FFIV

F5 Networks, Inc. (FFIV)

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F5 Networks, Inc. (FFIV)

F3Q 2011 Earnings Conference Call

July 20, 2011 16:30 ET

Executives

John Eldridge – Director, Investor Relations

Andy Reinland – Senior Vice President and Chief Financial Officer

John McAdam – President and Chief Executive Officer

Analysts

Rod Hall – JPMorgan

Alex Henderson – Miller Tabak

Mark Sue – RBC Capital Markets

Ittai Kidron – Oppenheimer

Brian Marshall – Gleacher & Company

Troy Jensen – Piper Jaffrey

Nikos Theodosopoulos – UBS

Kent Schofield – Goldman Sachs

Vijay Bhagavath – Deutsche Bank

Matt Robison – Wunderlich Securities

Jess Lubert – Wells Fargo Securities

Presentation

Operator

Good afternoon and welcome to the F5 Third Quarter Financial Results Conference Call. At this time, all parties will be able to listen-only until the question-and-answer portion. Also today’s conference is being recorded. (Operator Instructions)

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

John Eldridge – Director, Investor Relations

Thank you, Carol and welcome everyone to our conference call for the third quarter of fiscal 2011. The speakers on today’s call are John McAdam, President and CEO and Andy Reinland, Senior VP and Chief Financial Officer. Other members of our executive 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, it is available on our website f5.com. In addition, you can access an archived version of today’s live webcast from the Events Calendar page of our website through October 25. From 4.30 p.m. today until midnight Pacific Time, July 21, you can also listen to a telephone replay at 866-511-5157 or 203-369-1957.

During today’s call, our discussion will contain forward-looking statements, which 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 and described in detail in our SEC filings. Please note 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 – Senior Vice President and Chief Financial Officer

Thank you, John. In the third quarter of fiscal 2011, F5 achieved solid sequential and year-over-year growth. Revenue of $290.7 million was at the high end of our $287 million to $292 million guided range grew 5% from the prior quarter and grew 26% compared to a very strong Q3 a year ago.

GAAP EPS of $0.77 per diluted share was above our guided range of $0.69 to $0.71. Excluding stock-based compensation expense, non-GAAP EPS of $0.97 per diluted share was also above our guided range of $0.89 to $0.91. The strong EPS results reflect additional R&D tax credit benefits of approximately $0.05 per share recognized in the current quarter.

Product revenue of $179.3 million grew 22% year-over-year, and represented 62% of total revenue. Service revenue of $111.4 million grew 34% year-over-year, and accounted for 38% of total revenue. Book-to-bill for the quarter was greater than 1. Both APAC and Japan delivered strong revenue growth during the quarter. APAC which represented 16% of total revenue grew 58% year-over-year and Japan as 7% of total revenue was up 42% year-over-year.

EMEA representing 20% of total revenue grew 15% from the third quarter of fiscal 2010 and was down sequentially. Accounting for 57% of the total, revenue from the Americas was up slightly compared to the prior quarter and grew 22% year-over-year.

During Q3, our core application delivery networking business accounted for $282.5 million compared to $270.5 million in Q2. Revenue from our ARX file virtualization business was $8.3 million up 16% from Q2 and 32% from the third quarter a year ago. Both the telco and technology verticals represented 21% of total revenue in Q3. The financial vertical accounted for 19%. Total government revenue was 10% including 5% from U.S. federal.

In Q3 we had two greater than 10% distributors, Avnet which represented 16.4% of total revenue and Ingram Micro which accounted for 10.6%. Our GAAP gross margin in Q3 ticked up slightly to 82%. Excluding approximately $2.4 million of stock-based compensation expense, non GAAP gross margin also moved up to 82.8%. GAAP operating expenses of $150 million were within her target range $147 million to $151 million. Excluding $20.5 million of stock-based compensation expense, non-GAAP operating expenses were $129.5 million.

GAAP operating margin was 30.4%. Our non-GAAP operating margin which excludes stock-based compensation expense was 38.2%. Reflecting the R&D tax benefit, I mentioned earlier, our GAAP effective tax rate for Q3 was 30.6%. Excluding stock-based compensation, our non GAAP effective tax rate was 29.8%.

Turning to the balance sheet, cash flow from operations was $101.1 million, free cash flow for the quarter was $92.2 million. We ended the quarter with total cash and investments of $1.57 billion. DSO at the end of Q3 was 48 days. Inventories were 17.9 million. Deferred revenue increased 3% sequentially to $321.9 million. Capital expenditures for the quarter were $8.8 million and depreciation and amortization expense was $5.2 million. We ended the quarter with approximately 2350 employees an increase of 95 from the prior quarter. During the quarter we repurchased approximately 472,000 shares or common stock at an average price of $105.96 per share for a total of $50 million.

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