F5, Inc. (NASDAQ: FFIV) — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019; fourth quarter ended September 30, 2019. Amounts are in U.S. dollars. The company provides multi-cloud application services through hardware, software, SaaS and support offerings. It acquired NGINX on May 8, 2019, expanding its software and cloud-native application portfolio.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $2.242 billion | $2.161 billion |
| Product revenue | $985.6 million | $960.1 million |
| Services revenue | $1.257 billion | $1.201 billion |
| Gross profit / gross margin | $1.886 billion / 84.1% | $1.800 billion / 83.3% |
| Operating income / operating margin | $518.5 million / 23.1% | $590.9 million / 27.3% |
| Net income / diluted EPS | $427.7 million / $7.08 | $453.7 million / $7.32 |
| Cash provided by operating activities | $747.8 million | $761.1 million |
FY2019 revenue increased 3.7% as reported, while operating income fell 12.3% and net income fell 5.7%. The effective tax rate declined to 21.0% from 24.9%. Reported results include the effect of adopting ASC 606; without ASC 606, FY2019 revenue would have been $2.170 billion and net income $372.5 million, so comparisons with FY2018 are affected by the accounting change.
FY2019 Q4: Revenue was $590.4 million versus $562.7 million a year earlier. Net income was $94.8 million and diluted EPS was $1.57, compared with $132.9 million and $2.18 in Q4 FY2018. Operating income was $114.7 million versus $153.6 million.
Liquidity, capital and balance sheet
- Cash, cash equivalents and investments totaled $1.331 billion at year-end, down from $1.451 billion. Cash and investments exceeded current liabilities; the reported current ratio was approximately 1.37.
- The company reported no long-term debt. Shareholders’ equity was $1.761 billion, up from $1.285 billion.
- Cash used for the NGINX acquisition was $611.6 million; capital expenditures were $103.5 million. The company repurchased $201.0 million of shares during the year, then suspended the automatic portion of its repurchase program in Q2; no shares were repurchased in Q4.
- Current and long-term deferred revenue totaled $1.198 billion. Management said existing cash and investments, together with operating cash flow, should cover operating requirements for the next 12 months.
- Contractual obligations included $465.6 million of operating lease payments and $20.8 million of purchase obligations. Uncertain-tax-position liabilities, including interest and penalties, were approximately $46.3 million; timing of potential cash outflows was not clear.
Material changes and management commentary
- Software revenue grew 60% in FY2019, according to the company, as F5 pursued a shift from a hardware-centric business toward software- and SaaS-based multi-cloud application services. Services revenue rose 4.6%, supported by maintenance contracts; product revenue rose 2.7%, with software gains partly offset by lower systems revenue.
- NGINX was acquired for approximately $643.2 million. The purchase accounting recorded $509.4 million of goodwill and $62.5 million of developed technology. NGINX’s reported operating contribution and pro forma results were not considered material for separate disclosure.
- Operating expenses rose 13.1% to $1.367 billion, with higher sales and marketing, R&D, and G&A costs. Management cited headcount growth, NGINX-related costs, headquarters relocation and acquisition-related professional fees. A $6.3 million internal-use software impairment and $8.2 million of lease-exit costs were recorded.
- F5 launched its Cloud Services SaaS platform in March 2019. Management emphasized continued investment in software, cloud services, security, developer engagement and strategic partnerships; no quantified FY2020 revenue or earnings guidance is provided in the supplied filing text.
- Product backlog fell to $17.4 million from $30.5 million. Management cautioned that orders may be canceled or rescheduled and backlog is not a reliable indicator of future revenue.
Risks, contingencies and unusual items
- Execution risk accompanies the transition to cloud, SaaS and subscription models; F5 cautions that these offerings may fail to attract sufficient customers or could pressure revenue and margins. Competition, pricing pressure and rapid technology changes are significant risks.
- Three distributors accounted for 38.4% of FY2019 revenue, creating channel concentration. The company also depends on a single contract manufacturer and has some single- or limited-source hardware components.
- Cybersecurity vulnerabilities, product defects, privacy regulation, international operations, taxes, hiring and integration of acquisitions could adversely affect results. The company identified uncertain outcomes from litigation as a general risk.
- A patent dispute with Radware was settled in FY2019 on confidential terms, with no material financial-statement impact. The company reported no accrual for pending legal contingencies because an unfavorable outcome and estimable loss were not established.
- ASC 606 materially affected FY2019 reported revenue and earnings: adoption increased reported revenue by $72.2 million and net income by $55.2 million versus the prior accounting basis. Adoption also increased opening retained earnings by $36.0 million.
- F5 expected adoption of the new lease standard in FY2020 to materially increase balance-sheet lease assets and liabilities. The auditor gave unqualified opinions on the financial statements and internal controls, while identifying revenue-contract judgments and NGINX technology valuation as critical audit matters.
Key facts for investors to verify
- Assess underlying growth after adjusting for ASC 606, and track software, subscription and SaaS revenue separately from hardware and services.
- Monitor whether NGINX integration produces durable growth and whether the acquisition supports margins after added operating costs.
- Reconcile cash and investment balances with acquisition spending, capital expenditures, future lease obligations and the company’s stated liquidity outlook.
- Track operating-expense growth, margins, maintenance renewals and distributor concentration, including the company’s dependence on its contract manufacturer.
- Review subsequent filings for FY2020 guidance, lease-standard adoption effects, changes in tax exposures and any material developments in litigation or cybersecurity risks.