F5, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2022; comparisons are with the three months ended December 31, 2021, unless otherwise noted. F5 provides multi-cloud application security and delivery solutions, including hardware, software, cloud services, and support.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $700.4 million | $687.1 million |
| Gross profit / gross margin | $545.4 million / 77.9% | $552.0 million / 80.3% |
| Operating income / margin | $91.2 million / 13.0% | $114.2 million / 16.6% |
| Net income | $72.4 million | $93.6 million |
| Diluted EPS | $1.20 | $1.51 |
| Cash from operating activities | $157.6 million | $90.4 million |
| Cash used in investing activities | $61.9 million provided | $42.0 million used |
| Cash used in financing activities | $374.9 million | $116.0 million |
Revenue comprised $340.6 million of products and $359.8 million of services. Cash and cash equivalents plus short- and long-term investments totaled $667.6 million at December 31, 2022, down from $894.1 million at September 30, 2022. Current assets were $1.715 billion and current liabilities were $1.533 billion. Deferred revenue totaled $1.760 billion, including $1.131 billion current. Non-cancelable remaining performance obligations were $1.8 billion; F5 expects to recognize about 64.3% within 12 months.
Material changes and drivers
- Revenue increased 1.9%, primarily from services, which grew 4.6% as the installed base expanded and maintenance contracts were purchased or renewed. Product revenue was relatively flat.
- Gross margin fell 2.4 percentage points. Product cost of revenue rose 21.1%, which F5 attributed principally to software product revenue growth, component cost increases, expedite fees, and other sourcing costs.
- Operating expenses increased to $454.2 million from $437.9 million, including higher research and development and general and administrative spending. Restructuring charges were $8.7 million, versus $7.9 million.
- Net income declined to $72.4 million from $93.6 million. The effective tax rate increased to 24.5% from 16.3%; F5 cited stock-based compensation and international operations. Other income improved, partly due to foreign currency gains and increased investment income.
- Operating cash flow rose year over year. Cash balances and investments declined mainly because F5 prepaid $350.0 million of term debt and repurchased $40.0 million of shares.
Liquidity, debt, outlook, and risks
F5 prepaid its $350.0 million term loan in full in December 2022 and had no borrowings under its $350.0 million revolving credit facility at quarter-end; the full facility was available, and the company reported covenant compliance. Management said existing cash and investments, expected operating cash flows, and available revolver capacity should meet liquidity needs. F5 reported days sales outstanding of 62.
Management noted changing customer buying patterns amid macroeconomic uncertainty and said it would continue to monitor conditions. Risks discussed include inflation, higher interest rates, slower growth, foreign-exchange movements, supply-chain and component costs, and potential customer reprioritization of spending. F5 said inflation had not materially affected results to date, but it might not be able to offset significant cost increases through pricing. The filing provides no specific financial guidance.
F5 reported no accrual for the legal proceedings discussed. In the Hemma Investments (formerly Lynwood) NGINX-related case, the district court dismissed claims with prejudice and entered final judgment for F5; the plaintiff appealed, and F5’s answering brief was due March 20, 2023. The court found F5 entitled to attorneys’ fees, with the amount still to be determined. F5 said it could not determine whether an unfavorable outcome in other pending legal matters was probable or estimate potential losses. A $40 million, four-year supplier commitment for components was entered in October 2022; total non-cancelable long-term purchase commitments were $31.8 million at quarter-end.
Subsequent event: F5 acquired Lilac Cloud on February 1, 2023, adding CDN technology; the company did not expect a material impact on operating results.
Important facts for investors to verify
- Whether service growth and deferred-revenue trends continue to offset flat product revenue, and how customer buying patterns develop.
- Whether elevated product costs and lower gross margins persist, including the effect of component prices and sourcing costs.
- Cash generation and capital allocation after the term-loan payoff, including future share repurchases and any acquisitions.
- Progress and outcome of the NGINX-related appeal, attorneys’ fee determination, and other litigation or tax audits; no litigation loss accrual was recorded.
- The integration and financial contribution of the Lilac Cloud acquisition.