F5, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023. Dollar amounts are in millions unless otherwise noted.
Business context
F5 provides multi-cloud application security and delivery solutions across hardware, software, SaaS, and services. It reports as one operating segment. In February 2023, F5 completed its acquisition of Lilac Cloud, adding content delivery network technology; the acquisition did not materially affect reported results.
Financial results
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $703.2 | $634.2 | $1,403.6 | $1,321.3 |
| Gross profit | $547.5 | $507.9 | $1,092.9 | $1,059.9 |
| Operating income | $106.0 | $74.6 | $197.3 | $188.8 |
| Net income | $81.4 | $56.2 | $153.8 | $149.8 |
| Diluted EPS | $1.34 | $0.92 | $2.54 | $2.43 |
- Q2 revenue increased 10.9% year over year; six-month revenue increased 6.2%. Q2 products revenue rose 14.5%, while services revenue rose 7.7%.
- Q2 systems revenue was $208.7 million, up from $146.0 million; software revenue was $131.9 million, down from $151.5 million. Services revenue was $362.6 million, up from $336.7 million.
- Consolidated gross margin declined to 77.9% from 80.1% in Q2. Management attributed higher product costs to systems sales growth, component cost increases, expedite fees, and other sourcing costs.
- Q2 operating margin increased to 15.1% from 11.8%; net margin increased to 11.6% from 8.9%. Six-month net income grew 2.7% year over year.
- Cash provided by operating activities was $298.6 million for the six months, versus $216.9 million a year earlier. Investing activities provided $52.4 million; financing activities used $377.4 million. Capital expenditures were $23.8 million.
- Cash, cash equivalents, and investments totaled $760.0 million at March 31, 2023, down from $894.1 million at September 30, 2022. The decline primarily reflected repayment of $350 million of term debt and $40 million of share repurchases.
- F5 had no term-loan balance and no revolver borrowings at quarter-end; $350 million remained available under its revolving credit facility, and the company reported covenant compliance. Deferred revenue was $1.80 billion, versus $1.69 billion at fiscal year-end. Non-cancelable remaining performance obligations were $1.8 billion, with approximately 64.6% expected to be recognized over the next 12 months.
Changes, outlook, and risks
- Management reported softer customer orders for both software and systems products and services amid macroeconomic uncertainty, customer budget constraints, and delayed purchase decisions. It characterized the environment as temporary and pointed to stronger-than-normal maintenance renewals as evidence of purchase delays, while noting it would continue to monitor conditions.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said current cash and investments, expected operating cash flows, and available revolver capacity should be sufficient for liquidity needs.
- After quarter-end, on April 19, F5 announced a restructuring affecting approximately 620 employees, or 9% of its workforce. It expects about $45 million of severance and other restructuring charges in fiscal 2023, plus facility-related costs that it could not yet estimate.
- Other notable risks include prolonged macroeconomic weakness reducing demand and forecast visibility, supply-chain and cost pressures, interest-rate effects on investment values and income, and foreign-currency exposure as international operations expand.
- In the Lynwood NGINX intellectual-property case, the dismissal and final judgment in F5’s favor were appealed. The court awarded F5 $0.8 million in attorneys’ fees in April 2023. F5 reported no accrual for the other legal proceedings discussed, stating that potential losses were not estimable or not considered probable.
Important facts for investors to verify
- Whether order softness and delayed purchases persist, and whether subscription/software demand improves relative to systems and maintenance renewals.
- How product mix, component costs, and sourcing expenses affect gross margin in subsequent quarters.
- The realized cost and savings from the April restructuring, including facility reductions and the expected $45 million charge.
- Cash generation, deferred-revenue and performance-obligation conversion, and planned uses of cash, including acquisitions and share repurchases.
- Developments in the Lynwood appeal and other legal or tax matters; the filing notes $70.5 million of unrecognized tax benefits at March 31, 2023.