F5, Inc. Form 10-Q Summary
Business context and period: F5 provides multi-cloud application security and delivery products and services, including BIG-IP, NGINX and Distributed Cloud offerings. This report covers the fiscal third quarter and first nine months ended June 30, 2023; comparisons are with the corresponding 2022 periods. F5 reports one operating segment.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $702.6 million, up 4.2% | $2.106 billion, up 5.5% |
| Product revenue | $328.2 million, up 0.5% | $1.009 billion, up 4.4% |
| Service revenue | $374.5 million, up 7.6% | $1.097 billion, up 6.6% |
| Gross profit / margin | $561.0 million / 79.8% (prior year 80.6%) | $1.654 billion / 78.5% (prior year 80.4%) |
| Operating income | $103.6 million (prior year $107.5 million) | $300.8 million (prior year $296.3 million) |
| Net income / diluted EPS | $89.0 million / $1.48 (prior year $83.0 million / $1.37) | $242.8 million / $4.02 (prior year $232.8 million / $3.80) |
Margins and cost trends: Third-quarter operating margin was 14.8% versus 15.9% a year earlier; net margin was 12.7% versus 12.3%. Gross margin declined as product costs rose, including component, expediting and sourcing costs. Operating expenses included $56.6 million of restructuring charges in the quarter.
Cash flow and liquidity: For the first nine months, operating cash flow was $463.6 million, compared with $288.3 million in the prior-year period. Investing activities provided $44.0 million; financing activities used $591.9 million. Capital expenditures were $38.8 million. Cash, cash equivalents and investments totaled $696.5 million at June 30, 2023, down from $894.1 million at September 30, 2022. Current assets were $1.714 billion and current liabilities $1.490 billion. Deferred revenue totaled $1.791 billion.
Debt: F5 prepaid its $350 million term loan in December 2022 and had no term debt outstanding at June 30, 2023. Its $350 million revolving credit facility was undrawn, with $350 million available; the company reported covenant compliance.
Material changes and management commentary
- Growth was led by services, particularly maintenance renewals. Management said customers were delaying new-product purchases amid macroeconomic uncertainty and budget constraints; stronger-than-normal maintenance renewals were viewed as consistent with customers extending support on existing products.
- Quarterly product revenue was nearly flat. For the nine months, systems revenue increased while software revenue declined; services rose in both periods. F5 said it believed softer demand was temporary, but continued to monitor macroeconomic conditions.
- A fiscal third-quarter restructuring affected approximately 620 employees, about 9% of the workforce, and included leased-space reductions. The charge was $56.7 million; management estimated approximately $130 million in annualized savings and did not expect significant further charges for this plan.
- Share repurchases were $250.0 million in the quarter and $290.0 million year to date. Approximately $982 million remained authorized at June 30.
- The Lilac Cloud acquisition closed in February 2023 and was described as not material to results. F5 also amended its revolving credit agreement to replace LIBOR with SOFR.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management said current cash, investments, expected operating cash flows and available revolver capacity should meet liquidity needs. Remaining non-cancelable customer-contract performance obligations were $1.8 billion; F5 expected to recognize approximately 64.2% over the next 12 months.
Key risks include prolonged macroeconomic weakness, customer spending delays, inflation and supply-chain or component-cost pressures, and uncertainty in forecasting demand. Ingram Micro and Synnex each represented more than 10% of quarterly revenue; Carahsoft also exceeded 10% in the quarter. The Lynwood litigation appeal remained ongoing; management had not accrued a loss contingency and said it could not estimate a potential loss. The company also reported tax audits and $73.2 million of unrecognized tax benefits, while stating expected near-term changes were not expected to be material.
Important facts for investors to verify
- Whether delayed product purchases convert into future systems and software sales, or continue to be offset mainly by maintenance renewals.
- Whether the restructuring delivers the estimated $130 million in annualized savings without undermining growth or product development.
- Whether component and sourcing costs continue to pressure gross margins.
- How distributor concentration and the large deferred-revenue balance evolve, including renewal and collection trends.
- Developments in the Lynwood appeal, tax audits and other legal or regulatory matters.