Market Overview

F5 Networks Announces Third Quarter Fiscal 2018 Results


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

F5 Networks, Inc. (NASDAQ: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

About F5

) 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
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  
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
- -

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
  -     -     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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