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F5 Networks Announces Fourth Quarter and Fiscal Year 2019 Results; Delivers Second Consecutive Quarter of 91% Software Revenue Growth

SEATTLE--(BUSINESS WIRE)--

Generates Fourth Quarter GAAP EPS of $1.57 and non-GAAP EPS of $2.59 per diluted share

F5 Networks, Inc. (FFIV) today announced financial results for its fiscal fourth quarter and year ended September 30, 2019.

“Customer demand for consistent application security and reliable application performance across private, public and multi-cloud environments drove 5% total revenue growth in our fourth quarter, fueled by software revenue growth of 91% for the second consecutive quarter,” said François Locoh-Donou, F5 President and Chief Executive Officer.

“F5’s multi-cloud application services are making it possible for enterprises and service providers across the globe to deliver digital experiences with the reliability, speed and security their end customers expect,” continued Locoh-Donou. “From the growth and interest we are seeing in our new software, SaaS and container solutions, it is clear that customers view F5 as a critical partner in their transition to multi-cloud architectures.”

Fourth Quarter Performance Summary

Revenue of $590.4 million for the fourth quarter of fiscal year 2019 reflects 5% growth from $562.7 million in the fourth quarter of fiscal year 2018, driven by software solutions revenue growth of 91%.

GAAP net income for the fourth quarter of fiscal year 2019 was $94.8 million, or $1.57 per diluted share compared to fourth quarter fiscal year 2018 GAAP net income of $132.9 million, or $2.18 per diluted share.

Non-GAAP net income for the fourth quarter of fiscal year 2019 was $156.7 million, or $2.59 per diluted share, compared to $177.0 million, or $2.90 per diluted share, in the fourth quarter of fiscal year 2018. Non-GAAP net income for the fourth quarter of fiscal year 2019 excludes $43.7 million in stock-based compensation, $15.0 million in facility-exit costs, $8.1 million in costs related to the acquisition of NGINX, $6.3 million in impairment charges and $4.6 million in amortization of purchased intangible assets.

Fiscal Year 2019 Performance Summary

For fiscal year 2019, F5 delivered revenue of $2,242.4 million, representing growth of 4% from revenue of $2,161.4 million in fiscal year 2018.

GAAP net income in fiscal year 2019 was $427.7 million, or $7.08 per diluted share, compared to fiscal year 2018 GAAP net income of $453.7 million, or $7.32 per diluted share.

Non-GAAP net income for fiscal year 2019 was $626.3 million, or $10.36 per diluted share, compared to $612.1 million, or $9.87 per diluted share in fiscal year 2018. Non-GAAP net income for fiscal year 2019 excludes $162.9 million in stock-based compensation, $41.7 million in costs related to the acquisition of NGINX, $28.8 million in facility-exit costs, $11.8 million in amortization of purchased intangible assets and $6.3 million in impairment charges.

A reconciliation of net income, earnings per share, and other measures on a GAAP to non-GAAP basis is included in the attached Consolidated Income Statements. Additional information about non-GAAP financial information is included in this release.

Business Outlook

For the first quarter of fiscal year 2020 ending December 31, 2019, the Company expects to deliver revenue in the range of $560 million to $570 million with non-GAAP earnings in the range of $2.41 to $2.44 per diluted share.

All forward-looking non-GAAP measures included in the outlook exclude estimates for amortization of intangible assets, share-based compensation expenses, significant effects of tax legislation and judicial or administrative interpretation of tax regulations, including the impact of income tax reform, non-recurring income tax adjustments, valuation allowance on deferred tax assets, and the income tax effect of non-GAAP exclusions, and do not include the impact of any future acquisitions or divestitures, restructuring charges, facility exit costs, or other non-recurring charges that may occur in the period. F5 is unable to provide a reconciliation of non-GAAP guidance measures to corresponding U.S. generally accepted accounting principles or GAAP measures on a forward-looking basis without unreasonable effort due to the overall high variability and low visibility of most of the foregoing items that have been excluded. Material changes to any one of these items could have a significant effect on our guidance and future GAAP results. Certain exclusions, such as amortization of intangible assets and share-based compensation expenses, are generally incurred each quarter, but the amounts have historically varied and may continue to vary significantly from quarter to quarter.

Live Webcast and Conference Call

F5 will host a live webcast and conference call to review its financial results and outlook today, October 23, 2019, at 1:30 pm PT. The live webcast can be accessed from the investor relations portion of F5.com. To participate in the live call via telephone in the U.S., dial 866-209-3822 and request the F5 Networks call. Outside the U.S., dial +1-647-689-5683. Please call 10 minutes prior to the call start time. The webcast replay will be archived on the investor relations portion of F5’s website.

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, share repurchases, demand for application delivery networking, application delivery services, security, and software 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, and software and SaaS 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 and other documents that we may file or furnish 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 GAAP net income excluding, as applicable, stock-based compensation, amortization of purchased intangible assets, acquisition-related charges, net of taxes, restructuring charges, facility-exit costs, significant litigation and other contingencies 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 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.

The non-GAAP adjustments, and F5's basis for excluding them from non-GAAP financial measures, are outlined below:

Stock-based compensation. Stock-based compensation consists of expense for stock options, restricted stock and employee stock purchases through the company’s ESPP. Although stock-based compensation is an important aspect of the compensation of F5’s employees and executives, management believes it is useful to exclude stock-based compensation expenses to better understand the long-term performance of the company’s core business and to facilitate comparison of the company’s results to those of peer companies.

Amortization of purchased intangible assets. Purchased intangible assets are amortized over their estimated useful lives and generally cannot be changed or influenced by management after the acquisition. Management does not believe these charges accurately reflect the performance of the company’s ongoing operations, therefore, they are not considered by management in making operating decisions. However, investors should note that the use of intangible assets contributed to F5’s revenues earned during the periods presented and will contribute to F5’s future period revenues as well.

Acquisition-related charges, net. F5 does not acquire businesses on a predictable cycle and the terms and scope of each transaction can vary significantly and are unique to each transaction. F5 excludes acquisition-related charges from its non-GAAP financial measures to provide a useful comparison of the company’s operating results to prior periods and to its peer companies. Acquisition-related charges consist of planning, execution and integration costs incurred directly as a result of an acquisition.

Impairment charges. In fiscal year 2019, F5 recorded impairment of capitalized software development costs reflecting strategy changes in certain product development initiatives. These charges are not representative of ongoing costs to the business and are not expected to recur. As a result, these charges are being excluded to provide investors with a more comparable measure of costs associated with ongoing operations.

Restructuring charges. F5 has incurred restructuring charges that are included in its GAAP financial statements, primarily related to workforce reductions and costs associated with exiting facility lease commitments. F5 excludes these items from its non-GAAP financial measures when evaluating its continuing business performance as such items vary significantly based on the magnitude of the restructuring action and do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or past operations of its business.

Facility-exit costs. In fiscal year 2019, F5 relocated its headquarters in Seattle, Washington and recorded charges in connection with this facility exit as well as other non-recurring lease activity. These charges are not representative of ongoing costs to the business and are not expected to recur. As a result, these charges are being excluded to provide investors with a more comparable measure of costs associated with ongoing operations.

Significant litigation and other contingencies. F5, from time to time, may incur charges or benefits that are outside of the ordinary course of F5’s business related to litigation and other contingencies. F5 believes it is useful to exclude such charges or benefits, when significant, because it does not consider such amounts to be part of the ongoing operation of F5’s business and because of the singular nature of the claims underlying such matters.

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 measures of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company’s core business and is used by management 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 these supplemental measures since, with reconciliation to GAAP, it may provide additional insight into the company’s operational performance and financial results.

For reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section in our attached Consolidated Income Statements entitled “Non-GAAP Financial Measures.”

About F5

F5 (FFIV) gives the world’s largest businesses, service providers, governments, and consumer brands the freedom to securely deliver every app, anywhere—with confidence. F5 delivers cloud and security application services that enable organizations to embrace the 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 is a trademark and service mark of F5 Networks, Inc., in the U.S. and other countries.

 
F5 Networks, Inc.
Consolidated Balance Sheets
(unaudited, in thousands)
 
 

September 30,

 

September 30,

2019

 

2018

 
Assets
Current assets
Cash and cash equivalents

$

599,219

$

424,707

Short-term investments

 

373,063

 

614,705

Accounts receivable, net of allowances of 3,259 and $2,040

 

322,029

 

295,352

Inventories

 

34,401

 

30,568

Other current assets

 

182,874

 

52,326

Total current assets

 

1,511,586

 

1,417,658

 
Property and equipment, net

 

223,426

 

145,042

Long-term investments

 

358,402

 

411,184

Deferred tax assets

 

27,701

 

33,441

Goodwill

 

1,065,379

 

555,965

Other assets, net

 

203,781

 

42,186

Total assets

$

3,390,275

$

2,605,476

 
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable

$

62,627

$

57,757

Accrued liabilities

 

235,869

 

180,979

Deferred revenue

 

807,030

 

715,697

Total current liabilities

 

1,105,526

 

954,433

 
Other long-term liabilities

 

131,853

 

65,892

Deferred revenue, long-term

 

391,086

 

299,624

Deferred tax liabilities

 

313

 

35

Total long-term liabilities

 

523,252

 

365,551

 
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, 60,367 and 60,215 shares issued and outstanding

 

142,597

 

20,427

Accumulated other comprehensive loss

 

(19,190)

 

(22,178)

Retained earnings

 

1,638,090

 

1,287,243

Total shareholders' equity

 

1,761,497

 

1,285,492

Total liabilities and shareholders' equity

$

3,390,275

$

2,605,476

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

Three Months Ended

 

Years Ended

September 30,

 

September 30,

2019

 

2018

 

2019

 

2018

 
Net revenues
Products

$

264,926

 

$

256,412

 

$

985,591

 

$

960,108

 

Services

 

325,462

 

 

306,297

 

 

1,256,856

 

 

1,201,299

 

Total

 

590,388

 

 

562,709

 

 

2,242,447

 

 

2,161,407

 

 
Cost of net revenues (1)(2)(3)
Products

 

44,693

 

 

48,505

 

 

174,986

 

 

181,061

 

Services

 

46,225

 

 

44,935

 

 

181,591

 

 

180,420

 

Total

 

90,918

 

 

93,440

 

 

356,577

 

 

361,481

 

Gross profit

 

499,470

 

 

469,269

 

 

1,885,870

 

 

1,799,926

 

 
Operating expenses (1)(2)(3)(4)(5)
Sales and marketing

 

217,554

 

 

160,425

 

 

748,619

 

 

664,135

 

Research and development

 

102,812

 

 

95,078

 

 

408,058

 

 

366,084

 

General and administrative

 

64,390

 

 

41,748

 

 

210,730

 

 

160,382

 

Restructuring charges

 

-

 

 

18,426

 

 

-

 

 

18,426

 

Total

 

384,756

 

 

315,677

 

 

1,367,407

 

 

1,209,027

 

 
Income from operations

 

114,714

 

 

153,592

 

 

518,463

 

 

590,899

 

Other income, net (6)

 

3,397

 

 

5,667

 

 

22,648

 

 

12,861

 

Income before income taxes

 

118,111

 

 

159,259

 

 

541,111

 

 

603,760

 

Provision for income taxes

 

23,274

 

 

26,378

 

 

113,377

 

 

150,071

 

Net income

$

94,837

 

$

132,881

 

$

427,734

 

$

453,689

 

 
 
Net income per share - basic

$

1.57

 

$

2.20

 

$

7.12

 

$

7.41

 

Weighted average shares - basic

 

60,283

 

 

60,462

 

 

60,044

 

 

61,262

 

 
Net income per share - diluted

$

1.57

 

$

2.18

 

$

7.08

 

$

7.32

 

Weighted average shares - diluted

 

60,448

 

 

61,070

 

 

60,456

 

 

62,013

 

 
 
Non-GAAP Financial Measures
 
Net income as reported

$

94,837

 

$

132,881

 

$

427,734

 

$

453,689

 

Stock-based compensation expense (7)

 

43,732

 

 

36,848

 

 

162,914

 

 

157,855

 

Amortization of purchased intangible assets

 

4,586

 

 

2,667

 

 

11,846

 

 

11,080

 

Facility-exit costs

 

15,048

 

 

2,514

 

 

28,800

 

 

2,514

 

Acquisiton-related charges

 

8,079

 

 

-

 

 

41,742

 

 

-

 

Impairment charges

 

6,273

 

 

-

 

 

6,273

 

 

-

 

Restructuring charges

 

-

 

 

18,426

 

 

-

 

 

18,426

 

Gain on sale of patent

 

-

 

 

(534

)

 

-

 

 

(534

)

Tax effects related to above items

 

(15,807

)

 

(15,769

)

 

(53,048

)

 

(49,557

)

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, facility-exit costs, acquisition-related charges, impairment charges, restructuring charges, gain on sale of patent and non-recurring tax expenses and benefits (non-GAAP) - diluted

$

156,748

 

$

177,033

 

$

626,261

 

$

612,057

 

 
Net income per share excluding stock-based compensation expense, amortization of purchased intangible assets, facility-exit costs, acquisition-related charges, impairment charges, restructuring charges, gain on sale of patent and non-recurring tax expenses and benefits (non-GAAP) - diluted

$

2.59

 

$

2.90

 

$

10.36

 

$

9.87

 

 
Weighted average shares - diluted

 

60,448

 

 

61,070

 

 

60,456

 

 

62,013

 

 
(1) Includes stock-based compensation expense as follows:
Cost of net revenues

$

5,233

 

$

5,182

 

$

20,385

 

$

21,122

 

Sales and marketing

 

19,832

 

 

14,347

 

 

69,477

 

 

61,533

 

Research and development

 

10,288

 

 

10,892

 

 

40,886

 

 

47,327

 

General and administrative

 

8,379

 

 

6,427

 

 

32,166

 

 

27,873

 

$

43,732

 

$

36,848

 

$

162,914

 

$

157,855

 

 
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues

$

3,096

 

$

1,890

 

$

7,653

 

$

7,973

 

Sales and marketing

 

961

 

 

252

 

 

2,083

 

 

1,007

 

General and administrative

 

529

 

 

525

 

 

2,110

 

 

2,100

 

$

4,586

 

$

2,667

 

$

11,846

 

$

11,080

 

 
(3) Includes facility-exit costs as follows:
Cost of net revenues

$

1,806

 

$

352

 

$

3,520

 

$

352

 

Sales and marketing

 

3,838

 

 

630

 

 

7,470

 

 

630

 

Research and development

 

4,403

 

 

1,247

 

 

9,994

 

 

1,247

 

General and administrative

 

5,001

 

 

285

 

 

7,816

 

 

285

 

$

15,048

 

$

2,514

 

$

28,800

 

$

2,514

 

 
(4) Includes acquisition-related charges as follows:
Sales and marketing

$

445

 

$

-

 

$

6,551

 

$

-

 

Research and development

 

205

 

 

-

 

 

16,321

 

 

-

 

General and administrative

 

7,429

 

 

-

 

 

18,870

 

 

-

 

$

8,079

 

$

-

 

$

41,742

 

$

-

 

 
(5) Includes impairment charges as follows:
General and administrative

$

6,273

 

$

-

 

$

6,273

 

$

-

 

$

6,273

 

$

-

 

$

6,273

 

$

-

 

 
(6) Includes gain on sale of patent as follows:
Other income, net

$

-

 

$

(534

)

$

-

 

$

(534

)

$

-

 

$

(534

)

$

-

 

$

(534

)

 
(7) 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)
     
     
 

Years Ended

 

September 30,

 

 

2019

 

 

 

 

2018

 

     
Operating activities    
Net income  

$

427,734

 

 

$

453,689

 

Adjustments to reconcile net income to net cash provided by operating activities:    
Realized loss (gain) on disposition of assets and investments  

 

1,106

 

 

 

(267

)

Stock-based compensation  

 

162,914

 

 

 

157,855

 

Provisions for doubtful accounts and sales returns  

 

556

 

 

 

1,461

 

Depreciation and amortization  

 

68,507

 

 

 

59,491

 

Deferred income taxes  

 

7,440

 

 

 

20,810

 

Impairment of assets  

 

6,273

 

 

 

-

 

Non-cash provisions for exit costs  

 

8,211

 

 

 

-

 

Changes in operating assets and liabilities:    
Accounts receivable  

 

(18,305

)

 

 

(4,889

)

Inventories  

 

(3,832

)

 

 

(734

)

Other current assets  

 

(75,449

)

 

 

15,607

 

Other assets  

 

(22,742

)

 

 

446

 

Accounts payable and accrued liabilities  

 

74,710

 

 

 

6,583

 

Deferred revenue  

 

110,718

 

 

 

51,016

 

Net cash provided by operating activities  

 

747,841

 

 

 

761,068

 

     
Investing activities    
Purchases of investments  

 

(602,987

)

 

 

(855,424

)

Maturities of investments  

 

625,201

 

 

 

439,130

 

Sales of investments  

 

278,244

 

 

 

12,736

 

Acquisition of businesses, net of cash acquired  

 

(611,550

)

 

 

-

 

Cash provided by sale of fixed asset  

 

-

 

 

 

1,000

 

Purchases of property and equipment  

 

(103,542

)

 

 

(53,465

)

Net cash used in investing activities  

 

(414,634

)

 

 

(456,023

)

     
Financing activities    
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan  

 

45,598

 

 

 

48,818

 

Repurchase of common stock  

 

(201,045

)

 

 

(600,081

)

Net cash used in financing activities  

 

(155,447

)

 

 

(551,263

)

     
Net increase (decrease) in cash, cash equivalents and restricted cash  

 

177,760

 

 

 

(246,218

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash  

 

(1,400

)

 

 

(2,340

)

Cash, cash equivalents and restricted cash, beginning of period  

 

425,894

 

 

 

674,452

 

Cash, cash equivalents and restricted cash, end of period  

$

602,254

 

 

$

425,894

 

 

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