F5 Networks, Inc. — Form 10-Q Summary
Business context and reporting period
F5 provides application delivery networking products and related services, including the BIG-IP and VIPRION product families. This report covers the fiscal third quarter and first nine months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $370.3 million | $352.6 million | $1,086.0 million | $1,014.7 million |
| Gross margin | 82.5% | 82.9% | 82.9% | 82.9% |
| Operating income | $104.1 million | $110.0 million | $305.6 million | $314.5 million |
| Net income | $68.2 million | $72.3 million | $201.1 million | $207.5 million |
| Diluted EPS | $0.86 | $0.91 | $2.54 | $2.60 |
| Cash from operations | — | $351.7 million | $346.9 million |
- Q3 product revenue was $196.7 million, down 5.0%; services revenue was $173.6 million, up 19.3%. For the nine months, products declined 3.7% and services grew 23.1%.
- Q3 operating margin was 28.1%, versus 31.2% a year earlier; net margin was 18.4%, versus 20.5%. Nine-month operating and net margins were 28.1% and 18.5%, respectively, compared with 31.0% and 20.5%.
- At June 30, cash and cash equivalents were $198.3 million, short-term investments $353.0 million, and long-term investments $714.3 million. Combined cash and investments totaled $1.266 billion, versus $1.195 billion at September 30, 2012. The filing reports no long-term debt.
- Current assets were $834.3 million and current liabilities $529.9 million. Deferred revenue, current and long-term combined, was $519.8 million, up from $447.3 million at fiscal year-end.
Material changes versus the prior period
- Revenue growth was led by services, primarily maintenance contracts on the expanding installed base; product revenue declined. Management attributed the product decrease principally to lower application delivery networking product sales.
- Despite higher revenue, operating income and net income fell in both comparison periods. Operating expenses rose 10.4% in Q3 and 12.8% for the nine months, reflecting personnel, commissions, and other costs. Research and development spending increased 15.1% in Q3 and 19.6% for the nine months.
- F5 acquired LineRate Systems in February 2013 for approximately $125.3 million. The acquisition added $99.6 million of goodwill and $29.9 million of in-process research and development; management expected to complete that development project in 2014, after which amortization would begin over an estimated ten-year life.
- The company repurchased $150.0 million of common stock during the first nine months and authorized an additional $200 million for its repurchase program in April. As of August 2, 2013, $227.8 million remained authorized.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expected research and development expense to remain consistent as a percentage of revenue and believed available cash and investments, excluding auction-rate securities, plus operating cash generation would cover operating needs for at least 12 months.
- Management said deferred revenue increased with new and renewed maintenance contracts; third-quarter days sales outstanding were 50. International sales remain significant. Three distributors together accounted for 40.7% of Q3 revenue, and one distributor represented 16.6% of receivables at June 30.
- Key risks include dependence on application delivery networking products, distributor concentration, competition and pricing pressure, unpredictable quarter-end sales timing, and reliance on a single contract manufacturer for application delivery networking hardware. The company had a $15.9 million component-inventory purchase commitment for the next 30 days.
- Investments include $4.0 million of illiquid auction-rate securities, classified as Level 3; management did not expect liquidity constraints to materially affect its ability to meet needs and reported no other-than-temporary impairment. The portfolio also has interest-rate and credit risks.
- Stock-based compensation was $82.2 million for the nine months, with $100.8 million of unrecognized compensation cost, mostly expected to be recognized over the next two years. The effective tax rate was 35.6% for the nine months; unrecognized tax benefits were $6.3 million.
- F5 reported no pending legal proceeding expected to have a material adverse effect. Disclosure controls were deemed effective as of June 30, 2013, with no material change in internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- Whether service growth and maintenance renewals can offset continued weakness in product revenue, and whether operating margins stabilize as expenses rise.
- The sustainability and returns of the $150 million repurchase activity and remaining authorization, alongside acquisition and investment spending.
- Exposure to the three largest distributors, including their share of revenue and accounts receivable, and the single-source hardware manufacturing risk.
- Progress and commercial prospects for LineRate’s in-process technology, including the anticipated 2014 completion and subsequent amortization.
- Liquidity and valuation developments in auction-rate securities, and changes in tax exposures or stock-based compensation expense.