F5, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; comparisons are with the three months ended December 31, 2012. Amounts are in U.S. dollars.
Business context
F5 develops and sells application-delivery networking hardware, software and related services, including BIG-IP and VIPRION offerings. It reports one operating segment and sells primarily through distributors and other channel partners. Its products help customers manage application traffic, security, performance and availability.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $406.5 million | $365.5 million | +11.2% |
| Product revenue | $218.6 million | $204.7 million | +6.8% |
| Service revenue | $187.9 million | $160.7 million | +16.9% |
| Gross profit / gross margin | $333.6 million / 82.1% | $304.6 million / 83.3% | Margin down 1.2 percentage points |
| Operating income / operating margin | $109.1 million / 26.8% | $109.1 million / 29.9% | Income approximately flat; margin lower |
| Net income | $68.0 million | $69.5 million | Down 2.1% |
| Diluted EPS | $0.87 | $0.88 | Down $0.01 |
| Cash from operations | $158.9 million | $144.8 million | Up $14.1 million |
Revenue growth reflected higher demand for core application-delivery networking products and a larger installed base generating maintenance sales. Services rose to 46.2% of revenue from 44.0%. International revenue was 49.4% of total, compared with 46.7% a year earlier. The filing reports cost of revenue growth outpacing revenue growth for products; consolidated gross margin declined.
Balance sheet and liquidity
- Cash and cash equivalents were $231.3 million at December 31, 2013, versus $189.7 million at September 30, 2013.
- Cash, short- and long-term investments totaled $1.235 billion, down $35.9 million from quarter-end September. F5 reported no long-term debt.
- Current assets were $870.9 million and current liabilities $614.0 million. Current deferred revenue was $450.1 million; long-term deferred revenue was $117.6 million.
- Operating cash flow was $158.9 million. Investing activities provided $70.2 million, primarily reflecting investment sales and maturities, while financing activities used $186.6 million, mainly for share repurchases.
- F5 spent $200.0 million repurchasing shares during the quarter. Capital expenditures were $5.0 million.
Material changes, outlook and risks
- Operating expenses increased 14.8% to $224.4 million. Research and development rose 32.1%, primarily from higher personnel costs and headcount; sales and marketing increased 10.3%. Stock-based compensation rose to $34.5 million from $26.7 million.
- Management said existing cash and investments plus expected operating cash generation should meet operating requirements for at least the next 12 months. It expected R&D expense to remain consistent as a percentage of revenue in the foreseeable future and international sales to remain significant. The filing provides no specific revenue or earnings guidance.
- Management attributed the lower other income partly to a $1.0 million legal-settlement charge. The effective tax rate increased to 37.8% from 37.2%, primarily due to state taxes and nondeductible stock compensation.
- On January 22, 2014, the board authorized an additional $500 million for the repurchase program. As of February 3, 2014, F5 had repurchased and retired 14.9 million shares at an average $75.65 per share, with $674.2 million remaining under the programs.
- Key disclosed risks include quarterly sales timing and order volatility, dependence on ADN products and major distributors, competition and pricing pressure, reliance on a single primary hardware contract manufacturer, component supply constraints, product errors or security vulnerabilities, and international, tax and intellectual-property risks. Three distributors represented 45.7% of quarterly revenue.
- F5 reported no pending legal proceeding it believed reasonably likely to have a material adverse effect. It was undergoing an IRS audit for fiscal 2011 and state tax audits for fiscal 2009–2012; management did not expect changes in unrecognized tax benefits to be material. No goodwill or other asset impairment was recorded in the quarter.
Important facts for investors to verify
- Whether service-led growth and maintenance renewals continue to offset slower product growth, and whether gross margin stabilizes.
- Whether operating expense growth, particularly R&D hiring and stock-based compensation, translates into durable revenue growth and profitability.
- Distributor concentration and the ability of the primary contract manufacturer and component suppliers to meet demand.
- The pace and value of share repurchases, including the effect on cash balances and per-share results.
- Developments in tax audits, legal matters, product-security risks and other contingencies.