F5 Networks Announces Results for Second Quarter of Fiscal 2015

SEATTLE--(BUSINESS WIRE)--

For the second quarter of fiscal 2015, F5 Networks, Inc. FFIV announced revenue of $472.1 million, up 2 percent from $462.8 million in the prior quarter and 12 percent from $420.0 million in the second quarter of fiscal 2014.

GAAP net income was $85.7 million ($1.18 per diluted share), compared to $89.1 million ($1.21 per diluted share) in the prior quarter and $69.6 million ($0.91 per diluted share) in the second quarter a year ago.

Excluding the impact of stock-based compensation and amortization of purchased intangible assets, non-GAAP net income was $115.3 million ($1.59 per diluted share), compared to $114.2 million ($1.55 per diluted share) in the prior quarter and $96.9 million ($1.27 per diluted share) in the second quarter of last year.

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

"Revenue in the second quarter of fiscal 2015 reflected solid sequential and year-over-year growth in sales to U.S. service providers and enterprise customers," said John McAdam, F5 President and Chief Executive Officer. "The region's strong performance was underpinned by a rebound in both the number and total dollar amount of deals greater than $1 million. In contrast, sales growth in EMEA and APAC came in below our expectations.

"Our solid earnings results reflect continued strength in our operating margins and were also supported by a lower than anticipated effective tax rate for the quarter. Earnings growth and a 23 percent year-over-year increase in deferred revenue contributed to exceptionally strong cash flow from operations during the quarter.

"We recognize that the US dollar's strength relative to the Euro and other currencies likely had an impact on the demand environment in EMEA and APAC in Q2. While it is difficult to assess future movements in exchange rates, we believe it is prudent to factor this impact into our revenue guidance for the current quarter," McAdam said.

For the quarter ending June 30, 2015, the company has set a revenue goal of $475 million to $485 million with a GAAP earnings target of $1.16 to $1.19 per diluted share and a non-GAAP earnings target of $1.57 to $1.60 per diluted share.

A reconciliation of the company's expected GAAP and non-GAAP earnings is provided in the following table:

		Three months ended June 30, 2015
Reconciliation of Expected Non-GAAP Third Quarter Earnings		Low				High
Net income		$	83.5			$	85.7
Stock-based compensation expense		$	38.5			$	38.5
Amortization of purchased intangible assets		$	3.4			$	3.4
Tax effects related to above items		$	(12.0	)		$	(12.0	)
Non-GAAP net income excluding stock-based compensation expense and amortization of purchased intangible assets		$	113.4			$	115.6
Net income per share - diluted		$	1.16			$	1.19
Non-GAAP net income per share - diluted		$	1.57			$	1.60

Appointment of Manny Rivelo as F5 Chief Executive Officer

In a separate release issued today, the company announced the appointment of Manny Rivelo as F5's President, Chief Executive Officer, and member of the company's Board of Directors, effective July 1. Rivelo will replace John McAdam, who will remain on F5's Board of Directors as non-executive Board Chair. Al Higginson, current Board Chair, will serve as the Board's lead independent Director.

About F5 Networks

F5 (NASDAQ:FFIV) provides solutions for an application world. F5 helps organizations seamlessly scale cloud, data center, telecommunications, and software defined networking (SDN) deployments to successfully deliver applications and services to anyone, anywhere, at any time. F5 solutions broaden the reach of IT through an open, extensible framework and a rich partner ecosystem of leading technology and orchestration vendors. This approach lets customers pursue the infrastructure model that best fits their needs over time. The world's largest businesses, service providers, government entities, and consumer brands rely on F5 to stay ahead of cloud, security, and mobility trends. 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.

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, demand for application delivery networking, application delivery services, security, virtualization and diameter 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, diameter and virtualization 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 that we may file 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 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.

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 Consolidated Statements of Operations entitled "Non-GAAP Financial Measures."

F5 Networks, Inc. Consolidated Balance Sheets (unaudited, in thousands)
		March 31, 2015				September 30, 2014
Assets
Current assets
Cash and cash equivalents		$	367,605			$	281,502
Short-term investments			298,862				363,877
Accounts receivable, net of allowances of $3,277 and $2,921			262,624				242,242
Inventories			29,343				24,471
Deferred tax assets			44,832				42,290
Other current assets			48,858				44,466
Total current assets			1,052,124				998,848
Property and equipment, net			68,746				66,791
Long-term investments			467,702				482,917
Deferred tax assets			1,315				4,434
Goodwill			556,957				556,957
Other assets, net			74,435				75,003
Total assets		$	2,221,279			$	2,184,950
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable		$	34,683			$	43,772
Accrued liabilities			118,617				108,772
Deferred revenue			544,426				484,437
Total current liabilities			697,726				636,981
Other long-term liabilities			23,217				22,718
Deferred revenue, long-term			176,162				152,312
Deferred tax liabilities			2,778				3,629
Total long-term liabilities			202,157				178,659
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, 71,655 and 73,390 shares issued and outstanding			20,683				15,753
Accumulated other comprehensive loss			(13,224	)			(9,584	)
Retained earnings			1,313,937				1,363,141
Total shareholders' equity			1,321,396				1,369,310
Total liabilities and shareholders' equity		$	2,221,279			$	2,184,950

F5 Networks, Inc. Consolidated Statements of Operations (unaudited, in thousands, except per share amounts)
		Three Months Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Net revenues
Products		$	244,116			$	225,135			$	485,053			$	443,736
Services			228,027				194,908				449,883				382,759
Total			472,143				420,043				934,936				826,495
Cost of net revenues (1)(2)
Products			43,600				37,806				85,670				75,050
Services			38,996				37,856				76,274				73,495
Total			82,596				75,662				161,944				148,545
Gross profit			389,547				344,381				772,992				677,950
Operating expenses (1)(2)
Sales and marketing			151,238				140,252				300,054				275,055
Research and development			74,521				67,232				144,581				131,365
General and administrative			30,933				26,033				63,187				51,533
Total			256,692				233,517				507,822				457,953
Income from operations			132,855				110,864				265,170				219,997
Other income, net			3,266				23				5,860				269
Income before income taxes			136,121				110,887				271,030				220,266
Provision for income taxes			50,392				41,246				96,225				82,577
Net income		$	85,729			$	69,641			$	174,805			$	137,689
Net income per share - basic		$	1.19			$	0.92			$	2.40			$	1.80
Weighted average shares - basic			72,240				75,508				72,801				76,483
Net income per share - diluted		$	1.18			$	0.91			$	2.38			$	1.79
Weighted average shares - diluted			72,711				76,244				73,326				77,086
Non-GAAP Financial Measures
Net income as reported		$	85,729			$	69,641			$	174,805			$	137,689
Stock-based compensation expense (3)			36,777				35,636				67,402				70,164
Amortization of purchased intangible assets			3,314				2,083				6,463				4,169
Tax effects related to above items			(10,556	)			(10,463	)			(19,185	)			(20,362	)
Net income excluding stock-based compensation expense and amortization of purchased intangible assets (non-GAAP) - diluted		$	115,264			$	96,897			$	229,485			$	191,660
Net income per share excluding stock-based compensation expense and amortization of purchased intangible assets (non-GAAP) - diluted		$	1.59			$	1.27			$	3.13			$	2.49
Weighted average shares - diluted			72,711				76,244				73,326				77,086
(1) Includes stock-based compensation expense as follows:
Cost of net revenues		$	3,826			$	4,014			$	6,757			$	7,872
Sales and marketing			15,360				14,218				27,987				28,220
Research and development			12,193				11,990				22,633				23,628
General and administrative			5,398				5,414				10,025				10,444
		$	36,777			$	35,636			$	67,402			$	70,164
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues		$	2,666			$	1,726			$	5,317			$	3,453
Sales and marketing			487				357				973				716
General and administrative			161				-				173				-
		$	3,314			$	2,083			$	6,463			$	4,169
(3) 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)
		Six Months Ended March 31,
		2015				2014
Operating activities
Net income		$	174,805			$	137,689
Adjustments to reconcile net income to net cash provided by operating activities:
Realized gain on disposition of assets and investments			(23	)			(120	)
Stock-based compensation			67,402				70,164
Provisions for doubtful accounts and sales returns			1,311				1,610
Depreciation and amortization			26,254				22,678
Deferred income taxes			(1,213	)			(3,491	)
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable			(21,693	)			(20,877	)
Inventories			(4,872	)			(1,684	)
Other current assets			(4,792	)			(24,148	)
Other assets			478				(1,257	)
Accounts payable and accrued liabilities			7,195				3,973
Deferred revenue			83,839				56,356
Net cash provided by operating activities			328,691				240,893
Investing activities
Purchases of investments			(254,819	)			(289,521	)
Maturities of investments			251,773				342,100
Sales of investments			79,211				98,319
(Increase) decrease in restricted cash			(344	)			26
Acquisition of intangible assets			(6,224	)			-
Purchases of property and equipment			(20,502	)			(10,119	)
Net cash provided by investing activities			49,095				140,805
Financing activities
Excess tax benefit from stock-based compensation			4,186				4,808
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan			16,655				13,917
Repurchase of common stock			(306,863	)			(350,000	)
Net cash used in financing activities			(286,022	)			(331,275	)
Net increase in cash and cash equivalents			91,764				50,423
Effect of exchange rate changes on cash and cash equivalents			(5,661	)			(280	)
Cash and cash equivalents, beginning of period			281,502				189,693
Cash and cash equivalents, end of period		$	367,605			$	239,836