F5, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2017. This is an annual report, not a standalone Q4 filing; selected Q4 results are included below. Dollar amounts are U.S. dollars.
Business context
F5 sells application delivery and security services through BIG-IP and VIPRION hardware, software-only Virtual Editions, cloud-based Silverline subscriptions, and related support and maintenance. Enterprise and service-provider customers are served primarily through indirect channels. The company reports one operating segment.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change / note |
|---|---|---|---|
| Revenue | $2.090 billion | $1.995 billion | +4.8% |
| Product revenue | $964.7 million | $944.5 million | +2.1% |
| Services revenue | $1.125 billion | $1.051 billion | +7.1% |
| Gross profit / margin | $1.737 billion / 83.1% | $1.658 billion / 83.1% | Margin unchanged |
| Operating income / margin | $564.0 million / 27.0% | $547.4 million / 27.4% | Income +3.0%; margin lower |
| Net income / diluted EPS | $420.8 million / $6.50 | $365.9 million / $5.38 | Net income +15.0% |
| Cash from operations | $740.3 million | $711.5 million | Capital expenditures were $38.7 million; approximate operating cash flow less capex was $701.6 million |
| Cash, cash equivalents and investments | $1.302 billion | $1.159 billion | Includes $673.2 million cash, $343.7 million short-term investments and $284.8 million long-term investments |
| Debt | No long-term debt reported | — | Management described the company as having no long-term debt |
At year-end, current assets were $1.459 billion and current liabilities were $934.6 million. Total deferred revenue was approximately $964.3 million, including current and long-term balances. The company said existing cash and investments plus expected operating cash flow should cover operating requirements for the next 12 months. Days sales outstanding in Q4 was 49.
Q4 FY2017: Revenue was $538.0 million and net income was $135.7 million; diluted EPS was $2.14. Q4 net income included a comparatively low $18.1 million income-tax provision; the filing attributes the full-year tax-rate reduction in part to foreign income and foreign tax credits, including a one-time benefit from distributing prior-year foreign earnings.
Material changes versus the prior year
- Growth returned to product revenue after a 4.7% decline in FY2016. FY2017 product growth was led by ADN products, security solutions and Virtual Editions.
- Service revenue continued to grow, but at a slower rate: 7.1% versus 13.2% in FY2016, reflecting the installed base and maintenance renewals.
- Gross margin held at 83.1%; operating margin declined from 27.4% to 27.0% as operating expenses grew 5.6%.
- Net income rose despite modest operating-income growth, with the effective tax rate falling to 26.9% from 33.5%. The filing reports a $21.0 million tax-expense reduction related to previously unrecognized foreign tax credits.
- F5 repurchased 4.56 million shares for $600.1 million, reducing weighted-average basic shares to 64.2 million from 67.4 million. At September 30, $173.7 million remained under the existing authorization.
- A September 2017 workforce restructuring generated a $12.7 million charge. Management did not expect significant additional charges from the plan.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected R&D expense to remain consistent as a percentage of revenue and said current liquidity should meet operating needs for the next 12 months.
- Management cited demand for core ADN products and maintenance growth, while investing in cloud, software-only and subscription offerings. It cautioned that cloud transition may require infrastructure investment and could pressure revenue or margins.
- Revenue is concentrated in four distributors, which together represented 56.6% of FY2017 revenue. The primary hardware manufacturing relationship is with a single contract manufacturer, and some components have limited sources.
- Competitive pressure, changing customer purchasing and subscription models, product-development and acceptance risks, cybersecurity vulnerabilities, and quarter-end shipment timing could affect results.
- Radware litigation remained material: a prior $6.4 million patent-damages judgment was affirmed on appeal in September 2017, with recovery of judgment amounts pending at the report date. Separate patent disputes between the parties continued; the company said outcomes and potential exposure in pending matters could not be determined.
- F5 signed a lease for a planned 515,000-square-foot Seattle headquarters, with a 14.5-year initial term expected to begin in 2019. Contractual obligations included $468.1 million of gross operating lease payments and $20.3 million of purchase obligations.
- CEO François Locoh-Donou took office in April 2017. The company also noted $221.4 million of undistributed foreign subsidiary earnings intended to remain invested abroad and $23.1 million of unrecognized tax benefits.
Most important facts for investors to verify
- Whether product growth, particularly security and Virtual Editions, can persist and offset reliance on the established ADN business.
- Maintenance renewal trends, deferred-revenue growth and the eventual revenue and margin contribution of Silverline and other subscription offerings.
- Distributor concentration, including the effects of distributor acquisitions, and the resilience of the single-source hardware manufacturing arrangement.
- The resolution and financial exposure of Radware litigation and any other legal contingencies.
- The sustainability of the lower effective tax rate, the one-time foreign tax-credit benefit, and potential taxes on foreign earnings.
- Execution and cost implications of the workforce restructuring, share repurchases and long-term headquarters lease.