F5, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2014. This is an annual report; fourth-quarter figures below are for the three months ended September 30, 2014. Unless otherwise noted, amounts are U.S. dollars.
Business context
F5 provides application delivery, traffic management, security and related services through its TMOS software platform, BIG-IP and VIPRION hardware, virtual editions, subscriptions and support services. Products represented 54% of FY2014 revenue and services 46%. The company operates as one reportable segment and sells primarily through distributors, resellers and systems integrators.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $1.732 billion | $1.481 billion |
| Product revenue | $936.1 million | $798.9 million |
| Service revenue | $795.9 million | $682.5 million |
| Gross profit / margin | $1.422 billion / 82.1% | $1.228 billion / 82.9% |
| Operating income / margin | $493.6 million / 28.5% | $430.8 million / 29.1% |
| Net income / net margin | $311.2 million / 18.0% | $277.3 million / 18.7% |
| Diluted EPS | $4.09 | $3.50 |
| Cash from operating activities | $549.0 million | $499.7 million |
FY2014 revenue grew 16.9% year over year; product and service revenue increased 17.2% and 16.6%, respectively. ADN products accounted for 98.1% of product revenue. International revenue was 48.3% of total revenue. The fourth quarter generated $465.3 million in revenue and $94.0 million in net income, with diluted EPS of $1.26.
At September 30, 2014, cash, cash equivalents and investments totaled $1.128 billion. The company reported no long-term debt. Current assets were $998.8 million and current liabilities $637.0 million; current deferred revenue was $484.4 million. Total assets were $2.185 billion and shareholders’ equity $1.369 billion. FY2014 capital expenditures were $22.7 million.
Material changes versus prior year
- Revenue growth accelerated to 16.9%, compared with 7.6% in FY2013. Product revenue rebounded from a 2.4% decline in FY2013, supported principally by higher ADN product volumes.
- Gross margin declined 0.8 percentage points; operating margin declined 0.6 points and net margin declined 0.7 points. Higher operating expenses, including increased sales and R&D staffing and investment, contributed to the lower operating margin.
- R&D expense rose 25.8% to $263.8 million. Sales and marketing expense rose 15.6% to $558.3 million.
- Cash and investments decreased $142.8 million to $1.128 billion, mainly reflecting $650.5 million of share repurchases and the Defense.Net acquisition, partly offset by operating cash generation.
- Shares repurchased during FY2014 totaled $650.5 million; weighted-average diluted shares fell to 76.1 million from 79.1 million. The company does not pay dividends and said it did not anticipate doing so in the foreseeable future.
Outlook, commentary, risks and unusual items
- Management said cash and investments, together with expected operating cash flow, should meet operating requirements for the next 12 months. It expected R&D expense to remain consistent as a percentage of revenue; no specific revenue or earnings guidance was provided in the filing.
- Management cited growing demand for core ADN products and maintenance, and reported strong, increasing demand for its tiered Good, Better, Best pricing model. It is investing in cloud-based services and subscription offerings, while warning these models could pressure revenue or margins.
- F5 acquired Defense.Net in May 2014 for approximately $49.7 million, including transaction costs; the cash flow statement reports $49.4 million for the acquisition. The cloud-based DDoS protection business complements its on-premise security products.
- Goodwill was reduced by $6.1 million to correct accounting for a 2007 acquisition; the company said the correction was not material to current or prior-period financial statements. FY2014 also included a $1.0 million legal-settlement charge in other income and $1.7 million of foreign currency losses.
- Key risks include distributor concentration: three distributors generated 45.9% of FY2014 revenue, and two accounted for 34.0% of year-end receivables. Other notable exposures include reliance on a single primary hardware contract manufacturer, quarter-end sales concentration and unpredictable sales cycles, competitive pricing, cloud-business execution and margin risk, and international operations.
- CEO John McAdam had announced his intended retirement at the end of FY2015; the company identified succession and transition as potential risks. The company reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion.
Important facts for investors to verify
- Whether FY2014 revenue growth and product demand continued, and how much growth came from recurring services versus hardware sales.
- Whether gross and operating margins stabilize as F5 increases R&D, sales and professional-services staffing and expands subscription and cloud offerings.
- The persistence of distributor concentration and the financial exposure to the primary contract manufacturer and limited-source components.
- Cash deployment and share-repurchase pace, alongside acquisition integration, liquidity and any changes in debt or contractual commitments.
- CEO succession plans, Defense.Net’s contribution, and the eventual effect of the new revenue-recognition standard, which the company was still assessing.