UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2004
OR
[
]
|
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
(State or other jurisdiction of incorporation or organization) |
91-1714307
(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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the registrants common stock as of August 10, 2004 was 34,559,380.
F5 NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2004
Table of Contents
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
3
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
4
F5 NETWORKS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 2004
The accompanying notes are an integral part of these consolidated financial statements.
5
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
6
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description of Business
F5 Networks, Inc. (the Company) provides integrated products and services
to manage, control and optimize Internet traffic. Our core products, the BIG-IP
Controller, 3-DNS Controller, and the BIG-IP Link Controller, help manage
traffic to servers and network devices in a way that maximizes availability and
throughput. Our FirePass family of network server appliances provides secure
user access to corporate networks and individual applications via any standard
Web browser. Our unique iControl architecture integrates our products and also
allows our customers and other vendors to integrate them with third party
products, including enterprise applications. As components of an integrated
solution, our products address many elements required for successful Internet
and intranet business applications, high availability, high performance,
intelligent load balancing, fault tolerance, streamlined manageability, remote
access to corporate networks, and network and application security. By
enhancing Internet performance and availability, our solutions enable our
customers and partners to maximize the use of the Internet in their business.
Acquisition
On May 31, 2004, the Company acquired MagniFire Websytems, Inc. and its
subsidiaries (MagniFire) through a merger transaction. The Company agreed to
pay $29.0 million in cash for all of the issued and outstanding shares of
MagniFire capital stock. The Company also incurred $1.5 million of direct
transaction costs for an estimated total purchase price of $30.5 million. The
acquisition of MagniFire is intended to allow the Company to quickly enter the
web application security market, broaden our customer base and augment existing
product lines. Refer to Note 5, Business Combinations, for additional
information related to the acquisition.
2. Summary of Significant Accounting Policies
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, 2003.
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. 101, Revenue Recognition in Financial
Statements, and 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, revenue is recognized upon
sale to the end user. In this situation, the Company receives a sales report
from the channel partner to determine when the sales transaction to the end
user has occurred. 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 become
due.
7
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Whenever a software license, hardware, installation and post-contract
customer support (PCS) elements are combined into a package with a single
bundled price, a portion of the sales price is allocated to each element of
the bundled package 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.
Goodwill and Acquired Technology
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. We
performed our annual goodwill impairment test as of March 31, 2004 and
concluded that goodwill was not impaired. Goodwill of $24.2 million was
recorded in connection with the acquisition of uRoam, Inc. in July 2003. As a
result of the MagniFire acquisition on May 31, 2004, we recorded an additional
$24.8 million of goodwill pursuant to the preliminary purchase price allocation
discussed further in Note 5 below.
Acquired technology is recorded at cost and amortized over its estimated
useful life of five years. The following table summarizes the net acquired
technology as of June 30, 2004 (in thousands):
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 amortized in accordance with Financial
Accounting Standards Board Interpretation No. 28 on an accelerated basis over
the vesting period of the individual options.
8
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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):
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 1.4 million and 2.3 million common shares potentially
issuable from stock options for the three months ended June 30, 2004 and 2003,
respectively, are excluded from the calculation of diluted earnings per share
because the effect was antidilutive. Approximately 1.4 million and 4.2 million
of common shares potentially issuable from stock options for the nine months
ended June 30, 2004 and 2003, respectively, are excluded from the calculation
of diluted earnings per share because the effect was antidilutive.
9
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Recent Accounting Pronouncements
In March 2004, the Emerging Issues Task Force (EITF) reached a consensus
on the remaining portions of EITF 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments with an effective date
of June 15, 2004. EITF 03-01 provides new disclosure requirements for
other-than-temporary impairments on debt and equity investments. Investors are
required to disclose quantitative information about: (i) the aggregate amount
of unrealized losses, and (ii) the aggregate related fair values of investments
with unrealized losses, segregated into time periods during which the
investment has been in an unrealized loss position of less than 12 months and
greater than 12 months. In addition, investors are required to disclose the
qualitative information that supports their conclusion that the impairments
noted in the qualitative disclosure are not other-than temporary. The adoption
of the remaining portions of EITF 03-01 is not expected to have a material
impact on the Companys results of operations or financial condition.
3. 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 of liability 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 and one
year for software, 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 and nine months ended June 30, 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 cancellation is given outside of applicable lead times. As of
June 30, 2004, the Company was committed to purchase approximately $4.8 million
of such inventory over the next quarter.
Litigation
In July and August 2001, a series of securities class action lawsuits were
filed in United States District Court, Southern District of New York against
certain investment banking firms that underwrote the Companys initial and
secondary public offerings, the Company and some of the Companys officers and
directors. These cases, which have
10
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
been consolidated under In re. F5 Networks, Inc. Initial Public Offering
Securities Litigation, No. 01 CV 7055, assert that the registration statements
for the Companys June 4, 1999 initial public offering and September 30, 1999
secondary offering failed to disclose certain alleged improper actions by the
underwriters for the offerings. The consolidated, amended complaint alleges
claims against the Company and those of our officers and directors named in the
complaint under Sections 11 and 15 of the Securities Act of 1933, and under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Other lawsuits
have been filed making similar allegations regarding the public offerings of
more than 300 other companies. All of these various consolidated cases have
been coordinated for pretrial purposes as In re. Initial Public Offering
Securities Litigation, Civil Action No. 21-MC-92. In October 2002, the
directors and officers were dismissed without prejudice. The issuer defendants
filed a coordinated motion to dismiss these lawsuits in July 2002, which the
Court granted in part and denied in part in an order dated February 19, 2003.
The Court declined to dismiss the Section 11 and Section 10(b) and Rule 10b-5
claims against the Company. In June 2003, a proposal was made for the
settlement and release of claims against the issuer defendants and their
directors and officers, including us, in exchange for a guaranteed recovery to
be paid by the issuer defendants insurance carriers and an assignment of
certain claims against the underwriters. The settlement is subject to a number
of conditions, including approval by the proposed settling parties and the
Court. If the settlement does not occur, and litigation against us continues,
we believe we have meritorious defenses and intend to defend the case
vigorously. Securities class action litigation could result in substantial
costs and divert our managements attention and resources. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of the litigation, and any unfavorable outcome could have a material adverse
impact on our business, financial condition and operating results.
On March 19, 2003, the Company sued Radware, Inc. alleging that Radware
has infringed F5s U.S. Patent No. 6,473,802. The Complaint seeks injunctive
relief, damages, enhanced damages, attorneys fees and interest on the basis
that Radware has infringed the 802 patent. The 802 patent is generally
directed at the use of cookies to create persistent sessions between a client
and a server. The Company filed an amended complaint on March 25, 2004, adding
Radware, Ltd., as a defendant. Radware, Ltd. and Radware, Inc. have denied
infringement, and filed a counterclaim seeking a declaratory judgment that they
do not infringe and that the 802 patent is invalid. The parties have engaged
in discovery and depositions, and a hearing to construe certain disputed
elements in the asserted patent claims is scheduled for September 2, 2004.
Fact discovery is scheduled to end September 22, 2004. Trial is scheduled for
January 10, 2005.
On July 20, 2004, Radware, Inc. and Radware, Ltd. sued F5 Networks, Inc.
in the United States District Court for the District of New Jersey, asserting
that F5 Networks has infringed and is infringing Radwares U.S. Patent No.
6,718,359 (359 patent). The Complaint alleges that the F5 Networks has
made, used, sold and or offered for sale, and continues to make, use, sell and
or offer for sale products, including the 3-DNS
®
product and BIG-IP
®
, that
incorporate technology and processes that are or when in use are covered by one
or more claims of the 359 patent. The Complaint seeks injunctive relief
prohibiting F5 Networks and its agents from making, using, selling, offering
to sell and importing into the United States any project that infringes, or
contributes to, or induces infringement of, the 359 patent, as well as
damages, pre-and post-judgment interest, enhanced damages and attorney fees.
The 359 patent is entitled Load Balancing. The Complaint alleges that the
patent is directed to methods and systems relating to network-proximity
determinations and non-geographical load balancing.
The Company is not aware of any additional 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.
4. 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 in the
fiscal year 2002. The restructuring
11
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 June 30, 2004
and 2003.
The activity to June 30, 2004 of the remaining restructuring liability
included as a component of accrued liabilities on the balance sheet as of
September 30, 2003 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. The
difference between the lease payments and sublease income has historically been
applied against the restructuring liability. The excess facilities liability
is scheduled to be paid over the remaining term of the lease ending in April
2007. During the three months ended December 31, 2003, timely receipts of
sublease income were not received and the collectibility of sublease income was
in question. Because of this uncertainty, neither the rent payment nor receipt
of sublease income was applied against the restructuring liability during the
December quarter. However, during the six months ended June 30, 2004 we
received payments of sublease income and have therefore applied the rent
payment and the sublease income against the restructuring liability. In the
event we are unable to collect sublease income throughout the duration of the
lease term, the actual loss may be increased from the original estimate.
5. Business Combination
On May 31, 2004, the Company completed its acquisition of MagniFire a
provider of web application firewall products. As a result of the merger, the
Company acquired all the assets of MagniFire, including MagniFires web
application firewall product line (TrafficShield), all property, equipment and
other assets that MagniFire used in its business and assumed certain of the
liabilities of MagniFire. The preliminary purchase price was $30.5 million.
The total purchase price includes an estimate of the direct costs associated
with the transaction totaling $1.5 million. The results of operations of
MagniFire have been included in the Companys unaudited consolidated financial
statements from June 1, 2004 to June 30, 2004.
We accounted for the acquisition under the purchase method of accounting
in accordance with Statement of Financial Accounting Standards No. 141,
Business Combinations. Under the purchase method of accounting, the total
purchase price is allocated to the tangible and intangible assets acquired and
the liabilities assumed based on their estimated fair values. The excess of
the purchase price over those fair values is recorded as goodwill. The fair
value assigned to the tangible and intangible assets acquired and liabilities
assumed are based on estimates and assumptions provided by management, and
other information compiled by management, including an independent valuation,
prepared by an independent valuation specialist that utilizes established
valuation techniques appropriate for the technology industry.
12
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The preliminary purchase price allocation is as follows (in thousands):
Of the total estimated purchase price, $5.0 million was allocated to
developed technology. To determine the value of the developed technology, a
combination of cost and market approaches were used. The cost approach
required an estimation of the costs required to reproduce the acquired
technology. The market approach measures the fair value of the technology
through an analysis of recent comparable transactions. The $5.0 million
allocated to developed technology will be amortized on a straight-line basis
over an estimated useful life of five years.
The estimated purchase price was allocated to goodwill of $24.8 million,
including the Companys valuation allowance on the deferred taxes acquired from
MagniFire. We have a full valuation allowance to offset U.S. deferred tax
assets in accordance with the provisions of Financial Accounting Standards
Board Statement No. 109, Accounting for Income Taxes. Based on current and
expected financial trends, we expect to release the valuation allowance during
the fourth quarter of fiscal 2004. At that time, we expect Goodwill will be
increased by an estimated additional $1.0 million to $2.0 million. Goodwill
represents the excess of the purchase price of an acquired business over the
fair value of the underlying net tangible and intangible assets. In accordance
with Statement of Financial Accounting Standards No. 142, Goodwill and other
Intangible Assets, goodwill is not amortized but instead is tested for
impairment at least annually.
Pro Forma Results
The unaudited pro forma condensed combined consolidated summary financial
information below, presents the combined results of operations of F5 Networks
and MagniFire as if the acquisition had occurred on October 1, 2002. As a
result of different fiscal year ends, financial information has been combined
for different periods in the pro forma financial information. MagniFires
results of operations for the three months ended December 31, 2003 were
combined with the results of operations for the three months ended March 31,
2004 and the two months ended May 31, 2004, the effective date of the
acquisition. As required, the pro forma information for the three and nine
months ended June 30, 2003 also combines the results of operations of uRoam,
Inc., a business we acquired during the prior fiscal year, and the related pro
forma adjustments as if the uRoam acquisition had occurred on October 1, 2002.
13
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unaudited pro forma financial information is as follows (in thousands,
except per share data):
Net adjustments of $0.4 million for the three months ended June 30, 2004
and 2003, and $1.0 million and $1.4 million for the nine months ended June 30,
2004 and 2003, respectively, have been made to the combined results of
operations reflecting the amortization of the developed technology acquired and
the net change in interest income (expense) had the acquisition taken place at
the beginning of the period. The unaudited pro forma financial information
does not reflect integration costs, or cost savings or other synergies
anticipated as a result of the acquisition. This information is not
necessarily indicative of the operating results that would have occurred if the
acquisition had been consummated on the date indicated nor is it necessarily
indicative of future operating results of the combined enterprise.
6. Common Stock
In November 2003, the Company sold 5,175,000 shares, including 675,000
shares sold upon the exercise of the underwriters over-allotment option, of
its common stock in a public offering at a price of $23.25 per share. The
proceeds to the Company were $113.6 million, net of offering costs of $6.7
million.
14
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 October 30,
2003. 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, 2003, 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. We
enable our customers to keep their IP-based Internet traffic flowing and
business information always available to any user from any device, anywhere in
the world. Our products ensure secure and reliable access to servers and the
applications that run on them. We market and sell our products primarily
through indirect sales channels in North America, Europe, Japan and the Asia
Pacific region, and to some direct customer accounts in North America.
Enterprise customers (Fortune 1000 or Business Week Global 1000 companies) in
financial services, manufacturing, transportation and mobile telecommunications
continues 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:
15
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.
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 Securities and Exchange Commission, or SEC, Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, and 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, revenue is recognized upon
sale to the end user. 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 to certain customers, in which case,
revenue is recognized when payments become due.
Whenever a software license, hardware, installation and post-contract
customer support (PCS) elements are combined into a package with a single
bundled price, a portion of the sales price is allocated to each element of
the bundled package 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 on a percentage of our 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
16
any collateral. If there is a 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.
Product returns are estimated based on
historical experience and are recorded at the time revenues are recognized. In
some instances, product revenue from distributors is subject to agreements
allowing rights of return. 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 and result
in reductions to recognized revenues.
Reserve for Excess or Obsolete Inventory.
We currently reserve for
estimated obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated net realizable value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory charges may be required.
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.
Income Tax Valuation Allowance.
The Company has net deferred tax assets
which are fully offset by a valuation allowance due to managements
determination that the criteria for recognition have not been met. In the
event management were to determine that the Company would be able to realize
its net deferred tax assets in the future, an adjustment to the deferred tax
assets would be made, increasing net income (or decreasing net loss) in the
period in which such a determination was made. Factors such as cumulative
profitability of the U.S. operations and projected future taxable income are
examples of the key criteria the Company uses for determining if and when the
valuation allowance will be released. Based on current and expected financial
trends, the Companys management believes that the valuation allowance will be
released during the final quarter of fiscal 2004.
Goodwill.
The Company accounts for goodwill in accordance with SFAS No.
141, Business Combinations. Under the purchase method of accounting, the
total purchase price is allocated to the tangible and intangible assets
acquired and the liabilities assumed based on their estimated fair values.
Goodwill is the excess of the purchase price (including liabilities assumed and
direct costs) over the fair value of tangible and identifiable intangible
assets acquired in purchase business combinations. We are required to perform
goodwill impairment tests on an annual basis or when indicators of impairment
exist. We performed our annual goodwill impairment test as of March 31, 2004
and concluded that goodwill was not impaired.
17
Results of Operations
Net revenues.
Total net revenues increased 51.6% and 43.6% for the three
and nine months ended June 30, 2004, respectively, from comparable periods in
the prior year. The improvement was due to increased demand for our
application traffic management products and higher services revenues resulting
from our increased installed base of products. Each of our primary geographic
regions reported higher revenues compared to the prior year period; however,
the increase in revenues was primarily driven by higher sales in North America.
International revenues increased to 37.2% of total net revenues for the three
months ended June 30, 2004 compared to 34.7% for the same period in the prior
year. International revenues increased to 38.9% of total net revenues for the
nine months ended June 30, 2004 compared to 34.2% for the same period in the
prior year. We expect international revenues will continue to represent a
significant amount of total net revenues.
Net product revenues increased 52.7% and 44.9% for the three and nine
months ended June 30, 2004, respectively, up from the comparable periods in the
prior year. The increase was primarily due to growth in the volume of product
sales and customer acceptance of our switch based BIG-IP product as well as
continued growth in revenues from our FirePass SSL VPN product line. Sales of
our BIG-IP products represented 72.6% and 85.3% of product revenues for the
three months ended June 30, 2004 and 2003, respectively and 75.6% and 83.6% of
product revenues for the nine months ended June 30, 2004 and 2003,
respectively. The decrease as a percentage of total sales was due to an
improvement in sales of our other products, such as our recently introduced
FirePass SSL VPN product which represented 11.8% and 9.0% of product revenues
for the three and nine months ended June 30, 2004, respectively. During the
current quarter, we had no recognized revenue from sales of TrafficShield, our
application security product recently acquired as part of our purchase of
MagniFire.
Net services revenues increased 48.6% and 39.9% for the three and nine
months ended June 30, 2004, respectively, from the comparable periods 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 19.9%
and 12.0% of our total net revenues for the three months ended June 30, 2004
and 2003, respectively. For the nine months ended June 30, 2004, this
distributor accounted for 17.5% of our total net revenues. Ingram Micro Inc.
accounted for 27.8% of our accounts receivable as of June 30, 2004.
18
Cost of Net Product Revenues
. Cost of our net product revenues consist
primarily 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. The increase in cost of net product revenues as a
percentage of net product revenues was primarily due to variations in the
product sales mix, increased warranty charges in connection with the growth in
overall product shipments and developed technology related amortization charges
of $0.2 million and $0.5 million for the three and nine months ended June 30,
2004, respectively. There were no amortization charges of developed technology
recorded in the prior comparable periods.
Cost of Net Services Revenues
. Cost of net services revenues increased in
absolute dollars due primarily to increased salary and benefits expenses as a
result of an increase in professional services employee headcount. Services
employee headcount at the end of June 2004 increased to 87 from 67 at the end
of June 2003. 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.
19
Sales and marketing.
Sales and marketing expenses consist primarily 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 24.4% and 21.2% for the three and nine months ended June 30,
2004, respectively, from the comparable periods in the prior year. The
increase was primarily due to higher salary, commission and employee benefit
related expenses. The increase in commission expenses is consistent with the
increased revenue for the corresponding period. The increased personnel costs
were driven by growth in employee headcount. Sales and marketing headcount at
the end of June 2004 increased to 244 from 203 at the end of June 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
primarily 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 by 30.0% and 24.9% for the three and nine months ended June
30, 2004, respectively, up from the comparable periods in the prior year. The
increase was primarily attributed to higher salary and employee benefits.
Research and development headcount at the end of June 2004 increased to 177
from 125 at the end of June 2003. The growth in employee headcount was
primarily related to our acquisition of uRoam, Inc. in July of 2003 and the
acquisition of MagniFire in May of 2004. 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
primarily 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 45.3% and 24.5% for the
three and nine months ended June 30, 2004, respectively, from the comparable
periods in the prior year. The increase for the three months ended June 30,
2004 was primarily due to increased salary and benefit expenses and
professional service fees, particularly audit and tax related. The increase
for the nine months ended June 30, 2004 was primarily due to increased
personnel costs and higher legal expenses related to a patent suit filed by us
against a competitor. General and administrative headcount at the end of June
2004 increased to 74 from 68 at the end of June 2003.
20
Amortization of unearned compensation.
We have recorded $8.3 million of
stock compensation costs since our inception through June 30, 2004. These
compensation costs represented the difference between the exercise price and
the deemed fair value of certain stock options granted to our employees and
outside directors. These stock options generally vested ratably over a
four-year period. We amortized these compensation costs using an accelerated
method as prescribed by FASB interpretation No. 28 (FIN No. 28). As of
December 31, 2003, the balance of unearned compensation was fully amortized and
no amortization of unearned compensation was recorded during the three months
ended June 30, 2004.
Other income, net.
Other income, net, consists primarily of interest
income and foreign currency transaction gains and losses. Other income, net,
increased 140.9% for the three months ended June 30, 2004 from the same period
in the prior year. The increase was primarily due to interest income earned on
the proceeds from our public offering completed in November of 2003. For the
nine months ended June 30, 2004 other income, net, increased 63.4% from the
same period in the prior year. The increase was primarily due to higher
interest income partially offset by higher foreign currency losses realized in
the first quarter of fiscal year 2004.
Income taxes
. The provision for income tax for the three and nine months
ended June 30, 2004 and 2003, primarily consists of foreign taxes related to
our international operations. The provision for income taxes in the three and
nine months ended June 30, 2004 also includes charges for deferred tax
liabilities associated with the amortization of goodwill. We have a full
valuation allowance to offset U.S. deferred tax assets in accordance with the
provisions of FAS 109. Based on current and expected financial trends, we
expect to release the valuation allowance during the fourth quarter of fiscal
2004. As a result, we expect to realize a one time benefit (net of actual tax
expense for the period) of $5.7 million to $6.1 million. For the nine months
ended June 30, 2004 we continued to incur U.S. tax losses primarily due to the
tax benefits received from employee stock option deductions. At June 30, 2004,
a significant portion of the valuation allowance is derived from tax benefits
from stock option deductions. In the fourth quarter, when the valuation
allowance related to these deductions is expected to be released, a significant
proportion of the benefit will be credited to additional paid in capital.
During the first quarter of fiscal 2005 we expect to record a provision for
income taxes using an overall effective tax rate of approximately 37%.
Financial Condition
Cash and cash equivalents, short-term investments and long-term
investments totaled $210.5 million as of June 30, 2004 compared to $79.0
million as of September 30, 2003, representing an increase of $131.5 million.
The significant increase was primarily due to the net proceeds of $113.6
million, generated by the sale of 5,175,000 shares of common stock in a public
offering in November 2003. In addition, cash flow from operations and cash
generated from employee stock option exercises contributed significantly to the
overall increase since the beginning of our fiscal year. The overall increase
in cash for the nine months ended June 30, 2004 was partially offset by cash
21
used for the acquisition of MagniFire of $26.9 million. Total cash payments
for the acquisition, excluding taxes, are estimated to be $30.5 million after all remaining cash obligations (direct
transaction costs and MagniFire investor payments) are remitted.
Cash provided by operating activities was $29.2 million for the nine
months ended June 30, 2004 compared to $9.0 million for the same period in the
prior year. During the first nine months of fiscal 2004, operating cash was
primarily provided by net income and an increase in advance payments from
customers. Advanced payments from customers increased due to higher sales of
service maintenance contracts, which are typically billed at the beginning of
the contract term and recognized as revenue over the service period. Cash
used in investing activities was $152.8 million for the nine months ended June
30, 2004 compared to $19.4 million for the same period in the prior year. The
increase was primarily due to investing the proceeds of the offering and the
acquisition of MagniFire. Cash provided by financing activities for the nine
months ended June 30, 2004 was $135.2 million compared to $8.8 million for the
same period in the prior year. Our financing activities consisted of $113.6
million net proceeds received from a public stock offering as well as cash
received from the exercise of employee stock options and purchases under our
employee stock purchase plan. 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 June 30, 2004, our principal commitments consisted of obligations
outstanding under operating leases. In 2000, we entered into lease agreements
on two buildings for our corporate headquarters. The lease agreements expire
in 2012 with an option for renewal. The lease for the second building has been
fully subleased through 2012. We established a restricted escrow account in
connection with the lease agreements. Under the lease terms, a $6.0 million
letter of credit is required through November 2012, unless the lease is
terminated before then. The letter of credit is fully collateralized by a $6.0
million certificate of deposit that has been included on our balance sheet as a
component of restricted cash.
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 outside of
applicable lead times. As of June 30, 2004, we were committed to purchase
approximately $4.8 million of such inventory over the next quarter.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk.
The primary objective of our investment activities is
to preserve principal, while at the same time maximize the income we receive
from our investments without significantly increasing risk. Some of the
securities that we have invested in may be subject to market risk. This means
that a change in prevailing interest rates may cause the market value of the
investment to fluctuate. For example, if we hold a security that was issued
with a fixed interest rate at the then-prevailing rate and the prevailing
interest rate later rises, the market value of our investment will probably
decline. To minimize this risk, we maintain our portfolio of cash equivalents
and investments in a variety of securities, including commercial paper,
government securities and money market funds.
22
The following table presents the amounts of our cash equivalents,
short-term investments and long-term investments that are subject to market
risk by range of expected maturity and weighted-average interest rates as of
June 30, 2004.
Foreign Currency Risk.
The majority of our sales and expenses are
denominated in U.S. dollars. While we have conducted some transactions in
foreign currencies during the three and nine months ended June 30, 2004 and
expect to continue to do so, we do not anticipate that foreign currency
transaction gains or losses will be significant. We have not engaged in
foreign currency hedging to date, however we may do so in the future.
Item 4. Controls and Procedures
As of June 30, 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In July and August 2001, a series of securities class action lawsuits were
filed in United States District Court, Southern District of New York against
certain investment banking firms that underwrote the Companys initial and
secondary public offerings, the Company and some of the Companys officers and
directors. These cases, which have been consolidated under In re. F5 Networks,
Inc. Initial Public Offering Securities Litigation, No. 01 CV 7055, assert that
the registration statements for the Companys June 4, 1999 initial public
offering and September 30, 1999 secondary offering failed to disclose certain
alleged improper actions by the underwriters for the offerings. The
consolidated, amended complaint alleges claims against the Company and those of
our officers and directors named in the complaint under Sections 11 and 15 of
the Securities Act of 1933, and under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. Other lawsuits have been filed making similar
allegations regarding the public offerings of more than 300 other companies.
All of these various consolidated cases have been coordinated for pretrial
purposes as In re. Initial Public Offering Securities Litigation, Civil Action
No. 21-MC-92. In October 2002, the directors and officers were dismissed
without prejudice. The issuer defendants filed a coordinated motion to
23
dismiss these lawsuits in July 2002, which the Court granted in part and
denied in part in an order dated February 19, 2003. The Court declined to
dismiss the Section 11 and Section 10(b) and Rule 10b-5 claims against the
Company. In June 2003, a proposal was made for the settlement and release of
claims against the issuer defendants and their directors and officers,
including us, in exchange for a guaranteed recovery to be paid by the issuer
defendants insurance carriers and an assignment of certain claims against the
underwriters. The settlement is subject to a number of conditions, including
approval by the proposed settling parties and the Court. If the settlement does
not occur, and litigation against us continues, we believe we have meritorious
defenses and intend to defend the case vigorously. Securities class action
litigation could result in substantial costs and divert our managements
attention and resources. Due to the inherent uncertainties of litigation, we
cannot accurately predict the ultimate outcome of the litigation, and any
unfavorable outcome could have a material adverse impact on our business,
financial condition and operating results.
On March 19, 2003, we sued Radware, Inc. alleging that Radware has
infringed F5s U.S. Patent No. 6,473,802. The Complaint seeks injunctive
relief, damages, enhanced damages, attorneys fees and interest on the basis
that Radware has infringed the 802 patent. The 802 patent is generally
directed at the use of cookies to create persistent sessions between a client
and a server. We filed an amended complaint on March 25, 2004, adding Radware,
Ltd., as a defendant. Radware, Ltd. and Radware, Inc. have denied
infringement, and filed a counterclaim seeking a declaratory judgment that they
do not infringe and that the 802 patent is invalid. The parties have engaged
in discovery and depositions, and a hearing to construe certain disputed
elements in the asserted patent claims is scheduled for September 2, 2004.
Fact discovery is scheduled to end September 22, 2004. Trial is scheduled for
January 10, 2005.
On July 20, 2004, Radware, Inc. and Radware, Ltd. sued us in the United
States District Court for the District of New Jersey, asserting that F5
Networks has infringed and is infringing Radwares U.S. Patent No. 6,718,359
(359 patent). The Complaint alleges that F5 Networks has made, used, sold
and or offered for sale, and continues to make, use, sell and or offer for sale
products, including the 3-DNS® product and BIG-IP®, that incorporate technology
and processes that are or when in use are covered by one or more claims of the
359 patent. The Complaint seeks injunctive relief prohibiting us and our
agents from making, using, selling, offering to sell and importing into the
United States any project that infringes, or contributes to, or induces
infringement of, the 359 patent, as well as damages, pre-and post-judgment
interest, enhanced damages and attorney fees. The 359 patent is entitled
Load Balancing. The Complaint alleges that the patent is directed to
methods and systems relating to network-proximity determinations and
non-geographical load balancing.
We are not aware of any additional pending legal proceedings that,
individually or in the aggregate, would have a material adverse effect on the
Companys business, operating results, or financial condition. We 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.
24
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on April 29, 2004, to elect two
class I directors, elect one class III director, amend our 1998 Equity
Incentive Plan to increase the number of shares issuable by an additional
2,000,000 shares, and amend our 1999 Employee Stock Purchase Plan to increase
the number of shares of common stock issuable by an additional 1,000,000
shares. At the Annual Meeting, the following nominees were elected as follows:
The shareholders voted against amending the 1998 Equity Incentive Plan to
increase the number of shares issuable by an additional 2,000,000 shares, with
voting as follows: 3,958,089 for, 19,011,051 against, and 33,521 abstain. The
shareholders voted in favor of amending the 1999 Employee Stock Purchase Plan
to increase the number of shares of common stock issuable by an additional
1,000,000 shares, with voting as follows: 21,906,914 for, 1,066,886 against and
28,858 abstain.
25
Item 6. Exhibits and Reports on Form 8-K
(1) Incorporated by reference from Registration Statement on Form S-1, File
No. 333-75817.
(b) Reports on Form 8-K
On August 6, 2004, the Company filed on Form 8-K/A reporting under Item 7,
presenting the financial statements in connection with our acquisition of
MagniFire.
On July 21, 2004, the Company furnished on Form 8-K a press release,
reporting under Item 12, announcing our financial results for the three
months ended June 30, 2004.
On June 2, 2004, the Company filed on Form 8-K a press release, reporting
under Item 2, announcing our acquisition of MagniFire.
26
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 12th day of August, 2004.
27
EXHIBIT INDEX
(unaudited, in thousands)
June 30,
September 30,
2004
2003
$
22,165
$
10,351
90,265
34,527
19,789
19,325
1,868
762
4,500
4,779
138,587
69,744
6,258
6,000
12,007
10,079
98,058
34,132
48,998
24,188
9,003
4,030
$
312,911
$
148,173
$
6,348
$
3,714
16,107
13,148
26,321
19,147
48,776
36,009
1,812
1,584
605
151
2,417
1,735
277,009
141,709
(10
)
(998
)
195
(14,293
)
(31,465
)
261,718
110,429
$
312,911
$
148,173
Table of Contents
(unaudited, in thousands, except per share amounts)
Three months ended
Nine months ended
June 30,
June 30,
2004
2003
2004
2003
$
32,537
$
21,310
$
88,633
$
61,149
11,706
7,879
32,338
23,113
44,243
29,189
120,971
84,262
7,267
4,491
19,915
12,751
2,832
2,290
7,920
6,726
10,009
6,781
27,835
19,477
34,144
22,408
93,136
64,785
16,907
13,593
47,781
39,413
6,253
4,810
17,597
14,091
4,069
2,800
11,271
9,050
6
10
77
27,229
21,209
76,659
62,631
6,915
1,199
16,477
2,154
848
352
1,840
1,126
7,763
1,551
18,317
3,280
347
152
1,145
546
$
7,416
$
1,399
$
17,172
$
2,734
$
0.22
$
0.05
$
0.52
$
0.10
34,382
26,638
32,760
26,227
$
0.20
$
0.05
$
0.48
$
0.10
36,969
28,467
35,703
27,525
Table of Contents
(unaudited, in thousands)
Common Stock
Accumulated
Other
Total
Unearned
Comprehensive
Accumulated
Shareholders
Shares
Amount
Compensation
Income
Deficit
Equity
27,403
$
141,709
$
(10
)
$
195
$
(31,465
)
$
110,429
1,769
19,085
19,085
162
2,579
2,579
5,175
113,636
113,636
10
10
17,172
(1,303
)
110
15,979
34,509
$
277,009
$
$
(998
)
$
(14,293
)
$
261,718
Table of Contents
(unaudited, in thousands)
Nine months ended
June 30,
2004
2003
$
17,172
$
2,734
(14
)
(3
)
(1
)
10
77
962
887
3,568
3,878
(1,049
)
(786
)
(1,099
)
(313
)
597
317
(628
)
(370
)
2,666
(674
)
7,015
3,270
29,211
9,005
(307,637
)
(136,844
)
186,672
119,291
(183
)
14
(26,899
)
(4,735
)
(1,876
)
(152,782
)
(19,415
)
113,636
21,606
8,771
135,242
8,771
11,671
(1,639
)
143
(164
)
10,351
20,801
$
22,165
$
18,998
Table of Contents
Table of Contents
Table of Contents
Three months ended
Nine months ended
June 30,
June 30,
2004
2003
2004
2003
$
7,416
$
1,399
$
17,172
$
2,734
6
10
77
4,885
5,090
14,697
18,171
$
2,531
$
(3,685
)
$
2,485
$
(15,360
)
$
0.22
$
0.05
$
0.52
$
0.10
$
0.07
$
(0.14
)
$
0.08
$
(0.59
)
$
0.20
$
0.05
$
0.48
$
0.10
$
0.07
$
(0.14
)
$
0.07
$
(0.59
)
Table of Contents
Table of Contents
Table of Contents
Balance at
Balance at
June 30,
September 30, 2003
Additional Charges
Cash Payments
Write-offs
2004
$
782
$
$
(107
)
$
$
675
62
(62
)
$
844
$
$
(107
)
$
(62
)
$
675
Table of Contents
$
895
152
76
235
81
5,000
24,809
$
31,248
$
(723
)
(25
)
(748
)
$
30,500
Table of Contents
Three months ended
Nine months ended
June 30,
June 30,
2004
2003
2004
2003
$
44,362
$
29,779
$
121,090
$
85,263
$
6,507
$
(2,313
)
$
13,415
$
(6,412
)
basic
pro forma
$
0.19
$
(0.09
)
$
0.41
$
(0.24
)
$
0.18
$
(0.09
)
$
0.38
$
(0.24
)
Table of Contents
Revenues
. We derive revenues from sales of our core
products; BIG-IP server appliances; BIG-IP application switches;
3-DNS Controller; BIG-IP Link Controller; 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
revenue within the reporting period. We believe customer acceptance
rates of our new products and feature enhancements are key
indicators of future trends. Additionally, we believe the growth in
our service revenues is a key indicator of our successes in
penetrating large enterprise accounts. 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 contract manufacturers, third-party software license fees,
amortization of developed technology, personnel and overhead
expenses. Our margins have remained relatively stable over the past
year, however factors such as product mix, inventory obsolescence,
returns, component price increases, and warranty costs could
significantly impact our gross margins from quarter to quarter and
represent a few of the more substantial 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
very strong with significant cash and investments and no long term
debt. Going forward, we believe the primary driver of our cash
flows will be net income from operations. Capital expenditures
during the nine months ended June 30, 2004
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were comprised primarily of tenant improvements to our facilities,
computer hardware and software for our information technology
infrastructure and equipment related to new product introductions.
During the third fiscal quarter, we used $26.9 million of cash in
connection with our acquisition of MagniFire. Total cash payments for
this acquisition, excluding taxes, are estimated to be $30.5 million
after all remaining cash obligations are remitted. We will continue
to evaluate possible acquisitions of or investments in businesses,
products, or technologies that we believe are strategic, which may
require the use of cash.
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.
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Three months ended
Nine months ended
June 30,
June 30,
2004
2003
2004
2003
(in thousands, except percentages)
$
32,537
$
21,310
$
88,633
$
61,149
11,706
7,879
32,338
23,113
$
44,243
$
29,189
$
120,971
$
84,262
73.5
%
73.0
%
73.3
%
72.6
%
26.5
27.0
26.7
27.4
100.0
%
100.0
%
100.0
%
100.0
%
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Maturing in (in thousands)
Three months to one
Greater than one
Three months or less
year
year
Total
Fair value
$
14,805
$
14,805
$
14,805
1.03
%
$
63,170
$
27,095
$
90,265
$
90,265
1.49
%
1.58
%
$
98,058
$
98,058
$
98,058
2.04
%
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Votes
For
Withheld
30,082,431
1,088,701
29,016,998
2,154,134
Votes
For
Against
Withheld
29,744,673
156,025
1,270,434
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(a)
Exhibits
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.
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F5 NETWORKS, INC.
By:
/s/ STEVEN B. COBURN
Steven B. Coburn
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
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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: August 12, 2004 /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: August 12, 2004 /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 June 30, 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: August 12, 2004 /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.