F5, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2017; compared with the corresponding 2016 periods. Amounts are in U.S. dollars. F5 provides application delivery and security products, software, cloud subscriptions, and related services.
Financial results
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $518.2M | $483.7M | $1,034.2M | $973.2M |
| Gross profit / margin | $430.3M / 83.0% | $401.4M / 83.0% | $861.0M / 83.3% | $805.3M / 82.7% |
| Operating income / margin | $138.5M / 26.7% | $114.9M / 23.8% | $276.0M / 26.7% | $245.9M / 25.3% |
| Net income | $93.1M | $75.4M | $187.4M | $165.1M |
| Diluted EPS | $1.43 | $1.11 | $2.87 | $2.40 |
- Quarterly revenue rose 7.1%; six-month revenue rose 6.3%. Product revenue increased 6.9% and 4.4%, respectively; services revenue increased 7.3% and 7.9%.
- Management attributed growth principally to demand for core application delivery networking products, security solutions and software-only Virtual Editions, and maintenance purchases and renewals as the installed base expanded.
- Operating expenses were $291.8M for the quarter and $585.1M for six months. Quarterly growth in operating income outpaced revenue growth; the prior-year comparison included $8.9M of litigation expense, versus a $0.1M litigation credit in Q2 FY2017.
- Cash from operations was $364.7M for six months, compared with $337.0M a year earlier. Capital expenditures were $23.7M, implying operating cash flow less capex of approximately $340.9M. Investing activities provided $54.4M; financing activities used $275.9M, primarily for repurchases.
- Cash and cash equivalents were $655.8M at March 31, 2017; short- and long-term investments totaled $559.1M. Combined cash and investments were $1,214.9M, up $56.1M from September 30, 2016. The company reported no long-term debt and said resources and operating cash generation should cover requirements for at least 12 months.
- Current assets were $1,444.8M and current liabilities $916.0M. Current deferred revenue was $684.5M, with another $245.1M classified as long-term.
Changes, outlook and notable matters
- International sales represented 48.8% of quarterly revenue, down from 49.9% a year earlier. Four distributors each accounted for over 10% of quarterly revenue; Westcon was the largest at 17.9%.
- Management expects R&D expense to remain consistent as a percentage of revenue in the foreseeable future. It provided no specific revenue or earnings guidance in this filing.
- F5 repurchased $300.0M of stock in the first six months, retiring 2.14M shares at an average $140.11 per share; $473.7M remained authorized. Weighted-average diluted shares declined year over year.
- Annual stock-based compensation was $90.5M for the six-month period; $191.8M remained unrecognized, mostly expected to be recognized over the next two years. Management noted compensation expense may increase with future equity awards.
- Radware patent litigation remained under appeal. A district court judgment was approximately $6.9M; F5 posted security of approximately $6.9M pending appeal. Radware’s request for $192,000 in costs remained pending. F5 recorded a $7.0M litigation accrual in FY2016 and a $0.1M credit in Q2 FY2017; ultimate outcomes and exposure in other proceedings were uncertain.
- CEO François Locoh-Donou’s appointment became effective April 3, 2017, following John McAdam’s retirement; the filing identifies transition and retention of key personnel as risks. On May 3, 2017, F5 agreed to lease approximately 515,000 square feet for a new Seattle headquarters, with a 14.5-year initial term expected to commence in 2019 or later, subject to construction timing.
- F5 completed its Q2 goodwill assessment and found no impairment indicators. It planned to adopt the new revenue standard in fiscal Q1 2019 and was evaluating the impact; the standard could change timing of term-license revenue and commission-cost recognition.
Investor facts to verify
- Whether product and security demand, Virtual Editions, and maintenance renewals sustain growth, and how revenue mix affects margins.
- Distributor and receivables concentration, including Westcon’s 20.9% share of receivables, and the implications of international exposure.
- Developments and potential costs in the Radware cases, including the pending appeal and cost request.
- Capital allocation, remaining repurchase authorization, stock-based compensation, and the CEO transition.
- Execution and financial statement effects of the new revenue standard and the long-term headquarters lease.