F5, INC. The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These statements include, but are not limited to, statements about our plans, objectives, expectations, strategies, intentions or other characterizations of future events or circumstances and are generally identified by the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions. These forward-looking statements are based on current information and expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 1A. "Risk Factors" herein and in other documents we file from time to time with theSecurities and Exchange Commission . We assume no obligation to revise or update any such forward-looking statements. Overview F5 is a leading provider of multi-cloud application services which enable our customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. Our enterprise-grade application services are available as cloud-based, software-as-a-service, and software-only solutions optimized for multi-cloud environments, with modules that can run independently, or as part of an integrated solution on our high-performance appliances. We market and sell our products primarily through multiple indirect sales channels in theAmericas (primarilythe United States );Europe , theMiddle East , andAfrica (EMEA); and theAsia Pacific region (APAC). Enterprise customers (Fortune 1000 or Business Week Global 1000 companies) in the technology, telecommunications, financial services, transportation, education, manufacturing and health care industries, along with government customers, continue to make up the largest percentage of our customer base. Our management team monitors and analyzes a number of key performance indicators in order to manage our business and evaluate our financial and operating performance on a consolidated basis. Those indicators include: •Revenues. The majority of our revenues are derived from sales of our application delivery controller (ADC) products including our BIG-IP appliances and VIPRION chassis and related software modules and our software-only Virtual Editions; Local Traffic Manager (LTM), DNS Services (formerly Global Traffic Manager); Advanced Firewall Manager (AFM) and Policy Enforcement Manager (PEM), that leverage the unique performance characteristics of our hardware and software architecture; and products that incorporate acquired technology, including Application Security Manager (ASM) and Access Policy Manager (APM); NGINX Plus and NGINX Controller; Shape Defense and Enterprise Defense; and the Secure Web Gateway and Silverline DDoS and Application security offerings which are sold to customers on a subscription basis. We also derive revenues from the sales of services including annual maintenance contracts, training and consulting services. We carefully monitor the sales mix of our revenues within each reporting period. We believe customer acceptance rates of our new products and feature enhancements are indicators of future trends. We also consider overall revenue concentration by customer and by geographic region as additional indicators of current and future trends. We are also monitoring the uncertainty related to the impacts that the COVID-19 pandemic has on the global economy and our customer base. 27 -------------------------------------------------------------------------------- Table of Contents •Cost of revenues and gross margins. We strive to control our cost of revenues and thereby maintain our gross margins. Significant items impacting cost of revenues are hardware costs paid to our contract manufacturers, third-party software license fees, software-as-a-service infrastructure costs, amortization of developed technology and personnel and overhead expenses. Our margins have remained relatively stable; however, factors such as sales price, product and services mix, inventory obsolescence, returns, component price increases, warranty costs, and the uncertainty surrounding the COVID-19 pandemic and its potential impacts to our supply chain could significantly impact our gross margins from quarter to quarter and represent significant indicators we monitor on a regular basis. •Operating expenses. Operating expenses are substantially driven by personnel and related overhead expenses. Existing headcount and future hiring plans are the predominant factors in analyzing and forecasting future operating expense trends. Other significant operating expenses that we monitor include marketing and promotions, travel, professional fees, computer costs related to the development of new products and provision of services, facilities and depreciation expenses. •Liquidity and cash flows. Our financial condition remains strong with significant cash and investments. The decrease in cash and investments for the first nine months of fiscal year 2021 was primarily due to$411.3 million in cash paid for the acquisition ofVolterra in the second quarter of fiscal 2021, partially offset by cash provided by operating activities of$448.1 million . Going forward, we believe the primary driver of cash flows will be net income from operations. Capital expenditures of$23.5 million for the first nine months of fiscal year 2021 were primarily related to the expansion of our facilities to support our operations worldwide as well as investments in information technology infrastructure and equipment purchases to support our core business activities. We will continue to evaluate possible acquisitions of, or investments in businesses, products, or technologies that we believe are strategic, which may require the use of cash. Additionally, onJanuary 31, 2020 , we entered into a Revolving Credit Agreement (the "Revolving Credit Agreement") that provides for a senior unsecured revolving credit facility in an aggregate principal amount of$350.0 million (the "Revolving Credit Facility"). We have the option to increase commitments under the Revolving Credit Facility from time to time, subject to certain conditions, by up to$150.0 million . As ofJune 30, 2021 , there were no outstanding borrowings under the Revolving Credit Facility, and we had available borrowing capacity of$350.0 million . •Balance sheet. We view cash, short-term and long-term investments, deferred revenue, accounts receivable balances and days sales outstanding as important indicators of our financial health. Deferred revenues continued to increase in the third quarter of fiscal year 2021 due to growth in the amount of annual maintenance contracts purchased on new products and maintenance renewal contracts related to our existing product installation base. In addition, we continued to see growth in our subscriptions business, including deferred revenue associated with theVolterra acquisition. Our days sales outstanding at the end of the third quarter of fiscal year 2021 was 53. Days sales outstanding is calculated by dividing ending accounts receivable by revenue per day for a given quarter. Summary of Critical Accounting Policies and Estimates The preparation of our financial condition and results of operations requires us to make judgments and estimates that may have a significant impact upon our financial results. We believe that, of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management, which can materially impact reported results: revenue recognition, accounting for business combinations and accounting for leases. Actual results may differ from these estimates under different assumptions or conditions. There were no material changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K for the fiscal year endedSeptember 30, 2020 . Refer to the "Recently Adopted Accounting Standards" section of Note 1 in this Quarterly Report on Form 10-Q for a summary of the new accounting policies. COVID-19 Update Management has prioritized a human-first approach to the COVID-19 pandemic. For F5, this means ensuring the health and safety of employees, their families and our communities. Further, this approach extends to our customers as we look for ways that we can support their operations during this crisis. While our analysis shows COVID-19 did not have a significant impact on our results of operations for the quarter endedJune 30, 2021 , the full impacts of the global pandemic on our business and financial outlook are currently unknown. We are conducting business with substantial modifications to employee travel, employee work locations, and virtualization or cancellation of certain sales and marketing events, among other modifications. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, 28 -------------------------------------------------------------------------------- Table of Contents or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers and prospects, or on our financial results. Results of Operations The following discussion and analysis should be read in conjunction with our consolidated financial statements, related notes and risk factors included elsewhere in this Quarterly Report on Form 10-Q. Three months ended Nine months ended June 30, June 30, 2021 2020 2021 2020 (in thousands, except percentages) Net Revenues Products$ 309,929 $ 253,331 $ 907,163 $ 747,405 Services 341,586 329,921 1,014,256 988,601 Total$ 651,515 $ 583,252 $ 1,921,419 $ 1,736,006 Percentage of net revenues Products 47.6 % 43.4 % 47.2 % 43.1 % Services 52.4 56.6 52.8 56.9 Total 100.0 % 100.0 % 100.0 % 100.0 % Net Revenues. Total net revenues increased 11.7% and 10.7% for the three and nine months endedJune 30, 2021 , respectively, from the comparable periods in the prior year. Overall revenue growth for the three and nine months endedJune 30, 2021 , was primarily due to increased software product revenue including our subscription-based software products and increased service revenues as a result of our increased installed base of products. International revenues represented 46.5% and 48.4% of total net revenues for the three and nine months endedJune 30, 2021 , respectively, compared to 46.9% and 48.9% for the same periods in the prior year, respectively. Net Product Revenues. Net product revenues increased 22.3% and 21.4% for the three and nine months endedJune 30, 2021 , respectively, from the comparable periods on the prior year. The increase in net product revenues for the three and nine months endedJune 30, 2021 was primarily due to an increase in software product sales compared to the same periods in the prior year. The following presents net product revenues by systems and software: Three months ended Nine months ended June 30, June 30, 2021 2020 2021 2020 (in thousands, except percentages) Net product revenues Systems revenue$ 180,448 $ 159,447 $ 559,970 $ 500,431 Software revenue 129,481 93,884 347,193 246,974 Total net product revenue$ 309,929 $ 253,331 $ 907,163 $ 747,405 Percentage of net product revenues Systems revenue 58.2 % 62.9 % 61.7 % 67.0 % Software revenue 41.8 37.1 38.3 33.0 Total net product revenue 100.0 % 100.0 % 100.0 % 100.0 % Net Service Revenues. Net service revenues increased 3.5% and 2.6% for the three and nine months endedJune 30, 2021 , respectively, from the comparable periods in the prior year. The increase in net service revenues was primarily due to increases in the purchase or renewal of maintenance contracts driven by additions to our installed base of products. 29 -------------------------------------------------------------------------------- Table of Contents The following distributors of our products accounted for more than 10% of total net revenue: Three months ended Nine months ended June 30, June 30, 2021 2020 2021 2020 Ingram Micro, Inc. 20.7 % 16.0 % 18.8 % 16.6 % Arrow ECS - 11.1 % - 10.3 % Synnex Corporation 12.0 % - 11.2 % - The following distributors of our products accounted for more than 10% of total receivables: June 30, September 30, 2020 2021 Ingram Micro, Inc. 17.1 % 14.1 % Arrow ECS 12.8 % - Synnex Corporation 12.5 % 11.4 % No other distributors accounted for more than 10% of total net revenue or receivables. Three months ended Nine months ended June 30, June 30, 2021 2020 2021 2020 (in thousands, except percentages) Cost of net revenues and gross profit Products$ 68,974 $ 57,437 $ 209,301 $ 152,641 Services 51,930 48,603 155,167 143,279 Total$ 120,904 $ 106,040 $ 364,468 $ 295,920 Gross profit$ 530,611 $ 477,212 $ 1,556,951 $ 1,440,086 Percentage of net revenues and gross profit (as a percentage of related net revenue) Products 22.3 % 22.7 % 23.1 % 20.4 % Services 15.2 14.7 15.3 14.5 Total 18.6 % 18.2 % 19.0 % 17.0 % Gross profit 81.4 % 81.8 % 81.0 % 83.0 % Cost of Net Product Revenues. Cost of net product revenues consist of finished products purchased from our contract manufacturers, manufacturing overhead, freight, warranty, provisions for excess and obsolete inventory, software-as-a-service infrastructure costs and amortization expenses in connection with developed technology from acquisitions. Cost of net product revenues increased$11.5 million and$56.7 million , or 20.1% and 37.1% for the three and nine months endedJune 30, 2021 , respectively, from the comparable periods in the prior year. The increase in cost of net product revenues was primarily due to software product revenue growth for the three and nine months endedJune 30, 2021 from the comparable periods in the prior year. Cost of Net Service Revenues. Cost of net service revenues consist of the salaries and related benefits of our professional services staff, travel, facilities and depreciation expenses. For the three and nine months endedJune 30, 2021 , cost of net service revenues as a percentage of net service revenues was 15.2% and 15.3%, respectively, compared to 14.7% and 14.5% for the comparable periods in the prior year, respectively. Professional services headcount at the end ofJune 2021 increased to 997 from 950 at the end ofJune 2020 . 30
--------------------------------------------------------------------------------
Table of Contents
Three months ended Nine months ended
June 30, June 30,
2021 2020 2021 2020
(in thousands, except percentages)
Operating expenses
Sales and marketing $ 237,375
133,283 115,991 387,927 321,024
General and administrative 63,541 61,792 204,534 194,809
Restructuring charges - - - 7,800
Total $ 434,199
36.4 % 36.3 % 36.3 % 35.9 %
Research and development 20.5 19.9 20.2 18.5
General and administrative 9.7 10.6 10.6 11.2
Restructuring charges - - - 0.4
Total 66.6 % 66.8 % 67.1 % 66.0 %
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions and related benefits of our sales and marketing staff, the costs of
our marketing programs, including public relations, advertising and trade shows,
travel, facilities, and depreciation expenses. Sales and marketing expenses
increased $25.6 million and $74.0 million , or 12.1% and 11.9% for the three and
nine months ended June 30, 2021 , respectively, from the comparable periods in
the prior year. The increase in sales and marketing expense was primarily due to
an increase of $11.6 million and $43.1 million in personnel costs for the three
and nine months ended June 30, 2021 , respectively, from the comparable periods
in the prior year. Sales and marketing expenses for the nine months ended
June 30, 2021 also included impairment charges of $11.5 million related to the
exit of certain facilities. Sales and marketing headcount at the end of June
2021 increased to 2,449 from 2,386 at the end of June 2020 . Sales and marketing
expenses included stock-based compensation expense of $26.4 million and
$78.7 million for the three and nine months ended June 30, 2021 , respectively,
compared to $21.8 million and $66.2 million for the same periods in the prior
year, respectively.
Research and Development. Research and development expenses consist of the
salaries and related benefits of our product development personnel, prototype
materials and other expenses related to the development of new and improved
products, facilities and depreciation expenses. Research and development
expenses increased $17.3 million and $66.9 million , or 14.9% and 20.8% for the
three and nine months ended June 30, 2021 , respectively, from the comparable
periods in the prior year. The increase in research and development expense was
primarily due to an increase of $15.2 million and $43.6 million in personnel
costs for the three and nine months ended June 30, 2021 , respectively, from the
comparable periods in the prior year. Research and development expenses for the
nine months ended June 30, 2021 also included impairment charges of
$13.0 million related to the exit of certain facilities. Research and
development headcount at the end of June 2021 increased to 1,881 from 1,771 at
the end of June 2020 . Research and development expenses included stock-based
compensation expense of $17.3 million and $50.0 million for the three and nine
months ended June 30, 2021 , respectively, compared to $13.1 million and
$36.9 million for the same periods in the prior year, respectively.
General and Administrative. General and administrative expenses consist of the
salaries, benefits and related costs of our executive, finance, information
technology, human resource and legal personnel, third-party professional service
fees, facilities and depreciation expenses. General and administrative expenses
increased $1.7 million and $9.7 million , or 2.8% and 5.0% for the three and nine
months ended June 30, 2021 , respectively, from the comparable periods in the
prior year. The increase in general and administrative expense was primarily due
to an increase of $3.6 million and $9.4 million in personnel costs for the three
and nine months ended June 30, 2021 , respectively, from the comparable periods
in the prior year. General and administrative expenses for the nine months ended
June 30, 2021 also included impairment charges of $9.9 million related to the
exit of certain facilities. General and administrative headcount at the end of
June 2021 increased to 802 from 679 at the end of June 2020 . General and
administrative expenses included stock-based compensation expense of
$10.5 million and $32.1 million for the three and nine months ended June 30,
2021 , respectively, compared to $9.2 million and $28.0 million for the same
periods in the prior year, respectively.
Restructuring Charges. In the first fiscal quarter of 2020, we completed a
restructuring plan to align strategic and financial objectives and optimize
resources for long term growth. As a result of these initiatives, we recorded a
restructuring charge of $7.8 million related to a reduction in workforce that is
reflected in our results for the nine months ended June 30, 2020 . There were no
restructuring expenses recorded for the nine months ended June 30, 2021 .
31--------------------------------------------------------------------------------
Table of Contents
Three months ended Nine months ended
June 30, June 30,
2021 2020 2021 2020
(in thousands, except percentages)
Other income and income taxes
Income from operations $ 96,412 $ 87,621 $ 267,661 $ 293,654
Other income, net (2,163) 141 (4,223) 5,220
Income before income taxes 94,249 87,762 263,438 298,874
Provision for income taxes 4,645 17,890 42,915 69,096
Net income $ 89,604 $ 69,872 $ 220,523 $ 229,778
Other income and income taxes (as percentage of net revenue)
Income from operations 14.8 % 15.0 % 13.9 % 16.9 %
Other income, net (0.3) - (0.2) 0.3
Income before income taxes 14.5 15.0 13.7 17.2
Provision for income taxes 0.7 3.0 2.2 4.0
Net income 13.8 % 12.0 % 11.5 % 13.2 %
Other Income, Net. Other income, net consists primarily of interest income and
expense and foreign currency transaction gains and losses. The decrease in other
income, net for the three and nine months ended June 30, 2021 was primarily due
to a decrease in interest income of $1.9 million and $9.0 million , respectively,
from our investments compared to the same periods in the prior year.
Provision for Income Taxes. The effective tax rate was 4.9% and 16.3% for the
three and nine months ended June 30, 2021 , respectively, compared to 20.4% and
23.1% for the three and nine months ended June 30, 2020 , respectively. The
decrease in the effective tax rate for the three and nine months ended June 30,
2021 as compared to the three and nine months ended June 30, 2020 is primarily
due to the discrete impact from filing of the company's fiscal year 2020 U.S.
federal income tax return during the period ended June 30, 2021 and the tax
impact of stock-based compensation.
We record a valuation allowance to reduce our deferred tax assets to the amount
we believe is more likely than not to be realized. In making these
determinations we consider historical and projected taxable income, and ongoing
prudent and feasible tax planning strategies in assessing the appropriateness of
a valuation allowance. Our net deferred tax assets at June 30, 2021 and
September 30, 2020 were $126.9 million and $44.6 million , respectively. The net
deferred tax assets include valuation allowances of $41.6 million and $32.6
million as of June 30, 2021 and September 30, 2020 , respectively, which are
primarily related to certain state and foreign net operating loss and tax credit
carryforwards.
Our worldwide effective tax rate may fluctuate based on a number of factors,
including variations in projected taxable income in the various geographic
locations in which we operate, the impact of stock-based compensation, changes
in the valuation of our net deferred tax assets, resolution of potential
exposures, tax positions taken on tax returns filed in the various geographic
locations in which we operate, and the introduction of new accounting standards
or changes in tax laws or interpretations thereof in the various geographic
locations in which we operate. We have recorded liabilities to address potential
tax exposures related to business and income tax positions we have taken that
could be challenged by taxing authorities. The ultimate resolution of these
potential exposures may be greater or less than the liabilities recorded which
could result in an adjustment to our future tax expense.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and long-term investments
totaled $863.1 million as of June 30, 2021 , compared to $1,312.8 million as of
September 30, 2020 , representing a decrease of $449.7 million . The decrease was
primarily due to $411.3 million in cash paid for the acquisition of Volterra in
the second quarter of fiscal 2021, partially offset by cash provided by
operating activities of $448.1 million for the nine months ended June 30, 2021 .
Cash provided by operating activities for the first nine months of fiscal year
2021 resulted from net income of $220.5 million combined with changes in
operating assets and liabilities, as adjusted for various non-cash items
including stock-based compensation, deferred revenue, depreciation and
amortization charges.
Cash from operations could be affected by various risks and uncertainties,
including, but not limited to, the effects of the COVID-19 pandemic and other
risks detailed in Part II, Item 1A titled "Risk Factors". However, we anticipate
our current cash, cash equivalents and investment balances, anticipated cash
flows generated from operations, and available borrowing capacity on the
Revolver Credit Facility will be sufficient to meet our liquidity needs.
32
--------------------------------------------------------------------------------
Table of Contents
Cash used in investing activities was $253.7 million for the nine months ended
June 30, 2021 , compared to cash used in investing activities of $762.8 million
for the same period in the prior year. Investing activities include purchases,
sales and maturities of available-for-sale securities, business acquisitions and
capital expenditures. The amount of cash used in investing activities for the
nine months ended June 30, 2021 was primarily the result of $411.3 million in
cash paid for the acquisition of Volterra and $255.3 million in purchases of
investments, partially offset by $164.9 million in maturities of investments and
$271.5 million in sales of investments.
Cash used in financing activities was $461.2 million for the nine months ended
June 30, 2021 , compared to cash provided by financing activities of $394.0
million for the same period in the prior year. Our financing activities for the
nine months ended June 30, 2021 primarily consisted of $500.0 million in cash
used to repurchase shares under our Accelerated Share Repurchase agreements, as
well as $15.0 million in cash used to make principal payments on our term loan
and $10.9 million in cash used for taxes related to net share settlement of
equity awards. Cash used in financing activities was partially offset by
$64.7 million of cash received from the exercise of employee stock options and
stock purchases under our employee stock purchase plan.
On January 31, 2020 , we entered into a Revolving Credit Agreement (the
"Revolving Credit Agreement") that provides for a senior unsecured revolving
credit facility in an aggregate principal amount of $350.0 million (the
"Revolving Credit Facility"). We have the option to increase commitments under
the Revolving Credit Facility from time to time, subject to certain conditions,
by up to $150.0 million . As of June 30, 2021 , there were no outstanding
borrowings under the Revolving Credit Facility, and we had available borrowing
capacity of $350.0 million .
On February 3, 2021 , we entered into Accelerated Share Repurchase ("ASR")
agreements with two financial institutions under which we paid an aggregate of
$500 million . See Note 11, Shareholders' Equity, for additional information on
the ASR program.
Obligations and Commitments
As of June 30, 2021 , our principal commitments consisted of borrowings under the
Term Loan Facility and obligations outstanding under operating leases.
In connection with the acquisition of Shape, on January 24, 2020 , we entered
into a Term Credit Agreement ("Term Credit Agreement") with certain
institutional lenders that provides for a senior unsecured term loan facility in
an aggregate principal amount of $400.0 million (the "Term Loan Facility"). The
proceeds from the Term Loan Facility were primarily used to finance the
acquisition of Shape and related expenses. As of June 30, 2021 , $375.0 million
of principal amount under the Term Loan Facility was outstanding. There is a
financial covenant that requires us to maintain a leverage ratio, calculated as
of the last day of each fiscal quarter, of consolidated total indebtedness to
consolidated EBITDA. This covenant may result in a higher interest rate on our
outstanding principal borrowings on the Term Loan Facility in future periods,
depending on the Company's performance. We will monitor the effect that the
COVID-19 pandemic may have on our leverage ratio calculation but do not believe
there will be a material impact to the interest payable on our borrowings under
the Term Loan Facility. Refer to Note 7 for the scheduled principal maturities
of the Term Loan Facility as of June 30, 2021 .
We lease our facilities under operating leases that expire at various dates
through 2033. There have been no material changes in our principal lease
commitments compared to those discussed in Management's Discussion and Analysis
of Financial Condition and Results of Operations included in our Annual Report
on Form 10-K for the fiscal year ended September 30, 2020 .
We outsource the manufacturing of our pre-configured hardware platforms to
contract manufacturers who assemble each product to our specifications. Our
agreement with our largest contract manufacturer allows them to procure
component inventory on our behalf based upon a rolling production forecast. We
are contractually obligated to purchase the component inventory in accordance
with the forecast, unless we give notice of order cancellation in advance of
applicable lead times.
Recent Accounting Pronouncements
The anticipated impact of recent accounting pronouncements is discussed in Note
1 to the accompanying Notes to Consolidated Financial Statements of this
Quarterly Report on Form 10-Q.
33--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
