F5 Networks, Inc. (NASDAQ: FFIV) today announced revenue of $518.2 million for the second quarter of fiscal 2017, up 7.1% from $483.7 million in the second quarter of fiscal 2016. Growth compared with the second quarter of fiscal 2016 was driven by solid execution in the Americas and strong sales of security solutions. Partially offsetting these positive trends was continued soft demand in Europe.

GAAP net income for the second quarter of fiscal 2017 was $93.1 million, or $1.43 per diluted share, compared to $75.4 million, or $1.11 per diluted share in the second quarter of 2016. Non-GAAP net income for the second quarter of fiscal 2017 was $127.0 million, or $1.95 per diluted share, compared to $114.0 million, or $1.68 per diluted share in the second quarter of fiscal 2016.

A reconciliation of net income, earnings per share, and other measures on a GAAP to non-GAAP basis is included on the attached Consolidated Income Statements.

In the just completed quarter, several new products were introduced including 40-Gigabit BIG-IP virtual editions, Herculon SSL Orchestrator and Herculon DDoS Hybrid Defender purpose-built security products, as well as the latest version of our BIG-IP operating system, TMOS 13.0. BIG-IP iSeries products continue to be well received by customers with adoption trends tracking in line with past major product refresh cycles. The BIG-IP iSeries appliance family was architected to offer massive performance and scalability across the entire line, and these programmable, software-defined hardware platforms include features designed to simplify private cloud deployments and hybrid cloud build-outs.

Several new products scheduled to begin shipping in the current quarter are designed to help enable customers to deploy their applications across a variety of cloud environments. These solutions include Application Connector 1.0 for connecting public and private cloud application infrastructures, support for BIG-IP in the Google Public Cloud, and Container Connector and Application Services Proxy for microservices environments.

“My early internal and external interactions have reinforced my enthusiasm for joining the F5 team and my view that the company offers a compelling platform for growth,” said François Locoh-Donou, F5 President and Chief Executive Officer. “I am excited by the new products and services we continue to bring to market and I look forward to actively engaging with our customers and key strategic partners around these offerings.

“With a strong culture of technology innovation and a solid financial foundation, F5 is uniquely positioned to address our customers' evolving demands around securing and optimizing performance of their mission-critical business applications.”

For the third quarter of fiscal 2017, ending June 30, the company has set a revenue goal of $520 million to $530 million with a GAAP earnings target of $1.47 to $1.50 per diluted share and a non-GAAP earnings target of $2.01 to $2.04 per diluted share.

A reconciliation of the company’s expected GAAP and non-GAAP earnings is provided in the following table:

     
Three months ended
June 30, 2017
 
Reconciliation of Expected Non-GAAP Third Quarter Earnings Low     High
Net income $ 94.8 $ 96.8
Stock-based compensation expense $ 44.0 $ 44.0
Amortization of purchased intangible assets $ 2.8 $ 2.8
Tax effects related to above items $ (12.1 ) $ (12.1 )
Non-GAAP net income excluding stock-based compensation expense and amortization of purchased intangible assets $ 129.5   $ 131.5  
Net income per share - diluted $ 1.47   $ 1.50  
Non-GAAP net income per share - diluted $ 2.01   $ 2.04  
 

Forward-Looking Statements

This press release contains forward-looking statements including, among other things, statements regarding the continuing strength and momentum of F5's business, future financial performance, sequential growth, projected revenues including target revenue and earnings ranges, income, earnings per share, share amount and share price assumptions, demand for application delivery networking, application delivery services, security, virtualization and diameter products, expectations regarding future services and products, expectations regarding future customers, markets and the benefits of products, and other statements that are not historical facts and which are forward-looking statements. These forward-looking statements are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. Such forward-looking statements involve risks and uncertainties, as well as assumptions and other factors that, if they do not fully materialize or prove correct, could cause the actual results, performance or achievements of the company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: customer acceptance of our new traffic management, security, application delivery, optimization, diameter and virtualization offerings; the timely development, introduction and acceptance of additional new products and features by F5 or its competitors; competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors into F5’s markets, and new product and marketing initiatives by our competitors; increased sales discounts; uncertain global economic conditions which may result in reduced customer demand for our products and services and changes in customer payment patterns; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; litigation involving patents, intellectual property, shareholder and other matters, and governmental investigations; natural catastrophic events; a pandemic or epidemic; F5's ability to sustain, develop and effectively utilize distribution relationships; F5's ability to attract, train and retain qualified product development, marketing, sales, professional services and customer support personnel; F5's ability to expand in international markets; the unpredictability of F5's sales cycle; F5’s share repurchase program; future prices of F5's common stock; and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission, including our most recent reports on Form 10-K and Form 10-Q and current reports on Form 8-K that we may file from time to time, which could cause actual results to vary from expectations. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in F5’s most recent reports on Forms 10-Q and 10-K as each may be amended from time to time. All forward-looking statements in this press release are based on information available as of the date hereof and qualified in their entirety by this cautionary statement. F5 assumes no obligation to revise or update these forward-looking statements.

GAAP to non-GAAP Reconciliation

F5’s management evaluates and makes operating decisions using various operating measures. These measures are generally based on the revenues of its products, services operations and certain costs of those operations, such as cost of revenues, research and development, sales and marketing and general and administrative expenses. One such measure is net income excluding stock-based compensation, amortization of purchased intangible assets and acquisition-related charges, net of taxes, which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended. This measure consists of GAAP net income excluding, as applicable, stock-based compensation, amortization of purchased intangible assets and acquisition-related charges. This measure of non-GAAP net income is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company’s tax liability. Stock-based compensation is a non-cash expense that F5 has accounted for since July 1, 2005 in accordance with the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 Compensation—Stock Compensation (“FASB ASC Topic 718”). Amortization of intangible assets is a non-cash expense. Investors should note that the use of intangible assets contribute to revenues earned during the periods presented and will contribute to revenues in future periods. Acquisition-related expenses consist of professional services fees incurred in connection with acquisitions. In addition, expense related to a jury verdict and other associated costs of that patent litigation have been excluded from GAAP net income for the purpose of measuring non-GAAP earnings and earnings per share in fiscal 2016 and 2017.

Management believes that non-GAAP net income per share provides useful supplemental information to management and investors regarding the performance of the company’s core business operations and facilitates comparisons to the company’s historical operating results. Although F5’s management finds this non-GAAP measure to be useful in evaluating the performance of the core business, management’s reliance on this measure is limited because items excluded from such measures could have a material effect on F5’s earnings and earnings per share calculated in accordance with GAAP. Therefore, F5’s management will use its non-GAAP earnings and earnings per share measures, in conjunction with GAAP earnings and earnings per share measures, to address these limitations when evaluating the performance of the company’s core business. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures in accordance with GAAP.

F5 believes that presenting its non-GAAP measure of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company’s core business and which management uses in its own evaluation of the company’s performance. Investors are encouraged to look at GAAP results as the best measure of financial performance. However, while the GAAP results are more complete, the company provides investors this supplemental measure since, with reconciliation to GAAP, it may provide additional insight into the company’s operational performance and financial results.

For reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure, please see the section in our Consolidated Income Statements entitled “Non-GAAP Financial Measures.”

About F5

F5 (NASDAQ: FFIV) makes apps go faster, smarter, and safer for the world’s largest businesses, service providers, governments, and consumer brands. F5 delivers cloud and security solutions that enable organizations to embrace the application infrastructure they choose without sacrificing speed and control. For more information, go to f5.com. You can also follow @f5networks on Twitter or visit us on LinkedIn and Facebook for more information about F5, its partners, and technologies.

 
F5 Networks, Inc.
Consolidated Balance Sheets
(unaudited, in thousands)
 
      March 31,     September 30,
2017 2016
ASSETS
Current assets
Cash and cash equivalents $ 655,773 $ 514,571
Short-term investments 358,851 367,824
Accounts receivable, net of allowances of $2,005 and $2,062 293,872 268,175
Inventories 32,548 34,051
Deferred tax assets 52,777 51,601
Other current assets 51,022   52,579  
Total current assets 1,444,843   1,288,801  
Property and equipment, net 126,705 123,248
Long-term investments 200,253 276,375
Deferred tax assets 1,992 2,044
Goodwill 555,965 555,965
Other assets, net 58,159   59,890  
Total assets $ 2,387,917   $ 2,306,323  
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 47,289 $ 34,117
Accrued liabilities 184,234 178,353
Deferred revenue 684,495   631,768  
Total current liabilities 916,018   844,238  
Other long-term liabilities 37,051 34,138
Deferred revenue, long-term 245,094 238,473
Deferred tax liabilities 5,149   4,212  
Total long-term liabilities 287,294   276,823  
Commitments and contingencies
Shareholders’ equity
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding — —
Common stock, no par value; 200,000 shares authorized, 64,111 and 65,315 shares issued and outstanding 19,401 13,191
Accumulated other comprehensive loss (15,469 ) (13,194 )
Retained earnings 1,180,673   1,185,265  
Total shareholders’ equity 1,184,605   1,185,262  
Total liabilities and shareholders’ equity $ 2,387,917   $ 2,306,323  
 
 
F5 Networks, Inc.
Consolidated Income Statements
(unaudited, in thousands, except per share amounts)
 
      Three Months Ended     Six Months Ended
March 31, March 31,
2017     2016 2017     2016
Net revenues
Products $ 241,080 $ 225,441 $ 480,563 $ 460,119
Services 277,168   258,236   553,643   513,044  
Total 518,248   483,677   1,034,206   973,163  
Cost of net revenues (1)(2)
Products 43,928 39,908 85,604 82,559
Services 43,984   42,322   87,570   85,354  
Total 87,912   82,230   173,174   167,913  
Gross profit 430,336   401,447   861,032   805,250  
Operating expenses (1)(2)
Sales and marketing 164,705 156,469 329,219 313,925
Research and development 89,234 86,294 176,284 167,439
General and administrative 38,009 34,803 79,687 69,056
Litigation expense (135 ) 8,948   (135 ) 8,948  
Total 291,813   286,514   585,055   559,368  
Income from operations 138,523 114,933 275,977 245,882
Other income, net 1,302   133   3,945   1,268  
Income before income taxes 139,825 115,066 279,922 247,150
Provision for income taxes 46,687   39,651   92,566   82,019  
Net income $ 93,138   $ 75,415   $ 187,356   $ 165,131  
 
Net income per share — basic $ 1.44   $ 1.12   $ 2.89   $ 2.41  
Weighted average shares — basic 64,479   67,549   64,841   68,557  
 
Net income per share — diluted $ 1.43   $ 1.11   $ 2.87   $ 2.40  
Weighted average shares — diluted 65,028   67,804   65,389   68,881  
 
Non-GAAP Financial Measures
Net income as reported $ 93,138 $ 75,415 $ 187,356 $ 165,131
Stock-based compensation expense (3) 43,895 41,773 90,506 80,006
Amortization of purchased intangible assets 3,292 3,519 6,695 6,922
Litigation expense (135 ) 8,948 (135 ) 8,948
Tax effects related to above items (13,184 ) (15,649 ) (27,150 ) (26,437 )
Net income excluding stock-based compensation expense, amortization of purchased intangible assets and litigation expense (non-GAAP) - diluted $ 127,006   $ 114,006   $ 257,272   $ 234,570  
 
Net income per share excluding stock-based compensation expense, amortization of purchased intangible assets and litigation expense (non-GAAP) - diluted $ 1.95   $ 1.68   $ 3.93   $ 3.41  
 
Weighted average shares - diluted 65,028   67,804   65,389   68,881  
 
(1) Includes stock-based compensation expense as follows:
Cost of net revenues $ 5,554 $ 4,851 $ 10,771 $ 9,286
Sales and marketing 18,110 15,957 35,160 30,832
Research and development 13,884 13,784 27,816 26,614
General and administrative 6,347   7,181   16,759   13,274  
$ 43,895   $ 41,773   $ 90,506   $ 80,006  
 
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues $ 2,532 $ 2,666 $ 5,317 $ 5,333
Sales and marketing 251 487 503 973
General and administrative 509   366   875   616  
$ 3,292   $ 3,519   $ 6,695   $ 6,922  
 
(3) Stock-based compensation is accounted for in accordance with the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation (“FASB ASC Topic 718”)
 
 
F5 Networks, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
      Six Months Ended
March 31,
2017     2016
Operating activities
Net income $ 187,356 $ 165,131
Adjustments to reconcile net income to net cash provided by operating activities:
Realized (gain) loss on disposition of assets and investments (7 ) 31
Stock-based compensation 90,506 80,006
Provisions for doubtful accounts and sales returns 455 522
Depreciation and amortization 30,278 27,847
Deferred income taxes (214 ) 7,424
Changes in operating assets and liabilities:
Accounts receivable (26,152 ) 12,726
Inventories 1,504 (1,462 )
Other current assets 1,449 (16,302 )
Other assets (942 ) (126 )
Accounts payable and accrued liabilities 21,072 1,844
Deferred revenue 59,347   59,348  
Net cash provided by operating activities 364,652   336,989  
Investing activities
Purchases of investments (146,236 ) (138,925 )
Maturities of investments 187,660 173,165
Sales of investments 40,737 47,742
(Increase) decrease in restricted cash (36 ) 8
Acquisition of intangible assets (4,000 ) (3,250 )
Purchases of property and equipment (23,715 ) (29,793 )
Net cash provided by investing activities 54,410   48,947  
Financing activities
Excess tax benefit from stock-based compensation 5,239 1,378
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan 18,868 18,594
Repurchase of common stock (300,042 ) (400,077 )
Net cash used in financing activities (275,935 ) (380,105 )
Net increase in cash and cash equivalents 143,127 5,831
Effect of exchange rate changes on cash and cash equivalents (1,925 ) 2,034
Cash and cash equivalents, beginning of period 514,571   390,460  
Cash and cash equivalents, end of period $ 655,773   $ 398,325