How strong was F5's revenue and profit growth in fiscal 2005?

Revenue grew 64% to $281.4 million and operating income nearly tripled to $71.9 million from $26.3 million. Diluted EPS rose to $1.34 from $0.92. Growth was driven primarily by product revenue, which rose 74%, while services grew 37%.

Is F5's net income growth a reliable indicator of operating performance?

Only partially. Fiscal 2004 net income was boosted by a large deferred tax valuation allowance reversal, which resulted in a tax benefit. Fiscal 2005 net income includes a normal tax provision of $28.2 million, so the year-over-year comparison is distorted. Operating income growth of about 173% is a cleaner measure of the business's improvement.

What is F5's financial position and liquidity at year-end?

F5 had about $365 million in cash and investments, including $51.9 million in cash, $184.3 million in short-term investments, and $128.8 million in long-term investments. It had no debt, and shareholders' equity rose to $464.2 million. Operating cash flow of $85.0 million comfortably funded $9.3 million in capital expenditures and $2.3 million in intangible acquisitions.

What risks should investors note from this filing?

Key risks include a pending IPO securities class action, which the company says could have a material adverse effect if the settlement does not proceed; customer concentration, with one domestic distributor providing 18.6% of revenue; and a 84% increase in receivables, which may warrant monitoring of collections. The filing also highlights competitive pricing pressure and the need to keep pace with technological change.

What did F5 disclose about recent or upcoming corporate developments?

In October 2005, F5 acquired Swan Labs, Inc., a WAN optimization and application acceleration company, for $43.0 million in cash plus $3.2 million in transaction costs, totaling about $46.2 million. The company said the acquisition would let it quickly enter the WAN optimization market and broaden its product line and customer base. It also adopted SFAS 123(R) for stock-based compensation, with $32.7 million of unrecognized cost to be recognized over about two years.

FFIV 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed December 15, 2005. Cited figures are marked; the original filing is the authoritative source.

F5 Networks (FFIV) closed fiscal 2005 (year ended September 30, 2005) with a strong year of growth and profitability.

Net revenues rose 64% to $281.4 million^a from $171.2 million in fiscal 2004, and products revenue grew 74% to $219.6 million while services grew 37% to $61.8 million. Gross margin held at roughly 77% (216.3 / 281.4), and operating income more than doubled to $71.9 million from $26.3 million, reflecting strong operating leverage as operating expenses grew 37%. Net income reached $51.7 million, or $1.34 per diluted share, versus $33.0 million ($0.92) a year earlier.

Part of the net income increase was helped by a $32.3 million^b tax benefit from employee stock transactions, which is recorded in equity rather than the income statement, and by a valuation allowance reversal that benefited the prior year more heavily, so investors should look at operating income as the cleaner indicator of performance. The balance sheet strengthened considerably. Cash, short-term and long-term investments combined totaled roughly $365 million at September 30, 2005 (cash $51.9M, short-term investments $184.3M, long-term investments $128.8M), and shareholders' equity rose to $464.2 million from $307.6 million.

Operating cash flow was $85.0 million^c, well above net income, supported by deferred revenue growth and stock option tax benefits. Accounts receivable increased 84% to $41.7 million, which outpaced revenue growth and warrants monitoring of collections, and one domestic distributor represented 18.6% of total revenue and 26.2% of receivables. The company also disclosed a pending securities class action (IPO allocation litigation) that is subject to court approval of a settlement, and a subsequent event: the October 2005 acquisition of Swan Labs for approximately $46.2 million, intended to enter the WAN optimization market.

The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on both the financial statements and internal control over financial reporting as of September 30, 2005. Management also adopted SFAS 123(R) early in the fourth quarter, recognizing $4.6 million^d of stock-based compensation, with $32.7 million of unrecognized compensation cost remaining to be expensed over roughly two years. Overall, the filing portrays a rapidly growing, highly profitable company with a conservative balance sheet, with the key watch items being receivables growth, customer concentration with a single distributor, and the outcome of the securities litigation.

02—Key points

Key Highlights

Net revenues grew 64% year over year to $281.4 million, with products up 74% to $219.6 million and services up 37% to $61.8 million.
Operating income increased to $71.9 million from $26.3 million, and gross margin remained strong at approximately 77%.
Net income rose to $51.7 million, or $1.34 per diluted share, compared with $33.0 million, or $0.92, in fiscal 2004; the tax benefit from employee stock transactions boosted equity, not net income.
Operating cash flow of $85.0 million, roughly 64% above net income, reflecting deferred revenue growth and stock option tax benefits.
Total cash and investments of about $365 million at fiscal year-end, with shareholders' equity increasing to $464.2 million from $307.6 million.
Accounts receivable rose 84% to $41.7 million, and one domestic distributor accounted for 18.6% of revenue and 26.2% of receivables, a concentration risk.
Subsequent to year-end, F5 acquired Swan Labs for about $46.2 million to enter the WAN optimization market, and a securities class action over its IPO remains pending settlement approval.

03—Questions

Frequently Asked Questions

How strong was F5's revenue and profit growth in fiscal 2005?
Revenue grew 64% to $281.4 million and operating income nearly tripled to $71.9 million from $26.3 million. Diluted EPS rose to $1.34 from $0.92. Growth was driven primarily by product revenue, which rose 74%, while services grew 37%.
Is F5's net income growth a reliable indicator of operating performance?
Only partially. Fiscal 2004 net income was boosted by a large deferred tax valuation allowance reversal, which resulted in a tax benefit. Fiscal 2005 net income includes a normal tax provision of $28.2 million, so the year-over-year comparison is distorted. Operating income growth of about 173% is a cleaner measure of the business's improvement.
What is F5's financial position and liquidity at year-end?
F5 had about $365 million in cash and investments, including $51.9 million in cash, $184.3 million in short-term investments, and $128.8 million in long-term investments. It had no debt, and shareholders' equity rose to $464.2 million. Operating cash flow of $85.0 million comfortably funded $9.3 million in capital expenditures and $2.3 million in intangible acquisitions.
What risks should investors note from this filing?
Key risks include a pending IPO securities class action, which the company says could have a material adverse effect if the settlement does not proceed; customer concentration, with one domestic distributor providing 18.6% of revenue; and a 84% increase in receivables, which may warrant monitoring of collections. The filing also highlights competitive pricing pressure and the need to keep pace with technological change.
What did F5 disclose about recent or upcoming corporate developments?
In October 2005, F5 acquired Swan Labs, Inc., a WAN optimization and application acceleration company, for $43.0 million in cash plus $3.2 million in transaction costs, totaling about $46.2 million. The company said the acquisition would let it quickly enter the WAN optimization market and broaden its product line and customer base. It also adopted SFAS 123(R) for stock-based compensation, with $32.7 million of unrecognized cost to be recognized over about two years.

04—Continue

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