F5, Inc. (FFIV) — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2020. The filing also reports unaudited results for the quarter ended September 30, 2020 (FY2020 Q4). Amounts are in U.S. dollars.
Business context
F5 provides application security and delivery products and services across on-premises, software, SaaS and managed-service models. Its portfolio includes BIG-IP, NGINX and, following its January 2020 acquisition, Shape Security’s fraud and abuse prevention technology. Services—including maintenance, consulting and support—remain the largest revenue category. F5 operates as one reportable segment and sells through direct and indirect channels worldwide.
Key financial metrics
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Revenue | $2,350.8 million | $2,242.4 million | Up 4.8% |
| Product revenue | $1,025.9 million | $985.6 million | Up 4.1% |
| Services revenue | $1,325.0 million | $1,256.9 million | Up 5.4% |
| Software product revenue | $357.5 million | $239.8 million | Reported software revenue growth was 52%; software was 34.9% of product revenue versus 24.3% |
| Systems product revenue | $668.3 million | $745.8 million | Down; systems mix fell to 65.1% of product revenue from 75.7% |
| Gross profit / gross margin | $1,942.9 million / 82.6% | $1,885.9 million / 84.1% | Margin contracted 1.5 percentage points |
| Operating income / margin | $392.3 million / 16.7% | $518.5 million / 23.1% | Operating income fell 24.3% |
| Net income / diluted EPS | $307.4 million / $5.01 | $427.7 million / $7.08 | Net income fell 28.1% |
| Operating cash flow | $660.9 million | $747.8 million | Down $86.9 million |
| Cash, cash equivalents and investments | $1,312.8 million | $1,330.7 million | Includes $849.6 million cash and cash equivalents at FY2020 year-end |
| Debt and borrowing capacity | $390.0 million term-loan principal outstanding; $350.0 million revolver unused | No term debt reported | Term loan financed the Shape acquisition; covenant compliance reported |
Current assets were $1,793.5 million and current liabilities were $1,288.3 million. Deferred revenue totaled $1,272.6 million, and remaining non-cancelable performance obligations were approximately $1.3 billion; F5 expected to recognize about 69.4% of that balance within 12 months.
FY2020 Q4 and material changes
FY2020 Q4 revenue was $614.8 million, up 4.1% from $590.4 million in the year-earlier quarter. Operating income was $98.6 million versus $114.7 million, and net income was $77.7 million versus $94.8 million. Diluted EPS was $1.26 versus $1.57.
Annual revenue growth reflected higher software sales, including Shape SaaS offerings and subscription-based products, and increased service revenue from the installed base. Hardware systems revenue declined. Profitability weakened as product costs and operating expenses rose: sales and marketing increased 12.6%, R&D 8.2%, and general and administrative expense 22.6%. Higher costs included Shape-related managed-service costs, acquisition-related professional fees, and personnel. Stock-based compensation was $201.9 million, up from $162.9 million.
F5 paid $955.6 million net of cash acquired for Shape and recorded $799.6 million of acquisition goodwill. The acquisition added approximately $120 million of developed technology; the valuation depended on management assumptions about revenue growth and technology migration. Cash and investments were broadly stable year over year despite the acquisition, supported by operating cash flow and $400 million of term-loan proceeds. F5 repurchased $100.0 million of stock in FY2020 and had $1.3 billion of authorization remaining.
Outlook, commentary and risks
- F5 expects continued software growth from BIG-IP enhancements, NGINX, application security, Shape and cloud services. The filing provides no quantified forward revenue or earnings guidance.
- Management said COVID-19 did not significantly affect FY2020 results, but its future effects on demand, customer spending and collections, supply chains and operations remained uncertain. The company substantially modified travel, work locations and sales and marketing events.
- Principal risks include intense competition and pricing pressure, execution of the shift to software and SaaS, unpredictable sales timing, dependence on indirect channels, and reliance on a single primary hardware contract manufacturer and some single- or limited-source components. Ingram Micro represented 16.7% of FY2020 revenue.
- The $390 million term loan matures in January 2023, with $350 million of scheduled principal due in FY2023. Its interest margin depends partly on a leverage covenant; F5 reported compliance at year-end. The company said current liquidity, expected operating cash flows and available revolver capacity should meet needs for the next 12 months.
- F5 recorded a $9.7 million impairment for the former Seattle headquarters right-of-use asset and $7.8 million of restructuring charges related to a workforce reduction affecting about 75 employees. The company reported no significant future restructuring charges expected.
- A lawsuit filed in June 2020 alleges that NGINX software intellectual property belongs to the plaintiff. F5 moved to dismiss the claims, said it intends to defend itself, and recorded no litigation accrual; the outcome and potential exposure were not estimable.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Check whether software and subscription growth continues to offset declining systems revenue, and how recurring revenue and renewals develop.
- Assess whether margin pressure and elevated operating expenses moderate, including the effects of Shape integration and stock-based compensation.
- Review the Shape purchase-price allocation and acquired-technology assumptions, as well as the integration and performance of both Shape and NGINX.
- Monitor debt repayment, leverage-covenant headroom, liquidity and the company’s capital allocation, including repurchases and potential acquisitions.
- Track the NGINX intellectual-property litigation and the still-uncertain effects of COVID-19 on customer demand and supply operations.
- Evaluate distributor concentration and hardware supply-chain dependence, including Ingram Micro’s revenue share.