F5 Networks, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended March 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise stated.
Business context
F5 provides multi-cloud application services, including hardware, software, subscription products and related services, primarily through indirect sales channels. On January 24, 2020, it completed its approximately $1.0 billion cash acquisition of Shape Security, adding fraud and abuse prevention products. Shape’s results were included from the acquisition date; the company said their contribution and pro forma information were not material to operations.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $583.4M | $544.9M | $1,152.8M | $1,088.7M |
| Gross profit / margin | $482.2M / 82.6% | $456.7M / 83.8% | $962.9M / 83.5% | $913.8M / 83.9% |
| Operating income / margin | $83.7M / 14.3% | $142.8M / 26.2% | $206.0M / 17.9% | $301.0M / 27.7% |
| Net income | $61.4M | $116.1M | $159.9M | $247.0M |
| Diluted EPS | $1.00 | $1.93 | $2.62 | $4.09 |
| Operating cash flow | Not separately presented | Not separately presented | $325.8M | $391.4M |
Q2 revenue increased 7.1% year over year: product revenue rose 9.1% to $259.5M and services revenue rose 5.5% to $323.9M. For the six-month period, revenue increased 5.9%. Management attributed growth mainly to software, including subscriptions, and maintenance revenue from a larger installed base. Despite revenue growth, Q2 operating income fell 41% and net income fell 47% year over year, reflecting higher operating expenses and lower other income.
Q2 operating expenses were $398.5M, up from $313.9M. Sales and marketing increased 26.0%, R&D 13.2%, and G&A 58.6%; G&A included $11.4M of Shape-related transaction costs for the quarter. Six-month expenses also included $7.8M of restructuring charges.
Liquidity, debt and balance sheet
- At March 31, 2020, cash and cash equivalents were $572.9M, short- and long-term investments totaled $453.2M, and combined cash and investments were $1.026B, down $304.6M from September 30, 2019. Management attributed the decrease primarily to the Shape acquisition.
- Six-month operating cash flow was $325.8M; investing cash flow was negative $716.0M, including $955.6M paid for Shape; financing cash flow was positive $368.4M, including $400.0M of term-loan proceeds and $50.0M of share repurchases. Capital expenditures were $35.5M.
- Shape was financed partly with a $400.0M senior unsecured term loan, maturing January 2023; $400.0M principal was outstanding, with a reported weighted-average interest rate of 2.765%. The company was in compliance with its financial covenants.
- A $350.0M revolving credit facility was undrawn, leaving $350.0M available. Management said current liquidity, expected operating cash flows and the revolver should meet liquidity needs.
- Current assets were $1.409B and current liabilities $1.252B. Deferred revenue was $1.281B. Operating lease liabilities totaled $404.5M following adoption of the new lease standard; lease commitments extend through 2033.
Material changes, outlook and risks
- Shape increased goodwill by a preliminary $799.6M; the purchase price allocation remained subject to change. The acquisition added $120.0M of developed technology and other identifiable intangible assets.
- F5 said COVID-19 had a net-neutral impact on results for the quarter ended March 31, but the pandemic’s future effects were uncertain. Risks cited included weaker customer demand or spending, collection delays, supply-chain disruption, higher costs and operational disruption. The company shifted employees to remote work, restricted travel and canceled or postponed in-person events; some event costs were unrecoverable.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It expected to recognize approximately 69.4% of the $1.3B of non-cancelable remaining performance obligations within 12 months.
- Ingram Micro accounted for 17.3% of Q2 revenue. Management also identified distributor and receivables concentration, interest-rate exposure, and potential changes in borrowing costs tied to the leverage covenant. No pending legal matter was identified as reasonably likely to have a material adverse effect.
- The company repurchased 441,851 shares in Q2 for an average $113.18 per share; $1.323B remained authorized. A workforce restructuring affected approximately 75 employees, and management did not expect significant further charges.
Important facts for investors to verify
- Whether post-quarter COVID-19 impacts changed customer demand, collections, supply availability or costs; the filing states the future effect was uncertain.
- How Shape performs and integrates, and whether its preliminary purchase-price allocation, goodwill and expected synergies change.
- Whether operating expense growth and acquisition-related costs abate, and whether revenue growth translates into recovering operating and net margins.
- Term-loan repayment, leverage-covenant headroom and interest-rate exposure, alongside continuing liquidity and lease commitments.
- Deferred revenue and remaining performance obligation conversion, distributor concentration, and the pace and economics of share repurchases.