F5 Networks Announces Third Quarter Fiscal Year 2019 Results Including 91% Software Revenue Growth

F5 Networks, Inc. (NASDAQ: FFIV) today announced financial results for its fiscal year 2019 third quarter ended June 30, 2019. Third quarter fiscal year 2019 results include the acquisition of NGINX, Inc., completed on May 8, 2019.

“The quarter’s 4% total revenue growth and 91% software growth was driven by customer demand for the software form factors of our application services, as customers globally rely on F5 to provide consistent application security and reliable performance across private, public and multi-cloud environments,” said François Locoh-Donou, F5 President and Chief Executive Officer. “With customers facing an ever-increasing array of threats, our software growth continues to be driven by security use cases, including web application firewall and bot-defense and mitigation.”

“We continue to aggressively execute our strategy of expanding our reach and broadening our role while transitioning F5 to a software-driven model,” continued Locoh-Donou. “Customers are beginning to recognize a new F5 as a result of our reprioritization of development resources, introduction of new, flexible consumption models, and most recently, the acquisition and integration of NGINX.”

Third Quarter Performance Summary

Revenue of $563.4 million for the third quarter of fiscal year 2019 reflects 4% growth from $542.2 million in the third quarter of fiscal year 2018, driven by total software solutions revenue growth of 91%, including a partial quarter contribution from NGINX.

GAAP net income for the third quarter of fiscal year 2019 was $85.9 million, or $1.43 per diluted share, and includes $41.0 million in stock-based compensation, $30.1 million in costs related to the acquisition of NGINX, $8.7 million in facility-exit costs and $3.7 million in amortization of purchased intangible assets. This compares with third quarter fiscal year 2018 GAAP net income of $122.7 million, or $1.99 per diluted share.

Non-GAAP net income for the third quarter of fiscal year 2019 was $151.5 million, or $2.52 per diluted share, compared to $150.1 million, or $2.44 per diluted share, in the third quarter of fiscal year 2018. Non-GAAP net income for the third quarter of fiscal year 2019 and the third quarter of fiscal year 2018 excludes the impact of stock-based compensation, and amortization of purchased intangible assets. Non-GAAP net income for the third quarter of fiscal year 2019 also excludes facility-exit costs related to the Company’s headquarters move and costs related to the acquisition of NGINX.

A reconciliation of net income, earnings per share, and other measures on a GAAP to non-GAAP basis is included in the attached Consolidated Income Statements. Additional information about non-GAAP financial information is included below.

Business Outlook

For the fourth quarter of fiscal year 2019 ending September 30, 2019, the Company expects to deliver revenue in the range of $577 million to $587 million with non-GAAP earnings in the range of $2.53 to $2.56 per diluted share.

All forward-looking non-GAAP measures included in the outlook exclude estimates for amortization of intangible assets, share-based compensation expenses, significant effects of tax legislation and judicial or administrative interpretation of tax regulations, including the impact of income tax reform, non-recurring income tax adjustments, valuation allowance on deferred tax assets, and the income tax effect of non-GAAP exclusions, and do not include the impact of any future acquisitions or divestitures, restructuring charges, facility exit costs, or other non-recurring charges that may occur in the period. F5 is unable to provide a reconciliation of non-GAAP guidance measures to corresponding U.S. generally accepted accounting principles or GAAP measures on a forward-looking basis without unreasonable effort due to the overall high variability and low visibility of most of the foregoing items that have been excluded. Material changes to any one of these items could have a significant effect on our guidance and future GAAP results. Certain exclusions, such as amortization of intangible assets and share-based compensation expenses, are generally incurred each quarter, but the amounts have historically varied and may continue to vary significantly from quarter to quarter.

Live Webcast and Conference Call

F5 will host a live webcast and conference call to review its financial results and outlook today, July 24, 2019, at 1:30 pm PT. The live webcast can be accessed at https://event.on24.com/wcc/r/2004027/4341065A22F8EDBD53E07FA6C21D5E13. To participate in the live call via telephone in the U.S., dial 866-209-3822. Outside the U.S., dial [phone]. Please call 10 minutes prior to the call start time. The webcast replay will be archived on the investor relations portion of F5’s website at https://www.f5.com.

Forward Looking Statements

This press release contains forward-looking statements including, among other things, statements regarding the continuing strength and momentum of F5's business, future financial performance, sequential growth, projected revenues including target revenue and earnings ranges, income, earnings per share, share amount and share price assumptions, share repurchases, demand for application delivery networking, application delivery services, security, and software products, expectations regarding future services and products, expectations regarding future customers, markets and the benefits of products, and other statements that are not historical facts and which are forward-looking statements. These forward-looking statements are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. Such forward-looking statements involve risks and uncertainties, as well as assumptions and other factors that, if they do not fully materialize or prove correct, could cause the actual results, performance or achievements of the company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: customer acceptance of our new traffic management, security, application delivery, optimization, and software and F5aaS offerings; the timely development, introduction and acceptance of additional new products and features by F5 or its competitors; competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors into F5’s markets, and new product and marketing initiatives by our competitors; increased sales discounts; uncertain global economic conditions which may result in reduced customer demand for our products and services and changes in customer payment patterns; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; litigation involving patents, intellectual property, shareholder and other matters, and governmental investigations; natural catastrophic events; a pandemic or epidemic; F5's ability to sustain, develop and effectively utilize distribution relationships; F5's ability to attract, train and retain qualified product development, marketing, sales, professional services and customer support personnel; F5's ability to expand in international markets; the unpredictability of F5's sales cycle; F5’s share repurchase program; future prices of F5's common stock; and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission, including our most recent reports on Form 10-K and Form 10-Q and current reports on Form 8-K and other documents that we may file or furnish from time to time, which could cause actual results to vary from expectations. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in F5’s most recent reports on Forms 10-Q and 10-K as each may be amended from time to time. All forward-looking statements in this press release are based on information available as of the date hereof and qualified in their entirety by this cautionary statement. F5 assumes no obligation to revise or update these forward-looking statements.

GAAP to non-GAAP Reconciliation

F5’s management evaluates and makes operating decisions using various operating measures. These measures are generally based on the revenues of its products, services operations and certain costs of those operations, such as cost of revenues, research and development, sales and marketing and general and administrative expenses. One such measure is GAAP net income excluding, as applicable, stock-based compensation, amortization of purchased intangible assets, acquisition-related charges, net of taxes, restructuring charges, facility-exit costs, significant litigation and other contingencies and certain non-recurring tax expenses and benefits, which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended. This measure of non-GAAP net income is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company’s tax liability.

The non-GAAP adjustments, and F5's basis for excluding them from non-GAAP financial measures, are outlined below:

Stock-based compensation. Stock-based compensation consists of expense for stock options, restricted stock and employee stock purchases through the company’s ESPP. Although stock-based compensation is an important aspect of the compensation of F5’s employees and executives, management believes it is useful to exclude stock-based compensation expenses to better understand the long-term performance of the company’s core business and to facilitate comparison of the company’s results to those of peer companies.

Amortization of purchased intangible assets. Purchased intangible assets are amortized over their estimated useful lives and generally cannot be changed or influenced by management after the acquisition. Management does not believe these charges accurately reflect the performance of the company’s ongoing operations, therefore, they are not considered by management in making operating decisions. However, investors should note that the use of intangible assets contributed to F5’s revenues earned during the periods presented and will contribute to F5’s future period revenues as well.

Acquisition-related charges, net. F5 does not acquire businesses on a predictable cycle and the terms and scope of each transaction can vary significantly and are unique to each transaction. F5 excludes acquisition-related charges from its non-GAAP financial measures to provide a useful comparison of the company’s operating results to prior periods and to its peer companies. Acquisition-related charges consist of planning, execution and integration costs incurred directly as a result of an acquisition.

Restructuring charges. F5 has incurred restructuring charges that are included in its GAAP financial statements, primarily related to workforce reductions and costs associated with exiting facility lease commitments. F5 excludes these items from its non-GAAP financial measures when evaluating its continuing business performance as such items vary significantly based on the magnitude of the restructuring action and do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or past operations of its business.

Facility-exit costs. In fiscal year 2019, F5 relocated its headquarters in Seattle, Washington and recorded charges in connection with this facility exit as well as other non-recurring lease activity. These charges are not representative of ongoing costs to the business and are not expected to recur. As a result, these charges are being excluded to provide investors with a more comparable measure of costs associated with ongoing operations.

Significant litigation and other contingencies. F5, from time to time, may incur charges or benefits that are outside of the ordinary course of F5’s business related to litigation and other contingencies. F5 believes it is useful to exclude such charges or benefits, when significant, because it does not consider such amounts to be part of the ongoing operation of F5’s business and because of the singular nature of the claims underlying such matters.

Management believes that non-GAAP net income per share provides useful supplemental information to management and investors regarding the performance of the company’s core business operations and facilitates comparisons to the company’s historical operating results. Although F5’s management finds this non-GAAP measure to be useful in evaluating the performance of the core business, management’s reliance on this measure is limited because items excluded from such measures could have a material effect on F5’s earnings and earnings per share calculated in accordance with GAAP. Therefore, F5’s management will use its non-GAAP earnings and earnings per share measures, in conjunction with GAAP earnings and earnings per share measures, to address these limitations when evaluating the performance of the company’s core business. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures in accordance with GAAP.

F5 believes that presenting its non-GAAP measures of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company’s core business and is used by management in its own evaluation of the company’s performance. Investors are encouraged to look at GAAP results as the best measure of financial performance. However, while the GAAP results are more complete, the company provides investors these supplemental measures since, with reconciliation to GAAP, it may provide additional insight into the company’s operational performance and financial results.

For reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section in our attached Consolidated Income Statements entitled “Non-GAAP Financial Measures.”

About F5

F5 (NASDAQ: FFIV) gives the world’s largest businesses, service providers, governments, and consumer brands the freedom to securely deliver every app, anywhere—with confidence. F5 delivers cloud and security application services that enable organizations to embrace the infrastructure they choose without sacrificing speed and control. For more information, go to f5.com. You can also follow @f5networks on Twitter or visit us on LinkedIn and Facebook for more information about F5, its partners, and technologies.

F5 Networks, Inc.
Consolidated Balance Sheets
(unaudited, in thousands)
	June 30,				September 30,
		2019				2018
Assets
Current assets
Cash and cash equivalents	$	688,350			$	424,707
Short-term investments		298,137				614,705
Accounts receivable, net of allowances of $2,562 and $2,040		320,465				295,352
Inventories		36,009				30,568
Other current assets		161,940				52,326
Total current assets		1,504,901				1,417,658
Property and equipment, net		226,002				145,042
Long-term investments		161,619				411,184
Deferred tax assets		25,079				33,441
Goodwill		1,065,379				555,965
Other assets, net		194,295				42,186
Total assets	$	3,177,275			$	2,605,476
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	55,630			$	57,757
Accrued liabilities		213,195				180,979
Deferred revenue		803,241				715,697
Total current liabilities		1,072,066				954,433
Other long-term liabilities		117,804				65,892
Deferred revenue, long-term		363,271				299,624
Deferred tax liabilities		352				35
Total long-term liabilities		481,427				365,551
Commitments and contingencies
Shareholders’ equity
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding		-				-
Common stock, no par value; 200,000 shares authorized, 60,129 and 60,215 shares issued and outstanding		98,722				20,427
Accumulated other comprehensive loss		(18,193	)			(22,178	)
Retained earnings		1,543,253				1,287,243
Total shareholders' equity		1,623,782				1,285,492
Total liabilities and shareholders' equity	$	3,177,275			$	2,605,476

F5 Networks, Inc.
Consolidated Income Statements
(unaudited, in thousands, except per share amounts)
	Three Months Ended								Nine Months Ended
	June 30,								June 30,
		2019				2018				2019				2018
Net revenues
Products	$	248,929			$	238,835			$	720,665			$	703,696
Services		314,465				303,368				931,394				895,002
Total		563,394				542,203				1,652,059				1,598,698
Cost of net revenues (1)(2)(3)
Products		44,336				45,164				130,293				132,556
Services		46,431				45,845				135,366				135,485
Total		90,767				91,009				265,659				268,041
Gross profit		472,627				451,194				1,386,400				1,330,657
Operating expenses (1)(2)(3)(4)
Sales and marketing		195,852				165,806				531,065				503,710
Research and development		116,894				94,061				305,246				271,006
General and administrative		57,141				39,374				146,340				118,634
Total		369,887				299,241				982,651				893,350
Income from operations		102,740				151,953				403,749				437,307
Other income, net		4,722				2,259				19,251				7,194
Income before income taxes		107,462				154,212				423,000				444,501
Provision for income taxes		21,557				31,469				90,103				123,693
Net income	$	85,905			$	122,743			$	332,897			$	320,808
Net income per share - basic	$	1.43			$	2.01			$	5.55			$	5.21
Weighted average shares - basic		59,981				60,970				59,963				61,531
Net income per share - diluted	$	1.43			$	1.99			$	5.51			$	5.16
Weighted average shares - diluted		60,196				61,633				60,372				62,214
Non-GAAP Financial Measures
Net income as reported	$	85,905			$	122,743			$	332,897			$	320,808
Stock-based compensation expense (5)		40,999				38,739				119,182				121,007
Amortization of purchased intangible assets		3,712				2,803				7,260				8,413
Facility-exit costs		8,704				-				13,752				-
Acquisiton-related charges		30,133				-				33,663				-
Tax effects related to above items		(17,919	)			(14,139	)			(37,241	)			(33,788	)
Tax on deemed repatriation of undistributed foreign earnings		-				-				-				7,000
Remeasurement of net deferred tax assets due to change in U.S. tax rate		-				-				-				11,584
Net income excluding stock-based compensation expense, amortization of purchased intangible assets, facility-exit costs, acquisition-related charges and non-recurring tax expenses and benefits (non-GAAP) - diluted	$	151,534			$	150,146			$	469,513			$	435,024
Net income per share excluding stock-based compensation expense, amortization of purchased intangible assets, facility-exit costs, acquisition-related charges and non-recurring tax expenses and benefits (non-GAAP) - diluted	$	2.52			$	2.44			$	7.78			$	6.99
Weighted average shares - diluted		60,196				61,633				60,372				62,214
(1) Includes stock-based compensation expense as follows:
Cost of net revenues	$	5,118			$	4,947			$	15,152			$	15,940
Sales and marketing		17,767				16,153				49,645				47,186
Research and development		10,037				11,532				30,598				36,435
General and administrative		8,077				6,107				23,787				21,446
	$	40,999			$	38,739			$	119,182			$	121,007
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues	$	2,471			$	2,027			$	4,557			$	6,083
Sales and marketing		710				251				1,122				755
General and administrative		531				525				1,581				1,575
	$	3,712			$	2,803			$	7,260			$	8,413
(3) Includes facility-exit costs as follows:
Cost of net revenues	$	1,026			$	-			$	1,714			$	-
Sales and marketing		2,021				-				3,632				-
Research and development		3,605				-				5,591				-
General and administrative		2,052				-				2,815				-
	$	8,704			$	-			$	13,752			$	-
(4) Includes acquisition-related charges as follows:
Sales and marketing	$	6,106			$	-			$	6,106			$	-
Research and development		16,116				-				16,116				-
General and administrative		7,911				-				11,441				-
	$	30,133			$	-			$	33,663			$	-

(5)	Stock based compensation is accounted for in accordance with the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation (“FASB ASC Topic 718”)

F5 Networks, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
	Nine Months Ended
	June 30,
		2019				2018
Operating activities
Net income	$	332,897			$	320,808
Adjustments to reconcile net income to net cash provided by operating activities:
Realized loss on disposition of assets and investments		606				64
Stock-based compensation		119,182				121,007
Provisions for doubtful accounts and sales returns		65				1,494
Depreciation and amortization		46,645				44,081
Deferred income taxes		10,171				19,241
Changes in operating assets and liabilities:
Accounts receivable		(16,249	)			(6,945	)
Inventories		(5,441	)			(1,488	)
Other current assets		(54,381	)			11,590
Other assets		(8,785	)			(68	)
Accounts payable and accrued liabilities		37,932				(16,423	)
Deferred revenue		79,113				63,402
Net cash provided by operating activities		541,755				556,763
Investing activities
Purchases of investments		(210,109	)			(499,084	)
Maturities of investments		507,804				295,479
Sales of investments		276,278				10,748
Acquisition of businesses, net of cash acquired		(611,550	)			-
Cash provided by sale of fixed asset		-				1,000
Purchases of property and equipment		(83,008	)			(36,074	)
Net cash used in investing activities		(120,585	)			(227,931	)
Financing activities
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan		45,455				48,818
Repurchase of common stock		(201,045	)			(450,064	)
Net cash used in financing activities		(155,590	)			(401,246	)
Net increase (decrease) in cash and cash equivalents		265,580				(72,414	)
Effect of exchange rate changes on cash and cash equivalents		(111	)			(1,588	)
Cash, cash equivalents and restricted cash, beginning of period		425,894				674,452
Cash, cash equivalents and restricted cash, end of period	$	691,363			$	600,450

 

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