F5(FFIV) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents F5 Networks' unaudited consolidated financial statements for Q1 fiscal 2021, covering key financial statements and notes Consolidated Balance Sheets | 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 | 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 | 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 | 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][27] Consolidated Statements of Cash Flows | 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 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 - 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] - 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][40] - 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] 2. Revenue from Contracts with Customers | 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] 3. Fair Value Measurements | 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] 4. Short-Term and Long-Term Investments | 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] - Gross unrealized losses were not material, and no other-than-temporary impairments were identified as of December 31, 2020[69][70] 5. Business Combinations - 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][72] | 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] 6. Balance Sheet Details | 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 - 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] - 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] - The company was in compliance with all financial covenants under both debt agreements as of December 31, 2020[86][88] 8. Leases - 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] | 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] 9. Commitments and Contingencies - 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][102] - 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][103] 10. Income Taxes - 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] - Unrecognized tax benefits totaled $54.3 million as of December 31, 2020, which could affect the effective tax rate if recognized[106] - The company is currently under audit by various states and foreign jurisdictions (Israel, Saudi Arabia, Singapore) for different fiscal years[108] 11. Net Income Per Share | 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 - F5 Networks operates as a single reportable operating segment focused on the development, marketing, and sale of application services[111] | 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] 13. Restructuring Charges - 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][117] 14. Subsequent Events - 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][119][120] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for Q1 fiscal 2021 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] - 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][128] - Days sales outstanding (DSO) for the first quarter of fiscal year 2021 was 50 days[128] Summary of Critical Accounting Policies and Estimates - Critical accounting policies and estimates requiring complex judgments include revenue recognition, accounting for business combinations, and accounting for leases[129] - There were no material changes to the critical accounting policies and estimates compared to the prior fiscal year[130] COVID-19 Update - 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] Results of Operations | 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][140] | 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] - 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] Liquidity and Capital Resources - 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] - 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] - 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][155] - Subsequent to the quarter, the company entered into $500 million Accelerated Share Repurchase (ASR) agreements on February 3, 2021[156] Obligations and Commitments - Principal commitments include $385.0 million outstanding under the Term Loan Facility and obligations under operating leases expiring through 2033[157][158][161] - The company is contractually obligated to purchase component inventory from contract manufacturers based on rolling production forecasts[162] Recent Accounting Pronouncements - The anticipated impact of recent accounting pronouncements is discussed in Note 1 to the accompanying Notes to Consolidated Financial Statements[163] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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][166] - 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] - 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] Item 4. Controls and Procedures 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][170] - 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] Changes in Internal Control over Financial Reporting - 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] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - The company did not repurchase and retire any shares during the three months ended December 31, 2020[174] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[176] Item 5. Other Information This item states that there is no other information to report - None[177] Item 6. Exhibits 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] SIGNATURES 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][182]