F5, INC. Q2 FY2021 earnings

F5 Networks reported GAAP revenue of $645.3 million for its fiscal 2021 second quarter, up 10.6% from the prior-year quarter. GAAP gross profit rose 7.2% to $516.7 million. Gross margin was 80.1%, down 2.6 percentage points. The top line benefited from non-GAAP product revenue growth of 18% and non-GAAP global services revenue growth of 4%. Within products, non-GAAP software revenue grew 20% and non-GAAP systems revenue grew 17%. Management described the quarter as the second consecutive quarter of double-digit revenue growth and pointed to demand for application security and delivery solutions across multi-cloud environments.

Profitability moved in the opposite direction. GAAP operating income fell 36.1% to $53.5 million. Operating margin was 8.3%, down 6.1 percentage points. GAAP net income fell 29.6% to $43.2 million. GAAP diluted EPS fell 30.0% to $0.70. Non-GAAP net income was $155 million, or $2.50 per diluted share, compared with $136 million, or $2.23 per diluted share, in the prior-year quarter. Non-GAAP net income excluded $63 million in stock-based compensation, $34 million in impairment charges, $28 million in acquisition-related charges, $12 million in amortization of purchased intangible assets, and $5 million in facility-exit costs. The gap between revenue growth and profit decline reflects higher operating expenses and the impairment charges tied to facility exits.

Cash generation and backlog metrics were mixed. GAAP operating cash flow fell 29.3% to $128.5 million. Capital expenditures fell 28.6% to $9.4 million. Deferred revenue rose 6.7% to $1.37 billion. Remaining performance obligations rose 7.7% to $1.40 billion. The MD&A said deferred revenue increased because of annual maintenance contracts on new products and renewals on the existing installed base. Subscription growth, including deferred revenue from the Volterra acquisition, also contributed. The quarter included the Volterra acquisition, which management said added multi-cloud application services capabilities. The company also used an accelerated share repurchase program during the period.

For the third quarter of fiscal 2021 ending June 30, 2021, F5 expects revenue of $620 million to $650 million and non-GAAP earnings of $2.36 to $2.54 per diluted share. The outlook excludes amortization of intangible assets, share-based compensation, acquisition-related charges, restructuring charges, facility exit costs, and other non-recurring items. Management said it cannot provide a reconciliation of forward-looking non-GAAP earnings to GAAP without unreasonable effort because of high variability and low visibility of those excluded items. The guidance is for the next quarter, not the full fiscal year.

Management flagged several risks. They include customer acceptance of offerings, integration of acquired businesses and technologies, potential supply chain disruptions, competitive pricing pressures, and uncertain global economic conditions. The company also cited the COVID-19 pandemic, litigation, cybersecurity attacks, and the ability to attract and retain personnel. F5 said COVID-19 did not have a significant impact on its results of operations for the quarter ended March 31, 2021, but the full effects on the business and financial outlook remain unknown. The company noted a financial covenant on its term loan facility that requires maintaining a leverage ratio, and it said it monitors the effect of the pandemic on that calculation.