F5, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. Financial amounts are in U.S. dollars; figures below are rounded to millions unless noted. F5 provides multi-cloud application security and delivery products and services.
Financial performance
| Metric | Three months ended March 31, 2022 | Prior-year quarter | Six months ended March 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $634.2 | $645.3 | $1,321.3 | $1,269.9 |
| Gross profit / gross margin | $507.9 / 80.1% | $516.7 / 80.1% | $1,059.9 / 80.2% | $1,026.3 / 80.8% |
| Operating income / margin | $74.6 / 11.8% | $53.5 / 8.3% | $188.8 / 14.3% | $171.2 / 13.5% |
| Net income | $56.2 | $43.2 | $149.8 | $130.9 |
| Diluted earnings per share | $0.92 | $0.70 | $2.43 | $2.10 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $216.9 | $265.8 |
- Revenue mix: Quarterly product revenue was $297.5 million, down 3.8%; services were $336.7 million, essentially flat. Within products, systems revenue fell to $146.0 million from $201.0 million, while software revenue rose to $151.5 million from $108.2 million. For the six months, total revenue grew 4.0%, including 7.3% growth in product revenue and 1.2% growth in service revenue.
- Cash flow and liquidity: Cash, cash equivalents and investments totaled $922.0 million at March 31, 2022, versus $1,043.4 million at September 30, 2021. Operating cash flow was $216.9 million for the half-year. Cash and restricted cash at period-end totaled $589.9 million. Management said current liquidity, anticipated operating cash flows and available credit capacity should meet liquidity needs.
- Debt: Term-loan principal outstanding was $360.0 million, classified as current, with $350.0 million scheduled in fiscal 2023 and maturity on January 24, 2023. The company had no revolver borrowings and $350.0 million of available capacity. It reported compliance with debt covenants.
- Balance sheet indicators: Total assets were $5.08 billion. Deferred revenue was $1.60 billion, up from $1.49 billion at September 30, 2021. Non-cancelable remaining performance obligations were approximately $1.6 billion; F5 expects to recognize about 65.2% over the next 12 months.
Material changes and notable items
- Quarterly revenue declined 1.7%, primarily because semiconductor and other supply constraints limited hardware systems shipments. Software growth partly offset the decline. Over six months, software growth more than offset lower systems revenue.
- Quarterly operating income and net income increased year over year despite lower revenue, alongside lower operating expenses. The six-month gross margin eased to 80.2% from 80.8%, while operating margin increased to 14.3% from 13.5%.
- Operating cash flow declined year over year. Management cited annual billing of multi-year subscriptions, which can increase unbilled assets, and significant prepayments to the contract manufacturer for future hardware components.
- F5 paid approximately $68.0 million for the October 2021 acquisition of Threat Stack; its revenue and earnings were not material for the periods presented. The company recorded a $7.9 million restructuring charge in the first quarter for a workforce reduction affecting approximately 70 positions and said no significant additional charges were expected.
- F5 repurchased $250.0 million of shares during the six months, leaving $522 million authorized. Stock-based compensation was $127.9 million for the half-year.
Outlook, risks and contingencies
- Supply chain: Management expects ongoing semiconductor and component constraints to limit hardware availability, lengthen lead times and delay fulfillment of some orders. Component price increases, expedite fees and other sourcing costs also affected the first half.
- Guidance: The filing does not provide specific numerical revenue or earnings guidance. Management described liquidity as sufficient for anticipated needs and expects operating income to be the primary driver of future cash flow.
- Risks: The filing identifies uncertainty from the COVID-19 pandemic and supply chain disruptions, potential gross-margin effects from product mix and component costs, interest-rate exposure on investments and variable-rate debt, and possible inflation-related cost pressures. F5 said inflation had not materially affected results to date. It reported no material changes to the risk factors in its prior annual report.
- Legal and tax matters: A pending lawsuit alleges intellectual-property and other claims related to NGINX; F5 disputes the allegations, and its motion to dismiss remained pending. The company had not accrued a loss contingency and said the outcome and potential exposure could not be determined. F5 also reported $66.2 million of unrecognized tax benefits; expected changes within 12 months were not expected to be material.
- Other: F5 reported that a distributor filed required Russian import notifications or license applications with the FSB during the quarter; F5 and its subsidiaries generated no direct revenue or net profit from that activity and do not sell to the FSB. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether supply constraints ease, and how hardware shipment delays and component costs affect revenue, margins and customer demand.
- Whether software and subscription growth continues to offset lower systems sales, and how deferred revenue and remaining performance obligations convert into recognized revenue and cash.
- F5’s ability to repay or refinance the $350 million fiscal-2023 term-loan maturity while maintaining liquidity and covenant compliance.
- Operating cash-flow trends, including the effect of subscription billing and component prepayments.
- Developments in the NGINX litigation, the Threat Stack integration and the company’s distributor concentration; two distributors each represented more than 10% of quarterly revenue.