F5 Networks Announces Third Quarter 2013 Results

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F5 Networks Announces Third Quarter 2013 Results

SEATTLE--(BUSINESS WIRE)-- F5 Networks, Inc. (NAS: FFIV) today announced revenue of $370.3 million for the third quarter of fiscal 2013, up 6 percent from $350.2 million in the prior quarter and 5 percent from $352.6 million in the third quarter of fiscal 2012.

GAAP net income for the third quarter was $68.2 million ($0.86 per diluted share) compared to $63.4 million ($0.80 per diluted share) in the second quarter of 2013 and $72.3 million ($0.91 per diluted share) in the third quarter a year ago.

Excluding the impact of stock-based compensation and amortization of purchased intangible assets, non-GAAP net income for the third quarter was $88.4 million ($1.12 per diluted share), compared to $84.7 million ($1.07 per diluted share) in the prior quarter and $90.6 million ($1.14 per diluted share) in the third quarter of fiscal 2012.

A reconciliation of GAAP net income to non-GAAP net income is included on the attached Consolidated Statements of Operations.

"Results for the third quarter exceeded our expectations," said John McAdam, F5 president and chief executive officer. "Strong sales in the Americas led to a 6 percent sequential increase in both product and overall revenue.

"Product sales during the quarter were driven by growing demand for our BIG-IP 4000 appliances and our new entry-level BIG-IP 2000 series. In late June, we released our new midrange BIG-IP 5000 and BIG-IP 7000 series appliances, and initial customer response has been very encouraging.

"The significant performance and scalability enhancements of the new appliances have helped drive growing sales of our security software, including our new Advanced Firewall Manager and our recently upgraded Application Security Manager and Access Policy Manager. Sales of our other software modules have also grown, and demand for our software-only virtual edition products has increased steadily. Along with major enhancements to TMOS, designed to strengthen our SDN integration and cloud scaling capabilities, we recently introduced new 5-gigabit versions of our virtual edition products which run on all major hypervisors including AWS," McAdam said.

Positive customer response to the company's new products has contributed to a strong and growing sales pipeline. In spite of ongoing weakness in the global economy, McAdam said he believes that demand for the new products in combination with other business drivers could be a significant catalyst for continued growth.

For the fourth quarter of fiscal 2013, ending September 30, the company has set a revenue target of $378 million to $388 million and a GAAP earnings target of $0.93 to $0.96 per diluted share. Management's GAAP earnings target includes an anticipated charge of $2.5 million related to a loss on a facility sublease. Excluding this charge, as well as stock-based compensation expense and amortization of purchased intangible assets, the company's non-GAAP earnings target is $1.17 to $1.20 per diluted share. A reconciliation of the company's expected GAAP and non-GAAP earnings is provided in the following table:


Three months ended

September 30, 2013


Reconciliation of Expected Non-GAAP Fourth Quarter Earnings





Net income $ 73.0 $ 75.4
Stock-based compensation expense $ 22.0 $ 22.0
Amortization of purchased intangible assets $ 1.0 $ 1.0
Loss on facility sublease $ 2.5 $ 2.5
Tax effects related to above items






Non-GAAP net income excluding stock-based compensation expense,
amortization of purchased intangible assets and loss on facility sublease $ 91.9 $ 94.3
Net income per share - diluted $ 0.93 $ 0.96
Non-GAAP net income per share - diluted $ 1.17 $ 1.20

About F5 Networks

F5 Networks (NAS: FFIV) makes the connected world run better. F5 helps organizations meet the demands and embrace the opportunities that come with the relentless growth of voice, data, and video traffic, mobile workers, and applications—in the data center, the network, and the cloud. The world's largest businesses, service providers, government entities, and consumer brands rely on F5's intelligent services framework to deliver and protect their applications and services while ensuring people stay connected. Learn more at www.f5.com.

You can also follow @f5networks on Twitter or visit us on Facebook for more information about F5, its partners, and technology. For a complete listing of F5 community sites, please visit www.f5.com/news-press-events/web-media/community.html.

Forward Looking Statements

Statements in this press release concerning the continuing strength of F5's business, sequential growth, the target revenue and earnings range, share amount and share price assumptions, demand for application delivery networking and storage virtualization products and other statements that are not historical facts are forward-looking statements. 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, WAN optimization and storage virtualization offerings; the timely development, introduction and acceptance of additional new products and features by F5 or its competitors; competitive pricing pressures; 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; 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; the 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. 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 net income excluding stock-based compensation, amortization of purchased intangible assets and acquisition-related charges, net of taxes, which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended. This measure consists of GAAP net income excluding, as applicable, stock-based compensation, amortization of purchased intangible assets and acquisition-related charges. 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. Stock-based compensation is a non-cash expense that F5 has accounted for since July 1, 2005 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"). Amortization of intangible assets is a non-cash expense. Investors should note that the use of intangible assets contribute to revenues earned during the periods presented and will contribute to revenues in future periods. Acquisition-related expenses consist of professional services fees incurred in connection with acquisitions.

The reconciliation of the company's expected GAAP and non-GAAP fourth quarter earnings also excludes an anticipated loss on a facility sublease from net income (non-GAAP). This loss will be incurred during the quarter ending September 30, 2013 in connection with the extension of certain subleases at the company's corporate headquarters.

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 measure of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company's core business and which management uses 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 this supplemental measure since, with reconciliation to GAAP, it may provide additional insight into the company's operational performance and financial results.

For reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure, please see the section in our Condensed Consolidated Statement of Operations entitled "GAAP to Non-GAAP Reconciliation."

F5 Networks, Inc.
Consolidated Balance Sheets
(unaudited, in thousands)
June 30, September 30,
  2013     2012  
Current assets
Cash and cash equivalents $ 198,280 $ 211,181
Short-term investments 353,045 320,970
Accounts receivable, net of allowances of $3,094 and $3,254 205,138 185,172
Inventories 18,260 17,410
Deferred tax assets 10,617 10,362
Other current assets   48,969     30,986  
Total current assets   834,309     776,081  
Property and equipment, net 63,720 59,604
Long-term investments 714,331 662,803
Deferred tax assets 33,085 35,478
Goodwill 447,799 348,239
Other assets, net   54,559     28,996  
Total assets $ 2,147,803   $ 1,911,201  
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 28,691 $ 27,026
Accrued liabilities 89,780 86,409
Deferred revenue   411,477     352,594  
Total current liabilities   529,948     466,029  
Other long-term liabilities 21,391 21,078
Deferred revenue, long-term   108,278     94,694  
Total long-term liabilities   129,669     115,772  
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, 78,305 and 78,715 shares issued and outstanding

290,143 326,922
Accumulated other comprehensive loss (9,347 ) (3,829 )
Retained earnings   1,207,390     1,006,307  
Total shareholders' equity   1,488,186     1,329,400  
Total liabilities and shareholders' equity $ 2,147,803   $ 1,911,201  
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F5 Networks, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
  2013     2012     2013     2012  
Net revenues
Products $ 196,746 $ 207,118 $ 586,565 $ 608,837
Services   173,556     145,516     499,420     405,851  
Total 370,302 352,634 1,085,985 1,014,688
Cost of net revenues (1)(2)
Products 32,350 34,482 93,915 101,350
Services   32,567     25,805     92,189     72,137  
Total   64,917     60,287     186,104     173,487  
Gross Profit 305,385 292,347 899,881 841,201
Operating expenses (1)(2)(3)
Sales and marketing 121,906 112,064 363,205 329,297
Research and development 54,075 46,985 155,150 129,675
General and administrative   25,327     23,298     75,889     67,760  
Total   201,308     182,347     594,244     526,732  
Income from operations 104,077 110,000 305,637 314,469
Other income, net   2,874     1,713     6,542     5,002  
Income before income taxes 106,951 111,713 312,179 319,471
Provision for income taxes   38,773     39,377     111,096     112,002  
Net Income $ 68,178   $ 72,336   $ 201,083   $ 207,469  
Net income per share - basic $ 0.87   $ 0.91   $ 2.56   $ 2.62  
Weighted average shares - basic   78,516     79,135     78,636     79,188  
Net income per share - diluted $ 0.86   $ 0.91   $ 2.54   $ 2.60  
Weighted average shares - diluted   78,864     79,655     79,207     79,834  
Non-GAAP Financial Measures
Net income as reported $ 68,178 $ 72,336 $ 201,083 $ 207,469
Stock-based compensation expense (4) 27,861 23,537 82,181 69,005
Amortization of purchased intangible assets (5) 1,032 1,894 3,098 3,233
Acquisition-related charges (5) - - - 750
Tax effects related to above items (8,650 ) (7,191 ) (22,576 ) (20,530 )



Net income excluding stock-based compensation, amortization of purchased intangible assets and acquisition-related charges (non-GAAP) - diluted

$ 88,421   $