F5 Networks, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and financial performance
F5 provides multi-cloud application services, including hardware, software, subscription-based offerings and related services. It completed its acquisition of edge-as-a-service provider Volterra on January 22, 2021.
| Metric | Quarter ended March 31, 2021 | Prior-year quarter | Six months ended March 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $645.3 million | $583.4 million | $1,269.9 million | $1,152.8 million |
| Gross profit / gross margin | $516.7 million / 80.1% | $482.2 million / 82.6% | $1,026.3 million / 80.8% | $962.9 million / 83.5% |
| Operating income / margin | $53.5 million / 8.3% | $83.7 million / 14.3% | $171.2 million / 13.5% | $206.0 million / 17.9% |
| Net income | $43.2 million | $61.4 million | $130.9 million | $159.9 million |
| Diluted earnings per share | $0.70 | $1.00 | $2.10 | $2.62 |
| Cash from operations | Not stated for the quarter | Not stated for the quarter | $265.8 million | $325.8 million |
Revenue, margins and material changes
- Quarterly revenue grew 10.6% year over year. Product revenue rose 19.1%, led by software; service revenue increased 3.8%. For the six-month period, revenue grew 10.2%.
- Quarterly software product revenue was $108.2 million, up from $88.2 million; systems revenue was $201.0 million, up from $171.4 million. Services represented 52.1% of quarterly revenue.
- Gross margin declined to 80.1% from 82.6%, while operating margin fell to 8.3% from 14.3%. Higher operating expenses—including increased personnel costs and $33.8 million of quarterly facility-related impairment charges—contributed to lower operating income.
- Quarterly net income declined 29.6% year over year. The six-month results also included $40.7 million of impairment charges, versus none in the prior-year period, and no restructuring charge, compared with $7.8 million in the prior-year six months.
- Deferred revenue was $1.367 billion at March 31, up from $1.273 billion at September 30, 2020. Non-cancelable remaining performance obligations were approximately $1.4 billion; F5 expected to recognize about 68% over the following 12 months.
Cash, debt and liquidity
- Cash, cash equivalents and investments totaled $662.3 million at March 31, compared with $1.313 billion at September 30, 2020. Cash and cash equivalents alone were $532.2 million.
- Six-month operating cash flow was $265.8 million. Investing activities used $94.4 million, including $411.3 million paid for Volterra, offset in part by investment sales and maturities. Financing activities used $489.2 million, primarily reflecting $500 million spent under accelerated share repurchase agreements.
- Term-loan principal outstanding was $380 million, with a 1.390% weighted-average interest rate for the quarter; $10 million was repaid during the six months. The loan matures January 24, 2023. The $350 million revolving facility had no borrowings, and F5 reported compliance with its debt covenants.
- Management stated that cash, investments, expected operating cash flows and available revolver capacity should be sufficient for liquidity needs.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management said the future financial and business effects of COVID-19 remained uncertain, although it had not significantly affected results for the reported quarter.
- Volterra was acquired for approximately $427.2 million in net consideration. Preliminary purchase accounting included $351.4 million of goodwill; acquired operating results and pro forma information were not material for the periods presented.
- F5 recorded $33.8 million of quarterly impairment charges, including $23.5 million against lease right-of-use assets related to exiting six floors at its Seattle headquarters and $10.3 million for associated tenant improvements and other fixed assets. Six-month impairment charges totaled $40.7 million.
- A lawsuit brought by Lynwood Investment CY Limited alleges intellectual-property and other claims involving NGINX. The court dismissed the ten claims selected for litigation, with leave to amend; mediation was referred to, and the company said it could not determine the ultimate outcome or potential exposure. F5 had recorded no loss-contingency accrual.
- Other risks noted include potential effects of COVID-19, interest-rate exposure on floating-rate debt and investments, reliance on distributors and contract manufacturers, and the possibility of costly litigation. Ingram Micro and Synnex each accounted for more than 10% of quarterly revenue.
Important facts for investors to verify
- Whether software-led product growth and maintenance renewals continue to support revenue and deferred-revenue growth.
- Whether operating expenses and facility-related costs moderate enough to stabilize operating and gross margins.
- How cash and investment balances evolve after the Volterra acquisition and $500 million share repurchase, and whether debt covenants remain comfortably satisfied.
- The final Volterra purchase-price allocation and integration progress, and any developments in the NGINX-related litigation.
- The extent to which pandemic conditions, supply-chain costs, distributor concentration and interest-rate changes affect future results.