F5 Networks, Inc. (NASDAQ:FFIV) Q3 2021 Earnings Conference Call July 26, 2021 4:30 PM ET Company Participants Suzanne DuLong - Vice President of Investor Relations François Locoh-Donou - President & Chief Executive Officer Frank Pelzer - Executive Vice President & Chief Financial Officer Kara Sprague - Executive Vice President & General Manager of BIG-IP Conference Call Participants Tim Long - Barclays Samik Chatterjee - JP Morgan Rod Hall - Goldman Sachs James Fish - Piper Sandler Meta Marshall - Morgan S ...

| --- | --- | --- | |--------------------------------------------|-------|-------| | | | | | Q3FY21 Results PERIOD ENDING JUNE 30, 2021 | | | | Published July 26, 2021 | | | Forward-looking statements This presentation and associated commentary forward-looking statements including, among other things, statements regarding the continuing strength and momentum of F5's business, past and future financial performance including revenue, operating targets, earnings and earnings per share ranges, demand for applic ...

Table of Contents Title of each class Trading Symbol(s) Name of each exchange on which registered Common stock, no par value FFIV NASDAQ Global Select Market Emerging Growth Company ☐ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transiti ...

Financial Performance - F5's Q2FY21 revenue increased to $645.3 million, compared to $583.4 million in Q2FY20[7] - Software revenue grew by 20%[8, 10] - Systems revenue increased by 17%[8, 10] - Global Services revenue increased by 4%[8] - Non-GAAP gross margin was 83.4% in Q2FY21, compared to 84.9% in Q2FY20[15, 27] - Non-GAAP operating margin was 30.3% in Q2FY21, compared to 29.1% in Q2FY20[15, 28] - Non-GAAP diluted EPS was $2.50 in Q2FY21, compared to $2.23 in Q2FY20[17, 28] Revenue Mix and Geography - Software accounted for 21% of revenue in Q2FY21, with subscriptions making up 79% of that software revenue[11] - North America contributed 54% of total revenue with $346 million, EMEA 27% with $172 million, and APAC 20% with $127 million[12] - Revenue growth in North America was 15%, EMEA 16%, and APAC 6%[12] Capital Allocation - F5 initiated a $500 million accelerated share repurchase (ASR) program in Q2FY21[22] - Approximately $400 million of shares were retired during Q2FY21 under the ASR program[22]

Financial Data and Key Metrics Changes - Q2 revenue reached $645 million, a 10% year-over-year increase, at the top end of guidance range [10] - Non-GAAP net income was $155 million or $2.50 per share, while GAAP net income was $43 million or $0.70 per share [19] - GAAP gross margin was 80.1%, and non-GAAP gross margin was 83.4% [18] Business Line Data and Key Metrics Changes - Product revenue was $309 million, up 18% year-over-year, accounting for approximately 48% of total revenue [11] - Systems revenue increased by 17% to $201 million, while software revenue grew by 20% to $108 million [13][14] - Global services revenue was $336 million, up 4% year-over-year, representing 52% of total revenue [15] Market Data and Key Metrics Changes - Americas revenue grew by 6%, EMEA by 16%, and APAC by 15% [16] - Enterprise customers represented 68% of product bookings, with service providers and government customers each at 16% [17] Company Strategy and Development Direction - The company is focused on a multi-cloud approach and is benefiting from strong macro growth drivers powered by application growth [8][9] - There is a strong emphasis on application security and delivery solutions, with a notable shift towards subscription-based models [14][42] - The integration of F5 and Volterra aims to enhance application security offerings in a SaaS model [53][56] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in future growth driven by increasing application traffic and demand for application security [27][52] - There are concerns about supply chain tightening, but the company has mitigation efforts in place [22][24] - The guidance for Q3 revenue is projected between $620 million to $650 million, reflecting a cautious outlook due to supply chain challenges [23] Other Important Information - The company generated $128.5 million in cash flow from operations in Q2 [20] - Deferred revenue increased by 7% year-over-year to $1.4 billion [21] - The company is experiencing a notable shift in customer preferences towards hardware solutions due to urgent capacity needs [39][40] Q&A Session Summary Question: Near-term benefits on systems and software bookings - Management confirmed a strong pipeline of software deals for NGINX and BIG-IP expected to materialize in the second half of the year [59] Question: Impact of security breaches on WAF pipeline - There is good traction in web application firewalls, with demand seen in both hardware and modern application environments [66] Question: Organic software growth excluding Volterra - Management stated that Volterra's impact is immaterial for the current quarter, but it is a critical asset for future growth [71] Question: Update on US federal demand - Demand trends for US federal business remain strong and are expected to follow normal patterns [85] Question: Growth trends in the cloud vertical - The cloud vertical continues to be a growth driver, but there was a moderation in growth rates due to customers delaying migration to the public cloud [91]

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(unaudited)) This section presents F5 Networks' unaudited consolidated financial statements for Q1 fiscal 2021, covering key financial statements and notes [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) | Metric | Dec 31, 2020 (in thousands) | Sep 30, 2020 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $1,026,829 | $849,556 | | Total current assets | $2,029,810 | $1,793,476 | | Total assets | $4,899,339 | $4,677,920 | | Total current liabilities | $1,319,249 | $1,288,279 | | Total liabilities | $2,497,749 | $2,445,652 | | Total shareholders' equity | $2,401,590 | $2,232,268 | [Consolidated Income Statements](index=5&type=section&id=Consolidated%20Income%20Statements) | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | Change (YoY) | | :--------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net revenues | $624,617 | $569,305 | +9.7% | | Products revenue | $288,045 | $234,536 | +22.8% | | Services revenue | $336,572 | $334,769 | +0.5% | | Gross profit | $509,638 | $480,663 | +6.0% | | Income from operations | $117,748 | $122,335 | -3.7% | | Net income | $87,678 | $98,527 | -11.0% | | Net income per share — basic | $1.43 | $1.62 | -11.8% | | Net income per share — diluted | $1.41 | $1.62 | -12.9% | [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | Change (YoY) | | :--------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net income | $87,678 | $98,527 | -11.0% | | Foreign currency translation adjustment | $1,278 | $634 | +101.6% | | Net change in unrealized (losses) gains on available-for-sale securities, net of tax | $(417) | $180 | -331.7% | | Total other comprehensive income | $861 | $814 | +5.8% | | Comprehensive income | $88,539 | $99,341 | -10.9% | [Consolidated Statements of Shareholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) | Metric | Dec 31, 2020 (in thousands) | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Common stock | $386,236 | $305,453 | $211,217 | | Accumulated other comprehensive loss | $(17,855) | $(18,716) | $(18,376) | | Retained earnings | $2,033,209 | $1,945,531 | $1,736,617 | | Total shareholders' equity | $2,401,590 | $2,232,268 | $1,929,458 | - Stock-based compensation for the three months ended December 31, 2020, was **$58,069 thousand**, up from **$47,661 thousand** in the prior year[26](index=26&type=chunk)[27](index=27&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | Change (YoY) | | :----------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net cash provided by operating activities | $137,363 | $144,012 | -4.6% | | Net cash provided by (used in) investing activities | $20,643 | $(29,400) | +170.2% | | Net cash provided by financing activities | $17,715 | $20,959 | -15.5% | | Net increase in cash, cash equivalents and restricted cash | $175,721 | $135,571 | +29.6% | | Cash, cash equivalents and restricted cash, end of period | $1,030,202 | $738,645 | +39.5% | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed disclosures and explanations for the consolidated financial statements, covering accounting policies and key financial areas [1. Summary of Significant Accounting Policies](index=9&type=section&id=1.%20Summary%20of%20Significant%20Accounting%20Policies) - **F5 Networks, Inc.** is a leading provider of multi-cloud application services, enabling customers to develop, deploy, operate, secure, and govern applications across various architectures, from on-premises to public cloud[36](index=36&type=chunk) - The company adopted ASU 2018-15 (capitalizing implementation costs for hosting arrangements) and ASU 2016-13 (credit losses) on October 1, 2020, with no material impact on its consolidated financial statements[39](index=39&type=chunk)[40](index=40&type=chunk) - The extent to which the COVID-19 pandemic may impact the company's financial condition or results of operations remains uncertain as of the filing date[38](index=38&type=chunk) [2. Revenue from Contracts with Customers](index=10&type=section&id=2.%20Revenue%20from%20Contracts%20with%20Customers) | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Capitalized contract acquisition costs, end of period | $71,969 | $58,153 | | Amortization of capitalized contract acquisition costs | $8,152 | $8,705 | | Contract assets, end of period | $245,804 | $135,245 | | Deferred revenue, end of period | $1,358,825 | $1,237,973 | - As of December 31, 2020, total non-cancelable remaining performance obligations were approximately **$1.4 billion**, with **68.9%** expected to be recognized as revenue over the next 12 months[52](index=52&type=chunk) [3. Fair Value Measurements](index=11&type=section&id=3.%20Fair%20Value%20Measurements) | Asset Category (Fair Value) | Dec 31, 2020 (in thousands) | Sep 30, 2020 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Cash equivalents | $494,901 | $250,970 | | Short-term investments | $346,515 | $360,333 | | Long-term investments | $88,753 | $102,939 | | **Total** | **$930,169** | **$714,242** | - The company recorded an impairment of **$6.7 million** against the right-of-use asset related to the integration of the former Shape headquarters in Santa Clara, California, in the first quarter of fiscal 2021[65](index=65&type=chunk) [4. Short-Term and Long-Term Investments](index=13&type=section&id=4.%20Short-Term%20and%20Long-Term%20Investments) | Investment Type (Fair Value) | Dec 31, 2020 (in thousands) | Sep 30, 2020 (in thousands) | | :--------------------------- | :-------------------------- | :-------------------------- | | Short-term investments | $346,515 | $360,333 | | Long-term investments | $88,753 | $102,939 | - Interest income from investments decreased significantly to **$1.1 million** for the three months ended December 31, 2020, from **$5.6 million** in the prior year[66](index=66&type=chunk) - Gross unrealized losses were not material, and no other-than-temporary impairments were identified as of December 31, 2020[69](index=69&type=chunk)[70](index=70&type=chunk) [5. Business Combinations](index=14&type=section&id=5.%20Business%20Combinations) - F5 acquired **Shape Security, Inc.** on January 24, 2020, for approximately **$1.0 billion** in cash, aiming for synergies and enhanced fraud prevention solutions[71](index=71&type=chunk)[72](index=72&type=chunk) | Acquired Assets (Shape Security) | Amount (in thousands) | Estimated Useful Life | | :------------------------------- | :-------------------- | :-------------------- | | Developed technologies | $120,000 | 7 years | | Customer relationships | $21,000 | 4 years | | Trade name | $9,500 | 5 years | | Goodwill | $804,537 | N/A | - Goodwill related to the Shape acquisition was increased by **$4.9 million** in the first quarter of fiscal 2021 due to a post-close measurement period adjustment[75](index=75&type=chunk) [6. Balance Sheet Details](index=16&type=section&id=6.%20Balance%20Sheet%20Details) | Account (in thousands) | Dec 31, 2020 | Sep 30, 2020 | | :------------------------------------- | :----------- | :----------- | | Cash, cash equivalents and restricted cash | $1,030,202 | $852,826 | | Inventories | $26,455 | $27,898 | | Other current assets | $283,341 | $259,506 | | Other assets, net | $367,955 | $347,447 | | Accrued liabilities | $305,792 | $321,398 | | Other long-term liabilities | $61,653 | $59,511 | [7. Debt Facilities](index=17&type=section&id=7.%20Debt%20Facilities) - The company has a **$400.0 million** Term Loan Facility, with **$385.0 million** outstanding as of December 31, 2020, maturing on January 24, 2023[86](index=86&type=chunk) - A **$350.0 million** Revolving Credit Facility is available, with no outstanding borrowings as of December 31, 2020, providing **$350.0 million** in available borrowing capacity[88](index=88&type=chunk) - The company was in compliance with all financial covenants under both debt agreements as of December 31, 2020[86](index=86&type=chunk)[88](index=88&type=chunk) [8. Leases](index=18&type=section&id=8.%20Leases) - Adoption of ASU 2016-02 (Leasing Standard) on October 1, 2019, led to the recognition of **$304.8 million** in right-of-use assets and **$386.4 million** in lease liabilities[89](index=89&type=chunk) | Lease Metric (in thousands) | Dec 31, 2020 | Sep 30, 2020 | | :--------------------------------------- | :----------- | :----------- | | Operating lease right-of-use assets, net | $286,044 | $300,680 | | Total operating lease liabilities | $375,231 | $384,725 | | Weighted average remaining lease term (in years) | 10.1 | 10.2 | | Weighted average discount rate | 2.59% | 2.58% | - Total lease expense for the three months ended December 31, 2020, was **$20.2 million**, up from **$18.0 million** in the prior year[91](index=91&type=chunk) [9. Commitments and Contingencies](index=19&type=section&id=9.%20Commitments%20and%20Contingencies) - The company is involved in a lawsuit filed by **Lynwood Investment CY Limited**, claiming intellectual property rights to **NGINX software**, which F5 intends to vigorously defend[101](index=101&type=chunk)[102](index=102&type=chunk) - Accrued warranty costs were not material as of December 31, 2020, and no accrual for loss contingencies related to legal proceedings has been recorded[97](index=97&type=chunk)[103](index=103&type=chunk) [10. Income Taxes](index=20&type=section&id=10.%20Income%20Taxes) - The effective tax rate increased to **25.1%** for the three months ended December 31, 2020, from **22.8%** in the prior year, primarily due to the tax impact from stock-based compensation and other non-deductible expenses[105](index=105&type=chunk) - Unrecognized tax benefits totaled **$54.3 million** as of December 31, 2020, which could affect the effective tax rate if recognized[106](index=106&type=chunk) - The company is currently under audit by various states and foreign jurisdictions (Israel, Saudi Arabia, Singapore) for different fiscal years[108](index=108&type=chunk) [11. Net Income Per Share](index=21&type=section&id=11.%20Net%20Income%20Per%20Share) | Metric | Three months ended Dec 31, 2020 | Three months ended Dec 31, 2019 | | :--------------------------- | :------------------------------ | :------------------------------ | | Basic net income per share | $1.43 | $1.62 | | Diluted net income per share | $1.41 | $1.62 | | Weighted average shares outstanding — diluted | 62,282 thousand | 60,815 thousand | [12. Segment Information](index=21&type=section&id=12.%20Segment%20Information) - **F5 Networks** operates as a single reportable operating segment focused on the development, marketing, and sale of application services[111](index=111&type=chunk) | Geographic Region | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | | :---------------- | :--------------------------------------------- | :--------------------------------------------- | | Americas | $343,136 | $301,562 | | EMEA | $162,084 | $155,952 | | Asia Pacific | $119,397 | $111,791 | | **Total Revenues**| **$624,617** | **$569,305** | | Net Product Revenues | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | | :------------------- | :--------------------------------------------- | :--------------------------------------------- | | Systems revenue | $178,571 | $169,601 | | Software revenue | $109,474 | $64,935 | | **Total** | **$288,045** | **$234,536** | - Key distributors accounting for over 10% of total net revenue in Q1 fiscal 2021 were **Ingram Micro, Inc. (18.1%)** and **Synnex Corporation (10.0%)**[114](index=114&type=chunk) [13. Restructuring Charges](index=22&type=section&id=13.%20Restructuring%20Charges) - In December 2019, the company initiated a restructuring plan, including a reduction in force of approximately **75 employees**, resulting in a **$7.8 million** charge in the first quarter of fiscal 2020[115](index=115&type=chunk)[117](index=117&type=chunk) [14. Subsequent Events](index=23&type=section&id=14.%20Subsequent%20Events) - On January 22, 2021, F5 acquired **Volterra, Inc.** for approximately **$440 million** in cash and **$60 million** in deferred consideration, aiming to integrate its universal edge-as-a-service platform[118](index=118&type=chunk)[119](index=119&type=chunk)[120](index=120&type=chunk) - On February 3, 2021, the company entered into Accelerated Share Repurchase (ASR) agreements totaling **$500 million**, with an initial delivery of shares approximating **80%** of the total to be repurchased[122](index=122&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations for Q1 fiscal 2021 [Overview](index=24&type=section&id=Overview) - **F5** is a leading provider of multi-cloud application services, offering cloud-based, software-as-a-service, and software-only solutions optimized for multi-cloud environments[125](index=125&type=chunk) - Key performance indicators monitored include revenues (from **ADC products**, **NGINX**, **Shape**, and subscription offerings), cost of revenues, operating expenses, liquidity, cash flows, and balance sheet metrics like deferred revenue and accounts receivable[126](index=126&type=chunk)[128](index=128&type=chunk) - Days sales outstanding (DSO) for the first quarter of fiscal year 2021 was **50 days**[128](index=128&type=chunk) [Summary of Critical Accounting Policies and Estimates](index=25&type=section&id=Summary%20of%20Critical%20Accounting%20Policies%20and%20Estimates) - Critical accounting policies and estimates requiring complex judgments include revenue recognition, accounting for business combinations, and accounting for leases[129](index=129&type=chunk) - There were no material changes to the critical accounting policies and estimates compared to the prior fiscal year[130](index=130&type=chunk) [COVID-19 Update](index=25&type=section&id=COVID-19%20Update) - While **COVID-19** did not have a significant impact on Q1 fiscal 2021 results, the potential effects on business and financial outlook remain unknown due to ongoing modifications to employee travel, work locations, and events[131](index=131&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | Change (YoY) | | :--------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Total net revenues | $624,617 | $569,305 | +9.7% | | Net product revenues | $288,045 | $234,536 | +22.8% | | Net service revenues | $336,572 | $334,769 | +0.5% | | Cost of net product revenues | $67,038 | $42,118 | +59.2% | | Cost of net service revenues | $47,941 | $46,524 | +3.0% | | Gross profit | $509,638 | $480,663 | +6.0% | | Income from operations | $117,748 | $122,335 | -3.7% | | Net income | $87,678 | $98,527 | -11.0% | - The increase in net product revenues was primarily driven by higher software sales, while the increase in cost of net product revenues was mainly due to the **Shape acquisition** and related managed service costs[136](index=136&type=chunk)[140](index=140&type=chunk) | Operating Expense (in thousands) | Three months ended Dec 31, 2020 | Three months ended Dec 31, 2019 | Change (YoY) | | :------------------------------- | :------------------------------ | :------------------------------ | :----------- | | Sales and marketing | $214,546 | $195,519 | +9.7% | | Research and development | $114,191 | $96,005 | +18.9% | | General and administrative | $63,153 | $59,004 | +7.0% | | Restructuring charges | $0 | $7,800 | -100.0% | | **Total Operating Expenses** | **$391,890** | **$358,328** | **+9.4%** | - Other (loss) income, net decreased primarily due to a **$4.4 million** decrease in interest income from investments and a **$1.7 million** increase in interest expense from the Term Loan Facility[146](index=146&type=chunk) - The effective tax rate increased to **25.1%** from **22.8%** due to the tax impact from stock-based compensation and other non-deductible expenses[147](index=147&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) - Cash, cash equivalents, short-term, and long-term investments increased by **$149.3 million** to **$1,462.1 million** as of December 31, 2020, primarily driven by **$137.4 million** in cash from operating activities[151](index=151&type=chunk) - Cash provided by investing activities was **$20.6 million**, a significant improvement from **$29.4 million** used in the prior year, mainly due to maturities of investments[153](index=153&type=chunk) - The company has **$350.0 million** in available borrowing capacity under its Revolving Credit Facility and believes current cash, investments, and anticipated cash flows are sufficient to meet liquidity needs[152](index=152&type=chunk)[155](index=155&type=chunk) - Subsequent to the quarter, the company entered into **$500 million** Accelerated Share Repurchase (ASR) agreements on February 3, 2021[156](index=156&type=chunk) [Obligations and Commitments](index=29&type=section&id=Obligations%20and%20Commitments) - Principal commitments include **$385.0 million** outstanding under the Term Loan Facility and obligations under operating leases expiring through 2033[157](index=157&type=chunk)[158](index=158&type=chunk)[161](index=161&type=chunk) - The company is contractually obligated to purchase component inventory from contract manufacturers based on rolling production forecasts[162](index=162&type=chunk) [Recent Accounting Pronouncements](index=30&type=section&id=Recent%20Accounting%20Pronouncements) - The anticipated impact of recent accounting pronouncements is discussed in Note 1 to the accompanying Notes to Consolidated Financial Statements[163](index=163&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses the company's exposure to market risks, primarily interest rate and foreign currency risks - The company is exposed to **interest rate risk**, where a sharp rise in market interest rates could adversely impact the fair value of its fixed income investment portfolio and increase interest payable on its Term Loan Facility[164](index=164&type=chunk)[166](index=166&type=chunk) - As of December 31, 2020, **41.5%** of the fixed income securities balance consisted of U.S. government and U.S. government agency securities, and the overall credit quality of the portfolio is strong[164](index=164&type=chunk) - The majority of sales and expenses are denominated in U.S. dollars, resulting in no significant foreign currency transaction gains and losses to date[167](index=167&type=chunk) [Item 4. Controls and Procedures](index=30&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of disclosure controls and procedures and reports no material changes to internal control over financial reporting - The company's disclosure controls and procedures were effective as of December 31, 2020, ensuring timely and accurate reporting of required information[168](index=168&type=chunk)[170](index=170&type=chunk) - There were no material changes to internal control over financial reporting during the first fiscal quarter, even with the entire global workforce working remotely due to the COVID-19 pandemic[171](index=171&type=chunk) [Changes in Internal Control over Financial Reporting](index=31&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - No material changes to internal control over financial reporting occurred during the first fiscal quarter, despite the global F5 workforce working remotely due to the **COVID-19 pandemic**[171](index=171&type=chunk) [PART II. OTHER INFORMATION](index=31&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=31&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 9 for details on legal proceedings, including a lawsuit concerning NGINX software IP - Information regarding legal proceedings, including the lawsuit filed by **Lynwood Investment CY Limited** concerning **NGINX software** intellectual property, is detailed in Note 9 to the Financial Statements[172](index=172&type=chunk) [Item 1A. Risk Factors](index=31&type=section&id=Item%201A.%20Risk%20Factors) This section states no material changes to the company's risk factors from those described in its Annual Report on Form 10-K - No material changes to risk factors were identified compared to those disclosed in the Annual Report on Form 10-K for the fiscal year ended September 30, 2020[173](index=173&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=31&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's common stock share repurchase program, with no repurchases in Q1 fiscal 2021 - The Board of Directors authorized an additional **$1.0 billion** for the common stock share repurchase program in October 2018, supplementing an existing **$4.4 billion** program[174](index=174&type=chunk) - The company did not repurchase and retire any shares during the three months ended December 31, 2020[174](index=174&type=chunk) [Item 4. Mine Safety Disclosures](index=32&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable[176](index=176&type=chunk) [Item 5. Other Information](index=32&type=section&id=Item%205.%20Other%20Information) This item states that there is no other information to report - None[177](index=177&type=chunk) [Item 6. Exhibits](index=32&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL-related documents - Exhibits include certifications pursuant to **Sections 302 and 906 of the Sarbanes-Oxley Act of 2002**, and various **XBRL taxonomy extension documents**[178](index=178&type=chunk) [SIGNATURES](index=33&type=section&id=SIGNATURES) [SIGNATURES](index=33&type=section&id=SIGNATURES) This section contains the official signatures, certifying the filing of the report on behalf of F5 Networks, Inc. - The report was duly signed on **February 5, 2021**, by **Francis J. Pelzer**, **Executive Vice President, Chief Financial Officer** (principal financial officer and principal accounting officer) of F5 Networks, Inc.[181](index=181&type=chunk)[182](index=182&type=chunk)

PART I [Item 1. Business](index=4&type=section&id=Item%201.%20Business) F5 Networks, Inc. is a multi-cloud application security and delivery company focused on adaptive applications, transitioning to a software- and SaaS-driven model with global operations - F5 Networks, Inc. is a multi-cloud application security and delivery company, aiming to make applications adaptive, automated, self-healing, and secure[16](index=16&type=chunk) - The company offers enterprise-grade solutions in various consumption models (on-premises, managed services) and professional services including consulting, training, installation, maintenance, and technical support[17](index=17&type=chunk) - F5 acquired Shape Security on January 24, 2020, integrating its online fraud and abuse prevention capabilities with F5's application delivery and security portfolio[18](index=18&type=chunk) - F5 serves large enterprise businesses, public sector institutions, governments, and service providers globally, organized into Americas, EMEA, and APAC regions[19](index=19&type=chunk) - The company is transforming towards a software- and SaaS-driven business; software revenue grew **52% in fiscal year 2020** and constituted **35% of product revenue**[20](index=20&type=chunk) - F5's core strategy is to solve customer application challenges by enabling adaptive applications that scale, secure, and optimize both traditional and modern applications[24](index=24&type=chunk) - Key strategic components include delivering adaptive applications through organic investments and acquisitions (NGINX, Shape Security), transforming customer experience with new consumption models, and capturing growth in security and software markets[25](index=25&type=chunk)[26](index=26&type=chunk)[28](index=28&type=chunk) - F5 aims to provide consistent, industry-leading security across customers' entire application estate, noting a **300% increase in application attacks** over the past two years[28](index=28&type=chunk) - The company expects continued software growth from enhancements to BIG-IP, advancements in NGINX, application security, Shape, and cloud services[30](index=30&type=chunk) - F5's BIG-IP family offers feature-rich, programmable application delivery solutions for traditional applications, including load balancing, DNS, and advanced security capabilities like Web Application Firewall (WAF)[33](index=33&type=chunk)[34](index=34&type=chunk) - NGINX technologies provide lightweight, agile ADC and API management software for modern applications, supporting container-built applications, CI/CD workflows, and microservices[39](index=39&type=chunk) - F5 offers advanced application security services such as DDoS mitigation, WAF, bot protection, and SSL/TLS traffic decryption, available as on-premises or cloud-based solutions[43](index=43&type=chunk) - Shape's AI platform protects against advanced fraud and abuse, including credential stuffing attacks, and is integrated into F5's Silverline managed services platform as Silverline Shape Defense[45](index=45&type=chunk)[46](index=46&type=chunk)[47](index=47&type=chunk) - Beacon, a SaaS application, provides cross-platform visibility and analytics for application service performance and security, leveraging F5 products and third-party data[49](index=49&type=chunk) - F5's BIG-IP offerings also serve service providers with solutions for 4G/LTE and 5G networks, NFV environments, and edge computing, including intelligent traffic management and carrier-class network firewall services[51](index=51&type=chunk)[53](index=53&type=chunk) - F5 competes in a broader market encompassing application delivery, security, and policy management, beyond traditional ADC functions[54](index=54&type=chunk) - Key competitors in the traditional ADC market include Citrix Systems, Radware, A10 Networks, Amazon Web Services, Microsoft Azure, and VMware[55](index=55&type=chunk) - In application security, F5 competes with companies like A10 Networks, Akamai, Cisco, Citrix Systems, Imperva, Juniper Networks, Radware, and Symantec/Blue Coat, with additional competitors in fraud and abuse solutions post-Shape acquisition[56](index=56&type=chunk) - Principal competitive factors include form factor, consumption model, ecosystem integrations, features, performance, customer support, brand recognition, distribution, and pricing[57](index=57&type=chunk) - F5 offers a broad range of professional services, including consulting, training, installation, maintenance, and technical support, directly to end-users and through channel partners[58](index=58&type=chunk)[59](index=59&type=chunk)[60](index=60&type=chunk) - The company's product development is primarily software, SaaS, and managed services focused, with over **90% of engineers** in eight major locations globally, including Seattle, Hyderabad, Tel Aviv, and San Francisco[62](index=62&type=chunk)[64](index=64&type=chunk) - F5 holds **387 U.S. patents** and **44 international patents**, relying on intellectual property laws to protect its technology[67](index=67&type=chunk) - Research and product development expenses were **$441.3 million**, **$408.1 million**, and **$366.1 million** for fiscal years 2020, 2019, and 2018, respectively[69](index=69&type=chunk) - F5 sells products and services globally through direct sales teams and channel partners (distributors, VARs, MSPs, systems integrators), with Ingram Micro, Inc. accounting for **16.7% of total revenues in fiscal 2020**[71](index=71&type=chunk)[73](index=73&type=chunk)[76](index=76&type=chunk) - Marketing efforts are increasing focus on digital, personalized experiences, and transforming marketing into a revenue center to drive brand momentum and customer growth[79](index=79&type=chunk)[80](index=80&type=chunk) - Manufacturing of hardware platforms is outsourced to Flex Ltd. in Guadalajara, Mexico, and Zhuhai, China, with F5 providing rolling forecasts for component procurement and assembly[81](index=81&type=chunk)[82](index=82&type=chunk)[83](index=83&type=chunk) - As of September 30, 2020, F5 had **6,109 employees**, with **55% in the United States**, and none represented by a labor union[85](index=85&type=chunk) - F5 promotes a culture based on 'BeF5' guiding principles and 'LeadF5' leadership principles, supported by competitive benefits, flexible work programs, and wellness initiatives, especially during the COVID-19 pandemic[86](index=86&type=chunk)[87](index=87&type=chunk)[89](index=89&type=chunk) - The company supports employee growth and development through various learning organizations and promotes Diversity and Inclusion via Employee Inclusion Groups (EIGs) with dedicated budgets and executive sponsors[94](index=94&type=chunk)[95](index=95&type=chunk)[96](index=96&type=chunk) - F5 offers a competitive Total Rewards package including market-competitive pay, incentive plans, RSUs, an Employee Stock Purchase Plan, retirement plans, healthcare, and paid time off[97](index=97&type=chunk) - In April 2020, the Compensation Committee's charter was updated to include oversight of talent management and development policies[98](index=98&type=chunk) Executive Officers of the Registrant The following table lists the key executive officers of F5 Networks, detailing their positions within the company | Name | Age | Position | | :------------------ | :-- | :-------------------------------------------------------------------- | | François Locoh-Donou | 49 | President, Chief Executive Officer, and Director | | Tom Fountain | 44 | Executive Vice President of Global Services and Chief Strategy Officer | | Geng Lin | 56 | Executive Vice President and Chief Technology Officer | | Frank Pelzer | 50 | Executive Vice President and Chief Financial Officer | | Gus Robertson | 51 | Senior Vice President and General Manager, NGINX | | Scot Rogers | 53 | Executive Vice President and General Counsel | | Kara Sprague | 40 | Executive Vice President and General Manager, BIG-IP | | Derek Smith | 56 | Senior Vice President and General Manager, Shape | | Chad Whalen | 49 | Executive Vice President, Worldwide Sales | | Ana White | 47 | Executive Vice President and Chief Human Resources Officer | | Mika Yamamoto | 48 | Executive Vice President and Chief Marketing and Customer Experience Officer | [Item 1A. Risk Factors](index=17&type=section&id=Item%201A.%20Risk%20Factors) F5 faces risks from IT market conditions, cloud competition, product development challenges, security vulnerabilities, and reliance on key personnel, alongside international commerce, regulatory, and litigation exposures - F5's business is susceptible to adverse conditions in the information technology market, including economic downturns and evolving IT service delivery models like cloud computing, which can impact demand for its products and services[116](index=116&type=chunk) - The transition to cloud-based computing presents competitive and execution risks, with new competitors emerging and potential reductions in F5's revenues or operating margins if its cloud strategies are not successful[118](index=118&type=chunk)[119](index=119&type=chunk) - Industry consolidation may intensify competition, as larger companies with greater resources acquire or partner to offer comprehensive solutions that could compete with F5's offerings[120](index=120&type=chunk) - F5's success relies on timely development of new products and features, market acceptance, and proper management of product life cycles in a rapidly evolving and highly competitive market[123](index=123&type=chunk)[124](index=124&type=chunk)[125](index=125&type=chunk) - Security vulnerabilities in IT systems or products, as well as unforeseen product errors, could lead to significant financial and reputational harm, including data breaches, system disruptions, and liability claims[127](index=127&type=chunk)[131](index=131&type=chunk)[133](index=133&type=chunk) - The company is dependent on key personnel and its ability to attract, retain, and motivate qualified employees; recent restructuring programs could lead to attrition and negatively impact operations[138](index=138&type=chunk)[139](index=139&type=chunk) - International commerce exposes F5 to risks such as difficulty enforcing contracts, intellectual property protection uncertainty, regulatory changes, trade restrictions, and foreign currency fluctuations[165](index=165&type=chunk) - The COVID-19 pandemic's full impact on F5's financial condition and results of operations remains uncertain, potentially affecting customer demand, supply chain, and operational continuity[187](index=187&type=chunk) [Item 1B. Unresolved Staff Comments](index=30&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) This item indicates that there are no unresolved staff comments applicable to the registrant - Not applicable[191](index=191&type=chunk) [Item 2. Properties](index=30&type=section&id=Item%202.%20Properties) F5 Networks leases its principal administrative, sales, marketing, research, and development facilities in Seattle, Washington, and other global locations, believing current facilities are sufficient for operations and growth - F5 leases its main administrative, sales, marketing, R&D facilities in Seattle, Washington, covering approximately **515,000 square feet**, with the current headquarters lease expiring in 2033[192](index=192&type=chunk) - The company also leases about **320,000 square feet** at a previous Seattle location, with leases expiring in July 2022[193](index=193&type=chunk) - F5 believes its existing properties are in good condition and sufficient for business operations, with future growth accommodated by current facilities or additional leased space[194](index=194&type=chunk) [Item 3. Legal Proceedings](index=30&type=section&id=Item%203.%20Legal%20Proceedings) F5 Networks is involved in legal proceedings, including an intellectual property infringement lawsuit related to NGINX software, which the company intends to vigorously defend - F5 is subject to a lawsuit filed by Lynwood Investment CY Limited on June 8, 2020, alleging copyright infringement, trademark law violation, tortious interference, conspiracy, and fraud related to NGINX software[489](index=489&type=chunk) - The company is also involved in other legal proceedings, claims, investigations, and litigation in the ordinary course of business, including intellectual property disputes[490](index=490&type=chunk) - Management believes it has meritorious defenses and intends to vigorously defend these lawsuits, but the ultimate outcome and potential exposure to loss are currently indeterminable[490](index=490&type=chunk) [Item 4. Mine Safety Disclosures](index=30&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item indicates that there are no mine safety disclosures applicable to the registrant - Not applicable[196](index=196&type=chunk) PART II [Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=31&type=section&id=Item%205.%20Market%20For%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) F5 Networks' common stock trades on Nasdaq under 'FFIV', with the company retaining cash for business and share repurchases, not anticipating dividends - F5 Networks' common stock is traded on the Nasdaq Global Select Market under the symbol 'FFIV'[199](index=199&type=chunk) Common Stock High and Low Sales Prices (Fiscal Years 2019-2020) | Quarter | Fiscal Year 2020 High ($) | Fiscal Year 2020 Low ($) | Fiscal Year 2019 High ($) | Fiscal Year 2019 Low ($) | | :--------------- | :------------------------ | :----------------------- | :------------------------ | :----------------------- | | First Quarter | 153.00 | 128.51 | 195.41 | 149.87 | | Second Quarter | 141.31 | 79.78 | 173.44 | 148.91 | | Third Quarter | 153.56 | 101.42 | 168.94 | 131.53 | | Fourth Quarter | 156.36 | 116.79 | 153.99 | 121.36 | - As of November 9, 2020, the closing sales price was **$154.97**, and **61,603,102 shares** of common stock were outstanding[6](index=6&type=chunk)[200](index=200&type=chunk) - F5's policy is to retain cash for business, acquisitions, and share repurchases; it does not anticipate declaring dividends in the foreseeable future[202](index=202&type=chunk) - In fiscal year 2020, F5 repurchased and retired **799,495 shares** at an average price of **$125.10 per share**, with **$1.3 billion** remaining authorized under its share repurchase program[204](index=204&type=chunk)[466](index=466&type=chunk) [Item 6. Selected Financial Data](index=33&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a summary of F5 Networks' selected consolidated historical financial data, including income statement and balance sheet data, for fiscal years 2016 through 2020 Consolidated Income Statement Data (in millions, except per share data) | Indicator | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Net revenues | | | | | | | Products | $1,025.9 | $985.6 | $960.1 | $964.7 | $944.5 | | Services | 1,325.0 | 1,256.9 | 1,201.3 | 1,125.4 | 1,050.6 | | Total | 2,350.8 | 2,242.4 | 2,161.4 | 2,090.0 | 1,995.0 | | Cost of net revenues | | | | | | | Products | 215.3 | 175.0 | 181.1 | 176.0 | 166.6 | | Services | 192.6 | 181.6 | 180.4 | 177.5 | 170.6 | | Total | 407.9 | 356.6 | 361.5 | 353.5 | 337.2 | | Gross profit | 1,942.9 | 1,885.9 | 1,799.9 | 1,736.6 | 1,657.8 | | Operating expenses | | | | | | | Sales and marketing | 843.2 | 748.6 | 664.1 | 652.2 | 628.7 | | Research and development | 441.3 | 408.1 | 366.1 | 350.4 | 334.2 | | General and administrative | 258.4 | 210.7 | 160.4 | 156.9 | 138.4 | | Litigation expense | — | — | — | 0.4 | 9.1 | | Restructuring charges | 7.8 | — | 18.4 | 12.7 | — | | Total | 1,550.7 | 1,367.4 | 1,209.0 | 1,172.6 | 1,110.5 | | Income from operations | 392.3 | 518.5 | 590.9 | 564.0 | 547.4 | | Other income, net | 4.1 | 22.6 | 12.9 | 11.6 | 2.5 | | Income before income taxes | 396.4 | 541.1 | 603.8 | 575.5 | 549.9 | | Provision for income taxes | 89.0 | 113.4 | 150.1 | 154.8 | 184.0 | | Net income | $307.4 | $427.7 | $453.7 | $420.8 | $365.9 | | Net income per share — basic | $5.05 | $7.12 | $7.41 | $6.56 | $5.43 | | Weighted average shares — basic| 60,911 | 60,044 | 61,262 | 64,173 | 67,433 | | Net income per share — diluted | $5.01 | $7.08 | $7.32 | $6.50 | $5.38 | | Weighted average shares — diluted| 61,378 | 60,456 | 62,013 | 64,775 | 67,984 | Consolidated Balance Sheet Data (in millions) | Indicator | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------------------------ | :---------- | :---------- | :---------- | :---------- | :---------- | | Cash, cash equivalents, and short-term investments | $1,209.9 | $972.3 | $1,039.4 | $1,016.9 | $882.4 | | Restricted cash | 3.3 | 3.0 | 1.2 | 1.2 | 1.2 | | Long-term investments | 102.9 | 358.4 | 411.2 | 284.8 | 276.4 | | Total assets | 4,677.9 | 3,390.3 | 2,605.5 | 2,476.5 | 2,306.3 | | Long-term liabilities | 1,157.4 | 523.3 | 365.6 | 312.6 | 276.8 | | Total shareholders' equity | 2,232.3 | 1,761.5 | 1,285.5 | 1,229.4 | 1,185.3 | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=34&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides an overview of F5 Networks' financial performance, highlighting revenue growth driven by software and acquisitions, increased operating expenses, decreased net income, and strong liquidity Overview F5 is a multi-cloud application services provider, marketing globally through indirect channels, with the Shape Security acquisition enhancing its offerings, while monitoring key financial indicators - F5 is a leading provider of multi-cloud application services, enabling customers to develop, deploy, operate, secure, and govern applications across various architectures[213](index=213&type=chunk) - The company markets its products primarily through indirect sales channels in the Americas, EMEA, and APAC regions, serving large enterprise, public sector, and government customers[213](index=213&type=chunk) - F5 completed the acquisition of Shape Security on January 24, 2020, integrating its fraud and abuse prevention solutions to offer end-to-end application security[213](index=213&type=chunk) - Key performance indicators monitored include revenues (product/service mix, new product acceptance, geographic concentration), cost of revenues and gross margins (hardware costs, software license fees, amortization), operating expenses (personnel, marketing), and liquidity/cash flows (cash, investments, deferred revenue, DSO)[214](index=214&type=chunk)[216](index=216&type=chunk) - The COVID-19 pandemic's full impact on F5's financial condition and results of operations remains uncertain, though it did not significantly impact fiscal year 2020 results[214](index=214&type=chunk) Critical Accounting Policies F5's critical accounting policies involve significant estimates in revenue recognition, business combinations, and lease obligations, with the Shape acquisition requiring substantial valuation judgment - F5's critical accounting policies involve significant estimates and judgments, particularly in revenue recognition, business combinations (fair value of acquired assets), and the incremental borrowing rate for lease obligations[217](index=217&type=chunk)[218](index=218&type=chunk)[230](index=230&type=chunk)[231](index=231&type=chunk) - Revenue recognition follows a five-step process, with product revenue recognized at a point in time (hardware, perpetual software, term-based licenses) and SaaS revenue recognized ratably over time[220](index=220&type=chunk)[221](index=221&type=chunk)[222](index=222&type=chunk)[223](index=223&type=chunk)[224](index=224&type=chunk)[226](index=226&type=chunk) - Service revenues for post-contract customer support (PCS) are recognized straight-line over the contract term, while consulting and training revenues are recognized as services are completed[227](index=227&type=chunk) - Sales commissions for initial service and subscription contracts are deferred and amortized over **4.5 and 3 years**, respectively[228](index=228&type=chunk) - Business combinations are accounted for using the acquisition method, allocating purchase consideration to acquired assets and liabilities based on estimated fair values, with any excess recorded as goodwill[230](index=230&type=chunk) - The acquisition of Shape Security for **$1.0 billion** in January 2020 involved significant judgment in valuing developed technology, including assumptions on revenue growth rate and technology migration curve[231](index=231&type=chunk) - While COVID-19 did not significantly impact fiscal year 2020 results, its future effects on F5's financial condition and operations remain uncertain[233](index=233&type=chunk) Results of Operations F5's total net revenues increased in fiscal year 2020, driven by software growth, but net income and operating income decreased due to higher operating expenses and lower other income Net Revenues (in millions) | Category | 2020 | 2019 | 2018 | | :------- | :---------- | :---------- | :---------- | | Products | $1,025.9 | $985.6 | $960.1 | | Services | 1,325.0 | 1,256.9 | 1,201.3 | | Total | $2,350.8 | $2,242.4 | $2,161.4 | - Total net revenues increased **4.8% in fiscal year 2020**, driven by increased product and service revenue, with software revenue growing **52%** and representing **35% of product revenue**[20](index=20&type=chunk)[236](index=236&type=chunk)[237](index=237&type=chunk)[238](index=238&type=chunk) - Revenues outside the United States represented **48.1% of net revenues in fiscal year 2020**, a slight decrease from **49.3% in 2019**[236](index=236&type=chunk) Cost of Net Revenues and Gross Profit (in millions) | Category | 2020 | 2019 | 2018 | | :----------------- | :---------- | :---------- | :---------- | | Products | $215.3 | $175.0 | $181.1 | | Services | 192.6 | 181.6 | 180.4 | | Total | 407.9 | 356.6 | 361.5 | | Gross profit | $1,942.9 | $1,885.9 | $1,799.9 | | Gross margin (%) | 82.6% | 84.1% | 83.3% | - Cost of net product revenues increased **23.0% in fiscal year 2020**, primarily due to the Shape acquisition's revenue and related managed service costs[240](index=240&type=chunk) - Operating expenses increased across all categories in fiscal year 2020, with sales and marketing up **12.6%**, R&D up **8.2%**, and G&A up **22.6%**, largely due to personnel costs and acquisition-related expenses[243](index=243&type=chunk)[244](index=244&type=chunk)[245](index=245&type=chunk) - Net income decreased to **$307.4 million** in fiscal year 2020 from **$427.7 million in 2019**, and income from operations decreased to **$392.3 million from $518.5 million**[250](index=250&type=chunk) - Other income, net, decreased by **$18.5 million** in fiscal year 2020, mainly due to a **$13.1 million decrease in interest income** and a **$7.5 million increase in interest expense** from new debt[249](index=249&type=chunk) - The provision for income taxes was **22.4% in fiscal year 2020**, up from **21.0% in 2019**, primarily due to increased tax impact from stock-based compensation and non-deductible expenses[250](index=250&type=chunk) Liquidity and Capital Resources F5's liquidity remains strong despite cash outlays for acquisitions and share repurchases, supported by operating cash flow and new debt facilities Liquidity and Capital Resources (in millions) | Category | 2020 | 2019 | 2018 | | :------------------------------------------ | :---------- | :---------- | :---------- | | Cash and cash equivalents and investments | $1,312.8 | $1,330.7 | $1,450.6 | | Cash provided by operating activities | 660.9 | 747.8 | 761.1 | | Cash used in investing activities | (747.0) | (414.6) | (456.0) | | Cash provided by (used in) financing activities | 337.2 | (155.4) | (551.3) | - Cash, cash equivalents, and investments decreased by **$17.9 million** in fiscal year 2020, primarily due to **$955.6 million for the Shape acquisition** and **$100.0 million for share repurchases**, partially offset by operating cash flow and debt issuance[256](index=256&type=chunk) - Cash provided by operating activities was **$660.9 million** in fiscal year 2020, a decrease from **$747.8 million in 2019**[257](index=257&type=chunk) - Cash used in investing activities was **$747.0 million** in fiscal year 2020, mainly due to the Shape acquisition (**$955.6 million**)[259](index=259&type=chunk) - Cash provided by financing activities was **$337.2 million** in fiscal year 2020, including **$400.0 million from a term loan** for the Shape acquisition, partially offset by share repurchases[260](index=260&type=chunk) - F5 entered into a **$400.0 million Term Loan Facility** and a **$350.0 million Revolving Credit Facility** in January 2020; as of September 30, 2020, **$390.0 million** was outstanding on the Term Loan and the Revolving Credit Facility had **$350.0 million available**[263](index=263&type=chunk)[267](index=267&type=chunk)[440](index=440&type=chunk)[441](index=441&type=chunk) - The company expects current cash, investments, operating cash flows, and available credit to meet liquidity needs for the next twelve months[258](index=258&type=chunk)[264](index=264&type=chunk) Recently Adopted Accounting Standards F5 adopted new accounting standards for revenue recognition (ASC 606) and leases (ASC 842), with the latter materially impacting balance sheets but not income statements or cash flows - F5 adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on October 1, 2018, using the modified retrospective approach, which outlines a new comprehensive model for revenue recognition[270](index=270&type=chunk) - The company adopted ASU 2016-02, Leases (Topic 842), on October 1, 2019, on a modified retrospective basis, requiring recognition of right-of-use assets and corresponding lease liabilities for leases over twelve months, materially impacting consolidated balance sheets but not income statements or cash flows[271](index=271&type=chunk) - Upon adopting the leasing standard, F5 elected practical expedients not to reassess lease existence, classification, or initial direct costs for existing contracts, and applies a short-term lease exemption[272](index=272&type=chunk) Recently Issued Accounting Pronouncements F5 does not anticipate a material impact from recently issued FASB ASUs on credit losses (Topic 326) and internal-use software capitalization (Subtopic 350-40) - FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), effective for fiscal years after December 15, 2019, which modifies credit loss accounting to an expected loss model; F5 does not anticipate a material impact[274](index=274&type=chunk) - FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), effective for fiscal years after December 15, 2019, aligning capitalization requirements for implementation costs in hosting arrangements; F5 does not anticipate a material impact[275](index=275&type=chunk) [Item 7A. Quantitative and Qualitative Disclosure About Market Risk](index=44&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) F5 Networks is exposed to interest rate risk on its cash equivalents and investments, with a 1% decrease in average interest rate potentially reducing interest income by $2.3 million in fiscal year 2020 - F5's cash equivalents and investments are subject to interest rate risk; a **1% decrease in the average interest rate** would have reduced interest income by approximately **$2.3 million** in fiscal year 2020[277](index=277&type=chunk) Interest Rate Risk Exposure (September 30, 2020, in millions) | Category | Three Months or Less | Three Months to One Year | Greater Than One Year | Total | Fair Value | | :-------------------------------------- | :------------------- | :----------------------- | :-------------------- | :---------- | :---------- | | Cash and cash equivalents | $251.0 | — | — | $251.0 | $251.0 | | Weighted average interest rate | 0.6% | — | — | — | — | | Short-term investments | $51.9 | $308.5 | — | $360.3 | $360.3 | | Weighted average interest rates | 1.4% | 1.5% | — | — | — | | Long-term investments | — | — | $102.9 | $102.9 | $102.9 | | Weighted average interest rate | — | — | 1.6% | — | — | - The company's investment policy limits credit exposure to any one issuer (except U.S. treasury/agency securities) and requires investments to mature in **three years or less**, with an average maturity no greater than **1.5 years**[277](index=277&type=chunk) - The majority of F5's sales and expenses are denominated in U.S. dollars, limiting foreign currency risk to date, but international expansion could increase future transaction gains or losses; F5 has not yet engaged in foreign currency hedging[278](index=278&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=85&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding F5 Networks' directors, executive officers, and corporate governance practices is incorporated by reference from the company's definitive Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the Definitive Proxy Statement for the fiscal year 2020 Annual Shareholders Meeting[514](index=514&type=chunk) [Item 11. Executive Compensation](index=85&type=section&id=Item%2011.%20Executive%20Compensation) Details on executive compensation, including the Compensation Committee's report and interlocks, are incorporated by reference from F5 Networks' definitive Proxy Statement - Information regarding executive compensation and the Compensation Committee is incorporated by reference from the Proxy Statement[515](index=515&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=85&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information concerning the security ownership of certain beneficial owners and management, as well as related stockholder matters, is incorporated by reference from F5 Networks' definitive Proxy Statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the Proxy Statement[516](index=516&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=85&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related person transactions, and director independence is incorporated by reference from F5 Networks' definitive Proxy Statement - Information on certain relationships, related person transactions, and director independence is incorporated by reference from the Proxy Statement[517](index=517&type=chunk) [Item 14. Principal Accountant Fees and Services](index=85&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Details on fees paid to PricewaterhouseCoopers LLP and audit committee pre-approval procedures are incorporated by reference from F5 Networks' definitive Proxy Statement - Information on fees paid to PricewaterhouseCoopers LLP and audit committee pre-approval procedures is incorporated by reference from the Proxy Statement[518](index=518&type=chunk) PART IV [Item 15. Exhibits and Financial Statement Schedules](index=86&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the documents filed as part of the 10-K report, including consolidated financial statements, financial statement schedules, and a comprehensive exhibit index - This item details the documents filed as part of the 10-K report, including consolidated financial statements and an exhibit index[521](index=521&type=chunk) - Financial statement schedules are omitted if not applicable, material, or already presented in the consolidated financial statements or notes[521](index=521&type=chunk) - The exhibit index includes merger agreements (Shape Security, Nginx), corporate governance documents (Articles of Incorporation, Bylaws), debt agreements (Term Credit, Revolving Credit), lease agreements, indemnification agreements, employee stock plans, and various certifications[525](index=525&type=chunk) [Item 16. Form 10-K Summary](index=86&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item indicates that a Form 10-K Summary is not applicable to the registrant - Not applicable[522](index=522&type=chunk) [SIGNATURES](index=89&type=section&id=SIGNATURES) This section contains the required signatures for the Annual Report on Form 10-K, including those of the Chief Executive Officer, Chief Financial Officer, and Board of Directors - The report is signed by François Locoh-Donou, Chief Executive Officer and President, and Francis J. Pelzer, Executive Vice President and Chief Financial Officer, along with other directors[533](index=533&type=chunk)[535](index=535&type=chunk) - Signatures confirm the report's submission pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934[531](index=531&type=chunk)[534](index=534&type=chunk) Item 8. Financial Statements and Supplementary Data This section presents F5 Networks' audited consolidated financial statements, including balance sheets, income statements, statements of comprehensive income, shareholders' equity, cash flows, and detailed notes [Report of Independent Registered Public Accounting Firm](index=46&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers LLP issued an unqualified opinion on F5 Networks' consolidated financial statements and internal controls, highlighting the Shape Security acquisition valuation as a critical audit matter - PricewaterhouseCoopers LLP issued an unqualified opinion on F5 Networks' consolidated financial statements for the periods ended September 30, 2020 and 2019[284](index=284&type=chunk)[285](index=285&type=chunk) - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of September 30, 2020, based on COSO criteria[284](index=284&type=chunk)[285](index=285&type=chunk) - Changes in accounting principles for leases (effective October 1, 2019) and revenue from contracts with customers (effective October 1, 2018) are noted[286](index=286&type=chunk) - The valuation of the developed technology intangible asset from the Shape Security acquisition is identified as a critical audit matter due to high auditor judgment and subjectivity in applying fair value measurement procedures and evaluating significant assumptions[295](index=295&type=chunk)[296](index=296&type=chunk)[297](index=297&type=chunk) [Consolidated Balance Sheets](index=48&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheets present F5 Networks' financial position, showing significant increases in total assets and liabilities due to acquisitions and lease accounting Consolidated Balance Sheets (in millions) | ASSETS | September 30, 2020 | September 30, 2019 | | :------------------------------------------------------------------------------------------------------------------------------- | :----------------- | :----------------- | | Current assets | | | | Cash and cash equivalents | $849.6 | $599.2 | | Short-term investments | 360.3 | 373.1 | | Accounts receivable, net | 296.2 | 322.0 | | Inventories | 27.9 | 34.4 | | Other current assets | 259.5 | 182.9 | | Total current assets | 1,793.5 | 1,511.6 | | Property and equipment, net | 229.2 | 223.4 | | Operating lease right-of-use assets | 300.7 | — | | Long-term investments | 102.9 | 358.4 | | Deferred tax assets | 45.2 | 27.7 | | Goodwill | 1,859.0 | 1,065.4 | | Other assets, net | 347.4 | 203.8 | | Total assets | $4,677.9 | $3,390.3 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Current liabilities | | | | Accounts payable | $64.5 | $62.6 | | Accrued liabilities | 321.4 | 235.9 | | Deferred revenue | 883.1 | 807.0 | | Current portion of long-term debt | 19.3 | — | | Total current liabilities | 1,288.3 | 1,105.5 | | Deferred tax liabilities | 0.6 | 0.3 | | Deferred revenue, long-term | 389.5 | 391.1 | | Operating lease liabilities, long-term | 338.7 | — | | Long-term debt | 369.0 | — | | Other long-term liabilities | 59.5 | 131.9 | | Total long-term liabilities | 1,157.4 | 523.3 | | Shareholders' equity | | | | Common stock | 305.5 | 142.6 | | Accumulated other comprehensive loss | (18.7) | (19.2) | | Retained earnings | 1,945.5 | 1,638.1 | | Total shareholders' equity | 2,232.3 | 1,761.5 | | Total liabilities and shareholders' equity | $4,677.9 | $3,390.3 | - Total assets increased significantly from **$3,390.3 million in 2019 to $4,677.9 million in 2020**, primarily due to a substantial increase in goodwill from acquisitions and the recognition of operating lease right-of-use assets[301](index=301&type=chunk) - Total liabilities increased from **$1,105.5 million in 2019 to $1,288.3 million** for current liabilities, and from **$523.3 million to $1,157.4 million** for long-term liabilities, driven by new long-term debt and operating lease liabilities[301](index=301&type=chunk) - Shareholders' equity increased from **$1,761.5 million in 2019 to $2,232.3 million in 2020**[301](index=301&type=chunk) [Consolidated Income Statements](index=49&type=section&id=Consolidated%20Income%20Statements) The consolidated income statements show F5 Networks' total net revenues increased year-over-year, but net income and income from operations decreased in fiscal 2020 compared to 2019, primarily due to higher operating expenses and lower other income Consolidated Income Statements (in millions, except per share amounts) | Category | 2020 | 2019 | 2018 | | :---------------------------- | :---------- | :---------- | :---------- | | Net revenues | | | | | Products | $1,025.9 | $985.6 | $960.1 | | Services | 1,325.0 | 1,256.9 | 1,201.3 | | Total | 2,350.8 | 2,242.4 | 2,161.4 | | Cost of net revenues | | | | | Products | 215.3 | 175.0 | 181.1 | | Services | 192.6 | 181.6 | 180.4 | | Total | 407.9 | 356.6 | 361.5 | | Gross profit | 1,942.9 | 1,885.9 | 1,799.9 | | Operating expenses | | | | | Sales and marketing | 843.2 | 748.6 | 664.1 | | Research and development | 441.3 | 408.1 | 366.1 | | General and administrative | 258.4 | 210.7 | 160.4 | | Restructuring charges | 7.8 | — | 18.4 | | Total | 1,550.7 | 1,367.4 | 1,209.0 | | Income from operations | 392.3 | 518.5 | 590.9 | | Other income, net | 4.1 | 22.6 | 12.9 | | Income before income taxes | 396.4 | 541.1 | 603.8 | | Provision for income taxes | 89.0 | 113.4 | 150.1 | | Net income | $307.4 | $427.7 | $453.7 | | Net income per share — basic | $5.05 | $7.12 | $7.41 | | Weighted average shares — basic | 60,911 | 60,044 | 61,262 | | Net income per share — diluted | $5.01 | $7.08 | $7.32 | | Weighted average shares — diluted | 61,378 | 60,456 | 62,013 | - Total net revenues increased from **$2,242.4 million in 2019 to $2,350.8 million in 2020**[304](index=304&type=chunk) - Net income decreased from **$427.7 million in 2019 to $307.4 million in 2020**[304](index=304&type=chunk) - Diluted EPS decreased from **$7.08 in 2019 to $5.01 in 2020**[304](index=304&type=chunk) [Consolidated Statements of Comprehensive Income](index=50&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) The consolidated statements of comprehensive income show F5 Networks' net income and other comprehensive income (loss) components for the fiscal years ended September 30, 2020, 2019, and 2018 Consolidated Statements of Comprehensive Income (in millions) | Category | 2020 | 2019 | 2018 | | :----------------------------------------------------------------------- | :---------- | :---------- | :---------- | | Net income | $307.4 | $427.7 | $453.7 | | Other comprehensive income (loss): | | | | | Foreign currency translation adjustment | (0.6) | (0.8) | (1.4) | | Net change in unrealized gains (losses) on available-for-sale securities, net of tax | 1.0 | 3.8 | (2.8) | | Total other comprehensive income (loss) | 0.5 | 3.0 | (4.2) | | Comprehensive income | $307.9 | $430.7 | $449.5 | - Comprehensive income for fiscal year 2020 was **$307.9 million**, consisting of net income of **$307.4 million** and total other comprehensive income of **$0.5 million**[308](index=308&type=chunk) - Other comprehensive income in 2020 included a foreign currency translation adjustment of **$(0.6) million** and net unrealized gains on available-for-sale securities of **$1.0 million**[308](index=308&type=chunk) [Consolidated Statements of Shareholders' Equity](index=51&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) The consolidated statements of shareholders' equity detail changes in equity for the fiscal years ended September 30, 2018, 2019, and 2020 Consolidated Statements of Shareholders' Equity (in millions) | Category | Common Shares | Common Stock Amount | Accumulated Other Comprehensive Loss | Retained Earnings | Total Shareholders' Equity | | :------------------------------------------------------------------------------- | :------------ | :------------------ | :----------------------------------- | :---------------- | :------------------------- | | Balances, September 30, 2017 | 62,594 | $17.6 | $(18.0) | $1,229.8 | $1,229.4 | | Repurchase of common stock (2018) | (4,074) | (203.9) | — | (396.2) | (600.1) | | Stock-based compensation (2018) | — | 157.9 | — | — | 157.9 | | Net income (2018) | — | — | — | 453.7 | 453.7 | | Balances, September 30, 2018 | 60,215 | $20.4 | $(22.2) | $1,287.2 | $1,285.5 | | Cumulative effect adjustment from adoption of ASC 606 | — | — | — | 36.0 | 36.0 | | Repurchase of common stock (2019) | (1,186) | (88.1) | — | (112.9) | (201.0) | | Stock-based compensation (2019) | — | 164.7 | — | — | 164.7 | | Net income (2019) | — | — | — | 427.7 | 427.7 | | Balances, September 30, 2019 | 60,367 | $142.6 | $(19.2) | $1,638.1 | $1,761.5 | | Repurchase of common stock (2020) | (799) | (100.0) | — | — | (100.0) | | Stock-based compensation (2020) | — | 212.6 | — | — | 212.6 | | Net income (2020) | — | — | — | 307.4 | 307.4 | | Balances, September 30, 2020 | 61,099 | $305.5 | $(18.7) | $1,945.5 | $2,232.3 | - Total shareholders' equity increased from **$1,761.5 million in 2019 to $2,232.3 million in 2020**[311](index=311&type=chunk) - Stock-based compensation contributed **$212.6 million** to equity in 2020, up from **$164.7 million in 2019**[311](index=311&type=chunk) - Common stock repurchases reduced equity by **$100.0 million in 2020**, following a **$201.0 million reduction in 2019**[311](index=311&type=chunk) [Consolidated Statements of Cash Flows](index=52&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The consolidated statements of cash flows show F5 Networks' cash movements from operating, investing, and financing activities for the fiscal years ended September 30, 2020, 2019, and 2018 Consolidated Statements of Cash Flows (in millions) | Category | 2020 | 2019 | 2018 | | :-------------------------------------------------------------------- | :---------- | :---------- | :---------- | | Operating activities | | | | | Net cash provided by operating activities | $660.9 | $747.8 | $761.1 | | Investing activities | | | | | Net cash used in investing activities | (747.0) | (414.6) | (456.0) | | Financing activities | | | | | Net cash provided by (used in) financing activities | 337.2 | (155.4) | (551.3) | | Net increase (decrease) in cash, cash equivalents and restricted cash | 251.1 | 177.8 | (246.2) | | Cash, cash equivalents and restricted cash, end of year | $852.8 | $602.3 | $425.9 | - Net cash provided by operating activities decreased to **$660.9 million** in fiscal year 2020 from **$747.8 million in 2019**[314](index=314&type=chunk) - Net cash used in investing activities significantly increased to **$747.0 million** in fiscal year 2020, primarily due to the **$955.6 million cash payment for the Shape Security acquisition**[314](index=314&type=chunk)[259](index=259&type=chunk) - Net cash provided by financing activities was **$337.2 million** in fiscal year 2020, a shift from cash used in prior years, driven by **$400.0 million in proceeds from a term debt agreement**[314](index=314&type=chunk)[260](index=260&type=chunk) - Cash paid for taxes was **$80.2 million in 2020**, and cash paid for interest on long-term debt was **$6.6 million**[316](index=316&type=chunk) [Notes to Consolidated Financial Statements](index=54&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide detailed disclosures on F5 Networks' accounting policies, significant transactions, and financial balances, including revenue recognition, business combinations, and debt facilities 1. Summary of Significant Accounting Policies F5 Networks' financial statements adhere to GAAP, requiring management estimates for revenue, business combinations, and leases, with recent adoptions of ASC 606 and ASC 842 - F5 Networks is a leading provider of multi-cloud application services, offering cloud, software, and hardware solutions, along with professional services[319](index=319&type=chunk) - The company's financial statements are prepared in accordance with GAAP, requiring management to make estimates and assumptions, particularly for revenue recognition, business combinations, and lease obligations[320](index=320&type=chunk)[323](index=323&type=chunk) - The acquisition of Shape Security on January 24, 2020, added online fraud and abuse prevention to F5's portfolio[319](index=319&type=chunk) - Cash equivalents are highly liquid investments with original maturities of **three months or less**; investments are classified as available-for-sale and reported at fair value[325](index=325&type=chunk)[327](index=327&type=chunk) - F5 extends credit to customers and maintains an allowance for doubtful accounts; Ingram Micro, Inc. and Synnex Corporation accounted for **14.1% and 11.4% of accounts receivable**, respectively, at September 30, 2020[328](index=328&type=chunk) - Goodwill is tested for impairment annually, and intangible assets with finite lives are amortized over their estimated useful lives (**2 to 15 years**)[336](index=336&type=chunk)[338](index=338&type=chunk) - The company adopted new revenue recognition (ASC 606) on October 1, 2018, and lease accounting (ASC 842) on October 1, 2019, both using modified retrospective methods[377](index=377&type=chunk)[378](index=378&type=chunk) - F5 operates in one reportable segment: the development, marketing, and sale of application services[365](index=365&type=chunk) 2. Revenue from Contracts with Customers This section details F5's capitalized contract acquisition costs, contract assets, and deferred revenue balances, with remaining performance obligations of approximately $1.3 billion Capitalized Contract Acquisition Costs (in millions) | Category | 2020 | 2019 | | :------------------------------------------------- | :-------- | :-------- | | Balance, beginning of year | $59.4 | — | | Impacts from adoption of ASC 606 | — | $54.6 | | Additional capitalized contract acquisition costs deferred | 43.6 | 33.9 | | Amortization of capitalized contract acquisition costs | (32.6) | (29.1) | | Balance, end of year | $70.4 | $59.4 | - Amortization of capitalized contract acquisition costs was **$32.6 million in 2020** and **$29.1 million in 2019**, recorded in Sales and Marketing expense[384](index=384&type=chunk) Contract Assets (in millions) | Category | 2020 | 2019 | | :------------------------------------------------- | :-------- | :-------- | | Balance, beginning of year | $132.5 | — | | Impacts from adoption of ASC 606 | — | $57.5 | | Revenue recognized during period but not yet billed| 37.3 | 27.5 | | Contract asset net additions | 123.5 | 88.1 | | Contract assets acquired through the purchase of Shape | 6.0 | — | | Contract assets reclassified to accounts receivable| (98.9) | (40.5) | | Balance, end of year | $200.5 | $132.5 | Deferred Revenue Balances (in millions) | Category | 2020 | 2019 | | :------------------------------------------------- | :------------ | :------------ | | Balance, beginning of year | $1,198.1 | $1,015.3 | | Impacts from adoption of ASC 606 | — | 68.1 | | Amounts billed but not recognized as revenues | 850.0 | 866.1 | | Amounts acquired through the purchase of Shape | 39.0 | — | | Revenues recognized related to the opening balance of deferred revenue | (814.5) | (751.4) | | Balance, end of year | $1,272.6 | $1,198.1 | - As of September 30, 2020, total non-cancelable remaining performance obligations were approximately **$1.3 billion**, with **69.4% expected to be recognized as revenue over the next 12 months**[389](index=389&type=chunk) 3. Business Combinations This section details F5's acquisitions of Shape Security for $1.0 billion and Nginx for $643.2 million, including the allocation of purchase consideration and goodwill - On January 24, 2020, F5 acquired Shape Security, Inc. for approximately **$1.0 billion in cash**, including **$23.2 million in transaction costs** paid by F5[390](index=390&type=chunk)[391](index=391&type=chunk) Shape Security Acquisition: Allocated Purchase Consideration (in millions) | Assets Acquired / Liabilities Assumed | Amount | Estimated Useful Life | | :------------------------------------ | :---------- | :-------------------- | | Cash, cash equivalents, and restricted cash | $53.9 | | | Accounts receivable | 21.1 | | | Deferred tax assets | 24.6 | | | Operating lease right-of-use assets | 29.6 | | | Other tangible assets | 22.6 | | | Developed technologies | 120.0 | 7 years | | Customer relationships | 21.0 | 4 years | | Trade name | 9.5 | 5 years | | Goodwill | 799.6 | | | Total assets acquired | $1,102.0 | | | Deferred revenue | (39.0) | | | Operating lease liabilities | (30.8) | | | Other assumed liabilities | (18.6) | | | Total liabilities assumed | $(88.4) | | | Net assets acquired | $1,013.6 | | - Goodwill from the Shape acquisition, primarily representing expected synergies and unqualifying intangible assets, is not expected to be tax deductible[392](index=392&type=chunk) - The developed technology from Shape will be amortized over **7 years**, customer relationships over **4 years**, and trade names over **5 years**[395](index=395&type=chunk) - On May 8, 2019, F5 acquired Nginx, Inc. for approximately **$643.2 million in cash**, including **$19.0 million in transaction costs**[397](index=397&type=chunk)[398](index=398&type=chunk) NGINX Acquisition: Allocated Purchase Consideration (in millions) | Assets Acquired / Liabilities Assumed | Amount | Estimated Useful Life | | :------------------------------------ | :-------- | :-------------------- | | Cash and cash equivalents | $29.9 | | | Other tangible assets | 23.7 | | | Developed technologies | 62.5 | 7 years | | Customer relationships | 12.0 | 15 years | | Trade name | 14.5 | 7 years | | Non-competition agreements | 0.3 | 2 years | | Goodwill | 503.4 | | | Total assets acquired | $646.3 | | | Other assumed liabilities | (9.1) | | | Total liabilities assumed | $(9.1) | | | Net assets acquired | $637.2 | | - Goodwill from the NGINX acquisition was **$503.4 million**, with **$490.3 million** estimated as tax deductible[401](index=401&type=chunk)[402](index=402&type=chunk) 4. Fair Value Measureme

| --- | --- | --- | |---------------------------------------------------------|-------|-------| | | | | | | | | | | | | | | | | | | | | | Q4FY20 & FY20 Results PERIOD ENDING SEPTEMBER 30, 2020 | | | | Published October 26, 2020 | | | Forward-looking statements This presentation and associated commentary contains forward-looking statements including, among other things, statements regarding the continuing strength and momentum of F5's business, future financial performance, projected and target revenue and e ...

Financial Data and Key Metrics Changes - For Q4 2020, GAAP revenue was $615 million, with non-GAAP revenue of $617 million, representing a 4% year-over-year increase and exceeding guidance [9][10] - Full-year 2020 GAAP revenue totaled $2.35 billion, while non-GAAP revenue grew 5% to $2.36 billion [19][20] - Non-GAAP net income for Q4 was $150 million, or $2.43 per share, while for the full year, it was $575 million, or $9.37 per share [16][20] Business Line Data and Key Metrics Changes - Q4 product revenue was $280 million, up 6% year-over-year, with software revenue at $113 million, growing 36% [10][12] - For FY 2020, software revenue grew 52%, while systems revenue declined 10% [19][20] - Services revenue for Q4 was $336 million, growing 3% year-over-year, and represented 55% of total revenue [12][20] Market Data and Key Metrics Changes - In Q4, the Americas delivered 4% revenue growth year-over-year, EMEA grew 9%, while APAC was down 1% [14] - Enterprise customers represented 70% of product bookings, with service providers at 15% and government customers at 16% [15] Company Strategy and Development Direction - The company is focused on transitioning to a software and subscription-driven business model, with expectations of continued software revenue growth of more than 35% in FY 2021 [21][23] - The strategy includes expanding the application security portfolio and enhancing cloud service offerings, particularly through partnerships with cloud providers like AWS [33][34][35] - The company aims to leverage its strengths in application security and delivery to meet growing customer demands in a rapidly evolving digital landscape [37][40] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate the ongoing challenges posed by COVID-19, with expectations for continued strong demand in application security and software solutions [22][30] - The outlook for FY 2021 anticipates a moderate decline in systems revenue, while software revenue is expected to accelerate significantly [23][36] - Management noted that the current environment has reset customer expectations for application performance and security, creating opportunities for F5 to deliver enhanced solutions [38][39] Other Important Information - The company generated $175 million in cash flow from operations in Q4, with cash and investments totaling approximately $1.3 billion [17] - Deferred revenue increased 6% year-over-year to $1.3 billion, indicating strong future revenue visibility [18] Q&A Session Summary Question: Changes in order behavior from service providers - Management indicated no fundamental change in order behavior from service providers, with continued momentum in 5G activity expected to contribute in the second half of 2021 [42][44] Question: Drivers for hardware choices - Management noted that security has become a more significant factor in hardware business, which is not declining as previously expected [45][46] Question: Strength of application security portfolio - Management expressed confidence in the application security portfolio, highlighting the acceleration of growth due to increased online fraud and security demands [49][50] Question: APAC sales recovery - Management acknowledged ongoing challenges in specific APAC geographies due to COVID-19 but noted a positive outlook for the software pipeline in the first half of 2021 [51][52] Question: Enterprise order momentum - Management reported strong enterprise demand, particularly in financial services, technology, and government sectors, with limited exposure to negatively impacted verticals [59][60] Question: Software growth composition - Management clarified that the recent software growth is broad-based and not concentrated on specific customers, indicating a healthy subscription model [66] Question: Revenue synergies from Nginx and Shape - Management highlighted substantial increases in average deal sizes and new logo acquisitions due to the integration of Nginx and Shape into F5's go-to-market strategy [77] Question: Shape adoption and vendor consolidation concerns - Management noted that Shape's adoption is driven by increased security needs, and they do not foresee significant vendor consolidation post-COVID [81]

PART I. FINANCIAL INFORMATION This section covers the company's unaudited financial statements, management's analysis, market risks, and internal controls [Item 1. Financial Statements (unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(unaudited)) This section presents F5 Networks' unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed accounting notes [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) This section details the company's financial position, including assets, liabilities, and equity, highlighting year-over-year changes | Metric | June 30, 2020 (in thousands) | September 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------- | :-------------------------------- | :----------- | | Total Assets | $4,573,357 | $3,390,275 | +34.9% | | Total Liabilities | $2,419,458 | $1,628,778 | +48.5% | | Total Shareholders' Equity | $2,153,899 | $1,761,497 | +22.3% | | Goodwill | $1,858,966 | $1,065,379 | +74.5% | - The significant increase in Goodwill is primarily due to the acquisition of Shape Security, Inc. in fiscal year 2020[15](index=15&type=chunk)[71](index=71&type=chunk) [Consolidated Income Statements](index=6&type=section&id=Consolidated%20Income%20Statements) This section presents the company's revenues, gross profit, operating income, and net income for the three and nine months Three Months Ended June 30 | Metric | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (YoY) | | :----------------- | :--------------------------- | :--------------------------- | :----------- | | Net Revenues | $583,252 | $563,394 | +3.5% | | Gross Profit | $477,212 | $472,627 | +1.0% | | Income from Operations | $87,621 | $102,740 | -14.8% | | Net Income | $69,872 | $85,905 | -18.6% | | Diluted EPS | $1.14 | $1.43 | -20.3% | Nine Months Ended June 30 | Metric | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (YoY) | | :----------------- | :--------------------------- | :--------------------------- | :----------- | | Net Revenues | $1,736,006 | $1,652,059 | +5.1% | | Gross Profit | $1,440,086 | $1,386,400 | +3.9% | | Income from Operations | $293,654 | $403,749 | -27.3% | | Net Income | $229,778 | $332,897 | -31.0% | | Diluted EPS | $3.76 | $5.51 | -31.7% | [Consolidated Statements of Comprehensive Income](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section outlines the company's net income and other comprehensive income components for the three and nine months Three Months Ended June 30 | Metric | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | | :--------------------- | :--------------------------- | :--------------------------- | | Net Income | $69,872 | $85,905 | | Total Other Comprehensive Income | $4,408 | $1,148 | | Comprehensive Income | $74,280 | $87,053 | Nine Months Ended June 30 | Metric | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | | :--------------------- | :--------------------------- | :--------------------------- | | Net Income | $229,778 | $332,897 | | Total Other Comprehensive Income | $695 | $3,985 | | Comprehensive Income | $230,473 | $336,882 | [Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) This section details changes in the company's shareholders' equity, including common stock and retained earnings - Total Shareholders' Equity increased from **$1,761,497 thousand** as of September 30, 2019, to **$2,153,899 thousand** as of June 30, 2020[29](index=29&type=chunk) - Common stock increased from **$142,597 thousand** (September 30, 2019) to **$304,526 thousand** (June 30, 2020), and retained earnings increased from **$1,638,090 thousand** to **$1,867,868 thousand** over the same period[29](index=29&type=chunk) [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents the company's cash flows from operating, investing, and financing activities for the nine months Nine Months Ended June 30 | Activity | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | | :----------------- | :--------------------------- | :--------------------------- | | Operating Activities | $484,994 | $541,755 | | Investing Activities | $(762,816) | $(120,585) | | Financing Activities | $393,950 | $(155,590) | | Net Increase in Cash | $116,128 | $265,580 | - Cash used in investing activities significantly increased in 2020, primarily due to **$955.6 million** paid for the acquisition of Shape Security[34](index=34&type=chunk)[154](index=154&type=chunk) - Cash provided by financing activities in 2020 was driven by **$400.0 million** in proceeds from a term debt agreement[34](index=34&type=chunk)[155](index=155&type=chunk) [Notes to Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations of significant accounting policies and financial statement items [Note 1. Summary of Significant Accounting Policies](index=12&type=section&id=Note%201.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the company's core business, recent acquisition, accounting policy adoptions, and COVID-19 impact - F5 Networks, Inc. is a leading provider of multi-cloud application services, offering cloud-based, software-as-a-service, and software-only solutions for application development, deployment, operation, security, and governance[38](index=38&type=chunk)[126](index=126&type=chunk) - On January 24, 2020, the company acquired Shape Security, Inc., a leader in online fraud and abuse prevention, enhancing its application services portfolio[38](index=38&type=chunk)[69](index=69&type=chunk)[71](index=71&type=chunk) - The company adopted ASU 2016-02, Leases (Topic 842), on October 1, 2019, recognizing right-of-use assets and lease liabilities on the balance sheet, with no impact on consolidated income or cash flow statements[39](index=39&type=chunk)[40](index=40&type=chunk)[94](index=94&type=chunk) - The extent to which the COVID-19 pandemic may impact the company's financial condition or results of operations remains uncertain as of the filing date[39](index=39&type=chunk)[132](index=132&type=chunk) [Note 2. Revenue from Contracts with Customers](index=13&type=section&id=Note%202.%20Revenue%20from%20Contracts%20with%20Customers) This note details the company's revenue recognition policies, capitalized contract costs, and deferred revenue Capitalized Contract Acquisition Costs (Nine Months Ended June 30, 2020) | Metric | Amount (in thousands) | | :----------------------------------------------- | :-------------------- | | Balances, September 30, 2019 | $59,446 | | Additional capitalized contract acquisition costs | $31,759 | | Amortization of capitalized contract costs | $(24,768) | | Balances, June 30, 2020 | $66,437 | Deferred Revenue Balances (Nine Months Ended June 30, 2020) | Metric | Amount (in thousands) | | :----------------------------------------------- | :-------------------- | | Balances, September 30, 2019 | $1,198,116 | | Amounts billed but not recognized as revenues | $740,050 | | Amounts acquired through Shape acquisition | $39,000 | | Revenues recognized from opening balance | $(702,114) | | Balances, June 30, 2020 | $1,275,052 | - Total non-cancelable remaining performance obligations were approximately **$1.3 billion** as of June 30, 2020, with **69.7%** expected to be recognized as revenue over the next 12 months[49](index=49&type=chunk) [Note 3. Fair Value Measurements](index=1