F5 Networks Announces Third Quarter Fiscal 2018 Results - F5 (NASDAQ:FFIV)

Appoints global sales leader; announces new dedicated SSL Orchestrator and Access Manager solutions

F5 Networks, Inc. FFIV today announced revenue of $542.2 million for the third quarter of fiscal 2018, up 4.7% from $517.8 million in the third quarter of fiscal 2017. Growth compared with the third quarter of fiscal 2017 was driven by our software solutions and services business.

GAAP net income for the third quarter of fiscal 2018 was $122.7 million, or $1.99 per diluted share, compared to $97.7 million, or $1.52 per diluted share in the third quarter of fiscal 2017. Excluding the impact of stock-based compensation, amortization of purchased intangible assets, and litigation expenses, non-GAAP net income for the third quarter of fiscal 2018 was $150.1 million, or $2.44 per diluted share, compared to $130.8 million, or $2.03 per diluted share in the third quarter of fiscal 2017.

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

"I'm pleased with results for the third quarter," said François Locoh-Donou, F5 President and Chief Executive Officer. "We continue to see momentum in our security and software business, traction in our public cloud offerings and customer excitement around new multi-cloud application solutions like BIG-IP Cloud Edition.

"In our just released Application Protection Report we note that while apps are vital to companies' digital transformation, they have also become the largest threat vector for security breaches. Application security is a priority for every business and F5 is well positioned to help protect customers' applications, both on-premises and across multiple clouds. With the announcement today of two new dedicated security products–F5 SSL Orchestrator and F5 Access Manager–we give security professionals advanced resources to help thwart today's most sophisticated cyber-attacks."

For the fourth quarter of fiscal 2018, ending September 30, the company has set a revenue goal of $555 million to $565 million with a GAAP earnings target of $1.77 to $1.80 per diluted share and a non-GAAP earnings target of $2.61 to $2.64 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, 2018
	(in millions, except per share amounts)

Reconciliation of Expected Non-GAAP Fourth Quarter Earnings	Low			High
Net income	$	108.0		$	109.8
Stock-based compensation expense	$	39.0		$	39.0
Amortization of purchased intangible assets	$	2.8		$	2.8
Restructuring charges	$	24.0		$	24.0
Tax effects related to above items	$	(14.3	)	$	(14.3	)
Non-GAAP net income excluding stock-based compensation expense, amortization of purchased intangible assets and restructuring charges	$	159.5		$	161.3
Net income per share - diluted	$	1.77		$	1.80
Non-GAAP net income per share - diluted	$	2.61		$	2.64

Chad Whalen Promoted to Executive Vice President, Worldwide Sales

The company also announced the appointment of Chad Whalen to Executive Vice President, Worldwide Sales, effective immediately. Whalen was promoted from his role running F5's worldwide cloud sales team where he was responsible for the company's global public cloud sales strategy, program development and execution. In his new position, Whalen will oversee the company's sales and channel strategy as F5 further expands into multi-cloud application services and protection. Previous to F5, he served as VP of Global Alliances and Cloud Services at Fortinet and the GM/VP of North America Field Operations.

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, acquisition-related charges, net of taxes, 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 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. In addition, restructuring charges have been excluded from GAAP net income for the purpose of measuring non-GAAP earnings and earnings per share in fiscal 2017, and litigation expenses primarily related to a jury verdict and other associated costs of that patent litigation have been excluded in fiscal 2016 and 2017.

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 Income Statements entitled "Non-GAAP Financial Measures."

About F5

F5 (NASDAQ: FFIV) makes apps go faster, smarter, and safer for the world's largest businesses, service providers, governments, and consumer brands. F5 delivers cloud and security solutions that enable organizations to embrace the application 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,
		2018			2017

Assets
Current assets
Cash and cash equivalents	$	599,268		$	673,228
Short-term investments		485,232			343,700
Accounts receivable, net of allowances of $2,136 and $1,815		297,375			291,924
Inventories		31,322			29,834
Other current assets		55,853			67,538
Total current assets		1,469,050			1,406,224

Property and equipment, net		126,108			122,420
Long-term investments		329,412			284,802
Deferred tax assets		35,153			53,303
Goodwill		555,965			555,965
Other assets, net		45,378			53,775
Total assets	$	2,561,066		$	2,476,489

Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	44,647		$	50,760
Accrued liabilities		163,246			187,379
Deferred revenue		736,032			696,404
Total current liabilities		943,925			934,543

Other long-term liabilities		59,466			44,589
Deferred revenue, long-term		291,675			267,902
Deferred tax liabilities		25			63
Total long-term liabilities		351,166			312,554

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, 60,818 and 62,594 shares issued and outstanding		20,008			17,627
Accumulated other comprehensive loss		(21,983	)		(17,997	)
Retained earnings		1,267,950			1,229,762
Total shareholders' equity		1,265,975			1,229,392
Total liabilities and shareholders' equity	$	2,561,066		$	2,476,489


F5 Networks, Inc.
Consolidated Income Statements
(unaudited, in thousands, except per share amounts)


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
		2018			2017			2018			2017

Net revenues
Products	$	238,835		$	235,109		$	703,696		$	715,672
Services		303,368			282,728			895,002			836,371
Total		542,203			517,837			1,598,698			1,552,043

Cost of net revenues (1)(2)
Products		45,164			43,787			132,556			129,391
Services		45,845			45,983			135,485			133,553
Total		91,009			89,770			268,041			262,944
Gross profit		451,194			428,067			1,330,657			1,289,099

Operating expenses (1)(2)
Sales and marketing		165,806			160,952			503,710			490,171
Research and development		94,061			88,602			271,006			264,886
General and administrative		39,374			39,368			118,634			119,055
Litigation expense		-			1			-			(134	)
Total		299,241			288,923			893,350			873,978

Income from operations		151,953			139,144			437,307			415,121
Other income, net		2,259			2,589			7,194			6,534
Income before income taxes		154,212			141,733			444,501			421,655
Provision for income taxes		31,469			44,071			123,693			136,637
Net income	$	122,743		$	97,662		$	320,808		$	285,018


Net income per share - basic	$	2.01		$	1.53		$	5.21		$	4.42
Weighted average shares - basic		60,970			63,935			61,531			64,539

Net income per share - diluted	$	1.99		$	1.52		$	5.16		$	4.38
Weighted average shares - diluted		61,633			64,361			62,214			65,116


Non-GAAP Financial Measures

Net income as reported	$	122,743		$	97,662		$	320,808		$	285,018
Stock-based compensation expense (3)		38,739			43,234			121,007			133,740
Amortization of purchased intangible assets		2,803			2,788			8,413			9,483
Litigation expense		-			1			-			(134	)
Tax effects related to above items		(14,139	)		(12,910	)		(33,788	)		(40,060	)
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, litigation expense, and non-recurring tax expenses and benefits (non-GAAP) - diluted	$	150,146		$	130,775		$	435,024		$	388,047

Net income per share excluding stock-based compensation expense, amortization of purchased intangible assets, litigation expense, and non-recurring tax expenses and benefits (non-GAAP) - diluted	$	2.44		$	2.03		$	6.99		$	5.96

Weighted average shares - diluted		61,633			64,361			62,214			65,116

(1) Includes stock-based compensation expense as follows:
Cost of net revenues	$	4,947		$	5,384		$	15,940		$	16,155
Sales and marketing		16,153			17,577			47,186			52,737
Research and development		11,532			13,579			36,435			41,395
General and administrative		6,107			6,694			21,446			23,453
	$	38,739		$	43,234		$	121,007		$	133,740

(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues	$	2,027		$	2,028		$	6,083		$	7,345
Sales and marketing		251			251			755			754
General and administrative		525			509			1,575			1,384
	$	2,803		$	2,788		$	8,413		$	9,483

(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)


	Nine Months Ended
	June 30,
		2018			2017

Operating activities
Net income	$	320,808		$	285,018
Adjustments to reconcile net income to net cash provided by operating activities:
Realized loss (gain) on disposition of assets and investments		64			(463	)
Stock-based compensation		121,007			133,740
Provisions for doubtful accounts and sales returns		1,494			385
Depreciation and amortization		44,081			45,603
Deferred income taxes		19,241			(1,307	)
Changes in operating assets and liabilities:
Accounts receivable		(6,945	)		(27,295	)
Inventories		(1,488	)		3,007
Other current assets		11,590			1,063
Other assets		(68	)		(425	)
Accounts payable and accrued liabilities		(16,423	)		14,270
Deferred revenue		63,402			73,620
Net cash provided by operating activities		556,763			527,216

Investing activities
Purchases of investments		(499,084	)		(255,386	)
Maturities of investments		295,479			271,878
Sales of investments		10,748			65,857
Decrease (increase) in restricted cash		42			(87	)
Acquisition of intangible assets		-			(4,000	)
Cash provided by sale of fixed asset		1,000			-
Purchases of property and equipment		(36,074	)		(31,175	)
Net cash (used in) provided by investing activities		(227,889	)		47,087

Financing activities
Excess tax benefit from stock-based compensation		-			6,471
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan		48,818			46,959
Repurchase of common stock		(450,064	)		(450,065	)
Net cash used in financing activities		(401,246	)		(396,635	)

Net (decrease) increase in cash and cash equivalents		(72,372	)		177,668
Effect of exchange rate changes on cash and cash equivalents		(1,588	)		(1,327	)
Cash and cash equivalents, beginning of period		673,228			514,571
Cash and cash equivalents, end of period	$	599,268		$	690,912

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