F5, Inc. (F5 Networks) — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparison is the three months ended December 31, 2019 unless otherwise noted. F5 provides multi-cloud application services, including hardware, software, subscription offerings, and related services. Figures below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $624.6 million | $569.3 million | +9.7% |
| Product revenue | $288.0 million | $234.5 million | +22.8% |
| Service revenue | $336.6 million | $334.8 million | +0.5% |
| Gross profit / gross margin | $509.6 million / 81.6% | $480.7 million / 84.4% | Margin down 2.8 percentage points |
| Operating income / margin | $117.7 million / 18.9% | $122.3 million / 21.5% | Income down 3.7% |
| Net income / diluted EPS | $87.7 million / $1.41 | $98.5 million / $1.62 | Income down 11.0% |
| Cash from operations | $137.4 million | $144.0 million | Down $6.6 million |
Product revenue growth was led by software: software revenue rose to $109.5 million from $64.9 million, while systems revenue increased to $178.6 million from $169.6 million. Services made up 53.9% of revenue. The company attributed overall growth primarily to Shape-acquired SaaS offerings and subscription-based products, including enterprise license agreements.
Gross margin declined as product costs grew faster than revenue, primarily reflecting higher revenue and associated managed-service costs from Shape. Operating expenses were $391.9 million, up from $358.3 million; the prior-year quarter included $7.8 million of restructuring charges, while the current quarter did not. The effective tax rate was 25.1%, versus 22.8%.
Cash, liquidity, and debt
- Cash and cash equivalents were $1.027 billion at December 31, 2020; short- and long-term investments totaled $435.3 million. Cash plus investments totaled $1.462 billion, up $149.3 million from September 30, 2020.
- Operating cash flow was $137.4 million; investing activities provided $20.6 million, and financing activities provided $17.7 million. Capital expenditures were $4.7 million.
- Current assets were $2.030 billion and current liabilities were $1.319 billion. Deferred revenue totaled $1.359 billion, compared with $1.273 billion at September 30, 2020.
- Term-loan principal outstanding was $385 million, with $19.3 million classified as current on the balance sheet. The loan matures January 2023; the company made a $5 million principal payment during the quarter. The reported weighted-average interest rate was 2.106%.
- No revolver borrowings were outstanding; $350 million of capacity was available. F5 reported compliance with its debt covenants.
Material changes, outlook, and risks
- F5 reported approximately $1.4 billion of non-cancelable remaining performance obligations at quarter-end and expected to recognize 68.9% over the next 12 months.
- Shape, acquired in January 2020, contributed to subscription and SaaS growth. F5 recorded a $6.7 million impairment of a right-of-use asset related to integrating Shape’s former Santa Clara headquarters.
- After quarter-end, F5 completed its Volterra acquisition on January 22, 2021, for approximately $440 million in cash and $60 million of deferred consideration, subject to adjustments. Initial purchase accounting was incomplete at filing.
- On February 3, 2021, F5 paid $500 million under accelerated share repurchase agreements. The final shares and average purchase price were to be determined by settlement at the end of Q3 FY2021.
- Management said COVID-19 had not significantly affected the reported quarter, but its future effect on business and financial outlook remained uncertain. The filing provides no specific revenue or earnings guidance.
- A lawsuit concerning alleged ownership of NGINX intellectual property remained pending; F5 moved to dismiss the claims and had recorded no loss-contingency accrual. Management said the ultimate outcome and potential exposure could not be determined.
- Distributor concentration remained notable: Ingram Micro accounted for 18.1% of quarterly revenue; Synnex accounted for 10.0%. F5 also identified interest-rate, credit, foreign-currency, supply-chain, and litigation risks.
Most important facts for investors to verify
- Whether product and subscription growth continues, and how much reflects acquired Shape offerings versus organic growth.
- Whether gross-margin pressure persists, particularly from SaaS and managed-service costs and product mix.
- The financial impact of the Volterra acquisition, including purchase accounting, integration costs, and the $500 million share repurchase.
- Cash generation and liquidity after the acquisition and repurchase, alongside term-loan repayment and covenant headroom.
- Developments in the NGINX litigation and the uncertain effects of COVID-19 on customers, operations, and outlook.