FFIV F5 Inc

For the first quarter of fiscal 2017, F5 Networks, Inc. (NASDAQ: FFIV) announced revenue of $516.0 million, up 5.4 percent from $489.5 million in the first quarter of fiscal 2016.

GAAP net income was $94.2 million ($1.44 per diluted share), compared to $89.7 million ($1.28 per diluted share) in the first quarter a year ago. Excluding the impact of stock-based compensation and amortization of purchased intangible assets, non-GAAP net income was $130.3 million ($1.98 per diluted share), compared to $120.6 million ($1.73 per diluted share) in the first quarter of last year.

A reconciliation of GAAP net income to non-GAAP net income is included on the attached Consolidated Income Statements.

“As we anticipated, the launch of BIG-IP iSeries, which we successfully completed in November, was a significant contributor to product revenue which grew 2 percent year-over-year,” said John McAdam, F5 president and chief executive officer. “iSeries bookings during the quarter represented approximately 18 percent of appliance bookings and we believe that percentage will increase during the current quarter with general availability of the complete family for the entire quarter.

“In addition to strong initial demand for the iSeries, software sales, including software modules that run on our purpose-built hardware and Virtual Editions designed to run on any standard hypervisor, continued to grow as a percentage of product revenue. We expect this trend to continue in the current quarter, driven by the release of our 40-Gigabit VEs, with throughput four times faster than previous versions, and by increasing uptake of iSeries appliances, designed to support more modules than their predecessors.

“For the second quarter in a row, security sales also accounted for an increasing percentage of product sales reflecting strong demand for Access Policy Manager and our firewall products and benefiting from increased sales of SSL Orchestrator. During the quarter, both SSL Orchestrator and DDoS Hybrid defender shipped as software modules on BIG-IP. Beginning this quarter, each will ship as a standalone product on our new Herculon security platform.

“Product sales were robust in the Americas, APAC and Japan in Q1, while sales in EMEA remained relatively soft, and were down year over year. As we emphasized during our Analyst/Investor Meeting in November, the array of new products we have brought to market recently and those we are introducing this quarter are closely aligned with major industry trends and the needs of large organizations worldwide. We believe the migration of applications to public and private clouds, the build-out of hybrid cloud infrastructures, the explosion of SSL-encrypted traffic, and the need to provide security for applications, including the burgeoning array of IoT applications, all represent major market opportunities in the current quarter and beyond.”

For the second quarter of fiscal 2017, ending March 31st, the company has set a revenue goal of $518 million to $528 million with a GAAP earnings target of $1.41 to $1.44 per diluted share and a non-GAAP earnings target of $1.95 to $1.98 per diluted share.

A reconciliation of the company’s expected GAAP and non-GAAP earnings is provided in the following table:

      Three months ended March 31, 2017   Reconciliation of Expected Non-GAAP Second Quarter Earnings Low     High Net income $ 91.6 $ 93.6 Stock-based compensation expense $ 44.0 $ 44.0 Amortization of purchased intangible assets $ 3.3 $ 3.3 Tax effects related to above items $ (12.3 ) $ (12.3 ) Non-GAAP net income excluding stock-based compensation expense and amortization of purchased intangible assets $ 126.6   $ 128.6   Net income per share - diluted $ 1.41   $ 1.44   Non-GAAP net income per share - diluted $ 1.95   $ 1.98    

About F5 Networks

F5 (NASDAQ: FFIV) makes apps go faster, smarter, and safer for the world’s largest businesses, service providers, governments, and consumer brands. F5 delivers cloud and security solutions that enable organizations to embrace the application infrastructure they choose without sacrificing speed and control. For more information, go to f5.com. You can also follow @f5networks on Twitter or visit us on LinkedIn and Facebook for more information about F5, its partners, and technologies.

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

Management believes that non-GAAP net income per share provides useful supplemental information to management and investors regarding the performance of the company’s core business operations and facilitates comparisons to the company’s historical operating results. Although F5’s management finds this non-GAAP measure to be useful in evaluating the performance of the core business, management’s reliance on this measure is limited because items excluded from such measures could have a material effect on F5’s earnings and earnings per share calculated in accordance with GAAP. Therefore, F5’s management will use its non-GAAP earnings and earnings per share measures, in conjunction with GAAP earnings and earnings per share measures, to address these limitations when evaluating the performance of the company’s core business. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures in accordance with GAAP.

F5 believes that presenting its non-GAAP measure of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company’s core business and which management uses in its own evaluation of the company’s performance. Investors are encouraged to look at GAAP results as the best measure of financial performance. However, while the GAAP results are more complete, the company provides investors this supplemental measure since, with reconciliation to GAAP, it may provide additional insight into the company’s operational performance and financial results.

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

  F5 Networks, Inc. Consolidated Balance Sheets (unaudited, in thousands)           December 31, September 30, 2016 2016   Assets Current assets Cash and cash equivalents $ 572,934 $ 514,571 Short-term investments 400,909 367,824 Accounts receivable, net of allowances of $2,609 and $2,062 313,211 268,175 Inventories 33,678 34,051 Deferred tax assets 54,058 51,601 Other current assets   52,706     52,579   Total current assets   1,427,496     1,288,801     Property and equipment, net 128,667 123,248 Long-term investments 222,999 276,375 Deferred tax assets 1,956 2,044 Goodwill 555,965 555,965 Other assets, net   60,012     59,890   Total assets $ 2,397,095   $ 2,306,323     Liabilities and Shareholders’ Equity Current liabilities Accounts payable $ 49,925 $ 34,117 Accrued liabilities 198,832 178,353 Deferred revenue   669,926     631,768   Total current liabilities   918,683     844,238     Other long-term liabilities 35,841 34,138 Deferred revenue, long-term 244,322 238,473 Deferred tax liabilities   3,256     4,212   Total long-term liabilities   283,419     276,823     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, 64,788 and 65,315 shares issued and outstanding

17,280 13,191 Accumulated other comprehensive loss (16,048 ) (13,194 ) Retained earnings   1,193,761     1,185,265   Total shareholders' equity   1,194,993     1,185,262   Total liabilities and shareholders' equity $ 2,397,095   $ 2,306,323       F5 Networks, Inc. Consolidated Income Statements (unaudited, in thousands, except per share amounts)              

Three months ended

Three months ended Three months ended December 31, September 30, December 31, 2016 2016 2015   Net revenues Products $ 239,483 $ 252,984 $ 234,678 Services   276,475     272,365     254,808  

Total

515,958 525,349 489,486   Cost of net revenues (1)(2) Products 41,676 43,591 42,651 Services   43,586     41,358     43,032   Total   85,262     84,949     85,683   Gross profit 430,696 440,400 403,803   Operating expenses (1)(2) Sales and marketing 164,514 158,198 157,456 Research and development 87,050 83,746 81,145 General and administrative 41,678 35,193 34,253 Litigation expense   -     630     -   Total   293,242     277,767     272,854     Income from operations 137,454 162,633 130,949 Other income, net   2,643     268     1,135   Income before income taxes 140,097

 

162,901 132,084 Provision for income taxes   45,879     53,966     42,368   Net Income $ 94,218   $ 108,935   $ 89,716       Net income per share - basic $ 1.45   $ 1.66   $ 1.29   Weighted average shares - basic   65,195     65,772     69,554     Net income per share - diluted $ 1.44   $ 1.64   $ 1.28   Weighted average shares - diluted   65,645     66,262     69,878       Non-GAAP Financial Measures   Net income as reported $ 94,218 $ 108,935 $ 89,716 Stock-based compensation expense (3) 46,611 38,317 38,233 Amortization of purchased intangible assets 3,403 3,462 3,403 Litigation expense - 630 - Tax effects related to above items (13,966 ) (11,433 ) (10,788 ) Net income excluding stock-based compensation expense, amortization of       purchased intangible assets and litigation expense (non-GAAP) - diluted $ 130,266   $ 139,911   $ 120,564     Net income per share excluding stock-based compensation expense, amortization of purchased intangible assets and litigation expense (non-GAAP) - diluted $ 1.98   $ 2.11   $ 1.73     Weighted average shares - diluted   65,645     66,262     69,878     (1) Includes stock-based compensation as follows: Cost of net revenues $ 5,217 $ 4,601 $ 4,435 Sales and marketing 17,050 15,203 14,875 Research and development 13,932 12,949 12,830 General and administrative   10,412     5,564     6,093   $ 46,611   $ 38,317   $ 38,233     (2) Includes amortization of purchased intangible assets as follows: Cost of net revenues $ 2,785 $ 2,706 $ 2,667 Sales and marketing 252 391 486 General and administrative   366     365     250   $ 3,403   $ 3,462   $ 3,403    

(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)           Three months ended December 31, 2016 2015   Operating activities Net income $ 94,218 $ 89,716 Adjustments to reconcile net income to net cash provided by operating activities: Realized loss on disposition of assets and investments 30 27 Stock-based compensation 46,611 38,233 Provisions for doubtful accounts and sales returns 291 297 Depreciation and amortization 14,887 13,763 Deferred income taxes (2,945 ) 4,237 Changes in operating assets and liabilities: Accounts receivable (45,327 ) (22 ) Inventories 374 146 Other current assets (306 ) (568 ) Other assets 391 45 Accounts payable and accrued liabilities 37,082 3,761 Deferred revenue   44,006     54,236   Net cash provided by operating activities   189,312     203,871     Investing activities Purchases of investments (98,983 ) (107,340 ) Maturities of investments 105,744 95,586 Sales of investments 11,211 47,742 Decrease in restricted cash 32 39 Acquisition of intangible assets (4,000 ) (3,250 ) Purchases of property and equipment   (14,133 )   (13,292 ) Net cash (used in) provided by investing activities   (129 )   19,485     Financing activities Excess tax benefit from stock-based compensation 2,940 1,194

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

18,836 18,474 Repurchase of common stock   (150,021 )   (200,035 ) Net cash used in financing activities   (128,245 )   (180,367 )   Net increase in cash and cash equivalents 60,938 42,989 Effect of exchange rate changes on cash and cash equivalents (2,575 ) (152 ) Cash and cash equivalents, beginning of period   514,571     390,460   Cash and cash equivalents, end of period $ 572,934   $ 433,297  

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F5 Networks, Inc.Investor RelationsJohn Eldridge, 206-272-6571j.eldridge@f5.comorPublic RelationsNathan Misner, 206-272-7494n.misner@f5.com