F5 Networks, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing also reports fourth-quarter results for the three months ended September 30, 2011. Amounts are in U.S. dollars.
Business context
F5 sells application delivery networking products and related services, including maintenance and support, primarily to enterprise customers and service providers through distributors, resellers, and systems integrators. Application delivery networking accounted for 97.4% of product revenue. International sales were 41.2% of FY2011 revenue.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $1,151.8 million | $882.0 million | +30.6% |
| Product revenue | $722.0 million | $561.1 million | +28.7% |
| Services revenue | $429.9 million | $320.8 million | +34.0% |
| Gross profit / margin | $943.8 million / 81.9% | $710.0 million / 80.5% | Margin +1.4 percentage points |
| Operating income / margin | $350.7 million / 30.4% | $230.0 million / 26.1% | Income +52.5% |
| Net income | $241.4 million | $151.2 million | +59.7% |
| Diluted EPS | $2.96 | $1.86 | +59.1% |
| Operating cash flow | $416.9 million | $313.6 million | +$103.3 million |
FY2011 product gross margin was 82.1%, up from 79.7%; services gross margin was 81.7%, versus 81.9%. The effective tax rate declined to 33.1% from 36.4%.
Fourth quarter: Revenue was $314.6 million, operating income $99.3 million, net income $67.6 million, and diluted EPS $0.84. Compared with Q4 FY2010, revenue increased 23.7% and net income increased 40.2%.
Cash, liquidity and capital structure
- Cash, cash equivalents, and short- and long-term investments totaled $1,012.8 million at year-end, compared with $862.1 million a year earlier. F5 reported no long-term debt.
- Cash from operations was $416.9 million; investing activities used $139.7 million and financing activities used $226.7 million. Capital expenditures were $30.4 million.
- F5 repurchased $271.5 million of stock during FY2011. The board authorized further repurchases after year-end; the programs may be discontinued at any time. No dividend was paid or anticipated in the foreseeable future.
- Current assets were $763.7 million and current liabilities $372.3 million. Deferred revenue totaled $343.3 million, including $72.4 million classified as long-term.
- Contractual obligations included $172.4 million of gross operating lease payments and $13.6 million of purchase commitments. Management said existing cash and investments, excluding auction-rate securities, plus expected operating cash flow should cover requirements for the next 12 months.
Changes, outlook and key risks
- Growth reflected increased demand and product shipments in core application delivery networking, as well as higher maintenance revenue from the expanding installed base. Product revenue growth slowed to 28.7% from 38.0% in FY2010; services growth accelerated to 34.0% from 30.1%.
- Operating expenses rose 23.6% to $593.2 million, but declined as a share of revenue to 51.5% from 54.4%. Sales and marketing expense increased with headcount, commissions, and marketing programs. Research and development expense rose to $138.9 million; management expected it to remain consistent as a percentage of revenue in the foreseeable future.
- No specific numerical revenue or earnings guidance is provided in the filing. Management cited continued investment in product development, sales capacity, and potential strategic acquisitions or investments.
- Liquidity risk includes auction-rate securities: $13.0 million fair value against $15.0 million par value remained classified as long-term, with failed auctions limiting liquidity. F5 said underlying assets were generally U.S.-government-guaranteed student loans and it did not expect this to materially affect overall liquidity.
- Revenue and results are exposed to order timing and a lengthy, variable sales cycle; a substantial portion of sales occurs near quarter-end. Two distributors accounted for 28.8% of FY2011 revenue. F5 also relies on a single contract manufacturer for its application delivery networking hardware and has single- or limited-source component suppliers.
- Other disclosed risks include competition and pricing pressure, product-development and transition execution, economic conditions and IT spending, international operations and export controls, intellectual-property claims, and stock-based compensation. No pending legal proceeding was identified as reasonably likely to have a material adverse effect.
- F5 adopted amended multiple-element revenue-recognition guidance prospectively in FY2011; management said the impact was not material. Auditors reported effective internal control over financial reporting, and the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether application delivery networking demand and maintenance renewals sustain revenue growth, given the product concentration.
- Distributor exposure: Avnet represented 18.1% and Ingram Micro 10.7% of FY2011 revenue; together they also represented 29.5% of year-end receivables.
- Liquidity and valuation of auction-rate securities, including the difference between $15.0 million par value and $13.0 million fair value.
- Whether buybacks, stock-based compensation, and share-count changes affect per-share returns; FY2011 stock-based compensation was $89.7 million.
- Execution and supply continuity at the primary hardware contract manufacturer, alongside the $13.6 million of purchase commitments.
- Subsequent repurchase authorizations and actual repurchases after September 30, 2011, which are not part of FY2011 operating results.