F5, INC. Q1 FY2024 earnings

F5 traded top-line growth for profitability in its first quarter of fiscal 2024. Revenue for the quarter ended December 31, 2023 was $692.6 million, down 1.1% from $700.4 million in the prior-year quarter. The mix shifted underneath that headline. Product revenue fell while services revenue grew, as customers renewed maintenance contracts on perpetual assets they already own and kept those assets in place longer. Chief executive François Locoh-Donou framed the quarter around a growing customer crisis in managing and securing applications and APIs, a problem he expects AI adoption to intensify. Management said the softer demand for new products reflects customer budget constraints tied to macroeconomic uncertainty rather than architectural shifts or losses to competitors.

Gross profit rose 2.0% to $556.2 million. GAAP gross margin reached 80.3%, up from 77.9% a year earlier. Operating income climbed 80.4% to $164.5 million, and GAAP operating margin expanded to 23.8% from 13.0%. The gain came from cost control, not from the top line. Sales and marketing expense fell $34.2 million, or 14.7%. Research and development fell $22.7 million, or 16.0%. General and administrative fell $5.3 million, or 7.5%. Headcount came down in every function: sales and marketing ended December at 2,154 against 2,490 a year earlier, research and development at 1,986 against 2,165, general and administrative at 882 against 959, and professional services at 1,049 against 1,082. Restructuring charges were roughly level with the prior-year quarter.

GAAP net income rose 91.1% to $138.4 million, and diluted EPS rose 93.3% to $2.32 from $1.20. The effective tax rate fell to 20.7% from 24.5%, which the company attributed to the tax impact of stock-based compensation and foreign operations. On a non-GAAP basis, net income was $205 million, or $3.43 per diluted share, against $149 million, or $2.47, a year earlier. Non-GAAP operating margin was 35.5% versus 26.5%, and non-GAAP gross margin was 83.1% versus 80.4%. Those non-GAAP figures exclude stock-based compensation, amortization of purchased intangibles, facility-exit costs, acquisition-related charges, restructuring charges and the related tax effects.

Cash generation held steady. Operating cash flow for the quarter was $165.3 million, up 4.9% from $157.6 million. Capital expenditures were $9.0 million, down 31.0% from $13.1 million. Deferred revenue ended the quarter at $1.83 billion, up 4.0% from $1.76 billion a year earlier, which management linked to maintenance renewals across the installed base. Remaining performance obligations were $1.80 billion, flat against the prior-year level. Cash, cash equivalents and investments totaled $832.0 million at December 31, 2023, up from $808.4 million at September 30, 2023. The company used $150.0 million to repurchase stock and carried no borrowings on its $350.0 million revolving credit facility. Days sales outstanding was 67.

Guidance suggests the near-term picture stays similar. For the second quarter of fiscal 2024, F5 expects revenue of $675 million to $695 million and non-GAAP earnings of $2.79 to $2.91 per diluted share. For the full fiscal year 2024, the company raised its non-GAAP earnings per share outlook to growth of 6% to 8% from 5% to 7%, citing a lower expected tax rate. Management called demand trends stabilizing across all major geographic theaters while noting that customers continue to watch budgets closely. Concentration is a real exposure: Ingram Micro accounted for 15.3% of total net revenue and Synnex for 15.6%. Revenue outside the United States was 49.5% of the total, up from 46.4%. The MD&A also flags supply chain disruption, component sourcing, competitive pricing pressure, and acquisition integration among the risks that could move results. The company carries a $40 million four-year component purchase commitment with one supplier, with $20.2 million of total non-cancelable long-term purchase commitments outstanding at December 31, 2023.