F5 Networks, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. The filing also reports unaudited fourth-quarter results for the three months ended September 30, 2013. Unless otherwise stated, financial amounts below are in U.S. dollars.
Business context
F5 develops application-delivery hardware, software and services, including traffic management, application and network security, access management and acceleration. Its products run on purpose-built appliances and as virtual editions. Revenue is primarily generated through indirect sales channels, including distributors and resellers.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $1,481.3 million | $1,377.2 million | +7.6% |
| Product revenue | $798.9 million | $818.6 million | -2.4% |
| Services revenue | $682.5 million | $558.7 million | +22.2% |
| Gross profit / gross margin | $1,228.3 million / 82.9% | $1,141.1 million / 82.9% | Margin unchanged |
| Operating income / margin | $430.8 million / 29.1% | $426.3 million / 31.0% | Income +1.1% |
| Net income | $277.3 million | $275.2 million | +0.8% |
| Diluted EPS | $3.50 | $3.45 | +1.4% |
| Cash from operations | $499.7 million | $495.4 million | +0.9% |
Fourth-quarter revenue was $395.3 million, versus $362.6 million in the prior-year quarter; net income was $76.2 million, versus $67.7 million. Fourth-quarter diluted EPS was $0.97, compared with $0.85.
Liquidity, debt and capital allocation
- Cash, cash equivalents and short- and long-term investments totaled $1.271 billion at year-end, up from $1.195 billion a year earlier. The company reported no long-term debt.
- Current assets were $816.4 million and current liabilities were $551.4 million. Current deferred revenue was $421.4 million, with another $109.9 million classified as long-term.
- Operating cash flow was $499.7 million; investing activities used $352.5 million and financing activities used $166.3 million. Investing outflows included $212.6 million for the LineRate and Versafe acquisitions. Capital expenditures were $26.6 million.
- F5 spent $200 million repurchasing shares during FY2013. As of November 15, 2013, $112.5 million remained authorized for repurchases. The company did not pay dividends and said it did not anticipate doing so in the foreseeable future.
Changes and management commentary
- Annual revenue growth slowed to 7.6% from 19.6% in FY2012. Product revenue declined as customers evaluated appliances planned for FY2014; management reported sequential product-sales growth in the third and fourth quarters and strong demand for the new appliances.
- Services growth reflected a larger installed base, maintenance renewals, and increased consulting and training sales. Services rose to 46.1% of revenue from 40.6%.
- Operating expenses increased 11.6%, faster than revenue, with research and development spending up 18.2%. Operating margin declined to 29.1% from 31.0%.
- F5 acquired LineRate Systems, expanding software-defined application services, and Versafe, adding web and mobile fraud-protection technology. Goodwill increased to $523.7 million from $348.2 million.
- Management stated that cash and investments, excluding auction-rate securities, plus operating cash flow should meet operating requirements for the next 12 months. It expected R&D expense to remain consistent as a percentage of revenue. The filing does not provide numerical revenue or earnings guidance.
Risks, contingencies and unusual items
- Three distributors represented 44.1% of FY2013 revenue; one distributor represented 18.6% of year-end receivables. F5 cautioned that distributor sales can be reduced or delayed.
- F5 relies on one contract manufacturer for application-delivery products and uses single- or limited-source suppliers for certain components. Quarter-end shipment concentration and a variable, lengthening sales cycle may increase results volatility.
- Product revenue softness, competitive pricing, product-transition execution, technology changes, security vulnerabilities, international operations and acquisition integration are identified risks. Sales outside the Americas represented 42.5% of revenue.
- A $2.4 million charge was recorded in FY2013 for consolidation of certain headquarters subleases. Operating lease commitments totaled $135.2 million gross, or $116.3 million net of disclosed sublease income; purchase obligations were $16.4 million.
- Approximately $3.0 million of auction-rate securities remained illiquid and were valued using significant unobservable inputs. Management said it did not intend or expect to be required to sell them before recovery.
- Management reported no pending legal proceeding it believed reasonably likely to have a material adverse effect. The independent auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether FY2014 appliance launches convert the reported late-year product-demand recovery into sustained product revenue growth.
- Whether service growth and maintenance renewals continue to offset weaker product sales, and how the revenue mix affects margins.
- Distributor concentration, receivable collection and the company’s dependence on its primary contract manufacturer and limited-source components.
- Acquisition integration and returns from LineRate and Versafe; reconcile the cash outlays disclosed in MD&A with purchase-price allocations in the notes.
- Use of repurchase authorization, share-count trends, stock-based compensation of $104.2 million in FY2013, and remaining illiquid auction-rate securities.
- Tax exposure and valuation assumptions: the filing reports $7.3 million of unrecognized tax benefits and ongoing IRS and state audits.