F5(FFIV) - 2021 Q4 - Annual Report

Part I Business F5 is a multi-cloud application security and delivery company transitioning to a software and SaaS model, driven by strategic acquisitions and channel partnerships General and Strategy F5 is transforming into a software and SaaS-driven multi-cloud application security company, leveraging strategic acquisitions to enable adaptive applications - F5 is a multi-cloud application security and delivery company, enabling adaptive applications that automatically adjust to performance, availability, or security changes[12][20] - The company is transforming towards software and SaaS, with product revenue from software sales growing 40% in fiscal 2021 and comprising 40% of total product revenue[16] - Strategic acquisitions, including NGINX (May 2019), Shape Security (Jan 2020), and Volterra (Jan 2021), are central to F5's growth, expanding its portfolio across modern applications, fraud prevention, and edge-as-a-service[14][21] - At the end of fiscal 2021, the company had a product backlog of approximately $124.9 million, primarily for systems-based products[17] Products and Solutions F5 offers a diverse product portfolio for traditional and modern applications, including BIG-IP and NGINX technologies, with a strong focus on comprehensive security solutions - BIG-IP Family offers application delivery solutions for traditional applications, available as physical appliances (iSeries, VIPRION, VELOS) and software-only Virtual Editions (VEs)[29][31][33] - NGINX Technologies provide lightweight, agile solutions such as NGINX Plus and NGINX App Protect for modern, container-based applications and microservices environments[34][35] - Security Solutions include F5 Advanced WAF, Shape's AI platform for fraud and bot protection, Volterra's ML-based API security, and Silverline for fully-managed security services like WAF and DDoS protection[38][40][42][43] Competition F5 navigates a diverse competitive landscape across application delivery, modern application management, and security, facing both established players and emerging cloud-native providers - Application Delivery: Competes with Citrix Systems, AWS, Microsoft Azure, and VMware[49] - Modern Applications (API management, Kubernetes): Competes with emerging players such as Apogee and Kong[50] - Application Security (WAF, bot detection, fraud): Competes with Akamai, Citrix, Imperva, Juniper, Cloudflare, Fastly (Signal Sciences), and PerimeterX[51][52] Corporate Functions F5's global operations are supported by outsourced manufacturing, a channel-focused sales model, significant R&D investment, and intellectual property protection - Hardware manufacturing is outsourced to Flex Ltd., with facilities in Mexico and China[76] - The company relies on a channel sales model, with Ingram Micro, Inc. and Synnex Corporation accounting for 19.2% and 11.1% of total revenues in fiscal year 2021, respectively[69][71] Research and Development Expenses (in millions) | Fiscal Year | R&D Expense | | :--- | :--- | | 2021 | $512.6 | | 2020 | $441.3 | | 2019 | $408.1 | - F5 holds 433 U.S. patents and 59 international patents to protect its intellectual property[62] Human Capital F5 prioritizes employee engagement, diversity, and flexible work arrangements for its 6,461 global employees, fostering a strong corporate culture - As of September 30, 2021, the company had 6,461 employees, with 52% in the U.S. and 48% internationally[81] - Employee engagement is high, with a May 2021 survey indicating 81% feel a sense of belonging, 88% are proud to work for F5, and 87% believe F5 has a great culture[88] - The company fosters diversity and inclusion through seven Employee Inclusion Groups (EIGs) and has published its inaugural Diversity and Inclusion Report[90][91][92] - The "Freedom to Flex" program, established in 2018, allows employees to choose between office, remote, or hybrid work models[87] Environmental, Social & Governance (ESG) F5 is expanding its ESG commitment with environmental targets, significant social contributions through its Global Good program, and robust governance oversight - Environmental: Commits to disclosing science-aligned Scope 1 and 2 targets in FY2022 and declaring 2030 Science-Based Targets with SBTi in FY2023[96] - Social: F5 and its employees donated over $4.8 million to over 2,900 non-profits worldwide in fiscal 2021 through the F5 Global Good program[97] - Governance: The Nominating and Governance Committee of the board of directors has expanded its charter to include oversight of ESG programs[98] Risk Factors The company faces diverse risks including market competition, product development, security vulnerabilities, supply chain disruptions, operational complexities, acquisition integration, litigation, and the ongoing impact of the COVID-19 pandemic - Market and Competition: Business is dependent on IT spending and faces risks from cloud computing trends, industry consolidation, and intense competition in application delivery and security markets[112][114][116] - Product and Technology: Success depends on timely new product development, with risks including security vulnerabilities in IT systems or products that could cause significant financial and reputational harm[125][128] - Supply Chain: The company relies on a single contract manufacturer for hardware and faces risks from supply interruptions or delays of components from limited sources, exacerbated by global shortages[144][146] - Operations and Sales: Risks include an unpredictable sales cycle, reliance on distribution partners, challenges in government sales, and complexities of international commerce[147][150][169] - Acquisitions and Litigation: The company faces risks in integrating acquired businesses like Volterra and Shape, and is subject to litigation, including intellectual property disputes[178][177] - COVID-19 Pandemic: The pandemic could disrupt customer demand, supply chains (leading to delays and shortages), and overall financial performance[191][192] Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[196] Properties F5's principal facilities, including its 515,000 square foot Seattle headquarters, are leased globally for various corporate functions - The company's corporate headquarters in Seattle, Washington, consists of approximately 515,000 square feet of leased space, with the lease expiring in 2033[197] Legal Proceedings Information regarding legal proceedings is detailed in Note 13 of the Notes to Financial Statements - Information regarding legal proceedings is detailed in Note 13 - Commitments and Contingencies[199] Mine Safety Disclosures This item is reported as not applicable - Not applicable[200] Part II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities F5's common stock trades on Nasdaq, the company retains cash and does not pay dividends, and it executed a $500 million Accelerated Share Repurchase in fiscal 2021 - The company has not paid dividends and does not anticipate declaring them in the foreseeable future[206] - In February 2021, the company entered into Accelerated Share Repurchase (ASR) agreements totaling $500 million, repurchasing 2.5 million shares at an average price of $199.90 per share[209] - As of September 30, 2021, $773 million remained authorized for future share repurchases[210] Selected Financial Data This item is no longer required due to amendments to Regulation S-K - Item 6 is no longer required due to the adoption of amendments to Regulation S-K[215] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2021, total net revenues grew 10.7% to $2.60 billion, driven by strong software revenue growth, while cash and investments decreased due to share repurchases and acquisitions Fiscal Year 2021 Financial Highlights (in thousands, except percentages) | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | $2,603,416 | $2,350,822 | 10.7% | | Product Revenue | $1,247,084 | $1,025,856 | 21.6% | | Service Revenue | $1,356,332 | $1,324,966 | 2.4% | | Gross Profit | $2,110,270 | $1,942,935 | 8.6% | | Gross Margin | 81.1% | 82.6% | (1.5 p.p.) | | Income from Operations | $394,025 | $392,267 | 0.4% | | Net Income | $331,241 | $307,441 | 7.7% | Product Revenue Breakdown (in thousands) | Product Type | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Systems Revenue | $748,192 | $668,313 | 12.0% | | Software Revenue | $498,892 | $357,543 | 39.5% | | Total Product Revenue | $1,247,084 | $1,025,856 | 21.6% | - Cash and investments decreased by $269.4 million to $1.04 billion, primarily due to $500.0 million for share repurchases and $411.3 million for acquisitions (mainly Volterra), offset by $645.2 million in cash from operations[260] - As of September 30, 2021, the company had $370.0 million of principal outstanding under its Term Loan Facility, maturing in January 2023[271][440] Quantitative and Qualitative Disclosure About Market Risk The company is exposed to interest rate risk, with a hypothetical 100 basis point increase potentially reducing its investment portfolio by $3.4 million, while foreign currency risk is currently not significant - Interest Rate Risk: A hypothetical 100 basis point increase in interest rates at September 30, 2021, could reduce the market value of the investment portfolio by approximately $3.4 million[278] - Foreign Currency Risk: The majority of sales and expenses are denominated in U.S. dollars, so foreign currency transaction gains and losses have not been significant, and the company does not currently engage in foreign currency hedging[279] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, an unqualified audit opinion from PricewaterhouseCoopers LLP, and notes detailing business combinations, debt, litigation, and segment information Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified audit opinion on the financial statements and internal controls, highlighting the valuation of Volterra's developed technology as a critical audit matter - PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[288] - A critical audit matter was identified regarding the valuation of the $59.5 million developed technology intangible asset from the Volterra, Inc. acquisition, due to significant judgment in estimating its fair value, particularly the royalty rate assumption[297][298] Notes to Consolidated Financial Statements The notes provide detailed disclosures on business combinations including Volterra, Shape, and NGINX acquisitions, debt facilities, share repurchases, ongoing litigation, and segment information - Business Combinations (Note 3): Details the acquisition of Volterra, Inc. on January 22, 2021, for a total purchase price of $427.2 million, including $59.5 million for developed technology[386][389] - Debt Facilities (Note 7): As of September 30, 2021, $370.0 million of principal was outstanding under the Term Loan Facility for the Shape acquisition, maturing in January 2023[435][440] - Shareholders' Equity (Note 10): On February 3, 2021, the company initiated a $500 million Accelerated Share Repurchase (ASR), buying back 2.5 million shares, with $773 million remaining authorized as of September 30, 2021[463][466] - Litigation (Note 13): The company is a defendant in a lawsuit by Lynwood Investment CY Limited regarding NGINX intellectual property and is defending three separate patent infringement actions filed by Proven Networks LLC[489][493] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure - None[511] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2021, with no material changes during the fourth fiscal quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[514] - Management concluded that the company's internal control over financial reporting was effective as of September 30, 2021, based on the COSO framework, a conclusion audited by PricewaterhouseCoopers LLP[516][517] - No material changes were made to the company's internal control over financial reporting during the fourth fiscal quarter[518] Other Information The company reports no other information to disclose for this item - None[519] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the definitive Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement[522] Executive Compensation Information regarding executive compensation is incorporated by reference from the definitive Proxy Statement - The required information is incorporated by reference from the "Executive Compensation" and related sections in the Proxy Statement[523] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the definitive Proxy Statement - The required information is incorporated by reference from the "Security Ownership of Certain Beneficial Owners and Management" section in the Proxy Statement[524] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the definitive Proxy Statement - The required information is incorporated by reference from the sections concerning director independence and related person transactions in the Proxy Statement[525] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the definitive Proxy Statement - The required information is incorporated by reference from the sections concerning fees paid to PricewaterhouseCoopers LLP and audit committee procedures in the Proxy Statement[526] Part IV Exhibits and Financial Statement Schedules This section lists the Consolidated Financial Statements and various exhibits filed as part of the Form 10-K report - Lists the Consolidated Financial Statements and Exhibits filed with the report; financial statement schedules were omitted as not applicable, material, or included elsewhere[529] Form 10-K Summary This item is reported as not applicable - Not applicable[530]