F5(FFIV) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) Unaudited Q3 2023 financial statements reflect increased revenues and net income, alongside shifts in assets, liabilities, and cash flow activities Consolidated Balance Sheets As of June 30, 2023, total assets decreased to $5.12 billion, liabilities fell to $2.46 billion due to debt repayment, and shareholders' equity rose to $2.66 billion Consolidated Balance Sheets Highlights (in thousands) | Account | June 30, 2023 | September 30, 2022 | Change | | :--- | :--- | :--- | :--- | | Total current assets | $1,713,784 | $1,912,224 | ($198,440) | | Cash and cash equivalents | $677,498 | $758,012 | ($80,514) | | Total assets | $5,119,156 | $5,276,194 | ($157,038) | | Total current liabilities | $1,489,541 | $1,839,951 | ($350,410) | | Current portion of long-term debt | $— | $349,772 | ($349,772) | | Total liabilities | $2,461,653 | $2,807,216 | ($345,563) | | Total shareholders' equity | $2,657,503 | $2,468,978 | $188,525 | Consolidated Income Statements Q3 2023 saw total revenues increase 4.2% to $702.6 million and net income rise 7.2% to $89.0 million, despite a $56.6 million restructuring charge Income Statement Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YoY Change | 9 Months 2023 | 9 Months 2022 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Net Revenues | $702,642 | $674,488 | +4.2% | $2,106,195 | $1,995,812 | +5.5% | | Products | $328,175 | $326,482 | +0.5% | $1,009,314 | $967,149 | +4.4% | | Services | $374,467 | $348,006 | +7.6% | $1,096,881 | $1,028,663 | +6.6% | | Gross Profit | $560,959 | $543,755 | +3.2% | $1,653,851 | $1,603,647 | +3.1% | | Income from Operations | $103,569 | $107,464 | -3.6% | $300,827 | $296,262 | +1.5% | | Restructuring charges | $56,648 | $— | N/A | $65,388 | $7,909 | +726.8% | | Net Income | $88,976 | $83,019 | +7.2% | $242,814 | $232,814 | +4.3% | | Diluted EPS | $1.48 | $1.37 | +8.0% | $4.02 | $3.80 | +5.8% | Consolidated Statements of Comprehensive Income Comprehensive income for Q3 2023 increased to $90.0 million, driven by higher net income and positive foreign currency translation adjustments Comprehensive Income (in thousands) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $88,976 | $83,019 | $242,814 | $232,814 | | Other comprehensive income (loss) | $1,041 | ($1,998) | $4,240 | ($4,553) | | Comprehensive Income | $90,017 | $81,021 | $247,054 | $228,261 | Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $2.66 billion by June 30, 2023, primarily due to net income, partially offset by $290.0 million in stock repurchases - For the nine months ended June 30, 2023, the company repurchased 2,075 thousand shares of common stock for $290.0 million[20] - Net income of $242.8 million and stock-based compensation of $183.4 million were the primary contributors to the increase in shareholders' equity during the nine months ended June 30, 2023[20] Consolidated Statements of Cash Flows Net cash from operations significantly increased to $463.6 million, while financing activities used $591.9 million for debt repayment and stock repurchases, resulting in an $84.3 million net cash decrease Cash Flow Summary (in thousands) | Activity | Nine months ended June 30, 2023 | Nine months ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $463,608 | $288,276 | | Net cash provided by investing activities | $43,958 | $147,394 | | Net cash used in financing activities | ($591,913) | ($470,249) | | Repurchase of common stock | ($290,041) | ($500,023) | | Payments on term debt agreement | ($350,000) | ($15,000) | | Net decrease in cash | ($84,347) | ($34,579) | Notes to Consolidated Financial Statements Notes detail accounting policies, revenue, debt, and restructuring, highlighting the Lilac Cloud acquisition, Term Loan repayment, and Q3 2023 restructuring plan - F5 provides multi-cloud application security and delivery solutions, available as cloud-based, software-as-a-service (SaaS), and software-only solutions, along with professional services[26] - On February 1, 2023, the Company acquired Lilac Cloud, Inc., a provider of Content Delivery Network (CDN) technologies[51] - On December 15, 2022, the Company fully prepaid its Term Loan Facility, including the outstanding principal of $350.0 million[66] - In Q3 2023, the Company initiated a restructuring plan, including a 9% workforce reduction, incurring $56.7 million in costs[99] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by services, softer product demand due to macroeconomic uncertainty, increased operating expenses from restructuring, and strong liquidity after debt repayment and stock repurchases - Management noted changes in customer buying patterns due to the uncertain macroeconomic environment, leading to softer demand for both software and systems products[105] - This is viewed as temporary, with stronger maintenance renewals signaling purchase delays rather than competitive losses[105] Revenue Performance (in thousands) | Revenue Type | Q3 2023 | Q3 2022 | YoY Change | 9 Months 2023 | 9 Months 2022 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Net Revenues | $702,642 | $674,488 | +4.2% | $2,106,195 | $1,995,812 | +5.5% | | Product Revenues | $328,175 | $326,482 | +0.5% | $1,009,314 | $967,149 | +4.4% | | Service Revenues | $374,467 | $348,006 | +7.6% | $1,096,881 | $1,028,663 | +6.6% | - Gross margin decreased to 79.8% in Q3 2023 from 80.6% in Q3 2022, and to 78.5% for the nine-month period from 80.4% a year ago, primarily due to higher product costs including component cost increases and expedite fees[113] - The company's liquidity remains strong, with cash and investments totaling $696.5 million[124] - The decrease from the prior year-end was mainly due to a $350.0 million debt prepayment and $290.0 million in stock repurchases, offset by $463.6 million in cash from operations[124] Quantitative and Qualitative Disclosures About Market Risk The company identifies interest rate, inflation, and foreign currency as primary market risks, with no material changes noted and most transactions in U.S. dollars - Interest Rate Risk: A sharp rise in market interest rates could adversely impact the fair value of the company's fixed income investment portfolio[135] - Inflation Risk: While being monitored, inflation has not had a material effect[136] - However, significant inflationary pressure could increase costs, and a constrained customer spending environment could harm business[136] - 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[137] Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the quarter - Based on an evaluation as of June 30, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[140] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[141] PART II. OTHER INFORMATION Legal Proceedings The company is involved in a legal dispute with Lynwood Investment CY Limited over NGINX software, where F5 won dismissal and attorneys' fees, both of which Lynwood has appealed - In the case of Lynwood Investment CY Limited v. F5, the court granted F5's motion to dismiss without leave to amend on August 16, 2022, and entered final judgment against Lynwood[82] - Lynwood has appealed this decision to the Ninth Circuit Court of Appeals[82] - The court subsequently granted F5 attorneys' fees of over $0.8 million, which Lynwood has also appealed[83] Risk Factors Adverse macroeconomic conditions, including inflation and supply chain disruptions, continue to soften customer demand, impacting business, revenues, and profitability - Adverse global macroeconomic conditions have softened customer demand and purchase decisions, which may limit the company's ability to forecast future business activities[144] - Continued worsening of macroeconomic conditions could adversely affect business through softer demand for products and services, as well as unfavorable increases to operating costs, which could negatively impact profitability[144] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased approximately 1.8 million shares for $250 million in Q3 2023, with $982 million remaining authorized under its common stock repurchase program - On July 25, 2022, the Board of Directors authorized an additional $1.0 billion for the common stock share repurchase program[145] - As of June 30, 2023, $982 million remained available for repurchase[145] Share Repurchases for Q3 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2023 | 76,271 | $131.13 | | May 2023 | 1,611,454 | $137.48 | | June 2023 | 135,811 | $147.50 | Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[148] Other Information Two company executives adopted Rule 10b5-1 trading plans for future share sales during Q3 2023 - On May 1, 2023, Scot Rogers, EVP, General Counsel, adopted a Rule 10b5-1 plan for the sale of 4,500 shares[149] - On May 1, 2023, Chad Whalen, EVP, Worldwide Sales, adopted a Rule 10b5-1 plan for the sale of 5,585 shares[150] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - Exhibits filed include Certifications Pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002, and various XBRL data files[151]