F5 Networks, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended September 30, 2018; it is an annual report, not a standalone Q4 filing. F5 sells application delivery and security services through hardware, software, cloud and managed-service offerings. Its products support application performance, availability, access management and network and application security. Revenue is reported in one operating segment.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $2,161.4 million | $2,090.0 million | +3.4% |
| Product revenue | $960.1 million | $964.7 million | -0.5% |
| Services revenue | $1,201.3 million | $1,125.4 million | +6.7% |
| Gross profit / gross margin | $1,799.9 million / 83.3% | $1,736.6 million / 83.1% | Margin +0.2 percentage points |
| Operating income / margin | $590.9 million / 27.3% | $564.0 million / 27.0% | Income +4.8% |
| Net income / diluted EPS | $453.7 million / $7.32 | $420.8 million / $6.50 | Income +7.8%; EPS +12.6% |
| Cash from operations | $761.1 million | $740.3 million | +2.8% |
Services were 55.6% of revenue and grew mainly with the installed base and maintenance renewals. Product revenue declined as lower systems revenue more than offset higher software revenue. Annual product and services cost rates were 18.9% and 15.0% of their respective revenues; total cost of revenue was 16.7% of revenue.
At September 30, 2018, cash, cash equivalents and investments totaled $1,450.6 million, including $424.7 million of cash and cash equivalents. Total current assets were $1,417.7 million and current liabilities $954.4 million. The company reported no long-term debt and stated it expected available cash and operating cash generation to cover requirements for the next 12 months. Deferred revenue totaled approximately $1,015.3 million, including current and long-term balances.
Operating cash flow was $761.1 million; investing activities used $456.0 million and financing activities used $551.3 million. The company repurchased $600.1 million of shares during FY2018. Capital expenditures were $53.5 million. Shareholders’ equity was $1,285.5 million.
For Q4 FY2018, revenue was $562.7 million versus $538.0 million a year earlier; net income was $132.9 million versus $135.7 million, and diluted EPS was $2.18 versus $2.14. Q4 included an $18.4 million restructuring charge.
Material changes versus the prior year
- Revenue growth slowed to 3.4% from 4.8% in FY2017. Services growth remained positive but eased to 6.7% from 7.1%.
- Operating expenses rose to $1,209.0 million from $1,172.6 million, including FY2018 restructuring charges of $18.4 million; FY2017 included $12.7 million of restructuring charges.
- Net income benefited from a lower effective tax rate, 24.9% versus 26.9%, primarily reflecting U.S. tax reform effects. The reported FY2017 rate also benefited from a one-time $21.0 million reduction related to use of foreign tax credits.
- Cash and investments increased by $148.9 million despite substantial repurchases. Shares outstanding at fiscal year-end were 60.2 million versus 62.6 million a year earlier.
Outlook, commentary, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management expected R&D expense to remain consistent as a percentage of revenue and said operating cash generation was expected to remain the principal cash-flow driver. F5 was preparing to adopt the new revenue standard in FY2019 and anticipated no material income-statement impact, while noting possible balance-sheet and disclosure effects. Lease accounting adoption was planned for FY2020 and expected to materially increase reported lease assets and liabilities.
- F5 identified cloud migration, subscription and as-a-service pricing shifts, intense competition, product development and execution, and customer spending variability as risks to growth and margins.
- Five distributors represented 60.1% of FY2018 revenue. The company also relies on a single primary hardware contract manufacturer and has single- or limited-source components.
- A July 2018 restructuring affected approximately 215 employees. The company recorded $18.4 million of charges and said it did not expect significant further charges from that plan.
- Tax reform included a $7.0 million provisional expense for deemed repatriation and a $14.0 million deferred-tax remeasurement expense. A foreign tax incentive, conditional on employment and investment thresholds, reduced FY2018 taxes by $6.4 million.
- F5 had $31.7 million of gross unrecognized tax benefits and disclosed approximately $33.3 million of tax liabilities, including interest and penalties, related to uncertain tax positions; timing of cash outflows was not estimable.
- In patent litigation with Radware, F5 disclosed no loss-contingency accrual. After year-end, the court granted F5 summary judgment of noninfringement on Radware’s counterclaim; F5’s claims against Radware remained scheduled for trial in November 2019.
- F5 had $462.3 million of future operating lease payments and $26.2 million of purchase obligations. A new Seattle headquarters lease was expected to commence in 2019.
- On October 31, 2018, the board authorized an additional $1.0 billion for repurchases, in addition to $573.6 million remaining under the existing authorization.
Important facts for investors to verify
- Whether service and subscription growth can offset flat-to-declining product revenue, and how the changing sales mix affects margins.
- Distributor concentration, channel inventory and the company’s dependence on its contract manufacturer and constrained component sources.
- Execution and margin effects of cloud and subscription strategies, including adoption of the new revenue-recognition standard.
- The eventual cash and earnings effects of tax examinations, uncertain tax positions and tax-law changes.
- Progress, cost and balance-sheet impact of the new headquarters lease and planned lease-accounting adoption.
- Developments in the Radware litigation and any other legal matters; the filing states that outcomes and potential losses could not be determined with assurance.