F5 Networks, Inc. — FY2010 Form 10-K
Business context and reporting period. F5 sells application delivery networking products and related services, principally BIG-IP platforms and software, as well as file-virtualization products. The fiscal year ended September 30, 2010; the filing also presents unaudited results for the quarter ended that date. Fiscal-year figures below are compared with FY2009.
Financial performance
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $882.0 million | $653.1 million | +35.0% |
| Gross profit / margin | $710.0 million / 80.5% | $510.4 million / 78.1% | Margin +2.4 percentage points |
| Operating income / margin | $230.0 million / 26.1% | $121.9 million / 18.7% | Income +88.7% |
| Net income / margin | $151.2 million / 17.1% | $91.5 million / 14.0% | Income +65.1% |
| Diluted EPS | $1.86 | $1.14 | +$0.72 |
| Operating cash flow | $313.6 million | $202.0 million | +$111.6 million |
- Product revenue was $561.1 million, up 38.0%; services revenue was $320.8 million, up 30.1%. ADN products accounted for 95.4% of product revenue. International sales were 41.4% of total revenue, compared with 44.7% in FY2009.
- Operating expenses rose to $480.0 million from $388.4 million, including sales and marketing of $293.2 million and R&D of $118.3 million. Stock-based compensation expense was $70.8 million, versus $56.1 million.
- At September 30, cash, cash equivalents and investments totaled $862.1 million, up from $574.4 million. Cash and short-term investments were $428.5 million; long-term investments were $433.6 million. The company reported no long-term debt.
- Current assets were $606.0 million and current liabilities $287.1 million. Deferred revenue totaled $259.4 million, including $204.1 million current; management attributed its growth to maintenance contracts and renewals.
- Investing activities used $238.2 million, primarily reflecting net investment purchases and capital expenditures; financing activities used $16.8 million. The company repurchased $75.0 million of shares during FY2010.
Fourth-quarter snapshot
For the quarter ended September 30, 2010, revenue was $254.3 million, net income was $48.2 million and diluted EPS was $0.59. In the comparable FY2009 quarter, revenue was $175.1 million, net income was $28.4 million and diluted EPS was $0.36. These quarterly figures are unaudited.
Material changes, outlook and risks
- Growth was driven mainly by increased demand and shipment volume for core ADN products, including application security and WAN optimization; service growth reflected the expanding installed base and maintenance renewals. Product costs as a share of product revenue fell to 20.3% from 23.4%, while total gross margin improved.
- Management said existing cash and investments, excluding auction rate securities (ARS), plus operating cash generation should fund foreseeable operating requirements. It expected R&D spending to remain consistent as a percentage of revenue. The filing provides no specific forward revenue or earnings guidance.
- ARS had a fair value of $16.0 million at year-end and remained exposed to failed-auction illiquidity and possible impairment. The company said it expected no material effect on overall liquidity; UBS had purchased eligible ARS for $34.4 million at par by year-end.
- Key risks include dependence on ADN products, intense competition and pricing pressure, unpredictable enterprise sales timing, concentration in two distributors (24.7% of FY2010 revenue), and reliance on a single contract manufacturer for ADN hardware. International operations, component availability, product errors and intellectual-property claims also pose risks.
- Historical stock-option-practices derivative litigation had a proposed settlement preliminarily approved by the court, subject to final approval and dismissal of the state case. The SEC reported that no enforcement action was recommended; management believed the DOJ would take no further action. No other pending litigation was identified as expected to have a material adverse effect.
- The board approved a new share-repurchase authorization of up to $200 million on October 26, 2010. This followed the prior program, under which $75.0 million was repurchased in FY2010. The company did not anticipate paying dividends in the foreseeable future.
Investor verification priorities
- Check subsequent results against the FY2010 revenue growth and margin improvement, particularly the sustainability of ADN product demand and gross margins.
- Review distributor concentration, channel inventory and cancellations; reported backlog of $50.3 million was not considered a reliable revenue indicator because orders could be cancelled or rescheduled.
- Assess the liquidity, valuation assumptions and recovery prospects for ARS, and distinguish those holdings from readily available cash and investments.
- Track maintenance renewals and deferred revenue, alongside operating cash conversion and rising personnel, sales and marketing costs.
- Confirm final court approval and completion of the derivative-litigation settlement, and monitor the new repurchase program and share-based compensation.