F5 Networks Announces Third Quarter Fiscal 2017 Results

SEATTLE--()--F5 Networks, Inc. (NASDAQ: FFIV) today announced revenue of $517.8 million for the third quarter of fiscal 2017, up 4.3% from $496.5 million in the third quarter of fiscal 2016. Growth compared with the third quarter of fiscal 2016 was driven by iSeries appliance and security solutions adoption and Services revenue. Results were impacted by slower activity in EMEA and Japan.

GAAP net income for the third quarter of fiscal 2017 was $97.7 million, or $1.52 per diluted share, compared to $91.8 million, or $1.37 per diluted share in the third quarter of 2016. Non-GAAP net income for the third quarter of fiscal 2017 was $130.8 million, or $2.03 per diluted share, compared to $121.7 million, or $1.81 per diluted share in the third quarter of fiscal 2016.

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.

F5’s 2017 State of Application Delivery report shows that while customers are shifting application workloads to both public and private clouds, many are choosing to invest in multiple cloud technologies. Multi-cloud creates complexities for organizations around managing application services across multiple cloud platforms, compliance risks from inconsistent security policies, and diminished return on the cloud’s value as multiple cloud architectures put pressure on IT skills gaps.

In the just completed quarter, several new products were introduced that enhanced F5’s position in enabling multi-cloud deployments. These new products include Application Connector 1.0 for connecting public and private cloud application infrastructures, support for BIG-IP in the Google Cloud Platform, and Container Connector and Application Services Proxy for microservices environments.

“While we delivered year-over-year revenue growth and strong profitability in the third quarter, our product revenue performance fell short of our expectations, in particular in Europe and Japan,” said François Locoh-Donou, F5 President and Chief Executive Officer. “As we look at the broader environment, we continue to see some pause in activity as customers evaluate how a long-term cloud strategy could impact their application deployment architectures. Where customers have made these decisions around the cloud, the evidence shows we are their critical partner in providing consistent application services and security across environments.

“The reacceleration of product revenue growth is our top priority and we believe we are well positioned to deliver on this over the coming periods. The entire F5 team is focused on ensuring our solutions fit our customers' evolving application deployment needs and we continue to grow our relevance in providing secure application services.”

For the fourth quarter of fiscal 2017, ending September 30, the company has set a revenue goal of $530 million to $540 million with a GAAP earnings target of $1.64 to $1.67 per diluted share and a non-GAAP earnings target of $2.20 to $2.23 per diluted share.

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

Three months ended
September 30, 2017
Reconciliation of Expected Non-GAAP Fourth Quarter Earnings Low   High
Net income $ 104.8 $ 106.8
Stock-based compensation expense $ 44.0 $ 44.0
Amortization of purchased intangible assets $ 2.8 $ 2.8
Tax effects related to above items $ (11.3 ) $ (11.3 )
Non-GAAP net income excluding stock-based compensation expense and amortization of purchased intangible assets $ 140.3   $ 142.3  
Net income per share - diluted $ 1.64   $ 1.67  
Non-GAAP net income per share - diluted $ 2.20   $ 2.23  

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 have been excluded from GAAP net income for the purpose of measuring non-GAAP earnings and earnings per share 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)
June 30, September 30,
2017 2016
Current assets
Cash and cash equivalents $ 690,912 $ 514,571
Short-term investments 323,336 367,824
Accounts receivable, net of allowances of $1,857 and $2,062 295,085 268,175
Inventories 31,045 34,051
Deferred tax assets 54,010 51,601
Other current assets   51,513     52,579  
Total current assets   1,445,901     1,288,801  
Property and equipment, net 125,139 123,248
Long-term investments 234,587 276,375
Deferred tax assets 2,050 2,044
Goodwill 555,965 555,965
Other assets, net   54,930     59,890  
Total assets $ 2,418,572   $ 2,306,323  
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable $ 44,544 $ 34,117
Accrued liabilities 178,712 178,353
Deferred revenue   686,085     631,768  
Total current liabilities   909,341     844,238  
Other long-term liabilities 41,293 34,138
Deferred revenue, long-term 257,777 238,473
Deferred tax liabilities   5,554     4,212  
Total long-term liabilities   304,624     276,823  
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, 63,544 and 65,315 shares issued and outstanding

17,532 13,191
Accumulated other comprehensive loss (15,458 ) (13,194 )
Retained earnings   1,202,533     1,185,265  
Total shareholders' equity   1,204,607     1,185,262  
Total liabilities and shareholders' equity $ 2,418,572   $ 2,306,323  
F5 Networks, Inc.
Consolidated Income Statements
(unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
2017 2016 2017 2016
Net revenues
Products $ 235,109 $ 231,366 $ 715,672 $ 691,485
Services   282,728     265,156     836,371     778,200  
Total 517,837 496,522 1,552,043 1,469,685
Cost of net revenues (1)(2)
Products 43,787 40,474 129,391 123,033
Services   45,983     43,869     133,553     129,223  
Total   89,770     84,343     262,944     252,256  
Gross profit 428,067 412,179 1,289,099 1,217,429
Operating expenses (1)(2)
Sales and marketing 160,952 156,620 490,171 470,545
Research and development 88,602 83,042 264,886 250,481
General and administrative 39,368 34,182 119,055 103,238
Litigation expense   1     (527 )   (134 )   8,421  
Total   288,923     273,317     873,978     832,685  
Income from operations 139,144 138,862 415,121 384,744
Other income, net   2,589     978     6,534     2,246  
Income before income taxes 141,733 139,840 421,655 386,990
Provision for income taxes   44,071     48,051     136,637     130,070  
Net income $ 97,662   $ 91,789   $ 285,018   $ 256,920  
Net income per share - basic $ 1.53   $ 1.37   $ 4.42   $ 3.78  
Weighted average shares - basic   63,935     66,851     64,539     67,990  
Net income per share - diluted $ 1.52   $ 1.37   $ 4.38   $ 3.75  
Weighted average shares - diluted   64,361     67,235     65,116     68,429  
Non-GAAP Financial Measures
Net income as reported $ 97,662 $ 91,789 $ 285,018 $ 256,920
Stock-based compensation expense (3) 43,234 38,437 133,740 118,443
Amortization of purchased intangible assets 2,788 3,518 9,483 10,440
Litigation expense 1 (527 ) (134 ) 8,421
Tax effects related to above items   (12,910 )   (11,515 )   (40,060 )   (37,952 )

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

$ 130,775   $ 121,702   $ 388,047   $ 356,272  

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

$ 2.03   $ 1.81   $ 5.96   $ 5.21  
Weighted average shares - diluted   64,361     67,235     65,116     68,429  
(1) Includes stock-based compensation expense as follows:
Cost of net revenues $ 5,384 $ 4,643 $ 16,155 $ 13,929
Sales and marketing 17,577 15,130 52,737 45,962
Research and development 13,579 12,987 41,395 39,601
General and administrative   6,694     5,677     23,453     18,951  
$ 43,234   $ 38,437   $ 133,740   $ 118,443  
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues $ 2,028 $ 2,666 $ 7,345 $ 7,999
Sales and marketing 251 486 754 1,459
General and administrative   509     366     1,384     982  
$ 2,788   $ 3,518   $ 9,483   $ 10,440  

(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)
Nine Months Ended
June 30,
2017 2016
Operating activities
Net income $ 285,018 $ 256,920
Adjustments to reconcile net income to net cash provided by operating activities:
Realized (gain) loss on disposition of assets and investments (463 ) 22
Stock-based compensation 133,740 118,443
Provisions for doubtful accounts and sales returns 385 876
Depreciation and amortization 45,603 42,284
Deferred income taxes (1,307 ) 9,295
Changes in operating assets and liabilities:
Accounts receivable (27,295 ) 15,307
Inventories 3,007 (87 )
Other current assets 1,063 (80 )
Other assets (425 ) 549
Accounts payable and accrued liabilities 14,270 (8,922 )
Deferred revenue   73,620     72,858  
Net cash provided by operating activities   527,216     507,465  
Investing activities
Purchases of investments (255,386 ) (225,226 )
Maturities of investments 271,878 244,905
Sales of investments 65,857 62,836
(Increase) decrease in restricted cash (87 ) 29
Acquisition of intangible assets (4,000 ) (3,250 )
Purchases of property and equipment   (31,175 )   (45,909 )
Net cash provided by investing activities   47,087     33,385  
Financing activities
Excess tax benefit from stock-based compensation 6,471 1,596

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

46,959 44,848
Repurchase of common stock   (450,065 )   (550,101 )
Net cash used in financing activities   (396,635 )   (503,657 )
Net increase in cash and cash equivalents 177,668 37,193
Effect of exchange rate changes on cash and cash equivalents (1,327 ) 1,944
Cash and cash equivalents, beginning of period   514,571     390,460  
Cash and cash equivalents, end of period $ 690,912   $ 429,597  


F5 Networks, Inc.
Investor Relations
Jason Willey, 206-272-7908
Public Relations
Nathan Misner, 206-272-7494


F5 Networks, Inc.
Investor Relations
Jason Willey, 206-272-7908
Public Relations
Nathan Misner, 206-272-7494