F5 Networks, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 30, 2010; year-to-date figures cover the nine months ended June 30, 2010. The filing identifies the registrant as F5 Networks, Inc. It provides application delivery networking and file virtualization products, plus related services.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages. Quarterly and year-to-date comparisons are against the corresponding 2009 periods.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $230.5 | $158.2 | $627.7 | $477.9 |
| Gross profit / margin | $185.9 / 80.7% | $124.6 / 78.7% | $502.6 / 80.1% | $371.7 / 77.8% |
| Operating income / margin | $60.1 / 26.1% | $31.3 / 19.8% | $153.7 / 24.5% | $81.8 / 17.1% |
| Net income / margin | $40.5 / 17.6% | $22.8 / 14.4% | $102.9 / 16.4% | $63.2 / 13.2% |
| Diluted EPS | $0.50 | $0.29 | $1.27 | $0.79 |
| Operating cash flow | Not separately stated for the quarter | $227.2 | $143.4 |
- Quarterly revenue grew 45.7%; nine-month revenue grew 31.3%. Product revenue increased 54.1% and 33.1%, respectively, while services revenue increased 32.7% and 28.4%.
- Management attributed growth mainly to higher demand for core application delivery networking products, including application security and WAN optimization, and a larger installed base driving maintenance revenue. ADN products were 95.5% of quarterly product revenue and 95.3% year to date.
- Quarterly gross margin improved year over year, although product gross margin declined to 80.1%? The filing reports product cost as a percentage of product revenue of 19.9% versus 23.0%, equivalent to product gross margin of 80.1% versus 77.0%. Service gross margin was 81.6% versus 81.3%.
- Operating expenses rose in dollars as the company expanded hiring and sales and marketing investment, but fell as a share of revenue. Nine-month 2009 included $4.3 million of restructuring charges; none were recorded in 2010.
Financial position, liquidity, and capital allocation
- At June 30, 2010, cash and cash equivalents were $143.8 million, short-term investments $254.5 million, and long-term investments $382.3 million: $780.6 million combined, versus $574.4 million at September 30, 2009.
- Total assets were $1.267 billion; current assets $560.1 million and current liabilities $259.3 million. Deferred revenue was $239.6 million, including $189.0 million current.
- The balance sheet reports no debt; management states the company had no long-term debt. Management believes cash and investments excluding auction rate securities, together with operating cash generation, will meet foreseeable operating requirements.
- Nine-month investing cash use was $183.5 million, primarily reflecting investment purchases and capital expenditures, partly offset by maturities and sales. Financing cash use was $9.2 million, including $55.0 million of share repurchases, offset by employee equity proceeds and related tax benefits.
- The company repurchased $55.0 million of stock during the nine months. As of August 4, 2010, it had repurchased 4.33 million shares at an average $33.28 under the $200 million program; approximately $55.7 million remained authorized.
Outlook, risks, and notable items
- The filing gives no numeric revenue or earnings guidance. Management expects R&D expense to remain consistent as a percentage of revenue and says international sales should remain significant, without assuring that the current mix will persist.
- Key risks include reliance on ADN products, intense competition, product development and transition timing, variable sales cycles and quarter-end deal timing, channel and distributor concentration, and dependence on a single contract manufacturer for ADN hardware. Two distributors represented 23.3% of nine-month revenue.
- International customers generated 41.9% of nine-month revenue. Risks include economic and foreign-exchange conditions, regulatory/export restrictions, and geopolitical factors.
- Liquidity risk remains for auction rate securities (ARS): $15.9 million fair value was classified as long-term and valued using significant unobservable inputs. UBS had purchased all eligible securities for $34.4 million at par before June 30; the remaining ARS may remain illiquid, and further valuation losses are possible. Management cites U.S. government guarantees on underlying student-loan assets and continued interest receipts.
- Other commitments include approximately $15.7 million of component inventory purchases for the following quarter and a headquarters lease extended through July 2022. The filing reports $2.4 million of restricted cash held as lease collateral.
- Stock-based compensation was $51.0 million for the nine months; $42.8 million remained unrecognized, mostly expected to be recognized over the next two years. On August 2, 2010, after quarter-end, the company granted approximately 910,000 RSUs.
- Derivative suits relating to historical stock-option practices remained pending. The SEC reported in January 2010 that its investigation was complete and no enforcement action was recommended; management believed the Department of Justice would take no further action. The company said it knew of no pending proceedings expected to have a material adverse effect.
- Management assessed disclosure controls as effective at June 30, 2010 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ADN demand, maintenance renewals, and strong revenue growth continue, and whether the large-channel and distributor concentration changes.
- Whether the reported margin improvement is sustainable given product mix, warranty costs, pricing, and increasing operating expenses.
- The liquidity, valuation assumptions, and recovery prospects for the remaining ARS, including any subsequent UBS put-option activity.
- Remaining authorization and subsequent activity under the share-repurchase program, alongside dilution from stock awards and stock-based compensation.
- Developments in derivative litigation, tax exposures, component commitments, and the single-source manufacturing relationship.