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F5 Networks Announces Second Quarter Fiscal 2018 Results
[April 25, 2018]

F5 Networks Announces Second Quarter Fiscal 2018 Results


F5 Networks, Inc. (NASDAQ:FFIV) today announced revenue of $533.3 million for the second quarter of fiscal 2018, up 2.9% from $518.2 million in the second quarter of fiscal 2017. Growth compared with the second quarter of fiscal 2017 was driven by our software solutions and Services business.

GAAP net income for the second quarter of fiscal 2018 was $109.6 million, or $1.77 per diluted share, compared to $93.1 million, or $1.43 per diluted share in the second quarter of fiscal 2017. Excluding the impact of stock-based compensation, amortization of purchased intangible assets, and litigation expenses, non-GAAP net income for the second quarter of fiscal 2018 was $143.3 million, or $2.31 per diluted share, compared to $127.0 million, or $1.95 per diluted share in the second quarter of fiscal 2017.

A reconciliation of net income, earnings per share, and other measures on a GAAP to non-GAAP basis is included on the attached Consolidated Income Statements.

"We had solid execution across the organization during the second quarter," said François Locoh-Donou, F5 President and Chief Executive Officer. "Our software business had another quarter of outstanding growth, driven by deployments in the public cloud, and our Services organization continues to deliver tremendous value to our customers and strong financial performance.

"At our Analyst and Investor meeting in early March, we outlined a long-term strategic roadmap centered on supporting customers as their applications evolve in a multi-cloud world. The entire F5 organization is aligned to delivering the products and services necessary to meet our customers' needs, regardless of where their applications reside. This focus is evident in the new BIG-IP Cloud Edition announced today and the Advanced Web Application Firewall solutions we introduced earlier this month."

For the third quarter of fiscal 2018, ending June 30, the company has set a revenue goal of $535 million to $545 million with a GAAP earnings target of $1.79 to $1.82 per diluted share and a non-GAAP earnings target of $2.36 to $2.39 per diluted share.

A reconciliation of the company's expected GAAP and non-GAAP earnings is provided in the following table:





 
  Three months ended
June 30, 2018
(in millions, except per share amounts)
 
Reconciliation of Expected Non-GAAP Third Quarter Earnings Low   High
Net income $ 110.2 $ 112.0
Stock-based compensation expense $ 42.0 $ 42.0
Amortization of purchased intangible assets $ 2.8 $ 2.8
Tax effects related to above items $ (9.4 ) $ (9.4 )
Non-GAAP net income excluding stock-based compensation expense and amortization of purchased intangible assets $ 145.6   $ 147.4  
Net income per share - diluted $ 1.79   $ 1.82  
Non-GAAP net income per share - diluted $ 2.36   $ 2.39  
 

Francis J. Pelzer Appointed Executive Vice President and Chief Financial Officer

The company also announced the appointment of Francis "Frank" Pelzer as Executive Vice President and Chief Financial Officer, effective May 21, 2018. Pelzer joins F5 from SAP where he was most recently President and Chief Operating Officer of the Cloud Business Group, where he has been responsible for the execution of SAP's Software-as-a-Service portfolio, including Concur, Ariba, Fieldglass, SucessFactors, and Hybris. Previously, Pelzer served as Chief Financial Officer of Concur Technologies, a cloud-based travel and expense management solution provider that was purchased by SAP in 2014.

Forward Looking Statements

This press release contains forward-looking statements including, among other things, statements regarding the continuing strength and momentum of F5's business, future financial performance, sequential growth, projected revenues including target revenue and earnings ranges, income, earnings per share, share amount and share price assumptions, demand for application delivery networking, application delivery services, security, virtualization and diameter products, expectations regarding future services and products, expectations regarding future customers, markets and the benefits of products, and other statements that are not historical facts and which are forward-looking statements. These forward-looking statements are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. Such forward-looking statements involve risks and uncertainties, as well as assumptions and other factors that, if they do not fully materialize or prove correct, could cause the actual results, performance or achievements of the company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: customer acceptance of our new traffic management, security, application delivery, optimization, diameter and virtualization offerings; the timely development, introduction and acceptance of additional new products and features by F5 or its competitors; competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors into F5's markets, and new product and marketing initiatives by our competitors; increased sales discounts; uncertain global economic conditions which may result in reduced customer demand for our products and services and changes in customer payment patterns; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; litigation involving patents, intellectual property, shareholder and other matters, and governmental investigations; natural catastrophic events; a pandemic or epidemic; F5's ability to sustain, develop and effectively utilize distribution relationships; F5's ability to attract, train and retain qualified product development, marketing, sales, professional services and customer support personnel; F5's ability to expand in international markets; the unpredictability of F5's sales cycle; F5's share repurchase program; future prices of F5's common stock; and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission, including our most recent reports on Form 10-K and Form 10-Q and current reports on Form 8-K that we may file from time to time, which could cause actual results to vary from expectations. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in F5's most recent reports on Forms 10-Q and 10-K as each may be amended from time to time. All forward-looking statements in this press release are based on information available as of the date hereof and qualified in their entirety by this cautionary statement. F5 assumes no obligation to revise or update these forward-looking statements.

GAAP to non-GAAP Reconciliation

F5's management evaluates and makes operating decisions using various operating measures. These measures are generally based on the revenues of its products, services operations and certain costs of those operations, such as cost of revenues, research and development, sales and marketing and general and administrative expenses. One such measure is net income excluding stock-based compensation, amortization of purchased intangible assets, acquisition-related charges, net of taxes, and certain non-recurring tax expenses and benefits, which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended. This measure consists of GAAP net income excluding, as applicable, stock-based compensation, amortization of purchased intangible assets and acquisition-related charges. This measure of non-GAAP net income is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability. Stock-based compensation is a non-cash expense that F5 has accounted for since July 1, 2005 in accordance with the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718 Compensation-Stock Compensation ("FASB ASC Topic 718"). Amortization of intangible assets is a non-cash expense. Investors should note that the use of intangible assets contribute to revenues earned during the periods presented and will contribute to revenues in future periods. Acquisition-related expenses consist of professional services fees incurred in connection with acquisitions. In addition, restructuring charges have been excluded from GAAP net income for the purpose of measuring non-GAAP earnings and earnings per share in fiscal 2017, and litigation expenses primarily related to a jury verdict and other associated costs of that patent litigation have been excluded in fiscal 2016 and 2017.

Management believes that non-GAAP net income per share provides useful supplemental information to management and investors regarding the performance of the company's core business operations and facilitates comparisons to the company's historical operating results. Although F5's management finds this non-GAAP measure to be useful in evaluating the performance of the core business, management's reliance on this measure is limited because items excluded from such measures could have a material effect on F5's earnings and earnings per share calculated in accordance with GAAP. Therefore, F5's management will use its non-GAAP earnings and earnings per share measures, in conjunction with GAAP earnings and earnings per share measures, to address these limitations when evaluating the performance of the company's core business. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures in accordance with GAAP.

F5 believes that presenting its non-GAAP measure of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company's core business and which management uses in its own evaluation of the company's performance. Investors are encouraged to look at GAAP results as the best measure of financial performance. However, while the GAAP results are more complete, the company provides investors this supplemental measure since, with reconciliation to GAAP, it may provide additional insight into the company's operational performance and financial results.

For reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure, please see the section in our Consolidated Income Statements entitled "Non-GAAP Financial Measures."

About F5

F5 (NASDAQ: FFIV) makes apps go faster, smarter, and safer for the world's largest businesses, service providers, governments, and consumer brands. F5 delivers cloud and security solutions that enable organizations to embrace the application infrastructure they choose without sacrificing speed and control. For more information, go to f5.com. You can also follow @f5networks on Twitter or visit us on LinkedIn and Facebook for more information about F5, its partners, and technologies.

 
F5 Networks, Inc.
Consolidated Balance Sheets
(unaudited, in thousands)
   
March 31,
2018 		September 30,
2017
 
Assets
Current assets
Cash and cash equivalents $ 595,917 $ 673,228
Short-term investments 428,756 343,700
Accounts receivable, net of allowances of $1,874 and $1,815 290,919 291,924
Inventories 29,512 29,834
Other current assets   62,125     67,538  
Total current assets   1,407,229     1,406,224  
 
Property and equipment, net 117,392 122,420
Long-term investments 350,241 284,802
Deferred tax assets 36,982 53,303
Goodwill 555,965 555,965
Other assets, net   49,337     53,775  
Total assets $ 2,517,146   $ 2,476,489  
 
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 40,271 $ 50,760
Accrued liabilities 185,924 187,379
Deferred revenue   735,976     696,404  
Total current liabilities   962,171     934,543  
 
Other long-term liabilities 53,770 44,589
Deferred revenue, long-term 274,564 267,902
Deferred tax liabilities   27     63  
Total long-term liabilities   328,361     312,554  
 
Commitments and contingencies
 
Shareholders' equity
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding - -

Common stock, no par value; 200,000 shares authorized, 61,115 and 62,594 shares issued and outstanding

21,120 17,627
Accumulated other comprehensive loss (20,980 ) (17,997 )
Retained earnings   1,226,474     1,229,762  
Total shareholders' equity   1,226,614     1,229,392  
Total liabilities and shareholders' equity $ 2,517,146   $ 2,476,489  
 
 
F5 Networks, Inc.
Consolidated Income Statements
(unaudited, in thousands, except per share amounts)
 
  Three Months Ended
March 31, 		  Six Months Ended
March 31,
2018   2017 2018   2017
 
Net revenues
Products $ 237,558 $ 241,080 $ 464,861 $ 480,563
Services   295,746     277,168     591,634     553,643  
Total 533,304 518,248 1,056,495 1,034,206
 
Cost of net revenues (1)(2)
Products 44,127 43,928 87,392 85,604
Services   45,518     43,984     89,640     87,570  
Total   89,645     87,912     177,032     173,174  
Gross profit 443,659 430,336 879,463 861,032
 
Operating expenses (1)(2)
Sales and marketing 169,970 164,705 337,904 329,219
Research and development 91,056 89,234 176,945 176,284
General and administrative 39,276 38,009 79,260 79,687
Litigation expense   -     (135 )   -     (135 )
Total   300,302     291,813     594,109     585,055  
 
Income from operations 143,357 138,523 285,354 275,977
Other income, net   2,790     1,302     4,935     3,945  
Income before income taxes 146,147 139,825 290,289 279,922
Provision for income taxes   36,511     46,687     92,224     92,566  
Net income $ 109,636   $ 93,138   $ 198,065   $ 187,356  
 
 
Net income per share - basic $ 1.79   $ 1.44   $ 3.20   $ 2.89  
Weighted average shares - basic   61,420     64,479     61,812     64,841  
 
Net income per share - diluted $ 1.77   $ 1.43   $ 3.18   $ 2.87  
Weighted average shares - diluted   62,059     65,028     62,351     65,389  
 
 
Non-GAAP Financial Measures
 
Net income as reported $ 109,636 $ 93,138 $ 198,065 $ 187,356
Stock-based compensation expense (3) 41,320 43,895 82,268 90,506
Amortization of purchased intangible assets 2,805 3,292 5,610 6,695
Litigation expense - (135 ) - (135 )
Tax effects related to above items (10,466 ) (13,184 ) (19,649 ) (27,150 )
Tax on deemed repatriation of undistributed foreign earnings - - 7,000 -
Remeasurement of net deferred tax assets due to change in U.S. tax rate   -     -     11,584     -  

Net income excluding stock-based compensation expense, amortization of purchased intangible assets, litigation expense, and non-recurring tax expenses and benefits (non-GAAP) - diluted

$ 143,295   $ 127,006   $ 284,878   $ 257,272  

Net income per share excluding stock-based compensation expense, amortization of purchased intangible assets, litigation expense, and non-recurring tax expenses and benefits (non-GAAP) - diluted

$ 2.31   $ 1.95   $ 4.57   $ 3.93  
 
Weighted average shares - diluted   62,059     65,028     62,351     65,389  
 
(1) Includes stock-based compensation expense as follows:
Cost of net revenues $ 5,543 $ 5,554 $ 10,993 $ 10,771
Sales and marketing 15,555 18,110 31,033 35,160
Research and development 12,497 13,884 24,903 27,816
General and administrative   7,725     6,347     15,339     16,759  
$ 41,320   $ 43,895   $ 82,268   $ 90,506  
 
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues $ 2,028 $ 2,532 $ 4,056 $ 5,317
Sales and marketing 252 251 504 503
General and administrative   525     509     1,050     875  
$ 2,805   $ 3,292   $ 5,610   $ 6,695  
 
(3) Stock-based compensation is accounted for in accordance with the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation ("FASB ASC Topic 718")
 
 
F5 Networks, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
  Six Months Ended
March 31,
2018   2017
 
Operating activities
Net income $ 198,065 $ 187,356
Adjustments to reconcile net income to net cash provided by operating activities:
Realized loss (gain) on disposition of assets and investments 52 (7 )
Stock-based compensation 82,268 90,506
Provisions for doubtful accounts and sales returns 691 455
Depreciation and amortization 30,049 30,278
Deferred income taxes 17,642 (214 )
Changes in operating assets and liabilities:
Accounts receivable 314 (26,152 )
Inventories 322 1,504
Other current assets 5,493 1,449
Other assets (1,111 ) (942 )
Accounts payable and accrued liabilities (5,308 ) 21,072
Deferred revenue   46,235     59,347  
Net cash provided by operating activities   374,712     364,652  
 
Investing activities
Purchases of investments (353,414 ) (146,236 )
Maturities of investments 186,961 187,660
Sales of investments 9,248 40,737
Increase in restricted cash (19 ) (36 )
Acquisition of intangible assets - (4,000 )
Cash provided by sale of fixed asset 1,000 -
Purchases of property and equipment   (16,246 )   (23,715 )
Net cash (used in) provided by investing activities   (172,470 )   54,410  
 
Financing activities
Excess tax benefit from stock-based compensation - 5,239

Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan

19,917 18,868
Repurchase of common stock   (300,046 )   (300,042 )
Net cash used in financing activities   (280,129 )   (275,935 )
 
Net (decrease) increase in cash and cash equivalents (77,887 ) 143,127
Effect of exchange rate changes on cash and cash equivalents 576 (1,925 )
Cash and cash equivalents, beginning of period   673,228     514,571  
Cash and cash equivalents, end of period $ 595,917   $ 655,773  
 


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