F5, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022. Unless stated otherwise, financial amounts below are in U.S. dollars and millions. Comparisons are with the corresponding 2021 periods.
Business context
F5 provides multi-cloud application security and delivery solutions, including systems, software, subscriptions, cloud services, and support. It reports one operating segment. Threat Stack, acquired October 1, 2021, was included in the results; its contribution was not material.
Financial performance
| Metric | Three months ended June 30, 2022 | Nine months ended June 30, 2022 |
|---|---|---|
| Revenue | $674.5; up 3.5% | $1,995.8; up 3.9% |
| Product revenue | $326.5; up 5.3% | $967.1; up 6.6% |
| Service revenue | $348.0; up 1.9% | $1,028.7; up 1.4% |
| Gross profit / gross margin | $543.8 / 80.6% (81.4% prior year) | $1,603.6 / 80.4% (81.0% prior year) |
| Operating income / margin | $107.5 / 15.9% (up from $96.4 / 14.8%) | $296.3 / 14.8% (up from $267.7 / 13.9%) |
| Net income | $83.0 (down from $89.6); diluted EPS $1.37 (from $1.46) | $232.8 (up from $220.5); diluted EPS $3.80 (from $3.55) |
| Operating cash flow | Not separately provided for the quarter | $288.3 (down from $448.1) |
Software product revenue rose to $178.9 million for the quarter from $129.5 million, while systems revenue fell to $147.5 million from $180.4 million. Management attributed the systems decline to supply shortages. Higher product and service costs, including component-price increases, expedite fees, and sourcing costs, weighed on gross margin. Quarterly net income declined despite higher operating income, mainly amid a higher effective tax rate and greater other expense.
Financial position and liquidity
- Cash and cash equivalents were $541.9 million; short- and long-term investments totaled $215.6 million. Cash and investments together were $757.5 million at June 30, 2022, down $285.9 million from September 30, 2021.
- Current assets were $1,688.9 million and current liabilities were $1,768.7 million. Deferred revenue was $1,637.3 million in total, including current and long-term balances.
- Accounts receivable was $455.8 million; management reported third-quarter days sales outstanding of 61.
- Term-loan principal outstanding was $355.0 million, classified as current, with maturity on January 24, 2023. The company had no revolving-credit borrowings and $350 million available under its facility. It reported compliance with debt covenants.
- Operating lease liabilities totaled $308.6 million. The filing reports no material change in lease commitments.
Changes, outlook, and notable items
- Operating cash flow fell year over year, which management attributed in part to multi-year subscriptions billed annually, related unbilled receivables, and prepayments to its contract manufacturer for future hardware components. Investing cash flow was $147.4 million provided, including investment maturities and sales; financing cash flow used $470.2 million, primarily reflecting $500.0 million of share repurchases.
- Management said ongoing global supply-chain constraints, particularly semiconductor availability, were limiting its ability to meet hardware demand and could delay shipments. It also cited component-price increases and higher sourcing costs. No numerical revenue or earnings guidance is provided in the supplied filing text.
- Management expected cash, investments, operating cash flows, and available revolving-credit capacity to be sufficient for liquidity needs. Remaining performance obligations were approximately $1.6 billion; the company expected to recognize about 64.1% within the next 12 months.
- For the nine-month period, F5 recorded $7.9 million in restructuring charges related to a reduction of approximately 70 positions and a $6.2 million impairment of the Shape trade name. It said it expected no significant future restructuring charges.
- F5 repurchased $500.0 million of stock in the first nine months. On July 22, 2022, the board authorized an additional $1 billion for repurchases, beyond $272 million then remaining under the existing authorization; purchases are discretionary.
- A lawsuit concerning claimed ownership of NGINX-related intellectual property remained pending. The company said it intended to defend the matter; it had not accrued a loss contingency, and the ultimate outcome and potential exposure were not determinable.
- Management said inflation had not materially affected results to date but warned it could raise costs or affect customer purchasing. It also identified interest-rate, foreign-currency, pandemic, and supply-chain uncertainties. Risk factors were reported as unchanged from the prior Form 10-K.
Important facts for investors to verify
- Whether hardware supply constraints and related costs continue to limit shipments, affect revenue mix, or pressure margins.
- How subscription billing, unbilled receivables, and contract-manufacturer prepayments affect cash conversion and operating cash flow.
- Plans and funding for the $355 million term-loan maturity in January 2023, alongside the company’s repurchase activity.
- Whether reported remaining performance obligations convert to revenue as expected, and how distributor concentration affects sales and receivables.
- Developments in the NGINX litigation and any changes to the company’s assessment of potential loss exposure.