Fortinet, Inc. (FTNT) Earnings Call Transcript & Summary

Good morning, and welcome to the Fortinet, Inc. 2020 Annual Meeting of Stockholders. Please note that this event is being webcast and recorded. However, no one attending via the webcast is permitted to use any audio recording device. A webcast playback will be available at our Investor Relations page at www.fortinet.com within 24 hours of the meeting. The webcast will be available for up to 1 year after this meeting. I would now like to turn the conference over to Ken Xie. Mr. Xie, please go ahead.

Thank you. Good morning, ladies and gentlemen. My name is Ken Xie. I'm the Founder, Chairman, CEO and a Director of Fortinet. I'll be proceeding as Chairman of the Fortinet 2020 Annual Meeting of the Stockholders, which I now call to order. We are pleased to be hosting our annual meeting virtually, which facilitates increased shareholder participation and provides a safer forum in light of ongoing COVID-19 pandemic. Before proceeding to formal business, I would like to introduce other members of the Fortinet's senior leadership team participating in today's meeting. Keith Jensen, Fortinet's Chief Finance Officer; John Whittle, Fortinet's Executive Vice President of Corporate Development, General Counsel and Corporate Secretary; Peter Salkowski, Fortinet's Vice President of Investor Relations; and Robert Turner, Fortinet's Director of Stock Administration. I now ask Mr. Whittle as the Secretary of the meeting to review the meeting agenda and commence the formal business of the meeting.

Thank you, Mr. Chairman, and good morning, Fortinet stockholders and guests. The agenda for this meeting is as follows: first, I will provide an overview of certain matters relating to this meeting. Next, the proposals that are the subject of this meeting will be put before the meeting and the polls will open. After a sufficient period of time, the polls will close and any votes cast at the meeting today will be recorded by the Inspector of Election, concluding the formal business of the meeting. Then Mr. Xie and Mr. Jensen will respond to any of your questions. The meeting will then be concluded. I am pleased to introduce Mark Cano of Computershare Investor Services. Mr. Cano has been engaged to serve as the Inspector of Election for this meeting. Mr. Cano has taken an oath of office on behalf of Computershare, which oath will be filed with the minutes of the meeting. Affidavits of mailing were prepared, certifying the due mailing of the notice of the meeting to holders of Fortinet's common stock as of the close of business on April 24, 2020, the record date for the meeting. The affidavits will also be filed with the minutes of this meeting. Mr. Chairman, the certified list of the holders of Fortinet's common stock at the close of business on the record date was prepared and certified by Computershare, as transfer agent and registrar for Fortinet's common stock. As of the record date, there were 161,212,077 shares of Fortinet's common stock outstanding. The certified list of stockholders will be filed with the records of the company and will be available for inspection by any stockholder for purposes related to this meeting. The Inspector of Election has reviewed the proxies delivered to date and has advised us that based on his review, a majority of the outstanding shares entitled to vote at the meeting are present in person or by proxy. Accordingly, a quorum is present, and this meeting is properly constituted for the transaction of the business for which it has been called and as stated in the notice of meeting.

Thank you, Mr. Secretary. As quorum is being present, I declare that this meeting has been duly called, and we are able to transact business. Each stockholder is entitled to 1 vote for each share of Fortinet common stock, holding the stockholders' name on the book of the company and at the close of business on the record date of this meeting.

The voting today is by electronic voting. Any stockholder who has not voted or wishes to change their vote and is logged into the virtual meeting website using their control number may vote by clicking on the Cast Your Vote link on the webcast portal and following the instructions there. Stockholders who have sent in proxies or previously voted by the Internet or by phone, and who do not wish to change their vote, do not need to take further action. Their votes will be counted automatically. If you've logged into the virtual meeting website as a guest, you will not be able to cast your vote today through the virtual meeting website. After the matters of business that are the subject of this meeting have been introduced and considered by the stockholders, Mr. Xie will announce the closing of the polls on all of the matters of this meeting, and there will be a brief question-and-answer period. [Operator Instructions] We will now consider the 5 proposals to be brought before this meeting as set forth in the notice of the meeting. The first item of formal business to be considered is the election of 8 directors. If elected, each of the 8 candidates nominated for election at this meeting will serve 1-year terms expiring at the 2021 Annual Meeting of Stockholders. The following 8 individuals have been nominated by the Board of Directors: Ken Xie, Michael Xie, Kelly Ducourty, Ming Hsieh, Jean Hu, William Neukom, Christopher Paisley, and Judith Sim. The second item of formal business to be considered at this meeting is to ratify the appointment of Deloitte & Touche LLP as Fortinet's independent registered public accounting firm to audit Fortinet's financial statements for our fiscal year ending December 31, 2020. The third item of business to be considered is to hold an advisory vote on named executive officer compensation. The fourth item of formal business to be considered at this meeting is a stockholder proposal to allow stockholders to act by written consent. The stockholder proposal, its supporting statement and the Board of Directors' statement recommending against this proposal are set forth in the proxy statement. The proposal was submitted by John Chevedden. If Mr. Chevedden or his authorized representative is present to speak regarding this proposal, please state your name once we open the line. And if you are Mr. Chevedden's representative, please also confirm that you've been authorized by Mr. Chevedden to serve as his representative. Please limit your remarks to no more than 3 minutes. Operator, please open the line so that Mr. Chevedden or his authorized representative may address the meeting.

Hello, this is John Chevedden. Can you hear me okay?

Yes. Thank you.

This is proposal 4, Adopt a Mainstream Shareholder Right - Written Consent. Shareholders request that our Board of Directors take the steps necessary to permit written consent by shareholders entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. Hundreds of major companies enable shareholder action by written consent and to call a special shareholder meeting. And Fortinet shareholders have neither right. This proposal topic won majority shareholder support at 13 large companies in a single year. This included 67% support at both Allstate and Sprint. This proposal topic also won 63% support at Cigna. This proposal topic would have received higher votes than the 63% to 67% at these companies if more shareholders had access to independent proxy voting advice. The right for shareholders to act by written consent is gaining acceptance as a more important right than the right to call a special meeting. This also seems to be the conclusion of the Intel shareholder vote at the 2019 Intel Shareholder Meeting. The Directors at Intel apparently thought they could divert shareholder attention away from written consent by making it less difficult for shareholders to call a special meeting. However, Intel shareholders responded with greater support for written consent in 2019 compared to 2018. After a 45% vote for a written consent shareholder proposal, which is clearly less than a majority vote, The Bank of New York Mellon said it adopted written consent in 2019. It can be of increased importance to refresh our Board of Directors through written consent after Christopher Paisley, Chairman of the Audit Committee, was rejected by 29 times as many shares as another Director at our 2019 Annual Meeting. And Gary Locke, Chairman of the Governance Committee, was rejected by 17 times as many shares as another Director at our 2019 Annual Meeting. Adoption of this proposal enable shareholders to engage with management with more of a position of strength since shareholders will have a plan B, if management thinks it can get away with simply going through the motions of shareholder engagement. While management claims to be interested in shareholder engagement, management at the same time took action in April 2020 to make it easier for management to get away with defrauding shareholders, if management chooses to do so. Please vote, yes: Adopt a Mainstream Shareholder Right - Written Consent - Proposal 4.

Thank you, Mr. Chevedden. I recognize the proposal as being properly presented. The fifth item of formal business to be considered at this meeting is a stockholder proposal for Fortinet to publish an annual report assessing Fortinet's diversity and inclusion efforts. The stockholder proposal and supporting statement, and the Board of Directors' statement recommending against the proposal are set forth in the proxy statement. The proposal was submitted by Nia Impact Capital. I believe Dr. Kristin Hull, Founder and CEO of Nia Impact Capital, may be present to speak to this proposal. And if so, Dr. Hull, please state your name once we open the line, and please also confirm that you've been authorized by Nia to serve as its representative. Please limit your remarks to no more than 3 minutes. Operator, would you please open the line so that Dr. Hull of Nia Impact Capital can address the meeting.

The line is open.

Good morning. My name is Kristin Hull. I'm Founder and CEO of Nia Impact Capital and I am authorized to serve on behalf of our firm. Today, on June 19, 2020, I formally propose proposal #5, requesting that Fortinet publish an annual report assessing Fortinet's efforts to promote both diversity and inclusion within its governance and workforce. Fortinet has not yet released meaningful information that would allow investors to determine the effectiveness of its workplace practices as they relate to building a diverse and inclusive company culture. The benefits associated with diverse teams are [Technical Difficulty] they include better decision making. In fact, diverse teams make better decisions up to 87% of the time. Diverse leadership attracts top talent and inclusive workplaces are able to recruit [Technical Difficulty] diverse teams where many [Technical Difficulty] also encourage more [Technical Difficulty] environment where innovation thrives. Such companies see an increase in revenues specific from innovative product [Technical Difficulty]. In contrast, where diversity is not [Technical Difficulty], where harassment and gender discrimination may exist, the company [Technical Difficulty] reduced employee morale [Technical Difficulty] and high absenteeism. When a company releases [Technical Difficulty] composition, including its rates of [Technical Difficulty] efforts, [Technical Difficulty] as well as take up data, the company not only provides comfort to its investors that it is taking seriously the need to capture the benefits of a diverse workforce. This transparency in hiring and HR processes illustrates a high level of competency and strategy to its employees and all stakeholders. Transparent reporting demonstrates that the company takes seriously that [Technical Difficulty] discrimination is a systemic problem in corporate America, that it is willing to take responsibility and to rise to the challenge in addressing this issue openly. This transparency shows that the company values its employees and its company culture as an asset to invest in rather than seeing employees as an expense on balance sheet. When a company acknowledges its own imperfections honestly, trust is built. Such reports provide data which allows investors to assess and compare the effectiveness of its programs and the [Technical Difficulty] to make progress in such an important driver of alpha. In the Board's statement in [Technical Difficulty] Fortinet describes a number of diversity and inclusion programs with pride as well as its belief in openness, teamwork and motivation. Given this confidence in Fortinet's programs as well as the belief that its workforce position sits above or in line with industry standards, we see little reason why Fortinet has not released information requested by the shareholder resolution. We respectfully ask Fortinet then to proactively report workforce position, recruitment, retention, promotion and [Technical Difficulty] so that investors will be able to assess effectiveness of the workplace equity and policies that Fortinet currently has in [Technical Difficulty]. Thank you.

Thank you, Dr. Hull. I recognize the proposal as being properly presented.

Okay. We will proceed to vote. It's now 10:15 a.m. on Friday, June 19, 2020. The polls are now open for voting on all of the proposals brought before the meeting. Until the polls close on the proposals, any stockholders may revoke or change his or her previous vote on any matter. However, upon the closing of the polls on any matters, no ballot proxy or vote, nor any revocation or changes will be accepted with respect to those matters. We will now pause to allow any voting. We'll wait 1 to 2 minutes. [Voting]

Okay. Has the Inspector of Election received all votes.

Mr. Chairman, I confirm all votes have been received.

Okay. It's now 10:17 a.m. on Friday, June 19, 2020. I hereby declare all polls closed. The Inspector of Election will count the vote.

While the votes are being counted and the preliminary results are being tallied, we will open the meeting up to questions you may have for Mr. Xie and Mr. Jensen. And I'll now turn the meeting over to Peter Salkowski, Fortinet's Vice President of Investor Relations, who will read to Mr. Xie and Mr. Jensen, any questions posted.

There are currently no questions.

Okay. Thank you, Mr. Salkowski. Mark Cano, please let us know once you've been able to tally the votes.

I am -- I have tallied the votes. Mr. Chairman, based on the preliminary results, all of the proposals passed, except for proposal 4, the stockholder proposal to permit written consent by shareholders, which did not pass. The meeting stands adjourned pending the receipt of the final report of the Inspector of Election, which I shall provide to the company for their records. I will now turn the call over to Fortinet's Secretary and operator to conclude the meeting.

Thank you all for attending Fortinet's 2020 Annual Stockholders Meeting. This concludes our meeting.

As stated, this concludes Fortinet's Annual Stockholders meeting. A replay of the meeting will be available within 24 hours at Fortinet's Investor Relations page at www.fortinet.com. You may now disconnect from the meeting. Thank you. Have a good day, and please enjoy your weekend.