F5 Networks Announces Results for Second Quarter of Fiscal 2014

For the second quarter of fiscal 2014, F5 Networks, Inc. (NASDAQ: FFIV) announced revenue of $420.0 million, up 3 percent from $406.5 million in the prior quarter and 20 percent from $350.2 million in the second quarter of fiscal 2013.

GAAP net income was $69.6 million ($0.91 per diluted share), compared to $68.0 million ($0.87 per diluted share) in the prior quarter and $63.4 million ($0.80 per diluted share) in the second quarter a year ago.

Excluding the impact of stock-based compensation and amortization of purchased intangible assets, non-GAAP net income was $96.9 million ($1.27 per diluted share), compared to $94.8 million ($1.22 per diluted share) in the prior quarter and $84.7 million ($1.07 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.

"There were very few surprises in the second quarter of fiscal 2014," said John McAdam, F5 president and chief executive officer. "During the quarter, strong demand for our software-defined application services resulted in 22 percent year-over-year product revenue growth. Increasing revenue from the sale of software modules, particularly our Security modules, was driven in part by a growing percentage of customers purchasing our 'Better' and 'Best' offerings. Revenue by geographic region met or exceeded our expectations, with solid year-over-year growth in the Americas, EMEA and Japan. Sales of our TMOS-based products into vertical markets were also in line with historical trends and our internal expectations for the quarter, and our Traffix Diameter Signaling and Routing products continued to gain traction with key wins at several large service providers.

"Looking out to the second half of fiscal 2014, we believe we can continue to build on the momentum we generated in the first two quarters of the year," McAdam said.

For the current quarter, ending June 30, the company has set a revenue goal of $428 million to $438 million with a GAAP earnings target of $0.99 to $1.02 per diluted share and a non-GAAP earnings target of $1.33 to $1.36 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, 2014
Reconciliation of Expected Non-GAAP Third Quarter EarningsLowHigh
Net income $ 75.0 $ 77.3
Stock-based compensation expense $ 31.5 $ 31.5
Amortization of purchased intangible assets $ 2.3 $ 2.3
Tax effects related to above items $ (8.2 ) $ (8.2 )
Non-GAAP net income excluding stock-based compensation expense and amortization of purchased intangible assets $ 100.6 $ 102.9
Net income per share - diluted $ 0.99 $ 1.02
Non-GAAP net income per share - diluted $ 1.33 $ 1.36

About F5 Networks

F5 (NASDAQ: FFIV) provides solutions for an application world. F5 helps organizations seamlessly scale cloud, data center, and software defined networking (SDN) deployments to successfully deliver applications 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 data center 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 Facebook for more information about F5, its partners, and technology.

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.

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,
20142013
ASSETS
Current assets
Cash and cash equivalents $ 239,836 $ 189,693
Short-term investments 383,924 352,450
Accounts receivable, net of allowances of $4,205 and $3,259 223,472 204,205
Inventories 20,710 19,026
Deferred tax assets 23,724 16,342
Other current assets 58,753 34,655
Total current assets 950,419 816,371
Property and equipment, net 61,608 63,522
Long-term investments 541,172 728,981
Deferred tax assets 22,834 22,389
Goodwill 517,611 523,727
Other assets, net 72,556 75,564
Total assets $ 2,166,200 $ 2,230,554
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 40,371 $ 37,313
Accrued liabilities 96,070 92,608
Deferred revenue 461,402 421,429
Total current liabilities 597,843 551,350
Other long-term liabilities 22,661 25,202
Deferred revenue, long-term 126,328 109,944
Deferred tax liabilities 4,429 5,346
Total long-term liabilities 153,418 140,492
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, 75,200 and 78,090 shares issued and outstanding 21,320 262,505
Accumulated other comprehensive loss (7,241 ) (7,414 )
Retained earnings 1,400,860 1,283,621
Total shareholders’ equity 1,414,939 1,538,712
Total liabilities and shareholders’ equity $ 2,166,200 $ 2,230,554
F5 Networks, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
Three Months EndedSix Months Ended
March 31,March 31,
2014201320142013
Net revenues
Products $ 225,135 $ 185,107 $ 443,736 $ 389,819
Services 194,908 165,125 382,759 325,864

Total

420,043 350,232 826,495 715,683
Cost of net revenues (1)(2)
Products 37,806 29,773 75,050 61,565
Services 37,856 30,529 73,495 59,622
Total 75,662 60,302 148,545 121,187
Gross profit 344,381 289,930 677,950 594,496
Operating expenses (1)(2)
Sales and marketing 140,252 119,031 275,055 241,299
Research and development 67,232 52,534 131,365 101,075
General and administrative 26,033 25,889 51,533 50,562
Total 233,517 197,454 457,953 392,936
Income from operations 110,864 92,476 219,997 201,560
Other income, net 23 2,118 269 3,668
Income before income taxes 110,887 94,594 220,266 205,228
Provision for income taxes 41,246 31,182 82,577 72,323
Net income $ 69,641 $ 63,412 $ 137,689 $ 132,905
Net income per share — basic $ 0.92 $ 0.81 $ 1.80 $ 1.69
Weighted average shares — basic 75,508 78,601 76,483 78,696
Net income per share — diluted $ 0.91 $ 0.80 $ 1.79 $ 1.68
Weighted average shares — diluted 76,244 79,114 77,086 79,263
Non-GAAP Financial Measures
Net income as reported $ 69,641 $ 63,412 $ 137,689 $ 132,905
Stock-based compensation expense (3) 35,636 27,610 70,164 54,320
Amortization of purchased intangible assets (4) 2,083 1,033 4,169 2,066
Tax effects related to above items (10,463 ) (7,313 ) (20,362 ) (13,926 )
Net income excluding stock-based compensation and amortization of purchased intangible assets (non-GAAP) - diluted $ 96,897 $ 84,742 $ 191,660 $ 175,365
Net income per share excluding stock-based compensation and amortization of purchased intangible assets (non-GAAP) - diluted $ 1.27 $ 1.07 $ 2.49 $ 2.21
Weighted average shares - diluted 76,244 79,114 77,086 79,263
(1) Includes stock-based compensation as follows:
Cost of net revenues $ 4,014 $ 2,927 $ 7,872 $ 5,894
Sales and marketing 14,218 10,718 28,220 21,274
Research and development 11,990 8,262 23,628 16,064
General and administrative 5,414 5,703 10,444 11,088
$ 35,636 $ 27,610 $ 70,164 $ 54,320
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues $ 1,726 $ 958 $ 3,453 $ 1,916
Sales and marketing 357 75 716 150
$ 2,083 $ 1,033 $ 4,169 $ 2,066
(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”)
(4) Beginning with the second quarter of fiscal 2012, the company will exclude amortization of purchased intangible assets and acquisition-related charges in addition to stock-based compensation expense as a non-GAAP financial measure
F5 Networks, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
Six Months Ended
March 31,
20142013
Operating activities
Net income $ 137,689 $ 132,905
Adjustments to reconcile net income to net cash provided by operating activities:
Realized gain on disposition of assets and investments (120 ) (217 )
Stock-based compensation 70,164 54,320
Provisions for doubtful accounts and sales returns 1,610 578
Depreciation and amortization 22,678 19,913
Deferred income taxes (3,491 ) (1,313 )
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable (20,877 ) (8,202 )
Inventories (1,684 ) (553 )
Other current assets (24,148 ) (29,198 )
Other assets (1,257 ) 621
Accounts payable and accrued liabilities 3,973 13,243
Deferred revenue 56,356 43,371
Net cash provided by operating activities 240,893 225,468
Investing activities
Purchases of investments (289,521 ) (446,978 )
Maturities of investments 342,100 329,141
Sales of investments 98,319 138,171
Decrease (increase) in restricted cash 26 (729 )
Acquisition of businesses, net of cash acquired (124,918 )
Purchases of property and equipment (10,119 ) (14,769 )
Net cash provided by (used in) investing activities 140,805 (120,082 )
Financing activities
Excess tax benefit from stock-based compensation 4,808 2,395
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan 13,917 12,040
Repurchase of common stock (350,000 ) (100,000 )
Net cash used in financing activities (331,275 ) (85,565 )
Net increase in cash and cash equivalents 50,423 19,821
Effect of exchange rate changes on cash and cash equivalents (280 ) (1,340 )
Cash and cash equivalents, beginning of year 189,693 211,181
Cash and cash equivalents, end of year $ 239,836 $ 229,662

Contacts:

F5 Networks, Inc.
Investor Relations
John Eldridge, 206-272-6571
j.eldridge@f5.com
or
Public Relations
Alane Moran, 206-272-6850
a.moran@f5.com

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