10-QPeriod: Q2 FY2016

F5, INC. Quarterly Report for Q2 Ended Mar 31, 2016

Filed April 27, 2016For Securities:FFIV

Summary

F5 Networks, Inc. reported steady overall revenue growth for the third quarter of fiscal year 2016, driven primarily by a significant increase in service revenues, which offset a decline in product revenues. This shift in revenue mix indicates a growing reliance on recurring revenue streams from maintenance and support contracts, likely due to an expanding installed base. While total revenue saw a modest increase, profitability per share saw a slight decrease compared to the prior year, partly influenced by increased operating expenses, particularly in research and development and sales and marketing, and a notable litigation expense. The company's balance sheet remains strong with substantial cash and investments, though it was impacted by a significant stock repurchase program. The company's liquidity is considered sufficient for the next twelve months. Investors should note the ongoing shift towards services revenue and the company's commitment to innovation through increased R&D spending, alongside careful management of operating expenses. The significant ongoing legal proceeding with Radware presents a notable risk factor and potential financial impact.

Financial Highlights

49 data points
Beta

Revenue

$483.68M

83.0% Gross Margin

Net Income

$75.42M

15.6% Net Margin

EPS (Diluted)

$1.11

Total Assets

$2.24B

Cash & Equivalents

$398.32M

Free Cash Flow

$116.62M

Financial Statements
Beta
Revenue$483.68M
Cost of Revenue$82.23M
Gross Profit$401.45M
R&D Expenses$86.29M
Operating Expenses$286.51M
Operating Income$114.93M
Net Income$75.42M
EPS (Basic)$1.12
EPS (Diluted)$1.11
Shares Outstanding (Basic)67.55M
Shares Outstanding (Diluted)67.80M

Key Highlights

  • 1Total net revenues increased by 2.4% to $483.7 million for the three months ended March 31, 2016, compared to the prior year period.
  • 2Service revenues increased by 13.2% to $258.2 million, while product revenues decreased by 7.7% to $225.4 million, indicating a shift towards a services-heavy revenue model.
  • 3Gross profit increased to $401.4 million, with a gross margin of 83.0%, showing improved profitability on sales.
  • 4Operating expenses increased by 17.1% to $286.5 million, driven by higher spending in Sales and Marketing, R&D, and General and Administrative costs, as well as a $8.9 million litigation expense.
  • 5Net income decreased to $75.4 million from $85.7 million in the prior year's comparable quarter.
  • 6Diluted EPS decreased to $1.11 from $1.18 in the prior year's comparable quarter.
  • 7The company repurchased $400.1 million of its common stock during the six months ended March 31, 2016, significantly impacting its cash reserves.

Frequently Asked Questions

The primary driver of revenue growth was a substantial increase in service revenues, which rose by 13.2%. This was largely attributed to increased purchases and renewals of maintenance contracts, reflecting growth in the company's installed base of products.

Net product revenues saw a decrease of 7.7%, primarily due to a reduction in sales of the company's Application Delivery Networking (ADN) products. This decline in product sales was partially offset by growth in services revenue.

The company recorded a litigation expense of $8.9 million in the current quarter related to a patent infringement lawsuit with Radware. This expense negatively impacted net income and diluted earnings per share for the period.

The company's cash and investments decreased by $77.7 million during the first six months of fiscal year 2016. The primary use of cash was the repurchase of common stock under the company's stock repurchase program, which amounted to $400.1 million. This outflow was partially offset by cash generated from operating activities.