FFIV

F5 Networks, Inc. (FFIV)

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F5 Networks, Inc. (FFIV)

F1Q13 Earnings Call

January 23, 2013, 4:30 p.m. ET

Executives

John Eldridge - Director, IR

Andy Reinland - EVP and CFO

John McAdam - President and CEO

Karl Triebes - EVP, Product Development and CTO

Dan Matte - EVP, Marketing and Business Development

Manny Rivelo - EVP, Security and Strategic Solutions

Analysts

Brent Bracelin – Pacific Crest Securities

Matt Robison – Wunderlich Securities

Ehud Gelblum - Morgan Stanley

Jess Lubert – Wells Fargo Securities. LLC

Mark Sue – RBC Capital Markets

Jayson Noland – Robert W. Baird

Alex Kurtz – Sterne Agee

Rod Hall – JP Morgan

Simon Leopold – Raymond James

Kent Schofield – Goldman Sachs

(Toa Leone) – Merrill Lynch

Presentation

Operator

Operator

Ladies and gentlemen, thank you for standing by and welcome to the F5 Networks' first quarter results conference call. (Operator Instructions).

I'd now like to turn the call over to Mr. John Eldridge, Director of Investor Relations. Sir, you may begin.

John Eldridge

Thank you, Angie, and welcome everyone to our conference call for the first quarter of 2013. The speakers on today's call are John McAdam, President and Chief Executive Officer and Andy Reinland, Chief Financial Officer. Other members of our exec team are also with us to answer questions following their prepared comments.

If you have questions following today's call, please direct them to me at 206-272-6571. If you don’t have a copy of today's press release, you can get one from our website, F5.com. In addition, you can access an archived version of today's live webcast in the investor relations events calendar page of our website through April 24th. From 4:30 p.m. today until midnight Pacific Time, January 24th, you can also listen to a telephone replay at 800-695-3640 or 402-220-0318.

During today's call, the discussion will contain forward-looking statements that include words such as believe, anticipate, expect, and target. These forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in our quarterly release described in detail in our SEC filings.

Before we begin, I want to remind you that F5 has no duty to update any information presented in this call. Now I'll turn the call over to Andy Reinland.

Andy Reinland

Thank you, John.

Q1 marked a quarter of focused execution within a challenging macro-economic environment. Against the backdrop of our typical fiscal Q1 seasonality, we delivered our 15th consecutive quarter of sequential revenue growth reporting revenue and earnings results within our guided range.

Before I discuss specific results for the quarter and our outlook for the second quarter, I would like to remind you that non-GAAP numbers exclude stock-based compensation expense and amortization of purchased and tangible assets. A reconciliation of GAAP to non-GAAP results is included in our press release.

For the first quarter of fiscal 2013, revenue of $365.5 million was within our guided range of $363 to $370 million, an increase of 1% from the prior quarter and 13% year-over-year. GAAP EPS of $0.88 per diluted share and non-GAAP EPS of $1.14 per diluted share were within our guided ranges.

Product revenue of $204.7 million grew 4% year-over-year and represented 56% of total revenue. Service revenue of $160.7 million grew 28% year-over-year and accounted for 44%.

Q1 revenue from our Application Delivery Networking business was $359.9 million. And revenue from our ARX File Virtualization business was $5.5 million. Book-to-bill for the quarter was less than 1.

Accounting for 58% of the total, revenue from the Americas grew 12% from the first quarter of 2012. EMEA, which represented 23% of revenue grew 22% from the first quarter of last year.

APEC accounted for 14% of revenue and grew 16% year-over-year. Japan revenue declined 11% from a year ago and represented 5% of total revenue for the quarter.

Representing 23% of sales during the quarter, Telco was our strongest vertical followed by financial at 20%, technology 13%, and total government was 11% including U.S. Federal, which accounted for 5% of the total.

In Q1, we had three greater than 10% distributors, Avnet, which represented 16.9% of total revenue, Ingram Micro, which accounted for 15.2%, and Wescon, which accounted for 11%.

Reflecting a record contribution from software sales, our GAAP gross margin in Q1 was 83.3%. Our non-GAAP gross margin was 84.4%.

GAAP operating expenses of $195.5 million were within our target range of $193.5 to $198.5 million. Non-GAAP operating expenses were $171.7 million. GAAP operating margin was 29.8%. Our non-GAAP operating margin was 37.4%. Our GAAP effective tax rate for Q1 was 37.2%. And our non-GAAP effective tax rate was 34.5%.

Turning to the balance sheet, cash flow from operations was $145 million contributing to total cash in investments of $1.29 billion at quarter end. ESO at the end of Q1 was 51 days. Inventories were $18.7 million. Capital expenditures for the quarter were $7.8 million. Deferred revenue increased 26% year-over-year to $480.6 million.

We ended the quarter with 3,125 employees, an increase of 95 from the prior quarter.

In Q1, we repurchased approximately 555,000 shares of our common stock at an average price of $90.02 per share for a total of $50 million. Approximately $131 million remains authorized under the current share repurchase program.

Now for the Q2 outlook. At the end of Q1, we began shipping several of the new hardware and software products we will be announcing over the next several weeks. We believe these new additions to our product portfolio will have a positive impact on our business as demand for the new products builds throughout fiscal year 2013.

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