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F5 Networks Announces Results for Third Quarter of Fiscal 2014

For the third quarter of fiscal 2014, F5 Networks, Inc. (NASDAQ: FFIV) announced revenue of $440.3 million, up 5 percent from $420.0 million in the prior quarter and 19 percent from $370.3 million in the third quarter of fiscal 2013.

GAAP net income was $79.5 million ($1.05 per diluted share), compared to $69.6 million ($0.91 per diluted share) in the prior quarter and $68.2 million ($0.86 per diluted share) in the third quarter a year ago.

Excluding the impact of stock-based compensation and amortization of purchased intangible assets, non-GAAP net income was $104.6 million ($1.39 per diluted share), compared to $96.9 million ($1.27 per diluted share) in the prior quarter and $88.4 million ($1.12 per diluted share) in the third quarter of last year.

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

"F5’s solid gains in Q3 were driven by strong growth in product revenue, up 5 percent sequentially and 20 percent year-over-year," said John McAdam, F5 president and chief executive officer. "Growing demand for our expanding array of systems and application services was fueled by increasing awareness and uptake of our security offerings and the appeal of our Good, Better, Best pricing options. During the quarter, sales of Good, Better, Best bundles grew 49 percent from the prior quarter and contributed to a significant increase in sales of software products and of security solutions in particular.

“Sales were generally solid across all geographic regions and vertical market segments, with the exception of Japan. EMEA continued to show signs of strengthening with an increase in year-over-year revenue growth for the fourth consecutive quarter.

"As we move toward the close of our fiscal year, ending September 30, we believe all of the company-specific drivers that propelled our business through the first three quarters will continue to generate solid sequential and year-over-year growth in the current quarter," McAdam said.

For the fourth quarter of fiscal 2014, the company has set a revenue goal of $453 million to $463 million with a GAAP earnings target of $1.15 to $1.18 per diluted share and a non-GAAP earnings target of $1.46 to $1.49 per diluted share.

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

    Three months ended
September 30, 2014
 
Reconciliation of Expected Non-GAAP Fourth Quarter Earnings Low   High
Net income $ 86.4 $ 88.7
Stock-based compensation expense $ 27.0 $ 27.0
Amortization of purchased intangible assets $ 3.2 $ 3.2
Tax effects related to above items $ (7.2 ) $ (7.1 )
Non-GAAP net income excluding stock-based compensation expense and amortization of purchased intangible assets $ 109.4   $ 111.8  
Net income per share - diluted $ 1.15   $ 1.18  
Non-GAAP net income per share - diluted $ 1.46   $ 1.49  

About F5 Networks

F5 (NASDAQ: FFIV) provides solutions for an application world. F5 helps organizations seamlessly scale cloud, data center, and software defined networking (SDN) deployments to successfully deliver applications to anyone, anywhere, at any time. F5 solutions broaden the reach of IT through an open, extensible framework and a rich partner ecosystem of leading technology and data center orchestration vendors. This approach lets customers pursue the infrastructure model that best fits their needs over time. The world’s largest businesses, service providers, government entities, and consumer brands rely on F5 to stay ahead of cloud, security, and mobility trends. For more information, go to f5.com.

You can also follow @f5networks on Twitter or visit us on Facebook for more information about F5, its partners, and technology.

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.

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 Statements of Operations entitled “Non-GAAP Financial Measures.”

   
F5 Networks, Inc.
Consolidated Balance Sheets
(unaudited, in thousands)
 
June 30, September 30,
2014   2013  
 
ASSETS
Current assets
Cash and cash equivalents $ 241,973 $ 189,693
Short-term investments 369,390 352,450
Accounts receivable, net of allowances of $4,611 and $3,259 243,072 204,205
Inventories 23,143 19,026
Deferred tax assets 22,898 16,342
Other current assets 44,647   34,655  
Total current assets 945,123   816,371  
Property and equipment, net 62,650 63,522
Long-term investments 508,581 728,981
Deferred tax assets 25,285 22,389
Goodwill 556,957 523,727
Other assets, net 76,889   75,564  
Total assets $ 2,175,485   $ 2,230,554  
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 36,399 $ 37,313
Accrued liabilities 94,445 92,608
Deferred revenue 480,376   421,429  
Total current liabilities 611,220   551,350  
Other long-term liabilities 22,377 25,202
Deferred revenue, long-term 137,062 109,944
Deferred tax liabilities 4,112   5,346  
Total long-term liabilities 163,551   140,492  
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, 74,415 and 78,090 shares issued and outstanding 18,712 262,505
Accumulated other comprehensive loss (6,834 ) (7,414 )
Retained earnings 1,388,836   1,283,621  
Total shareholders’ equity 1,400,714   1,538,712  
Total liabilities and shareholders’ equity $ 2,175,485   $ 2,230,554  
 
F5 Networks, Inc.
Consolidated Statements of Operations

(unaudited, in thousands, except per share amounts)

   
Three Months Ended Nine Months Ended
June 30, June 30,
2014     2013   2014     2013  
Net revenues
Products $ 236,933 $ 196,746 $ 680,669 $ 586,565
Services 203,352   173,556   586,111   499,420  
Total 440,285   370,302   1,266,780   1,085,985  
Cost of net revenues (1)(2)
Products 40,387 32,350 115,437 93,915
Services 39,075   32,567   112,570   92,189  
Total 79,462   64,917   228,007   186,104  
Gross profit 360,823   305,385   1,038,773   899,881  
Operating expenses (1)(2)
Sales and marketing 139,945 121,906 415,000 363,205
Research and development 67,026 54,075 198,391 155,150
General and administrative 27,773   25,327   79,306   75,889  
Total 234,744   201,308   692,697   594,244  
Income from operations 126,079 104,077 346,076 305,637
Other income, net 1,193   2,874   1,462   6,542  
Income before income taxes 127,272 106,951 347,538 312,179
Provision for income taxes 47,799   38,773   130,376   111,096  
Net income $ 79,473   $ 68,178   $ 217,162   $ 201,083  
 
Net income per share — basic $ 1.06   $ 0.87   $ 2.86   $ 2.56  
Weighted average shares — basic 74,812   78,516   75,926   78,636  
 
Net income per share — diluted $ 1.05   $ 0.86   $ 2.84   $ 2.54  
Weighted average shares — diluted 75,369   78,864   76,581   79,207  
 
Non-GAAP Financial Measures
Net income as reported $ 79,473 $ 68,178 $ 217,162 $ 201,083
Stock-based compensation expense (3) 31,833 27,861 101,997 82,181
Amortization of purchased intangible assets 2,172 1,032 6,341 3,098
Tax effects related to above items (8,912 ) (8,650 ) (29,274 ) (22,576 )
Net income excluding stock-based compensation and amortization of purchased intangible assets (non-GAAP) - diluted $ 104,566   $ 88,421   $ 296,226   $ 263,786  
 
Net income per share excluding stock-based compensation and amortization of purchased intangible assets (non-GAAP) - diluted $ 1.39   $ 1.12   $ 3.87   $ 3.33  
 
Weighted average shares - diluted 75,369   78,864   76,581   79,207  
 
(1) Includes stock-based compensation as follows:
Cost of net revenues $ 3,522 $ 2,966 $ 11,394 $ 8,860
Sales and marketing 12,350 10,259 40,570 31,533
Research and development 10,976 8,966 34,604 25,030
General and administrative 4,985   5,670   15,429   16,758  
$ 31,833   $ 27,861   $ 101,997   $ 82,181  
 
(2) Includes amortization of purchased intangible assets as follows:
Cost of net revenues $ 1,786 $ 957 $ 5,239 $ 2,873
Sales and marketing 386   75   1,102   225  
$ 2,172   $ 1,032   $ 6,341   $ 3,098  
 
(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)
 
Nine Months Ended
June 30,
2014     2013  
Operating activities
Net income $ 217,162 $ 201,083
Adjustments to reconcile net income to net cash provided by operating activities:
Realized gain on disposition of assets and investments (179 ) (190 )
Stock-based compensation 101,997 82,181
Provisions for doubtful accounts and sales returns 2,109 584
Depreciation and amortization 34,055 29,705
Deferred income taxes (4,389 ) (3,601 )
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable (40,964 ) (20,550 )
Inventories (4,117 ) (850 )
Other current assets (9,800 ) (18,069 )
Other assets (1,056 ) 1,517
Accounts payable and accrued liabilities (1,659 ) 7,420
Deferred revenue 85,968   72,468  
Net cash provided by operating activities 379,127   351,698  
Investing activities
Purchases of investments (387,147 ) (744,557 )
Maturities of investments 437,752 509,381
Sales of investments 144,790 138,171
Decrease (increase) in restricted cash 5 (713 )
Acquisition of businesses, net of cash acquired (49,439 ) (124,918 )
Purchases of property and equipment (15,636 ) (21,434 )
Net cash provided by (used in) investing activities 130,325   (244,070 )
Financing activities
Excess tax benefit from stock-based compensation 8,155 3,656
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan 35,247 29,405
Repurchase of common stock (500,542 ) (150,000 )
Net cash used in financing activities (457,140 ) (116,939 )
Net increase (decrease) in cash and cash equivalents 52,312 (9,311 )
Effect of exchange rate changes on cash and cash equivalents (32 ) (3,590 )
Cash and cash equivalents, beginning of year 189,693   211,181  
Cash and cash equivalents, end of year $ 241,973   $ 198,280  

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