F5 Networks, Inc. — Form 10-Q Summary
Business context and period: F5 provides multi-cloud application services, including hardware, software, subscriptions and support. This report covers the fiscal third quarter and nine months ended June 30, 2021; comparisons are with the same periods in 2020. The company completed its acquisition of edge-services provider Volterra in January 2021.
Financial performance
| Metric | Quarter ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $651.5 million, up 11.7% | $1.921 billion, up 10.7% |
| Product revenue | $309.9 million, up 22.3% | $907.2 million, up 21.4% |
| Service revenue | $341.6 million, up 3.5% | $1.014 billion, up 2.6% |
| Gross margin | 81.4%, versus 81.8% | 81.0%, versus 83.0% |
| Operating income | $96.4 million, versus $87.6 million | $267.7 million, versus $293.7 million |
| Net income | $89.6 million, versus $69.9 million | $220.5 million, versus $229.8 million |
| Diluted EPS | $1.46, versus $1.14 | $3.55, versus $3.76 |
Quarterly product growth was led by software revenue, which rose to $129.5 million from $93.9 million; systems revenue was $180.4 million, compared with $159.4 million. Services growth reflected a larger installed base and maintenance renewals. Quarterly net income benefited from a lower effective tax rate of 4.9%, versus 20.4% a year earlier; the nine-month rates were 16.3% and 23.1%.
Cash flow and liquidity: Nine-month operating cash flow was $448.1 million, down from $485.0 million. Investing activities used $253.7 million, including $411.3 million paid for Volterra, partly offset by investment sales and maturities. Financing activities used $461.2 million, principally due to $500 million of share repurchases. Cash, cash equivalents and investments totaled $863.1 million at June 30, down from $1.313 billion at September 30, 2020. Cash and cash equivalents were $583.8 million. Deferred revenue was $1.441 billion, versus $1.273 billion at fiscal year-end.
Debt and obligations: Term-loan principal outstanding was $375 million, with maturity in January 2023; the company had no revolver borrowings and $350 million of available capacity. F5 reported compliance with debt covenants. Operating lease liabilities totaled $358.3 million. Cash and investments exceeded term-loan principal by approximately $488 million, before other obligations.
Material changes and notable items
- Software product revenue grew faster than systems and services, increasing software’s share of product revenue to 41.8% for the quarter from 37.1%.
- Nine-month operating expenses rose to $1.289 billion from $1.146 billion, including higher personnel and stock-based compensation costs. Research and development expense grew 20.8% for the nine-month period.
- F5 recorded $40.7 million of impairment charges in the first nine months, mainly related to exiting office space, including its Seattle headquarters and the former Shape headquarters. No impairment was recorded in the third quarter.
- The Volterra acquisition added $351.4 million of preliminary goodwill. Its operating results were not material to the periods presented. F5 also reported approximately $1.4 billion in non-cancelable remaining performance obligations; about 66.1% was expected to be recognized within 12 months.
- F5 repurchased $500 million of shares through an accelerated share repurchase, retiring approximately 2.5 million shares. $773 million remained authorized under its repurchase program at June 30.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said current cash and investments, expected operating cash flows and available revolver capacity should be sufficient for liquidity needs. It cited uncertainty about future COVID-19 effects, including impacts on customers, operations and supply chains. Management reported no significant COVID-19 impact on the quarter, but said future effects remained uncertain.
Risks discussed include interest-rate exposure on investments and variable-rate debt, reliance on distributors and contract manufacturers, and litigation. Ingram Micro represented 20.7% of quarterly revenue and Synnex 12.0%. F5 is defending claims brought by Lynwood Investment and multiple patent cases brought by Proven Networks; management said it intended to defend the matters and believed it had strong defenses. No legal-loss accrual was recorded, and the potential exposure was not determinable. The filing reported no material changes to previously disclosed risk factors.
Investor verification checklist
- Check whether software-led growth and subscription momentum continue, and whether the $1.4 billion performance-obligation balance converts to revenue as expected.
- Assess the drivers of lower nine-month operating income and gross margin, including expense growth, acquired-technology costs and facility impairments.
- Review cash generation, the remaining term-loan amortization and 2023 maturity, and capital allocation following the $500 million repurchase.
- Monitor distributor concentration, supply-chain and COVID-19 developments, and the status or potential financial effects of the disclosed litigation.
- Verify subsequent filings for updated Volterra purchase accounting, tax-rate changes and any changes in guidance or risk disclosures.