FFIV

F5 Networks, Inc. (FFIV)

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F5 Networks, Inc. (FFIV)

F3Q08 Earnings Call

July 23, 2008 4:30 pm ET

Executives

John Eldridge - Director of Investor Relations

Andrew Reinland - Senior VP and Chief Financial Officer

John McAdam - President and CEO

Dan Matte - Senior VP of Marketing

Julian Eames - Senior VP of Business Operations

Mark Anderson - Senior VP of Worldwide Sales

Analysts

Erik Suppiger - Signal Hill

Mark Sue - RBC Capital Markets

Kimberly Watkins - JP Morgan

Troy Jensen - Piper Jaffray

Matt Robison – Pacific Growth Equity

Paul Mansky - Citigroup

Ken Muth - Robert Baird

Manny Recarey – Kaufman Brothers

Rohit Chopra – Wedbush Morgan

Samuel Wilson - JMP Securities

Ryan Hutchinson – Lazard

Brent Bracelin – Pacific Crest Securities

Saud Masud - UBS

Tim Long - Banc of America Securities

Presentation

Operator

Welcome to the F5 third quarter financial results conference call. (Operator Instructions) I would now like to turn the call over to John Eldridge, Director of Investor Relations.

John Eldridge

Welcome to F5s conference call for the third quarter of fiscal 2008. Speakers on today’s call are John McAdam, President and CEO and Andy Reinland, Senior VP and Chief Financial Officer. John Rodriguez, Senior VP and Chief Accounting Officer, Mark Anderson, Senior VP of Worldwide Sales, Julian Eames, Senior VP of Business Operations in Global Services, Chris Lynch, Senior VP of Data Solutions, Dan Matte, Senior VP of Marketing and Karl Triebes, Senior VP of Product Development and CTO are also with us to answer questions following our prepared comments.

During Q&A today we’d ask that you limit yourself to two questions. That will ensure that everyone who’d like to ask a question has an opportunity to do so. If you have follow up questions that are not addressed on the call, please direct them to me afterwards at 206-272-6571.

If you don’t have a copy of today’s press release, it is available on our website, www.f5.com. In addition, you can access an archive version of today’s live webcast from the events calendar page of our website through October 22, from 4:30 pm today until 5:00pm Pacific Time, July 24 you can also listen to a telephone replay at 800-216-2086 or 402-220-3765.      .

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 will turn the call over to Andy Reinland.

Andrew Reinland

During Q3, solid top line results marked our 22nd consecutive quarter of sequential growth, driven by strong execution in our core business.

Revenue for the third quarter of fiscal 2008 was $165.6 million, above our guided range of $160 million to $162 million. GAAP EPS of $0.23 per diluted share was also above our guided range of $0.21 to $0.22. Excluding stock-based compensation expense, non-GAAP EPS of $0.37 per diluted share was also above guidance.

Product revenue of $114.8 million represented 69% of total revenue. Service revenue of $50.8 million accounted for 31%. Book to bill for the quarter was greater than one.

On a geographic basis, the Americas represented 58% of revenue, EMEA accounted for 21% and APAC was 13%. Japan contributed 7% of total revenue reflecting continued weakness, which was compounded by expected seasonal softness.

Revenue from our core application delivery networking business was $153 million and accounted for 92% of total revenue. Revenue from our ARX storage virtualization products was $5.1 million, down from $8.1 million in Q2, and accounted for 3% of total revenue. At $7.5 million, revenue from FirePass was flat with Q2 and represented just under 5% of total. During Q3, technology was our strongest vertical at 22% of total revenue. Telco and service providers represented 21%, and the finance sector was 20%. US federal was 4% and total government accounted for 9%.

During Q3 we had two greater than 10% distributors, AB-NET technologies at 14.2% and Ingram Micro at 10.8%.

Moving down the income statement, GAAP gross margin in Q3 was 76.9%. Excluding approximately $1.1 million of stock based compensation expense non-GAAP gross margin was 77.6%. GAAP operating expenses of $100.2 million were within our target range of $98 million to $101 million. This includes $13.8 million of stock comp expense.

GAAP operating margin was 16.4%. Non-GAAP operating margin, which excludes stock based compensation expense, was 25.4%. Our GAAP effective tax rate was 38.1%. Excluding stock based compensation expense, our non-GAAP effective tax rate was 34%.

On the balance sheet we ended the quarter with $447 million in cash and investments. Cash flow from operations was $55.8 million. Also during the quarter we repurchased $50 million of our common stock, representing approximately 1.8 million shares. Accounts receivable DSO ended the period at 53 days. Inventories at quarter end were $9.7 million. Deferred revenue increased 13% from the prior quarter to $139 million.

Capital expenditures for the quarter were $11.3 million and depreciation and amortization expense was $6 million. We ended the quarter with approximately 1,665 employees, essentially flat with Q2 as guided on the last call.

Moving on to the fourth quarter outlook, we are targeting Q4 revenue in the range of $172 million to $174 million. We expect GAAP gross margin in the 76% to 77% range, including approximately $1 million of stock based compensation expense. We anticipate operating expenses in the range of $108.3 million to $111.3 million. This includes approximately $15 million of stock based compensation expense and a one time $5.3 million charge related to office consolidation at our corporate headquarters.

Read the rest of this transcript for free on seekingalpha.com