F5 Networks, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. The filing also reports results for the quarter ended September 30, 2012 (FY2012 Q4). Unless noted, amounts are in U.S. dollars.
Business context
F5 sells application delivery networking products and related services, including BIG-IP and VIPRION systems, software modules, virtual editions, and file-virtualization products. In February 2012, it acquired Traffix Systems, adding Diameter signaling products for service providers. The company operates as one reportable segment and sells primarily through distributors, resellers, and systems integrators.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Product revenue | $818.6 million | $722.0 million | +13.4% |
| Services revenue | $558.7 million | $429.9 million | +30.0% |
| Total revenue | $1,377.2 million | $1,151.8 million | +19.6% |
| Gross profit / margin | $1,141.1 million / 82.9% | $943.8 million / 81.9% | Margin +1.0 percentage point |
| Operating income / margin | $426.3 million / 31.0% | $350.7 million / 30.4% | Income +21.5% |
| Net income | $275.2 million | $241.4 million | +14.0% |
| Diluted EPS | $3.45 | $2.96 | +16.6% |
| Operating cash flow | $495.4 million | $416.9 million | +$78.5 million |
FY2012 product revenue growth reflected higher volume of core application delivery networking products. Services growth was driven by new and renewed maintenance contracts as the installed base expanded. Services contributed 40.6% of total revenue, up from 37.3% in FY2011. Application delivery networking products represented 98.6% of product revenue.
In FY2012 Q4, revenue was $362.6 million versus $314.6 million in the prior-year quarter, up 15.2%. Net income was $67.7 million versus $67.6 million, and diluted EPS was $0.85 versus $0.84.
Balance sheet, cash flow, and capital allocation
- Cash, cash equivalents, and investments totaled $1.195 billion at September 30, 2012, compared with $1.013 billion a year earlier. This includes $211.2 million cash, $321.0 million short-term investments, and $662.8 million long-term investments.
- F5 reported no long-term debt. Total assets were $1.911 billion and shareholders’ equity was $1.329 billion.
- Cash from operations was $495.4 million; investing activities used $352.3 million, including $128.3 million for the Traffix acquisition and $29.9 million in property and equipment purchases. Financing activities used $149.2 million, including $184.8 million of share repurchases.
- Deferred revenue rose to $447.3 million, current and long-term combined, from $343.3 million, primarily reflecting growth in maintenance contracts. Fourth-quarter days sales outstanding were 46.
- The company stated existing cash and investments, excluding auction rate securities, plus expected operating cash flows should cover operating requirements for the next 12 months. Contractual operating lease and purchase obligations totaled $156.2 million.
Material changes, outlook, and risks
- Revenue growth slowed to 19.6% in FY2012 from 30.6% in FY2011; product revenue growth slowed to 13.4% from 28.7%. Net income margin declined to 20.0% from 20.9%, while gross and operating margins improved.
- Operating expenses rose 20.5% to $714.8 million, including sales and marketing expense of $445.6 million and R&D expense of $177.4 million. Management attributed increases largely to personnel and commissions. It expected R&D expense to remain consistent as a percentage of revenue.
- The effective tax rate increased to 36.3% from 33.1%, largely due to expiration of the federal research credit and higher nondeductible stock-based compensation related to foreign employees.
- Traffix was acquired for $133.7 million in cash. The acquisition added $113.2 million of goodwill; F5 reported no goodwill impairment in FY2012.
- F5 highlighted order timing and quarter-end sales concentration, an unpredictable enterprise sales cycle, competition and pricing pressure, product-development and transition risks, and reliance on a single contract manufacturer for application delivery networking hardware.
- Two distributors accounted for 30.9% of FY2012 revenue. International sales were 47.1% of revenue. Product backlog was $38.8 million at year-end, down from $40.9 million, and management cautioned that backlog is not a reliable predictor of future revenue.
- Auction rate securities with $5.0 million par value were classified as long-term and valued at $4.8 million; management believed they could remain illiquid beyond 12 months. F5 reported no pending legal proceedings believed reasonably likely to have a material adverse effect.
- No numerical FY2013 revenue or earnings guidance is provided in the filing. Management’s liquidity assessment and R&D expense expectation are forward-looking and subject to the risks described in the filing.
Important facts for investors to verify
- Whether the slower product growth rate and continued reliance on ADN products remain consistent with subsequent results and demand trends.
- The sustainability of service revenue growth, deferred-revenue expansion, and the reported margin improvement as operating expenses continue to rise.
- Distributor concentration, including the financial health and purchasing patterns of Avnet and Ingram Micro, and the company’s ability to diversify its channels.
- Integration, growth, and returns from the Traffix acquisition, including the assumptions supporting its goodwill and acquired intangible assets.
- Liquidity and valuation of the remaining auction rate securities, along with exposure to investment, tax, supply-chain, and product-security risks.