F5, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 30, 2014. Comparisons are with the three and nine months ended June 30, 2013, as applicable. Financial statement amounts below are in millions of dollars unless stated otherwise.
Business context
F5 develops and sells application delivery networking hardware, software, and related services, including traffic management and security offerings. It reports as one operating segment and sells primarily through distributors and other channel partners. The filing describes growth as driven by demand for core application delivery networking products and a larger installed base supporting maintenance services.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $440.3 | $370.3 | $1,266.8 | $1,086.0 |
| Gross profit | $360.8 | $305.4 | $1,038.8 | $899.9 |
| Operating income | $126.1 | $104.1 | $346.1 | $305.6 |
| Net income | $79.5 | $68.2 | $217.2 | $201.1 |
| Diluted EPS | $1.05 | $0.86 | $2.84 | $2.54 |
- Q3 revenue increased 18.9% year over year; nine-month revenue increased 16.6%. Product revenue rose 20.4% and 16.0%, respectively, while services revenue rose 17.2% and 17.4%.
- Gross margin was 82.0% in Q3 versus 82.5%; for nine months it was 82.0% versus 82.9%. Operating margin was 28.7% versus 28.1% in Q3, and 27.3% versus 28.1% for nine months. Net margin was 18.1% versus 18.4% in Q3 and 17.1% versus 18.5% for nine months.
- Operating expenses increased 16.6% in Q3 and 16.6% for nine months, including higher sales and marketing and research and development spending. R&D expense grew 24.0% in Q3 and 27.9% for nine months.
- Cash from operations was $379.1 for the first nine months, compared with $351.7 a year earlier. Investing activities provided $130.3, versus using $244.1; financing activities used $457.1, primarily for share repurchases.
- Cash and cash equivalents were $242.0 at June 30, 2014, versus $189.7 at September 30, 2013. Cash and short- and long-term investments totaled $1,119.9, down from $1,271.1. Management reported no long-term debt.
- Current liabilities were $611.2 and current assets were $945.1. Deferred revenue, current and long-term combined, was $617.4, up from $531.4 at September 30, 2013.
Material changes and notable items
- F5 acquired Defense.Net on May 22, 2014, for approximately $49.7 million (about $49.4 million net cash outflow). The cloud-based DDoS protection business adds a cloud service alongside F5’s on-premise security offering. The preliminary allocation included $39.3 million of goodwill; the acquisition was not material to reported results individually or in aggregate.
- The company repurchased $500.5 million of stock in the first nine months. As of August 4, 2014, it had repurchased and retired 17.2 million shares at an average $79.95 per share, with $422.8 million remaining under its repurchase programs.
- International revenue was 48.5% of Q3 revenue and 48.8% for nine months, compared with 46.4% and 47.9% in the prior-year periods.
- Three distributors accounted for 46.3% of Q3 revenue and 45.3% of nine-month revenue. Two distributors represented 33.0% of accounts receivable at June 30, 2014.
- The effective tax rate rose to 37.6% for Q3 and 37.5% for nine months, compared with 36.3% and 35.6%. The filing attributes the increase primarily to expiration of the federal research credit and prior-year recognition of its retroactive reinstatement.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expects cash and investments, together with operating cash generation, to cover operating requirements for at least the next 12 months. It expects R&D expense to remain consistent as a percentage of revenue in the foreseeable future.
- Management identifies quarterly revenue variability, long and sometimes unpredictable sales cycles, end-of-quarter shipment concentration, and reliance on large channel partners as important risks. Three distributors generated 45.3% of nine-month revenue.
- Other disclosed risks include intense competition and pricing pressure, dependence on continued innovation and ADN products, reliance on a single primary hardware contract manufacturer and limited-source components, international and foreign-exchange exposure, product defects or security vulnerabilities, and acquisition integration risks.
- F5 reported no pending legal proceeding reasonably expected to have a material adverse effect, while noting ordinary-course claims may involve uncertainty and expense. It reported $6.4 million of unrecognized tax benefits and ongoing state tax audits; expected changes in those benefits were not expected to be material.
- Unusual or nonrecurring items included $1.9 million of foreign-currency losses in Q3, $3.5 million for the nine-month period, and a $1.0 million legal-settlement charge in Q1. A $6.1 million goodwill reduction corrected accounting for a 2007 acquisition; the company said it was not material and did not affect other financial statement amounts.
- Management concluded disclosure controls and procedures were effective as of June 30, 2014, and reported no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether revenue growth and maintenance renewals continue, and whether the increased deferred revenue converts into recognized revenue as expected.
- How margins respond to product mix, hardware costs, competition, and continued hiring and R&D investment.
- Distributor concentration, receivable exposure, and the company’s ability to maintain channel relationships.
- Defense.Net integration, commercial progress in cloud-based security, and the value and assumptions underlying acquisition goodwill and intangibles.
- The pace and price of future share repurchases, and their effect on cash resources and per-share results.
- Changes in tax exposure, foreign-currency effects, and the status of disclosed tax audits and ordinary-course legal matters.