F5 Networks, Inc. — Form 10-Q summary
Period: Fiscal third quarter and nine months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Financial statement amounts below are in millions of dollars unless stated otherwise. The filing identifies the registrant as F5 Networks, Inc.
Business context and reporting period
F5 sells application delivery networking products and related services, as well as file virtualization products. Application delivery networking products accounted for 98.4% of product revenue in the quarter. The company acquired Traffix Systems in February 2012, adding Diameter signaling products for telecommunications operators.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2012 / 2011 | $352.6 / $290.7; up 21.3% | $1,014.7 / $837.2; up 21.2% |
| Product revenue, 2012 / 2011 | $207.1 / $179.3 | $608.8 / $524.5 |
| Service revenue, 2012 / 2011 | $145.5 / $111.4 | $405.9 / $312.7 |
| Gross profit, 2012 / 2011 | $292.3 / $238.3 | $841.2 / $685.1 |
| Gross margin, 2012 / 2011 | 82.9% / 82.0% | 82.9% / 81.8% |
| Operating income, 2012 / 2011 | $110.0 / $88.3 | $314.5 / $251.3 |
| Operating margin, 2012 / 2011 | 31.2% / 30.4% | 31.0% / 30.0% |
| Net income, 2012 / 2011 | $72.3 / $62.5 | $207.5 / $173.8 |
| Diluted EPS, 2012 / 2011 | $0.91 / $0.77 | $2.60 / $2.13 |
- Quarterly service revenue grew 30.6% and product revenue grew 15.5% year over year. Management attributed growth to the larger installed base and demand for core application delivery networking products, including application security and WAN optimization.
- Quarterly net income increased about 15.7%; net margin was 20.5%, compared with 21.5% a year earlier. For the nine months, net income increased about 19.4%, while net margin was 20.5% versus 20.7%.
- Operating cash flow for the nine months was $346.9 million, versus $295.4 million in 2011. Cash used in investing activities was $267.1 million, including $128.3 million net cash paid for Traffix; cash used in financing was $100.4 million, including $134.8 million of share repurchases.
- Cash and cash equivalents were $195.6 million at June 30. Short- and long-term investments totaled $911.4 million; cash and investments together were $1.107 billion, versus $1.013 billion at September 30, 2011. The company reported no long-term debt.
- Total assets were $1.838 billion; current liabilities were $446.6 million, including $344.9 million of deferred revenue. Deferred revenue, current and long-term combined, rose to $433.9 million from $343.3 million at September 30, 2011.
Changes, outlook, risks and unusual items
- Operating expenses rose 21.5% in the quarter, led by higher sales and marketing and research and development spending. Management cited increased headcount, sales commissions and investment in product development; R&D expenses are expected to remain consistent as a percentage of revenue in the foreseeable future.
- The effective tax rate was 35.2% for the quarter, versus 30.6% a year earlier. The filing attributes the increase primarily to expiration of the U.S. federal research credit and a favorable prior-year adjustment to uncertain tax positions.
- Traffix was acquired for $133.7 million in cash. The acquisition added $113.2 million of goodwill and $17.6 million of identifiable intangible assets. Management said the transaction’s effects were not material to reported-period results. No goodwill or other listed asset impairment charges were recorded in the quarter or nine-month period.
- Management said existing cash and investments, excluding auction-rate securities, together with operating cash generation should cover operating requirements for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Auction-rate securities had a fair value of $9.1 million and remained illiquid following failed auctions; the company believed government guarantees on underlying student loans reduced loss risk. Management did not expect this illiquidity to materially affect overall liquidity.
- Two distributors represented 32.1% of quarterly revenue and 31.5% of nine-month revenue. The company also identified dependence on a single contract manufacturer for application delivery networking hardware and limited-source component supply as risks.
- Other disclosed risks include variable order timing and lengthy sales cycles, competition and pricing pressure, reliance on continued innovation in application delivery networking, international and export-control exposure, acquisition integration, and potential intellectual-property claims. The company reported no pending legal proceedings expected to have a material adverse effect.
- At August 2, 2012, F5 reported 8.7 million shares repurchased and retired at an average $65.74 per share, with approximately $226.0 million remaining under its repurchase programs.
Important facts for investors to verify
- Whether service growth and the increase in deferred revenue continue, and how service and product mix affect margins.
- Revenue concentration at Avnet Technology Solutions and Ingram Micro, and the company’s ability to sustain or diversify channel sales.
- Traffix integration progress, contribution to growth, and the assumptions supporting acquired goodwill and intangible assets.
- Liquidity and valuation of auction-rate securities, alongside the reported cash-and-investment position.
- Exposure to the single contract manufacturer, component availability, and the remaining repurchase authorization and its effect on share count.