F5, INC. Q1 FY2022 earnings

F5's fiscal first quarter ended December 31, 2021, produced revenue of $687.1 million, up 10.0% from the prior-year quarter. Gross profit rose 8.3% to $552.0 million. Operating income fell 3.1% to $114.15 million. Net income increased 6.7% to $93.56 million. Diluted EPS was $1.51, up 7.1%. The top line grew, but margins compressed. Gross margin was 80.3%, down 1.3 percentage points, and operating margin was 16.6%, down 2.2 percentage points. The gap between revenue growth and profit growth shows that costs and spending rose faster than sales. The company said sales and marketing expenses increased on higher personnel costs and an impairment charge related to the Shape trade name. Research and development expenses rose on higher headcount, including employees from the Volterra and Threat Stack acquisitions. General and administrative expenses increased on higher personnel costs, partly offset by lower professional fees.

Demand for software remained the main growth engine. Non-GAAP software revenue grew 47% from the prior-year quarter. The company said product revenue growth of 19% and global services growth of 2% drove the total top line. Non-GAAP net income was $179 million, or $2.89 per diluted share, compared with $161 million, or $2.59 per diluted share. Deferred revenue rose 16.0% to $1.58 billion. Remaining performance obligations rose 14.3% to $1.60 billion. Those balances suggest customers continued to commit to multi-year subscriptions. F5 said the increase in deferred revenue came from growth in its subscriptions business, including acquired deferred revenue from the Threat Stack acquisition. The company also said product revenue growth was driven by software-as-a-service and subscription-based offerings, including software sold through its flexible consumption program and multi-year subscriptions. Service revenue growth came from increased purchases or renewals of maintenance contracts driven by additions to its installed base of products.

Cash generation weakened in the quarter. Operating cash flow was $90.37 million, down 34.2% from the prior-year quarter. Capital expenditures were $10.56 million, up 124.9%. The company said the operating cash flow decline came from strong multi-year subscription sales, which are generally billed annually with the remainder recognized as unbilled assets, and from significant prepayments to its contract manufacturer for components for future hardware builds. Days sales outstanding was 55. F5 also said cash from operations could be affected by risks and uncertainties, including the effects of the COVID-19 pandemic.

Guidance points to supply chain limits. For the fiscal second quarter, F5 expects revenue of $610 to $650 million. For fiscal year 2022, the company expects revenue growth of 4.5% to 8%, down from its prior expectation of 8% to 9% growth. It expects fiscal year 2022 software revenue growth near the top end of its previously provided 35% to 40% range, and fiscal year 2022 global services revenue growth of 1% to 2%. Management said demand for systems remains robust, but its ability to meet that demand will be restricted by supply chain constraints for the remainder of fiscal year 2022. The company also said worsening global supply chain constraints are expected to restrict its ability to meet customer demand for hardware-based solutions, thereby impacting systems revenue. Management said demand drivers across the business are as strong as they have ever been, and customers increasingly see F5 as an innovator equipped to help them build and scale traditional and modern application environments.

Risks around the outlook are mostly operational and external. The company cited worsening global supply chain constraints, component availability, lengthening lead times, potential inability to source required parts or doing so at greatly increased prices, competitive factors such as pricing pressures, industry consolidation, new competitors, integration of acquired businesses, cybersecurity attacks, litigation, and uncertain global economic conditions. Other risks include potential disruptions from integrating acquired businesses and teams, the ability of sales professionals and distribution partners to sell acquired products, the timely development and acceptance of new products, and the unpredictability of the sales cycle. F5 also continued to add headcount. Professional services headcount at the end of December 2021 was 1,037, up from 967 a year earlier. Research and development headcount rose to 1,947 from 1,801. Sales and marketing headcount increased to 2,430 from 2,398, and general and administrative headcount rose to 856 from 735. The quarter included the acquisition of Threat Stack and a restructuring charge, but the bigger question for fiscal year 2022 is whether supply chain constraints ease enough to let the company convert strong demand into systems revenue.