F5(FFIV) - 2020 Q4 - Annual Report

PART I Item 1. Business 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] - 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] - 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] - F5 serves large enterprise businesses, public sector institutions, governments, and service providers globally, organized into Americas, EMEA, and APAC regions[19] - 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] - 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] - 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][26][28] - 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] - The company expects continued software growth from enhancements to BIG-IP, advancements in NGINX, application security, Shape, and cloud services[30] - 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][34] - NGINX technologies provide lightweight, agile ADC and API management software for modern applications, supporting container-built applications, CI/CD workflows, and microservices[39] - 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] - 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][46][47] - Beacon, a SaaS application, provides cross-platform visibility and analytics for application service performance and security, leveraging F5 products and third-party data[49] - 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][53] - F5 competes in a broader market encompassing application delivery, security, and policy management, beyond traditional ADC functions[54] - Key competitors in the traditional ADC market include Citrix Systems, Radware, A10 Networks, Amazon Web Services, Microsoft Azure, and VMware[55] - 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] - Principal competitive factors include form factor, consumption model, ecosystem integrations, features, performance, customer support, brand recognition, distribution, and pricing[57] - 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][59][60] - 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][64] - F5 holds 387 U.S. patents and 44 international patents, relying on intellectual property laws to protect its technology[67] - 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] - 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][73][76] - Marketing efforts are increasing focus on digital, personalized experiences, and transforming marketing into a revenue center to drive brand momentum and customer growth[79][80] - 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][82][83] - As of September 30, 2020, F5 had 6,109 employees, with 55% in the United States, and none represented by a labor union[85] - 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][87][89] - 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][95][96] - 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] - In April 2020, the Compensation Committee's charter was updated to include oversight of talent management and development policies[98] 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 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] - 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][119] - 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] - 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][124][125] - 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][131][133] - 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][139] - International commerce exposes F5 to risks such as difficulty enforcing contracts, intellectual property protection uncertainty, regulatory changes, trade restrictions, and foreign currency fluctuations[165] - 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] Item 1B. Unresolved Staff Comments This item indicates that there are no unresolved staff comments applicable to the registrant - Not applicable[191] Item 2. Properties 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] - The company also leases about 320,000 square feet at a previous Seattle location, with leases expiring in July 2022[193] - 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] Item 3. Legal Proceedings 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] - The company is also involved in other legal proceedings, claims, investigations, and litigation in the ordinary course of business, including intellectual property disputes[490] - 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] Item 4. Mine Safety Disclosures This item indicates that there are no mine safety disclosures applicable to the registrant - Not applicable[196] PART II Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] 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][200] - F5's policy is to retain cash for business, acquisitions, and share repurchases; it does not anticipate declaring dividends in the foreseeable future[202] - 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][466] Item 6. Selected Financial Data 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 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] - 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] - 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] - 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][216] - 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] 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][218][230][231] - 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][221][222][223][224][226] - 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] - Sales commissions for initial service and subscription contracts are deferred and amortized over 4.5 and 3 years, respectively[228] - 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] - 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] - While COVID-19 did not significantly impact fiscal year 2020 results, its future effects on F5's financial condition and operations remain uncertain[233] 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][236][237][238] - Revenues outside the United States represented 48.1% of net revenues in fiscal year 2020, a slight decrease from 49.3% in 2019[236] 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] - 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][244][245] - 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] - 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] - 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] 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] - Cash provided by operating activities was $660.9 million in fiscal year 2020, a decrease from $747.8 million in 2019[257] - Cash used in investing activities was $747.0 million in fiscal year 2020, mainly due to the Shape acquisition ($955.6 million)[259] - 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] - 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][267][440][441] - The company expects current cash, investments, operating cash flows, and available credit to meet liquidity needs for the next twelve months[258][264] 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] - 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] - 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] 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] - 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] Item 7A. Quantitative and Qualitative Disclosure About Market Risk 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] 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] - 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] PART III Item 10. Directors, Executive Officers and Corporate Governance 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] Item 11. Executive Compensation 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] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Item 13. Certain Relationships and Related Transactions, and Director Independence 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] Item 14. Principal Accountant Fees and Services 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] PART IV Item 15. Exhibits and Financial Statement Schedules 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] - Financial statement schedules are omitted if not applicable, material, or already presented in the consolidated financial statements or notes[521] - 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] Item 16. Form 10-K Summary This item indicates that a Form 10-K Summary is not applicable to the registrant - Not applicable[522] 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][535] - Signatures confirm the report's submission pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934[531][534] 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 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][285] - 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][285] - Changes in accounting principles for leases (effective October 1, 2019) and revenue from contracts with customers (effective October 1, 2018) are noted[286] - 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][296][297] Consolidated Balance Sheets 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] - 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] - Shareholders' equity increased from $1,761.5 million in 2019 to $2,232.3 million in 2020[301] Consolidated Income Statements 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] - Net income decreased from $427.7 million in 2019 to $307.4 million in 2020[304] - Diluted EPS decreased from $7.08 in 2019 to $5.01 in 2020[304] Consolidated Statements of Comprehensive Income 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] - 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] Consolidated Statements of Shareholders' Equity 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] - Stock-based compensation contributed $212.6 million to equity in 2020, up from $164.7 million in 2019[311] - Common stock repurchases reduced equity by $100.0 million in 2020, following a $201.0 million reduction in 2019[311] Consolidated Statements of Cash Flows 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] - 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][259] - 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][260] - Cash paid for taxes was $80.2 million in 2020, and cash paid for interest on long-term debt was $6.6 million[316] Notes to Consolidated Financial Statements 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] - 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][323] - The acquisition of Shape Security on January 24, 2020, added online fraud and abuse prevention to F5's portfolio[319] - 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][327] - 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] - Goodwill is tested for impairment annually, and intangible assets with finite lives are amortized over their estimated useful lives (2 to 15 years)[336][338] - 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][378] - F5 operates in one reportable segment: the development, marketing, and sale of application services[365] 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] 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] 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][391] 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] - The developed technology from Shape will be amortized over 7 years, customer relationships over 4 years, and trade names over 5 years[395] - On May 8, 2019, F5 acquired Nginx, Inc. for approximately $643.2 million in cash, including $19.0 million in transaction costs[397][398] 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][402] 4. Fair Value Measureme