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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1714307
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
200 FIRST AVENUE WEST, SUITE 500
SEATTLE, WASHINGTON 98119
(Address of principal executive offices and zip code)
(206) 505-0800
(Registrant's 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 [ ] No [X].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date: 18,411,467 shares of common
stock, no par value, as of August 3, 1999.
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F5 NETWORKS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I. CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Item 1. Condensed Financial Statements
Condensed Balance Sheets
June 30, 1999 and September 30, 1998 3
Condensed Statements of Operations
Three months and nine months ended June 30, 1999 and
1998 4
Condensed Statements of Cash Flows
Nine months ended June 30, 1999 and 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
F5 NETWORKS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 26,948 $ 6,206
Accounts receivable, net of allowances of $826 and $382................. 5,858 2,032
Inventories............................................................. 710 99
Other current assets.................................................... 839 250
-------- -------
Total current assets.................................................. 34,355 8,587
Property and equipment, net................................................ 1,925 682
Other assets............................................................... 206 163
-------- -------
Total assets.......................................................... $ 36,486 $ 9,432
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................................... $ 3,540 $ 559
Accrued liabilities................................................... 1,579 477
Deferred revenue...................................................... 2,462 788
-------- -------
Total current liabilities........................................... 7,581 1,824
-------- -------
Commitments
Redeemable convertible preferred stock, no par value:
Series D Convertible, no and 1,138,438 shares issued and outstanding 7,688
-------- -------
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized...........
Series A Convertible, no and 400,000 shares issued and outstanding.. 1,123
Series B Convertible, no and 1,250,000 shares issued and outstanding 1,656
Series C Convertible, no and 156,250 shares issued and outstanding.. 1,418
Common stock, no par value; 100,000,000 shares authorized, 18,108,185
and 6,021,500 shares issued and outstanding........................... 45,751 2,875
Note receivable from shareholder........................................... (750)
Unearned compensation...................................................... (3,960) (1,694)
Accumulated deficit........................................................ (12,136) (5,458)
-------- -------
Total shareholders' equity (deficit).................................. 28,905 (80)
-------- -------
Total liabilities and shareholders' equity (deficit)................ $ 36,486 $ 9,432
-------- -------
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</TABLE>
The accompanying notes are an integral part of these financial statements
3
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F5 NETWORKS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts and share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net revenues:
Products...................................... $ 6,444 $ 929 $ 11,865 $ 2,537
Services...................................... 1,161 215 2,198 444
------------- ------------- ------------- --------------
Total net revenues........................ 7,605 1,144 14,063 2,981
------------- ------------- ------------- --------------
Cost of net revenues:
Products...................................... 1,636 291 3,075 694
Services...................................... 396 115 986 171
------------- ------------- ------------- --------------
Total cost of net revenues................ 2,032 406 4,061 865
------------- ------------- ------------- --------------
Gross profit.................................. 5,573 738 10,002 2,116
------------- ------------- ------------- --------------
Operating expenses:
Sales and marketing........................... 4,010 1,097 9,113 2,439
Research and development...................... 1,466 525 3,811 1,059
General and administrative.................... 954 252 2,145 690
Amortization of unearned compensation......... 759 114 1,797 205
------------- ------------- ------------- --------------
Total operating expenses.................. 7,189 1,988 16,866 4,393
------------- ------------- ------------- --------------
Loss from operations............................... (1,616) (1,250) (6,864) (2,277)
Interest income (expense), net..................... 97 (2) 186 (21)
------------- ------------- ------------- --------------
Net loss...................................... $ (1,519) $ (1,252) $ (6,678) $ (2,298)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Net loss per share - basic and diluted............. $ (0.15) $ (0.21) $ (0.88) $ (0.37)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Weighted-average common shares - basic and diluted. 10,149,000 5,892,000 7,582,000 6,135,000
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Pro forma: (A)
Net loss per share - basic and diluted............ $ (0.10) $ (0.11) $ (0.45) $ (0.20)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Weighted average shares - basic and diluted........ 15,945,000 11,585,000 14,923,000 11,300,000
------------- ------------- ------------- --------------
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</TABLE>
(A) Assumes shares of the Company's preferred stock outstanding prior to the
initial public offering have been converted into common stock as of the
date of issuance.
The accompanying notes are an integral part of these financial statements
4
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F5 NETWORKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $ (6,678) $ (2,298)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of unearned compensation................................. 1,797 205
Provision for doubtful accounts and sales returns..................... 1,078 399
Depreciation and amortization......................................... 364 213
Non-cash interest expense............................................. 12
Changes in operating assets and liabilities:
Accounts receivable................................................. (4,904) (1,108)
Inventories......................................................... (611) (48)
Other current assets................................................ (589) (62)
Other assets........................................................ (119) 13
Accounts payable and accrued liabilities............................ 4,083 746
Deferred revenue.................................................... 1,674 181
------------- -------------
Net cash used in operating activities............................. (3,905) (1,747)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of note receivable to officer................................... (10)
Purchases of property and equipment...................................... (1,531) (425)
Additions to software development costs.................................. (145)
------------- -------------
Net cash used in investing activities............................. (1,531) (580)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in initial public
offering.............................................................. 25,549
Proceeds from issuance of Series B Convertible Preferred Stock........... 1,235
Proceeds from issuance of Series C Convertible Preferred Stock........... 1,493
Proceeds from option and warrant exercises............................... 629 28
Repurchase of common stock under
shareholder agreement................................................. (245)
Proceeds from issuance of common stock under
shareholder agreement................................................. 172
Proceeds from line of credit............................................. 1,075
Repayment of line of credit.............................................. (825)
------------- -------------
Net cash provided by financing activities............................. 26,178 2,933
------------- -------------
Net increase in cash and cash equivalents............................. 20,742 606
Cash and cash equivalents, at beginning of period........................ 6,206 143
------------- -------------
Cash and cash equivalents, at end of period.............................. $ 26,948 $ 749
------------- -------------
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</TABLE>
The accompanying notes are an integral part of these financial statements
5
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F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed financial statements have been prepared by F5 Networks, Inc. (the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission and include the accounts of the Company. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such rules and regulations. In the opinion of the Company,
the unaudited financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the Company's
financial position at June 30, 1999, its operating results for the three months
and nine months ended June 30, 1999 and 1998 and cash flows for the nine months
ended June 30, 1999 and 1998. The condensed balance sheet at September 30, 1998
has been derived from audited financial statements as of that date. These
financial statements and the notes should be read in conjunction with the
Company's financial statements and notes thereto contained in the Company's
Registration Statement on Form S-1 (File No. 333-75817) filed with the
Securities and Exchange Commission.
The results of operations for the three months and nine months ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
future quarters or the year ending September 30, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could materially differ from these estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investment securities with maturity from
the date of purchase of three months or less to be cash equivalents and
investment securities with a weighted average maturity from the date of purchase
of more than three months but less than one year to be short-term investments.
As of June 30, 1999, the Company does not hold short-term investments within
its investment portfolio.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash equivalents and trade receivables. The
Company has placed its investments with high-credit quality issuers with no more
than 20% of the portfolio value due from any one issuer.
The Company's customers are from diverse industries and geographic locations.
Net revenues from international customers are denominated in U.S. Dollars and
were approximately $1.0 million for the nine months ended June 30, 1999, and
$677,000 for the three months ended June 30, 1999. For the nine months ended
June 30, 1999, one customer accounted for 21.7% of net revenues and for the nine
months ended June 30, 1998, no single customer accounted for more than 10% of
the Company's net revenues.
6
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INVENTORIES
Inventories consist of hardware, software and related component parts and are
recorded at the lower of cost or market (as determined by the first-in,
first-out method).
ACCRUED LIABILITIES:
At June 30, 1999 and September 30, 1998, accrued liabilities were approximately
as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
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<S> <C> <C>
Accrued payroll and benefits.................................. $ 871 $ 237
Accrued sales and use taxes................................... 287 141
Other......................................................... 421 99
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$ 1,579 $ 477
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</TABLE>
REVENUE RECOGNITION
On October 27, 1997, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position 97-2 ("SOP
97-2"), "Software Revenue Recognition." SOP 97-2 provides guidance on when
revenue should be recognized and in what amounts for licensing, selling,
leasing, or otherwise marketing computer software. The Company has implemented
SOP 97-2 for the year ended September 30, 1998.
The Company sells products through resellers, original equipment manufacturers
and other channel partners, as well as to end users, under similar terms. The
Company generally combines software license, installation and customer support
elements into a package with a single "bundled" price. The Company allocates a
portion of the sales price to each element of the bundled package based on their
respective fair values when the individual elements are sold separately.
Revenues from the license of software, net of an allowance for estimated
returns, are recognized when the product has been shipped and the customer is
obligated to pay for the product. Installation revenue is recognized when the
product has been installed at the customer's site. Revenues for customer support
are recognized on a straight-line basis over the service contract terms.
Estimated sales returns are based on historical experience by product and are
recorded at the time revenues are recognized.
INITIAL PUBLIC OFFERING
On June 4, 1999, the Company issued 2,860,000 shares of its common stock at an
initial public offering price of $10.00 per share. Also sold in this offering
were 590,000 shares held by selling shareholders, including 450,000 shares sold
upon the exercise of the underwriters' overallotment option. The net proceeds to
the Company from the offering, net of offering costs were approximately $25
million. Concurrent with the initial public offering, each outstanding share of
the Company's convertible preferred stock was automatically converted into
common stock. As of June 30, 1999, 18,108,185 shares of common stock were
outstanding, and 100,000,000 shares were authorized.
7
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NET LOSS AND PRO FORMA NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share is computed by dividing net loss by the weighted average number of
common and dilutive common stock equivalent shares outstanding during the
period. As the Company had a net loss attributable to common stockholders in
each of the periods presented, basic and diluted net loss per share are the
same. Pro forma net loss per share is computed using the weighted average number
of shares used for basic and diluted per share amounts and the weighted average
convertible preferred stock outstanding as if those shares were converted to
common stock at the time of issuance.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. The Company does not
use derivative instruments, therefore the adoption of this statement will not
have any effect on the Company's results of operations or its financial
position.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which establishes guidelines for the
accounting for the costs of all computer software developed or obtained for
internal use. This statement is effective for fiscal years beginning after
December 15, 1998. The Company does not expect this statement to have a material
impact on its financial statements.
8
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion in this report contains forward-looking statements that involve
risks and uncertainties. Such statements, which include statements concerning
the timing of availability and functionality of products under development,
product mix, trends in average selling prices, the percentage of international
sales and sales to strategic customers and the availability and cost of products
from the Company's suppliers, are subject to risks and uncertainties, including
those set forth below under "Factors That May Affect Results," that could cause
actual results to differ materially from those projected. These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based.
The following information should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Operating Results" on pages
18 through 26 of the Company's prospectus filed June 4, 1999 and "Factors That
May Affect Results of Operations and Financial Condition" in this Quarterly
Report on Form 10-Q.
OVERVIEW
F5 is a leading provider of integrated Internet traffic management
solutions designed to improve the availability and performance of
mission-critical Internet-based servers and applications. We were incorporated
on February 26, 1996 and began operations in April 1996. During the period from
February 26, 1996 through September 30, 1996, we were a development stage
enterprise and had no product revenues. Our operating activities during this
period related primarily to developing our initial product, recruiting
personnel, building our corporate infrastructure and raising capital.
In July, 1997, we released our first version of our
BIG/ip-Registered Trademark- Controller, and began to expand our operations.
We increased our investments in research and development, marketing programs,
domestic and international sales channels, customer support and services and
our general and administrative infrastructure. Since June 30, 1997, we have:
- hired more than 150 employees;
- hired sales representatives in eight domestic locations;
- hired professional services and customer support personnel in
eight domestic locations;
- released several upgrades to BIG/ip;
- released two new products our 3DNS-Registered Trademark-
Controller and our see/IT-TM- Network Manager;
- engaged sales representatives in the European and Asia Pacific
markets; and
- established distributor relationships with two international
resellers.
Our net revenues grew from $229,000 for the year ended September 30,
1997 to $4.9 million for the year ended September 30, 1998, and were $14.1
million for the nine months ended June 30, 1999. Currently, we derive
approximately 73% of our revenues from sales of BIG/ip. One of our resellers,
Exodus Communications, accounted for 21.7% of our net revenues for the nine
months ended June 30, 1999 and 29.4% of our accounts receivable balance at June
30, 1999. In addition, we expect to derive a significant portion of our net
revenues from sales of BIG/ip in the future.
9
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Net revenues derived from customers located outside of the United
States were $15,000 in 1997, $172,000 in 1998 and $1.0 million for the nine
months ended June 30, 1999. We currently are expanding our international
operations significantly, particularly in selected countries in the European and
Asia Pacific markets, because we believe international markets represent a
significant growth opportunity. The expansion of our international operations
will be subject to a variety of risks that could significantly harm our business
and results of operations.
Customers who purchase BIG/ip or 3DNS receive installation services and
an initial customer support contract, typically covering a 12-month period.
Customers may also purchase consulting services and renew their initial customer
support contract. As of June 30, 1999, approximately 80% of our customers have
renewed or anticipate renewing their initial customer support contract. Based on
our limited operating history, it is difficult to predict what our rate of
renewals will be in the future. We generally combine the software license,
installation, and customer support elements of our products into a package for a
single price. We allocate a portion of the sales price to each element of the
bundled package based on their respective fair values when the individual
elements are sold separately. Revenues from the license of software are
recognized when the product has been shipped and the customer is obligated to
pay for the product. Installation revenue is recognized when the product has
been installed at the customer's site. Revenues for customer support are
recognized on a straight-line basis over the service contract term. Consulting
services are customarily billed at fixed rates, plus out-of-pocket expenses. Our
ordinary payment terms to our customers are net 30 days, but we have extended
payment terms beyond net 30 days to some customers. Estimated sales returns are
based on historical experience by product and are recorded at the time revenues
are recognized.
We have incurred losses since our inception, and as of June 30, 1999,
had an accumulated deficit of $12.1 million. Our success in growing net revenues
depends on increasing our customer base and expanding our product line as well
as continued growth of the emerging Internet traffic management market.
Accordingly, we intend to continue to invest heavily in sales and marketing,
promotion of the F5 brand, customer service and support, research and
development, operating infrastructure and general and administrative staff to
support our growth. As a result of these investments, we expect that our
operating expenses will increase significantly and that we will continue to
incur substantial operating losses for the foreseeable future. To achieve and
maintain profitability we will need to increase our net revenues significantly.
Although we have experienced rapid growth in net revenues in recent periods, we
may not be able to sustain these growth rates or achieve or sustain
profitability.
We have recorded a total of $6.2 million of unearned compensation costs
since our inception through June 30, 1999. These charges represent the
difference between the exercise price and the deemed fair value of certain stock
options granted to our employees and outside directors. These options generally
vest ratably over a four-year period. We are amortizing these costs over the
vesting period of the options and have recorded unearned compensation charges of
$69,000 and $420,000 for the years ended September 30, 1997 and 1998,
respectively, and $205,000 and $1.8 million for the nine months ended June 30,
1998 and 1999, respectively.
We expect to recognize amortization expense related to unearned
compensation of approximately $2.5 million, $1.8 million, $953,000 and $408,000
during the years ended September 30, 1999, 2000, 2001 and 2002, respectively. We
cannot guarantee, however, that we will not accrue additional unearned
compensation costs in the future.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of net revenues
and operating results are not necessarily meaningful and should not be relied
upon as indications of future performance. This is particularly true of
companies such as ours that operate in new and rapidly evolving markets.
10
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net revenue represented by certain items reflected in our
Condensed Statements of Operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1999 1998 1999 1998
------- ------ ------- ------
(unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Products ................................................... 84.7% 81.2% 84.4% 85.1%
Services ................................................... 15.3 18.8 15.6 14.9
-------- ------ ------- ------
Total net revenues ................................ 100.0 100.0 100.0 100.0
--------- ---------- --------- ---------
Cost of net revenues:
Products ................................................... 21.5 25.4 21.9 23.3
Services ................................................... 5.2 10.1 7.0 5.7
--------- ---------- --------- ---------
Total cost of net revenues ........................ 26.7 35.5 28.9 29.0
--------- ---------- --------- ---------
Gross margin ...................................... 73.3 64.5 71.1 71.0
--------- ---------- --------- ---------
Operating expenses:
Sales and marketing ........................................ 52.7 95.9 64.8 81.8
Research and development ................................... 19.3 45.9 27.1 35.5
General and administrative ................................. 12.5 22.0 15.3 23.1
Amortization of unearned compensation ...................... 10.0 10.0 12.8 6.9
--------- ---------- --------- ---------
Total operating expenses .......................... 94.5 173.8 120.0 147.3
--------- ---------- --------- ---------
Loss from operations ........................................... (21.2) (109.3) (48.9) (76.3)
Interest income (expense), net ................................. 1.3 (0.1) 1.3 0.7
--------- ---------- --------- ---------
Net loss ....................................................... (19.9)% (109.4)% (47.6)% (77.0)%
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
NET REVENUES:
Net revenues consist of sales of our products and services, which
include software license and services. Services include revenue from service and
support agreements provided as part of the initial product sale, sales of
extended service and support contracts and consulting services.
PRODUCT REVENUES. Product revenues increased by 593.6% from $929,000
for the three months ended June 30, 1998 to $6.4 million for the three months
ended June 30, 1999. Product revenues increased by 367.7% from $2.5 million for
the nine months ended June 30, 1998 to $11.9 million for the nine months ended
June 30, 1999. This increase in product revenues was due primarily to an
increase in the quantity of our products sold through our sales channels
including the sales of our new products.
SERVICE REVENUES. Service revenues increased by 440.0% from $215,000
for the three months ended June 30, 1998 to $1.2 million for the three months
ended June 30, 1999. Service revenues increased by 395.0% from $444,000 for the
nine months ended June 30, 1998 to $2.2 million for the nine months ended June
30, 1999. This increase was due primarily to an increase in the installed base
of our products which resulted in increased revenues from service and support
contracts.
As our net revenue base increases, we do not believe we can sustain the
percentage growth rates of net revenues that we have experienced historically.
11
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COST OF NET REVENUES:
Cost of net revenues consists primarily of out-sourced hardware
components and manufacturing, fees for third-party software products integrated
into our products, manufacturing and service and support personnel and an
allocation of our facilities and depreciation expenses.
COST OF PRODUCT REVENUES. Cost of product revenues increased by 462.2%,
from $291,000 for the three months ended June 30, 1998 to $1.6 million for the
three months ended June 30, 1999 and decreased as a percentage of product
revenues to 25.4% from 31.3%. Cost of product revenues increased by 343.1%, from
$694,000 for the nine months ended June 30, 1998 to $3.1 million for the nine
months ended June 30, 1999 and decreased as a percentage of product revenues to
25.9% from 27.4%. The increase in absolute dollars was due primarily to an
increase in product revenues. The decrease in cost of product revenues as a
percentage of higher utilization of manufacturing operations, including
increased economies of scale achieved from an increase in production.
COST OF SERVICE REVENUES. Cost of service revenues increased by 244.3%,
from $115,000 for the three months ended June 30, 1998 to $396,000 for the three
months ended June 30, 1999 decreased as a percentage of service revenues to
34.1% from 53.5%. Cost of service revenues increased by 476.6%, from $171,000
for the nine months ended June 30, 1998 to $986,000 for the nine months ended
June 30, 1999 increased as a percentage of net service revenues from 38.5% to
44.9%. The increase in absolute dollars was due primarily to increases in
service and support personnel.
SALES AND MARKETING. Our sales and marketing expenses consist primarily
of salaries, commissions and related benefits of our sales and marketing staff,
costs of our marketing programs, including public relations, advertising and
trade shows and an allocation of our facilities and depreciation expenses. Sales
and marketing expenses increased by 265.5%, from $1.1 million for the three
months ended June 30, 1998 to $4.0 million for the three months ended June 30,
1999. Sales and marketing expenses increased by 273.6%, from $2.4 million for
the nine months ended June 30, 1998 to $9.1 million for the nine months ended
June 30, 1999. This increase was due to an increase in sales and professional
services personnel, increased commissions, and increased advertising and
promotional activities. We expect to increase sales and marketing expenses in
order to grow net revenues and expand our brand awareness.
RESEARCH AND DEVELOPMENT. Our research and development expenses consist
primarily of salaries and related benefits for our product development personnel
and an allocation of our facilities and depreciation expenses. Research and
development expenses increased by 179.2%, from $525,000 for the three months
ended June 30, 1998 to $1.5 million for the three months ended June 30, 1999.
Research and development expenses increased by 259.9%, from $1.1 million for the
nine months ended June 30, 1998 to $3.8 million for the nine months ended June
30, 1999. This increase was due primarily to an increase in product development
personnel. Our future success is dependent in large part on the continued
enhancement of our current products and our ability to develop new,
technologically advanced products that meet the sophisticated needs of our
customers. We expect research and development expenses to increase in future
periods.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
consist primarily of salaries, benefits and related costs of our executive,
finance, human resource and legal personnel, third-party professional service
fees, and an allocation of our facilities and depreciation expenses. General and
administrative expenses increased by 278.6% from $252,000 for the three months
ended June 30, 1998 to $954,000 for the three months ended June 30, 1999.
General and administrative expenses increased by 210.9% from $690,000 for the
nine months ended June 30, 1998 to $2.1 million for the nine months ended June
30, 1999. This increase was due primarily to an increase in general and
administrative personnel. We expect general and administrative expenses to
increase as we expand our staff, further develop our information systems and
incur costs associated with being a publicly held company.
AMORTIZATION OF UNEARNED COMPENSATION. We recorded unearned
compensation charges of $114,000 and $759,000 for the three months ended June
30, 1998 and 1999, respectively. For the nine months ended June 30, 1998 and
1999, we recorded unearned compensation charges of $205,000 and $1.8 million,
respectively.
12
<PAGE>
INCOME TAXES. There was no provision for federal or state income taxes
for any period as we have incurred operating losses since inception. As of
September 30, 1998, we had approximately $4.6 million of net operating loss
carryforwards for federal income tax purposes. Utilization of the net operating
loss carryforwards may be subject to annual limitations due to the ownership
change limitations contained in the Internal Revenue Code of 1986 and similar
state provisions. Annual limitations may result in the expiration of the net
operating losses before we can utilize them. The federal net operating loss
carryforwards will expire at various dates beginning in 2011 through 2018 if we
do not use them.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through May 1999, we financed our operations and
capital expenditures primarily through the sale of approximately $12.4 million
in equity securities. In June 1999 we completed an initial public offering of
2,860,000 shares of common stock and raised approximately $25 million, net of
offering costs. F5 Networks is listed on the Nasdaq National Market under the
symbol "FFIV."
We have a $2.0 million working capital revolving line of credit with a
lender that is collateralized by all of our accounts receivable and bears
interest at the lender's prime rate plus one-half percent. This facility allows
us to borrow up to the lesser of 75% of our eligible accounts receivable or $2.0
million. The agreement under which the line of credit was established contains
certain covenants, including a provision requiring us to maintain specific
financial ratios.
Cash used in our operating activities was $1.7 million for the nine
months ended June 30, 1998, and $3.9 million for the nine months ended June 30,
1999. These net cash outflows resulted from operating losses as well as
increases in accounts receivable due to increased sales and other current assets
and were partially offset by increases in accounts payable, accrued liabilities
and deferred revenues.
Cash used in investing activities was $1.5 million for the nine months
end June 30, 1999, substantially all of which was used for the purchase of
property and equipment. We expect capital expenditures to continue to increase
through the end of 1999, due to the costs of expansion and expenditures for
information systems and test equipment.
As of June 30, 1999, our principal commitment consisted of obligations
outstanding under operating leases. In July 1999, we agreed to lease
an additional 8,000 square feet in a facility located in Seattle, Washington,
for a term of 84 months. The annual cost of this additional lease is
approximately $164,000, subject to annual adjustments. Although we have no
other material commitments, we anticipate a substantial increase in our
capital expenditures and lease commitments consistent with anticipated growth
in our operations, infrastructure and personnel. In the future we may also
require a larger inventory of products in order to provide better
availability to customers and achieve purchasing efficiencies.
We do not hold derivative financial instruments or equity securities in
our investment portfolio. Our cash equivalents consist of high-quality
securities, as specified in our investment policy guidelines. The policy limits
the amount of credit exposure to any one issue or issuer to a maximum of 20% of
the total portfolio with the exception of treasury securities, commercial paper,
and money market funds, which are exempt from size limitation. The policy limits
all short-term investments to mature in two years or less, with the average
maturity being one year of less. These securities are subject to interest rate
risk and will decrease in value if interest rates increase.
YEAR 2000 READINESS DISCLOSURE
BACKGROUND OF YEAR 2000 ISSUES. Many currently installed computer and
communication systems and software products are unable to distinguish 21st
century dates from 20th century dates. This situation could result in system
failures or miscalculations causing business disruptions. As a result, many
companies' software and computer and communications systems may need to be
upgraded or replaced to become Year 2000 compliant.
13
<PAGE>
OUR PRODUCT TESTING AND LICENSING. We have tested all of our current
products for Year 2000 compliance. We derived our testing method from our
review and analysis of the Year 2000 testing practices of other software
vendors, relevant industry Year 2000 compliance standards and the specific
functionality and operating environments of our products. The tests are run
on all supported platforms for each current release of our product and
include testing for date calculations and internal storage of date
information with test numbers starting in 1999 and going beyond the Year
2000. Based on these tests, we believe our products to be Year 2000 compliant
with respect to date calculations and internal storage of date information.
CUSTOMER CLAIMS. We may be subject to customer claims to the extent our
products fail to operate properly as a result of the occurrence of the date
January 1, 2000. Liability may result to the extent our products are not able to
store, display, calculate, compute and otherwise process date-related data. We
could also be subject to claims based on the failure of our products to work
with software or hardware from other vendors.
OUR EXTERNAL VENDORS. We periodically verify Year 2000 compliance by
external vendors that supply us with material software and information systems
and communicated with our significant suppliers to determine their Year 2000
readiness. As part of our assessment, we periodically evaluate the level of
validation we require of third parties to ensure their year 2000 readiness. To
date, we have not encountered any material Year 2000 problems with software and
information systems provided to us by third parties.
OUR INTERNAL SYSTEMS. We periodically review our internal management
information and other systems to identify any products, services, or systems
that may not be Year 2000 compliant and to take corrective action when required.
To date, we have not encountered any material Year 2000 problems with our
computer systems or any other equipment that might be subject to such problems.
COSTS OF ADDRESSING YEAR 2000 COMPLIANCE. Based on our preliminary
evaluations, we do not believe we will incur significant expenses or be required
to invest heavily in computer system improvements to be Year 2000 compliant. We
do not believe the cost of remediation for Year 2000 non-compliance issues
identified to date will exceed $50,000. However, significant uncertainty exists
concerning the potential costs and effects associated with Year 2000 compliance.
Any Year 2000 compliance problem experienced by us or our customers could
decrease demand for our products which could seriously harm our business and
results of operations.
CONTINGENCY PLANNING. We are formulating a contingency plan at this
time but expect to have specific contingency plans in place prior to November
30, 1999.
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our limited operating history makes it difficult to evaluate our prospects.
We were founded in February 1996 and have a limited operating history,
which makes an evaluation of our prospects difficult. Because of our limited
operating history, we have limited insight into trends that may emerge and
affect our business. In addition, the revenues and income potential of our
business and market are unproven. An investor in our common stock must consider
the challenges, expenses and difficulties we face as an early stage company in a
new and rapidly evolving market.
14
<PAGE>
Our quarterly operating results are volatile and may cause our stock price to
fluctuate.
Our quarterly operating results have varied significantly in the past
and will vary significantly in the future, which makes it difficult for us to
predict our future operating results. In particular, we anticipate that the size
of customer orders may increase as we continue to focus on larger business
accounts and sales to governmental entities. A delay in the recognition of
revenue, even just one account, may have a significant negative impact on our
results of operations for a given period. In the past, a significant portion of
our sales have been realized near the end of a quarter. Accordingly, a delay in
an anticipated sale past the end of a particular quarter may negatively impact
our results of operations for that quarter. Furthermore, we base our decisions
regarding our operating expenses on anticipated revenue trends, and our expense
levels are relatively fixed. Consequently, if revenue levels fall below our
expectations, our net income (loss) will decrease (increase) because only a
small portion of our expenses vary with our revenues.
We believe that period-to-period comparisons of our results of
operations are not meaningful and should not be relied upon as indicators of
future performance. Our operating results will likely be below the expectations
of securities analysts and investors in some future quarter or quarters. Our
failure to meet these expectations will likely seriously harm the market price
of our common stock.
We have incurred losses and we expect to incur significant future operating
expenses and losses.
We have experienced operating losses in each quarterly and annual period
since inception. We incurred net losses of $330,000 for the period from February
26, 1996, inception, to September 30, 1996, $1.5 million for the year ended
September 30, 1997 and $3.7 million for the year ended September 30, 1998. As of
June 30, 1999, we had an accumulated deficit of $12.1 million, and we expect to
incur significant losses in the future.
We intend to substantially increase our operating expenses. As a result,
we will need to generate significant increases in our quarterly net revenues to
achieve and maintain profitability. Although our net revenues have grown in
recent quarters, we may not be able to sustain these growth rates or achieve or
sustain profitability. Our failure to achieve and sustain profitability will
seriously harm our business and results of operations.
Our success depends on sales of our BIG/ip-Registered Trademark- Controller.
We currently derive approximately 73% of our net revenues from sales of
our BIG/ip Controller. In addition, we expect to derive a significant portion of
our net revenues from sales of BIG/ip in the future. Implementation of our
strategy depends upon BIG/ip being able to solve critical network availability
and performance problems of our customers. If BIG/ip is unable to solve these
problems for our customers, our business and results of operations will be
seriously harmed.
Our success depends on our timely development of new products and features.
We expect the Internet traffic management market to be characterized by
rapid technological change, frequent new product introductions, changes in
customer requirements and evolving industry standards. We are currently
developing our global/SITE-TM- Controller and new features for our existing
products. We expect to continue to develop new products and new product features
in the future. If we fail to develop and deploy new products and new product
features on a timely basis, our business and results of operations may be
seriously harmed.
We may not be able to compete effectively in the emerging Internet traffic
management market.
Our markets are new, rapidly evolving and highly competitive, and we
expect competition to persist and intensify in the future. Our principal
competitors in the Internet traffic management market include Cisco Systems,
Alteon Networks, ArrowPoint Communications, HydraWeb Technology, RadWare and
Resonate. We expect to continue to face additional competition as new
participants enter the Internet traffic management market. In addition, larger
companies with significant resources, brand recognition and sales channels may
form alliances with
15
<PAGE>
or acquire competing Internet traffic management solutions and emerge as
significant competitors. Potential competitors may bundle their products or
incorporate an Internet traffic management component into existing products in a
manner that discourages users from purchasing our products. Potential customers
may also choose to purchase additional servers instead of our products.
We may not be able to support our rapid growth effectively.
Since the introduction of our product line, we have experienced a period
of rapid growth and expansion which has placed, and continues to place, a
significant strain on all of our resources. From September 30, 1997 to June 30,
1999, we increased the number of our employees from 20 to 151. We expect our
growth to continue to strain our management, operational and financial
resources. For example, we may not be able to install adequate financial control
systems in an efficient and timely manner, and our current or planned
information systems, procedures and controls may be inadequate to support our
future operations. The difficulties associated with installing and implementing
new systems, procedures and controls may place a significant burden on our
management and our internal resources. Our inability to manage growth
effectively may seriously harm our business and results of operations.
Our expansion into international markets may not succeed.
We intend to expand into international markets. We have only limited
experience in marketing, selling and supporting our products internationally.
International sales represented 6.6% of our net revenues for the year ended
September 30, 1997, 3.5% for the year ended September 30, 1998 and 7.1% for the
nine months ended June 30, 1999. We have engaged sales personnel in the United
Kingdom, Germany, Singapore and Australia. Our continued growth will require
further expansion of our international operations in selected countries in the
European and Asia Pacific markets. If we are unable to expand our international
operations successfully and in a timely manner, our business and results of
operations may be seriously harmed. Such expansion may be more difficult or take
longer than we anticipate, and we may not be able to successfully market, sell,
deliver and support our products internationally.
We may not be able to sustain or develop new distribution relationships.
Our sales strategy requires that we establish multiple distribution
channels in the United States and internationally through leading industry
resellers, original equipment manufacturers, systems integrators, Internet
service providers and other channel partners. We have a limited number of
agreements with companies in these channels, and we may not be able to increase
our number of distribution relationships or maintain our existing relationships.
One of our resellers, Exodus Communications, accounted for 23.1% and 21.7% of
our net revenues for the three and nine months ended June 30, 1999,
respectively. Our inability to effectively establish our indirect sales channels
may seriously harm our business and results of operations.
Our success depends on our ability to attract, train and retain qualified
marketing and sales, professional services and customer support personnel.
Our products require a sophisticated marketing and sales effort targeted
at several levels within a prospective customer's organization. We have recently
expanded our sales force and plan to hire additional sales personnel for direct
sales and to develop leads for our indirect sales channels. Competition for
qualified sales personnel is intense, and we might not be able to hire the kind
and number of sales personnel we are targeting. Our inability to retain and hire
qualified sales personnel may seriously harm our business and results of
operations.
We currently have a small professional services and customer support
organization and will need to increase our staff to support new customers and
the expanding needs of existing customers. The installation of Internet traffic
management solutions, the integration of these solutions into existing networks
and the ongoing support can be complex. Accordingly, we need highly-trained
professional services and customer support personnel. Hiring professional
services and customer support personnel is very competitive in our industry due
to the limited number of people available with the necessary technical skills
and understanding of our products. Our
16
<PAGE>
inability to attract, train or retain the number of highly qualified
professional services and customer support personnel that our business needs may
seriously harm our business and results of operations.
We depend on our key personnel and the loss of any key personnel may harm our
business and results of operations.
Our success depends to a significant degree upon the continued
contributions of our key management, product development, sales and marketing
and finance personnel, many of whom will be difficult to replace. In particular,
we rely on our President and Chief Executive Officer, Jeffrey Hussey. The loss
of services of any of our key personnel, especially the services of Mr. Hussey,
may seriously harm our business and results of operations. We do not have
employment contracts with any of our key personnel.
It is difficult to predict our future operating results because we have an
unpredictable sales cycle.
We are unable to predict our sales cycle because we have limited
experience selling our products. Historically, our sales cycle has ranged from
approximately two to three months. Sales of BIG/ip, 3DNS and our see/IT-TM-
Network Manager require us to educate potential customers on their use and
benefits. The sale of our products is subject to delays from the lengthy
internal budgeting, approval and competitive evaluation processes that large
corporations and governmental entities may require. For example, customers
frequently begin by evaluating our products on a limited basis and devote time
and resources to testing our products before they decide whether or not to
purchase. Customers may also defer orders as a result of anticipated releases of
new products or enhancements by us or our competitors. As a result, our products
have an unpredictable sales cycle that contributes to the uncertainty of our
future operating results.
The average selling prices of our products may decrease, which may negatively
impact gross profits.
We anticipate that the average selling prices of our products will
decrease in the future in response to competitive pricing pressures, increased
sales discounts, new product introductions by us or our competitors or other
factors. Therefore, in order to maintain our gross profits, we must develop and
introduce new products and product enhancements on a timely basis and
continually reduce our product costs. Our failure to do so will cause our net
revenue and gross profits to decline, which will seriously harm our business and
results of operations. In addition, we may experience substantial
period-to-period fluctuations in future operating results due to the erosion of
our average selling prices.
Our business may be harmed if our contract manufacturers are not able to provide
us with adequate supplies of our products.
We rely on third party contract manufacturers to assemble our products.
We outsource the manufacturing of our pre-configured, industry-standard hardware
platforms to primarily two contract manufacturers, Micro Standard Distributors
and Unisoft, who assemble these hardware platforms to our specifications. The
inability of our contract manufacturers to provide us with adequate supplies of
our products or the loss of one or more of our contract manufacturers may cause
a delay in our ability to fulfill orders while we obtain a replacement
manufacturer and may seriously harm our business and results of operations.
If the demand for our products grows, we will need to increase our
material purchases, contract manufacturing capacity and internal test and
quality functions. Any disruptions in product flow may limit our revenue, may
seriously harm our competitive position and may result in additional costs or
cancellation of orders by our customers.
Our business could suffer if there are any interruptions or delays in the
supply of hardware components from our third-party sources.
We currently purchase several hardware components used in the assembly
of our products from limited sources. Lead times for these components vary
significantly. Any interruption or delay in the supply of any of
17
<PAGE>
these hardware components, or the inability to procure a similar component from
alternate sources at acceptable prices within a reasonable time, will seriously
harm our business and results of operations.
Undetected software errors may seriously harm our business and results of
operations.
Software products frequently contain undetected errors when first
introduced or as new versions are released. We have experienced these errors in
the past in connection with new products and product upgrades. We expect that
these errors will be found from time to time in new or enhanced products after
commencement of commercial shipments. These problems may cause us to incur
significant warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts and cause significant customer
relations problems. We may also be subject to liability claims for damages
related to product errors. While we carry insurance policies covering this type
of liability, these policies may not provide sufficient protection should a
claim be asserted. A material product liability claim may seriously harm our
business and results of operations.
Our products must successfully operate with products from other vendors.
As a result, when problems occur in a network, it may be difficult to identify
the source of the problem. The occurrence of software errors, whether caused by
our products or another vendor's products, may result in the delay or loss of
market acceptance of our products. The occurrence of any of these problems may
seriously harm our business and results of operations.
We may not adequately protect our intellectual property and our products may
infringe on the intellectual property rights of third parties.
We rely on a combination of copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property rights.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States. In addition, we have not
entered into non-competition agreements with several of our former employees.
From time to time, third parties may assert patent, copyright, trademark
and other intellectual property rights claims or initiate litigation against us
or our contract manufacturers, suppliers or customers with respect to existing
or future products. In the event of a successful claim of infringement and our
failure or inability to develop non-infringing technology or license the
infringed or similar technology on a timely basis, our business and results of
operations may be seriously harmed.
Our failure and the failure of our key suppliers, manufacturers and customers to
be Year 2000 compliant may negatively impact our business and results of
operations.
The Year 2000 computer issue creates a significant risk for us in at
least four areas:
- potential warranty or other claims arising from our products;
- systems we use to run our business;
- systems used by our suppliers and contract manufacturers; and
- the potential reduced spending by other companies on Internet
traffic management solutions as a result of significant
information systems spending on Year 2000 remediation or to limit
additional changes to their systems during the current year.
A failure in any of these areas to be Year 2000 compliant may seriously
harm our operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness
18
<PAGE>
Disclosure."
Laws relating to encrypted software may limit the marketability of our products.
The encryption technology contained in our products is subject to United
States export controls. These export controls limit our ability to distribute
encrypted software outside of the United States and Canada. While we take
precautions against unlawful exportation, this exportation inadvertently may
have occurred in the past or may occur from time to time in the future,
subjecting us to potential liability and serious harm. We may also encounter
difficulties competing with non-United States producers of products containing
encrypted software, who may both import their products into the United States
and sell products overseas.
CAUTIONARY STATEMENT
This Item and other Items in this Report include "forward-looking"
information, as that term is defined in the Private Securities Litigation Reform
Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases, about the Company's financing, strategy, network
deployment, operations and third party services. The Company cautions investors
that any such statements made by the Company are not guarantees of future
performance. Known and unknown risks, uncertainties, and other factors,
including without limitation, availability of additional financial resources and
capital requirements, customer demand, technological risks, need for definitive
agreements, the ability to meet financing conditions, management of growth,
competition and government regulation may cause actual results to differ
materially from the future results implied or expressed in the forward looking
statements. Additional information about the most significant of such factors is
identified in Exhibit 99 to the Company's Registration Statement on Form S-1
(File No. 333-75817) filed with the SEC on June 4, 1999. The Company does not
undertake to update or revise its forward-looking statements publicly even if
experience or future changes make it clear that any projected results expressed
or implied herein will not be realized.
19
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
The Company's registration statement (No. 333-75817) under the Securities
Act of 1933, as amended, for its initial public offering of common stock became
effective on June 4, 1999. The Company sold a total of 2,860,000 shares to an
underwriting syndicate. The managing underwriters were Hambrecht & Quist,
BancBoston Robertson Stephens and Dain Rauscher Wessels. The offering commenced
on June 4, 1999 and was completed on June 9, 1999. An additional 140,000 of
shares of common stock were sold on behalf of a selling shareholder as part of
the initial public offering. Offering proceeds to the Company, net of aggregate
expenses of approximately $1.0 million, were approximately $25 million.
The Company has used all of the net offering proceeds for the purchase of
temporary investments consisting of cash and cash equivalents. The Company has
not used any of the net offering proceeds for construction of plant, building or
facilities, purchases of real estate, acquisition of other businesses, or
repayment of indebtedness. None of the net offering proceeds were paid directly
or indirectly to directors, officers, or general partners of the Company or
their associates, persons owning 10% or more of any class of the Company's
securities, or affiliates of the Company.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule (filed only with the electronic
submission of Form 10-Q in accordance with the Edgar
requirements).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the
period ended June 30, 1999.
20
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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 ___ day of August, 1999.
F5 Networks, Inc.
(Registrant)
By: /s/ Robert J. Chamberlain
-----------------------------
Robert J. Chamberlain
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
21
<PAGE>
EXHIBIT INDEX
Exhibit
Index Title
- ----- -----
27.1 Financial Data Schedule
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET AS OF JUNE 30, 1999 AND THE RELATED CONDENSED STATEMENTS
OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 26,948
<SECURITIES> 0
<RECEIVABLES> 6,684
<ALLOWANCES> (826)
<INVENTORY> 710
<CURRENT-ASSETS> 34,355
<PP&E> 2,523
<DEPRECIATION> (598)
<TOTAL-ASSETS> 36,486
<CURRENT-LIABILITIES> 7,581
<BONDS> 0
0
0
<COMMON> 45,751
<OTHER-SE> (16,846)
<TOTAL-LIABILITY-AND-EQUITY> 36,486
<SALES> 14,063
<TOTAL-REVENUES> 14,063
<CGS> 4,061
<TOTAL-COSTS> 16,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (186)
<INCOME-PRETAX> (6,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,678)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,678)
<EPS-BASIC> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
