Press release

F5 Networks Announces Second Quarter Fiscal Year 2019 Results Including Software Revenue Growth of 30%

Sponsored by Businesswire

F5 Networks, Inc. (NASDAQ: FFIV) today announced financial results for
its fiscal 2019 second quarter ended March 31, 2019.

“The combination of demand for application security and our new software
consumption models, including Enterprise Licensing Agreements, helped
drive 30% software revenue growth in our second fiscal quarter,” said
François Locoh-Donou, F5 President and Chief Executive Officer.
“Security use cases are at the forefront of our customer conversations
and customers globally rely on F5 to provide consistent application
security and reliable performance as they deploy across private, public,
hybrid, and multi-cloud environments.”

“Over the last 18 months, as part of our transition to a multi-cloud
applications services company, we have made significant shifts in where
and how we invest our resources and our customers already are
benefitting. In addition to meaningfully expanding our software
offerings, during the second quarter we launched F5 Cloud Services and
our first SaaS offering on that platform. Our portfolio of solutions to
reach every app, anywhere continues to expand at pace,” said Locoh-Donou.

Second Quarter Performance Summary

Revenue of $544.9 million for the second quarter of fiscal year 2019
reflects 2% growth from $533.3 million in the second quarter of fiscal
year 2018, driven by software solutions revenue growth of 30%.

GAAP net income for the second quarter of fiscal year 2019 was $116.1
million, or $1.93 per diluted share, and includes $39.5 million in
stock-based compensation, $3.5 million in costs related to the announced
acquisition of NGINX, $2.6 million in facility exit costs and $1.8
million in amortization of purchased intangible assets. This compares
with second quarter fiscal year 2018 GAAP net income of $109.6 million,
or $1.77 per diluted share.

Non-GAAP net income for the second quarter of fiscal year 2019 was
$154.4 million, or $2.57 per diluted share, compared to $143.3 million,
or $2.31 per diluted share, in the second quarter of fiscal year 2018.
Non-GAAP net income for the second quarter of fiscal year 2019 and the
second quarter of fiscal year 2018 excludes the impact of stock-based
compensation, amortization of purchased intangible assets, and
non-recurring tax expenses and benefits. Non-GAAP net income for the
second quarter of fiscal year 2019 also excludes facility exit costs
related to the Company’s headquarter move and costs related to the
announced acquisition of NGINX.

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 below.

F5 generated $194 million in cash flow from operations in the second
fiscal quarter, which contributed to cash and investments totaling $1.6
billion at quarter end.

During the second quarter of fiscal year 2019, F5 repurchased
approximately 617 thousand shares of its common stock at an average
price of $162.06 per share for an aggregate purchase price of $100.0

Business Outlook

Excluding any impact from the acquisition of NGINX, for the third
quarter of fiscal year 2019 ending June 30, 2019, the Company expects to
deliver revenue in the range of $550 million to $560 million with
non-GAAP earnings in the range of $2.54 to $2.57 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, April 24, 2019, at 1:30 pm PT. The live
webcast can be accessed at
To participate in the live call via telephone in the U.S., dial
866-209-3822. 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 IR portion of F5’s website at

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 F5aaS
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, 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, therefor, 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.

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.

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

About F5

F5 (NASDAQ: 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
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)
March 31, September 30,
  2019     2018  
Current assets

Cash and cash equivalents

$ 726,662 $ 424,707
Short-term investments 587,115 614,705
Accounts receivable, net of allowances of $2,326 and $2,040 321,484 295,352
Inventories 33,463 30,568
Other current assets   138,736     52,326  
Total current assets   1,807,460     1,417,658  
Property and equipment, net 208,221 145,042
Long-term investments 301,357 411,184
Deferred tax assets 21,551 33,441
Goodwill 555,965 555,965
Other assets, net   95,682     42,186  
Total assets $ 2,990,236   $ 2,605,476  
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable $ 68,156 $ 57,757
Accrued liabilities 197,295 180,979
Deferred revenue   809,336     715,697  
Total current liabilities   1,074,787     954,433  
Other long-term liabilities 95,530 65,892
Deferred revenue, long-term 352,109 299,624
Deferred tax liabilities   402     35  
Total long-term liabilities   448,041     365,551  
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, 59,695 and
60,215 shares issued and outstanding

29,401 20,427
Accumulated other comprehensive loss (19,341 ) (22,178 )
Retained earnings   1,457,348     1,287,243  
Total shareholders’ equity   1,467,408     1,285,492  
Total liabilities and shareholders’ equity $ 2,990,236   $ 2,605,476  
F5 Networks, Inc.
Consolidated Income Statements
(unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
  2019     2018     2019     2018  
Net revenues
Products $ 237,859 $ 237,558 $ 471,736 $ 464,861
Services   307,036     295,746     616,929     591,634  
Total 544,895 533,304 1,088,665 1,056,495
Cost of net revenues (1)(2)
Products 43,547 44,127 85,957 87,392
Services   44,631     45,518     88,935     89,640  
Total   88,178     89,645     174,892     177,032  
Gross profit 456,717 443,659 913,773 879,463
Operating expenses (1)(2)
Sales and marketing 170,954 169,970 335,213 337,904
Research and development 96,314 91,056 188,352 176,945
General and administrative   46,656     39,276     89,199     79,260  
Total   313,924     300,302     612,764     594,109  
Income from operations 142,793 143,357 301,009 285,354
Other income, net   7,434     2,790     14,529     4,935  
Income before income taxes 150,227 146,147 315,538 290,289
Provision for income taxes   34,140     36,511     68,546     92,224  
Net income $ 116,087   $ 109,636   $ 246,992   $ 198,065  
Net income per share – basic $ 1.94   $ 1.79   $ 4.12   $ 3.20  
Weighted average shares – basic   59,686     61,420     59,954     61,812  
Net income per share – diluted $ 1.93   $ 1.77   $ 4.09   $ 3.18  
Weighted average shares – diluted   60,029     62,059     60,374     62,351  
Non-GAAP Financial Measures
Net income as reported $ 116,087 $ 109,636 $ 246,992 $ 198,065
Stock-based compensation expense (3) 39,494 41,320 78,183 82,268
Amortization of purchased intangible assets 1,774 2,805 3,548 5,610
Facility exit costs 2,592 5,048
Acquisiton-related charges 3,530 3,530
Tax effects related to above items (9,036 ) (10,466 ) (19,322 ) (19,649 )
Tax on deemed repatriation of undistributed foreign earnings 7,000
Remeasurement of net deferred tax assets due to change in U.S. tax
Net income excluding stock-based compensation expense, amortization
purchased intangible assets, facility exit costs,
acquisition-related charges
and non-recurring tax expenses and benefits (non-GAAP) – diluted $ 154,441   $ 143,295   $ 317,979   $ 284,878  
Net income per share excluding stock-based compensation expense,
of purchased intangible assets, facility exit costs,
acquisition-related charges
and non-recurring tax expenses and benefits (non-GAAP) – diluted $ 2.57   $ 2.31   $ 5.27   $ 4.57  
Weighted average shares – diluted   60,029     62,059     60,374     62,351  
(1) Includes stock-based compensation expense as follows:
Cost of net revenues $ 4,946 $ 5,543 $ 10,034 $ 10,993
Sales and marketing 16,359 15,555 31,878 31,033
Research and development 10,269 12,497 20,561 24,903
General and administrative   7,920     7,725     15,710     15,339  
$ 39,494   $ 41,320   $ 78,183   $ 82,268  
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues $ 1,043 $ 2,028 $ 2,086 $ 4,056
Sales and marketing 206 252 412 504
General and administrative   525     525     1,050     1,050  
$ 1,774   $ 2,805   $ 3,548   $ 5,610  
(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,
  2019     2018  
Operating activities
Net income $ 246,992 $ 198,065
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized loss on disposition of assets and investments 47 52
Stock-based compensation 78,183 82,268
Provisions for doubtful accounts and sales returns (90 ) 691
Depreciation and amortization 28,246 30,049
Deferred income taxes 3,606 17,642
Changes in operating assets and liabilities:
Accounts receivable (24,419 ) 314
Inventories (2,895 ) 322
Other current assets (35,735 ) 5,493
Other assets 2,683 (1,111 )
Accounts payable and accrued liabilities 16,746 (5,308 )
Deferred revenue   78,046     46,235  
Net cash provided by operating activities   391,410     374,712  
Investing activities
Purchases of investments (211,087 ) (353,414 )
Maturities of investments 351,600 186,961
Sales of investments 2,499 9,248
Cash provided by sale of fixed asset 1,000
Purchases of property and equipment   (50,056 )   (16,246 )
Net cash provided by (used in) investing activities   92,956     (172,451 )
Financing activities

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

18,900 19,917
Repurchase of common stock   (201,045 )   (300,046 )
Net cash used in financing activities   (182,145 )   (280,129 )
Net increase (decrease) in cash, cash equivalents and restricted cash 302,221 (77,868 )
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
(265 ) 576
Cash, cash equivalents and restricted cash, beginning of period   425,894     674,452  
Cash, cash equivalents and restricted cash, end of period $ 727,850   $ 597,160