F5, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021; comparisons are with the three months ended December 31, 2020 unless stated otherwise. F5 provides multi-cloud application security and delivery solutions, including hardware, software, subscriptions, and services. The company reports as one operating segment.
Financial performance and position
| Metric | Q1 FY2022 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $687.1 million | $624.6 million | Up 10.0% |
| Product revenue | $343.1 million | $288.0 million | Up 19.1%; software revenue was $163.0 million, versus $109.5 million |
| Service revenue | $344.0 million | $336.6 million | Up 2.2% |
| Gross profit / gross margin | $552.0 million / 80.3% | $509.6 million / 81.6% | Gross margin down 1.3 percentage points |
| Operating income / margin | $114.2 million / 16.6% | $117.7 million / 18.9% | Income and margin declined |
| Net income | $93.6 million | $87.7 million | Up 6.7%; diluted EPS $1.51 versus $1.41 |
| Cash from operations | $90.4 million | $137.4 million | Down $47.0 million |
Operating cash flow reflected net income and non-cash adjustments, partly offset by higher receivables and other asset uses of cash. Management cited annual billing of multi-year subscriptions, with amounts recorded as unbilled assets, and prepayments to the contract manufacturer for future hardware components as reasons for the year-over-year decline.
At December 31, 2021, cash and cash equivalents were $512.4 million; short- and long-term investments totaled $423.5 million. Together, cash and investments were $935.9 million, down $107.5 million from September 30, 2021. Current assets were $1.688 billion and current liabilities were $1.432 billion. Deferred revenue totaled $1.576 billion, versus $1.490 billion at the start of the quarter. Non-cancelable remaining performance obligations were approximately $1.6 billion; F5 expected to recognize about 65.9% in the next 12 months.
F5 had $365.0 million of term-loan principal outstanding, with a 1.282% weighted-average rate for the quarter and maturity on January 24, 2023. The $350.0 million revolving facility was undrawn. The company reported compliance with debt covenants. It repurchased $125.0 million of stock during the quarter; $647.5 million remained authorized under the program. Days sales outstanding were 55.
Material changes and unusual items
- Revenue growth was led by software, including SaaS and subscription offerings; systems revenue was $180.2 million, little changed from $178.6 million. Services grew with the installed base.
- Product costs rose 21.8%, faster than product revenue, mainly due to component cost increases, expedite fees, and other supply-chain mitigation costs. Total gross margin fell to 80.3% from 81.6%.
- Operating expenses increased to $437.9 million from $391.9 million. The quarter included a $7.9 million restructuring charge tied to a reduction in force affecting approximately 70 positions; management did not expect significant additional charges.
- Sales and marketing expense included a $6.2 million impairment of the Shape trade name following a planned change in use. No goodwill impairment was recorded.
- F5 completed its acquisition of Threat Stack on October 1, 2021 for approximately $68.9 million in net consideration. The acquired business’s results were not material to the periods presented; purchase-price allocation remained preliminary.
- The effective tax rate was 16.3%, down from 25.1%, primarily due to the tax impact of stock-based compensation. Net income increased despite lower operating income, aided by the lower tax provision.
Outlook, commentary, and risks
F5 gave no specific quantitative revenue or earnings guidance in the provided filing text. Management said worsening global supply-chain constraints were expected to limit the company’s ability to meet demand for hardware-based solutions, lengthen lead times, and affect systems revenue. Constraints also increased product costs. F5 said COVID-19 had not significantly affected the quarter’s results but continued to monitor pandemic-related uncertainty. Management believed existing cash, investments, expected operating cash flows, and revolver availability would be sufficient for liquidity needs.
Risks and contingencies include hardware component availability and costs; interest-rate exposure on the floating-rate term loan and investment portfolio; and tax uncertainty, including $72.7 million of unrecognized tax benefits. F5 disclosed ongoing Lynwood litigation alleging intellectual-property and other claims related to NGINX; motions to dismiss were pending, and the company did not quantify a potential loss. The separate Proven Networks patent matters were resolved in a confidential, immaterial settlement. The filing reported no material changes to the risk factors in F5’s prior Form 10-K.
Important facts for investors to verify
- Whether supply constraints continued to delay hardware shipments or materially affect systems revenue, margins, and customer demand.
- Whether software/subscription growth and deferred revenue translated into recognized revenue and cash collection; track unbilled receivables and DSO.
- How operating cash flow compares in subsequent quarters, given subscription billing patterns and supplier prepayments.
- The term-loan repayment or refinancing plan ahead of the January 2023 maturity, covenant headroom, and exposure to changing interest rates.
- Final purchase accounting and integration effects for Threat Stack, and any further restructuring, impairment, or acquisition-related costs.
- Developments in the Lynwood litigation and tax audits or unrecognized tax benefits that could affect future results.