(FFIV) Announces Third Quarter 2013 Results

F5 Networks, Inc. (NASDAQ: 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 (NASDAQ: 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			$	90,576			$	263,786			$	259,927
Net income per share excluding stock-based compensation, amortization of purchased intangible assets and acquisition-related charges (non-GAAP) – diluted		$	1.12			$	1.14			$	3.33			$	3.26
Weighted average shares – diluted			78,864				79,655				79,207				79,834
(1) Includes stock-based compensation as follows:
Cost of net revenues		$	2,966			$	2,706			$	8,860			$	7,828
Sales and marketing			10,259				8,537				31,533				26,945
Research and development			8,966				7,504				25,030				19,840
General and administrative			5,670				4,790				16,758				14,392
		$	27,861			$	23,537			$	82,181			$	69,005
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues		$	957			$	1,704			$	2,873			$	2,903
Sales and marketing			75				190				225				330
		$	1,032			$	1,894			$	3,098			$	3,233
(3) Includes acquisition-related charges as follows:
General and administrative		$	–			$	–			$	–			$	750
		$	–			$	–			$	–			$	750
(4) 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”)
(5) Beginning with the second quarter of fiscal 2012, the company will exclude amortization of purchased intangible assets and acquisition-related charges in addition to stock-based compensation expense as a non-GAAP financial measure

F5 Networks, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
		Nine Months Ended
		June 30,
			2013				2012
Operating activities
Net income		$	201,083			$	207,469
Adjustments to reconcile net income to net cash provided by operating activities:
Realized (gain) loss on disposition of assets and investments			(190	)			552
Stock-based compensation			82,181				69,005
Provisions for doubtful accounts and sales returns			584				1,061
Depreciation and amortization			29,705				24,987
Deferred income taxes			(3,601	)			(1,057	)
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable			(20,550	)			(28,229	)
Inventories			(850	)			111
Other current assets			(18,069	)			(13,852	)
Other assets			1,517				(244	)
Accounts payable and accrued liabilities			7,420				(3,089	)
Deferred revenue			72,468				90,168
Net cash provided by operating activities			351,698				346,882
Investing activities
Purchases of investments			(744,557	)			(780,493	)
Maturities of investments			509,381				584,085
Sales of investments			138,171				76,444
Increase in restricted cash			(713	)			(30	)
Acquisition of intangible assets			–				(250	)
Acquisition of businesses, net of cash acquired			(124,918	)			(128,335	)
Purchases of property and equipment			(21,434	)			(18,544	)
Net cash used in investing activities			(244,070	)			(267,123	)
Financing activities
Excess tax benefit from stock-based compensation			3,656				9,426
Proceeds from the exercise of stock options and
purchases of stock under employee stock purchase plan			29,405				24,942
Repurchase of common stock			(150,000	)			(134,776	)
Net cash used in financing activities			(116,939	)			(100,408	)
Net decrease in cash and cash equivalents			(9,311	)			(20,649	)
Effect of exchange rate changes on cash and cash equivalents			(3,590	)			(528	)
Cash and cash equivalents, beginning of period			211,181				216,784
Cash and cash equivalents, end of period		$	198,280			$	195,607