F5 INC

Previous wording

We monitor the sales mix of our revenues within each reporting period. We believe customer acceptance rates of our new products, feature enhancements and consumption models are indicators of future trends. We also consider overall revenue concentration by geographic region as an additional indicator of current and future trends. In fiscal 2023 and into the first quarter of fiscal 2024, continued customer budget constraints brought on by uncertainties in the macroeconomic environment have led to delays in customer purchase decisions. The impact of these buying patterns led to softer demand for both our software and systems products and services. We believe the current demand environment is temporary based on several factors, notably the fact that demand for our products and services stems from the growth of applications and APIs. In addition, our stronger than normal maintenance renewals signal delays in purchases as customers extend their maintenance contracts over the products they currently own. We believe this softer demand for new products is brought on by the current macroeconomic uncertainties and related customer budget constraints, rather than architectural shifts or losses to competitors. We will continue to closely monitor the macroeconomic environment and its impacts on our business.

Current wording

We monitor the sales mix of our revenues within each reporting period. We believe customer acceptance rates of our new products, feature enhancements and consumption models are indicators of future trends. We also consider overall revenue concentration by geographic region as an additional indicator of current and future trends. In fiscal 2023 and into the first half of fiscal 2024, continued customer budget constraints brought on by uncertainties in the macroeconomic environment have led to delays in customer purchase decisions. The impact of these buying patterns led to softer demand for both our software and systems products and services. We believe the current demand environment is temporary based on several factors, notably the fact that demand for our products and services stems from the growth of applications and APIs. In addition, our stronger than normal maintenance renewals signal delays in purchases as customers extend their maintenance contracts over the products they currently own. We believe this softer demand for new products is brought on by the current macroeconomic uncertainties and related customer budget constraints, rather than architectural shifts or losses to competitors. We will continue to closely monitor the macroeconomic environment and its impacts on our business.

Previous wording

•Liquidity and cash flows. Our financial condition remains strong with significant cash and investments. The increase in cash and investments for the first three months of fiscal year 2024 was primarily due to cash provided by operating activities of $165.3 million, largely offset by $150.0 million of cash used to repurchase outstanding common stock under our stock repurchase program. Going forward, we believe the primary driver of cash flows will be net income from operations. We will continue to evaluate possible acquisitions of, or investments in businesses, products, or technologies that we believe are strategic, which may require the use of cash. Additionally, on January 31, 2020, we entered into a Revolving Credit Agreement (the "Revolving Credit Agreement") that provides for a senior unsecured revolving credit facility in an aggregate principal amount of $350.0 million (the "Revolving Credit Facility"). We have the option to increase commitments under the Revolving Credit Facility from time to time, subject to certain conditions, by up to $150.0 million. As of December 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility, and we had available borrowing capacity of $350.0 million.

Current wording

•Liquidity and cash flows. Our financial condition remains strong with significant cash and investments. The increase in cash and investments for the first six months of fiscal year 2024 was primarily due to cash provided by operating activities of $387.0 million, partially offset by $250.0 million of cash used for the repurchase of outstanding common stock under our stock repurchase program. Going forward, we believe the primary driver of cash flows will be net income from operations. We will continue to evaluate possible acquisitions of, or investments in businesses, products, or technologies that we believe are strategic, which may require the use of cash. Additionally, on January 31, 2020, we entered into a Revolving Credit Agreement (the "Revolving Credit Agreement") that provides for a senior unsecured revolving credit facility in an aggregate principal amount of $350.0 million (the "Revolving Credit Facility"). We have the option to increase commitments under the Revolving Credit Facility from time to time, subject to certain conditions, by up to $150.0 million. As of March 31, 2024, there were no outstanding borrowings under the Revolving Credit Facility, and we had available borrowing capacity of $350.0 million.

Previous wording

•Balance sheet. We view cash, short-term and long-term investments, deferred revenue, accounts receivable balances and days sales outstanding as important indicators of our financial health. Deferred revenues continued to increase in the first quarter of fiscal year 2024 primarily due to an increase in maintenance renewal contracts related to our existing product installation base. Our days sales outstanding for the first quarter of fiscal year 2024 was 67. Days sales outstanding is calculated by dividing ending accounts receivable by revenue per day for a given quarter.

Current wording

•Balance sheet. We view cash, short-term and long-term investments, deferred revenue, accounts receivable balances and days sales outstanding as important indicators of our financial health. Deferred revenues increased to $1.81 billion as of March 31, 2024 from $1.78 billion as of September 30, 2023 due to an increase in maintenance renewal contracts related to our existing product installation base. Our days sales outstanding for the second quarter of fiscal year 2024 was 51. Days sales outstanding is calculated by dividing ending accounts receivable by revenue per day for a given quarter.

Previous wording

Net Revenues. Total net revenues decreased 1.1% for the three months ended December 31, 2023, from the comparable period in the prior year. The decrease in total net revenues was primarily due to a decrease in product revenues associated with systems, partially offset by an increase in service revenues, primarily due to an increase in the renewal of maintenance contracts on existing perpetual assets held by customers. Revenues outside of the United States represented 49.5% of total net revenues for the three months ended December 31, 2023, compared to 46.4% for the same period in the prior year.

Current wording

Net Revenues. Total net revenues decreased 3.1% and 2.1% for the three and six months ended March 31, 2024, respectively, from the comparable periods in the prior year. The decrease in total net revenues for the three and six months ended March 31, 2024 was primarily due to a decrease in product revenues associated with systems, partially offset by an increase in service revenues. The increase in service revenues was primarily due to an increase in the renewal of maintenance contracts on existing perpetual assets held by customers, along with continued realization of price increases from prior periods. International revenues represented 46.6% and 48.0% of total net revenues for the three and six months ended March 31, 2024, respectively, compared to 48.8% and 47.6% for the same periods in the prior year, respectively.

Previous wording

Net Product Revenues. Net product revenues decreased 10.2% for the three months ended December 31, 2023, from the comparable period in the prior year. The decrease in net product revenues was primarily due to a decrease in systems sales, partially offset by an increase in software revenue primarily from packaged software sales.

Current wording

Net Product Revenues. Net product revenues decreased 11.9% and 11.0% for the three and six months ended March 31, 2024, respectively, from the comparable periods in the prior year. The decrease in net product revenues was primarily due to a decrease in systems sales, partially offset by an increase in software revenue primarily from packaged software sales.

Previous wording

The following presents net product revenues by systems and software (in thousands):

Current wording

The following presents net product revenues by systems and software:

Previous wording

Software Revenues. As a component of net product revenues, software revenues increased 1.8% for the three months ended December 31, 2023, from the comparable period in the prior year.

Current wording

Software Revenues. As a component of net product revenues, software revenues increased 20.2% and 9.9% for the three and six months ended March 31, 2024, respectively, from the comparable periods in the prior year.

Previous wording

Net Service Revenues. Net service revenues increased 7.5% for the three months ended December 31, 2023, from the comparable period in the prior year. The increase in service revenues was the result of the renewal of maintenance agreements associated with perpetual offerings as customers continue to utilize their assets for longer periods of time.

Current wording

Net Service Revenues. Net service revenues increased 5.1% and 6.3% for the three and six months ended March 31, 2024, respectively, from the comparable periods in the prior year. The increase in net service revenues for the three and six months ended March 31, 2024 was the result of the renewal of maintenance agreements associated with perpetual offerings as customers continue to utilize their assets for longer periods of time, as well as the realization of price increases from prior periods.

Previous wording

Cost of Net Product Revenues. Cost of net product revenues consists of finished products purchased from our contract manufacturers, manufacturing overhead, freight, warranty, provisions for excess and obsolete inventory, software-as-a-service infrastructure costs and amortization expenses in connection with developed technology from acquisitions. Cost of net product revenues decreased $16.1 million, or 16.3% for the three months ended December 31, 2023, from the comparable period in the prior year primarily due to a decrease in systems revenue.

Current wording

Cost of Net Product Revenues. Cost of net product revenues consists of finished products purchased from our contract manufacturers, manufacturing overhead, freight, warranty, provisions for excess and obsolete inventory, software-as-a-service infrastructure costs and amortization expenses in connection with developed technology from acquisitions. Cost of net product revenues decreased $14.5 million, or 14.5% for the three months ended March 31, 2024 and decreased $30.6 million, or 15.4% for the six months ended March 31, 2024 from the comparable periods in the prior year primarily due to a decrease in systems revenue.

Previous wording

Cost of Net Service Revenues. Cost of net service revenues consists of the salaries and related benefits of our professional services staff, travel, facilities and depreciation expenses. For the three months ended December 31, 2023, cost of net service revenues as a percentage of net service revenues was 13.9%, compared to 15.6% for the comparable period in the prior year. Professional services headcount at the end of December 2023 decreased to 1,049 from 1,082 at the end of December 2022.

Current wording

Cost of Net Service Revenues. Cost of net service revenues consists of the salaries and related benefits of our professional services staff, travel, facilities and depreciation expenses. For the three and six months ended March 31, 2024, cost of net service revenues as a percentage of net service revenues was 14.6% and 14.3%, respectively, compared to 15.4% and 15.5% for the comparable periods in the prior year, respectively. Professional services headcount at the end of March 2024 decreased to 1,049 from 1,072 at the end of March 2023.

Previous wording

Sales and Marketing. Sales and marketing expenses consist of salaries, commissions and related benefits of our sales and marketing staff, the costs of our marketing programs, including public relations, advertising and trade shows, travel, facilities, and depreciation expenses. Sales and marketing expenses decreased $34.2 million, or 14.7% for the three months ended December 31, 2023, from the comparable period in the prior year. The decrease in sales and marketing expenses for the three months ended December 31, 2023 was primarily due to a decrease of $20.6 million in personnel costs from the comparable period in the prior year. In addition, commissions for the three months ended December 31, 2023 decreased $5.9 million from the comparable period in the prior year. Sales and marketing headcount at the end of December 2023 decreased to 2,154 from 2,490 at the end of December 2022. Sales and marketing expenses included stock-based compensation expense of $21.6 million for the three months ended December 31, 2023, compared to $25.7 million for the same period in the prior year.

Current wording

Sales and Marketing. Sales and marketing expenses consist of salaries, commissions and related benefits of our sales and marketing staff, the costs of our marketing programs, including public relations, advertising and trade shows, travel, facilities and depreciation expenses. Sales and marketing expenses decreased $22.3 million, or 9.6% for the three months ended March 31, 2024 and decreased $56.5 million, or 12.1% for the six months ended March 31, 2024 from the comparable periods in the prior year. The decrease in sales and marketing expense for the three and six months ended March 31, 2024 was primarily due to a decrease of $14.3 million and $34.9 million, respectively, in personnel costs from the comparable periods in the prior year. In addition, commissions for the three and six months ended March 31, 2024 decreased $5.9 million and $11.8 million, respectively, from the comparable periods in the prior year. Sales and marketing headcount at the end of March 2024 decreased to 2,166 from 2,480 at the end of March 2023. Sales and marketing expenses included stock-based compensation expense of $21.4 million and $43.0 million for the three and six months ended March 31, 2024, respectively, compared to $26.9 million and $52.6 million for the same periods in the prior year, respectively.

Previous wording

Research and Development. Research and development expenses consist of the salaries and related benefits of our product development personnel, prototype materials and other expenses related to the development of new and improved products, facilities and depreciation expenses. Research and development expenses decreased $22.7 million, or 16.0% for the three months ended December 31, 2023, from the comparable period in the prior year. The decrease in research and development expenses for the three months ended December 31, 2023 was primarily due to a decrease of $18.1 million in personnel costs from the comparable period in the prior year. Research and development headcount at the end of December 2023 decreased to 1,986 from 2,165 at the end of December 2022. Research and development expenses included stock-based compensation expense of $16.0 million for the three months ended December 31, 2023, compared to $18.5 million for the same period in the prior year.

Current wording

Research and Development. Research and development expenses consist of the salaries and related benefits of our product development personnel, prototype materials and other expenses related to the development of new and improved products, facilities and depreciation expenses. Research and development expenses decreased $19.2 million, or 13.6% for the three months ended March 31, 2024 and decreased $41.9 million, or 14.8% for the six months ended March 31, 2024 from the comparable periods in the prior year. The decrease in research and development expense for the three and six months ended March 31, 2024 was primarily due to a decrease of $12.7 million and $30.9 million, respectively, in personnel costs from the comparable periods in the prior year. Research and development headcount at the end of March 2024 decreased to 1,981 from 2,212 at the end of March 2023. Research and development expenses included stock-based compensation expense of $15.5 million and $31.5 million for the three and six months ended March 31, 2024, respectively, compared to $18.7 million and $37.2 million for the same periods in the prior year, respectively.

Previous wording

General and Administrative. General and administrative expenses consist of the salaries, benefits and related costs of our executive, finance, information technology, human resource and legal personnel, third-party professional service fees, facilities and depreciation expenses. General and administrative expenses decreased $5.3 million, or 7.5% for the three months ended December 31, 2023, from the comparable period in the prior year. The decrease in general and administrative expenses for the three months ended December 31, 2023 was primarily due to a decrease of $2.3 million in personnel costs from the comparable period in the prior year. In addition, expenses for professional services decreased $2.1 million for the three months ended December 31, 2023 from the comparable period in the prior year. General and administrative headcount at the end of December 2023 decreased to 882 from 959 at the end of December 2022. General and administrative expenses included stock-based compensation expense of $10.7 million for the three months ended December 31, 2023, compared to $11.0 million for the same period in the prior year.

Current wording

General and Administrative. General and administrative expenses consist of the salaries, benefits and related costs of our executive, finance, information technology, human resources and legal personnel, third-party professional service fees, facilities and depreciation expenses. General and administrative expenses remained relatively flat for the three months ended March 31, 2024 and decreased $5.1 million, or 3.7% for the six months ended March 31, 2024 from the comparable periods in the prior year. The decrease in general and administrative expenses for the six months ended March 31, 2024 was primarily due to a decrease of $4.1 million in fees paid for professional services. In addition, personnel costs decreased $2.5 million for the six months ended March 31, 2024 from the comparable period in the prior year. General and administrative headcount at the end of March 2024 decreased to 881 from 972 at the end of March 2023. General and administrative expenses included stock-based compensation expense of $10.8 million and $21.5 million for the three and six months ended March 31, 2024, respectively, compared to $10.9 million and $21.9 million for the same periods in the prior year, respectively.

Previous wording

Restructuring Charges. In the first fiscal quarters of 2024 and 2023, we completed restructuring plans to align strategic and financial objectives and optimize resources for long term growth. As a result of our restructuring initiatives, we recorded charges of $8.5 million and $8.7 million, net of adjustments, related to reductions in workforce that are reflected in our results for the three months ended December 31, 2023 and December 31, 2022, respectively.

Current wording

Restructuring Charges. In the first fiscal quarters of 2024 and 2023, we completed restructuring plans to align strategic and financial objectives and optimize resources for long term growth. As a result of our restructuring initiatives, we recorded charges of $8.6 million and $8.7 million, net of adjustments, related to reductions in workforce that are reflected in our results for the six months ended March 31, 2024 and March 2023, respectively.

Previous wording

Other Income, Net. Other income, net consists primarily of interest income and expense and foreign currency transaction gains and losses. The increase in other income, net for the three months ended December 31, 2023 was primarily due to an increase in interest income from our investments of $4.6 million, and a decrease in interest expense of $3.3 million from the comparable period in the prior year. The increase in other income, net for the three months ended December 31, 2023 was partially offset by a decrease in foreign currency gains of $2.4 million from the comparable period in the prior year.

Current wording

Other Income, Net. Other income, net consists primarily of interest income and expense and foreign currency transaction gains and losses. The increase in other income, net for the three months ended March 31, 2024 was primarily due to an increase in interest income of $5.4 million from our investments, partially offset by an increase in foreign currency losses of $2.3 million compared to the same period in the prior year. The increase in other income, net for the six months ended March 31, 2024 was primarily due to an increase in interest income of $10.0 million from our investments and a decrease in interest expense of $3.2 million compared to the same period in the prior year. The increase in other income, net for the six months ended March 31, 2024 was partially offset by an increase in foreign currency losses of $4.7 million compared to the same period in the prior year.

Previous wording

Provision for Income Taxes. The effective tax rate was 20.7% and 24.5% for the three months ended December 31, 2023 and 2022, respectively. The decrease in the effective tax rate for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022 is primarily due to the tax impact of stock-based compensation and foreign operations.

Current wording

Provision for Income Taxes. The effective tax rate was 18.4% and 19.6% for the three and six months ended March 31, 2024, respectively, compared to 25.1% and 24.8% for the three and six months ended March 31, 2023, respectively. The decrease in the effective tax rate for the three and six months ended March 31, 2024, as compared to the three and six months ended March 31, 2023, is primarily due to the tax impact of stock-based compensation.

Previous wording

We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In making these determinations we consider historical and projected taxable income, and ongoing prudent and feasible tax planning strategies in assessing the appropriateness of a valuation allowance. Our net deferred tax assets at December 31, 2023 and September 30, 2023 were $301.9 million and $290.7 million, respectively. The net deferred tax assets include valuation allowances of $44.0 million as of December 31, 2023 and $43.9 million as of September 30, 2023, which are primarily related to certain state and foreign net operating losses and tax credit carryforwards.

Current wording

We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In making these determinations we consider historical and projected taxable income, and ongoing prudent and feasible tax planning strategies in assessing the appropriateness of a valuation allowance. Our net deferred tax assets at March 31, 2024 and September 30, 2023 were $319.2 million and $290.7 million, respectively. The net deferred tax assets include valuation allowances of $42.1 million and $43.9 million as of March 31, 2024 and September 30, 2023, respectively, which are primarily related to certain state and foreign net operating loss and tax credit carryforwards.

Previous wording

Cash and cash equivalents, short-term investments and long-term investments totaled $832.0 million as of December 31, 2023, compared to $808.4 million as of September 30, 2023, representing an increase of $23.6 million. The increase was primarily due to cash provided by operating activities of $165.3 million for the three months ended December 31, 2023. The increase in cash and investments for the first quarter of fiscal 2024 was partially offset by cash used for the repurchase of common stock during the three months ended December 31, 2023 of $150.0 million.

Current wording

Cash and cash equivalents, short-term investments and long-term investments totaled $909.8 million as of March 31, 2024, compared to $808.4 million as of September 30, 2023, representing an increase of $101.4 million. The increase was primarily due to cash provided by operating activities of $387.0 million for the six months ended March 31, 2024, partially offset by cash used for the repurchase of common stock during the six months ended March 31, 2024 of $250.0 million.

Previous wording

Cash provided by operating activities for the first three months of fiscal year 2024 resulted from net income of $138.4 million combined with changes in operating assets and liabilities, as adjusted for various non-cash items including stock-based compensation, deferred revenue, depreciation, impairment and amortization charges. Cash provided by operating activities for the first quarter of fiscal 2024 increased from the comparable period in the prior year primarily due to an increase in cash received from customers, which partially offset strong billings for the quarter and an increase in the balance of accounts receivable.

Current wording

Cash provided by operating activities for the first six months of fiscal year 2024 resulted from net income of $257.4 million combined with changes in operating assets and liabilities, as adjusted for various non-cash items including stock-based compensation, deferred revenue, depreciation, impairment and amortization charges. Cash provided by operating activities for the first six months of fiscal year 2024 increased from the comparable period in the prior year primarily due to an increase in cash received from customers.

Previous wording

Cash used in investing activities was $7.1 million for the three months ended December 31, 2023, compared to cash provided by investing activities of $61.9 million for the same period in the prior year. Investing activities include purchases, sales and maturities of available-for-sale securities, business acquisitions and capital expenditures. The amount of cash used in investing activities for the three months ended December 31, 2023 was primarily the result of $9.0 million in capital expenditures related to maintaining our operations worldwide, partially offset by $2.9 million in maturities of investments.

Current wording

Cash used in investing activities was $47.0 million for the six months ended March 31, 2024, compared to cash provided by investing activities of $52.4 million for the same period in the prior year. Investing activities include purchases, sales and maturities of available-for-sale securities, business acquisitions and capital expenditures. The amount of cash used in investing activities for the six months ended March 31, 2024 was primarily the result of $32.9 million in cash paid for acquisitions and $18.5 million in capital expenditures related to maintaining our operations worldwide.

Previous wording

Cash used in financing activities was $135.0 million for the three months ended December 31, 2023, compared to cash used in financing activities of $374.9 million for the same period in the prior year. Our financing activities for the three months ended December 31, 2023 primarily consisted of $150.0 million of cash used to repurchase shares of common stock. In addition, $6.8 million in cash was used for taxes related to net share settlement of equity awards. Cash used in financing activities was partially offset by cash received from the exercise of employee stock options and stock purchases under our employee stock purchase plan of $21.9 million.

Current wording

Cash used in financing activities was $236.1 million for the six months ended March 31, 2024, compared to cash used in financing activities of $377.4 million for the same period in the prior year. Our financing activities for the six months ended March 31, 2024 primarily consisted of $250.0 million of cash used to repurchase shares of common stock. In addition, $8.7 million in cash was used for taxes related to net share settlement of equity awards. Cash used in financing activities was partially offset by cash received from the exercise of employee stock options and stock purchases under our employee stock purchase plan of $22.6 million.

Previous wording

In October 2022, we entered into an unconditional purchase commitment with one of our suppliers for the delivery of systems components. Under the terms of the agreement, we are obligated to purchase $10 million of component inventory annually, with a total committed amount of $40 million over a four-year term. As of December 31, 2023, we had $0.2 million remaining purchase commitments under the second year of the agreement. Our total non-cancelable long-term purchase commitments outstanding as of December 31, 2023 was $20.2 million.

Current wording

In October 2022, we entered into an unconditional purchase commitment with one of our suppliers for the delivery of systems components. Under the terms of the agreement, we are obligated to purchase $10 million of component inventory annually, with a total committed amount of $40 million over a four-year term. As of March 31, 2024, we had no remaining purchase commitments under the second year of the agreement. Our total non-cancelable long-term purchase commitments outstanding as of March 31, 2024 was $20.0 million.