F5 Networks, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended March 31, 2018; comparisons are with the quarter ended March 31, 2017. Six-month figures cover the six months ended March 31. Amounts below are in U.S. dollars.
Business context
F5 provides application delivery and security products and services, including BIG-IP hardware and software, virtual editions, cloud-based subscriptions, and support services. Sales are primarily through distributors and resellers. The company reports one operating segment.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $533.3 million | $518.2 million | $1,056.5 million | $1,034.2 million |
| Gross profit | $443.7 million | $430.3 million | $879.5 million | $861.0 million |
| Gross margin | 83.2% | 83.0% | 83.2% | 83.3% |
| Operating income | $143.4 million | $138.5 million | $285.4 million | $276.0 million |
| Net income | $109.6 million | $93.1 million | $198.1 million | $187.4 million |
| Diluted EPS | $1.77 | $1.43 | $3.18 | $2.87 |
- Quarterly revenue grew 2.9%; six-month revenue grew 2.2%. Services revenue rose 6.7% and 6.9%, respectively, while product revenue fell 1.5% and 3.3%.
- Quarterly net income increased about 17.7%; six-month net income increased about 5.7%. Diluted EPS also benefited from fewer weighted-average shares, following share repurchases.
- Operating cash flow was $374.7 million for the six months, compared with $364.7 million a year earlier. Investing activities used $172.5 million, and financing activities used $280.1 million, primarily for repurchases.
- At March 31, cash and cash equivalents were $595.9 million, short-term investments $428.8 million, and long-term investments $350.2 million—$1.3749 billion combined. Current assets were $1.407 billion versus current liabilities of $962.2 million. The filing states the company had no long-term debt.
- Deferred revenue totaled $1.011 billion, including $736.0 million current; management attributed the increase to maintenance contracts on new products and renewals. Days sales outstanding were 49.
Changes, outlook, and significant items
- Service growth, driven by the installed base and maintenance renewals, more than offset declining product revenue. International sales were 50.0% of quarterly revenue, up from 48.8%.
- Quarterly effective tax rate fell to 25.0% from 33.4%; the six-month rate was 31.8% versus 33.1%. The Tax Cuts and Jobs Act lowered the federal rate, partly offset by a $7.0 million provisional deemed-repatriation tax and an $11.6 million deferred-tax remeasurement expense recorded in the six-month period. The company said further guidance could change the provisional amount.
- Management said cash and investments plus operating cash generation should be sufficient for operating needs for at least 12 months. It expects R&D expense to remain consistent as a percentage of revenue; no specific revenue or earnings guidance is provided in the supplied filing text.
- F5 repurchased 2.31 million shares during fiscal 2018 through March 31 at an average $130.01 per share, spending approximately $300.0 million; $873.6 million remained authorized. The board had authorized an additional $1.0 billion for the program in October 2017.
- Risks highlighted include cybersecurity attacks and product vulnerabilities or defects, including potential exposure related to Spectre and Meltdown; reliance on retaining key personnel; tax uncertainty; and distributor concentration. Four distributors each represented more than 10% of quarterly revenue.
- F5 is litigating patent matters with Radware, including F5’s infringement claims and Radware’s counterclaim. Litigation relating to Radware’s counterclaim was stayed pending an inter partes review; F5 had recorded no litigation-loss accrual, and the ultimate outcome and potential exposure were not determined.
- The CFO had notified the company of his intention to retire during fiscal Q3 2018, and F5 said it would begin a replacement search. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether product revenue stabilizes and service growth continues to offset product declines.
- How customer adoption of newer products, subscription offerings, and the installed-base maintenance business affects future revenue and margins.
- The cash-flow and share-count effects of continued repurchases, and the company’s capital allocation plans.
- Final tax-accounting effects of the Tax Cuts and Jobs Act, including the provisional repatriation-tax estimate.
- Developments in the Radware litigation and any cybersecurity incident, product defect, or related customer or legal costs.
- Distributor concentration and the financial impact of changes in distributor relationships or customer demand.