Business Wire | Jul 27, 2020 04:06PM EDT

F5 Delivers 4% Revenue Growth on Continued Strong Software Demand in Third Quarter Fiscal Year 2020

Jul. 27, 2020

SEATTLE--(BUSINESS WIRE)--Jul. 27, 2020--F5 Networks, Inc. (NASDAQ: FFIV) today announced financial results for its fiscal third quarter ended June 30, 2020.

"Large enterprise customers are accelerating their digital transformations, increasing their digital engagement, and boosting capacity and security on customer facing applications and on platforms that enable employee collaboration," said Franois Locoh-Donou, CEO and President of F5. "Demand for solutions to meet these immediate and long-term business requirements drove 4% GAAP and non-GAAP revenue growth, and 43% non-GAAP software revenue growth in our third quarter."

"Customers continue to look to F5 to enable their mission-critical application needs and increasingly, are deploying a combination of F5 solutions spanning our F5, NGINX and Shape multi-cloud application services portfolio," continued Locoh-Donou. "In a challenging COVID-19 environment, our deep incumbency and close alignment with customers' investment priorities are proving distinct competitive advantages and driving resiliency in our business."

Third Quarter Performance Summary

Following its acquisition of Shape Security, to provide transparency to what F5 management believes reflects its ongoing business results, F5 is reporting both GAAP and non-GAAP revenue. Non-GAAP revenue excludes the impact of the purchase accounting write-down on Shape's assumed deferred revenue. F5 expects purchase accounting will impact Shape-related recognized revenue on a GAAP-basis principally over the four quarters following the transaction close in January 2020.

GAAP revenue of $583 million for the third quarter of fiscal year 2020 reflects 4% growth from $563 million in the third quarter of fiscal year 2019.

Non-GAAP revenue for the third quarter of fiscal year 2020 was $586 million, reflecting 4% growth in total revenue and 43% growth in software revenue in the year ago period.

GAAP net income for the third quarter of fiscal year 2020 was $70 million, or $1.14 per diluted share compared to third quarter fiscal year 2019 GAAP net income of $86 million, or $1.43 per diluted share.

Non-GAAP net income for the third quarter of fiscal year 2020 was $134 million, or $2.18 per diluted share, compared to $152 million, or $2.52 per diluted share, in the third quarter of fiscal year 2019. Non-GAAP net income for the third quarter of fiscal year 2020 excludes $51 million in stock-based compensation, $13 million in acquisition-related charges, $11 million in amortization of purchased intangible assets, and $3 million in facility-exit costs.

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

Business Outlook

For the fourth quarter of fiscal year 2020 ending September 30, 2020, F5 expects to deliver both GAAP and non-GAAP revenue in the range of $595 million to $615 million with non-GAAP earnings in the range of $2.30 to $2.42 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, acquisition-related charges and write-downs, 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 earnings 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, July 27, 2020, at 4:30 pm ET. 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. and Canada, dial (833) 714-0927. Outside the U.S. and Canada, dial +1 (778) 560-2886. Reference Meeting ID 8166352. Please call at least 5 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, projected and target revenue and earnings ranges, income, earnings per share, share amounts 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: the impact of the COVID-19 global pandemic including but not limited to the advantages of incumbency in an uncertain environment, caution in spending patterns in the most severely impacted verticals, delays in orders in some impacted regions due to COVID-19 impacts; prolonged face-to-face sales engagement delaying some new strategic projects; customer acceptance of our new 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; F5 may not realize the financial and strategic goals that are contemplated through its acquisitions, including Shape and NGINX, and F5 may not successfully operate and integrate newly-acquired businesses appropriately or as expected; 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, including those related to COVID-19, 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; 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, performance or achievements to vary from expectations. The financial information contained in this presentation 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 presentation 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:

Acquisition-related write-downs of assumed deferred revenue. Included in its GAAP financial statements, F5 records acquisition-related write-downs of assumed deferred revenue to fair value, which results in lower recognized revenue over the term of the contract. F5 includes revenue associated with acquisition-related write-downs of assumed deferred revenue in its non-GAAP financial measures as management believes it provides a more accurate depiction of revenue arising from our strategic acquisitions.

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.

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.

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.

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.

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 Condensed Consolidated Income Statements entitled "Non-GAAP Financial Measures."

About F5

F5 (NASDAQ: FFIV) powers applications from development through their entire lifecycle, across any multi-cloud environment, so our customers-enterprise businesses, service providers, governments, and consumer brands-can deliver differentiated, high-performing, and secure digital experiences. 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 or service mark of F5 Networks, Inc., in the U.S. and other countries. All other product and company names herein may be trademarks of their respective owners.

Source: F5 Networks

F5 Networks, Inc.Consolidated Balance Sheets(unaudited, in thousands) June 30, September 30,

2020 2019

AssetsCurrent assetsCash and cash equivalents $ 714,268 $ 599,219

Short-term investments 379,303 373,063

Accounts receivable, net of allowances of $3,343 304,874 322,029 and $3,259Inventories 28,826 34,401

Other current assets 238,163 182,874

Total current assets 1,665,434 1,511,586

Property and equipment, net 228,293 223,426

Operating lease right-of-use assets 316,761 -

Long-term investments 112,928 358,402

Deferred tax assets 47,919 27,701

Goodwill 1,858,966 1,065,379

Other assets, net 343,056 203,781

Total assets $ 4,573,357 $ 3,390,275

Liabilities and Shareholders' EquityCurrent liabilitiesAccounts payable $ 54,389 $ 62,627

Accrued liabilities 301,038 235,869

Deferred revenue 888,614 807,030

Current portion of long-term debt 19,275 -

Total current liabilities 1,263,316 1,105,526

Deferred tax liabilities 444 313

Deferred revenue, long-term 386,438 391,086

Operating lease liabilities, long-term 345,577 -

Long-term debt 373,866 -

Other long-term liabilities 49,817 131,853

Total long-term liabilities 1,156,142 523,252

Commitments and contingencies Shareholders' equityPreferred stock, no par value; 10,000 shares - - authorized, no shares outstandingCommon stock, no par value; 200,000 shares 304,526 142,597 authorized, 61,164 and 60,367 shares issued andoutstandingAccumulated other comprehensive loss (18,495 ) (19,190 )

Retained earnings 1,867,868 1,638,090

Total shareholders' equity 2,153,899 1,761,497

Total liabilities and shareholders' equity $ 4,573,357 $ 3,390,275

F5 Networks, Inc.Consolidated Income Statements(unaudited, in thousands, except per shareamounts) Three Months Ended Nine Months Ended

June 30, June 30,

2020 2019 2020 2019

Net revenuesProducts (1) $ 253,331 $ 248,929 $ 747,405 $ 720,665

Services 329,921 314,465 988,601 931,394

Total 583,252 563,394 1,736,006 1,652,059

Cost of net revenues(2)(3)(4)(5)Products 57,437 44,336 152,641 130,293

Services 48,603 46,431 143,279 135,366

Total 106,040 90,767 295,920 265,659

Gross profit 477,212 472,627 1,440,086 1,386,400

Operating expenses(2)(3)(4)(5)Sales and marketing 211,808 195,852 622,799 531,065

Research and 115,991 116,894 321,024 305,246 developmentGeneral and 61,792 57,141 194,809 146,340 administrativeRestructuring charges - - 7,800 -

Total 389,591 369,887 1,146,432 982,651

Income from 87,621 102,740 293,654 403,749 operationsOther income, net 141 4,722 5,220 19,251

Income before income 87,762 107,462 298,874 423,000 taxesProvision for income 17,890 21,557 69,096 90,103 taxesNet income $ 69,872 $ 85,905 $ 229,778 $ 332,897

Net income per share $ 1.15 $ 1.43 $ 3.78 $ 5.55 - basicWeighted average 60,978 59,981 60,831 59,963 shares - basic Net income per share $ 1.14 $ 1.43 $ 3.76 $ 5.51 - dilutedWeighted average 61,415 60,196 61,182 60,372 shares - diluted Non-GAAP FinancialMeasures Net income as $ 69,872 $ 85,905 $ 229,778 $ 332,897 reportedAcquisition-relatedwrite-downs of 2,670 - 4,861 - assumed deferredrevenueStock-based 50,868 40,999 149,751 119,182 compensation expenseAmortization of 10,676 3,712 23,884 7,260 purchased intangibleassetsFacility-exit costs 2,545 8,704 5,556 13,752

Acquisiton-related 13,443 30,133 45,162 33,663 chargesRestructuring charges - - 7,800 -

Tax effects related (16,044 ) (17,919 ) (41,450 ) (37,241 )to above itemsNet income excludingacquisition-relatedwrite-downs ofassumed deferredrevenue, stock-basedcompensation expense,amortization ofpurchased intangible $ 134,030 $ 151,534 $ 425,342 $ 469,513assets, facility-exitcosts,acquisition-relatedcharges,restructuring chargesand non-recurring taxexpenses and benefits(non-GAAP) - diluted Net income per shareexcludingacquisition-relatedwrite-downs ofassumed deferredrevenue, stock-basedcompensation, expenseamortization of 2.18 2.52 6.95 7.78purchased intangible $ $ $ $assets, facility-exitcosts,acquisition-relatedcharges,restructuring chargesand non-recurring taxexpenses and benefits(non-GAAP) - diluted Weighted average 61,415 60,196 61,182 60,372 shares - diluted (1) GAAP net product $ 253,331 $ 248,929 $ 747,405 $ 720,665 revenuesAcquisition-relatedwrite-downs of 2,670 - 4,861 - assumed deferredrevenueNon-GAAP net product 256,001 248,929 752,266 720,665 revenuesGAAP net service 329,921 314,465 988,601 931,394 revenuesAcquisition-relatedwrite-downs of - - - - assumed deferredrevenueNon-GAAP net service 329,921 314,465 988,601 931,394 revenuesTotal non-GAAP net $ 585,922 $ 563,394 $ 1,740,867 $ 1,652,059 revenues (2) Includesstock-basedcompensation expenseas follows:Cost of net revenues $ 6,771 $ 5,118 $ 18,694 $ 15,152

Sales and marketing 21,784 17,767 66,188 49,645

Research and 13,145 10,037 36,904 30,598 developmentGeneral and 9,168 8,077 27,965 23,787 administrative $ 50,868 $ 40,999 $ 149,751 $ 119,182

(3) Includesamortization ofpurchased intangibleassets as follows:Cost of net revenues $ 7,382 $ 2,471 $ 16,432 $ 4,557

Sales and marketing 2,749 710 5,863 1,122

General and 545 531 1,589 1,581 administrative $ 10,676 $ 3,712 $ 23,884 $ 7,260

(4) Includesfacility-exit costsas follows:Cost of net revenues $ 342 $ 1,026 $ 843 $ 1,714

Sales and marketing 751 2,021 1,828 3,632

Research and 776 3,605 1,929 5,591 developmentGeneral and 676 2,052 956 2,815 administrative $ 2,545 $ 8,704 $ 5,556 $ 13,752

(5) Includesacquisition-relatedcharges as follows:Cost of net revenues $ - $ - $ 13 $ -

Sales and marketing 5,675 6,106 9,448 6,106

Research and 547 16,116 1,327 16,116 developmentGeneral and 7,221 7,911 34,374 11,441 administrative $ 13,443 $ 30,133 $ 45,162 $ 33,663

F5 Networks, Inc.Consolidated Statements of Cash Flows(unaudited, in thousands) Nine Months Ended

June 30,

2020 2019

Operating activitiesNet income $ 229,778 $ 332,897

Adjustments to reconcile net income to net cashprovided by operating activities:Stock-based compensation 149,315 119,182

Depreciation and amortization 69,337 46,645

Non-cash operating lease costs 29,731 -

Other 168 671

Deferred income taxes 4,357 10,171

Changes in operating assets and liabilities:Accounts receivable 38,024 (16,249 )

Inventories 5,575 (5,441 )

Other current assets (33,572 ) (54,381 )

Other assets (5,659 ) (8,785 )

Accounts payable and accrued liabilities (1,538 ) 37,932

Deferred revenue 37,934 79,113

Lease liabilities (38,456 ) -

Net cash provided by operating activities 484,994 541,755

Investing activitiesPurchases of investments (390,696 ) (210,109 )

Maturities of investments 322,271 507,804

Sales of investments 309,040 276,278

Acquisition of businesses, net of cash acquired (955,574 ) (611,550 )

Purchases of property and equipment (47,857 ) (83,008 )

Net cash used in investing activities (762,816 ) (120,585 )

Financing activitiesProceeds from the exercise of stock options and 51,999 45,455purchases of stock under employee stock purchaseplanRepurchase of common stock (50,009 ) (201,045 )

Proceeds from term debt agreement 400,000 -

Payments on term debt agreement (5,000 ) -

Payments for debt issuance costs (3,040 ) -

Net cash provided by (used in) financing activities 393,950 (155,590 )

Net increase in cash, cash equivalents and 116,128 265,580 restricted cashEffect of exchange rate changes on cash, cash (856 ) (111 )equivalents and restricted cashCash, cash equivalents and restricted cash, 602,254 425,894 beginning of periodCash, cash equivalents and restricted cash, end of $ 717,526 $ 691,363 period Supplemental disclosures of cash flow informationCash paid for amounts included in the measurement $ 45,399 $ - of lease liabilitiesCash paid for interest on long-term debt $ 4,330 $ -

Supplemental disclosures of non-cash activitiesRight-of-use assets obtained in exchange for lease $ 399,203 $ - obligationsCapitalized leasehold improvements paid directly by $ - $ 34,487 landlord

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CONTACT: Investor Relations Suzanne DuLong (206) 272-7049 s.dulong@f5.com

CONTACT: Public Relations Nathan Misner (206) 272-7494 n.misner@f5.com