Business context and reporting period
F5 Networks, Inc. (identified in the request as F5, Inc.) filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2010. The company sells application delivery networking and file virtualization products, together with maintenance, consulting, training and support services. Comparisons below are with the three months ended December 31, 2009 unless otherwise noted; balance-sheet comparisons are with September 30, 2010. Financial statement amounts are in millions of dollars unless stated otherwise.
Key financial metrics
| Metric | Q1 FY2011 | Prior-year quarter / comparison |
|---|---|---|
| Revenue | $268.9 | $191.2; up 40.7% |
| Product revenue | $171.5 | $119.2; up 43.8% |
| Services revenue | $97.4 | $71.9; up 35.5% |
| Gross profit and gross margin | $220.0; 81.8% | $152.0; 79.5% |
| Operating income and margin | $79.9; 29.7% | $43.7; 22.9% |
| Net income and net margin | $55.7; 20.7% | $29.3; 15.3% |
| Diluted earnings per share | $0.68 | $0.36 |
| Cash from operating activities | $103.1 | $74.0 |
| Cash and cash equivalents | $168.1 | $168.8 at September 30, 2010 |
| Short- and long-term investments | $784.1 | $693.3 at September 30, 2010 |
| Current assets / current liabilities | $684.5 / $327.9 | Current ratio approximately 2.1 |
| Total assets / shareholders’ equity | $1,475.8 / $1,075.1 | At December 31, 2010 |
Management reported no long-term debt. Cash, cash equivalents and investments totaled $952.3 million at quarter-end. Accounts receivable was $142.0 million, deferred revenue was $287.8 million in total, and days sales outstanding was 48.
Material changes versus the prior comparable period
- Growth was led by application delivery networking (ADN): product revenue rose $52.3 million, including a reported $51.4 million increase in ADN sales. Services growth reflected a larger installed base and increased maintenance purchases and renewals.
- Gross margin increased to 81.8% from 79.5%. Product costs rose 21.4%, slower than product revenue, while management cited higher shipment volume and warranty expense. Service cost as a share of service revenue declined to 17.8% from 18.2%.
- Operating expenses rose 29.4% to $140.1 million, but declined as a share of revenue to 52.1% from 56.7%. Headcount and personnel costs increased across sales and marketing, research and development, and general and administrative functions.
- The effective tax rate declined to 32.4% from 35.5%, primarily due to reinstatement of the federal research and development credit. Net income increased to $55.7 million from $29.3 million.
- Operating cash flow rose to $103.1 million. A $30.1 million increase in accounts receivable was partly offset by a $28.4 million increase in deferred revenue. Investment purchases exceeded sales and maturities, and the company repurchased $25.0 million of common stock.
Outlook, management commentary, risks and unusual items
- No specific numeric revenue or earnings guidance is provided in the supplied filing text. Management said it expects international sales to remain a significant portion of revenue, while noting that the share may not remain at current levels. It expects R&D expense to remain consistent as a percentage of revenue in the foreseeable future.
- Management said existing cash and investments, excluding auction rate securities (ARS), together with expected operating cash flows should fund operating requirements for at least the next 12 months. It may also pursue strategic acquisitions or investments.
- International customers generated 41.3% of revenue. One worldwide distributor represented 18.8% of quarterly revenue; Avnet Technology Solutions represented 16.9% of accounts receivable at quarter-end.
- The company held ARS with a fair value of $16.3 million and par value of $19.0 million, classified as long-term. Auctions had failed on approximately $53.4 million par value of municipal ARS held beginning in 2008; the filing says access to funds depends on a successful auction, issuer call, outside buyer or maturity. Management cited government guarantees on underlying student-loan assets and said it did not expect a material impact on overall liquidity, but acknowledged possible prolonged illiquidity and impairment risk.
- The company relies on a single contract manufacturer for ADN hardware and identified supplier availability, component shortages, product transitions, competition, pricing pressure, unpredictable enterprise sales cycles, economic conditions, and dependence on ADN innovation as risks. It was committed to approximately $14.4 million of component inventory purchases in the next quarter.
- Stock-based compensation was $22.9 million for the quarter, with $89.1 million of unrecognized compensation cost, most expected to be recognized over the next two years. A prospective revenue-recognition standard adopted in the quarter had no material reported impact.
- A long-running derivative lawsuit settlement received final court approval in January 2011, after the quarter-end. The company said it knew of no other pending legal proceedings expected to have a material adverse effect. Disclosure controls were reported effective as of December 31, 2010.
Important facts for investors to verify
- Whether strong revenue growth and gross-margin expansion continue, particularly given ADN’s substantial contribution to product revenue.
- Distributor concentration, receivables collection and the sustainability of the reported 48-day DSO.
- Liquidity and valuation of ARS, including the relationship between the reported $16.3 million fair value, $19.0 million par value and historical failed-auction exposure.
- Exposure to the single contract manufacturer, component supply constraints and the $14.4 million near-term purchase commitment.
- Effects of stock-based compensation and ongoing repurchases on per-share results and share count; the filing reports $25.0 million of quarterly repurchases and $204.4 million remaining authorization as of February 2, 2011.
- Potential changes in tax expense, including resolution of uncertain tax positions and expiration of tax-audit periods.