may receive from any other source.(b) Waiver . No provision of this Agreement will be modified, waived or discharged unless the modification, waiver ordischarge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). Nowaiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party willbe considered a waiver of any other condition or provision or of the same condition or provision at another time.(c) Headings . All captions and section headings used in this Agreement are for convenient reference only and do notform a part of this Agreement.(d) Entire Agreement . This Agreement constitutes the entire agreement of the parties hereto. Executive acknowledgesand agrees that this Agreement encompasses all the rights of Executive to any acceleration of Award vesting or severance pay basedon termination of employment, and Executive hereby agrees that he or she has no such rights except as stated herein, and Executiveagrees that any such rights, whether in an employment agreement, offer letter, stock option agreement, stock option plan, equityaward agreement or other agreement, are hereby waived.(e) Choice of Law . The validity, interpretation, construction and performance of this Agreement will be governed bythe laws of the State of California (with the exception of its conflict of laws provisions).(f) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement will not affect thevalidity or enforceability of any other provision hereof, which will remain in full force and effect.(g) Withholding . All payments made pursuant to this Agreement will be subject to withholding of applicable incomeand employment taxes.(h) Counterparts . This Agreement may be executed in counterparts, each of which will be deemed an original, but allof which together will constitute one and the same instrument.IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorizedofficer, as of the day and year set forth below.COMPANY FORTINET, INC. By:/s/ John Whittle John Whittle Title:Vice President, General Counsel EXECUTIVE By:/s/ Ken Xie Ken Xie Title:Chief Executive OfficerExhibit 10.16FORTINET, INC.AMENDED AND RESTATEDCHANGE OF CONTROL SEVERANCE AGREEMENTThis Change of Control Severance Agreement (the “Agreement”) is made and entered into by and between Michael Xie(“Executive”) and Fortinet, Inc. (the “Company”), effective as of February 4, 2016 (the “Effective Date”) and superseded theChange of Control Severance Agreement, between Executive and the Company (the “Prior Agreement”), effective as of August 7,2009 (the “Prior Effective Date”).RECITALS1. It is expected that the Company from time to time will consider the possibility of an acquisition by another company orother change of control. The Board of Directors of the Company (the “Board”) recognizes that such consideration can be adistraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that itis in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication andobjectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of theCompany.2. The Board believes that it is in the best interests of the Company and its stockholders to provide Executive with anincentive to continue his or her employment and to motivate Executive to maximize the value of the Company upon a Change ofControl for the benefit of its stockholders.3. The Board believes that it is imperative to provide Executive with certain benefits upon termination of employmentfollowing a Change of Control. These benefits will provide Executive with enhanced financial security and incentive andencouragement to remain with the Company.AGREEMENTNOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:1. Term of Agreement . This Agreement will terminate upon the earlier to occur of: (a) the Agreement’s terminationdate as provided in Section 8 below, and (b) the date that all of the obligations of the parties hereto with respect to this Agreementhave been satisfied.2. At-Will Employment . The Company and Executive acknowledge that Executive’s employment is and will continue tobe at-will, as defined under applicable law. If Executive’s employment terminates for any reason, including (without limitation) anytermination prior to or twelve (12) months following a Change of Control, Executive will not beentitled to any acceleration of Award (as defined herein) vesting or severance pay based on termination of employment other than asprovided by this Agreement.3. Severance Benefits .(a) Involuntary Termination Prior to, or Absent, a Change of Control or After 12 Months Following a Change ofControl . If prior to, or absent, a Change of Control or after twelve (12) months following a Change of Control, (i) the Company (orany parent or subsidiary of the Company) terminates Executive’s employment without Cause or (ii) Executive terminatesExecutive’s employment with the Company (or any parent or subsidiary of the Company) for Good Reason, Executive will receiveseverance pay and/or benefits as determined by the Company in its sole discretion.(b) Involuntary Termination within 12 Months Following a Change of Control . If within twelve (12) months followinga Change of Control, (i) the Company (or any parent or subsidiary of the Company) terminates Executive’s employment withoutCause or (ii) Executive terminates Executive’s employment with the Company (or any parent or subsidiary of the Company) forGood Reason, then, subject to Section 3(c) and Section 3(d) below, Executive will receive the following severance from theCompany:(i) Severance Payment . Executive will receive continuing payments of severance pay for a period of six (6)months from the date of such termination equal to the pro-rata portion of Executive’s base salary rate as in effect immediately priorto (A) the Change of Control, or (B) Executive’s termination, whichever is greater.(ii) Equity Awards . If Executive holds unvested equity awards (“Awards”) at the time of Executive’s termination,then one hundred percent (100%) of the then- unvested shares subject to such Awards will immediately vest as of Executive’stermination date. For the sake of clarity, Executive will fully vest in and have the right to exercise stock options and/or stockappreciation rights as to all of the shares underlying such Awards, including those shares which would not otherwise be vested orexercisable, all restrictions on restricted stock and restricted stock units will lapse, and, with respect to performance stock units andperformance shares, all performance goals or other vesting criteria will be deemed to have been achieved at one hundred percent(100%) of target levels and all other terms and conditions met. The Awards will remain exercisable, to the extent applicable,following the termination for the period prescribed in the respective stock plan and agreement for each Award.(iii) Continued Employee Benefits . Executive will receive Company-paid coverage for a period of twelve (12)months for Executive and Executive’s eligible dependents under the Company’s Benefit Plans (as defined herein).(c) Release of Claims Agreement . The receipt of any severance pay or other benefits pursuant to Sections 3(a) and (b)above will be subject to Executive signing and not revoking a release of claims agreement with the Company in a form reasonablyacceptable to the Company (provided the Company will work in good faith with Executive to reach agreement on the form ofrelease) that is effective and irrevocable no later than the later of (i) the fifteenth day of thethird month after the end of the Company’s fiscal year in which such termination occurs or (ii) March 15 of the calendar yearfollowing the calendar year in which such termination of employment occurs. No such severance pay or other benefits will be paidor provided until the release of claims agreement becomes effective, and any severance amounts or benefits otherwise payablebetween the date of Executive’s termination and the date of such release becomes effective and irrevocable shall be paid on theeffective date of such release.(d) Non-solicitation and Non-competition . Executive agrees, to the extent permitted by applicable law, that in theevent Executive receives severance pay or other benefits pursuant to Sections 3(a) and (b) above, for the twelve (12) consecutivemonth period immediately following the date of Executive’s termination, Executive, as a condition to receipt of severance pay andbenefits under Sections 3(a) and (b), will not (i) either directly or indirectly, solicit, induce, recruit, encourage any employee of theCompany to leave his employment either for Executive or for any other entity or person, or (ii) without the express written consentof the Company, directly or indirectly engage in, enter the employ, have any ownership interest in, or participate in any entity that asof the date of involuntary termination, engages in the design, development, manufacture, production, marketing, sale or servicing ofany product or the provision of any service that competes with any service offered by the Company or any product sold by theCompany or under development by the Company; provided, however, that ownership of less than one percent (1%) of theoutstanding stock of any publicly traded corporation will not be deemed to be violative of the restrictive covenant set forth in thisparagraph. The provisions of clause (ii) will not apply to Executive to the extent Executive is providing services or residing in theState of California.The covenants contained in this Section 3(d) hereof shall be construed as a series of separate covenants, one for each country,province, state, city or other political subdivision in which the Company currently engages in its business or, during the term of thisAgreement, becomes engaged in its business. Except for geographic coverage, each such separate covenant shall be deemed identicalin terms to the covenant contained in this Section 3(d). If, in any judicial proceeding, a court refuses to enforce any of such separatecovenants (or any part thereof), then such unenforceable covenant (or such part) shall be eliminated from this Agreement to theextent necessary to permit the remaining separate covenants (or portions thereof) to be enforced. In the event that the provisions ofthis Section 3(d) are deemed to exceed the time, geographic or scope limitations permitted by applicable law, then such provisionsshall be reformed to the maximum time, geographic or scope limitations, as the case may be, permitted by applicable law.(e) Timing of Severance Payments . Subject to Section 3(c), the Company will pay the severance payments to whichExecutive is entitled as salary continuation with the same timing as in effect immediately prior to Executive’s termination ofemployment. If Executive should die before all amounts have been paid, such unpaid amounts will be paid in a lump-sum payment(less any withholding taxes) to Executive’s designated beneficiary, if living, or otherwise to the personal representative ofExecutive’s estate.(f) Voluntary Resignation; Termination For Cause . If Executive’s employment with the Company terminates (i)voluntarily by Executive (except upon a termination for Good Reason within twelve (12) months following a Change of Control) or(ii) for Cause by the Company (or any parent or subsidiary of the Company), then Executive will not be entitled to receive severanceor other benefits except for those benefits (if any) which do not concern acceleration of Award vesting or severance pay based ontermination of employment as may then be established under other Company policies or programs, if any.(g) Disability; Death . If the Company terminates Executive’s employment as a result of Executive’s Disability, orExecutive’s employment terminates due to his or her death, then Executive will not be entitled to receive severance or other benefitsexcept for those benefits (if any) which do not concern acceleration of Award vesting or severance pay based on termination ofemployment as may then be established under other Company policies or programs, if any.(h) Exclusive Remedy . In the event of a termination of Executive’s employment with the Company (or any parent orsubsidiary of the Company), the provisions of this Section 3 are intended to be and are exclusive and in lieu of any other rights orremedies to which Executive or the Company may otherwise be entitled, whether at law, tort or contract, in equity, or under thisAgreement. Executive will be entitled to no severance or other benefits upon termination of employment with respect to accelerationof Award vesting or severance pay other than those benefits expressly set forth in this Section 3.(i) Section 409A . Notwithstanding anything to the contrary in this Agreement, no severance pay or benefits to be paidor provided to Executive, if any, pursuant to this Agreement, when considered together with any other severance payments orseparation benefits that are considered deferred compensation under Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”) and any final regulations and official guidance promulgated thereunder (“Section 409A”) (together, the“Deferred Compensation Separation Benefits”) will be paid or otherwise provided until Executive has a “separation from service”within the meaning of Section 409A. Similarly, no severance payments or separation benefits payable to Executive, if any, pursuantto this Agreement that otherwise would be exempt from Section 409A pursuant to Section 1.409A-1(b)(9) of the TreasuryRegulations will be payable until Executive has a “separation from service” within the meaning of Section 409A. In addition, ifExecutive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due todeath), then the Deferred Compensation Separation Benefits that are payable within the first six (6) months following Executive’sseparation from service, will become payable in a lump sum (without interest) on the first payroll date that occurs on or after the datesix (6) months and one (1) day following the date of Executive’s separation from service. All subsequent Deferred CompensationSeparation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit.Notwithstanding anything herein to the contrary, if Executive dies following Executive’s separation from service, but prior to the six(6) month anniversary of the separation from service, then any payments delayed in accordance with this paragraph will be payablein a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred CompensationSeparation Benefits will be payable in accordance with the payment schedule applicable to each payment orbenefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section1.409A-2(b)(2) of the Treasury Regulations. To the extent any payment under this Agreement may be classified as a “short-termdeferral” within the meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for anexemption from Section 409A under another provision of Section 409A. The foregoing provisions are intended to comply with therequirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to theadditional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Executive and theCompany agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions whichare necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment toExecutive under Section 409A.4. Limitation on Payments . In the event that the severance and other benefits provided for in this Agreement or otherwisepayable to Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for thisSection 4, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive’s severance benefits underSection 4(a)(i) will be either:(a) delivered in full, or(b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject toexcise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state andlocal income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of thegreatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable underSection 4999 of the Code. If a reduction in severance and other benefits constituting “parachute payments” is necessary so thatbenefits are delivered to a lesser extent, reduction shall occur in the following order: reduction of cash payments; cancellation ofawards granted “contingent on a change in ownership or control” (within the meaning of Code Section 280G); cancellation ofaccelerated vesting of equity awards; reduction of employee benefits. Within any such category of “parachute payment”, a reductionshall occur first with respect to amounts that are not “deferred compensation” within the meaning of Section 409A and then withrespect to amounts that are, and to the extent any such payment is to be made over time (e.g., in installments, etc.), then thepayments shall be waived in reverse chronological order. Unless the Company and Executive otherwise agree in writing, anydetermination required under this Section 4 will be made in writing by an independent firm immediately prior to Change of Control(the “Firm”), whose determination will be conclusive and binding upon Executive and the Company for all purposes. For purposesof making the calculations required by this Section 4, the Firm may make reasonable assumptions and approximations concerningapplicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of theCode. The Company and Executive will furnish to the Firm such information and documents as the Firm may reasonably request inorder to make a determination under this Section. The Company will bear all costs the Firm may reasonably incur in connection withany calculations contemplated by this Section 4.5. Definition of Terms . The following terms referred to in this Agreement will have the following meanings:(a) Benefit Plans . For purposes of this Agreement, “Benefit Plans” means plans, policies or arrangements that theCompany sponsors (or participates in) and that immediately prior to Executive’s termination of employment provide Executiveand/or Executive’s eligible dependents with medical, dental, and/or vision benefits. Benefit Plans do not include any other type ofbenefit (including, but not by way of limitation, disability, life insurance or retirement benefits). A requirement that the Companyprovide Executive and Executive’s eligible dependents with coverage under the Benefit Plans will not be satisfied unless thecoverage is no less favorable than that provided to senior executives of the Company at any applicable time during the periodExecutive is entitled to receive severance pursuant to Section 3. The Company may, at its option, satisfy any requirement that theCompany provide coverage under any Benefit Plan by (i) reimbursing Executive’s premiums under Title X of the ConsolidatedBudget Reconciliation Act of 1985, as amended (“COBRA”) after Executive has properly elected continuation coverage underCOBRA (in which case Executive will be solely responsible for electing such coverage for his eligible dependents), or (ii) providingcoverage under a separate plan or plans providing coverage that is no less favorable or by paying Executive a lump-sum paymentwhich is, on an after-tax basis, sufficient to provide Executive and Executive’s eligible dependents with equivalent coverage under athird party plan that is reasonably available to Executive and Executive’s eligible dependents.(b) Cause . “Cause” is defined as (i) an act of dishonesty made by Executive in connection with Executive’sresponsibilities as an employee that materially adversely affects the Company, (ii) Executive’s conviction of, or plea of nolocontendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude, (iii) Executive’s grossmisconduct that materially and adversely affects the Company’s reputation or business, or (iv) Executive’s continued intentionalrefusal to perform his employment duties in a material fashion that materially and adversely affects the Company’s reputation orbusiness, after Executive has received a written demand of performance from the Company which specifically sets forth the factualbasis for the Company’s belief that Executive has not substantially performed his duties and Executive continues to refuse to curesuch non-performance within thirty (30) days after receiving such notice.(c) Change of Control . “Change of Control” of the Company is defined as:(i) the acquisition by any one person, or more than one person acting as a group (for these purposes, persons will beconsidered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisitionof stock, or similar business transaction with the Company), (“Person”) that or is or becomes the owner, directly or indirectly, ofsecurities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s thenoutstanding securities (the “Voting Securities”); provided, however, that for purposes of this subsection (i), the acquisition ofadditional securities by any one Person, who is considered to own more than fifty percent (50%)of the total voting power of the securities of the Company shall not be considered a Change of Control;(ii) a change in the composition of the Board occurring within a twelve (12) month period, as a result of whichfewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” will mean directors who either (A) aredirectors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votesof at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whoseelection or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to theCompany);(iii) the date of the consummation of a merger or consolidation of the Company with any other corporation that hasbeen approved by the stockholders of the Company, other than a merger or consolidation which would result in the voting securitiesof the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by beingconverted into voting securities of the surviving entity) fifty percent (50%) or more of the total voting power represented by thevoting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or thestockholders of the Company approve a plan of complete liquidation of the Company; or(iv) a change in the ownership of a substantial portion of the Company’s assets which occurs on the date that anyPerson acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person orpersons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total fairmarket value of all of the assets of the Company immediately prior to such acquisition or acquisitions; provided, however, that forpurposes of this Section 5 (c)(iv), the following shall not constitute a change in the ownership of a substantial portion of theCompany’s assets: (1) a transfer to an entity that is controlled by the Company’s shareholders immediately after the transfer; or (2) atransfer of assets by the Company to: (A) a shareholder of the Company (immediately before the asset transfer) in exchange for orwith respect to the Company’s securities; (B) an entity, fifty percent (50%) or more of the total value or voting power of which isowned, directly or indirectly, by the Company; (C) a Person, that owns, directly or indirectly, fifty percent (50%) or more of the totalvalue or voting power of all the outstanding stock of the Company; or (D) an entity, at least fifty percent (50%) of the total value orvoting power of which is owned, directly or indirectly, by a Person described in subsection (C). For purposes of this clause (2), grossfair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined withoutregard to any liabilities associated with such assets.Notwithstanding the foregoing, a Company transaction that does not constitute a change of control event under Treasury Regulation1.409A-3(i)(5)(v) or (vii) shall be not be considered a Change of Control.(d) Disability . “Disability” will mean that Executive has been unable to perform his Company duties as the result ofhis incapacity due to physical or mental illness, and such inability, at least twenty-six (26) weeks after its commencement, isdetermined to be total andpermanent by a physician selected by the Company or its insurers and acceptable to Executive or Executive’s legal representative(such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effectedafter at least thirty (30) days’ written notice by the Company of its intention to terminate Executive’s employment. In the event thatExecutive resumes the performance of substantially all of his duties hereunder before the termination of his employment becomeseffective, the notice of intent to terminate will automatically be deemed to have been revoked.(e) Good Reason . “Good Reason” means the occurrence of one or more of the following events without Executive’sexpress written consent: (i) the assignment to Executive of any duties or the reduction of Executive’s duties, either of which resultsin a material diminution in Executive’s position or responsibilities with the Company in effect immediately prior to such assignment,or the removal of Executive from such position and responsibilities; provided, however, it being understood that a new position witha larger combined company does not alone constitute “Good Reason” if it is in the same area of operations and involves substantiallythe same duties and scope of responsibilities and management responsibility notwithstanding that Executive may not retain as seniorof a title within the larger combined company as Executive’s prior title; (ii) a material reduction by the Company in the base salaryof Executive; provided that, it being understood that a reduction by the Company by five percent (5%) or more in the base salary orbonus opportunity of Executive as in effect immediately prior to such reduction shall be deemed Good Reason within the meaning ofthis clause (ii); (iii) a material change in the geographic location at which Executive must perform services (for purposes of thisAgreement, the relocation of Executive to a facility or a location less than twenty-five (25) miles from Executive’s then-presentlocation shall not be considered a material change in geographic location); (iv) any material breach by the Company of any materialprovision of this Agreement, or (vi) the failure of the Company to obtain the assumption of this Agreement by any successor.Executive will not resign for Good Reason without first providing the Company with written notice of the acts or omissionsconstituting the grounds for “Good Reason” within ninety (90) days of the initial existence of the grounds for “Good Reason” and areasonable cure period of not less than thirty (30) days following the date of such notice.6. Successors .(a) The Company’s Successors . Any successor to the Company (whether direct or indirect and whether by purchase,merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets will assume theobligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to thesame extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes underthis Agreement, the term “Company” will include any successor to the Company’s business and/or assets which executes anddelivers the assumption agreement described in this Section 6(a) or which becomes bound by the terms of this Agreement byoperation of law.(b) Executive’s Successors . The terms of this Agreement and all rights of Executive hereunder will inure to the benefitof, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees,devisees and legatees.7. Notice .(a) General . Notices and all other communications contemplated by this Agreement will be in writing and will bedeemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receiptrequested and postage prepaid. In the case of Executive, mailed notices will be addressed to him or her at the home address which heor she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to itscorporate headquarters, and all notices will be directed to the attention of its President.(b) Notice of Termination . Any termination by the Company for Cause or by Executive for Good Reason or as a resultof a voluntary resignation by Executive will be communicated by a notice of termination to the other party hereto given inaccordance with Section 7(a) of this Agreement. Such notice will indicate the specific termination provision in this Agreement reliedupon, will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision soindicated, and will specify the termination date (which will be not more than thirty (30) days after the giving of such notice). Thefailure by Executive to include in the notice any fact or circumstance which contributes to a showing of Good Reason will not waiveany right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his or her rightshereunder.8. Term of Agreement . This Agreement will have a term of ten (10) years commencing on the Prior Effective Date, whichshall not be subject to renewal, unless a Change of Control occurs during such ten (10) year period, in which case this Agreementwill continue until all payments and benefits, if any, have been made to Executive.9. Arbitration .(a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation,validity, construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in Santa ClaraCounty, California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the AmericanArbitration Association (the “Rules”), except that each of Company and Executive may, at its, his or her option, seek injunctiverelief in a court of competent jurisdiction related to the improper use, disclosure or misappropriation of a party’s private, proprietary,confidential or trade secret information. The arbitrator may grant injunctions or other relief in such dispute or controversy. Thedecision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on thearbitrator’s decision in any court having jurisdiction.(b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to conflicts oflaw rules. The arbitration proceedings shall be governed byfederal arbitration law and by the Rules, without reference to state arbitration law. Executive hereby consents to the personaljurisdiction of the state and federal courts located in California for any action or proceeding arising from or relating to thisAgreement or relating to any arbitration in which the parties are participants.(c) Executive understands that nothing in this Section modifies Executive’s at-will employment status. EitherExecutive or the Company can terminate the employment relationship at any time, with or without Cause.(d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION.EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR INCONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVE’SRIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OFTHE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OFCONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING,BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS;NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITHCONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL STATUTE,INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991,THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990,THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABORCODE SECTION 201, et seq ;(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATINGTO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.10. Miscellaneous Provisions .(a) No Duty to Mitigate . Executive will not be required to mitigate the amount of any payment contemplated by thisAgreement, nor will any such payment be reduced by any earnings that Executive may receive from any other source.(b) Waiver . No provision of this Agreement will be modified, waived or discharged unless the modification, waiver ordischarge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). Nowaiver by either party ofany breach of, or of compliance with, any condition or provision of this Agreement by the other party will be considered a waiver ofany other condition or provision or of the same condition or provision at another time.(c) Headings . All captions and section headings used in this Agreement are for convenient reference only and do notform a part of this Agreement.(d) Entire Agreement . This Agreement constitutes the entire agreement of the parties hereto with respect to the subjectmatter described herein, and supersedes in its entirety the Prior Agreement. Executive acknowledges and agrees that this Agreementencompasses all the rights of Executive to any acceleration of Award vesting or severance pay based on termination of employment,and Executive hereby agrees that he or she has no such rights except as stated herein, and Executive agrees that any such rights,whether in an employment agreement, offer letter, stock option agreement, stock option plan, equity award agreement or otheragreement, are hereby waived.(e) Choice of Law . The validity, interpretation, construction and performance of this Agreement will be governed bythe laws of the State of California (with the exception of its conflict of laws provisions).(f) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement will not affect thevalidity or enforceability of any other provision hereof, which will remain in full force and effect.(g) Withholding . All payments made pursuant to this Agreement will be subject to withholding of applicable incomeand employment taxes.(h) Counterparts . This Agreement may be executed in counterparts, each of which will be deemed an original, but allof which together will constitute one and the same instrument.IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorizedofficer, as of the day and year set forth below.COMPANY FORTINET, INC. By:/s/ John Whittle John Whittle Title:Vice President, General Counsel EXECUTIVE By:/s/ Michael Xie Michael Xie Title:Chief Technology OfficerExhibit 10.17FORTINET, INC.AMENDED AND RESTATEDCHANGE OF CONTROL SEVERANCE AGREEMENTThis Amended and Restated Change of Control Severance Agreement (the “Agreement”) is made and entered into by andbetween John Whittle (“Executive”) and Fortinet, Inc. (the “Company”), effective as of February 4, 2016 (the “Effective Date”) andsupersedes the Change of Control Severance Agreement, between Executive and the Company (the “Prior Agreement”), effective asof August 7, 2009 (the “Prior Effective Date”).RECITALS1. It is expected that the Company from time to time will consider the possibility of an acquisition by another company orother change of control. The Board of Directors of the Company (the “Board”) recognizes that such consideration can be adistraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that itis in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication andobjectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of theCompany.2. The Board believes that it is in the best interests of the Company and its stockholders to provide Executive with anincentive to continue his or her employment and to motivate Executive to maximize the value of the Company upon a Change ofControl for the benefit of its stockholders.3. The Board believes that it is imperative to provide Executive with certain benefits upon termination of employment priorto and following a Change of Control. These benefits will provide Executive with enhanced financial security and incentive andencouragement to remain with the Company.AGREEMENTNOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:1. Term of Agreement . This Agreement will terminate upon the earlier to occur of: (a) the Agreement’s terminationdate as provided in Section 8 below, and (b) the date that all of the obligations of the parties hereto with respect to this Agreementhave been satisfied.2. At-Will Employment . The Company and Executive acknowledge that Executive’s employment is and will continue tobe at-will, as defined under applicable law. If Executive’s employment terminates for any reason, including (without limitation) anytermination prior to or twelve (12) months following a Change of Control, Executive will not beentitled to any acceleration of Award (as defined herein) vesting or severance pay based on termination of employment other than asprovided by this Agreement.3. Severance Benefits .(a) Involuntary Termination Prior to, or Absent a Change of Control or After 12 Months Following a Change ofControl . If prior to, or absent, a Change of Control or after twelve (12) months following a Change of Control, (i) the Company (orany parent or subsidiary of the Company) terminates Executive’s employment without Cause or (ii) Executive terminatesExecutive’s employment with the Company (or any parent or subsidiary of the Company) for Good Reason, then, subject to Sections3(c) and (d) below, Executive will receive the following severance from the Company:(i) Severance Payment . Executive will receive continuing payments of severance pay for a period of twelve (12)months from the date of such termination equal to Executive’s base salary rate as in effect immediately prior to Executive’stermination.(ii) Equity Awards . If Executive holds unvested equity awards (“Awards”) at the time of Executive’s termination, thenthe unvested portion of such Awards that would have otherwise vested over a twelve (12) month period following such terminationpursuant to the vesting schedule set forth in the award agreement will immediately vest as of Executive’s termination date. TheAwards will remain exercisable following the termination for the period prescribed in the respective stock plan and agreement foreach award.(b) Involuntary Termination within 12 Months Following a Change of Control . If within twelve (12) months followinga Change of Control, (i) the Company (or any parent or subsidiary of the Company) terminates Executive’s employment withoutCause or (ii) Executive terminates Executive’s employment with the Company (or any parent or subsidiary of the Company) forGood Reason, then, subject to Section 3(c) and Section 3(d) below, Executive will receive the following severance from theCompany:(i) Severance Payment . Executive will receive continuing payments of severance pay for a period of twelve (12)months from the date of such termination equal to Executive’s base salary rate as in effect immediately prior to (A) the Change ofControl, or (B) Executive’s termination, whichever is greater.(ii) Equity Awards . If Executive holds unvested Awards at the time of Executive’s termination, then one hundredpercent (100%) of the then-unvested shares subject to such Awards will immediately vest as of Executive’s termination date. TheAwards will remain exercisable, to the extent applicable, following the termination for the period prescribed in the respective stockplan and agreement for each Award.(iii) Continued Employee Benefits . Executive will receive Company-paid coverage for a period of twelve (12) monthsfor Executive and Executive’s eligible dependents under the Company’s Benefit Plans (as defined herein).(c) Release of Claims Agreement . The receipt of any severance pay or other benefits pursuant to Sections 3(a) and (b)above will be subject to Executive signing and not revoking a release of claims agreement with the Company in a form reasonablyacceptable to the Company (provided the Company will work in good faith with Executive to reach agreement on the form ofrelease) that is effective and irrevocable no later than the later of (i) the fifteenth day of the third month after the end of theCompany’s fiscal year in which such termination of employment occurs or (ii) March 15 of the calendar year following the calendaryear in which such termination of employment occurs. No such severance pay or other benefits will be paid or provided until therelease of claims agreement becomes effective, and any severance amounts or benefits otherwise payable between the date ofExecutive’s termination and the date of such release becomes effective and irrevocable shall be paid on the effective date of suchrelease.(d) Non-solicitation and Non-competition . Executive agrees, to the extent permitted by applicable law, that in theevent Executive receives severance pay or other benefits pursuant to Sections 3(a) and (b) above, for the twelve (12) consecutivemonth period immediately following the date of Executive’s termination, Executive, as a condition to receipt of severance pay andbenefits under Sections 3(a) and (b), will not (i) either directly or indirectly, solicit, induce, recruit, encourage any employee of theCompany to leave his employment either for Executive or for any other entity or person, or (ii) without the express written consentof the Company, directly or indirectly engage in, enter the employ, have any ownership interest in, or participate in any entity that asof the date of involuntary termination, engages in the design, development, manufacture, production, marketing, sale or servicing ofany product or the provision of any service that competes with any service offered by the Company or any product sold by theCompany or under development by the Company; provided, however, that ownership of less than one percent (1%) of theoutstanding stock of any publicly traded corporation will not be deemed to be violative of the restrictive covenant set forth in thisparagraph. The provisions of clause (ii) will not apply to Executive to the extent Executive is providing services or residing in theState of California.The covenants contained in this Section 3(d) hereof shall be construed as a series of separate covenants, one for eachcountry, province, state, city or other political subdivision in which the Company currently engages in its business or, during theterm of this Agreement, becomes engaged in its business. Except for geographic coverage, each such separate covenant shall bedeemed identical in terms to the covenant contained in this Section 3(d). If, in any judicial proceeding, a court refuses to enforce anyof such separate covenants (or any part thereof), then such unenforceable covenant (or such part) shall be eliminated from thisAgreement to the extent necessary to permit the remaining separate covenants (or portions thereof) to be enforced. In the event thatthe provisions of this Section 3(d) are deemed to exceed the time, geographic or scope limitations permitted by applicable law, thensuch provisions shall be reformed to the maximum time, geographic or scope limitations, as the case may be, permitted by applicablelaw.(e) Accelerated Vesting of Equity Awards . For the sake of clarity, with respect to the Awards vested pursuant toSections 3(a)(ii) or 3(b)(ii), Executive will fully vest in and have the right to exercise stock options and/or stock appreciation rightsas to all of the shares underlyingsuch Awards, including those shares which would not otherwise be vested or exercisable, all restrictions on restricted stock andrestricted stock units will lapse, and, with respect to performance stock units and performance shares, all performance goals or othervesting criteria will be deemed to have been achieved at one hundred percent (100%) of target levels and all other terms andconditions met.(f) Timing of Severance Payments . Subject to Section 3(c), the Company will pay the severance payments to whichExecutive is entitled as salary continuation with the same timing as in effect immediately prior to Executive’s termination ofemployment. If Executive should die before all amounts have been paid, such unpaid amounts will be paid in a lump-sum payment(less any withholding taxes) to Executive’s designated beneficiary, if living, or otherwise to the personal representative ofExecutive’s estate.(g) Voluntary Resignation; Termination For Cause . If Executive’s employment with the Company terminates (i)voluntarily by Executive (except upon a termination for Good Reason within twelve (12) months following a Change of Control) or(ii) for Cause by the Company (or any parent or subsidiary of the Company), then Executive will not be entitled to receive severanceor other benefits except for those benefits (if any) which do not concern acceleration of Award vesting or severance pay based ontermination of employment as may then be established under other Company policies or programs, if any.(h) Disability; Death . If the Company terminates Executive’s employment as a result of Executive’s Disability, orExecutive’s employment terminates due to his or her death, then Executive will not be entitled to receive severance or other benefitsexcept for those benefits (if any) which do not concern acceleration of Award vesting or severance pay based on termination ofemployment as may then be established under other Company policies or programs, if any.(i) Exclusive Remedy . In the event of a termination of Executive’s employment with the Company (or any parent orsubsidiary of the Company), the provisions of this Section 3 are intended to be and are exclusive and in lieu of any other rights orremedies to which Executive or the Company may otherwise be entitled, whether at law, tort or contract, in equity, or under thisAgreement. Executive will be entitled to no severance or other benefits upon termination of employment with respect to accelerationof Award vesting or severance pay other than those benefits expressly set forth in this Section 3.(j) Section 409A . Notwithstanding anything to the contrary in this Agreement, no severance pay or benefits to be paidor provided to Executive, if any, pursuant to this Agreement, when considered together with any other severance payments orseparation benefits that are considered deferred compensation under Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”) and any final regulations and official guidance promulgated thereunder (“Section 409A”) (together, the“Deferred Compensation Separation Benefits”) will be paid or otherwise provided until Executive has a “separation from service”within the meaning of Section 409A. Similarly, no severance payments or separation benefits payable to Executive, if any, pursuantto this Agreement that otherwise would be exempt from Section 409A pursuant to Section 1.409A-1(b)(9) of the TreasuryRegulations will be payable until Executive has a “separation from service” within the meaning of Section 409A. In addition, ifExecutive is a“specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due to death), then theDeferred Compensation Separation Benefits that are payable within the first six (6) months following Executive’s separation fromservice, will become payable in a lump sum (without interest) on the first payroll date that occurs on or after the date six (6) monthsand one (1) day following the date of Executive’s separation from service. All subsequent Deferred Compensation SeparationBenefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstandinganything herein to the contrary, if Executive dies following Executive’s separation from service, but prior to the six (6) monthanniversary of the separation from service, then any payments delayed in accordance with this paragraph will be payable in a lumpsum (without interest) as soon as administratively practicable after the date of Executive’s death and all other DeferredCompensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit.Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. To the extent any payment under this Agreement may be classified as a “short-term deferral”within the meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for anexemption from Section 409A under another provision of Section 409A. The foregoing provisions are intended to comply with therequirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to theadditional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Executive and theCompany agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions whichare necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment toExecutive under Section 409A.4. Limitation on Payments . In the event that the severance and other benefits provided for in this Agreement or otherwisepayable to Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for thisSection 4, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive’s severance benefits underSection 4(a)(i) will be either:(a) delivered in full, or(b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject toexcise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state andlocal income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of thegreatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable underSection 4999 of the Code. If a reduction in severance and other benefits constituting “parachute payments” is necessary so thatbenefits are delivered to a lesser extent, reduction shall occur in the following order: reduction of cash payments; cancellation ofawards granted “contingent on a change in ownership or control” (within the meaning of Code Section 280G); cancellation ofaccelerated vesting of equity awards; reduction of employee benefits. Within any such category of “parachute payment”, a reductionshall occur first with respect to amounts that are not “deferred compensation” within the meaning of Section409A and then with respect to amounts that are, and to the extent any such payment is to be made over time (e.g., in installments,etc.), then the payments shall be waived in reverse chronological order. Unless the Company and Executive otherwise agree inwriting, any determination required under this Section 4 will be made in writing by an independent firm immediately prior toChange of Control (the “Firm”), whose determination will be conclusive and binding upon Executive and the Company for allpurposes. For purposes of making the calculations required by this Section 4, the Firm may make reasonable assumptions andapproximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application ofSections 280G and 4999 of the Code. The Company and Executive will furnish to the Firm such information and documents as theFirm may reasonably request in order to make a determination under this Section. The Company will bear all costs the Firm mayreasonably incur in connection with any calculations contemplated by this Section 4.5. Definition of Terms . The following terms referred to in this Agreement will have the following meanings:(a) Benefit Plans . For purposes of this Agreement, “Benefit Plans” means plans, policies or arrangements that theCompany sponsors (or participates in) and that immediately prior to Executive’s termination of employment provide Executiveand/or Executive’s eligible dependents with medical, dental, and/or vision benefits. Benefit Plans do not include any other type ofbenefit (including, but not by way of limitation, disability, life insurance or retirement benefits). A requirement that the Companyprovide Executive and Executive’s eligible dependents with coverage under the Benefit Plans will not be satisfied unless thecoverage is no less favorable than that provided to senior executives of the Company at any applicable time during the periodExecutive is entitled to receive severance pursuant to Section 3. The Company may, at its option, satisfy any requirement that theCompany provide coverage under any Benefit Plan by (i) reimbursing Executive’s premiums under Title X of the ConsolidatedBudget Reconciliation Act of 1985, as amended (“COBRA”) after Executive has properly elected continuation coverage underCOBRA (in which case Executive will be solely responsible for electing such coverage for his eligible dependents), or (ii) providingcoverage under a separate plan or plans providing coverage that is no less favorable or by paying Executive a lump-sum paymentwhich is, on an after-tax basis, sufficient to provide Executive and Executive’s eligible dependents with equivalent coverage under athird party plan that is reasonably available to Executive and Executive’s eligible dependents.(b) Cause . “Cause” is defined as (i) an act of dishonesty made by Executive in connection with Executive’sresponsibilities as an employee that materially adversely affects the Company, (ii) Executive’s conviction of, or plea of nolocontendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude, (iii) Executive’s grossmisconduct that materially and adversely affects the Company’s reputation or business, or (iv) Executive’s continued intentionalrefusal to perform his employment duties in a material fashion that materially and adversely affects the Company’s reputation orbusiness, after Executive has received a written demand of performance from the Company which specifically sets forth the factualbasis for the Company’s belief that Executive has not substantially performed his dutiesand Executive continues to refuse to cure such non-performance within thirty (30) days after receiving such notice.(c) Change of Control . “Change of Control” of the Company is defined as:(i) the acquisition by any one person, or more than one person acting as a group (for these purposes, persons will beconsidered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisitionof stock, or similar business transaction with the Company), (“Person”) that or is or becomes the owner, directly or indirectly, ofsecurities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s thenoutstanding securities (the “Voting Securities”); provided, however, that for purposes of this subsection (i), the acquisition ofadditional securities by any one Person, who is considered to own more than fifty percent (50%) of the total voting power of thesecurities of the Company shall not be considered a Change of Control;(ii) a change in the composition of the Board occurring within a twelve (12) month period, as a result of whichfewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” will mean directors who either (A) aredirectors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votesof at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whoseelection or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to theCompany);(iii) the date of the consummation of a merger or consolidation of the Company with any other corporation that hasbeen approved by the stockholders of the Company, other than a merger or consolidation which would result in the voting securitiesof the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by beingconverted into voting securities of the surviving entity) fifty percent (50%) or more of the total voting power represented by thevoting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or thestockholders of the Company approve a plan of complete liquidation of the Company; or(iv) a change in the ownership of a substantial portion of the Company’s assets which occurs on the date that anyPerson acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person orpersons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total fairmarket value of all of the assets of the Company immediately prior to such acquisition or acquisitions; provided, however, that forpurposes of this Section 5 (c)(iv), the following shall not constitute a change in the ownership of a substantial portion of theCompany’s assets: (1) a transfer to an entity that is controlled by the Company’s shareholders immediately after the transfer; or (2) atransfer of assets by the Company to: (A) a shareholder of the Company (immediately before the asset transfer) in exchange for orwith respect to the Company’s securities; (B) an entity, fifty percent (50%) or more of the total value or voting power of which isowned, directly or indirectly, by the Company; (C) a Person, that owns, directly or indirectly, fifty percent (50%) or more of the totalvalue or voting power of all theoutstanding stock of the Company; or (D) an entity, at least fifty percent (50%) of the total value or voting power of which is owned,directly or indirectly, by a Person described in subsection (C). For purposes of this clause (2), gross fair market value means thevalue of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilitiesassociated with such assets.Notwithstanding the foregoing, a Company transaction that does not constitute a change of control event underTreasury Regulation 1.409A-3(i)(5)(v) or (vii) shall be not be considered a Change of Control.(d) Disability . “Disability” will mean that Executive has been unable to perform his Company duties as the result ofhis incapacity due to physical or mental illness, and such inability, at least twenty-six (26) weeks after its commencement, isdetermined to be total and permanent by a physician selected by the Company or its insurers and acceptable to Executive orExecutive’s legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting fromDisability may only be effected after at least thirty (30) days’ written notice by the Company of its intention to terminate Executive’semployment. In the event that Executive resumes the performance of substantially all of his duties hereunder before the terminationof his employment becomes effective, the notice of intent to terminate will automatically be deemed to have been revoked.(e) Good Reason . “Good Reason” means the occurrence of one or more of the following events without Executive’sexpress written consent: (i) the assignment to Executive of any duties or the reduction of Executive’s duties, either of which resultsin a material diminution in Executive’s position or responsibilities with the Company in effect immediately prior to such assignment,or the removal of Executive from such position and responsibilities; provided, however, it being understood that a new position witha larger combined company does not alone constitute “Good Reason” if it is in the same area of operations and involves substantiallythe same duties and scope of responsibilities and management responsibility notwithstanding that Executive may not retain as seniorof a title within the larger combined company as Executive’s prior title; (ii) a material reduction by the Company in the base salaryof Executive; provided that, it being understood that a reduction by the Company by five percent (5%) or more in the base salary orbonus opportunity of Executive as in effect immediately prior to such reduction shall be deemed Good Reason within the meaning ofthis clause (ii); (iii) a material change in the geographic location at which Executive must perform services (for purposes of thisAgreement, the relocation of Executive to a facility or a location less than twenty-five (25) miles from Executive’s then-presentlocation shall not be considered a material change in geographic location); (iv) any material breach by the Company of any materialprovision of this Agreement, or (vi) the failure of the Company to obtain the assumption of this Agreement by any successor.Executive will not resign for Good Reason without first providing the Company with written notice of the acts or omissionsconstituting the grounds for “Good Reason” within ninety (90) days of the initial existence of the grounds for “Good Reason” and areasonable cure period of not less than thirty (30) days following the date of such notice.6. Successors .(a) The Company’s Successors . Any successor to the Company (whether direct or indirect and whether by purchase,merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets will assume theobligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to thesame extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes underthis Agreement, the term “Company” will include any successor to the Company’s business and/or assets which executes anddelivers the assumption agreement described in this Section 6(a) or which becomes bound by the terms of this Agreement byoperation of law.(b) Executive’s Successors . The terms of this Agreement and all rights of Executive hereunder will inure to the benefitof, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees,devisees and legatees.7. Notice .(a) General . Notices and all other communications contemplated by this Agreement will be in writing and will bedeemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receiptrequested and postage prepaid. In the case of Executive, mailed notices will be addressed to him or her at the home address which heor she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to itscorporate headquarters, and all notices will be directed to the attention of its President.(b) Notice of Termination . Any termination by the Company for Cause or by Executive for Good Reason or as a resultof a voluntary resignation by Executive will be communicated by a notice of termination to the other party hereto given inaccordance with Section 7(a) of this Agreement. Such notice will indicate the specific termination provision in this Agreement reliedupon, will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision soindicated, and will specify the termination date (which will be not more than thirty (30) days after the giving of such notice). Thefailure by Executive to include in the notice any fact or circumstance which contributes to a showing of Good Reason will not waiveany right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his or her rightshereunder.8. Term of Agreement . This Agreement will have a term of ten (10) years commencing on the Prior Effective Date, whichshall not be subject to renewal, unless a Change of Control occurs during such ten (10) year period, in which case this Agreementwill continue until all payments and benefits, if any, have been made to Executive.9. Arbitration .(a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation,validity, construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in Santa ClaraCounty, California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect ofthe American Arbitration Association (the “Rules”), except that each of Company and Executive may, at its, his or her option, seekinjunctive relief in a court of competent jurisdiction related to the improper use, disclosure or misappropriation of a party’s private,proprietary, confidential or trade secret information. The arbitrator may grant injunctions or other relief in such dispute orcontroversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may beentered on the arbitrator’s decision in any court having jurisdiction.(b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to conflicts oflaw rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to statearbitration law. Executive hereby consents to the personal jurisdiction of the state and federal courts located in California for anyaction or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.(c) Executive understands that nothing in this Section modifies Executive’s at-will employment status. EitherExecutive or the Company can terminate the employment relationship at any time, with or without Cause.(d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION.EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR INCONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVE’SRIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OFTHE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OFCONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING,BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS;NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITHCONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL STATUTE,INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991,THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990,THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABORCODE SECTION 201, et seq ;(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATINGTO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.10. Miscellaneous Provisions .(a) No Duty to Mitigate . Executive will not be required to mitigate the amount of any payment contemplated by thisAgreement, nor will any such payment be reduced by any earnings that Executive may receive from any other source.(b) Waiver . No provision of this Agreement will be modified, waived or discharged unless the modification, waiver ordischarge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). Nowaiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party willbe considered a waiver of any other condition or provision or of the same condition or provision at another time.(c) Headings . All captions and section headings used in this Agreement are for convenient reference only and do notform a part of this Agreement.(d) Entire Agreement . This Agreement constitutes the entire agreement of the parties hereto with respect to the subjectmatter described herein, and supersedes in its entirety Sections 3 and 4 of the employment offer letter between Executive and theCompany, dated October 18, 2006 and the Prior Agreement. Executive acknowledges and agrees that this Agreement encompassesall the rights of Executive to any acceleration of Award vesting or severance pay based on termination of employment, andExecutive hereby agrees that he or she has no such rights except as stated herein, and Executive agrees that any such rights, whetherin an employment agreement, offer letter, stock option agreement, stock option plan, equity award agreement or other agreement, arehereby waived.(e) Choice of Law . The validity, interpretation, construction and performance of this Agreement will be governed bythe laws of the State of California (with the exception of its conflict of laws provisions).(f) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement will not affect thevalidity or enforceability of any other provision hereof, which will remain in full force and effect.(g) Withholding . All payments made pursuant to this Agreement will be subject to withholding of applicable incomeand employment taxes.(h) Counterparts . This Agreement may be executed in counterparts, each of which will be deemed an original, but allof which together will constitute one and the same instrument.IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorizedofficer, as of the day and year set forth below.COMPANY FORTINET, INC. By:/s/ Ken Xie Ken Xie Title:President and Chief Executive Officer EXECUTIVE By:/s/ John Whittle John Whittle Title:Vice President, General CounselExhibit 10.18FORTINET, INC.AMENDED AND RESTATEDCHANGE OF CONTROL SEVERANCE AGREEMENTThis Amended and Restated Change of Control Severance Agreement (the “Agreement”) is made and entered into by andbetween Andrew Del Matto (“Executive”) and Fortinet, Inc. (the “Company”), effective as of February 4, 2016 (the “EffectiveDate”) and supersedes the Change of Control Severance Agreement, between Executive and the Company (the “Prior Agreement”),effective as of December 17, 2013 (the “Prior Effective Date”).RECITALS1. It is expected that the Company from time to time will consider the possibility of an acquisition by another company orother change of control. The Board of Directors of the Company (the “Board”) recognizes that such consideration can be adistraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that itis in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication andobjectivity of Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein) of theCompany.2. The Board believes that it is in the best interests of the Company and its stockholders to provide Executive with anincentive to continue his or her employment and to motivate Executive to maximize the value of the Company upon a Change ofControl for the benefit of its stockholders.3. The Board believes that it is imperative to provide Executive with certain benefits upon termination of employmentfollowing a Change of Control. These benefits will provide Executive with enhanced financial security and incentive andencouragement to remain with the Company.AGREEMENTNOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:1. Term of Agreement . This Agreement will terminate upon the earlier to occur of: (a) the Agreement’s terminationdate as provided in Section 8 below, and (b) the date that all of the obligations of the parties hereto with respect to this Agreementhave been satisfied.2. At-Will Employment . The Company and Executive acknowledge that Executive’s employment is and will continue tobe at-will, as defined under applicable law. If Executive’s employment terminates for any reason, including (without limitation) anytermination prior to or twelve (12) months following a Change of Control, Executive will not beentitled to any acceleration of Award (as defined herein) vesting or severance pay based on termination of employment other than asprovided by this Agreement.3. Severance Benefits .(a ) Involuntary Termination Prior to, or Absent, a Change of Control or After 12 Months Following a Change ofControl .( 1) If within the first three hundred sixty-five (365) days after the commencement date of Executive’s employmentwith the Company and prior to, or absent, a Change of Control, the Company (or any parent or subsidiary of the Company) actuallyterminates Executive’s employment with the Company (or any parent or subsidiary of the Company) without Cause, Executive willreceive the following severance from the Company:(i) Severance Payment . Executive will receive continuing payments of severance pay for a period of nine (9)months from the date of such termination equal to the pro-rata portion of Executive’s base salary rate as in effect immediately priorto Executive’s termination.(ii) Equity Awards . If Executive holds unvested equity awards (“Awards”) at the time of Executive’s termination,then the unvested portion of such Awards that would have vested had Executive remained in continuous employment with theCompany for six (6) months following Executive’s date of termination will immediately vest as of Executive’s termination date. TheAwards will remain exercisable, to the extent applicable, following the termination for the period prescribed in the respective stockplan and agreement for each Award.(iii) Continued Employee Benefits . Executive will receive Company-paid coverage for a period of nine (9) monthsfor Executive and Executive’s eligible dependents under the Company’s Benefit Plans (as defined herein).( 2) If after the first three hundred sixty-five (365) days after the commencement date of Executive’s employment withthe Company and prior to, or absent, a Change of Control or after twelve (12) months following a Change of Control, (i) theCompany (or any parent or subsidiary of the Company) terminates Executive’s employment without Cause or (ii) Executiveterminates Executive’s employment with the Company (or any parent or subsidiary of the Company) for Good Reason, Executivewill receive the following severance from the Company:(i) Severance Payment . Executive will receive continuing payments of severance pay for a period of nine (9)months from the date of such termination equal to the pro-rata portion of Executive’s base salary rate as in effect immediately priorto Executive’s termination.(ii) Equity Awards . If Executive holds unvested equity awards at the time of Executive’s termination, then theunvested portion of such Awards that would have vested had Executive remained in continuous employment with the Company fornine (9) months following Executive’s date of termination will immediately vest as of Executive’s termination date. TheAwards will remain exercisable, to the extent applicable, following the termination for the period prescribed in the respective stockplan and agreement for each Award.(iii) Continued Employee Benefits . Executive will receive Company-paid coverage for a period of nine (9) monthsfor Executive and Executive’s eligible dependents under the Company’s Benefit Plans (as defined herein).( b) Involuntary Termination within 12 Months Following a Change of Control . If within twelve (12) monthsfollowing a Change of Control, (i) the Company (or any parent or subsidiary of the Company) terminates Executive’s employmentwithout Cause or (ii) Executive terminates Executive’s employment with the Company (or any parent or subsidiary of the Company)for Good Reason, Executive will receive the following severance from the Company:(iv) Severance Payment . Executive will receive continuing payments of severance pay for a period of twelve (12)months from the date of such termination equal to the pro-rata portion of Executive’s base salary rate as in effect immediately priorto (A) the Change of Control, or (B) Executive’s termination, whichever is greater.(v) Equity Awards . If Executive holds unvested equity awards at the time of Executive’s termination, then onehundred percent (100%) of the then-unvested portion of such Awards will immediately vest as of Executive’s termination date. TheAwards will remain exercisable, to the extent applicable, following the termination for the period prescribed in the respective stockplan and agreement for each Award.(vi) Continued Employee Benefits . Executive will receive Company-paid coverage for a period of twelve (12)months for Executive and Executive’s eligible dependents under the Company’s Benefit Plans (as defined herein).( c) Release of Claims Agreement . The receipt of any severance pay or other benefits pursuant to Sections 3(a) and (b)above will be subject to Executive signing and not revoking a release of claims agreement with the Company in a form reasonablyacceptable to the Company (provided the Company will work in good faith with Executive to reach agreement on the form ofrelease) that is effective and irrevocable no later than thirty (30) days after the date of termination of employment of Executive. Nosuch severance pay or other benefits will be paid or provided until the release of claims agreement becomes effective, and anyseverance amounts or benefits otherwise payable between the date of Executive’s termination and the date of such release becomeseffective and irrevocable shall be paid on the sixtieth (60th) day following the date of termination of employment of Executive.( d) Non-solicitation and Non-competition . Executive agrees, to the extent permitted by applicable law, that in theevent Executive receives severance pay or other benefits pursuant to Sections 3 (b) above, for the twenty-four (24) consecutivemonth period immediately following the date of the closing of the Change of Control, Executive, as a condition to receipt ofseverance pay, accelerated vesting, and benefits under Sections 3(b), will not (i) either directly or indirectly, solicit, induce, recruit,encourage any employee of the Company to leave his employment either for Executive or for any other entity or person, or (ii)without the expresswritten consent of the Company, directly or indirectly engage in, enter the employ, have any ownership interest in, or participate inany entity that as of the date of involuntary termination, engages in the design, development, manufacture, production, marketing,sale or servicing of any product or the provision of any service that competes with any service offered by the Company or anyproduct sold by the Company or under development by the Company; provided, however, that ownership of less than one percent(1%) of the outstanding stock of any publicly traded corporation will not be deemed to be violative of the restrictive covenant setforth in this paragraph. The provisions of clause (ii) will not apply to Executive to the extent Executive is providing services orresiding in the State of California.The covenants contained in this Section 3(d) hereof shall be construed as a series of separate covenants, one for each country,province, state, city or other political subdivision in which the Company currently engages in its business or, during the term of thisAgreement, becomes engaged in its business. Except for geographic coverage, each such separate covenant shall be deemed identicalin terms to the covenant contained in this Section 3(d). If, in any judicial proceeding, a court refuses to enforce any of such separatecovenants (or any part thereof), then such unenforceable covenant (or such part) shall be eliminated from this Agreement to theextent necessary to permit the remaining separate covenants (or portions thereof) to be enforced. In the event that the provisions ofthis Section 3(d) are deemed to exceed the time, geographic or scope limitations permitted by applicable law, then such provisionsshall be reformed to the maximum time, geographic or scope limitations, as the case may be, permitted by applicable law.( e) Accelerated Vesting of Equity Awards . For the sake of clarity, with respect to the Awards vested pursuant toSections 3(a)(1)(ii), 3(a)(2)(ii) or 3(b)(ii), Executive will fully vest in and have the right to exercise stock options and/or stockappreciation rights as to all of the shares underlying such Awards, including those shares which would not otherwise be vested orexercisable, all restrictions on restricted stock and restricted stock units will lapse, and, with respect to performance stock units andperformance shares, all performance goals or other vesting criteria will be deemed to have been achieved at one hundred percent(100%) of target levels and all other terms and conditions met (for clarity, for performance stock units and performance shares whereExecutive has earned greater than 100% of the granted shares, such as where Executive has earned 150% for performance shares,"100% of target levels" in the preceding sentence shall mean the greater of 100% and the earned percentage).( f) Timing of Severance Payments . Subject to Section 3(c), the Company will pay the severance payments to whichExecutive is entitled as salary continuation with the same timing as in effect immediately prior to Executive’s termination ofemployment. If Executive should die before all amounts have been paid, such unpaid amounts will be paid in a lump-sum payment(less any withholding taxes) to Executive’s designated beneficiary, if living, or otherwise to the personal representative ofExecutive’s estate.( g) Voluntary Resignation; Termination For Cause . If Executive’s employment with the Company terminates (i)voluntarily by Executive (except upon a termination for Good Reason within twelve (12) months following a Change of Control) or(ii) for Cause by theCompany (or any parent or subsidiary of the Company), then Executive will not be entitled to receive severance or other benefitsexcept for those benefits (if any) which do not concern acceleration of Award vesting or severance pay based on termination ofemployment as may then be established under other Company policies or programs, if any.( h) Disability; Death . If the Company terminates Executive’s employment as a result of Executive’s Disability, orExecutive’s employment terminates due to his or her death, then Executive will not be entitled to receive severance or other benefitsexcept for those benefits (if any) which do not concern acceleration of Award vesting or severance pay based on termination ofemployment as may then be established under other Company policies or programs, if any.( i) Exclusive Remedy . In the event of a termination of Executive’s employment with the Company (or any parent orsubsidiary of the Company), the provisions of this Section 3 are intended to be and are exclusive and in lieu of any other rights orremedies to which Executive or the Company may otherwise be entitled, whether at law, tort or contract, in equity, or under thisAgreement. Executive will be entitled to no severance or other benefits upon termination of employment with respect to accelerationof Award vesting or severance pay other than those benefits expressly set forth in this Section 3.( j) Section 409A . Notwithstanding anything to the contrary in this Agreement, no severance pay or benefits to be paidor provided to Executive, if any, pursuant to this Agreement, when considered together with any other severance payments orseparation benefits that are considered deferred compensation under Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”) and any final regulations and official guidance promulgated thereunder (“Section 409A”) (together, the“Deferred Compensation Separation Benefits”) will be paid or otherwise provided until Executive has a “separation from service”within the meaning of Section 409A. Similarly, no severance payments or separation benefits payable to Executive, if any, pursuantto this Agreement that otherwise would be exempt from Section 409A pursuant to Section 1.409A-1(b)(9) of the TreasuryRegulations will be payable until Executive has a “separation from service” within the meaning of Section 409A. In addition, ifExecutive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due todeath), then the Deferred Compensation Separation Benefits that are payable within the first six (6) months following Executive’sseparation from service, will become payable in a lump sum (without interest) on the first payroll date that occurs on or after the datesix (6) months and one (1) day following the date of Executive’s separation from service. All subsequent Deferred CompensationSeparation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit.Notwithstanding anything herein to the contrary, if Executive dies following Executive’s separation from service, but prior to the six(6) month anniversary of the separation from service, then any payments delayed in accordance with this paragraph will be payablein a lump sum (without interest) as soon as administratively practicable after the date of Executive’s death and all other DeferredCompensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit.Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. To the extent any payment under this Agreement may be classified as a“short-term deferral” within the meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may alsoqualify for an exemption from Section 409A under another provision of Section 409A. The foregoing provisions are intended tocomply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will besubject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Executiveand the Company agree to work together in good faith to consider amendments to this Agreement and to take such reasonableactions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actualpayment to Executive under Section 409A.4. Limitation on Payments . In the event that the severance and other benefits provided for in this Agreement or otherwisepayable to Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for thisSection 4, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive’s severance benefits underSection 4(a)(i) will be either:( a) delivered in full, or( b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject toexcise tax under Section 4999 of the Code,whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise taximposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits,notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. If a reduction inseverance and other benefits constituting “parachute payments” is necessary so that benefits are delivered to a lesser extent, thepayments and benefits shall be reduced in the following order unless Executive elects in writing a different order (provided,however, that such election shall be subject to Company approval if made on or after the date on which the event that triggers the“parachute payments” occurs): (A) a pro rata reduction of (i) cash payments that are subject to Section 409A as deferredcompensation and (ii) cash payments not subject to Section 409A of the Code; (B) a pro rata cancellation of (i) accelerated vesting ofstock and other equity-based awards that are subject to Section 409A of the Code as deferred compensation and (ii) stock and otherequity-based awards not subject to Section 409A; and (C) a pro rata reduction of (i) employee benefits that are subject to Section409A as deferred compensation and (ii) employee benefits not subject to Section 409A of the Code. In the event that acceleration ofvesting of equity award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the dateof grant of Executive’s equity awards. Unless the Company and Executive otherwise agree in writing, any determination requiredunder this Section 4 will be made in writing by an independent firm immediately prior to Change of Control (the “Firm”), whosedetermination will be conclusive and binding upon Executive and the Company for all purposes. For purposes of making thecalculations required by this Section 4, the Firm may make reasonable assumptions and approximations concerning applicable taxesand may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. TheCompany and Executive will furnish to the Firm suchinformation and documents as the Firm may reasonably request in order to make a determination under this Section. The Companywill bear all costs the Firm may reasonably incur in connection with any calculations contemplated by this Section 4.5. Definition of Terms . The following terms referred to in this Agreement will have the following meanings:( a) Benefit Plans . For purposes of this Agreement, “Benefit Plans” means plans, policies or arrangements that theCompany sponsors (or participates in) and that immediately prior to Executive’s termination of employment provide Executiveand/or Executive’s eligible dependents with medical, dental, and/or vision benefits. Benefit Plans do not include any other type ofbenefit (including, but not by way of limitation, disability, life insurance or retirement benefits). A requirement that the Companyprovide Executive and Executive’s eligible dependents with coverage under the Benefit Plans will not be satisfied unless thecoverage is no less favorable than that provided to senior executives of the Company at any applicable time during the periodExecutive is entitled to receive severance pursuant to Section 3. The Company may, at its option, satisfy any requirement that theCompany provide coverage under any Benefit Plan by (i) reimbursing Executive’s premiums under Title X of the ConsolidatedBudget Reconciliation Act of 1985, as amended (“COBRA”) after Executive has properly elected continuation coverage underCOBRA (in which case Executive will be solely responsible for electing such coverage for his eligible dependents), or (ii) providingcoverage under a separate plan or plans providing coverage that is no less favorable or by paying Executive a lump-sum paymentwhich is, on an after-tax basis, sufficient to provide Executive and Executive’s eligible dependents with equivalent coverage under athird party plan that is reasonably available to Executive and Executive’s eligible dependents.( b) Cause . “Cause” is defined as (i) an act of dishonesty made by Executive in connection with Executive’sresponsibilities as an employee that materially adversely affects the Company, (ii) Executive’s conviction of, or plea of nolocontendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude, (iii) Executive’s grossmisconduct that materially and adversely affects the Company’s reputation or business, or (iv) Executive’s continued intentionalrefusal to perform his employment duties in a material fashion that materially and adversely affects the Company’s reputation orbusiness, after Executive has received a written demand of performance from the Company which specifically sets forth the factualbasis for the Company’s belief that Executive has not substantially performed his duties and Executive continues to refuse to curesuch non-performance within thirty (30) days after receiving such notice.( c) Change of Control . “Change of Control” of the Company is defined as:(i) the acquisition by any one person, or more than one person acting as a group (for these purposes, persons will beconsidered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisitionof stock, or similar business transaction with the Company), (“Person”) that or is or becomes the owner, directly or indirectly, ofsecurities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s thenoutstanding securities (the “VotingSecurities”); provided, however, that for purposes of this subsection (i), the acquisition of additional securities by any one Person,who is considered to own more than fifty percent (50%) of the total voting power of the securities of the Company shall not beconsidered a Change of Control;(ii) a change in the composition of the Board occurring within a twelve (12) month period, as a result of whichfewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” will mean directors who either (A) aredirectors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votesof at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whoseelection or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to theCompany);(iii) the date of the consummation of a merger or consolidation of the Company with any other corporation that hasbeen approved by the stockholders of the Company, other than a merger or consolidation which would result in the voting securitiesof the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by beingconverted into voting securities of the surviving entity) fifty percent (50%) or more of the total voting power represented by thevoting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or thestockholders of the Company approve a plan of complete liquidation of the Company; or(iv) a change in the ownership of a substantial portion of the Company’s assets which occurs on the date that anyPerson acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person orpersons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total fairmarket value of all of the assets of the Company immediately prior to such acquisition or acquisitions; provided, however, that forpurposes of this Section 5 (c)(iv), the following shall not constitute a change in the ownership of a substantial portion of theCompany’s assets: (1) a transfer to an entity that is controlled by the Company’s shareholders immediately after the transfer; or (2) atransfer of assets by the Company to: (A) a shareholder of the Company (immediately before the asset transfer) in exchange for orwith respect to the Company’s securities; (B) an entity, fifty percent (50%) or more of the total value or voting power of which isowned, directly or indirectly, by the Company; (C) a Person, that owns, directly or indirectly, fifty percent (50%) or more of the totalvalue or voting power of all the outstanding stock of the Company; or (D) an entity, at least fifty percent (50%) of the total value orvoting power of which is owned, directly or indirectly, by a Person described in subsection (C). For purposes of this clause (2), grossfair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined withoutregard to any liabilities associated with such assets.Notwithstanding the foregoing, a Company transaction that does not constitute a change of control event under TreasuryRegulation 1.409A-3(i)(5)(v) or (vii) shall be not be considered a Change of Control.(d) Disability . “Disability” will mean that Executive has been unable to perform his Company duties as the resultof his incapacity due to physical or mental illness, and such inability, at least twenty-six (26) weeks after its commencement, isdetermined to be total and permanent by a physician selected by the Company or its insurers and acceptable to Executive orExecutive’s legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting fromDisability may only be effected after at least thirty (30) days’ written notice by the Company of its intention to terminate Executive’semployment. In the event that Executive resumes the performance of substantially all of his duties hereunder before the terminationof his employment becomes effective, the notice of intent to terminate will automatically be deemed to have been revoked.(e) Good Reason . “Good Reason” means the occurrence of one or more of the following events withoutExecutive’s express written consent: (i) the assignment to Executive of any duties or the reduction of Executive’s duties, either ofwhich results in a material diminution in Executive’s position or responsibilities with the Company in effect immediately prior tosuch assignment, or the removal of Executive from such position and responsibilities; provided, however, it being understood that anew position with a larger combined company does not alone constitute “Good Reason” if it is in the same area of operations andinvolves substantially the same duties and scope of responsibilities and management responsibility notwithstanding that Executivemay not retain as senior of a title within the larger combined company as Executive’s prior title; (ii) a material reduction by theCompany in the base salary of Executive; provided that, it being understood that a reduction by the Company by five percent (5%)or more in the base salary or bonus opportunity of Executive as in effect immediately prior to such reduction shall be deemed GoodReason within the meaning of this clause (ii); (iii) a material change in the geographic location at which Executive must performservices (for purposes of this Agreement, the relocation of Executive to a facility or a location less than twenty-five (25) miles fromExecutive’s then-present location shall not be considered a material change in geographic location); (iv) any material breach by theCompany of any material provision of this Agreement, or (vi) the failure of the Company to obtain the assumption of this Agreementby any successor. Executive will not resign for Good Reason without first providing the Company with written notice of the acts oromissions constituting the grounds for “Good Reason” within ninety (90) days of the initial existence of the grounds for “GoodReason” and a reasonable cure period of not less than thirty (30) days following the date of such notice.6. Successors .(a) The Company’s Successors . Any successor to the Company (whether direct or indirect and whether bypurchase, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets willassume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the samemanner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For allpurposes under this Agreement, the term “Company” will include any successor to the Company’s business and/or assets whichexecutes and delivers the assumption agreement described in this Section 6(a) or which becomes bound by the terms of thisAgreement by operation of law.(b) Executive’s Successors . The terms of this Agreement and all rights of Executive hereunder will inure to thebenefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs,distributees, devisees and legatees.7. Notice .(a) General . Notices and all other communications contemplated by this Agreement will be in writing and will bedeemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receiptrequested and postage prepaid. In the case of Executive, mailed notices will be addressed to him or her at the home address which heor she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to itscorporate headquarters, and all notices will be directed to the attention of its President.(b) Notice of Termination . Any termination by the Company for Cause or by Executive for Good Reason or as a resultof a voluntary resignation by Executive will be communicated by a notice of termination to the other party hereto given inaccordance with Section 7(a) of this Agreement. Such notice will indicate the specific termination provision in this Agreement reliedupon, will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision soindicated, and will specify the termination date (which will be not more than thirty (30) days after the giving of such notice). Thefailure by Executive to include in the notice any fact or circumstance which contributes to a showing of Good Reason will not waiveany right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his or her rightshereunder.8. Term of Agreement . This Agreement will have a term of five (5) years commencing on the Prior Effective Date, whichshall not be subject to renewal, unless a Change of Control occurs during such five (5) year period, in which case this Agreementwill continue until all payments and benefits, if any, have been made to Executive.9. Arbitration .(a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation,validity, construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in Santa ClaraCounty, California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the AmericanArbitration Association (the “Rules”). The arbitrator may grant injunctions or other relief in such dispute or controversy. Thedecision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on thearbitrator’s decision in any court having jurisdiction.(b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to conflicts oflaw rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to statearbitration law. Executive hereby consents to the personal jurisdiction of the state and federal courts located in Californiafor any action or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties areparticipants.(c) Executive understands that nothing in this Section modifies Executive’s at-will employment status. EitherExecutive or the Company can terminate the employment relationship at any time, with or without Cause.(d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION.EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR INCONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVE’SRIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OFTHE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OFCONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING,BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS;NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITHCONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL STATUTE,INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991,THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990,THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABORCODE SECTION 201, et seq;(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATINGTO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.10. Miscellaneous Provisions .(a) No Duty to Mitigate . Executive will not be required to mitigate the amount of any payment contemplated by thisAgreement, nor will any such payment be reduced by any earnings that Executive may receive from any other source.(b) Waiver . No provision of this Agreement will be modified, waived or discharged unless the modification, waiver ordischarge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). Nowaiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the otherparty will be considered a waiver of any other condition or provision or of the same condition or provision at another time.(c) Headings . All captions and section headings used in this Agreement are for convenient reference only and do notform a part of this Agreement.(d) Entire Agreement . This Agreement constitutes the entire agreement of the parties hereto with respect to the subjectmatter described herein and supersedes in its entirety the Prior Agreement. Executive acknowledges and agrees that this Agreementencompasses all the rights of Executive to any acceleration of Award vesting or severance pay based on termination of employment,and Executive hereby agrees that he or she has no such rights except as stated herein, and Executive agrees that any such rights,whether in an employment agreement, offer letter, stock option agreement, stock option plan, equity award agreement or otheragreement, are hereby waived.(e) Choice of Law . The validity, interpretation, construction and performance of this Agreement will be governed bythe laws of the State of California (with the exception of its conflict of laws provisions).(f) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement will not affect thevalidity or enforceability of any other provision hereof, which will remain in full force and effect.(g) Withholding . All payments made pursuant to this Agreement will be subject to withholding of applicable incomeand employment taxes.(h) Counterparts . This Agreement may be executed in counterparts, each of which will be deemed an original, but allof which together will constitute one and the same instrument.IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its dulyauthorized officer, as of the day and year set forth below.COMPANY FORTINET, INC. By:/s/ John Whittle John Whittle Title:Vice President, General Counsel EXECUTIVE By:/s/ Andrew Del Matto Andrew Del Matto Title:Chief Financial OfficerExhibit 21.1FORTINET, INC. SUBSIDIARIESEntity Jurisdiction of Incorporation Fortinet International, Inc. Cayman IslandsFortinet UK, Ltd. United KingdomFortinet Technologies (Canada), Inc. CanadaFortinet Japan K.K. JapanFortinet Information Technology (Beijing) Co., Ltd. ChinaFortinet Information Technology (Tianjin) Co., Ltd. ChinaFortinet Malaysia SDN. BHD. MalaysiaFortinet Singapore Private Limited SingaporeFortinet Technologies India Private Limited IndiaFortinet S.A.R.L. FranceFortinet GmbH GermanyFortinet Federal, Inc. U.S.A.Fortinet BV NetherlandsFortinet Mexico MexicoFortinet Network Security Brazil Limitada BrazilFortinet Colombia S.A.S ColombiaFortinet Security Israel Ltd. IsraelFortinet Security Korea Ltd. KoreaMeru Networks, Inc. U.S.A.Meru Networks K.K. JapanMeru Networks Pty Ltd. AustraliaMeru Networks International, Inc. U.S.AFortinet Innovation Centre India Limited IndiaMeru Networks BV NetherlandsMeru Networks Sweden AB SwedenMeru Networks GMBH GermanyMeru Networks UK Ltd. United KingdomMeru Networks Hong Kong Limited Hong KongExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement Nos. 333-205958, 333-202402, 333-163367, 333-172459, 333-175985, 333-179751, 333-186921, and 333-194281 on Form S-8 of our reports dated February 26, 2016, relating to the consolidated financial statements and financial statement schedule ofFortinet, Inc., and the effectiveness of Fortinet, Inc.'s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Fortinet, Inc. forthe year ended December 31, 2015./s/ DELOITTE & TOUCHE LLPSan Jose, CaliforniaFebruary 26, 2016Exhibit 31.1CERTIFICATIONI, Ken Xie, certify that:1.I have reviewed this Annual Report on Form 10-K of Fortinet, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: February 26, 2016 /s/ Ken Xie Ken Xie Chief Executive Officer and Chairman(Principal Executive Officer)Exhibit 31.2CERTIFICATIONI, Andrew Del Matto, certify that:1.I have reviewed this Annual Report on Form 10-K of Fortinet, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: February 26, 2016 /s/ Andrew Del Matto Andrew Del Matto Chief Financial Officer(Principal Financial Officer)Exhibit 32.1CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Ken Xie, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report onForm 10-K of Fortinet, Inc. for the fiscal year ended December 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), and that information contained in this Annual Report on Form 10-K fairly presents, in all material respects, thefinancial condition and results of operations of Fortinet, Inc. By:/s/ Ken XieDate:February 26, 2016Name:Ken Xie Title:Chief Executive Officer and Chairman(Principal Executive Officer)I, Andrew Del Matto, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport on Form 10-K of Fortinet, Inc. for the fiscal year ended December 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the ExchangeAct and that information contained in this Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations ofFortinet, Inc. By:/s/ Andrew Del MattoDate:February 26, 2016Name:Andrew Del Matto Title:Chief Financial Officer(Principal Financial Officer)This certification is being furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and will notbe deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. This certification will not be incorporated byreference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such afiling.

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