F5 Networks, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2018. Financial statements are unaudited. F5 provides software-defined application services, including hardware and software products, cloud subscriptions, and related support services.
Financial performance
Amounts in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $542.2 | $517.8 | $1,598.7 | $1,552.0 |
| Gross profit / margin | $451.2 / 83.2% | $428.1 / 82.7% | $1,330.7 / 83.2% | $1,289.1 / 83.1% |
| Operating income / margin | $152.0 / 28.0% | $139.1 / 26.9% | $437.3 / 27.4% | $415.1 / 26.8% |
| Net income | $122.7 | $97.7 | $320.8 | $285.0 |
| Diluted EPS | $1.99 | $1.52 | $5.16 | $4.38 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $556.8 | $527.2 |
- Quarterly product revenue was $238.8 million, up 1.6%; service revenue was $303.4 million, up 7.3%. Nine-month product revenue declined 1.7%, while service revenue rose 7.0%.
- Cash, cash equivalents, and short- and long-term investments totaled $1,413.9 million at June 30, 2018, versus $1,301.7 million at September 30, 2017. Cash and cash equivalents alone were $599.3 million.
- Current assets were $1,469.1 million and current liabilities were $943.9 million. Deferred revenue totaled approximately $1,027.7 million. Management reported no long-term debt.
- Nine-month investing cash flow was an outflow of $227.9 million, reflecting investment purchases and $36.1 million of capital expenditures, partly offset by investment maturities and sales. Financing cash flow was an outflow of $401.2 million, mainly from $450.1 million in share repurchases.
Changes versus prior comparable periods
- Quarterly revenue increased 4.7%; nine-month revenue increased 3.0%. Growth was primarily driven by services and maintenance renewals as the installed base expanded.
- Quarterly net income rose about 25.7%, while diluted EPS increased from $1.52 to $1.99. The lower effective tax rate materially contributed: 20.4% for the quarter versus 31.1% a year earlier. Nine-month effective tax rates were 27.8% and 32.4%, respectively.
- Product costs increased amid global memory shortages, investment in subscription software services, and transitions to the iSeries platform. Service costs as a share of service revenue declined, reflecting scale and higher maintenance revenue.
- Weighted-average diluted shares fell to 61.6 million from 64.4 million for the quarter, in part alongside ongoing repurchases. F5 repurchased and retired 3.21 million shares during the first nine months at an average $140.19 per share.
Outlook, commentary, and risks
- Management said existing cash and investments plus expected operating cash generation should meet operating requirements for at least the next 12 months. No specific revenue or earnings guidance was provided in the filing.
- On July 20, 2018, after quarter-end, F5 announced a restructuring affecting approximately 230 employees and the planned closure of its Lowell, Massachusetts office. Estimated charges are $23.0–$25.0 million, mostly expected in Q4 FY2018.
- The Tax Cuts and Jobs Act reduced the federal tax rate applicable to FY2018 to 24.5%, with a further reduction to 21% in FY2019. The nine-month tax provision included a $7.0 million provisional deemed-repatriation tax and an $11.6 million deferred-tax-asset remeasurement expense.
- F5 is involved in patent litigation with Radware, including claims and counterclaims concerning patents and BIG-IP products. Trial was scheduled for November 2019; F5 had not accrued a loss and said the outcome and potential exposure could not be determined.
- Key disclosed risks include cybersecurity incidents or product vulnerabilities and defects, dependence on retaining qualified personnel, restructuring execution and employee attrition, tax uncertainty, and market-rate or credit impacts on its fixed-income investment portfolio.
- Revenue and receivables are concentrated among distributors: Ingram Micro represented 16.9% of quarterly revenue, and Synnex represented 16.4% of receivables at June 30, 2018.
Important facts for investors to verify
- Whether services and maintenance growth can offset the nine-month decline in product revenue, and how new software and cloud offerings are contributing.
- The realized costs and operational effects of the announced restructuring, including whether projected savings or growth objectives materialize.
- The sustainability of earnings growth given the significant year-over-year tax-rate reduction and the remaining tax-law and audit uncertainties.
- Distributor concentration, investment portfolio exposure, and developments in the Radware litigation and any other material legal matters.
- The pace of share repurchases and resulting effects on cash balances and diluted share count.