F5 Networks, Inc. — Form 10-Q Summary
Business context and reporting period: The filing covers the quarter and six months ended March 31, 2012, the second quarter of F5’s fiscal 2012. F5 provides application delivery networking, storage virtualization and related services. In February 2012, it acquired Traffix Systems, adding telecommunications Diameter-signaling products.
Financial performance
Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 |
|---|---|---|
| Revenue | $339.6 million, up 22.4% year over year | $662.1 million, up 21.1% |
| Product revenue | $205.2 million, up 18.1% | $401.7 million, up 16.4% |
| Services revenue | $134.5 million, up 29.5% | $260.3 million, up 29.3% |
| Gross profit and margin | $282.0 million; 83.0% | $548.9 million; 82.9% |
| Operating income and margin | $104.7 million; 30.8% | $204.5 million; 30.9% |
| Net income | $68.6 million; diluted EPS $0.86 | $135.1 million; diluted EPS $1.69 |
- For the six-month period, operating cash flow was $233.5 million. Investing activities used $171.6 million, including $128.3 million net cash for the Traffix acquisition; financing activities used $69.2 million, including $84.8 million for share repurchases. Cash and cash equivalents ended at $209.5 million.
- Cash, short-term investments and long-term investments totaled $1.034 billion at March 31, 2012, versus $1.013 billion at September 30, 2011. F5 reported no long-term debt. Current liabilities were $433.9 million, including $325.4 million of current deferred revenue.
- Deferred revenue, current and long-term, totaled $412.8 million, up from $343.3 million at September 30, 2011. Management attributed the increase to new and renewed maintenance contracts. Second-quarter days sales outstanding were 49.
Changes versus prior comparable periods
- Revenue growth reflected increased demand for core application delivery networking products and a larger installed base driving maintenance sales. Services grew faster than products; products represented 60.4% of quarterly revenue versus 62.6% a year earlier.
- Quarterly gross margin rose to 83.0% from 81.7%, while operating margin increased to 30.8% from 30.0%. Quarterly operating expenses rose 23.4% to $177.3 million, driven in part by higher personnel, commissions and marketing costs.
- Quarterly net income increased from $55.6 million to $68.6 million. The effective tax rate rose to 35.3% from 34.4%, principally because the federal research activities credit expired on December 31, 2011.
- Goodwill increased to $347.9 million from $234.7 million, primarily reflecting the Traffix acquisition. F5 paid $133.7 million for Traffix; $113.2 million of the purchase allocation was goodwill. The acquisition was not considered material for pro forma reporting.
Outlook, risks and unusual items
- Management said cash and investments, excluding auction-rate securities, plus expected operating cash generation should be sufficient for at least the next 12 months. It expected operating cash flow to be driven primarily by net income and said it would continue evaluating strategic acquisitions and investments. No specific revenue or earnings guidance was provided in the supplied filing text.
- F5 identified its dependence on application delivery networking products: these represented 98.6% of product revenue and approximately 59.8% of total revenue for the six months. The filing also highlights competition, product development and transition risks, unpredictable enterprise sales cycles, and reliance on indirect sales channels and distributors.
- Two distributors accounted for 31.0% of six-month revenue; one distributor represented 18.0% of accounts receivable at March 31. F5 also disclosed reliance on a single contract manufacturer for application delivery networking hardware and component-supply risks.
- Approximately $13.2 million fair value of auction-rate securities remained illiquid and classified as long-term; the securities had a $15.0 million par value. Management said the underlying municipal securities were generally backed by U.S.-guaranteed student loans and that it did not expect the reduced liquidity to impair overall liquidity. Further impairment remains a stated risk.
- Other notable items include $96.2 million of unrecognized stock-based compensation cost, largely expected to be recognized over the next two years; $13.5 million of component-inventory purchase commitments for the next 30 days; and $5.8 million of unrecognized tax liabilities. F5 reported no pending legal proceeding expected to have a material adverse effect and no material warranty accrual.
Important facts for investors to verify
- Whether product demand, maintenance renewals and deferred-revenue growth continued after March 31, and how much reported growth reflected the acquired Traffix business.
- The sustainability of margins as operating expenses grow, including the effect of hiring and stock-based compensation.
- Distributor concentration, customer collections and the company’s reliance on its primary hardware manufacturer and component suppliers.
- The liquidity, valuation and potential impairment exposure of auction-rate securities, alongside the composition and maturity profile of the broader investment portfolio.
- The remaining share-repurchase authorization and its effect on cash balances and share count; as of May 3, 2012, $280.5 million remained authorized.