F5 Networks, Inc. — Q3 Fiscal 2015 Form 10-Q
Reporting period: Three and nine months ended June 30, 2015; comparative periods ended June 30, 2014. Amounts below are in U.S. dollars. The company develops and sells application delivery networking products and related services, including hardware, software and cloud-based offerings.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | 9M FY2015 | 9M FY2014 |
|---|---|---|---|---|
| Revenue | $483.6M | $440.3M | $1,418.5M | $1,266.8M |
| Gross profit | $397.9M | $360.8M | $1,170.9M | $1,038.8M |
| Gross margin | 82.3% | 82.0% | 82.5% | 82.0% |
| Operating income | $140.1M | $126.1M | $405.3M | $346.1M |
| Operating margin | 29.0% | 28.7% | 28.5% | 27.3% |
| Net income | $93.2M | $79.5M | $268.0M | $217.2M |
| Diluted EPS | $1.29 | $1.05 | $3.67 | $2.84 |
- Quarterly revenue increased 9.8% year over year; nine-month revenue rose 12.0%. Product revenue grew 5.0% and 7.8%, respectively, while services revenue grew 15.5% and 16.8%.
- Quarterly and nine-month net income increased approximately 17% and 23%, respectively. Lower effective tax rates contributed: 33.8% for Q3 and 34.9% for nine months, versus 37.6% and 37.5% a year earlier. The company cited the reinstated federal research credit and lower nondeductible compensation expense.
- Operating expenses rose 9.8% in Q3 and 10.5% for nine months. Management attributed growth mainly to personnel, commissions, marketing, product development and, in G&A, a $3.0M tax expense recorded in Q1 FY2015.
Cash flow, balance sheet and capital allocation
- Cash from operations was $501.2M for the first nine months, up from $379.1M. Deferred revenue increased $105.8M, supporting operating cash flow.
- Cash and cash equivalents were $562.2M at June 30, 2015, compared with $281.5M at September 30, 2014. Cash plus short- and long-term investments totaled $1,159.4M, up $31.1M from fiscal year-end.
- Investing activities provided $194.3M, principally from investment maturities and sales, partly offset by $41.7M in property and equipment purchases. Financing activities used $409.8M, primarily for $456.9M of share repurchases.
- The company reported no long-term debt and said its cash and investments, together with operating cash generation, should cover operating requirements for at least the next 12 months.
- Current deferred revenue was $553.1M and long-term deferred revenue was $189.5M. Accounts receivable was $261.1M; Q3 days sales outstanding was 49.
- At July 24, 2015, the company reported $623.9M remaining under its repurchase authorization; it had repurchased and retired 16.95M shares at an average $101.83 per share under the current program.
Changes, outlook and risks
- Growth reflected increased demand for core application delivery networking products and a larger installed base generating maintenance renewals. Services grew faster than products; product revenue was 51.4% of Q3 revenue versus 53.8% a year earlier.
- Management expected R&D expense to remain consistent as a percentage of revenue in the foreseeable future. It also said international sales should remain significant, without assuring that their share of revenue would hold at current levels. No specific revenue or earnings guidance was provided in the supplied filing text.
- Management said service-cost efficiency improved, while investments in cloud services and infrastructure could pressure margins. The company identified execution and customer adoption of cloud offerings as uncertain.
- Key risks include reliance on a small number of distributors (58.3% of nine-month revenue came from four distributors), dependence on a single contract manufacturer for application delivery networking products, quarter-end sales timing, competition, product development and transition risks, and potential customer spending weakness. International revenue was 46.3% of Q3 revenue.
- The company disclosed no pending legal matter it believed reasonably likely to have a material adverse effect, but noted ordinary-course claims and suits. It reported no goodwill or other impairment charges and no impairment indicators at June 30.
- The CEO succession was scheduled for July 1, 2015, with Manuel Rivelo to become president and CEO following John McAdam’s retirement. Management concluded disclosure controls were effective at June 30, 2015.
Most important facts for investors to verify
- Whether revenue growth, particularly maintenance and services growth, continues and supports the unusually high deferred-revenue balance.
- Distributor concentration and exposure to the primary contract manufacturer and component suppliers.
- Whether cloud-service investment generates customer adoption without materially reducing margins.
- Cash generation relative to substantial repurchases, remaining authorization and ongoing facility capital spending.
- Effects of tax-credit changes, tax audits and the CEO transition on future results and execution.