FFIV

F5 Networks, Inc. (FFIV)

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F5 Networks, Inc. (FFIV)

F1Q12 Earnings Call

January 18, 2012 04:30 pm ET

Executives

John Eldridge - Director of Investor Relations

John McAdam - Chief Executive Officer, President and Executive Director

Andrew Reinland – SVP and CFO

Mark Anderson - Senior Vice President of Worldwide Sales

Dan Matte - Senior Vice President Of Marketing & Business Development

Karl D. Triebes - Chief Technology Officer and Senior Vice President of Product

Manuel Rivelo - Senior Vice President of Security and Strategic Solutions

Analysts

Paul Silverstein - Credit Suisse

Tal Liani - Bank of America/Merrill Lynch

Alex Kurtz - Sterne Agee

Ryan Hutchinson - Lazard

Sanjiv Wadhwani from Stifel & Nicolaus

Alex Henderson - Miller Tabak

Brent A. Bracelin - Pacific Crest Securities, Inc.

Bill Choi - Janney Montgomery Scott

Troy Jensen - Piper Jaffray

Jeff Kvaal - Barclays Capital

Mark Sue - RBC Capital Markets

Simon Leopold - Morgan Keegan

Brian Modoff - Deutsche Bank

Prianka Chopra - Bush Securities

Presentation

Operator

Good morning and welcome to the F5 First Quarter financial 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

Thanks operator and welcome to all of you to our conference call for FQ1 2012. Speakers on today’s call are John McAdam - President and CEO of F5, Andy Reinland - Senior Vice President and Chief Finance Officer. Other members of our exec team are also with us to answer questions following the prepared comments. If you have questions after 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’s available on our website at www.F5.com. In addition, you can access an archived version of today’s live webcast from the Investor Relations Events Calendar page of our website through April 18. From 4:30 today until midnight Pacific Time January 19 you can also listen to a telephone replay at 800-219-6381 or 402-220-3807.

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.

Before we begin I also want to remind you that F5 has no duty to update any information presented in this call.

Now I’d like to turn the call over to Andy Reinland.

Andrew Reinland

Thank you John. For FQ1 2012 F5 achieved sequential revenue gains and solid year-over-year growth exceeding both revenue and earnings guidance. Revenue of $322.4 million which exceeded the high end of our $315 million to $320 million guided range grew 2.5% from the prior quarter and 20% year-over-year.

GAAP EPS of $.83 per diluted share was above our guided range of $.79 to $.81. Excluding stock based compensation expense, Non-GAAP EPS of $1.03 per diluted share was also above our guided range of $.99 to $1.01.

Product revenue of $196.6 million grew 15% year-over-year and represented 61% of total revenue. Service revenue of $125.9 million grew 29% year-over-year and accounted for 39% of total revenue. Book to bill for the quarter was greater than one.

On a geographic basis all regions contributed to the company’s solid year-over-year growth. Accounting for 59% of the total, revenue from the Americas grew 20% from FQ1 2011.

EMEA, which represented 21% of revenue grew 14% from Q1 of last year. APAC accounted for 14% of revenue and grew 28% year-over-year. And Japan contributed 6% of revenue, a 22% increase year-over-year.

During Q1 our application delivery networking business contributed $316.9 million. This compares to $307.3 million in Q4 and $261.7 million in Q1 a year ago.

Revenue from our ARX file virtualization business was $5.5 million compares to $7.3 million in Q4 and $7.2 million in Q1 of last year.

Telco was our strongest vertical in Q1 representing 23% of total sales. Financial was 21%, technology 17% and government was 9% including US Federal which accounted for 4% of the total.

In Q1 we had two greater than 10% distributors, Avnet which represented 17.9% of total revenue and Engro Micro which accounted for 13.7%.

Driven by exceptional strength and software sales, our GAAP gross margin in Q1 was 82.8%. Excluding approximately $2.5 million of stock based compensation expense, non-GAAP gross margin was 83.5%.

GAAP operating expenses of $167 million were above our target range of $161 million to $165 million. Excluding $19.6 million of stock based compensation expense, non-GAAP operating expenses were $147.5 million.

GAAP operating margin was 30.9%. Our Non-GAAP operating margin, which excludes stock based compensation expense, was 37.8%. Our GAAP effective tax rate for Q1 was 34.6%. Excluding stock based compensation our Non-GAAP effective tax rate was 33.6%.

Turning to the balance sheet. Cash flow from operations was $131.9 million contributing to total cash and investments of $1.1 billion at quarter end. Free cash flow for the quarter was $126 million. Capital expenditures for the quarter were $5.9 million and depreciation and amortization expense was $5.8 million.

ESO at the end of Q1 was 52 days. Inventories were $17.5 million. Deferred revenue increased 11% sequentially to $380 million.

We ended the quarter with approximately 2615 employees, an increase of 125 from the prior quarter.

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