CR_FTNT_2014-04-24-3.pdf

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					                                                                                           Company Report
                                                                                           April 24, 2014




  Fortinet Inc.                                                                            Buy
  The Next Voice in Security - Raising Target                                              FTNT
                                                                                           Price: Close $22.04
  Our Call
  Fortinet showed a very solid execution in its first quarter of the year, beating         Price Target $29.00
  expectations across all metrics. Going forward, expectations for revenue growth
  in the high teens will be the focus, with margin expansion to follow, the company
                                                                                           Enterprise Software
  trying to maintain a balance between top-line growth and reasonable bottom line
  results, while continuing to develop its product line and increase penetration with      Robert Breza
  sales force development. We maintain our Buy and raise our target to $29.                (612) 360-7550
                                                                                           rbreza@sterneagee.com
  Conference Call Take Aways. Not only is Fortinet now taking full advantage of
  the multi-year security and infrastructure cycle, but it is also performing very well    Jean-Baptiste Jouve
  in comparison with its competitors due to the relevance and rapid evolution of its       (917) 392-5700
                                                                                           jjouve@sterneagee.com
  offering. Management remains focused on building out its sales force coverage
  and increasing its sales capacity which, in our opinion, should allow the company
  to overachieve over consensus estimates going forward.                                   Company Data
                                                                                           Rating                                         Buy
  Q1/14 Results Beat Largely. Q1/14 Revenue/EPS of $168.9M/$0.11 were very                 Price: Close                                 $22.04
  comfortably above consensus and above the high end of the [$155M-159M]/$0.08             Price Target                                 $29.00
  guidance, supported notably by an increasing number of large enterprise data             52-Week Range                       $16.29 - $23.93
                                                                                           Market Capitalization (M)                 $3,589.3
  center security deals with a 150% increase in deals above $0.5M. Q1/14 Revenue           Cash                                       $561.00
  guidance was provided above consensus of $169M at [$169M-172M], while EPS                Enterprise Value ($M)                        $3,084
  at $0.10 was just shy of the $0.11 consensus. Overall Billings were $188M, which         Shares Outstanding (M)                        162.9
  came in above our estimate of $171M, driven by high-end large enterprise and             Avg. Daily Vol. (000)                       2,413.0
                                                                                           Assets (M)                                $1,168.5
  service provider Fortigate products, while Operating cash flow at $61M were
  below our estimates of $84M.                                                             EPS                  2013A 2014E 2015E
                                                                                           FY                     0.47         0.49      0.61
  Upbeat Tone for the Rest of the Year. Although no guidance is provided for
                                                                                            (Prev)                  -          0.60      0.73
  FY14, management reiterated its confidence in being able to grow twice faster            P/E                   46.9x        45.0x     36.1x
  the IDC/Gartner Security benchmark of 7%. We believe that the efforts granted in
  Marketing and Sales, as well as product development, shall continue to translate
  into deepened customer adoption to support growth.
  Adjusting Estimates. Although we do not expect the first quarter's rebound to be
  necessarily an indication of long term growth, in particular around its successful
  large deal completion, we believe that the outlook is positive in 2014 for the
  company and are now modeling an average growth of 15 % for the remaining
  quarters of the year, resulting in an 18% growth for FY14.
  Stock Price/Valuation. Fortinet stock was trading up about 7% after market hours,
  on the back of a strong quarter and a positive tone about the outlook for the rest of
  the year. At its closing price level, Fortinet trades at a P/S ratio of 5.2x our 2014
  Sales estimate, which is a discount to the Next Gen. Security group mean multiple
  of 5.8x. Our $29 price target assumes that shares of Fortinet trade at a 6.8x multiple
  on our CY/14 $715.5M Revenue estimate.                                                   Price Performance
  FYE Dec                           2013A    2014E     2014E      2015E       2015E            26

                                    (Curr)   (Prev)    (Curr)     (Prev)      (Curr)           24

  Revenue ($M)                                                                                 22

  Q1 (Mar)                          135.8     155.2    168.9A      180.5       190.4           20

  Q2 (Jun)                          147.4     165.2     171.5      186.4       194.2           18

  Q3 (Sept)                         154.7     177.4     178.7      196.9       199.8           16

  Q4 (Dec)                          177.4     198.4     196.4      224.1       212.6           14
                                                                                               Apr-13     Jul-13     Oct-13    Jan-14   Apr-14
  FY Revenue ($M)                   615.3     696.2     715.5      787.9       796.9                Fortinet Inc. ($)
  Source: Sterne Agee and FactSet                                                                   S&P 500 (SPX) ($)

                                                                                           Source: FactSet

Any Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification,
 Investment Banking, Ratings Definitions, and any potential conflicts of interest begin on Page I of the Appendix
                           Section. Past performance is no guarantee of future results.
                   800 Shades Creek ParkwaySuite 700Birmingham, AL 35209205-949-3500
                                       Sterne, Agee & Leach Inc. is Member NYSE, FINRA, SIPC
                                                                                            April 24, 2014


Upside/Downside Scenario
Base case scenario price target - $29
The base case price target is $29, representing 32% upside and is based on 6.8x our 2014
revenue estimate of $716M. This multiple is a premium to the Next Gen. security software
group of 5.8x. In our opinion, the premium multiple is justified given the superior technical
aspects of FTNT offering and the strong sales performance.

Upside scenario price target - $32
The upside scenario price target of $32 is based on 7.5x our 2014 revenue estimate of $716M.
We believe investors will apply a higher multiple to the equity based on potential revenue
growth upside which could approach 20% vs our base case revenue growth estimate of
approximately 18%.

Downside scenario price target - $18
The downside scenario price target of $18 is based on 4.2x our 2014 revenue estimate of
$716M, a discount to the Next Generation security companies but still a premium to the
Legacy Software Security Companies of 3.9x. We believe investors would apply a lower
multiple to the equity, based on a shortfall in overall bookings or subscriber growth which
would affect future revenue estimates in FY15 and beyond.



Exhibit 1: Price Target and Upside/downside scenarios
                         40
                         35                                       32
                                                  29
    Share Price ($/sh)




                         30
                         25      22.04
                         20                                                         18                         Upsid

                         15                                                                                       Up
                                                                                                              Upsid
                         10
                         5
                         0
                              Current Price   Price Target   Upside Scenario Downside Scenario
                                                                                                             Base c a


Source: Company reports and Sterne Agee estimates




                                                                                                  Page 2
                                                                                         April 24, 2014


Q1/14: Large Beat on Revenue and EPS


Exhibit 2: Q1/14 - Actual Results vs. Estimates and Guidance (Headline Metrics)
Metric              Guidance         Cons.      Actual      S.Ag.     Delta        Y/Y          Q/Q
Total revenue ($M) $155-$159        $157.7      $168.9     $155.2      9%          24%           -5%
EPS                $0.08-$0.08       $0.09       $0.11      $0.12    ($0.01)      $0.01        ($0.04)

Source: Company reports and Sterne Agee estimates


Q1/14 results beat comfortably expectations. Revenue/EPS of $168.9M/$0.11 were above
consensus estimates and the [$155M-159M]/$0.08 guidance.


Exhibit 3: Q1/14 - Actual Results vs. our Estimates
                                                     Mar-14E
P&L Items ($M except per share data)           Actual      S.Ag.     Delta         Y/Y          Q/Q
Total revenue                                  168.9       155.2      9%          24%            -5%
Gross margin                                   70.8%       72.3%    -143 bps   -119 bps        41 bps
Research and development                        25.2        24.0      5%          22%             5%
as % of revenue                                14.9%       15.5%    -56 bps     -24 bps        132 bps
Sales and marketing                             61.6        52.1      18%         34%             9%
as % of revenue                                36.4%       33.6%    290 bps     269 bps        446 bps
General and adminstrative                        6.6         7.3      -9%         -7%            -1%
as % of revenue                                 3.9%       4.7%     -79 bps    -135 bps        13 bps
  Operating income                              26.3        28.7      -9%          8%           -30%
Operating margin                               15.5%       18.5%    -298 bps   -229 bps       -551 bps
  Other income                                   0.9         0.9      na         -40%             5%
Taxes                                            9.0         9.8      -8%          5%           -34%
  Tax rate                                     33.0%       33.0%      na           na             na
EPS                                            $0.11       $0.12      -8%        $0.01         ($0.04)
  Shares                                       168.1       168.9      0%           0%             0%

Balance Sheet and Cash Flow
                                                59.4        66
Deferred revenue                               451.3      448.4       1%           20%           4%
Bookings                                       187.6      171.0       10%          26%         -11%
CFO                                             60.9       84.1      -28%          60%          31%
CFO per share                                  $0.36      $0.50      -27.3%       $0.14        $0.09
CAPEX                                          -11.3       -2.1      -444%        638%          58%
Free cash flow                                  49.6       82.0      -40%          36%          25%
Free cash flow per share                       $0.29      $0.49      -39%         $0.08        $0.06

Source: Company reports and Sterne Agee estimates




                                                                                               Page 3
                                                                                                                                                                                                                                                                                                                                                April 24, 2014


                                                                                                   Overall Bookings were $188M, which came above our estimate of $171M, due to a Deferred
                                                                                                   Revenue number marginally exceeding our expectations.


                                                                                                   Guidance and Outlook
                                                                                                   Exhibit 4: Guidance Update
                                                                                                      Guidance                                                                     New                                      Old                                Delta                               S.Ag.                                  Cons.
                                                                                                      Q2/14 Revenue ($M)                                                        $169-$172                                   na                                     na                             $165.2                               $169.0
                                                                                                      Q2/14 EPS                                                                  $0.1-$0.1                                  na                                     na                              $0.49                                $0.11

                                                                                                   Source: Company reports and Sterne Agee estimates


                                                                                                   The company provided its guidance for 2Q14 at [$169M-172M] for revenues and $0.10 for
                                                                                                   EPS, comparing with prior consensus of $0.11 and $169M.



Exhibit 5: Guidance Evolution and Actual Results and Estimates
    $200                                                                                                                                                                                             $0.20
    $190
    $180
    $170
                                                                                                                                                                                                     $0.15
    $160
    $150
    $140
    $130                                                                                                                                                                                             $0.10
    $120
    $110
    $100
                                                                                                                                                                                                     $0.05
     $90
     $80
     $70
     $60                                                                                                                                                                                              $-
                                                                                                                                                                                           Jun-14E




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                     Jun-10A




                                                               Jun-11A




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                                           Dec-10A




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                                                                                                                                                                                                                                                                                                                                                         Sep-13A
                                                                                                                                                                                 Mar-14E




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                                                     Mar-11A
           Mar-10A




                                                                                                Mar-12A




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                                                                                                                                                                                                                                                                                                                                     Mar-13A
                               Revenue Guidance Range ($M)                                   Actual Revenue ($M)                                                                                                                                                 EPS Guidance Range                        Actual EPS




Source: Company reports and Sterne Agee estimates




                                                                                                                                                                                                                                                                                                                                                                     Page 4
                                                                                                                                                         April 24, 2014


                                          Changes to our Estimates



Exhibit 6: Change to our Estimates
($M except per share data)                                                                      Mar-14E            Jun-14E               2014E                   2015E
P&L Items                     Sep-12A   Dec-12A   Mar-13A   Jun-13A   Sep-13A   Dec-13A   Actual      S.Ag.   Current    Prior   Current         Prior   Current         Prior
Total revenue                  136.3     151.2     135.8      147.4    154.7     177.4    168.9       155.2   171.5     165.2    715.5       696.2       796.9       787.9
Gross margin                   73.1%     73.3%     72.0%     71.5%     72.5%     70.4%    70.8%       72.3%   70.9%     71.9%    71.2%       71.9%       71.6%       72.1%
Research and development        18.0      18.1      20.6      21.9      22.9      24.1     25.2        24.0    25.9      24.3    103.4        99.3       111.1       109.3
as % of revenue                13.2%     12.0%     15.1%     14.8%     14.8%     13.6%    14.9%       15.5%   15.1%     14.7%    14.5%       14.3%       13.9%       13.9%
Sales and marketing             40.9      46.1      45.9      51.4      51.5      56.7     61.6        52.1    63.7      54.1    258.6       222.9       276.3       244.9
as % of revenue                30.0%     30.5%     33.8%     34.9%     33.3%     32.0%    36.4%       33.6%   37.2%     32.7%    36.1%       32.0%       34.7%       31.1%
General and adminstrative        6.1      5.3       7.2        7.8       7.8      6.7       6.6         7.3    6.9       7.6      27.8        31.4        34.1        34.9
as % of revenue                 4.5%     3.5%      5.3%       5.3%      5.0%     3.8%      3.9%       4.7%    4.0%      4.6%     3.9%        4.5%        4.3%         4.4%
  Operating income              34.6      41.3      24.2      24.4      30.1      37.3     26.3        28.7    25.2      32.8    119.6       147.3       149.4       178.8
Operating margin               25.4%     27.3%     17.8%     16.5%     19.4%     21.0%    15.5%       18.5%   14.7%     19.9%    16.7%       21.2%       18.7%       22.7%
  Other income                   0.5      1.2       1.6        1.2       0.1      0.9       0.9         0.9    1.0       1.0       4.1        4.1         4.9          4.9
Taxes                           11.9      14.5      8.5        8.4       9.9      13.5      9.0         9.8    8.6       11.2     40.8        50.0        50.9        60.6
  Tax rate                     34.0%     34.0%     33.0%     33.0%     33.0%     35.4%    33.0%       33.0%   33.0%     33.0%    33.0%       33.0%       33.0%       33.0%
EPS                            $0.14     $0.17     $0.10     $0.10     $0.12     $0.15    $0.11       $0.12   $0.10     $0.13    $0.49       $0.60       $0.61       $0.73
  Shares                       166.8     167.0     167.8      168.0    168.7     168.9    168.1       168.9   169.0     168.9    168.8       168.9       169.0       168.9

Balance Sheet and Cash Flow
  DSO                           59.3      64.1      67.8      66.5      62.7      66.2     59.4       66.0     65.0      65.0
Deferred revenue               340.1     363.2     376.4     389.7     400.2     432.6    451.3      448.4    467.2     464.2    514.8       511.5       608.7       604.7
Bookings                       145.0     174.3     149.0     160.7     165.2     209.8    187.6      171.0    187.4     181.0    797.7       775.0       890.8       881.1
CFO                             40.8      50.3      38.1      37.2      25.4      46.7     60.9       84.1     37.6      43.6    172.5       234.0       186.9       248.3
CFO per share                  $0.24     $0.30     $0.23     $0.22     $0.15     $0.28    $0.36      $0.50    $0.22     $0.26    $1.02       $1.39       $1.11       $1.47
CAPEX                          -16.4      -1.8      -1.5      -2.0      -3.2      -7.1    -11.3       -2.1     -5.1      -2.6    -29.2       -12.4       -30.2        -21.8
Free cash flow                  24.3      48.5      36.6      35.2      22.2      39.5     49.6       82.0     32.5      40.9    143.3       221.6       156.8       226.5
Free cash flow per share       $0.15     $0.29     $0.22     $0.21     $0.13     $0.23    $0.29      $0.49    $0.19     $0.24    $0.85       $1.31       $0.93       $1.34



Source: Company reports and Sterne Agee estimates




                                                                                                                                                                   Page 5
                                   April 24, 2014

Glossary of Terms used
EPS:        Earnings per share
FY:         Fiscal year
P/S:        Price to Sales ratio
q/q:        Quarter over Quarter
y/y:        Year over Year




                                         Page 6
                                                                                                                                                                                                                                                                  April 24, 2014



Fortinet ($ million)                            Fiscal 2012A                                    Fiscal 2013A                                   Fiscal 2014E                                   Fiscal 2015E
Period Ending                     Mar-12A    Jun-12A     Sep-12A     Dec-12A     Mar-13A     Jun-13A     Sep-13A    Dec-13A     Mar-14E     Jun-14E     Sep-14E    Dec-14E     Mar-15E     Jun-15E     Sep-15E    Dec-15E      2012A      2013E     2014E     2015E
Income Statement
 Total Revenue                     117.247    128.962     136.268     151.162     135.820     147.428    154.699     177.350     168.949     171.496    178.660     196.405     190.358     194.218    199.758     212.591    533.639   615.297   715.511   796.926
 Total Cost of Revenue              30.234     36.098      36.705      40.314      38.018      42.032     42.542      52.473      49.301      49.835     51.692      55.335      54.312      55.697     56.510      59.479    143.351   175.065   206.162   225.998
 Gross Profit                       87.013     92.864      99.563     110.848      97.802     105.396    112.157     124.877     119.648     121.662    126.969     141.070     136.046     138.521    143.248     153.112    390.288   440.232   509.349   570.927
      S&M                           38.593     40.784      40.864      46.121      45.858      51.403     51.472      56.732      61.580      63.739     64.917      68.322      65.961      67.339     68.712      74.293    166.362   205.465   258.559   276.304
      R&D                           17.710     18.096      17.973      18.073      20.568      21.867     22.873      24.081      25.173      25.861     25.872      26.537      27.196      27.754     27.804      28.356     71.852    89.389   103.443   111.111
      G&A                            4.749      5.182       6.126       5.330       7.164       7.766      7.755       6.734       6.639       6.860      6.921       7.339       8.206       8.474      8.541       8.929     21.387    29.419    27.759    34.150
 Operating Expenses                 61.052     64.062      64.963      69.524      73.590      81.036     82.100      87.547      93.392      96.460     97.710     102.198     101.363     103.567    105.057     111.578    259.601   324.273   389.760   421.564
 Operating Income                   25.961     28.802      34.600      41.324      24.212      24.360     30.057      37.330      26.256      25.202     29.259      38.872      34.684      34.954     38.191      41.534    130.687   115.959   119.589   149.363
 Interest Income                     1.014      1.276       0.523       1.230       1.584       1.237      0.076       0.899       0.944       0.994      1.044       1.094       1.144       1.194      1.244       1.294      4.043     3.796     4.076     4.876
 Pre-Tax (Income)/Expense           26.975     30.078      35.123      42.554      25.796      25.597     30.133      38.229      27.200      26.196     30.303      39.966      35.828      36.148     39.435      42.828    134.730   119.755   123.665   154.239
 Taxes, Net                          9.009     10.064      11.942      14.468       8.513       8.447      9.944      13.526       8.976       8.645     10.000      13.189      11.823      11.929     13.014      14.133     45.483    40.430    40.809    50.899
 Pro-forma Net Income               17.966     20.014      23.181      28.086      17.283      17.150     20.189      24.703      18.224      17.551     20.303      26.777      24.004      24.219     26.422      28.695     89.247    79.325    82.855   103.340
Earnings per Share (U.S.$)           $0.11      $0.12       $0.14       $0.17       $0.10       $0.10      $0.12       $0.15       $0.11       $0.10      $0.12       $0.16       $0.14       $0.14      $0.16       $0.17      $0.54     $0.47     $0.49     $0.61
 Shares O/S                        165.751    166.061     166.791     166.955     167.823     168.042    168.666     168.873     168.114     169.000    169.000     169.000     169.000     169.000    169.000     169.000    166.390   168.351   168.779   169.000
Key Metrics
DSO (based on recognized rev.)        65.06      66.54       59.34       64.09       67.83       66.48      62.72       66.21       59.39       65.00      65.00       70.00       65.00       63.00      65.00       68.00
Total Cash & Equivalents ($Mil)    600.306    644.398     690.303     739.586     782.538     814.410    841.005     843.045     888.314     893.282    880.028     899.526     915.961     922.057    905.951     939.973    739.586   843.045   899.526   939.973
Deferred Revenues                  314.572    331.368     340.078     363.185     376.414     389.682    400.173     432.628     451.303     467.211    479.789     514.814     533.566     552.373    567.244     608.653    363.185   432.628   514.814   608.653
Billings/Bookings                  136.986    145.758     144.978     174.269     149.049     160.696    165.190     209.805     187.624     187.404    191.239     231.430     209.110     213.025    214.629     254.000    601.991   684.740   797.696   890.765
Cash Flow From Operations           48.518     44.285      40.770      50.293      38.111      37.221     25.384      46.668      60.902      37.618     19.511      54.489      53.377      38.947     23.999      70.600    183.866   147.384   172.520   186.923
 Cash Flow From Ops/Share        $    0.29      $0.27       $0.24       $0.30       $0.23       $0.22      $0.15       $0.28       $0.36       $0.22      $0.12       $0.32       $0.32       $0.23      $0.14       $0.42      $1.11     $0.88     $1.02     $1.11
Cash Margin                          35.4%      30.4%       28.1%       28.9%       25.6%       23.2%      15.4%       22.2%       32.5%       20.1%      10.2%       23.5%       25.5%       18.3%      11.2%       27.8%      30.5%     21.5%     21.6%     21.0%
Percent of Revenue
Blended Gross Margin                 74.2%      72.0%       73.1%       73.3%       72.0%       71.5%      72.5%       70.4%       70.8%       70.9%      71.1%       71.8%       71.5%       71.3%      71.7%       72.0%     73.1%     71.5%     71.2%     71.6%
S&M                                  32.9%      31.6%       30.0%       30.5%       33.8%       34.9%      33.3%       32.0%       36.4%       37.2%      36.3%       34.8%       34.7%       34.7%      34.4%       34.9%     31.2%     33.4%     36.1%     34.7%
R&D                                  15.1%      14.0%       13.2%       12.0%       15.1%       14.8%      14.8%       13.6%       14.9%       15.1%      14.5%       13.5%       14.3%       14.3%      13.9%       13.3%     13.5%     14.5%     14.5%     13.9%
G&A                                   4.1%       4.0%        4.5%        3.5%        5.3%        5.3%       5.0%        3.8%        3.9%        4.0%       3.9%        3.7%        4.3%        4.4%       4.3%        4.2%      4.0%      4.8%      3.9%      4.3%
Operating Margin                     22.1%      22.3%       25.4%       27.3%       17.8%       16.5%      19.4%       21.0%       15.5%       14.7%      16.4%       19.8%       18.2%       18.0%      19.1%       19.5%     24.5%     18.8%     16.7%     18.7%
Interest Income, net                  0.9%       1.0%        0.4%        0.8%        1.2%        0.8%       0.0%        0.5%        0.6%        0.6%       0.6%        0.6%        0.6%        0.6%       0.6%        0.6%      0.8%      0.6%      0.6%      0.6%
Pretax Income (loss)                 23.0%      23.3%       25.8%       28.2%       19.0%       17.4%      19.5%       21.6%       16.1%       15.3%      17.0%       20.3%       18.8%       18.6%      19.7%       20.1%     25.2%     19.5%     17.3%     19.4%
Tax Rate                             33.4%      33.5%       34.0%       34.0%       33.0%       33.0%      33.0%       35.4%       33.0%       33.0%      33.0%       33.0%       33.0%       33.0%      33.0%       33.0%     33.8%     33.8%     33.0%     33.0%
Net Income (loss)                    15.3%      15.5%       17.0%       18.6%       12.7%       11.6%      13.1%       13.9%       10.8%       10.2%      11.4%       13.6%       12.6%       12.5%      13.2%       13.5%     16.7%     12.9%     11.6%     13.0%
Y/Y % Change
  Product                            32.5%      32.1%       18.7%      23.6%         8.9%        7.8%      10.6%       18.1%       32.5%       17.0%      17.0%       10.0%       12.6%       16.2%      15.6%       10.9%      26.1%     11.7%    18.1%     13.7%
  Services                           27.6%      24.2%       20.7%      25.6%        22.1%       21.8%      20.2%       17.7%       18.9%       16.0%      14.0%       11.0%       13.0%       11.0%       8.3%        5.2%      24.4%     20.3%    14.8%      9.2%
  Ratable Product & Svcs            -56.9%     -49.3%      -37.1%      47.5%         3.6%      -33.5%     -67.4%       -6.9%        0.0%        1.0%      32.9%       23.1%        0.9%       -2.8%      32.9%       23.1%     -33.0%    -29.3%    14.9%     16.0%
Total Revenue                        25.7%      25.2%       17.0%      25.1%        15.8%       14.3%      13.5%       17.3%       24.4%       16.3%      15.5%       10.7%       12.7%       13.2%      11.8%        8.2%      23.1%     15.3%    16.3%     11.4%
Earnings per Share (U.S.$)           27.1%      29.1%        5.2%      24.3%        -5.0%      -15.3%     -13.9%      -13.0%        5.3%        1.8%       0.4%        8.3%       31.0%       38.0%      30.1%        7.2%      20.2%    -12.2%     4.2%     24.6%
Deferred Revenues                    18.2%      21.3%       23.6%      23.2%        19.7%       17.6%      17.7%       19.1%       19.9%       19.9%      19.9%       19.0%       18.2%       18.2%      18.2%       18.2%      23.2%     19.1%    19.0%     18.2%
CFO                                  20.8%      30.0%       13.1%     122.9%       -21.4%      -16.0%     -37.7%       -7.2%       59.8%        1.1%     -23.1%       16.8%      -12.4%        3.5%      23.0%       29.6%      38.4%    -19.8%    17.1%      8.3%
FCF                                  18.8%      26.2%      -29.9%     123.3%       -22.0%      -16.3%      -8.7%      -18.5%       35.6%       -0.6%     -24.6%       25.3%       -6.3%        3.2%     -17.0%       29.3%      25.2%    -17.5%    13.0%      6.4%
Billings/Bookings                    28.4%      32.3%       22.5%      24.0%         8.8%       10.2%      13.9%       20.4%       25.9%       16.6%      15.8%       10.3%       11.5%       13.7%      12.2%        9.8%      26.5%     13.7%    16.5%     11.7%
Q/Q % Change
  Product                            -7.4%      16.0%        2.2%       12.7%      -18.4%       14.8%       4.8%      20.4%        -8.5%        1.4%       4.8%      13.2%        -6.3%        4.6%       4.2%       8.6%
  Services                            1.7%       5.3%        6.7%        9.9%       -1.1%        5.0%       5.3%       7.6%        -0.1%        2.4%       3.5%       4.8%         1.7%        0.6%       1.0%       1.8%
  Ratable Product & Svcs            -18.0%      -2.5%       86.2%       -1.0%      -42.4%      -37.4%      -8.6%     182.6%       -38.1%      -36.8%      20.3%     161.7%       -49.3%      -39.2%      64.4%     142.5%
Total Revenue                        -3.0%      10.0%        5.7%       10.9%      -10.1%        8.5%       4.9%      14.6%        -4.7%        1.5%       4.2%       9.9%        -3.1%        2.0%       2.9%       6.4%
Earnings per Share (U.S.$)          -19.9%      11.2%       15.3%       21.0%      -38.8%       -0.9%      17.3%      22.2%       -25.9%       -4.2%      15.7%      31.9%       -10.4%        0.9%       9.1%       8.6%
Deferred Revenues                     6.7%       5.3%        2.6%        6.8%        3.6%        3.5%       2.7%       8.1%         4.3%        3.5%       2.7%       7.3%         3.6%        3.5%       2.7%       7.3%
CFO                                 115.1%      -8.7%       -7.9%       23.4%      -24.2%       -2.3%     -31.8%      83.8%        30.5%      -38.2%     -48.1%     179.3%        -2.0%      -27.0%     -38.4%     194.2%
FCF                                 115.9%     -10.3%      -42.1%       99.2%      -24.6%       -3.8%     -36.8%      77.8%        25.5%      -29.4%     -52.1%     195.4%        -6.2%      -22.3%     -61.5%     360.4%
Billings/Bookings                    -2.5%       6.4%       -0.5%       20.2%      -14.5%        7.8%       2.8%      27.0%       -10.6%       -0.1%       2.0%      21.0%        -9.6%        1.9%       0.8%      18.3%
Source: Company reports and Sterne Agee estimates




                                                                                                                                                                                                                                                                        Page 7
                                                                                                                              April 24, 2014


                                                      APPENDIX SECTION
Company Description:
Fortinet provides threat management and network security solutions that are designed to address the more sophisticated information
technology threat landscape. Its products and subscription services provide integrated protection against dynamic security threats.
The company's flagship Unified Threat Management solution consists of its FortiGate physical and virtual appliance products that
provide firewall, VPN, application control, antivirus, intrusion prevention, Web filtering, vulnerability management, antispam, wireless
controller, and WAN acceleration. Its FortiGuard security subscription services provide end-customers with access to dynamic updates
to its application control, antivirus, intrusion prevention, Web filtering, and antispam functionality.

IMPORTANT DISCLOSURES:
Regulation Analyst Certification:
I, Robert Breza and Jean-Baptiste Jouve, hereby certify the views expressed in this research report accurately reflect my personal views
about the subject security(ies) or issuer(s). I further certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed by me in this report.

Price Target Risks & Related Risk Factors:
Investment risks associated with the achievement of the price target include, but are not limited to, a company's failure to achieve Sterne,
Agee & Leach, Inc., earnings and revenue estimates; unforeseen macroeconomic and/or industry events that adversely affect demand for a
company's products or services; product obsolescence; changes in investor sentiment regarding the specific company or industry; intense
and rapidly changing competitive pressures; the continuing development of industry standards; the company's ability to recruit and retain
competent personnel; and adverse market conditions. For a complete discussion of the risk factors that could affect the market price of
a company's shares, refer to the most recent Form 10-Q or 10-K that a company has filed with the Securities Exchange Commission.
Company Specific Risks:
■ Fortinet is specialized in an immature market that is hard to predict and the size of which is subject to interpretation.
■ Fortinet’s products are driven to some extent by the need for its customers to abide by compliance rules dictated by a tiptoeing
  regulatory environment.
■ The security market is prone to important M&A activity to preempt competition, foster growth, and capture new market share and
  market segments. Potential transactions are subject to poor rationale for acquisitions and failed integration risk.
■ Fortinet faces competition from many companies, some of which have significantly more resources.
■ Fortinet operates in a cutting-edge sector prone to disruption, potentially undermining the interest of legacy solutions provided by
  current players.
Valuation Methodology:
Methodology for assigning ratings and target prices includes qualitative and quantitative factors including an assessment of industry
size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition; and
expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry
or company-specific occurrences. Sterne, Agee & Leach, Inc., analysts base valuations on a combination of forward looking earnings
multiples, price-to-revenue multiples, and enterprise-value-to-revenue ratios. Sterne, Agee & Leach, Inc., believes this accurately reflects
the strong absolute value of earnings, the strong earnings growth rate, the inherent profitability, and adjusted balance sheet factors.
Additional company-specific valuation methodology is available through Sterne, Agee & Leach, Inc.

Company Specific Valuation:
At its closing price level, Fortinet trades at a P/S ratio of 5.2x our 2014 Sales estimate, which is a discount to the Next Gen. Security
group mean multiple of 5.8x. Our $29 price target assumes that shares of Fortinet trade at a 6.8x multiple on our CY/14 $715.5M
Revenue estimate.

Definition of Investment Ratings:
BUY: We expect this stock to outperform the industry over the next 12 months.
NEUTRAL: We expect this stock to perform in line with the industry over the next 12 months.
UNDERPERFORM: We expect this stock to underperform the industry over the next 12 months.
RESTRICTED: Restricted list requirements preclude comment.




                                                                                                            Appendix Section, Page I
                                                                                                                        April 24, 2014

Ratings Distribution:
                                                                                                      IB Serv./ Past 12Mos.
Rating Category                       Count                    Percent                  Count                    Percent
Buy                                   244                      48.13%                   33                       13.52%
Neutral                               248                      48.92%                   23                       9.27%
Underperform                          15                       2.96%                    0                        0.00%

ADDITIONAL INFORMATION AVAILABLE UPON REQUEST: Contact Robert Hoehn at 1-212-338-4731.
Other Disclosures:
Opinions expressed are our present opinions only. This material is based upon information that we consider reliable, but we do not
represent that it is accurate or complete, and it should not be relied upon as such. Past performance is no guarantee of future results.
Copyright © 2014 Sterne, Agee & Leach, Inc. All Rights Reserved.




To receive price charts or other disclosures on the companies mentioned in this report that are not the subject of this report
which Sterne Agee continues to cover, please visit our website at https://sterneagee.bluematrix.com/sellside/Disclosures.action
or contact Sterne, Agee & Leach, Inc. toll-free at (800) 240-1438 or (205) 949-3689.




                                                                                                        Appendix Section, Page II
                 Founded in 1901, Sterne Agee has been providing investors like you with high-quality investment opportunities for over a century. During the early years, our founders
                 prominently established themselves in the financial securities industry in the southeastern United States. Today, we have expanded to serve all regions of the country. Sterne,
                 Agee is headquartered in Birmingham, Alabama. Sterne Agee is one of the largest independent firms in the country. Sterne, Agee & Leach, Inc. is a division of Sterne Agee
                 Group, Inc., which also includes The Trust Company of Sterne, Agee & Leach, Inc.; Sterne Agee Asset Management, Inc.; Sterne Agee Clearing, Inc.; and Sterne Agee
Financial Services, Inc.—www.sterneagee.com
                                                                               EQUITY CAPITAL MARKETS

                                                 Ryan Medo                 Managing Dir., Eq. Cap. Mkts.                     (205) 949-3623


                                 INSTITUTIONAL SALES                                                                                 INSTITUTIONAL TRADING
William Jump             Director of Institutional Sales                   (404) 814-3960             JT Cacciabaudo           Head of Trading                                    (212) 763-8288
Jon Schenk               Assoc. Director of Inst. Sales                    (212) 763-8221

                                                                                    EQUITY RESEARCH

                                                 Robert Hoehn              Director of Research                              (212) 338-4731

CHIEF ECONOMIST                                                                                       HEALTHCARE
  Lindsey M. Piegza                           Mng. Dir.                    (312) 924-0607               Medical Technology
                                                                                                        Gregory P. Chodaczek                         Mng. Dir.                    (610) 260-9560
TECHNICAL ANALYSIS & RESEARCH
  Carter Braxton Worth                        Mng. Dir.                    (212) 338-4765                Pharmaceutical Services
                                                                                                         Gregory Bolan                               Mng. Dir.                    (615) 760-1469
CONSUMER
  Broadlines / Health & Wellness Retailing                                                               Specialty and Generic Pharmaceuticals
  Charles Grom, CFA                   Mng. Dir.                            (646) 376-5373                Shibani Malhotra                  Mng. Dir.                              (646) 376-5396
  Renato Basanta, CFA                 VP, Analyst                          (646) 376-5317
  John Parke                          Analyst                              (646) 376-5315             INDUSTRIALS
                                                                                                         Aerospace & Defense
   Footwear & Apparel                                                                                    Peter Arment                                Mng. Dir.                    (646) 376-5336
   Sam Poser                                  Mng. Dir.                    (212) 763-8226                Josh W. Sullivan                            Sr. Analyst                  (646) 376-5337
   Ben Shamsian                               Analyst                      (212) 338-4721                Asher Carey                                 Analyst                      (646) 218-4825

   Leisure & Entertainment
                                                                                                         Auto, Auto Parts and Auto Retailers
   David Bain                                 Mng. Dir.                    (949) 721-6651
                                                                                                         Michael P. Ward, CFA                Mng. Dir.                            (646) 376-5375

   Media & Entertainment
                                                                                                         Coal, Metals & Mining, Engineering & Construction
   Vasily Karasyov                            Mng. Dir.                    (646) 376-5362
                                                                                                         Michael S. Dudas, CFA               Mng. Dir.                            (646) 376-5329
   Kutgun Maral                               VP, Analyst                  (646) 376-5372
                                                                                                         Satyadeep Jain, CFA                 Analyst                              (646) 376-5357
                                                                                                         Patrick Uotila, CPA                 Analyst                              (646) 376-5358
   Restaurants
   Lynne Collier                              Mng. Dir.                    (214) 702-4045
                                                                                                         Construction Materials & Diversified Industrials
   Wes Carmichael                             Analyst                      (214) 702-4004                Todd Vencil, CFA                            Mng. Dir.                    (804) 282-7385

   Specialty Retail
                                                                                                         Homebuilding
   Ike Boruchow, Jr.                          Mng. Dir.                    (212) 338-4756
                                                                                                         Jay McCanless                               VP, Sr. Analyst              (615) 760-1475
   Tom Nikic, CFA                             VP, Analyst                  (212) 338-4784
                                                                                                         Annie Worthman                              Analyst                      (615) 760-1478
ENERGY
  Exploration & Production
                                                                                                         Water and Flow Control
                                                                                                         Kevin Bennett, CFA                          VP, Sr. Analyst              (804) 282-4506
  Tim Rezvan, CFA                             SVP, Sr. Analyst             (212) 338-4736
  Truman Hobbs                                Analyst                      (212) 338-4767
                                                                                                      TECHNOLOGY
   Oilfield Services & Equipment                                                                        Data Networking and Storage
   Stephen D. Gengaro                         Mng. Dir.                    (646) 376-5331               Alex Kurtz                                   Mng. Dir                     (415) 402-6015
   Ivan Suleiman                              Analyst                      (212) 338-4723               Amelia Harris                                Analyst                      (415) 402-6018
                                                                                                        Craig Jones                                  Analyst                      (415) 402-6024
FINANCIAL SERVICES
   Asset Management                                                                                      Enterprise Software
   Jason Weyeneth, CFA                        SVP, Sr. Analyst             (212) 763-8293                Robert Breza                                Sr. Analyst                  (612) 360-7550
                                                                                                         Jean-Baptiste Jouve                         Analyst                      (917) 392-5700
   Banks & Thrifts
   Matthew Kelley                             Mng. Dir.                    (207) 699-5800                Financial Technology
   Matthew Breese                             VP, Sr. Analyst              (207) 699-5800                Jennifer Dugan,CFA                          Sr. Analyst                  (415) 402-6051
   Brett Rabatin, CFA                         Mng. Dir.                    (615) 760-1466
   Nathan Race                                Analyst                      (615) 760-1477                Interactive Entertainment / Internet
   Peyton Green                               Mng. Dir.                    (877) 492-2663                Arvind Bhatia, CFA                   Mng. Dir.                           (214) 702-4001
   Maxwell Neely                              Analyst                      (615) 760-1468                Brett Strauser                       VP, Analyst                         (214) 702-4009
   Robert Greene                              VP, Analyst                  (212) 763-8296
                                                                                                         LED Supply Chain
   Life Insurance                                                                                        Andrew Huang                                Mng. Dir.                    (415) 362-6143
   John M. Nadel                              Mng. Dir.                    (212) 338-4717                John Shen                                   Analyst                      (415) 402-6052

   Specialty Lenders and Housing Finance                                                                 Semiconductors
   Henry J. Coffey, Jr., CFA          Mng. Dir.                            (615) 760-1472                Vijay Rakesh                                Mng. Dir.                    (312) 525-8431
   Kenneth James                      VP, Sr. Analyst                      (615) 760-1474                Troy Cowdrey                                Analyst                      (312) 525-8430
   Calvin Hotrum                      Analyst                              (615) 760-1476
                                                                                                      TRANSPORTATION, SERVICES & EQUIPMENT
   Property/Casualty Insurance                                                                           Sal Vitale                                  VP, Sr. Analyst              (212) 338-4766
   Dan Farrell                                Mng. Dir.                    (212) 338-4782
   Nitin Chhabra, FCAS                        Analyst                      (212) 338-4779




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