F5, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2024. Comparisons are with the same periods in fiscal 2023 unless otherwise noted. Amounts are in U.S. dollars.
Business context and key financial metrics
F5 provides multi-cloud application security and delivery solutions, including systems, software, SaaS and related services. It reports as one operating segment.
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $681.4 million | $703.2 million | $1,374.0 million | $1,403.6 million |
| Gross profit / gross margin | $540.2 million / 79.3% | $547.5 million / 77.9% | $1,096.4 million / 79.8% | $1,092.9 million / 77.9% |
| Operating income / margin | $140.0 million / 20.5% | $106.0 million / 15.1% | $304.5 million / 22.2% | $197.3 million / 14.1% |
| Net income | $119.0 million | $81.4 million | $257.4 million | $153.8 million |
| Diluted EPS | $2.00 | $1.34 | $4.32 | $2.54 |
| Operating cash flow | Not separately stated | Not separately stated | $387.0 million | $298.6 million |
- At March 31, cash and cash equivalents were $902.7 million; short- and long-term investments totaled $7.1 million. Cash, cash equivalents and investments together were $909.8 million.
- No borrowings were outstanding under the $350 million revolving credit facility; the full amount was available. The prior term loan had been fully repaid in December 2022. Operating lease liabilities totaled $266.8 million.
- Current assets were $1.95 billion and current liabilities were $1.50 billion. Deferred revenue totaled $1.81 billion. Remaining performance obligations were $1.8 billion; F5 expects to recognize approximately 65% in the next 12 months.
Material changes versus prior comparable periods
- Q2 revenue decreased 3.1%; six-month revenue decreased 2.1%. Product revenue fell 11.9% in Q2 and 11.0% for six months, mainly due to lower systems sales. Systems revenue declined 32.1% in Q2, while software revenue increased 20.2%.
- Services revenue increased 5.1% in Q2 and 6.3% for six months, reflecting maintenance renewals on existing products and realization of prior price increases. Services represented 55.9% of Q2 revenue, versus 51.6% a year earlier.
- Gross margin expanded to 79.3% in Q2 from 77.9%, while gross profit declined 1.3%. Operating income increased 32.0% in Q2 as operating expenses fell 9.3%, including lower sales and marketing and R&D personnel costs. Net income rose 46.2%.
- Six-month cash from operations increased to $387.0 million from $298.6 million. Cash increased by $103.8 million during the period, after $250.0 million of share repurchases and $32.9 million of acquisition spending.
Outlook, management commentary, risks and unusual items
- The filing provides no numeric revenue or earnings guidance. Management described customer demand as softer amid macroeconomic uncertainty and budget constraints, with delayed purchases affecting systems, software and services. Management believes the weakness is temporary and linked to customer budgets rather than architectural shifts or competitive losses; it cited stronger-than-normal maintenance renewals as evidence customers are extending use of installed products.
- Management expects current cash and investments, operating cash flows and available revolver capacity to meet liquidity needs. It will continue to evaluate strategic acquisitions and investments.
- Risks cited include uncertain economic and geopolitical conditions, inflation, higher interest rates, foreign exchange movements, customer reprioritization and the possibility that cost inflation cannot be offset through pricing. A sharp rise in interest rates could reduce investment portfolio fair value; lower rates could reduce interest income.
- F5 recorded $8.6 million of restructuring charges in the first six months of FY2024, primarily related to workforce reductions. Two Q2 acquisitions added $23.6 million of goodwill and did not materially affect operating results.
- The Lynwood intellectual-property litigation was dismissed with prejudice in 2022, and F5 was awarded more than $0.8 million in attorneys’ fees. Appeals remained pending at the filing date. F5 had recorded no litigation loss-contingency accrual and said potential losses could not be estimated.
- The effective tax rate was 18.4% for Q2 and 19.6% for the six months, down from 25.1% and 24.8%, respectively, primarily due to the tax impact of stock-based compensation.
Most important facts for investors to verify
- Whether systems demand stabilizes and whether software growth and maintenance renewals can offset continued systems weakness.
- Future trends in revenue, gross margin and operating expenses, particularly as cost reductions and restructuring affect results.
- Cash generation relative to share repurchases, acquisition spending and the remaining $672.4 million repurchase authorization.
- Developments in the pending Lynwood appeals and any changes to legal or tax contingencies.
- Distributor concentration: Ingram Micro and Synnex each accounted for more than 10% of Q2 revenue; together they represented 35.1%.