F5 Networks, Inc. — Form 10-Q Summary
Business and period: F5 provides application delivery and security products and services, including BIG-IP hardware and software, virtual editions, cloud subscriptions, and support services. This report covers the fiscal third quarter and first nine months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $517.8 | $496.5 | $1,552.0 | $1,469.7 |
| Gross profit / margin | $428.1 / 82.7% | $412.2 / 83.0% | $1,289.1 / 83.1% | $1,217.4 / 82.8% |
| Operating income / margin | $139.1 / 26.9% | $138.9 / 28.0% | $415.1 / 26.8% | $384.7 / 26.2% |
| Net income | $97.7 | $91.8 | $285.0 | $256.9 |
| Diluted EPS | $1.52 | $1.37 | $4.38 | $3.75 |
- Q3 revenue grew 4.3% year over year: product revenue increased 1.6% and services 6.6%. For nine months, revenue rose 5.6%, with products up 3.5% and services up 7.5%. Management attributed growth to demand for core application delivery networking products, security and software-only Virtual Editions, and maintenance contracts from a larger installed base.
- Q3 gross margin eased 0.3 percentage points, while operating margin declined 1.1 points. Higher operating expenses—particularly research and development and general and administrative costs—outpaced modest quarterly operating-income growth. Nine-month net income increased 10.9%.
- Operating cash flow was $527.2 for the first nine months, versus $507.5 a year earlier. Investing activities provided $47.1; financing activities used $396.6, mainly for $450.1 of share repurchases. Capital expenditures were $31.2.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $690.9; short- and long-term investments totaled $557.9. Cash plus investments totaled $1,248.8, up from $1,158.8 at September 30, 2016.
- Current assets were $1,445.9 and current liabilities $909.3. Deferred revenue totaled $943.9, including $686.1 current.
- Management reported no long-term debt and said cash, investments, and operating cash generation should be sufficient for operating requirements for at least the next 12 months.
- F5 repurchased 3.30 million shares during fiscal 2017 through June 30 at an average $136.34 per share; $323.7 remained authorized. Shares outstanding were 63.5 million as of July 28, 2017.
Changes, outlook, and notable items
- Services accounted for 54.6% of Q3 revenue, versus 53.4% a year earlier. International sales were 47.9% of Q3 revenue, compared with 48.3% in Q3 2016.
- Three distributors represented significant revenue shares in Q3: Westcon 19.1%, Ingram Micro 16.8%, and Tech Data 12.2%. This creates channel concentration exposure.
- The filing provides no specific forward revenue or earnings guidance. Management expects research and development expense to remain consistent as a percentage of revenue and expects international sales to remain significant, without assurance that their share will hold.
- F5 signed a lease for approximately 515,000 square feet of new Seattle headquarters space, with a 14.5-year initial term and expected aggregate base rent of about $359.5. Commencement is expected no earlier than April 2019, subject to construction timing; additional occupancy and build-out costs apply.
- The Radware patent case included a $6.9 judgment against F5, with execution stayed by security posted pending appeal; oral argument was scheduled for September 6, 2017. A separate patent dispute with Radware was also pending. Management said outcomes and potential exposure could not be determined; the company had recorded an approximately $7.0 litigation accrual.
- F5’s CEO transition to François Locoh-Donou took effect April 3, 2017. The company identified retention and recruitment of key personnel, including during the transition, as a risk.
- F5 planned to adopt the new revenue recognition standard in fiscal Q1 2019. It expected to defer and amortize incremental contract acquisition costs, primarily commissions, and to recognize some term-license revenue upfront; the overall financial impact remained under evaluation.
Key investor checks
- Monitor whether product growth improves and whether services growth remains supported by maintenance renewals.
- Assess operating-expense growth, stock-based compensation, and the sustainability of margins and EPS gains.
- Track distributor concentration, receivables exposure, and international revenue trends.
- Review the Radware appeals, related accruals, and any developments affecting potential legal exposure.
- Evaluate the headquarters lease’s total costs and timing, ongoing buybacks, and the eventual impact of the new revenue standard.