F5 Networks, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended June 30, 2019. F5 provides application delivery, security, and related services across hardware, software, cloud, and managed-service offerings. The quarter includes Nginx from its May 8, 2019 acquisition.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | First 9 months FY2019 | First 9 months FY2018 |
|---|---|---|---|---|
| Revenue | $563.4 million | $542.2 million | $1,652.1 million | $1,598.7 million |
| Gross profit | $472.6 million | $451.2 million | $1,386.4 million | $1,330.7 million |
| Operating income | $102.7 million | $152.0 million | $403.7 million | $437.3 million |
| Net income | $85.9 million | $122.7 million | $332.9 million | $320.8 million |
| Diluted EPS | $1.43 | $1.99 | $5.51 | $5.16 |
| Gross margin | 83.9% | 83.2% | 83.9% | 83.2% |
| Operating margin | 18.2% | 28.0% | 24.4% | 27.4% |
For the first nine months, operating cash flow was $541.8 million, capital expenditures were $83.0 million, and cash flow from operations less capital expenditures was approximately $458.7 million. Cash, cash equivalents, and investments totaled $1.148 billion at June 30, down $302.5 million from September 30, 2018. F5 reported no long-term debt. Current deferred revenue was $803.2 million and long-term deferred revenue was $363.3 million.
Changes and notable items
- Revenue rose 3.9% in the quarter and 3.3% year to date. Management cited software—including subscription products—and service revenue growth. Services were 55.8% of quarterly revenue.
- Quarterly net income fell 30.0% and operating income fell 32.4% year over year, despite higher revenue and gross margin. Operating expenses rose 23.6% to $369.9 million; sales and marketing, R&D, and G&A all increased. Management attributed increases principally to personnel, facilities, and, for G&A, Nginx-related consulting.
- ASC 606 adoption materially affected reported results. For Q3, it increased revenue by $29.3 million and net income by $24.0 million versus the former standard; for the first nine months, the increases were $36.5 million and $25.4 million. Prior-year periods were not restated, so reported growth is not fully comparable.
- F5 acquired Nginx for approximately $643.2 million in cash, including $19.0 million of transaction costs paid on Nginx’s behalf. The acquisition added $509.4 million of goodwill. Nginx contributed $5.1 million of revenue and $5.9 million of net losses as reported for the periods since acquisition.
- First-nine-month share repurchases were $201.0 million. F5 suspended the automatic component of the repurchase program in connection with the acquisition; $1.4 billion remained authorized at June 30.
Outlook, risks, and contingencies
- Management said existing cash and investments, together with operating cash generation, should cover operating needs for at least the next 12 months. No specific revenue or earnings guidance was provided in the filing.
- Management expects operating leases to be recognized as right-of-use assets and lease liabilities upon adoption of the new lease standard in fiscal 2020, with a material balance-sheet impact.
- Revenue concentration is notable: Ingram Micro represented 17.8% of quarterly revenue; Tech Data 10.8%; and Westcon 10.0%. Several distributors exceeded 10% in some comparative periods.
- Legal proceedings and ordinary-course claims remain possible sources of costly litigation or settlements. The company recorded no loss-contingency accrual for the matters described; potential exposure was not clearly quantified.
- F5 identified interest-rate risk in its fixed-income investment portfolio. It reported no material changes to risk factors from its prior annual report and said disclosure controls were effective.
Investor verification priorities
- Assess underlying revenue and earnings trends using the filing’s ASC 606 bridge, given the material accounting-standard effect and unadjusted prior-year comparisons.
- Evaluate whether operating-expense growth and lower quarterly operating margin reflect ongoing investment, acquisition costs, or sustained cost increases.
- Verify Nginx integration progress, contribution, and expected strategic or financial benefits; the filing provides no quantified synergy target.
- Monitor cash and investment levels after the acquisition, capital spending, and any resumption of repurchases.
- Review distributor concentration, deferred-revenue conversion, and the outcome of tax audits and unquantified legal matters.