F5 Networks Announces Third Quarter 2013 Results

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

Low

High

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

($

6.6

)

($

6.6

)

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

Assets

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

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

$