UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2004
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 000-26041
F5 NETWORKS, INC.
WASHINGTON | 91-1714307 | |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer Identification No.) |
401 Elliott Avenue West
Seattle, Washington 98119
(Address of principal executive offices and zip code)
(206) 272-5555
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
The number of shares outstanding of the registrants common stock as of February 4, 2005 was 36,669,190.
F5 NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended December 31, 2004
Table of Contents
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (unaudited)
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EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32.1 |
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F5 NETWORKS, INC.
The accompanying notes are an integral part of these consolidated financial statements.
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F5 NETWORKS, INC.
The accompanying notes are an integral part of these consolidated financial statements.
4
F5 NETWORKS, INC.
The accompanying notes are an integral part of these consolidated financial statements.
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F5 NETWORKS, INC.
The accompanying notes are an integral part of these consolidated financial statements.
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F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Summary of Significant Accounting Policies
Description of Business
F5 Networks, Inc. (the Company) provides products and services to help companies efficiently
and securely manage their Internet traffic. The Companys products enhance the delivery,
optimization and security of application traffic on Internet-based networks. IP traffic passes
through the Companys products where it is inspected and modified to ensure that it is delivered
securely and in a way that optimizes the performance of both the network and the applications.
The Company also offers a broad range of services such as consulting, training, installation,
maintenance, and other technical support services.
Basis of Presentation
In the opinion of management, the unaudited consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation
in conformity with accounting principles generally accepted in the United States of America.
Certain information and footnote disclosures normally included in annual financial statements have
been condensed or omitted in accordance with the rules and regulations of the Securities and
Exchange Commission. The information included in this Form 10-Q should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal
year ended September 30, 2004.
Reclassification
Certain reclassifications have been made to prior year balances to conform to the current
period presentation. Specifically, the Companys deferred tax liabilities have been reclassified
and presented net of deferred tax assets in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. The reclassifications had
no impact on previously reported net income or shareholders equity.
Revenue Recognition
The Company recognizes revenue in accordance with the guidance provided under Statement of
Position (SOP) No. 97-2, Software Revenue Recognition, and SOP No. 98-9 Modification of SOP No.
97-2, Software Revenue Recognition, with Respect to Certain Transactions, Statement of Financial
Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of Return Exists, and SEC
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition.
The Company sells products through distributors, resellers, and directly to end users. The
Company recognizes product revenue upon shipment, net of estimated returns, provided that
collection is determined to be probable and no significant obligations remain. In certain regions
where the Company does not have the ability to reasonably estimate returns, the Company defers
revenue on sales to its distributors until the Company has received information from the channel
partner indicating that the distributor has sold the product to its customer. Payment terms to
domestic customers are generally net 30 days. Payment terms to international customers range from
net 30 to 90 days based on normal and customary trade practices in the individual markets. The
Company has offered extended payment terms ranging from three to six months to certain customers,
in which case, revenue is recognized when payments are made.
Whenever a software license, hardware, installation and post-contract customer support, or
PCS, elements are sold together, a portion of the sales price is allocated to each element based on
their respective fair values as determined when the individual elements are sold separately.
Revenues from the license of software are recognized when the software has been shipped and the
customer is obligated to pay for the software. When rights of return are present and the Company
cannot estimate returns, the Company recognizes revenue when such rights of return lapse. Revenues
for PCS are recognized on a straight-line basis over the service contract term. PCS includes rights
to upgrades, when and if available, a limited period of telephone support, updates, and bug fixes.
Installation revenue is
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F5 NETWORKS, INC.
recognized when the product has been installed at the customers site. Consulting services are
customarily billed at fixed rates, plus out-of-pocket expenses, and revenues are recognized when
the consulting has been completed. Training revenue is recognized when the training has been
completed.
Goodwill
Goodwill represents the excess purchase price over the estimated fair value of net assets
acquired as of the acquisition date. The Company has adopted the requirements of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS
No. 142 requires goodwill to be tested for impairment on an annual basis and between annual tests
in certain circumstances, and written down when impaired. Goodwill of $24.2 million was recorded in
connection with the acquisition of uRoam, Inc. in July 2003 while $25.9 million was recorded as a
result of the MagniFire acquisition on May 31, 2004. There was no impairment of goodwill during
the three months ended December 31, 2004 and 2003, respectively.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with the
provisions of Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock
Issued to Employees, FASB Interpretation No. 44 (FIN No. 44) Accounting for Certain
Transactions Involving Stock Compensation, and related interpretations and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of our stock and the exercise
price of the option. The unearned compensation is being amortized in accordance with Financial
Accounting Standards Board Interpretation No. 28 on an accelerated basis over the vesting period of
the individual options.
Pro forma information regarding net income is required by SFAS No. 123 and has been determined
as if the Company had accounted for stock options under the fair value method. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized over the options vesting
period. The net income and net income per share would have been adjusted to the pro forma amounts
indicated below (in thousands, except per share data):
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F5 NETWORKS, INC.
Earnings Per Share
Basic net income per share is computed by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted net income per share is computed by
dividing net income by the weighted average number of common and dilutive common stock equivalent
shares outstanding during the period.
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except per share data):
Approximately 0.5 million and 1.5 million of common shares potentially issuable from
stock options for the three months ended December 31, 2004 and 2003, respectively, are excluded
from the calculation of diluted earnings per share because the exercise price was greater than the
average market price of the common stock for the respective period.
Recent Accounting Pronouncements
In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity
securities accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit
Organizations, and non-marketable equity securities accounted for under the cost method. The EITF
developed a basic three-step model to evaluate whether an investment is other-than-temporarily
impaired. On September 30, 2004, the FASB approved the issuance of FASB Staff Position (FSP) EITF
03-1-1, which delays the effective date until additional guidance is issued for the application of
the recognition and measurement provisions of EITF 03-1 to investments in securities that are
impaired. The Company does not expect the adoption of EITF 03-1 to have a material effect on the
Companys results of operations or financial condition.
In December 2004, the FASB issued SFAS No. 123®, Share-Based Payment. This Statement
revises FASB Statement No. 123, Accounting for Stock-Based Compensation and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees SFAS No. 123® focuses primarily on
the accounting for transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123® generally requires companies to recognize in the statement of
operations the cost of employee services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards. This Statement is effective as of the first
reporting period that begins after June 15, 2005. Accordingly, the Company will adopt SFAS 123®
in its fourth quarter of fiscal 2005. The Company is currently evaluating the provisions of SFAS
123® including the assessment
of allowable option valuation methodologies and expects that this Statement will have a material
impact on its financial statements beginning in the fourth quarter.
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F5 NETWORKS, INC.
2. Commitments and Contingencies
Guarantees and Product Warranties
In the normal course of business to facilitate sales of its products, the Company indemnifies
other parties, including customers, resellers, lessors, and parties to other transactions with the
Company, with respect to certain matters. The Company has agreed to hold the other party harmless
against losses arising from a breach of representations or covenants, or out of intellectual
property infringement or other claims made against certain parties. These agreements may limit the
time within which an indemnification claim can be made and the amount of the claim. In addition,
the Company has entered into indemnification agreements with its officers and directors, and the
Companys bylaws contain similar indemnification obligations to the Companys agents. It is not
possible to determine the maximum potential amount under these indemnification agreements due to
the limited history of prior indemnification claims and the unique facts and circumstances involved
in each particular agreement.
The Company generally offers warranties of 90 days for hardware with the option of purchasing
additional warranty coverage in increments of one year. The Company accrues for warranty costs as
part of its cost of sales based on associated material product costs and technical support labor
costs. The following table summarizes the activity related to product warranties during the three
months ended December 31, 2004 and 2003 (in thousands):
Purchase Commitments
The Company currently has arrangements with contract manufacturers and other suppliers for the
manufacture of the Companys products. The arrangement with the primary contract manufacturer
allows them to procure component inventory on the Companys behalf based on a rolling production
forecast provided by the Company. The Company is obligated to the purchase of component inventory
that the contract manufacturer procures in accordance with the forecast, unless we give notice of
order cancellation in advance of applicable lead times. As of December 31, 2004, the Company was
committed to purchase approximately $7.4 million of such inventory during the next quarter.
Litigation
The Company is not aware of any pending legal proceedings that, individually or in the
aggregate, would have a material adverse effect on the Companys business, operating results, or
financial condition. The Company may in the future be party to litigation arising in the ordinary
course of business, including claims that allegedly infringe upon third-party trademarks or other
intellectual property rights. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
3. Restructuring Charge
During the fiscal year 2002, the Company executed on a restructuring plan that included the
discontinuation of its cache appliance business. As a result of discontinuing this line of
business and other changes in the overall business, the Company incurred restructuring charges of
$3.3 million for the fiscal year 2002. The restructuring charges included employee termination
benefits, impaired assets, consolidation of excess facilities, and other obligations for which the
Company no longer derives an economic benefit. There were no restructuring charges for the three
months ended December 31, 2004 and 2003.
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F5 NETWORKS, INC.
The activity of the remaining restructuring liability included as a component of accrued
liabilities on the balance sheet for the three months ended December 31, 2004 is presented below
(in thousands):
The excess facilities charge was the result of the Companys decision to exit its support
facility in Washington DC and was estimated based on current comparable rates for leases in the
respective market. In April 2003, the excess facilities were subleased at the then current market
value. Since then the difference between the lease payments and sublease income has historically
been applied against the restructuring liability. During the three months ended December 31, 2004,
timely receipts of sublease income were not received and the collectibility of sublease income is
uncertain. If we are unable to collect further sublease income throughout the duration of the
lease term, expiring in 2007, the actual loss may be increased from the original estimate and an
additional restructuring charge may be required.
4. Geographic Sales and Significant Customers
The following presents revenues by geographic region (in thousands):
The Companys customers are in diverse industries and geographic locations. Net revenues from
international customers are primarily denominated in U.S. Dollars and totaled approximately $24.8
million and $12.3 million for the three months ended December 31, 2004 and 2003, respectively. One
domestic distributor accounted for 16.0% and 18.5% of total net revenue for the three months ended
December 31 2004 and 2003, respectively. This distributor accounted for 18.9% and 28.7% of
accounts receivable as of December 31, 2004 and 2003, respectively.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our consolidated financial statements and notes
thereto contained in the Companys Annual Report on Form 10-K filed with the Securities and
Exchange Commission on December 12, 2004. Our discussion may contain forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995, based upon current
expectations. These forward-looking statements include, but are not limited to, statements about
our plans, objectives, expectations and intentions and other statements that are not historical
facts. Because these forward-looking statements involve risks and uncertainties, our actual
results and the timing of certain events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set forth under Risk
Factors and Business in the Companys Annual Report on Form 10-K for the fiscal year ended
September 30, 2004, and elsewhere in this report.
Overview
We are a global provider of software and hardware products and services that help companies
efficiently and
securely manage their Internet traffic. Our products enhance the delivery, optimization and
security of application
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traffic on Internet-based networks. We market and sell our products
primarily through indirect sales channels in North America, Europe, Japan and the Asia Pacific
region. Enterprise customers (Fortune 1000 or Business Week Global 1000 companies) in financial
services, transportation, government and telecommunications industries continue to make up the
largest percentage of our customer base.
Our management monitors and analyzes a number of key performance indicators in order to manage
our business and evaluate our financial and operating performance. Those indicators include:
Revenues.
The majority of our revenues are derived from sales of our core products;
BIG-IP Local Traffic Manager; BIG-IP Global Traffic Manager; BIG-IP ISP Traffic Manager; and
FirePass SSL VPN servers. We also derive revenues from the sales of services including
annual maintenance contracts, installation, 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 key indicators of future
trends. We also consider overall revenue concentration by customer and by geographic region
as additional indicators of current and future trends.
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, amortization of
developed technology, personnel and overhead expenses. Our margins have remained relatively
stable over the past two years, however factors
such as sales price, product mix, inventory obsolescence, returns, component price
increases, and warranty costs could significantly impact our gross margins from quarter to
quarter and represent the 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, facilities and depreciation
expenses.
Liquidity and cash flows.
Our financial condition remains strong with significant cash and
investments and no long term debt. The increase in cash and investments during the first
quarter of fiscal 2005 was primarily due to the proceeds from the exercise of employee stock
options and cash from operations. Going forward, we believe the primary driver of our cash
flows will be net income from operations. Capital expenditures during the first quarter of
fiscal 2005 were comprised primarily of tenant improvements and information technology
infrastructure and equipment to support the growth of our core business activities.
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 due to the growth in the amount of
annual maintenance contracts purchased on new products and maintenance renewal contracts
related to our existing product installation base. Our days sales outstanding for the first
quarter of fiscal 2005 was 42 which we expect to maintain in the low to mid-40s range going
forward.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
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We believe the following critical accounting policies affect the more significant judgments
and estimates used in the preparation of our financial statements. These critical accounting
policies are consistent with those disclosed in our Annual Report on Form 10-K.
Revenue Recognition.
We recognize revenue in accordance with the guidance provided under
Statement of Position (SOP) No. 97-2, Software Revenue Recognition, and SOP No. 98-9
Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions.
Statement of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of
Return Exists, and SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition.
We sell products through distributors, resellers, and directly to end users. We recognize
product revenue upon shipment, net of estimated returns, provided that collection is determined to
be probable and no significant obligations remain. In certain regions where we do not have the
ability to reasonably estimate returns, we defer revenue on sales to distributors until we have
received information from the channel partner indicating that the distributor has sold the product
to its customer. Payment terms to domestic customers are generally net 30 days. Payment terms to
international customers range from net 30 to 90 days based on normal and customary trade practices
in the individual markets. We have offered extended payment terms to certain customers, in which
case, revenue is recognized when payments are made.
Whenever a software license, hardware, installation and post-contract customer support, or
PCS, elements are sold together, a portion of the sales price is allocated to each element based on
their respective fair values as determined when the individual elements are sold separately.
Revenues from the license of software are recognized when the software has been shipped and the
customer is obligated to pay for the software. When rights of return are present and we cannot
estimate returns, we recognize revenue when such rights of return lapse. Revenues for PCS are
recognized on a straight-line basis over the service contract term. PCS includes rights to
upgrades, when and if available, a limited period of telephone support, updates, and bug fixes.
Installation revenue is recognized when the product has been installed at the customers site.
Consulting services are customarily billed at fixed rates, plus out-of-pocket expenses, and
revenues are recognized when the consulting has been completed. Training revenue is recognized when
the training has been completed.
Reserve for Doubtful Accounts.
Estimates are used in determining our allowance for doubtful
accounts and are based upon an assessment of selected accounts and as a percentage of our remaining
accounts receivable by aging category. In determining these percentages, we evaluate historical
write-offs, current trends in the credit quality of our customer base, as well as changes in the
credit policies. We perform ongoing credit evaluations of our customers financial condition and
generally do not require any collateral. If there is deterioration of a major customers credit
worthiness or actual defaults are higher than our historical experience, our allowance for doubtful
accounts may not be sufficient.
Reserve for Product Returns.
In some instances, product revenue from distributors is subject
to agreements allowing rights of return. Product returns are estimated based on historical
experience and are recorded at the time revenues are recognized. Accordingly, we reduce recognized
revenue for estimated future returns at the time revenue is recorded. When rights of return are
present and we cannot estimate returns, revenue is recognized when such rights lapse. The estimates
for returns are adjusted periodically based upon changes in historical rates of returns, inventory
in the distribution channel and other related factors. It is possible that these estimates will
change in the future or that the actual amounts could vary from our estimates.
Reserve for Warranties.
A warranty reserve is established based on our historical experience
and an estimate of the amounts necessary to settle future and existing claims on products sold as
of the balance sheet date. While we believe that our warranty reserve is adequate and that the
judgment applied is appropriate, such amounts estimated to be due and payable could differ
materially from what will actually transpire in the future.
Accounting for Income Taxes.
We utilize the liability method of accounting for income taxes
pursuant to SFAS 109. Accordingly, we are required to estimate our income taxes in each of the
jurisdictions in which we operate as part of the process of preparing our consolidated financial
statements. This process involves estimating our actual
current tax exposure, including assessing the risks associated with tax audits, together with
assessing temporary
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differences resulting from the different treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and liabilities. Due to the
evolving nature of tax rules combined with the large number of jurisdictions in which we operate,
it is possible that our estimates of our tax liability could change in the future, which may result
in additional tax liabilities and adversely affect our results of operations, financial condition
and cash flows.
Results of Operations
Net revenues.
Total net revenues increased 66.3%, to $60.0 million for the three months
ended December 31, 2004 from $36.1 million for the same period in the prior year. The improvement
was due to increased demand for our application traffic management products, primarily sales of our
new BIG-IP version 9 products, across all geographic regions. Revenues from our recently introduced
application security products increased to approximately 9.0% of total net revenues. Higher services revenues
resulting from our increased installed base of products contributed to the overall increase from
the prior period. International revenues grew to 41.3% of total net revenues for the three months
ended December 31, 2004 compared to 34.1% for the same period in the prior year. We expect
international revenues will continue to represent a significant amount of total net revenues
although we cannot provide assurance that international revenues as a percentage of total net
revenues will remain at current levels.
Net product revenues increased 75.9%, to $46.4 million for the three months ended December 31,
2004 from $26.4 million for the same period in the prior year. Sales of our BIG-IP family of
application traffic management products represented 82.4% and 87.6% of product revenues for the
three months ended December 31, 2004 and 2003, respectively. The decrease was due to an increase in
sales of our application security products, including FirePass, and to a lesser degree our
TrafficShield products which began shipping in the current quarter.
Net services revenues increased 40.3%, to $13.6 million for the three months ended December
31, 2004 from $9.7 million for the same period in the prior year. The increase in services revenue
was primarily due to increases in the purchase or renewal of maintenance contracts as our installed
base of products increased.
Ingram Micro Inc., one of our domestic distributors, accounted for 16.0% and 18.5% of our
total net revenues for the three months ended December 31, 2004 and 2003, respectively. The
decrease as a percentage of total net revenues is due to the addition of new distributors and the
increase in international revenues. Ingram Micro Inc. accounted for 18.9% of our accounts
receivable as of December 31, 2004.
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Cost of Net Product Revenues
. Cost of our net product revenues consists of finished
products purchased from our contract manufacturers, manufacturing overhead, freight, warranty,
provisions for excess and obsolete inventory, and amortization expenses in connection with
developed technology from recent acquisitions. Cost of net product revenues increased as a
percentage of net product revenues to 22.7% from 22.2% in the prior period. The increase in cost
of net product revenues as a percentage of net product revenues was due to higher amortization
charges of $0.2 million related to the acquired technology we purchased from MagniFire Websystems,
Inc., or MagniFire, during the third quarter of fiscal 2004.
Cost of Net Services Revenues
. Cost of net services revenues increased in absolute dollars due
to increased salary and benefits expenses as a result of an increase in professional services
employee headcount. Services employee headcount at the end of December 2004 increased to 105 from
76 at the end of December 2003. Cost of net services revenues decreased as a percentage of
services revenues to 24.9% from 25.4% for the same periods. The decrease in cost of net services
revenues as a percentage of net services revenues is primarily the result of leveraging our
existing services operating infrastructure to support the increased net services revenue.
We expect to maintain our gross margins in the near term; however, gross margins could be
adversely affected by increased material costs, component shortages, excess and obsolete inventory
charges and heightened sales price competition.
15
Sales and marketing.
Sales and marketing expenses consists of salaries, commissions and
related expenses of our sales and marketing staff, costs of our marketing programs, including
public relations, advertising and trade shows, facilities and depreciation expenses. The decrease
in sales and marketing expenses as a percentage of total net revenues is primarily the result of
leveraging our existing sales and distribution infrastructure to support the increased net
revenues. In absolute dollars, sales and marketing expenses increased 31.3% from the prior period.
The increase was primarily due to higher salary, commission and employee benefit related expenses.
The increase in commission expenses is consistent with the increase in revenue for the current
period. The increased personnel costs were driven by growth in employee headcount. Sales and
marketing headcount at the end of December 2004 increased to 266 from 216 at the end of December
2003. In the future, we expect to continue to increase our sales and marketing expenses to grow
revenues and increase our market share.
Research and development
. Research and development expenses consist of salaries and benefits
for our product development personnel, prototype materials and expenses related to the development
of new and improved products, facilities and depreciation expenses. Research and development
expenses increased 28.1% from the prior period. The increase was attributed to higher salary and
employee benefit costs. Research and development headcount at the end of December 2004 increased
to 197 from 150 at the end of December 2003. The growth in employee headcount was primarily
related to our acquisition of MagniFire in May of 2004 and to support the further development
efforts of the new application security products. We expect to continue to increase research and
development expenses as our future success is dependent on the continued enhancement of our current
products and our ability to develop new, technologically advanced products that meet the changing
needs of our customers.
General and administrative
. General and administrative expenses consist of salaries and
related expenses of our executive, finance, information technology, human resource and legal
personnel, third-party professional service fees, bad debt charges, facilities and depreciation
expenses. The decrease in general and administrative expenses as a percentage of total net
revenues is primarily the result of leveraging our existing corporate infrastructure to support the
increased net revenues. In absolute dollars, general and administrative expenses increased 49.6%
from the prior period. The increase was primarily due to increased salary and benefit expenses of
$0.9 million and professional service fees of $0.5 million, particularly audit and internal
controls review in connection with the Sarbanes-Oxley Act of 2002. General and administrative
headcount at the end of December 2004 increased to 81 from 68 at the end of December 2003.
Amortization of unearned compensation.
During the current period we did not issue any stock
awards below fair market value on the date of the respective grant. Accordingly we recorded no
compensation expense related to stock options during the current period. As a result of new
accounting rules pertaining to stock-based compensation arrangements we will incur material
amortization charges for unearned stock-based compensation beginning in the fourth quarter of
fiscal 2005. We are currently evaluating the provisions of the new rules, including an assessment
16
of allowable option valuation methodologies and have not yet determined the specific impact
that the new rules will have on our financial statements.
Other income, net.
Other income, net, consists of interest income and foreign currency
transaction gains and losses. The significant increase was due to interest income earned on the
proceeds from our public offering completed in November of 2003.
Income taxes
. We recorded a 37% provision for income taxes during the current period. In the
prior comparable period when we had a valuation allowance offsetting our U.S. deferred tax assets,
the provision for income taxes consisted primarily of foreign taxes related to our international
operations. For the remainder of fiscal 2005, we expect to record a provision for income taxes
comparable to the current period; however, our effective tax rate may fluctuate based on a number
of factors including variations in estimated taxable income in our geographic locations, unforeseen
changes in the valuation of our net deferred tax assets or changes in tax laws or interpretations
thereof.
Financial Condition
Cash and cash equivalents, short-term investments and long-term investments were $254.4
million as of December 31, 2004 compared to $222.3 million as of September 30, 2004, representing
an increase of $32.1 million. The increase was due to cash provided by operations of $13.5 million
and cash received from employee stock option exercises of $21.3 million partially offset by $2.1
million used for the purchase of property and equipment and $0.4 million of cash payments to
shareholders of MagniFire, which was acquired in May 2004.
Cash provided by operating activities was $13.5 million for the three months ended December
31, 2004 compared to $8.4 million for the same period in the prior year. Cash flow from operations
in the three months ended December 31, 2004 resulted from increased net income combined with
changes in operating assets and liabilities, as adjusted for various non-cash items including
corporate tax deductions on certain employee stock option exercises and depreciation and
amortization charges. Due to the significant amount of cumulative net operating losses for tax
purposes we do not expect to incur or remit U.S. federal income taxes for the remainder of fiscal
2005.
Cash used in investing activities was $36.1 million for the three months ended December 31,
2004 compared to $109.4 million for the same period in the prior year. The significant amount of
cash used in investing activities in the prior period was primarily due to investing the proceeds
from our public offering in November 2003. Cash provided by financing activities for the three
months ended December 31, 2004 was $21.3 million compared to
17
$118.1 million for the same period in the prior year. Our financing activities in the current
period consisted of cash received from the exercise of employee stock options and purchases under
our employee stock purchase plan. Financing activities in the prior period was primarily
attributed to the $113.6 million net proceeds received from the November 2003 public stock
offering. Based on our current operating and capital expenditure forecasts, we believe that our
existing cash and investment balances together with cash generated from operations should be
sufficient to meet our operating requirements for the foreseeable future.
As of December 31, 2004, our principal commitments consisted of obligations outstanding under
operating leases. We lease our facilities under operating leases that expire at various dates
through 2012. There have been no material changes in our principal lease commitments compared to
those discussed in our Annual Report on Form 10-K for the year ended September 30, 2004. In
connection with the lease agreement for our corporate headquarters we established a restricted
escrow account collateralized by a $6.0 million certificate of deposit that has been included on
our balance sheet as a component of restricted cash. The total amount required in escrow reduces
at various dates as set forth by the lease agreement.
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. As of December 31, 2004, we were committed to purchase approximately $7.4 million of
such inventory during the next quarter.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management believes there have been no material changes to our quantitative and qualitative
disclosures about market risk during the three month period ended December 31, 2004, compared to
those discussed in our Annual Report on Form 10-K for the year ended September 30, 2004.
Item 4. Controls and Procedures
As of December 31, 2004, we carried out an evaluation, under the supervision and with the
participation of the Companys management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and
procedures are effective to timely alert them to any material information relating to the Company
(including its consolidated subsidiaries) that must be included in our periodic SEC filings. There
have been no significant changes in the Companys internal controls or in other factors that could
significantly affect internal controls subsequent to their evaluation.
We intend to review and evaluate the design and effectiveness of our disclosure controls and
procedures on an ongoing basis and to improve our controls and procedures over time and to correct
any deficiencies that we may discover in the future. Our goal is to ensure that our senior
management has timely access to all material financial and non-financial information concerning our
business. While we believe the present design of our disclosure controls and procedures is
effective to achieve our goal, future events affecting our business may cause us to modify our
disclosure controls and procedures.
We are in the process of implementing the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002 which requires our management to assess the effectiveness of our internal controls over
financial reporting and include an assertion in our annual report as to the effectiveness of our
controls. Subsequently, our independent auditors, PricewaterhouseCoopers LLP, will be required to
attest to whether our assessment of the effectiveness of our internal controls over financial
reporting is fairly stated in all material respects and separately report on whether it believes we
maintained, in all material respects, effective internal controls over financial reporting as of
September 30, 2005. We are in the process of performing the system and process documentation,
evaluation and testing required for management to make this assessment and for the auditors to
provide its attestation report. We have not completed this process or its assessment, and this
process will require significant amounts of management time and resources. In
18
the course of evaluation and testing, management may identify deficiencies that will need to
be addressed and remediated.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not aware of any pending legal proceedings that, individually or in the
aggregate, would have a material adverse effect on the Companys business, operating results, or
financial condition. The Company may in the future be party to litigation arising in the ordinary
course of business, including claims that allegedly infringe upon third-party trademarks or other
intellectual property rights. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Reference is made to Item 3, Legal Proceedings in our Annual Report on Form 10-K for the year
ended September 30, 2004, filed December 7, 2004 for descriptions of our legal proceedings. We
continue to believe that the resolution of these legal proceedings will not have a material adverse
effect on us and there have been no material developments since our 10-K filing.
Item 6. Exhibits
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on
this 9th day of February, 2005.
20
EXHIBIT INDEX
21
Table of Contents
Three months ended
December 31,
2004
2003
$
46,397
$
26,376
13,612
9,705
60,009
36,081
10,528
5,849
3,386
2,462
13,914
8,311
46,095
27,770
19,640
14,954
6,974
5,444
5,006
3,347
10
31,620
23,755
14,475
4,015
1,387
184
15,862
4,199
5,869
398
$
9,993
$
3,801
$
0.28
$
0.13
35,577
30,159
$
0.26
$
0.11
37,818
33,121
Table of Contents
Accumulated
Common Stock
Other
Total
Comprehensive
Retained
Shareholders'
Shares
Amount
Income / (Loss)
Earnings
Equity
34,772
$
306,655
$
(498
)
$
1,488
$
307,645
1,462
21,079
21,079
73
1,692
1,692
11,892
11,892
9,993
54
(493
)
9,554
36,307
$
341,318
$
(937
)
$
11,481
$
351,862
Table of Contents
Three months ended
December 31,
2004
2003
$
9,993
$
3,801
7
10
205
497
1,582
1,175
(6,205
)
11,892
(5,640
)
1,557
(31
)
(389
)
(1,226
)
296
(111
)
(168
)
2,061
(845
)
982
2,494
13,509
8,428
(120,260
)
(177,994
)
86,593
69,342
24
(395
)
(2,082
)
(751
)
(36,120
)
(109,403
)
113,636
21,331
4,441
21,331
118,077
(1,280
)
17,102
182
259
24,901
10,351
$
23,803
$
27,712
Table of Contents
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three months ended
December 31,
2004
2003
$
9,993
$
3,801
10
2,746
4,967
$
7,247
$
(1,156
)
$
0.28
$
0.13
$
0.20
$
(0.04
)
$
0.26
$
0.11
$
0.19
$
(0.04
)
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three months ended
December 31,
2004
2003
$
9,993
$
3,801
35,577
30,159
2,241
2,962
37,818
33,121
$
0.28
$
0.13
$
0.26
$
0.11
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three months ended
December 31,
2004
2003
$
1,062
$
827
266
98
(266
)
(96
)
$
1,062
$
829
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Balance at
Balance at
Cash Payments and
December 31,
September 30, 2004
Additional Charges
Write-offs
2004
$
625
$
$
(66
)
$
559
Three months ended
December 31,
2004
2003
35,197
23,792
11,034
5,296
8,599
4,218
5,179
2,775
$
60,009
$
36,081
Table of Contents
Table of Contents
Table of Contents
Three months ended
December 31,
2004
2003
(in thousands, except percentages)
$
46,397
$
26,376
13,612
9,705
$
60,009
$
36,081
77.3
%
73.1
%
22.7
26.9
100.0
%
100.0
%
Table of Contents
Three months ended
December 31,
2004
2003
(in thousands, except percentages)
$
10,528
$
5,849
3,386
2,462
13,914
8,311
$
46,095
$
27,770
22.7
%
22.2
%
24.9
25.4
23.2
23.0
76.8
%
77.0
%
Table of Contents
Three months ended
December 31,
2004
2003
(in thousands, except percentages)
$
19,640
$
14,954
6,974
5,444
5,006
3,347
10
$
31,620
$
23,755
32.7
%
41.4
%
11.6
15.1
8.3
9.3
52.7
%
65.8
%
Table of Contents
Three months ended
December 31,
2004
2003
(in thousands, except percentages)
$
14,475
$
4,015
1,387
184
15,862
4,199
5,869
398
$
9,993
$
3,801
24.1
%
11.1
%
2.3
0.5
26.4
11.6
9.8
1.1
16.7
%
10.5
%
Table of Contents
Table of Contents
Exhibit
Number
Exhibit Description
Second Amended and Restated Articles of Incorporation of the Registration (1)
Amended and Restated Bylaws of the Registrant (1)
Specimen Common Stock Certificate (1)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
Filed herewith.
(1)
Incorporated by reference from Registration Statement on Form S-1, File No. 333-75817.
Table of Contents
F5 NETWORKS, INC.
By:
/s/ STEVEN B. COBURN
Steven B. Coburn
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer )
Table of Contents
Exhibit
Number
Exhibit Description
Second Amended and Restated Articles of Incorporation of the Registration (1)
Amended and Restated Bylaws of the Registrant (1)
Specimen Common Stock Certificate (1)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
Filed herewith.
(1)
Incorporated by reference from Registration Statement on Form S-1, File No. 333-75817.
Exhibit 31.1
CERTIFICATIONS
I, John McAdam, certify that:
1) I have reviewed this quarterly report on Form 10-Q of F5 Networks, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 9, 2005 /s/ JOHN MCADAM ---------------------------------------- John McAdam Chief Executive Officer and President |
Exhibit 31.2
CERTIFICATIONS
I, Steven B. Coburn, certify that:
1) I have reviewed this quarterly report on Form 10-Q of F5 Networks, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 9, 2005 /s/ STEVEN B. COBURN ------------------------------------------------- Steven B. Coburn Senior Vice President, Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of F5 Networks, Inc. (the "Company") on Form 10-Q for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, John McAdam, President and Chief Executive Officer and Steven Coburn, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: February 9, 2005 /s/ JOHN MCADAM ------------------------- John McAdam /s/ STEVEN B. COBURN ------------------------- Steven B. Coburn |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to F5 Networks, Inc., and will be retained by F5 Networks, Inc., and furnished to the Securities
and Exchange Commission or its staff upon request.