Business context and reporting period
F5 Networks, Inc. filed this Form 10-K for the fiscal year ended September 30, 2015. F5 sells application delivery, security and traffic-management products as hardware, software, virtual editions and cloud subscriptions, alongside support and maintenance services. The filing also reports the quarter ended September 30, 2015 (Q4 FY2015). Amounts below are in U.S. dollars.
Financial results and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1.920 billion | $1.732 billion |
| Product revenue | $991.5 million | $936.1 million |
| Services revenue | $928.3 million | $795.9 million |
| Gross profit / margin | $1.588 billion / 82.7% | $1.422 billion / 82.1% |
| Operating income / margin | $552.9 million / 28.8% | $493.6 million / 28.5% |
| Net income | $365.0 million | $311.2 million |
| Diluted EPS | $5.03 | $4.09 |
| Cash from operations | $684.5 million | $549.0 million |
- Revenue grew 10.8% year over year; product revenue rose 5.9% and services revenue 16.6%. Management attributed growth to a larger installed base, maintenance renewals and demand for core application delivery networking products.
- Product gross margin was 82.4% and services gross margin 83.0%. The consolidated margin increased 0.6 percentage points.
- Capital expenditures were $60.3 million. Investing activities used $10.7 million and financing activities used $556.9 million, including $606.9 million of share repurchases.
- Cash, cash equivalents and investments totaled $1.172 billion at year-end, up $43.7 million. F5 reported no long-term debt and said available cash and investments plus operating cash flow should cover requirements for the next 12 months. Current assets were $1.188 billion and current liabilities $755.1 million.
- Deferred revenue totaled $783.3 million, including $573.9 million current, and increased with maintenance contracts. Q4 days sales outstanding were 50.
- F5 repurchased and retired 4.932 million shares during FY2015. Weighted-average diluted shares declined to 72.547 million from 76.092 million.
- Q4 FY2015 revenue was $501.3 million, operating income $147.6 million, net income $97.0 million and diluted EPS $1.36. A year earlier, Q4 revenue was $465.3 million, net income $94.0 million and diluted EPS $1.26.
Material changes versus the prior comparable period
- Annual revenue growth moderated to 10.8% from 16.9% in FY2014. Product revenue growth slowed to 5.9% from 17.2%, while services revenue growth held at 16.6%.
- Operating expenses rose 11.4% to $1.035 billion. General and administrative expense increased 27.3%, including a $3.0 million tax expense and higher personnel and outside-consultant costs. R&D rose 12.4%; sales and marketing rose 7.9%.
- Net income increased 17.3%, partly reflecting a lower effective tax rate: 35.0% versus 37.4%. The rate change included research-credit benefits, changes in foreign profitability and lower nondeductible compensation.
- Operating cash flow improved by $135.5 million, with higher net income and deferred revenue contributing. Cash used for repurchases remained substantial.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expected R&D to remain consistent as a percentage of revenue and said cash resources should meet operating needs for the following 12 months. It may use cash for strategic acquisitions or investments.
- F5 launched its Silverline cloud subscription platform in November 2014. The company cautioned that building and maintaining cloud services infrastructure may pressure margins, and success of the model is uncertain.
- Four distributors accounted for 57.9% of FY2015 revenue; Westcon, Ingram Micro, Avnet and Arrow represented 17.6%, 16.1%, 13.8% and 10.4%, respectively. Management notes distributor orders may be cancelled and backlog is not a reliable revenue indicator; backlog fell to $38.1 million from $61.6 million.
- Radware patent litigation remained unresolved. In an October 15, 2015 ruling, the court granted Radware partial summary judgment of infringement on certain issues, denied F5’s motion for summary judgment on willfulness, and left other issues outstanding. F5 recorded no litigation loss accrual and could not estimate potential exposure.
- Other key risks include intense competition and pricing pressure, product-development and security-defect risks, cloud-model execution, dependence on a single hardware contract manufacturer and limited-source components, international and currency exposure, and quarterly sales timing. The CEO transition to Manuel Rivelo took effect July 1, 2015.
- Stock-based compensation was $145.6 million, up from $127.2 million. Unrecognized compensation cost was $120.5 million, mostly expected to be recognized over the next two years. The company also had $9.6 million of unrecognized tax benefits and approximately $10.5 million of uncertain-tax-position liabilities including interest and penalties.
Important facts for investors to verify
- Whether slower product growth persists and whether services and maintenance can continue to outgrow product sales.
- Revenue concentration and receivable exposure to major distributors, as well as the quality and cancellation risk of channel orders.
- Future margin and cash-flow effects of Silverline investment, subscription adoption and product mix.
- Developments and potential financial exposure in the Radware litigation, for which no loss accrual was recorded.
- Share-repurchase pace and its effects on cash balances and per-share results; confirm remaining authorization and subsequent purchases.
- Tax exposures, including uncertain tax positions, and the impact of future tax-law or accounting-standard changes.