10-Q/APeriod: Q1 FY2006

F5, INC. Quarterly Report (Amendment) for Q1 Ended Dec 31, 2005

Filed December 13, 2006For Securities:FFIV

Summary

F5 Networks, Inc. (FFIV) reported strong revenue growth in the quarter ended December 31, 2005, with total net revenues increasing by 46.8% year-over-year to $88.1 million. This growth was driven by robust performance in both product and service revenues, indicating increasing demand for their application delivery networking solutions. The company also reported a significant improvement in net income, rising to $15.2 million from $8.3 million in the prior year's comparable quarter, alongside substantial growth in earnings per share. However, a significant development is the ongoing investigation into the company's stock option practices, which led to the restatement of previously issued financial statements. This restatement primarily impacted historical stock-based compensation expense and resulted in a cumulative reduction of net income of approximately $23.5 million from 1999 through 2005. While the company has implemented remedial measures and believes its current management is acting with integrity, this issue introduces a degree of uncertainty and underscores the importance of strong internal controls.

Key Highlights

  • 1Total net revenues grew 46.8% to $88.1 million for the quarter ended December 31, 2005, compared to $60.0 million in the prior year.
  • 2Net income increased significantly to $15.2 million, or $0.37 per diluted share, from $8.3 million, or $0.22 per diluted share, in the same period last year.
  • 3The company acquired Swan Labs, Inc. for $46.2 million to expand into the WAN optimization market.
  • 4A material weakness in internal controls related to stock-based compensation was identified, leading to a restatement of financial statements for periods from 1999 through 2005.
  • 5Stock-based compensation expense was increased by approximately $24.1 million due to the restatement of stock option grants.
  • 6Despite the restatement, the company's cash and investments remained strong, totaling $372.7 million as of December 31, 2005.
  • 7The company successfully appealed a delisting determination from Nasdaq and secured continued listing, subject to certain conditions.

Frequently Asked Questions

The primary driver of revenue growth was increased demand for F5's application delivery networking products, particularly the BIG-IP product line, along with higher service revenues resulting from a larger installed product base. Product revenues grew 47.8% and service revenues grew 43.2% year-over-year.

The stock option accounting restatement, announced in July 2006 and detailed in this filing, indicates that previously issued financial statements contained material misstatements primarily related to stock-based compensation expense due to improper grant dates and accounting treatment. This resulted in a cumulative reduction of net income of approximately $23.5 million from 1999-2005. While F5 has implemented remedial measures, this highlights a past material weakness in internal controls over financial reporting and introduces potential ongoing scrutiny.

The acquisition of Swan Labs for $46.2 million in October 2005 expanded F5's product portfolio into the WAN optimization and application acceleration market. Its results are included in the financial statements from the acquisition date, contributing to revenue and assets, and has resulted in the recognition of $32.0 million in goodwill.

F5 Networks maintains a strong liquidity position. As of December 31, 2005, the company had $372.7 million in cash, cash equivalents, and investments, and no long-term debt. Operating activities generated $34.5 million in cash flow for the quarter, and the company continues to evaluate strategic acquisitions.