10-QPeriod: Q1 FY2009

F5, INC. Quarterly Report for Q1 Ended Dec 31, 2008

Filed February 6, 2009For Securities:FFIV

Summary

F5 Networks, Inc. reported its results for the quarter ended December 31, 2008, showcasing revenue growth driven by its services segment, which offset a slight decline in product revenue. Total net revenues increased by 7.4% year-over-year to $165.6 million. The company maintained strong gross margins at 78.2%, while operating expenses also saw an increase, primarily in research and development and general and administrative costs. Net income rose to $21.4 million, or $0.27 per diluted share, from $17.8 million, or $0.21 per diluted share, in the prior year's comparable quarter. Financially, F5 Networks maintained a strong balance sheet with total assets of $986.4 million and significant liquidity, including $122.3 million in cash and cash equivalents and $156.2 million in short-term investments. The company also held substantial long-term investments totaling $209 million. Despite the challenging economic environment, the company generated healthy operating cash flow of $57.9 million. Management indicated confidence in its ability to meet operating requirements with existing cash and future operating cash flow, even with a recently increased stock repurchase program.

Key Highlights

  • 1Total net revenues increased 7.4% to $165.6 million, driven by a 31.1% surge in service revenues, which compensated for a 2.1% dip in product revenues.
  • 2Gross profit increased to $129.5 million, with gross margin improving to 78.2% from 77.1% in the prior year.
  • 3Net income grew to $21.4 million ($0.27 per diluted share) from $17.8 million ($0.21 per diluted share) in the comparable quarter of the previous year.
  • 4Operating cash flow remained robust, totaling $57.9 million, reflecting strong operational performance.
  • 5The company's liquidity position is solid, with cash and equivalents and short-term investments totaling $278.5 million as of December 31, 2008.
  • 6International sales constituted 46.0% of total net revenues, indicating a significant global presence.
  • 7The company is actively repurchasing shares, having spent $20.0 million on stock buybacks in the quarter.

Frequently Asked Questions

F5 Networks reported total net revenues of $165.6 million for the quarter ended December 31, 2008, an increase of 7.4% compared to $154.2 million in the same period of the prior year. This growth was primarily driven by a significant increase in service revenues, which rose by 31.1%, partially offsetting a 2.1% decrease in product revenues.

As of December 31, 2008, F5 Networks had $122.3 million in cash and cash equivalents and $156.2 million in short-term investments, totaling $278.5 million. The company generated $57.9 million in cash from operating activities during the quarter. Management stated that its existing cash and investment balances, excluding auction rate securities, are expected to be sufficient to meet operating requirements. The company also repurchased $20.0 million of its common stock during the quarter.

The report highlights several risks, including the rapid pace of technological change in its markets, intense competition, the unpredictability of its quarterly operating results due to a lengthy sales cycle, potential decreases in average selling prices, and reliance on contract manufacturers. A significant concern mentioned is the illiquidity of its Auction Rate Securities (ARS), with approximately $53.4 million in par value experiencing auction failures, leading to classification as long-term investments due to concerns about liquidation within twelve months. The company also notes potential impacts from adverse general economic conditions and reduced IT spending.

F5 Networks accounts for stock-based compensation under FAS 123R, recognizing compensation expense using the straight-line attribution method. For the three months ended December 31, 2008, the company recognized $14.9 million in stock-based compensation expense. As of December 31, 2008, there was $66.9 million of unrecognized stock-based compensation cost expected to be recognized over the next two years. The company also noted performance-based RSUs for executive officers tied to revenue growth targets.