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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 March 31, 2000
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 [X] No [ ].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date: 21,306,824 shares of common
stock, no par value, as of May 1, 2000.
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F5 NETWORKS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 and September 30, 1999 3
Condensed Consolidated Statements of Operations
Three months and six months ended March 31, 2000 4
and 1999
Condensed Consolidated Statements of Cash Flows
Six months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Securities None
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
F5 NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 61,225 $ 24,797
Restricted cash .................................................. 3,079 3,013
Accounts receivable, net of allowances of $900 and $826 .......... 21,147 10,353
Inventories ...................................................... 1,566 618
Other current assets ............................................. 1,804 981
----------- -----------
Total current assets ........................................... 88,821 39,762
----------- -----------
Property and equipment, net ........................................ 5,273 2,834
Other assets ....................................................... 295 250
----------- -----------
Total assets ................................................... $ 94,389 $ 42,846
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 4,792 $ 2,700
Accrued liabilities ............................................ 4,255 3,808
Deferred revenue ............................................... 9,903 4,365
----------- -----------
Total current liabilities .................................... 18,950 10,873
----------- -----------
Commitments and Contingencies:
Shareholders' equity:
Common stock, no par value; 100,000,000 shares authorized,
21,271,000 and 18,161,000 shares issued and outstanding ........ 79,557 45,760
Note receivable from shareholder ................................... (563) (750)
Accumulated other comprehensive income (loss) ...................... 77 (3)
Unearned compensation .............................................. (2,219) (3,232)
Accumulated deficit ................................................ (1,413) (9,802)
----------- -----------
Total shareholders' equity ..................................... 75,439 31,973
----------- -----------
Total liabilities and shareholders' equity ................... $ 94,389 $ 42,846
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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F5 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-----------------------------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues:
Products ................................... $18,532 $ 3,146 $34,814 $ 5,428
Services ................................... 5,072 616 7,963 1,029
------- ------- ------- -------
Total net revenues ..................... 23,604 3,762 42,777 6,457
------- ------- ------- -------
Cost of net revenues:
Products ................................... 5,053 825 9,677 1,449
Services ................................... 1,792 384 2,851 580
------- ------- ------- -------
Total cost of net revenues ............. 6,845 1,209 12,528 2,029
------- ------- ------- -------
Gross profit ............................... 16,759 2,553 30,249 4,428
------- ------- ------- -------
Operating expenses:
Sales and marketing ........................ 8,452 2,887 14,194 5,103
Research and development ................... 2,761 1,324 4,986 2,345
General and administrative ................. 1,748 666 3,226 1,191
Amortization of unearned compensation ...... 470 670 1,013 1,038
------- ------- ------- -------
Total operating expenses ............... 13,431 5,547 23,419 9,677
------- ------- ------- -------
Income (loss) from operations .................. 3,328 (2,994) 6,830 (5,249)
Interest income, net ........................... 818 31 1,559 89
------- ------- ------- -------
Net income (loss) .......................... $ 4,146 $(2,963) $ 8,389 $(5,160)
======= ======= ======= =======
Net income (loss) per share - basic ............ $ 0.20 $ (0.45) $ 0.40 $ (0.82)
======= ======= ======= =======
Weighted average shares - basic ................ 21,198 6,555 20,811 6,297
======= ======= ======= =======
Net income (loss) per share - diluted .......... $ 0.18 $ (0.45) $ 0.36 $ (0.82)
======= ======= ======= =======
Weighted average shares - diluted .............. 23,105 6,555 23,092 6,297
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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F5 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................... $ 8,389 $ (5,160)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Unrealized gain on marketable securities .................................. 87 --
Amortization of unearned compensation ..................................... 1,013 1,038
Provision for doubtful accounts and sales returns ......................... 702 667
Depreciation and amortization ............................................. 870 235
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (11,506) (2,014)
Inventories ............................................................. (950) (299)
Other assets ............................................................ (889) (303)
Accounts payable and accrued liabilities ................................ 2,546 1,510
Deferred revenue ........................................................ 5,543 780
-------- --------
Net cash provided by (used in) operating activities .................... 5,805 (3,546)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in restricted cash ............................................... (66) --
Purchases of property and equipment ......................................... (3,288) (720)
-------- --------
Net cash used in investing activities .................................. (3,354) (720)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from payments on shareholder loan .................................. 187 --
Proceeds from the secondary offering, net of issuance costs ................. 31,475 --
Proceeds from option and warrant exercises .................................. 2,322 520
-------- --------
Net cash provided by financing activities .............................. 33,984 520
-------- --------
Net increase (decrease) in cash and cash equivalents ................... 36,435 (3,746)
Effect of exchange rate changes on cash and cash equivalents ............ (7) --
-------- --------
Cash and cash equivalents, at beginning of period ........................... 24,797 6,206
-------- --------
Cash and cash equivalents, at end of period ................................. $ 61,225 $ 2,460
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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F5 NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. THE COMPANY AND BASIS OF PRESENTATION
F5 Networks, Inc. ("F5" or the "Company") was incorporated on February
26, 1996 in the State of Washington.
F5 is a leading provider of integrated Internet traffic and content
management solutions designed to improve the availability and performance of
mission-critical Internet-based servers and applications. F5's proprietary
software-based solutions monitor and manage local and geographically dispersed
servers and intelligently direct traffic to the server best able to handle a
user's request.
The accompanying unaudited condensed consolidated financial statements
have been prepared by F5 in accordance with the rules and regulations of the
Securities and Exchange Commission for interim financial statements.
Accordingly, 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 management 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 March 31, 2000, its operating results for the three and
six months ended March 31, 2000 and 1999 and cash flows for the six months ended
March 31, 2000 and 1999. The condensed consolidated balance sheet at September
30, 1999 has been derived from the Company's audited consolidated financial
statements as of that date. These financial statements and the notes should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto contained in the Company's annual report on Form 10-K filed
with the Securities and Exchange Commission on December 28, 1999.
The results of operations for the three and six months ended March 31,
2000 are not necessarily indicative of the results that may be expected for
future quarters or the year ending September 30, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements consolidate the accounts of F5 Networks, Inc.
and its wholly owned subsidiary F5 Networks, Ltd. All intercompany transactions
have been eliminated.
SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise,"
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
In the opinion of management, the Company operates in one segment providing
integrated Internet traffic and content management solutions.
USE OF 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
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amounts of revenues and expenses during the reporting period. Actual results
could materially differ from these estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are highly liquid investments, consisting of
investments in money market funds and marketable securities which are readily
convertible to cash without penalty and subject to insignificant risk of changes
in value. The Company's cash and cash equivalents balance consists of the
following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash .................... $ 25,140 $ 15,671
Marketable securities ... 36,085 9,126
------------- -------------
$ 61,225 $ 24,797
============= =============
</TABLE>
CONCENTRATION OF CREDIT RISK
The Company places its temporary cash investments with major financial
institutions. As of March 31, 2000, all of the Company's temporary cash
investments were placed with four institutions.
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 $6.6 million for the six months ended March 31,
2000 and $4.4 million for the three months ended March 31, 2000. One customer
accounted for 19.6% of net revenues for the six months ended March 31, 2000 and
15.8% of net revenues for the three months ended March 31, 2000. This customer
also accounted for 10.6% and 15.4% of the Company's accounts receivable balance
at March 31, 2000 and 1999, respectively.
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).
Inventories are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods ......... $ 1,000 $ 420
Raw materials .......... 566 198
------------- -------------
$ 1,566 $ 618
============= =============
</TABLE>
COMPREHENSIVE INCOME (LOSS)
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," in June 1997.
This statement established new standards for reporting and displaying
comprehensive income in the financial statements and was adopted by the Company
during the quarter ended September 30, 1999. In addition to net income,
comprehensive income includes charges or credits to equity that are not the
result of transactions with shareholders.
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The following table sets forth a reconciliation of net income (loss) to
comprehensive income (loss), net of tax:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) ........................... $ 4,146 $(2,963) $ 8,389 $(5,160)
Unrealized gain on investments .............. 31 -- 87 --
Foreign currency translation adjustment ..... (6) -- (7) --
------- ------- ------- -------
Comprehensive income (loss) ................. $ 4,171 $(2,963) $ 8,469 $(5,160)
======= ======= ======= =======
</TABLE>
REVENUE RECOGNITION
The Company recognizes software revenue under Statement of Position
97-2, "Software Revenue Recognition," and SOP 98-9 "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions."
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, hardware, 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 term. Estimated sales returns are based on historical experience by
product and are recorded at the time revenues are recognized. Additionally, the
Company offers extended payment terms. For these arrangements, revenue is
recognized ratably over the terms of the arrangement.
NET INCOME (LOSS) PER SHARE
In accordance with SFAS No. 128, basic net income (loss) per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, except that pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 98, if applicable, common shares issued
in each of the periods presented for nominal consideration have been included in
the calculation as if they were outstanding for all periods presented.
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common and dilutive common stock
equivalent shares outstanding during the period.
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The following table sets forth the computation of basic and diluted net
income (loss) per share for the three and six months ended March 31:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
2000 1999 2000 1999
(unaudited, in thousands except for per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ........................................ $ 4,146 $ (2,963) $ 8,389 $ (5,160)
========= ========= ========= =========
Denominator:
Weighted average shares outstanding - basic .............. 21,198 6,555 20,811 6,297
Dilutive effect of common shares from stock options ...... 1,896 -- 2,034 --
Dilutive effect of common shares from warrants ........... 11 -- 247 --
--------- --------- --------- ---------
Weighted average shares outstanding - diluted ............ 23,105 6,555 23,092 6,297
========= ========= ========= =========
Basic net income (loss) per share .............................. $ 0.20 $ (0.45) $ 0.40 $ (0.82)
========= ========= ========= =========
Diluted net income (loss) per share ............................ $ 0.18 $ (0.45) $ 0.36 $ (0.82)
========= ========= ========= =========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, SEC Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements," was issued. This pronouncement
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition. SAB 101 is required to be adopted
by the Company beginning October 1, 2000. The Company is currently reviewing the
requirements of SAB 101 and assessing its potential impact on the Company's
financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report concerning future events or future
performance, financial results or achievements of F5, or other statements which
are not statements of historical facts are forward-looking statements. These
statements may be identified by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts",
"potential" or "continue" or the negative of such terms or comparable terms.
These statements are subject to a number of known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to differ from those expressed or implied by those statements.
Relevant risks and uncertainties include among others: our limited operating
history; variability of our operating results; market acceptance of our Internet
traffic and content management products; our timely development of new products
and features; our ability to manage its growth; our ability to maintain and
develop distribution relationships; competition in the Internet traffic and
content management market; our ability to expand in the international markets;
unpredictability of our sales cycle and other risk factors referenced in our
public filings with the Securities and Exchange Commission, and in particular,
those set forth under the heading "Risk Factors" in our Annual Report on Form
10-K filed with the SEC on December 28, 1999. These forward-looking statements
speak only as of the date of this report. We expressly disclaim any obligation
or undertaking to release publicly any updates or revisions to any
forward-looking statements contained in this report to reflect any change in our
expectations with regard to such statements 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 Results of
Operations" on pages 15 through 27 of our annual report on Form 10-K.
OVERVIEW
F5 is a leading provider of integrated Internet traffic and content
management solutions designed to improve the availability and performance of
mission-critical Internet-based servers and applications. Our products monitor
and manage an organization's geographically dispersed servers and intelligently
direct traffic to the server best able to handle a user's request, preventing
system failure and providing timely responses and optimal data flow.
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(R) Controller
and began to expand our operations. We continue to commit a significant amount
of resources to research and development, marketing programs, domestic and
international sales channels, customer support and services and our general and
administrative infrastructure. As of March 31, 2000, we have:
- hired more than 300 employees;
- hired sales, professional services and customer support
personnel in U.S., Canada, Europe and Asia Pacific;
- released several upgrades to our suite of products;
- released three new products: our 3DNS(TM) Controller, our
see/IT(TM) Network Manager and our global/SITE(TM) Controller;
- engaged sales representatives in the European and Asia Pacific
markets; and
- established twenty-two international reseller relationships.
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Our net revenues grew from $3.8 million for the three months ended March
31, 1999 to $23.6 million for the three months ended March 31, 2000. Currently,
we derive approximately 62% of our net revenues from sales of BIG/ip. We expect
to continue to derive a significant portion of our net revenues from sales of
BIG/ip in the future. One of our resellers, accounted for 15.8% of our net
revenues for the three months ended March 31, 2000 and 10.6% of our accounts
receivable balance at March 31, 2000.
Net revenues derived from customers located outside of the United States
were $266,000 and $4.4 million for the three months ended March 31, 1999 and
2000, respectively. Net revenues derived from customers located outside of the
United States were $327,000 and $6.6 million for the six months ended March 31,
1999 and 2000, respectively. We plan to continue 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 our products receive installation services and an
initial customer support contract, typically covering a 12-month period. We
generally combine the software license, hardware, 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, net of allowances for
estimated returns, 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. Our
ordinary payment terms to our customers are net 30 days, but we have extended
payment terms beyond net 30 days to some customers. For extended payment term
arrangements, revenue is deferred, and recognized ratably over the term of the
arrangement. Estimated sales returns are based on historical experience by
product and are recorded at the time revenues are recognized. Consulting
services are customarily billed at fixed rates, plus out-of-pocket expenses.
Customers may also purchase consulting services and renew 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.
As of March 31, 2000, we had an accumulated deficit of $1.4 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 and content 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 continue to increase
significantly. Despite growing revenues, we have only begun to generate profits
during our three most recent quarters ended September 30, 1999, December 31,
1999 and March 31, 2000.
We have recorded a total of $6.2 million of unearned compensation costs
since our inception through March 31, 2000. These charges represent the
difference between the exercise price and the estimated 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 $670,000 and $470,000 for the three months ended March 31, 1999 and
2000, respectively.
We expect to recognize amortization expense related to unearned
compensation of approximately $1.8 million, $965,000, $411,000 and $60,000
during the years ended September 30, 2000, 2001, 2002 and 2003, 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. To 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
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sustain these growth rates to maintain profitability.
RESULTS OF OPERATIONS
The following table sets forth financial data as a percentage of total
net revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Products ................................ 78.5% 83.6% 81.4% 84.1%
Services ................................ 21.5 16.4 18.6 15.9
------ ------ ------ ------
Total net revenues .................. 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of net revenues:
Products ................................ 21.4 22.0 22.6 22.4
Services ................................ 7.6 10.2 6.7 9.0
------ ------ ------ ------
Total cost of net revenues .......... 29.0 32.2 29.3 31.4
------ ------ ------ ------
Gross margin ........................ 71.0 67.8 70.7 68.6
------ ------ ------ ------
Operating expenses:
Sales and marketing ..................... 35.8 76.7 33.2 79.0
Research and development ................ 11.7 35.2 11.7 36.3
General and administrative .............. 7.4 17.7 7.5 18.5
Amortization of unearned compensation.... 2.0 17.8 2.3 16.1
------ ------ ------ ------
Total operating expenses ............ 56.9 147.4 54.7 149.9
------ ------ ------ ------
Income (loss) from operations ............... 14.1 (79.6) 16.0 (81.3)
Interest income, net ........................ 3.5 .8 3.6 1.4
------ ------ ------ ------
Net income (loss) ........................... 17.6% (78.8)% 19.6% (79.9)%
====== ====== ====== ======
</TABLE>
NET REVENUES:
Net revenues consist of sales of our products and services, which
primarily include software licenses and services. Product revenues include
revenue from software licenses and hardware sales. Service revenues 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 489.1% from $3.1 million
for the three months ended March 31, 1999 to $18.5 million for the three months
ended March 31, 2000. Product revenues increased 541.4% from $5.4 million for
the six months ended March 31, 1999 to $34.8 million for the six months ended
March 31, 2000. These increases in product revenues were due primarily to an
increase in the quantity of our products sold. These increases also reflect the
continued addition of new customers, as well as repeat sales to existing
customers.
Service revenues. Service revenues increased by 723.4% from $616,000 for
the three months ended March 31, 1999 to $5.1 million for the three months ended
March 31, 2000. Service revenues increased 673.9% from $1.0 million for the six
months ended March 31, 1999 to $8.0 million for the six months ended March 31,
2000. The increases in service revenues were due primarily to an increase in the
installed base of our products and the renewal of service and support contracts
during the six months ended March 31, 2000.
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.
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COST OF NET REVENUES:
Cost of net revenues consists primarily of outsourced 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 512.5%,
from $825,000 for the three months ended March 31, 1999 to $5.0 million for the
three months ended March 31, 2000 and increased as a percentage of product
revenues from 26.7% to 27.8%. Cost of product revenues increased by 567.8% from
$1.5 million for the six months ended March 31, 1999 to $9.7 million for the six
months ended March 31, 2000 and increased as a percentage of product revenues
from 26.7% to 27.8%. The increases in product cost were due primarily to
increased product revenues.
Cost of service revenues. Cost of service revenues increased by 366.7%,
from $384,000 for the three months ended March 31, 1999 to $1.8 million for the
three months ended March 31, 2000 and decreased as a percentage of service
revenues to 35.3% from 62.3% for the same periods. Cost of service revenues
increased by 391.6% from $580,000 for the six months ended March 31, 1999 to
$2.9 million for the six months ended March 31, 2000 and decreased as a
percentage of service revenues to 35.8% from 56.4%. The increases in cost of
service revenues in absolute dollars were due primarily to increased personnel
costs, including training and consulting expenses related to hiring, as well as
additional salaries. The decreases in cost of service revenues as a percentage
of service revenues were primarily due to increased economies of scale achieved
from increased service revenues.
Sales and marketing. Our sales and marketing expenses consist primarily
of salaries, commissions and related benefits to 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 192.8%, from $2.9 million for the three
months ended March 31, 1999 to $8.4 million for the three months ended March 31,
2000. Sales and marketing expenses increased by 178.2% from $5.1 million for the
six months ended March 31, 1999 to $14.2 million for the six months ended March
31, 2000. These increases were due to an increase in sales and marketing and
professional services personnel from 54 to 170, increased commissions, and
increased advertising and promotional activities. We expect to continue
increasing 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 108.5%, from $1.3 million for the three months
ended March 31, 1999 to $2.8 million for the three months ended March 31, 2000.
Research and development expenses increased by 112.6% from $2.3 million for the
six months ended March 31, 1999 to $5.0 million for the six months ended March
31, 2000. These increases were due primarily to an increase in product
development personnel from 46 to 89. 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
absolute dollars in future periods.
General and administrative. Our general and administrative expenses
consist primarily of salaries, benefits and related costs of our executive,
finance, information technology, 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 162.5% from $666,000
for the three months ended March 31, 1999 to $1.8 million for the three months
ended March 31, 2000. General and administrative expenses increased by 170.9%
from $1.2 million for the six months ended March 31, 1999 to $3.2 million for
the six months ended March 31, 2000. These increases were due primarily to an
increase in general and administrative personnel from 24 to 48. We expect
general and administrative expenses to increase in absolute dollars as we expand
our staff and further develop our internal information systems and incur costs
associated with being a public company.
13
<PAGE> 14
Unearned compensation. We recorded amortization expense of unearned
compensation of $670,000 and $470,000 for the three months ended March 31, 1999
and 2000, respectively. For the six months ended March 31, 1999 and 2000, we
recorded unearned compensation charges of $1.0 million for each period,
respectively.
Interest income, net. Interest income consists of earnings on our cash
and cash equivalent balances offset by interest expense associated with debt
obligations. Interest income, net was $31,000 for the three months ended March
31, 1999 and $818,000 for the three months ended March 31, 2000. For the six
months ended March 31, 1999 and 2000, interest income, net was $89,000 and $1.6
million, respectively. These increases were due primarily to the investment of
the proceeds received from our initial and secondary public offerings in June
and October 1999.
Income taxes. As of September 30, 1999, we had approximately $7.8
million of net operating loss carryforwards for federal income tax purposes.
Accordingly, there was no provision for federal or state income taxes for any
prior period. 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 2019 if we do not use them.
FASB Statement No. 109 provides for the recognition of deferred tax
assets if realization is more likely than not. Based on available evidence,
which includes our historical operating performance and the reported cumulative
net losses in all prior years, we have provided a full valuation allowance
against our net deferred tax assets. We intend to evaluate the realizability of
the deferred tax assets on a quarterly basis.
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 $25.5 million, net of
offering costs. In October 1999, we completed a secondary public offering of
500,000 shares of common stock and raised approximately $31.5 million, net of
offering costs.
Cash provided by (used in) our operating activities was $(3.5) million
for the six months ended March 31, 1999 and $5.8 million for the six months
ended March 31, 2000. As of March 31, 2000, we had $61.2 million in cash and
cash equivalents and $3.1 million in restricted cash. We expect that accounts
receivable and inventories will continue to increase to the extent our revenues
continue to increase. Any such increases can be expected to reduce cash and cash
equivalents. We have provided extended payment terms to one of our resellers and
may offer similar financing to other resellers in the future. To the extent such
financing is offered, cash used in operating activities would increase to fund
the increase in outstanding receivables.
Cash used in investing activities was $720,000 for the six months ended
March 31, 1999 and $3.4 million for the six months ended March 31, 2000,
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 2000,
due to the costs of expansion and expenditures for information systems and test
equipment.
As of March 31, 2000, our principal commitments consisted of obligations
outstanding under operating leases. In March 1999 we began leasing approximately
20,000 square feet in a facility located in Seattle, Washington for a term of 60
months. In June 1999, we agreed to lease an additional 8,000 square feet in this
facility for a term of 84 months. In December 1999 we began leasing
approximately 13,000 square feet in an additional facility located in Seattle,
Washington for a term of eleven months. The annual cost of these leases is
approximately $854,000, subject to annual adjustments. We have also signed a
lease for approximately 84,000 square feet of new office space in Seattle,
Washington in a building which is currently under construction. This lease will
commence on approximately June 1, 2000 with a term of 12 years. The annual cost
of this lease is approximately $2 million, subject to annual adjustments. Our
obligation under this lease is collateralized by a secured letter of credit in
the
14
<PAGE> 15
amount of $2.5 million. As of March 31, 2000 we had no other material
commitments. However, in April 2000, we entered into an agreement to lease
approximately 110,000 square feet in Seattle, Washington in a building currently
under construction. We anticipate a substantial increase in our capital
expenditures and lease commitments consistent with our 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 expect that our existing cash
balances and cash from operations will be sufficient to meet our anticipated
working capital and capital expenditures for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Interest Rate Risk. 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 or less. These securities are subject
to interest rate risk and will decrease in value if interest rates increase.
Foreign Currency Risk. Currently the majority of our sales and expenses
are denominated in U.S. dollars and as a result, we have not experienced
significant foreign exchange gains and losses to date. While we have conducted
some transactions in foreign currencies during the fiscal year ended September
30, 1999 and the three and six months ended March 31, 2000 and expect to
continue to do so, we do not anticipate that foreign exchange gains and losses
will be significant. We have not engaged in foreign currency hedging to date,
however we may do so in the future.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Our registration statement (No. 333-75817) under the Securities Act of
1933, as amended, for our initial public offering of common stock became
effective on June 4, 1999. Offering proceeds to the Company, net of aggregate
expenses of approximately $1.0 million, were approximately $25.5 million. From
the time of receipt through March 31, 2000, the proceeds were applied as
follows:
- $2,500,000 was applied toward lease obligations for new office space
secured by an irrevocable standby letter of credit.
- $500,000 was allocated to purchase inventory on credit secured
by an irrevocable standby letter of credit; and
- Approximately $3,000,000 was applied toward working capital
expenditures, including expenditures to sales and marketing, research
and development and professional services.
The remaining proceeds are being held as cash, cash equivalents and
short-term investments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on February 17, 2000
to elect two class I directors and amend the Company's 1998 Equity Incentive
Plan to increase the number of shares issuable by an additional 1,000,000
shares. At the Annual Meeting, the following nominees were elected as follows:
<TABLE>
<CAPTION>
Votes
-----
For Against
--- -------
<S> <C> <C>
Karl Guelich 15,448,458 10,289
Keith Grinstein 15,448,458 10,289
</TABLE>
The shareholders voted in favor of amending the Company's 1998 Equity
Incentive Plan to increase the number of shares issuable by an additional
1,000,000 shares, with voting as follows: 10,771,580 for, 4,699,620 against, and
89,086 abstain.
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 March 31, 2000.
16
<PAGE> 17
SIGNATURE
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 10th day of May, 2000.
F5 Networks, Inc.
(Registrant)
By: /s/ Robert J. Chamberlain
----------------------------------------
Robert J. Chamberlain
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
Exhibit
Index Title
- ----- -----
27.1 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET AS OF MARCH 31, 2000 AND THE RELATED CONDENSED
STATEMENTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 61,225
<SECURITIES> 0
<RECEIVABLES> 22,047
<ALLOWANCES> (900)
<INVENTORY> 1,566
<CURRENT-ASSETS> 88,821
<PP&E> 6,914
<DEPRECIATION> (1,641)
<TOTAL-ASSETS> 94,389
<CURRENT-LIABILITIES> 18,950
<BONDS> 0
0
0
<COMMON> 79,557
<OTHER-SE> (4,118)
<TOTAL-LIABILITY-AND-EQUITY> 94,389
<SALES> 42,777
<TOTAL-REVENUES> 42,777
<CGS> 12,528
<TOTAL-COSTS> 23,419
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,559)
<INCOME-PRETAX> 8,389
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,389
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.36
</TABLE>
