F5 Networks Announces Results for Second Quarter of Fiscal 2016

SEATTLE--()--For the second quarter of fiscal 2016, F5 Networks, Inc. (NASDAQ: FFIV) announced revenue of $483.7 million, up 2 percent from $472.1 million in the second quarter of fiscal 2015.

GAAP net income was $75.4 million ($1.11 per diluted share), compared to $85.7 million ($1.18 per diluted share) in the second quarter a year ago. This result reflects the jury verdict and other associated costs with that patent litigation during the quarter.

Excluding the impact of this patent litigation expense, stock-based compensation and amortization of purchased intangible assets, non-GAAP net income was $114.0 million ($1.68 per diluted share), compared to $115.3 million ($1.59 per diluted share) in the second quarter of last year.

A reconciliation of GAAP net income to non-GAAP net income is included on the attached Consolidated Statements of Operations.

“Given the backdrop of a continued difficult macro and spending environment, I was pleased with our execution, as we delivered revenue within our guided range while maintaining solid profitability.” said John McAdam, F5 President and Chief Executive Officer. “In addition, sales of our Better/Best software bundles, Virtual Editions, and Silverline subscription services all grew during the quarter as customers continued to embrace hybrid strategies and venture into public and private clouds.

“This quarter, we will begin shipping our new 100Gb VIPRION blades, which deliver massive performance and scalability to help service providers manage and secure the exponentially increasing volume of wireless traffic. As I mentioned during last quarter’s conference call, several Tier 1 service providers have been testing the new blades, and feedback has been very positive. Also, in this quarter we will release version 5.0 of our BIG-IQ management platform, with major enhancements that include centralized management of all our Security products.”

For the quarter ending June 30, 2016, the company has set a revenue goal of $490 million to $500 million with a GAAP earnings target of $1.29 to $1.32 per diluted share and a non-GAAP earnings target of $1.77 to $1.80 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, 2016
 
Reconciliation of Expected Non-GAAP Third Quarter Earnings Low   High
Net income $ 86.6 $ 88.7
Stock-based compensation expense $ 41.0 $ 41.0
Amortization of purchased intangible assets $ 3.5 $ 3.5
Tax effects related to above items $ (12.0 ) $ (12.0 )
Non-GAAP net income excluding stock-based compensation expense and amortization of purchased intangible assets $ 119.1   $ 121.2  
Net income per share - diluted $ 1.29   $ 1.32  
Non-GAAP net income per share - diluted $ 1.77   $ 1.80  

Share Repurchase Program

The company also announced today that its board of directors had authorized an additional $1 billion for the company's common stock share repurchase program. This new authorization is incremental to the $73.8 million currently unused in the existing program which was initially authorized in October 2010.

Acquisitions for the share repurchase program will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The timing and amounts of any purchases will be based on market conditions and other factors including but not limited to price, regulatory requirements and capital availability. The program does not require the purchase of any minimum number of shares and the program may be modified, suspended or discontinued at any time.

About F5 Networks

F5 (NASDAQ: FFIV) provides solutions for an application world. F5 helps organizations seamlessly scale cloud, data center, telecommunications, and software defined networking (SDN) deployments to successfully deliver applications and services to anyone, anywhere, at any time. F5 solutions broaden the reach of IT through an open, extensible framework and a rich partner ecosystem of leading technology and orchestration vendors. This approach lets customers pursue the infrastructure model that best fits their needs over time. The world’s largest businesses, service providers, government entities, and consumer brands rely on F5 to stay ahead of cloud, security, and mobility trends. 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.

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 and acquisition-related charges, net of taxes, 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, expense related to a jury verdict and other associated costs of that patent litigation has been excluded from GAAP net income for the purpose of measuring non-GAAP earnings and earnings per share in the second fiscal quarter of 2016.

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 Statements of Operations entitled “Non-GAAP Financial Measures.”

 
F5 Networks, Inc.
Consolidated Balance Sheets
(unaudited, in thousands)
 
  March 31,   September 30,
2016 2015
 
Assets
Current assets
Cash and cash equivalents $ 398,325 $ 390,460
Short-term investments 376,680 383,882
Accounts receivable, net of allowances of $1,726 and $1,979 266,185 279,434
Inventories 35,179 33,717
Deferred tax assets 50,673 50,128
Other current assets   66,939     50,519  
Total current assets   1,193,981     1,188,140  
 
Property and equipment, net 107,545 95,909
Long-term investments 319,287 397,656
Deferred tax assets 680 6,492
Goodwill 555,965 555,965
Other assets, net   64,682     68,128  
Total assets $ 2,242,140   $ 2,312,290  
 
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable $ 37,243 $ 50,814
Accrued liabilities 143,511 130,401
Deferred revenue   619,681     573,908  
Total current liabilities   800,435     755,123  
 
Other long-term liabilities 32,190 30,136
Deferred revenue, long-term 222,977 209,402
Deferred tax liabilities   5,544     901  
Total long-term liabilities   260,711     240,439  
 
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, 66,981 and 70,138 shares issued and outstanding

25,181 10,159
Accumulated other comprehensive loss (13,558 ) (15,288 )
Retained earnings   1,169,371     1,321,857  
Total shareholders' equity   1,180,994     1,316,728  
Total liabilities and shareholders' equity $ 2,242,140   $ 2,312,290  
 
F5 Networks, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
 
  Three Months Ended   Six Months Ended
March 31, March 31,
2016   2015 2016   2015
 
Net revenues
Products $ 225,441 $ 244,116 $ 460,119 $ 485,053
Services   258,236     228,027     513,044     449,883  

Total

483,677 472,143 973,163 934,936
 
Cost of net revenues (1)(2)
Products 39,908 43,600 82,559 85,670
Services   42,322     38,996     85,354     76,274  
Total   82,230     82,596     167,913     161,944  
Gross profit 401,447 389,547 805,250 772,992
 
Operating expenses (1)(2)
Sales and marketing 156,469 151,238 313,925 300,054
Research and development 86,294 74,521 167,439 144,581
General and administrative 34,803 30,933 69,056 63,187
Litigation expense   8,948     -     8,948     -  

Total

  286,514     256,692     559,368     507,822  
 
Income from operations 114,933 132,855 245,882 265,170
Other income, net   133     3,266     1,268     5,860  
Income before income taxes 115,066 136,121 247,150 271,030
Provision for income taxes   39,651     50,392     82,019     96,225  
Net income $ 75,415   $ 85,729   $ 165,131   $ 174,805  
 
 
Net income per share - basic $ 1.12   $ 1.19   $ 2.41   $ 2.40  
Weighted average shares - basic   67,549     72,240     68,557     72,801  
 
Net income per share - diluted $ 1.11   $ 1.18   $ 2.40   $ 2.38  
Weighted average shares - diluted   67,804     72,711     68,881     73,326  
 
 
Non-GAAP Financial Measures
 
Net income as reported $ 75,415 $ 85,729 $ 165,131 $ 174,805
Stock-based compensation expense (3) 41,773 36,777 80,006 67,402
Amortization of purchased intangible assets 3,519 3,314 6,922 6,463
Litigation expense 8,948 - 8,948 -
Tax effects related to above items (15,649 ) (10,556 ) (26,437 ) (19,185 )

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

$ 114,006   $ 115,264   $ 234,570   $ 229,485  

 

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

$ 1.68   $ 1.59   $ 3.41   $ 3.13  
 
Weighted average shares - diluted   67,804     72,711     68,881     73,326  
 
(1) Includes stock-based compensation expense as follows:
Cost of net revenues $ 4,851 $ 3,826 $ 9,286 $ 6,757
Sales and marketing 15,957 15,360 30,832 27,987
Research and development 13,784 12,193 26,614 22,633
General and administrative   7,181     5,398     13,274     10,025  
$ 41,773   $ 36,777   $ 80,006   $ 67,402  
 
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues $ 2,666 $ 2,666 $ 5,333 $ 5,317
Sales and marketing 487 487 973 973
General and administrative   366     161     616     173  
$ 3,519   $ 3,314   $ 6,922   $ 6,463  
 
(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,
2016   2015
 
Operating activities
Net income $ 165,131 $ 174,805
Adjustments to reconcile net income to net cash provided by operating activities:
Realized loss (gain) on disposition of assets and investments 31 (23 )
Stock-based compensation 80,006 67,402
Provisions for doubtful accounts and sales returns 522 1,311
Depreciation and amortization 27,847 26,254
Deferred income taxes 7,424 (1,213 )
Changes in operating assets and liabilities:
Accounts receivable 12,726 (21,693 )
Inventories (1,462 ) (4,872 )
Other current assets (16,302 ) (4,792 )
Other assets (126 ) 478
Accounts payable and accrued liabilities 1,844 7,195
Deferred revenue   59,348     83,839  
Net cash provided by operating activities   336,989     328,691  
 
Investing activities
Purchases of investments (138,925 ) (254,819 )
Maturities of investments 173,165 251,773
Sales of investments 47,742 79,211
Decrease (increase) in restricted cash 8 (344 )
Acquisition of intangible assets (3,250 ) (6,224 )
Purchases of property and equipment   (29,793 )   (20,502 )
Net cash provided by investing activities   48,947     49,095  
 
Financing activities
Excess tax benefit from stock-based compensation 1,378 4,186

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

18,594 16,655
Repurchase of common stock   (400,077 )   (306,863 )
Net cash used in financing activities   (380,105 )   (286,022 )
 
Net increase in cash and cash equivalents 5,831 91,764
Effect of exchange rate changes on cash and cash equivalents 2,038 (5,661 )
Cash and cash equivalents, beginning of period   390,460     281,502  
Cash and cash equivalents, end of period $ 398,329   $ 367,605  

Contacts

F5 Networks, Inc.
Investor Relations
John Eldridge, 206-272-6571
j.eldridge@f5.com
or
Public Relations
Nathan Misner, 206-272-7494
n.misner@f5.com

Contacts

F5 Networks, Inc.
Investor Relations
John Eldridge, 206-272-6571
j.eldridge@f5.com
or
Public Relations
Nathan Misner, 206-272-7494
n.misner@f5.com