F5 Networks, Inc. — Q1 fiscal 2012 10-Q
Reporting period: Three months ended December 31, 2011, compared with the three months ended December 31, 2010. Unaudited; financial amounts below are in U.S. dollars and generally shown in millions.
Business context
F5 sells application delivery networking products and services, along with file virtualization products. Sales are primarily through indirect channels. Application delivery networking (ADN) products represented 98.7% of product revenue and about 60.2% of total revenue in the quarter.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Product revenue | $196.6m | $171.5m | +14.6% |
| Services revenue | $125.9m | $97.4m | +29.2% |
| Total revenue | $322.4m | $268.9m | +19.9% |
| Gross profit / margin | $266.8m / 82.8% | $220.0m / 81.8% | Margin +1.0 pp |
| Operating income / margin | $99.8m / 30.9% | $79.9m / 29.7% | Income +24.9% |
| Net income / margin | $66.5m / 20.6% | $55.7m / 20.7% | Income +19.5% |
| Diluted EPS | $0.83 | $0.68 | +22.1% |
| Cash from operations | $131.9m | $103.1m | +$28.7m |
- Operating expenses rose to $167.0m from $140.1m, principally reflecting higher sales and marketing and R&D personnel costs and increased headcount.
- Cash and investments totaled $1,114.8m at quarter-end, up from $1,012.8m at September 30, 2011. Cash and cash equivalents were $257.5m; short- and long-term investments were $299.0m and $558.3m, respectively.
- The company reported no long-term debt. Current assets were $804.1m and current liabilities $432.8m. Total deferred revenue was $380.0m, compared with $343.3m at September 30; management attributed the increase to new and renewed maintenance contracts. Days sales outstanding was 52.
- Investing activities used $67.4m, including investment purchases and $5.9m of capital expenditures. Financing activities used $23.5m, including $34.5m for share repurchases. Quarter-end cash increased to $257.5m from $216.8m.
Changes, outlook and risks
- Growth was driven by increased demand for core ADN products, including application security and WAN optimization, and by maintenance contract purchases and renewals tied to the growing installed base. Service revenue grew faster than product revenue.
- Sales outside the Americas were 41.2% of revenue. Two worldwide distributors accounted for 31.6% of quarterly revenue (17.9% and 13.7% individually), creating channel concentration. One distributor represented 15.6% of accounts receivable.
- Management said existing cash and investments, excluding auction rate securities, plus operating cash flow should cover operating requirements for at least the next 12 months. No numerical revenue or earnings guidance was provided. Management expected R&D expense to remain consistent as a percentage of revenue.
- F5 repurchased $34.5m of shares in the quarter. As of January 31, 2012, it had repurchased and retired 7.9m shares at an average $60.16 per share, with $324.4m remaining under repurchase programs.
- Key exposures include dependence on ADN products, volatile order timing and potentially lengthening enterprise sales cycles, competition and pricing pressure, and reliance on a single contract manufacturer for ADN hardware. The company was committed to purchase approximately $12.5m of component inventory in the next quarter.
- Municipal auction rate securities had a $13.1m fair value ($15.0m par) and remained illiquid following failed auctions. Management believed the government-guaranteed underlying assets supported recovery, but acknowledged potential impairment and prolonged illiquidity risk.
- The effective tax rate rose to 34.6% from 32.4%, largely because the federal research activities credit was reflected in the prior-year quarter but had expired by December 31, 2011. Unrecognized tax liabilities were approximately $5.7m.
- No pending legal proceedings were identified as likely to have a material adverse effect. The filing discusses ordinary-course litigation and indemnification exposure; the maximum potential indemnification amount could not be determined. No impairment charges were recorded in the quarter.
Important facts for investors to verify
- Whether subsequent quarters sustain revenue growth and the improved gross and operating margins, especially as operating costs and headcount expand.
- Distributor concentration and the company’s dependence on ADN products and its single hardware contract manufacturer.
- Liquidity and valuation developments for auction rate securities, including any impairment or changes in expected recovery.
- Share repurchase pace and remaining authorization relative to investment needs and operating cash generation.
- Tax-rate developments following expiration of the federal research credit, and any changes in uncertain tax positions.