F5 Networks, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are GAAP unless noted. F5 provides multi-cloud application services, software, hardware, and related support services.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $583.3 million | $563.4 million | $1,736.0 million | $1,652.1 million |
| Gross profit / margin | $477.2 million / 81.8% | $472.6 million / 83.9% | $1,440.1 million / 83.0% | $1,386.4 million / 83.9% |
| Operating income / margin | $87.6 million / 15.0% | $102.7 million / 18.2% | $293.7 million / 16.9% | $403.7 million / 24.4% |
| Net income | $69.9 million | $85.9 million | $229.8 million | $332.9 million |
| Diluted EPS | $1.14 | $1.43 | $3.76 | $5.51 |
Quarterly revenue increased 3.5% year over year: product revenue rose 1.8% to $253.3 million and services revenue rose 4.9% to $329.9 million. Management attributed growth primarily to software product sales, including subscriptions, and higher maintenance revenue from the installed base. For the quarter, product costs increased faster than product revenue; total gross margin fell 2.1 percentage points. Operating expenses rose 5.3% to $389.6 million, including higher sales and marketing costs. Net income declined 18.7% year over year.
For the first nine months, revenue increased 5.1%, while net income declined 31.0%. Operating expenses rose to $1,146.4 million from $982.7 million, including $7.8 million of restructuring charges and acquisition-related costs. Lower investment interest income and increased interest expense also reduced other income.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $714.3 million at June 30, 2020; short- and long-term investments totaled $492.2 million. Together, cash and investments were $1,206.5 million, down $124.2 million from September 30, 2019.
- Operating cash flow for the nine months was $485.0 million, compared with $541.8 million a year earlier. Capital expenditures were $47.9 million.
- Investing cash outflow was $762.8 million, principally reflecting $955.6 million paid for the Shape acquisition. Financing cash inflow was $394.0 million, including $400.0 million in term-loan proceeds.
- Term-loan principal outstanding was $395.0 million, due by January 2023; the weighted-average interest rate reported for the period was 2.452%. The $350 million revolving facility was undrawn, with $350 million available. F5 reported compliance with debt covenants.
- Current assets were $1,665.4 million and current liabilities $1,263.3 million. Deferred revenue totaled $1,275.1 million. F5 reported 47 days sales outstanding at quarter-end.
Material changes, outlook, and risks
- F5 completed its acquisition of Shape Security on January 24, 2020 for approximately $1.0 billion in cash, subject to adjustments. The preliminary allocation included $799.6 million of goodwill and $150.5 million of identifiable intangible assets. F5 said Shape’s revenue and earnings were not material to its operations. The acquisition was primarily funded with cash and the term loan.
- Management said COVID-19 had not significantly affected Q3 results, but its effects on business and financial outlook remained uncertain. Risks identified include weaker customer demand or spending, delayed collections, supply-chain disruption, added costs, and operating disruption. F5 gave no quantitative earnings or revenue guidance in the provided filing text.
- A June 2020 lawsuit alleges that intellectual property in NGINX software belongs to the plaintiff’s assignor and asserts copyright, trademark, and other claims. F5 intends to defend the case; it said the outcome and potential exposure could not be determined and recorded no loss-contingency accrual.
- F5 cited distributor concentration: Ingram Micro represented 16.0% of quarterly revenue and Arrow ECS 11.1%. It also noted possible margin variability from product mix, component costs, inventory, warranties, and COVID-related supply-chain effects.
- The company recorded a $7.8 million workforce-restructuring charge in the first quarter and said it did not expect significant further charges. Its disclosure controls were assessed as effective at June 30, 2020.
Important facts for investors to verify
- Whether revenue growth, particularly software and subscription sales, offsets pressure on gross margin and operating profitability.
- How Shape integration, acquired intangible-asset amortization, and acquisition-related costs affect future results and cash generation.
- Cash-flow resilience and debt-service capacity, including compliance with the term-loan leverage covenant and the January 2023 maturity.
- COVID-19 effects on customer spending, collections, suppliers, and operations, which management said remained uncertain.
- Developments in the NGINX intellectual-property litigation and any change in potential financial exposure.