F5, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended December 31, 2023; comparisons are to the three months ended December 31, 2022 unless otherwise stated. F5 provides multi-cloud application security and delivery products and services.
Financial results
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $692.6 million | $700.4 million | Down 1.1% |
| Product revenue | $305.9 million | $340.6 million | Down 10.2% |
| Service revenue | $386.7 million | $359.8 million | Up 7.5% |
| Gross profit / margin | $556.2 million / 80.3% | $545.4 million / 77.9% | Margin up 2.4 points |
| Operating income / margin | $164.5 million / 23.8% | $91.2 million / 13.0% | Operating income up 80.4% |
| Net income | $138.4 million | $72.4 million | Up 91.1% |
| Diluted EPS | $2.32 | $1.20 | Up 93.3% |
| Operating cash flow | $165.3 million | $157.6 million | Up $7.7 million |
Gross margin improved despite lower product sales, while lower operating expenses and higher other income contributed to higher earnings. Other income was $9.9 million, primarily reflecting investment interest; the effective tax rate was 20.7%, versus 24.5%.
Revenue mix and regions
- Systems revenue declined to $135.4 million from $173.0 million; software revenue increased to $170.5 million from $167.5 million.
- Services grew mainly because customers renewed maintenance contracts and continued using existing products longer.
- Americas revenue was $376.4 million, down from $402.2 million; EMEA was $193.4 million, up from $184.1 million; APAC was $122.8 million, up from $114.1 million.
- Revenue outside the United States represented 49.5%, compared with 46.4%.
Cash, liquidity, debt and capital allocation
- Cash and cash equivalents were $822.6 million at December 31, 2023; cash, cash equivalents and investments totaled $832.0 million, up $23.6 million from September 30, 2023.
- Operating cash flow was $165.3 million. Investing activities used $7.1 million, including $9.0 million of capital expenditures. Financing activities used $135.0 million, mainly reflecting $150.0 million of share repurchases.
- No revolving-credit borrowings were outstanding; $350.0 million of capacity was available. The company reported compliance with credit-facility covenants. It had no term debt outstanding.
- F5 repurchased $150.0 million of stock during the quarter, and $772.4 million remained authorized. Shares outstanding declined to 58.8 million from 59.2 million at September 30, 2023.
- Current and long-term deferred revenue totaled $1.83 billion. Non-cancelable remaining performance obligations were $1.8 billion; F5 expects to recognize approximately 64.8% over the next 12 months.
- Days sales outstanding was 67. Management said available cash, expected operating cash flows and borrowing capacity should meet liquidity needs.
Material changes, outlook and risks
- Management attributed softer product demand to customer budget constraints and macroeconomic uncertainty delaying purchases, rather than architectural shifts or competitive losses. It described the demand environment as temporary, citing stronger-than-normal maintenance renewals, and said it would continue monitoring conditions. No numerical revenue or earnings guidance was provided in the supplied filing text.
- F5 initiated a fiscal 2024 restructuring plan. The income statement reflects $8.5 million of restructuring expense for the quarter; the note describes $9.8 million in charges for the plan and says significant future charges are not expected. The filing does not clearly reconcile these amounts.
- Operating expenses fell year over year alongside lower personnel costs and reduced headcount, including in sales and marketing and research and development.
- Risks discussed include macroeconomic and geopolitical uncertainty, customer spending delays, potential inflation and interest-rate effects, foreign-exchange exposure, and possible litigation costs. Management reported no material change to the risk factors in its latest annual report.
- In the Lynwood intellectual-property case concerning NGINX, the district court dismissed the claims and awarded F5 more than $0.8 million in attorneys’ fees. Lynwood appealed; the Ninth Circuit heard the dismissal and fee appeals in December 2023 and had not ruled as of the filing. F5 had not accrued losses for the disclosed legal proceedings because management could not conclude that an unfavorable outcome was probable and reasonably estimable.
- Other commitments include $20.2 million of non-cancelable long-term purchase commitments and operating leases extending through 2033. The company reported $73.8 million of unrecognized tax benefits, with changes expected within 12 months but not expected to be material.
Key investor verification points
- Whether systems demand and overall product revenue recover, and whether maintenance renewals convert into new product purchases.
- How much earnings improvement reflects durable operating performance versus expense reductions, investment income and tax-rate changes.
- The timing and accounting reconciliation of the quarter’s restructuring charges and any impact on staffing or execution.
- Progress and potential financial exposure from the pending Lynwood appeals and other legal matters.
- Customer and channel concentration: two distributors each represented more than 10% of quarterly revenue.
- Whether cash generation, deferred-revenue growth and remaining performance obligations translate into recognized revenue as expected.