F5 Networks, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended March 31, 2015; comparisons are with the quarter and six months ended March 31, 2014, unless stated otherwise. Amounts are in U.S. dollars.
Business context
F5 develops application delivery networking products and services, including BIG-IP appliances and software, security offerings, and cloud-based services. Products are sold mainly through indirect channels. The company reports one operating segment.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $472.1 million, up 12.4% | $934.9 million, up 13.1% |
| Product revenue | $244.1 million, up 8.4% | $485.1 million, up 9.3% |
| Services revenue | $228.0 million, up 17.0% | $449.9 million, up 17.5% |
| Gross margin | 82.5%, versus 82.0% | 82.7%, versus 82.0% |
| Operating income / margin | $132.9 million / 28.1% | $265.2 million / 28.4% |
| Net income | $85.7 million, versus $69.6 million | $174.8 million, versus $137.7 million |
| Diluted EPS | $1.18, versus $0.91 | $2.38, versus $1.79 |
Revenue growth reflected higher demand for core application delivery networking products and a larger installed base driving maintenance-contract purchases and renewals. Services represented 48.3% of quarterly revenue. Operating expenses rose 9.9% for the quarter, less than revenue growth; general and administrative expense increased 18.8%, including a $3.0 million tax expense recorded in the first quarter.
Cash flow, liquidity and capital allocation
- Six-month operating cash flow was $328.7 million, versus $240.9 million in the prior-year period. Investing activities provided $49.1 million; financing activities used $286.0 million, principally for share repurchases.
- Cash and cash equivalents were $367.6 million at March 31, 2015. Cash and short- and long-term investments totaled $1.134 billion, up $5.9 million from September 30, 2014. The company reported no long-term debt.
- Current and long-term deferred revenue totaled approximately $720.6 million, compared with $636.7 million at September 30, 2014. Management attributed the increase to growth in new and renewed maintenance contracts.
- Capital expenditures were $20.5 million for the six months. The company repurchased $306.9 million of common stock during that period and authorized an additional $750 million for its repurchase program in January 2015.
Outlook, risks and unusual items
- Management said cash and investments plus expected operating cash generation should cover operating requirements for at least the next 12 months. It expected research and development expense to remain consistent as a percentage of revenue. The filing provides no numerical revenue or earnings guidance.
- Other income rose to $3.3 million for the quarter and $5.9 million for six months, primarily due to foreign-currency gains of $3.4 million and $4.3 million, respectively. The prior-year comparison included a $1.0 million legal-settlement charge in the first quarter of fiscal 2014.
- The six-month effective tax rate declined to 35.5% from 37.5%, partly due to reinstatement of the federal research credit retroactive to January 1, 2014. Management noted tax rates may fluctuate; $7.0 million of unrecognized tax benefits were recorded.
- Key disclosed risks include reliance on ADN products, significant distributor concentration, dependence on a single contract manufacturer for ADN hardware, quarterly sales timing and customer-order variability, competition, and the execution and margin risks of cloud-based services. Four distributors each contributed at least 10% of quarterly revenue; together they accounted for 56.1%.
- The company disclosed that CEO John McAdam intended to retire effective July 1, 2015, with Manuel Rivelo selected as successor. Management reported effective disclosure controls and no material adverse legal proceedings known to it.
Important facts for investors to verify
- Whether service and product revenue growth, gross margins, and deferred-revenue growth continue in subsequent quarters.
- Distributor concentration and exposure to the primary contract manufacturer and component suppliers.
- Progress, costs, and profitability of cloud-based offerings, including Silverline.
- Cash generation relative to buybacks, and remaining repurchase authorization; the filing reports $755.3 million remaining as of May 4, 2015.
- CEO succession execution and any subsequent changes in tax, legal, or other disclosed exposures.