F5(FFIV) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) The unaudited statements detail F5's financial position, performance, and liquidity for the quarter and six months ended March 31, 2023 Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2023 | September 30, 2022 | Change | | :-------------------------------- | :------------- | :----------------- | :----- | | Cash and cash equivalents | $734,544 | $758,012 | $(23,468) | | Short-term investments | $20,710 | $126,554 | $(105,844) | | Accounts receivable, net | $485,622 | $469,979 | $15,643 | | Inventories | $50,745 | $68,365 | $(17,620) | | Total current assets | $1,825,175 | $1,912,224 | $(87,049) | | Total assets | $5,223,251 | $5,276,194 | $(52,943) | | Accounts payable | $69,952 | $113,178 | $(43,226) | | Deferred revenue (current) | $1,160,118 | $1,067,182 | $92,936 | | Current portion of long-term debt | $— | $349,772 | $(349,772) | | Total current liabilities | $1,525,603 | $1,839,951 | $(314,348) | | Total liabilities | $2,497,692 | $2,807,216 | $(309,524) | | Total shareholders' equity | $2,725,559 | $2,468,978 | $256,581 | Consolidated Income Statements Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net revenues | $703,175 | $634,224 | $1,403,553 | $1,321,324 | | Cost of net revenues | $155,654 | $126,359 | $310,661 | $261,432 | | Gross profit | $547,521 | $507,865 | $1,092,892 | $1,059,892 | | Income from operations | $106,046 | $74,647 | $197,258 | $188,798 | | Net income | $81,436 | $56,236 | $153,838 | $149,795 | | Net income per share — diluted | $1.34 | $0.92 | $2.54 | $2.43 | - Net Revenues increased 10.9% for the three months and 6.2% for the six months ended March 31, 2023, compared to prior year periods[11] - Net Income increased 44.8% for the three months and 2.7% for the six months ended March 31, 2023, compared to prior year periods[11] Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net income | $81,436 | $56,236 | $153,838 | $149,795 | | Total other comprehensive income (loss) | $242 | $(1,413) | $3,199 | $(2,555) | | Comprehensive income | $81,678 | $54,823 | $157,037 | $147,240 | - Total Other Comprehensive Income (Loss) shifted from a loss of $(1,413) thousand to an income of $242 thousand for the three months ended March 31, 2023, and from a loss of $(2,555) thousand to an income of $3,199 thousand for the six months ended March 31, 2023[14] Consolidated Statements of Shareholders' Equity Consolidated Statements of Shareholders' Equity Highlights (in thousands) | Metric | September 30, 2022 | March 31, 2023 | Change | | :-------------------- | :----------------- | :------------- | :----- | | Common Stock | $91,048 | $190,592 | $99,544 | | Retained Earnings | $2,404,106 | $2,557,944 | $153,838 | | Total Shareholders' Equity | $2,468,978 | $2,725,559 | $256,581 | - Total Shareholders' Equity increased by $256,581 thousand from September 30, 2022, to March 31, 2023, primarily driven by net income and stock-based compensation[19] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | | Net cash provided by operating activities | $298,554 | $216,875 | | Net cash provided by investing activities | $52,370 | $37,919 | | Net cash used in financing activities | $(377,369) | $(248,211) | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(26,445) | $6,583 | | Cash, cash equivalents and restricted cash, end of period | $738,741 | $589,919 | - Net cash used in financing activities increased significantly due to the voluntary prepayment of the Term Loan Facility ($350 million) during the six months ended March 31, 2023[22] 1. Summary of Significant Accounting Policies F5 provides multi-cloud application security solutions, with no material changes to its GAAP-based accounting policies since fiscal year-end 2022 - F5, Inc provides multi-cloud application security and delivery solutions, enabling customers to develop, deploy, operate, secure, and govern applications across various architectures, including on-premises and public cloud[25] - No material changes to significant accounting policies or new accounting pronouncements were reported as of and for the three and six months ended March 31, 2023[27][28] 2. Revenue from Contracts with Customers The company's total non-cancelable remaining performance obligations were $1.8 billion, with 64.6% expected to be recognized within 12 months Capitalized Contract Acquisition Costs (in thousands) | Metric | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | | Balance, beginning of period | $77,220 | $77,836 | | Additional capitalized costs | $13,123 | $18,530 | | Amortization of capitalized costs | $(19,134) | $(19,092) | | Balance, end of period | $71,209 | $77,274 | Deferred Revenue Balances (in thousands) | Metric | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | | Balance, beginning of period | $1,691,580 | $1,489,841 | | Amounts added but not recognized | $785,122 | $723,631 | | Deferred revenue acquired | $1,800 | $10,591 | | Revenues recognized from opening balance | $(682,190) | $(624,327) | | Balance, end of period | $1,796,312 | $1,599,736 | - As of March 31, 2023, total non-cancelable remaining performance obligations were $1.8 billion, with approximately 64.6% expected to be recognized over the next 12 months[32] 3. Fair Value Measurements The company's financial assets are measured using a fair value hierarchy, with no material credit losses or impairment charges recognized - The Company categorizes financial assets and liabilities into a fair value hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[36][37][38] Assets Measured at Fair Value (March 31, 2023, in thousands) | Investment Type | Fair Value Level | Aggregate Fair Value | | :------------------------ | :--------------- | :------------------- | | Money Market Funds | Level 1 | $160,242 | | Corporate bonds and notes | Level 2 | $14,784 | | Municipal bonds and notes | Level 2 | $2,113 | | U.S. government securities | Level 2 | $4,301 | | U.S. government agency securities | Level 2 | $1,747 | | Equity investments | NAV* | $3,964 | | Total investments | | $187,151 | - No impairment charges related to intangible assets, goodwill, or long-lived assets were recognized during the three and six months ended March 31, 2023[47][48] 4. Business Combinations F5 acquired Lilac Cloud in fiscal 2023 and Threat Stack in fiscal 2022 to enhance its technology and security capabilities - On February 1, 2023, F5 acquired Lilac Cloud, Inc to enhance its Content Delivery Network (CDN) technologies, with an immaterial impact on operating results[49] - On October 1, 2021, F5 acquired Threat Stack, Inc for approximately $68.9 million in cash, adding cloud security and workload protection solutions[50][51] Threat Stack Acquisition: Allocated Purchase Consideration (in thousands) | Assets Acquired / Liabilities Assumed | Amount | | :------------------------------------ | :----- | | Deferred tax assets | $14,041 | | Other net tangible assets | $5,481 | | Cash, cash equivalents, and restricted cash | $911 | | Developed technology | $11,400 | | Customer relationships | $4,400 | | Goodwill | $43,282 | | Deferred revenue | $(10,591) | | Net assets acquired | $68,924 | 5. Balance Sheet Details This note provides a detailed breakdown of specific balance sheet accounts, highlighting changes between reporting periods Cash, Cash Equivalents and Restricted Cash (in thousands) | Metric | March 31, 2023 | September 30, 2022 | | :------------------------------------ | :------------- | :----------------- | | Cash and cash equivalents | $734,544 | $758,012 | | Restricted cash | $4,197 | $4,195 | | Total | $738,741 | $762,207 | Inventories (in thousands) | Metric | March 31, 2023 | September 30, 2022 | | :-------------------- | :------------- | :----------------- | | Finished goods | $9,697 | $10,164 | | Raw materials | $41,048 | $58,201 | | Total | $50,745 | $68,365 | Other Current Assets (in thousands) | Metric | March 31, 2023 | September 30, 2022 | | :-------------------- | :------------- | :----------------- | | Unbilled receivables | $339,029 | $319,707 | | Prepaid expenses | $87,430 | $57,340 | | Capitalized contract acquisition costs | $33,031 | $34,658 | | Other | $74,064 | $77,609 | | Total | $533,554 | $489,314 | 6. Debt Facilities F5 prepaid its $350.0 million Term Loan Facility in full and maintained full availability under its Revolving Credit Facility - On December 15, 2022, F5 voluntarily prepaid the entire $350.0 million principal balance and $3.0 million in accrued interest of its Term Loan Facility, releasing the Company from all related obligations[63] - As of March 31, 2023, the Company had no outstanding borrowings under its $350.0 million Revolving Credit Facility and maintained full available borrowing capacity, remaining in compliance with all covenants[65][66] 7. Leases The company's operating lease liabilities totaled $303.1 million, primarily for office spaces, with a weighted average remaining term of 8.8 years Total Lease Expense (in thousands) | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Operating lease expense | $12,181 | $11,870 | $24,697 | $23,784 | | Short-term lease expense | $744 | $619 | $1,399 | $1,175 | | Variable lease expense | $5,650 | $6,034 | $10,986 | $12,278 | | Total lease expense | $18,575 | $18,523 | $37,082 | $37,237 | Operating Lease Liabilities (in thousands, except lease term and discount rate) | Metric | March 31, 2023 | September 30, 2022 | | :------------------------------------------------------- | :------------- | :----------------- | | Operating lease right-of-use assets, net | $216,293 | $227,475 | | Operating lease liabilities, current | $43,215 | $42,523 | | Operating lease liabilities, long-term | $259,916 | $272,376 | | Total operating lease liabilities | $303,131 | $314,899 | | Weighted average remaining lease term (in years) | 8.8 | 9.2 | | Weighted average discount rate | 2.73 % | 2.66 % | Future Operating Lease Payments (in thousands) | Fiscal Years Ending September 30: | Operating Lease Payments | | :-------------------------------- | :----------------------- | | 2023 (remainder) | $25,738 | | 2024 | $49,002 | | 2025 | $41,249 | | 2026 | $31,530 | | 2027 | $30,310 | | 2028 | $28,444 | | Thereafter | $138,797 | | Total lease payments | $345,070 | | Less: imputed interest | $(41,939) | | Total lease liabilities | $303,131 | 8. Commitments and Contingencies The company has a $40 million purchase commitment and recently received a favorable ruling in the Lynwood NGINX lawsuit, which is under appeal - The Company has a $40 million unconditional purchase commitment with a supplier for systems components over a four-year term, with $1.2 million remaining under the first year's commitment as of March 31, 2023[74] - The Lynwood Investment CY Limited lawsuit, alleging intellectual property infringement related to NGINX software, was dismissed in F5's favor[76][78][79] - Accrued warranty costs were not material as of March 31, 2023, and September 30, 2022[73] 9. Income Taxes The effective tax rate increased due to stock-based compensation impacts, and the company holds $70.5 million in unrecognized tax benefits Effective Tax Rate | Period | March 31, 2023 | March 31, 2022 | | :-------------------- | :------------- | :------------- | | Three months ended | 25.1 % | 22.7 % | | Six months ended | 24.8 % | 18.8 % | - The change in the effective tax rate is primarily due to the tax impact of stock-based compensation[83] - As of March 31, 2023, the Company had $70.5 million of unrecognized tax benefits and is currently under audit by various state and foreign jurisdictions[84][85] 10. Shareholders' Equity The company has $1.232 billion remaining under its share repurchase authorization after repurchasing $40.0 million in stock - On July 25, 2022, the Board authorized an additional $1.0 billion for the common stock share repurchase program, with $1,232 million remaining authorized as of March 31, 2023[86][87] Common Stock Repurchases (in thousands, except per share data) | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Shares repurchased | — | 610 | 263 | 1,148 | | Average price per share | $— | $204.96 | $151.87 | $217.71 | | Amount repurchased | $— | $125,012 | $40,005 | $250,023 | 11. Net Income Per Share Diluted net income per share increased to $1.34 for the quarter and $2.54 for the six-month period ended March 31, 2023 Net Income Per Share Computation (in thousands, except per share data) | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net income | $81,436 | $56,236 | $153,838 | $149,795 | | Weighted average shares outstanding — basic | 60,330 | 60,573 | 60,211 | 60,693 | | Dilutive effect of common shares | 361 | 832 | 326 | 968 | | Weighted average shares outstanding — diluted | 60,691 | 61,405 | 60,537 | 61,661 | | Basic net income per share | $1.35 | $0.93 | $2.55 | $2.47 | | Diluted net income per share | $1.34 | $0.92 | $2.54 | $2.43 | 12. Segment Information F5 operates as a single segment, with quarterly revenue growth driven by a 43.0% increase in systems revenue - The Company operates in one reportable operating segment[91] Revenues by Geographic Region (in thousands) | Geographic Region | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :---------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Americas | $383,103 | $358,555 | $785,261 | $761,546 | | EMEA | $190,439 | $156,374 | $374,554 | $318,435 | | Asia Pacific | $129,633 | $119,295 | $243,738 | $241,343 | | Total | $703,175 | $634,224 | $1,403,553 | $1,321,324 | Net Product Revenues by Systems and Software (in thousands) | Product Type | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :----------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Systems revenue | $208,689 | $145,975 | $381,721 | $326,132 | | Software revenue | $131,892 | $151,543 | $299,418 | $314,535 | | Total net product revenue | $340,581 | $297,518 | $681,139 | $640,667 | 13. Restructuring Charges The company initiated restructuring plans in fiscal 2023 and 2022, incurring charges of $8.7 million and $7.9 million, respectively - Restructuring plans were initiated in the first quarters of fiscal 2023 and 2022 to align strategic and financial objectives and optimize resources, including a reduction in force[95] Restructuring Activity (in thousands) | Metric | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | | Accrued expenses, beginning of period | $— | $— | | Restructuring charges | $8,740 | $7,909 | | Cash payments | $(8,130) | $(6,644) | | Accrued expenses, end of period | $610 | $1,265 | 14. Subsequent Events F5 initiated a new restructuring plan in April 2023, impacting 9% of its workforce and expecting to incur $45.0 million in related costs - On April 19, 2023, F5 initiated a restructuring plan affecting approximately 620 employees, or 9% of its global workforce[97] - The Company expects to incur approximately $45.0 million in severance benefits and other related costs in fiscal year 2023, with additional costs for reducing leased facilities space yet to be estimated[98][99] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses F5's financial results, highlighting revenue growth from systems and services amid macroeconomic headwinds and strategic debt prepayment Overview - F5 is a leading provider of multi-cloud application security and delivery solutions, offering cloud-based, software-as-a-service, and software-only solutions optimized for multi-cloud environments[101] - Customer buying patterns showed softer demand for software and systems products and services in the first half of fiscal 2023 due to macroeconomic uncertainty and budget constraints, though strong maintenance renewals suggest delayed purchases[102] Summary of Critical Accounting Policies and Estimates - Critical accounting policies and estimates include revenue recognition, accounting for business combinations, and accounting for leases, which require complex, subjective judgments[105] - There were no material changes to critical accounting policies and estimates compared to the prior fiscal year's Annual Report on Form 10-K[106] Impact of Current Macroeconomic Conditions - Worsening global macroeconomic conditions, including inflation and higher interest rates, may adversely affect F5's business by softening customer demand and increasing operating costs[107] - Cash and investments decreased by $134.1 million for the first six months of fiscal year 2023, primarily due to the $350.0 million Term Loan Facility prepayment and $40.0 million in common stock repurchases, partially offset by $298.6 million from operating activities[108] - Deferred revenues continued to increase in the second quarter of fiscal year 2023 due to growth in the subscriptions business, and days sales outstanding (DSO) was 62 days[108] Results of Operations Net Revenues (in thousands, except percentages) | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Products | $340,581 | $297,518 | $681,139 | $640,667 | | Services | $362,594 | $336,706 | $722,414 | $680,657 | | Total | $703,175 | $634,224 | $1,403,553 | $1,321,324 | | Percentage of net revenues (Products) | 48.4 % | 46.9 % | 48.5 % | 48.5 % | | Percentage of net revenues (Services) | 51.6 % | 53.1 % | 51.5 % | 51.5 % | Net Product Revenues by Systems and Software (in thousands, except percentages) | Product Type | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Systems revenue | $208,689 | $145,975 | $381,721 | $326,132 | | Software revenue | $131,892 | $151,543 | $299,418 | $314,535 | | Total net product revenue | $340,581 | $297,518 | $681,139 | $640,667 | | Percentage of net product revenues (Systems) | 61.3 % | 49.1 % | 56.0 % | 50.9 % | | Percentage of net product revenues (Software) | 38.7 % | 50.9 % | 44.0 % | 49.1 % | Operating Expenses (in thousands, except percentages) | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Sales and marketing | $233,076 | $228,826 | $466,181 | $462,861 | | Research and development | $141,363 | $135,838 | $283,686 | $266,109 | | General and administrative | $67,036 | $68,554 | $137,027 | $134,215 | | Restructuring charges | $— | $— | $8,740 | $7,909 | | Total Operating Expenses | $441,475 | $433,218 | $895,634 | $871,094 | | Operating Expenses as % of Net Revenue | 62.8 % | 68.3 % | 63.8 % | 65.9 % | Liquidity and Capital Resources - Cash and cash equivalents, short-term investments, and long-term investments totaled $760.0 million as of March 31, 2023, a decrease of $134.1 million from September 30, 2022[126] - The decrease in cash and investments was primarily due to the voluntary prepayment of the $350.0 million Term Loan Facility and $40.0 million in common stock repurchases, partially offset by $298.6 million in cash provided by operating activities[126] - Cash provided by investing activities was $52.4 million for the six months ended March 31, 2023, primarily from investment maturities and sales, partially offset by acquisitions and capital expenditures[129] Obligations and Commitments - Principal commitments as of March 31, 2023, included operating lease obligations and a $40 million unconditional purchase commitment with a component supplier over four years, with $31.2 million remaining outstanding[132][134] - No material changes in lease obligations were reported compared to the prior fiscal year's Annual Report on Form 10-K[133] Recent Accounting Pronouncements - The anticipated impact of recent accounting pronouncements is discussed in Note 1 to the accompanying Notes to Consolidated Financial Statements[136] Item 3. Quantitative and Qualitative Disclosures About Market Risk F5 manages interest rate, inflation, and foreign currency risks, none of which have materially affected the business to date - The Company's fixed income investment portfolio, with 3% in U.S. government and agency securities as of March 31, 2023, is subject to interest rate risk, where rising rates could impact fair value and declining rates could affect interest income[137] - Inflation has not materially affected the business to date, but significant inflationary pressures could prevent cost offsets through price increases or constrain customer purchasing[138] - Foreign currency transaction gains and losses have not been significant due to the majority of transactions being in U.S. dollars, but this risk may increase with international expansion[139] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of March 31, 2023 - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of March 31, 2023[142] - There were no material changes in internal control over financial reporting during the quarter ended March 31, 2023[143] PART II. OTHER INFORMATION Item 1. Legal Proceedings Details on legal proceedings, including the NGINX software lawsuit, are referenced in Note 8 of the financial statements - Information regarding legal proceedings is detailed in Note 8 - Commitments and Contingencies of the Notes to Financial Statements[145] Item 1A. Risk Factors The company highlights potential adverse effects from continued macroeconomic downturns on its business, operations, and customer demand - Continued macroeconomic downturns or uncertainties, such as rising interest rates, inflation, and geopolitical conflicts, may adversely affect the Company's business, financial condition, and operating results by softening customer demand and increasing operating costs[147] - This section updates the risk factors discussed in Part I, Item 1A 'Risk Factors' in the Annual Report on Form 10-K for the fiscal year ended September 30, 2022[146] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Board of Directors authorized an additional $1.0 billion for share repurchases, with $1.2 billion remaining under the program - On July 25, 2022, the Board authorized an additional $1.0 billion for the common stock share repurchase program[148] - As of March 31, 2023, $1.2 billion remained authorized to purchase shares under the program[148] Item 4. Mine Safety Disclosures This item is not applicable to F5, Inc - This section is marked as 'Not applicable'[150] Item 5. Other Information No other information is reported in this section - This section contains no additional information[151] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including incentive plans, agreements, and required certifications - Exhibits include F5, Inc Incentive Plan, Employee Stock Purchase Plan, Severance Agreement, Lilac Cloud Equity Incentive Plans, Sarbanes-Oxley Act certifications, and XBRL documents[152] SIGNATURES - The report was signed on behalf of F5, Inc by Francis J Pelzer, Executive Vice President, Chief Financial Officer, on May 5, 2023[157][159]