01—Abstract
Summary
Summary of the 10-K filed November 20, 2009. Cited figures are marked; the original filing is the authoritative source.
F5 Networks (FFIV) closed fiscal 2009 (year ended September 30, 2009) with essentially flat total net revenue of $653.1 milliona, up only about 0.4% from $650.2 million in fiscal 2008, after 23.7% growth the prior year.
The mix shifted sharply: product revenue fell 10.2% to $406.5 millionb on lower Application Delivery Networking (ADN) unit volume, while services revenue rose 25.0% to $246.6 million, driven by growth in the installed base of maintenance contracts. Gross margin improved to 78.1% from 77.1%, and operating expenses fell 3.4% to $388.4 million after a Q2 restructuring program that included $4.3 million in charges and a workforce reduction. Operating income rose 22.8% to $121.9 million, and net income increased 23.2% to $91.5 million, or $1.14 per diluted share, helped by share repurchases that reduced the diluted share count.
The balance sheet and cash flow remain strong. Operating cash flow was $202.0 millionc, the company carries no long-term debt, and cash plus cash equivalents and investments totaled $574.4 million at year-end. Management repurchased $87.4 million of stock during the year, with $106.0 million remaining under the $200 million authorization as of November 18, 2009.
Key risks include roughly $40.1 milliond of auction rate securities that remain illiquid (about $53.4 million par value failed at auction), dependence on a single contract manufacturer for ADN hardware, concentration in distributors (Avnet at 15.4% of revenue), and ongoing SEC and Department of Justice informal inquiries and derivative litigation tied to historical stock option practices. For investors, the central question is whether the product slowdown is cyclical or structural.
Management guided to a mid-50-day DSO and expects research and development spending to remain stable as a percentage of revenue. The 10-K also shows stock-based compensation of $56.1 million and $82.5 million of unrecognized compensation cost, both of which are material relative to operating income.
02—Key points
Key Highlights
- Total net revenue was flat at $653.1M (vs. $650.2M in FY2008), with product revenue down 10.2% to $406.5M and services revenue up 25.0% to $246.6M.
- Gross margin expanded to 78.1% from 77.1%, reflecting higher-margin services mix and scalable customer support infrastructure.
- Operating income rose 22.8% to $121.9M after a comprehensive restructuring in Q2 FY2009 (including $4.3M of charges) and a 3.4% decline in total operating expenses.
- Net income was $91.5M ($1.14 diluted EPS), up 23.2%, while the effective tax rate fell to 30.5% from 37.1%.
- The balance sheet remains strong, with no long-term debt, $574.4M in cash and investments, and $202.0M of operating cash flow.
- The company repurchased $87.4M of stock in FY2009 under a $200M authorization, with $106.0M still available as of November 18, 2009.
- Risks include $40.1M of illiquid auction rate securities, single-source contract manufacturing for ADN hardware, distributor concentration (Avnet at 15.4% of revenue), and pending SEC/DOJ inquiries and derivative suits related to historical stock option practices.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, F5, Inc. kept $0.14.
- Revenue$653.1M100.0%
- Cost of revenue−$142.7M21.9%
- Gross profit$510.4M78.1%
- Operating costs−$388.4M59.5%
- Operating income$121.9M18.7%
- Interest, other & tax−$30.4M4.7%
- Net income$91.5M14.0%
Where FY2009 revenue went
$653.1M- Other operating costs: $284.8M, 44% of revenue
- Cost of revenue: $142.7M, 22% of revenue
- R&D: $103.7M, 16% of revenue
- Net income: $91.5M, 14% of revenue
- Interest, other & tax: $30.4M, 4.7% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed November 20, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $653.08M$650.17M | +0.4% |
| Cost of Revenue | $142.73M$149.02M | −4.2% |
| Gross Profit | $510.35M$501.15M | +1.8% |
| R&D Expenses | $103.66M$103.39M | +0.3% |
| Operating Expenses | $388.43M$401.84M | −3.3% |
| Operating Income | $121.92M$99.31M | +22.8% |
| Net Income | $91.53M$74.33M | +23.1% |
| EPS (Basic) | $1.16$0.90 | +28.9% |
| EPS (Diluted) | $1.14$0.89 | +28.1% |
| Shares Outstanding (Basic) | 78.84M82.29M | −4.2% |
| Shares Outstanding (Diluted) | 80.07M83.43M | −4.0% |
05—Questions
Frequently Asked Questions
Why did F5's total revenue stay flat in fiscal 2009 after strong growth the prior year?
Product revenue fell 10.2% to $406.5M, mainly because of a $36.1M decline in ADN product unit volume, a $5.4M decline in ARX file virtualization sales, and a $4.9M decline in FirePass sales. Management attributed the slowdown to the economic environment. Services revenue grew 25.0% to $246.6M, offsetting most of the product decline as the installed base of maintenance contracts expanded.
How did F5 maintain profitability despite flat revenue?
Gross margin rose to 78.1% from 77.1%, and total operating expenses fell 3.4% to $388.4M. Sales and marketing expense fell 5.1%, reflecting cost reduction initiatives and lower commissions. The Q2 FY2009 restructuring reduced headcount and consolidated facilities. Operating income still increased 22.8% to $121.9M.
What is the risk associated with F5's auction rate securities?
F5 held about $40.1M of fair value in municipal ARS at September 30, 2009. About $53.4M par value of these securities has failed auctions since February 2008, so the funds are not accessible until the issuer calls the securities, a successful auction occurs, or the securities mature. The company holds a UBS put option covering $26.1M par value exercisable from June 30, 2010 through July 2, 2012. Management believes the securities are backed by government-guaranteed student loans and that it will hold them until recovery, but it may record impairment charges if issuer credit ratings decline.
What are the main concentration risks for F5 investors?
Avnet Technology Solutions accounted for 15.4% of FY2009 total revenue and 11.6% of accounts receivable, and Ingram Micro accounted for 10.7% of receivables. Hardware for ADN products is manufactured by a single contract manufacturer (Flextronics) without a long-term contract, and several components come from single or limited sources. International sales were 44.7% of net revenue, with Japan representing 8.7% of total revenue.
What legal and regulatory issues remain unresolved?
F5 faces derivative lawsuits filed beginning in May 2006 that allege directors and officers manipulated stock option grant dates. The company is named as a nominal defendant, and its motion to dismiss the federal action remains pending. The SEC and the Department of Justice conducted informal inquiries into historical stock option practices, and F5 has cooperated fully. Management does not believe any pending matter will have a material adverse effect, but future regulatory action could include penalties.
06—Continue