ANNUAL REPORT
2019
TO OUR SHAREHOLDERS, CUSTOMERS, AND PARTNERS:
It is my honor to share with you the significant progress the F5 team has made in advancing our ability to serve our
customers in fiscal year 2019.
In this, my third letter as F5’s CEO, I will outline the significant opportunity we see for F5. I will also speak to our progress
to transform our business and better serve our customers, as well as our efforts to drive long-term shareholder returns.
Beyond our operational achievements, I also will discuss our ongoing efforts to drive our BeF5 culture and highlight our
F5 Global Good Foundation’s first year’s efforts.
OPPORTUNITY FOR F5
Digital transformation has changed the competitive stakes for nearly every business on the planet. With more digital access
than ever before, the number of applications is growing at an aggressive pace. Industry analyst firm, IDC, estimates there
were more than 700 million application instances globally in 2018 and forecasts that number will grow to approximately
3.7 billion by 2023.
At the same time the number of applications is growing more than 5x, the complexity of deploying, managing, and securing
these applications is increasing. Our customers are embracing new, highly distributed architectures and multi-cloud
environments. Simultaneously, the risk of cyber-attacks and security threats is increasing, with the majority of threats
targeting applications or the identity of the user accessing the application.
Amidst escalating application growth and increased threat, businesses feel the need to move faster than ever. Over the
course of 2019, my conversations with customers around the globe centered around how they manage their applications as
strategic assets, similar to how companies have historically managed financial, physical, and human capital. Successful
companies share two common attributes: they consistently deliver a higher volume and faster velocity of connecting
applications with their users. What do I mean by that?
Developers write the code that is the foundation of applications – the business logic, backend components, and customer-
facing interfaces. However, building a great application is only half the journey. The other half is delivering that application
all the way to the mobile device, machine, or browser that an end customer like you and I use to access the application.
The world’s most competitive companies have mastered how to connect applications to users with velocity at high volume.
They do it in minutes. Good companies do it in days. For most however, it still takes weeks.
OUR VISION
We envision a future where all business, service providers, and government agencies can deploy new applications or make
changes to existing applications in minutes not days, creating a compelling user experience and keeping their applications
and their users secure and safe from cybercriminals. To make this vision a reality, we are transforming F5 to enable,
support, and secure every application, anywhere, with a consistent set of enterprise-grade application services.
EXECUTION AND RESULTS
We have focused relentlessly on implementing changes in our business and delivering the solutions that make our vision a
reality for our customers. We are strategically investing both organically and inorganically to expand our ability to serve a
wider range of customers and applications across a broader set of environments.
During the last year we accelerated the pace of change and made tremendous progress on a number of transformative
organic efforts including:
• Reprioritizing our resources to better align our investments with our customers’ priorities including delivering new
solutions that fit well within customers’ software- and cloud-first mandates.
• Unlocking significant demand for our software solutions by making them easier for our customers to buy, deploy,
and manage.
• Employing deliberate go-to-market changes including enhancing our subscription offerings.
•
•
Improving our sales teams’ readiness to engage customers in new consumption models.
Strengthening our central management, orchestration, and API offerings, enabling our customers to drive automation
and improve service levels for their end users.
•
Investing to advance both our software- and hardware-based security solutions and to launch and scale new solutions
like F5 Cloud Services, our first-ever Software-as-a-Service offering.
In concert with our organic efforts, we also completed the acquisition of NGINX, Inc., in May 2019 for $670 million.
NGINX significantly expands our ability to serve applications in modern architectures including microservices-based
applications and opens access to new addressable market opportunities including web servers, application servers, and
API gateways.
Our progress to transform F5 is evident in our financial results. During fiscal year 2019 our total revenue grew 4%, to $2.24
billion. Product revenue of $986 million grew 3% from the prior year and accounted for 44% of total revenue. Significantly,
within product revenue, software revenue grew 60%, offsetting an 8% systems revenue decline. Services revenue remained
strong, growing approximately 5% to $1.26 billion during the year. GAAP net income for fiscal year 2019 was $427.7
million, or $7.08 cents per share. Non-GAAP net income was $626.3 million, or $10.36 cents per share.1 For fiscal year
2019, cash flow from operations also remained very strong, at $748 million, down $13 million from the prior year, largely
as a result of the NGINX acquisition.
Beyond our financial results, we see several leading indicators that our vision is resonating with customers and that our
actions are well aligned with market demand. For instance, we established a strategic collaboration agreement with AWS to
facilitate customers’ transition to the public cloud, and we are billing millions of hours of F5 services as software in public
cloud environments.
In December 2019, we took another significant step toward realizing our vision for customers, announcing the acquisition
of Shape Security for $1.0 billion. We believe the combination of F5 and Shape changes the game in application security.
Shape is a leader in anti-fraud and abuse protection, solving a mission-critical problem for large enterprises. Together with
F5’s world-class portfolio of application services, Shape and F5 will deliver the most comprehensive application security
portfolio available. Beyond accelerating our growth momentum and more than doubling our addressable security market,
Shape’s machine learning and AI-powered capabilities also will scale and extend F5’s broad portfolio of application
services and expand our ability to optimize and protect customers’ applications in an increasingly complex multi-cloud
world. We expect the Shape acquisition to close in the first calendar quarter of 2020.
We believe the combination of our organic and inorganic efforts positions us well for future growth, expanding our reach
and our role and enabling us to serve more applications across more environments while providing customers a broader
range of valuable application services.
1Fiscal year 2019 non-GAAP net income and net income per share excludes $162.9 million in stock-based compensation, $41.7 million in costs related
to the acquisition of NGINX, $28.8 million in facility-exit costs, $11.8 million in amortization of purchased intangible assets and $6.3 million in
impairment charges. A reconciliation of net income, earnings per share, and other measures on a GAAP to non-GAAP basis is included in the press
release announcing F5’s fiscal year 2019 results.
BEF5 AND LEADF5
For F5, it is not just what we do but also how we do it. In fact, creating a culture that makes our employees feel valued and
successful is a core part of our strategy and we are deliberately working to build a more agile and inclusive F5. We believe
our differences – when embraced with humility and respect – drive smarter decisions, increased innovation, and stronger
performance.
Last year I spoke of our BeF5 program and our work to encourage adoption of behaviors that highlight our commitment to
responsibility, speed, diversity, customer focus, and helping each other thrive. This year, we launched LeadF5, a program
designed to drive our collective success while encouraging leadership behaviors consistent with our values.
These leadership behaviors include:
Creating clarity and alignment.
We unite F5ers around shared goals that will delight our customers.
Finding and shaping brilliance.
We fight like crazy to recruit and retain top talent, and we empower them to do great things.
Boldly raising the bar.
We reject the status quo and continuously pursue higher levels of performance.
During 2019, we focused our efforts on identifying, launching, and promoting LeadF5 among our senior leaders and
people managers to create a shared understanding of what it means to be a leader at F5. As a result, we have improved
clarity about our strategy, increased the quality and frequency of coaching conversations, and shifted towards more
informed risk-tasking. We are committed to expanding and deepening those positive results and in 2020, we will embed
and sustain LeadF5 for all F5ers.
F5 GLOBAL GOOD
Last year, putting into action our belief that F5’s purpose extends past our products and solutions and into our community, we
also launched our foundation, F5 Global Good. I am very pleased to report that in its first year, F5 Global Good supported
more than 1,000 nonprofits in 17 countries including donating $1.9 million aligned along three core commitment pillars:
1. We are committed to supporting charitable causes that our employees feel most passionately about, especially
those in the communities where we live and work. Our F5 Global Good program includes paid time off for
employees to volunteer and charitable donation matching, as well as opportunities for employees to participate in
localized philanthropic campaigns, grant committees, and our Community Impact Grants. In 2019 F5ers chose to
support our communities in a number of ways including:
• Fundraising for a multiple sclerosis cure by biking 100+ miles across Washington state.
• Leading cyber security workshops for underrepresented communities in Israel.
• Delivering meals to the elderly in Singapore.
• Mentoring girls in science, technology, engineering, and math in India.
2. We are committed to enabling girls, women, minorities, and other underrepresented groups to develop science,
technology, engineering, and math (STEM) skills by connecting them to global educational and employment
opportunities. As an example, during the summer of 2019 we hosted 20 high school-aged girls at our Seattle,
Washington headquarters for a seven-week Girls Who Code summer immersion program. The majority of the
program’s attendees were girls of color with no former experience in computer science. Thirty F5 volunteers with roles
spanning numerous F5 teams hosted workshops and activities to teach computer science and introduce the girls to
technology including real-world projects in robotics, video games, programming, and website development.
3. We are committed to extending our purpose, reach, and connections beyond the walls of F5 by supporting
nonprofit organizations with their digital transformation efforts so they can do even more to help those they
serve. We are using our expertise to support nonprofit organizations with their digital transformation efforts. We also
provide Tech for Good Impact Grants and in-kind donations to help nonprofits update their technological resources,
making it possible for them to streamline administrative efforts, improve data security, and—most importantly—
expedite their missions so they can do even more to help those they serve. Our efforts along this pillar are relatively
new and I look forward to reporting on our progress.
IN CLOSING
We are entering 2020 in a position of strength and as a very different F5 than we were just 12 months ago. We have built
on our market-leading ADC and security portfolio with new solutions and technology advancements and new ways for our
customers to buy, deploy, and consume our solutions. We are investing strategically to capitalize on what we believe will
be significant growth opportunities related to escalating application growth and our customers’ desire to more consistently
secure and rapidly connect applications to users. While doing so, we are acutely mindful of preserving our strong operating
model and driving long-term shareholder returns.
F5’s success, today and in the future, comes from the F5ers that make it possible. My sincere and heartfelt thanks to you and
your commitment to reach our collective goals. Your energy, enthusiasm, and dedication fuel F5 and I know together, we
will boldly raise the bar in fiscal year 2020.
On behalf of your Board of Directors and the more than 5,300 employees of F5, I thank you for your continued support of F5
and I look forward to reporting on our continued success in 2020.
François Locoh-Donou
President, CEO, Director
January 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------
Form 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
For the fiscal year ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
Commission File Number 000-26041
------------------------------------------------
F5 Networks, Inc.
(Exact name of Registrant as specified in its charter)
------------------------------------------------
WASHINGTON
(State or other jurisdiction of
incorporation or organization)
91-1714307
(I.R.S. Employer
Identification No.)
801 5th Avenue
Seattle, Washington 98104
(Address of principal executive offices, including zip code)
(206) 272-5555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
------------------------------------------------
Trading Symbol(s)
FFIV
Securities registered pursuant to Section 12(g) of the Act:
None
------------------------------------------------
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
Title of Each Class
Common stock, no par value
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was
No
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
(Do not check if a smaller reporting company)
Accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
No
As of March 29, 2019, the aggregate market value of the Registrant’s Common Stock held by non-affiliates of the
Registrant was $9,350,718,618 based on the closing sales price of the Registrant’s Common Stock on the NASDAQ
Global Select Market on that date.
As of November 11, 2019, the number of shares of the Registrant’s common stock outstanding was 60,793,880.
------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Information required in response to Part III of this Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by
reference to the specified portions of the Registrant’s Definitive Proxy Statement for the Annual Shareholders Meeting for
fiscal year 2019, which Definitive Proxy Statement shall be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days of the end of the fiscal year to which this Report relates.
F5 NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 2019
Table of Contents
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
SIGNATURES
PART IV
2
Page
3
12
24
24
25
25
26
28
29
38
39
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75
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75
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79
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These statements include, but are not limited
to, statements about our plans, objectives, expectations, strategies, intentions or other characterizations of future events or
circumstances and are generally identified by the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” and similar expressions. These forward-looking statements are based on current information and expectations and
are subject to a number of risks and uncertainties. Our actual results could differ materially and adversely from those expressed
or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not
limited to, those discussed under “Item 1A. Risk Factors” below and in other documents we file from time to time with the
Securities and Exchange Commission. We assume no obligation to revise or update any such forward-looking statements.
Unless the context otherwise requires, in this Annual Report on Form 10-K, the terms “F5 Networks,” “the Company,”
“we,” “us,” and “our” refer to F5 Networks, Inc. and its subsidiaries. Our fiscal year ends on September 30, and fiscal years are
referred to by the calendar year in which they end. For example, “fiscal year 2019” and “fiscal 2019” refer to the fiscal year
ended September 30, 2019.
Item 1.
Business
General
F5 Networks is a leading provider of multi-cloud application services, which enable our customers to develop, deploy,
operate, secure, and govern applications in any architecture, from on-premises to the public cloud. Our cloud, software, and
hardware solutions enable our customers to deliver digital experiences to their customers faster, reliably, and at scale.
Our enterprise-grade application services are available as cloud-based, software-as-a-service, and software-only solutions
optimized for multi-cloud environments, with modules that can run independently, or as part of an integrated solution on our
high-performance appliances. In connection with our solutions, we offer a broad range of professional services, including
consulting, training, installation, maintenance, and other technical support services.
On May 8, 2019, we completed the acquisition of Nginx, Inc. ("NGINX"), the open source leader in application delivery
for modern applications. NGINX is the world’s leading web server by market share, powering more than 400 million websites.
The acquisition enables F5 to offer multi-cloud application services across a broader range of environments than either
company could have addressed independently, providing the ease-of-use and flexibility developers require while also delivering
the scale, security, reliability, and enterprise readiness IT operations teams demand.
Our customers include large enterprise businesses, public sector institutions, governments, and service providers. We
conduct our business globally and manage our business by geography. Our business is organized into the following three
geographic regions: Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific, China, and Japan (APAC).
Total revenue in fiscal year 2019 increased 4% to $2,242 million. Total revenue is comprised of services revenue of
$1,257 million and product revenue of $986 million. While the majority of our product revenue today is derived from appliance
sales, we are actively managing a transformation to a software- and SaaS-driven business with software revenue growing 60%
in fiscal year 2019.
At the end of fiscal years 2019 and 2018, we had product backlog of approximately $17.4 million and $30.5 million,
respectively. Backlog represents orders confirmed with a purchase order for products to be shipped generally within 90 days to
customers with approved credit status. Orders are subject to cancellation, rescheduling by customers, or product specification
changes by customers. Although we believe that the backlog orders are firm, purchase orders may be canceled by the customer
prior to shipment without significant penalty. For this reason, we believe that our product backlog at any given date is not a
reliable indicator of future revenues.
F5 Networks was incorporated on February 26, 1996 in the state of Washington. Our headquarters is in Seattle,
Washington, and our mailing address is 801 5th Avenue, Seattle, Washington 98104-1663. The telephone number at that
location is (206) 272-5555. Our website is www.f5.com. We have 73 subsidiaries, branch offices, or representative offices
worldwide. Through a link on the Investor Relations section of our website, we make available the following filings as soon as
reasonably possible after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All such filings are available free of charge.
The information posted on our website is not incorporated into this report.
3
Strategy and Priorities
F5 is at an inflection point, moving from a hardware-centric, ADC leader to a multi-cloud application services leader that
helps over 25,000 enterprise customers with their digital transformations; enabling them to be more application-centric, and
decreasing the time it takes to bring an application to market. F5 is uniquely positioned to offer an application services
architecture that spans from code creation to end user; making it possible for our customers to develop and deploy their
applications in days instead of months, securely and at scale, across any environment.
IDC estimates there were over 314 million enterprise application workloads in the world in 2018, and forecasts that
number to grow to approximately 1.8 billion by 2023. While the number of applications is growing 5x, the complexity of
deploying, managing, and securing these applications is increasing with enterprises embracing new, highly distributed
architectures and multi-cloud environments. Simultaneously, the risk of cyber-attacks is increasing with the majority of threats
targeting applications or the identity of the person accessing that application.
Our goal is to lead the industry in providing application services that ensure the secure, fast, and reliable delivery of
applications to any user, anywhere, anytime - regardless of a user's location or where the application resides. These application
services include availability, security, performance, and visibility. They also include managing and orchestrating resources, as
well as coordinating services across multiple data centers, networks, and cloud-based resources.
Key components of our strategy include:
Expanding our addressable market by being multi-platform and multi-cloud while expanding the value we deliver with a
growing range of application services.
Today our platform reach extends across all the different ways that customers want to consume application services. In
addition to our hardware appliances and software-based virtual editions, F5 application services can also be consumed via
standalone software, on a per-application basis, via a SaaS model, and as a managed service. These deployment models mean
that F5 services can follow the application wherever it resides, whether in a private data center, a private cloud, a public cloud,
microservices environments, or across a multi-cloud environment.
We also continue to expand the number of services we offer. We have developed a portfolio of application services that
extends beyond our industry-leading traffic management capabilities to encompass advanced security functionality, including
web application firewall (WAF), anti-bot, access management, SSL termination and orchestration, Layer-4 firewall, and DDoS
protection. We are also investing heavily in services that increase application portfolio visibility, as well as services to help
customers increase the value of their applications by extracting data and insights via an analytics engine.
Our multifaceted approach addresses the needs of today’s evolving hybrid infrastructures and sharply differentiates our
products from our competitors’ offerings. Moreover, in step with our product development efforts and acquisition strategies, we
believe our current addressable market is significantly broader and more diverse than the ADC market as industry analysts have
defined it.
Investing in technology to meet evolving customer needs.
We meet with our customers often and maintain multiple customer advisory relationships to ensure that our development
efforts are aligned with their needs. We continue to invest in research and development efforts that leverage the unique
attributes of our Traffic Management Operating System (TMOS) platform as well as new technologies to deliver new features
and functions that address the complex, changing needs of our customers. The majority of our investment is related to software
development, though we continue concurrent development of tightly integrated hardware that delivers consistent high-
performance. We also look for opportunities to acquire technologies that either extend our reach to new applications or expand
our role in developing, deploying, operating, securing, and governing those applications. NGINX, for example, extends our
reach to cloud-native and microservices environments and extends our role into application servers, web servers, and API
gateways.
Continuing to build and expand relationships with strategic technology partners.
F5 works with many of the world’s leading technology companies to improve manageability, enable automation,
strengthen security, and ensure faster and more successful deployments. Joint customers benefit from the integration and
interoperability that result from this close collaboration. In recent years, we have developed partnerships with leading public
cloud providers such as Amazon Web Services, Microsoft Azure, Google Cloud Platform, and Alibaba Cloud. We continue to
partner with and build integrations for Equinix, Cisco, Dell, FireEye, IBM/Red Hat, Okta, and VMware.
Enabling modern DevOps practices is critical for our customers practicing agile development and accelerating
applications’ time to market. F5 integrates into automation toolkits for deploying application services into Ansible, HashiCorp/
Terraform, Chef, Puppet, and Salt Stack. For microservices in container environments, F5 integrates with Kubernetes and Red
Hat OpenShift to enable application services in north-south traffic, enhances basic Kubernetes environments natively with
4
enterprise-grade delivery services, and runs a simplified service mesh in Kubernetes for east-west traffic. Strong, evolving
partner integrations allow organizations to inject enterprise-grade application services into their CI/CD toolchains, which
means that developers can focus all their energy on creating applications that delight customers and deliver business value.
We plan to continue building on our existing relationships and to extend our competitive edge by developing new
strategic partnerships with other technology leaders and emerging players.
Engaging in open source and technology communities.
F5 demonstrated its belief in open source technologies with the acquisition of NGINX, the popular open source project
trusted by more than 400 million websites and developers worldwide. This commitment to open source and developer
communities will continue as we build on the momentum of 2019.
In fiscal 2019, F5 reached over 25,000 technologists at DevOps community events, and saw threefold increases in
DevOps Share of Voice metrics with the NGINX acquisition. F5 will continue its DevOps community engagement, investing in
thought-leadership initiatives, and hiring technical fellows in the Office of the CTO.
We will continue to support our network architects as they manage and play a bigger role in leading their company’s
digital transformations. Our online community, DevCentral, lets customers and partners discuss and share the ways in which
they use our programmable technologies to solve problems and enhance the security, performance, and availability of their
applications. DevCentral also provides a valuable window into our customers’ constantly evolving needs that helps guide
product development efforts; a number of solutions posted by DevCentral participants have already become standard features in
newer product releases.
F5 Products and Solutions
F5 is expanding its portfolio of multi-cloud application services to address the modern enterprise’s need for scalable,
performant, secure, and available applications, delivered at speed from the time of coding to end-user interaction with the
application or service.
Our BIG-IP software offerings continue to provide feature-rich, highly customizable application delivery and security
services for enterprise applications. BIG-IP offerings also comprise our incremental service provider solutions that address the
complex needs of enabling fast, reliable communications among the elements of legacy infrastructures and existing packet-
based 4G/LTE and evolving 5G networks, network functions virtualization (NFV) environments, and edge computing.
To better address the needs of digitally transforming enterprises that will have a mix of traditional, three-tier architectures
and cloud-first microservices architectures, NGINX offers a lightweight, agile ADC and API management software for
container-built applications, CI/CD workflows, and microservices. NGINX enables developer and DevOps agility to get
applications to market quickly, with security and automation closer to the code. F5 SaaS offerings support modern cloud
application delivery and security use cases for cloud-native applications, making it easier for developers and DevOps engineers
to build in the application services required for production.
These solutions may be deployed on any infrastructure: on appliances and chassis, on premises, in colocation facilities, in
private clouds, in public clouds, in microservices environments, or in hybrid or multi-cloud environments. In addition, F5
works with many of the world’s leading technology companies to improve manageability, strengthen security, and ensure faster
and more successful deployments. Customers benefit from the integration and interoperability that results from this close
collaboration and F5 products and solutions are designed with these partnerships in mind.
Hardware Platforms
All of our purpose-built hardware products are designed to enhance the performance of our software by leveraging a
combination of custom FPGA logic and off-the-shelf silicon, providing a balance of cost and flexibility. Currently, we offer two
types of hardware configurations: BIG-IP iSeries appliances and our chassis-based VIPRION products. Both BIG-IP iSeries
and VIPRION systems run our BIG-IP software modules. Our hardware platforms have earned regulatory certifications such as
NIST FIPS 140-2 Level 2 and Common Criteria Evaluation Assurance Level (EAL 4+) to help customers comply with
regulatory requirements and protect sensitive data.
Platforms in our family of BIG-IP iSeries appliances and VIPRION chassis-based systems differ primarily in their
performance and size characteristics resulting from the hardware components and configurations that make up these systems.
Enhancements in performance, scalability, and hardware programmability enable F5 products to run various software services.
The iSeries appliance lineup ranges from the entry-level BIG-IP i2000 series for small and medium-sized organizations to the
highest-performing BIG-IP i15000 series for large enterprises and service providers. Currently, we offer four chassis-based
systems: VIPRION 4800, VIPRION 4480, VIPRION 2400, and VIPRION 2200. We also offer the VIPRION 4450 blade for
VIPRION 4800 (8-blade chassis) and VIPRION 4480 (4-blade chassis).
5
Software and Software-as-a-Service (SaaS) Platforms
Our software platforms are offered in a variety of licensing options including as a subscription, as part of an enterprise
license agreement, as a perpetual license, and in a utility model through several F5 cloud partners.
Traffic Management Operating System (TMOS)
The core of our BIG-IP appliance and virtual edition application services technology is TMOS, our Traffic Management
Operating System. The full-proxy characteristics of the TMOS architecture enable our products to intercept, inspect, and act on
the contents of traffic from virtually every type of IP-enabled application. The most recent versions of TMOS deliver leading
application services with enhanced public cloud integration and more sophisticated security policies for on-premises and multi-
cloud environments.
BIG-IP Software Modules
The features and functions of F5 products provide integrated software services that cover a broad range of multi-cloud
application services from intelligent L4-7 load balancing and DNS services to advanced application security services, including
DDoS mitigation, web application firewall (WAF), bot protection, and SSL/TLS traffic decryption. These services are available
as software modules designed to run on our appliances, as software-only Virtual Editions (VEs) with any standard hypervisor,
in private and public clouds, and as-a-service via F5 Cloud Services. Software modules can be licensed individually or as part
of an integrated system. In addition, our “Better” and “Best” offerings bundle certain modules and are sold at a discount on the
price customers would pay if each of the included items were purchased separately. F5 also offers its software as subscription
licenses with 1-, 2- and 3-year terms and enterprise licensing agreements (ELAs) with 3-year terms to give customers
additional operational flexibility and predictable budgeting.
BIG-IP Management and Orchestration Software
F5 BIG-IQ Centralized Management provides unified management, automation, and orchestration for BIG-IP virtual and
physical devices and the services that run on them. Available in enterprise-grade virtual or physical form factors, BIG-IQ
simplifies and enhances infrastructure and application services management and reduces customer operational costs. F5
Automation Toolchain provides a set of composable elements that deliver declarative, intent-based APIs for the F5 platform.
These APIs are backed by strong API contracts that enable forward and backward compatibility, rapid iteration, and release. In
addition to F5 Automation Toolchain, F5’s DevOps, Programmability, and API portfolio enables automation, orchestration, and
partner integration capabilities across F5 product offerings. This portfolio includes an iControl REST platform API,
customizable iApps templates, iRules programmability, and F5 Container Ingress Services (CIS) for container and Platform as
a Service (PaaS) deployments. F5 also integrates with third-party orchestration systems such as Ansible, Terraform, Chef, and
Puppet.
BIG-IP Virtual Edition (VE) and BIG-IP Cloud Edition (CE)
BIG-IP Virtual Edition (VE) is one of F5’s software services platforms and enables customers to leverage BIG-IP services
in virtualized and cloud-based environments. VE is consumable in many performance throughput offerings and integrates into
automation and orchestration frameworks such as Ansible, Puppet, Terraform, OpenShift, and Cloud Foundry to align with
modern application deployments as part of a CI/CD pipeline. BIG-IP Cloud Edition (CE) is another one of our software
services offerings that enables customers to leverage BIG-IP services in virtualized and cloud-based environments on a per-
application basis which is particularly effective for public cloud deployments. CE provides right-sized packaging and pricing
for enterprises that want to deploy dedicated BIG-IP services to support individual applications.
NGINX
Under the NGINX brand we offer:
• NGINX Plus, an all-in-one load balancer, web server, content cache, and API gateway for modern applications.
• NGINX Controller, which provides centralized monitoring and management for NGINX Plus.
We believe the combined forces of F5 and NGINX will enable multi-cloud application services across a broader range of
environments than either company could have addressed independently, providing the ease-of-use and flexibility developers
require while also delivering the scale, security, reliability, and enterprise readiness network operations teams demand.
F5 Cloud Services
On March 27, 2019, we introduced F5 Cloud Services, our SaaS platform. F5 Cloud Services is a portfolio of enterprise-
grade offerings designed to support modern cloud application delivery and security use cases for cloud-native applications,
microservices, and container-based environments. Built from the ground up to support DevOps workflows for modern
application teams, F5 Cloud Services can be consumed as a utility through a pay-as-you-go model, offering predictable pricing
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and flexibility. Services are easily provisioned and configured within minutes via a web interface, or via a complete suite of
declarative APIs.
Cloud-based Managed Services
F5 Silverline Managed Services
Silverline is a cloud-based, managed application services platform. Current offerings include Silverline Web Application
Firewall, Silverline DDoS Protection, and Silverline Threat Intelligence Services. These services provide enterprise and service
provider customers with F5’s proven security technologies coupled with world-class security professionals. Silverline’s
Security Operation Center experts set up, manage, and support each customer's application services as an extension to the
customer’s staff.
Depending on the level of protection required, customers can route traffic through the Silverline cloud-based platform
24/7 or only when an attack is detected. Silverline Managed Services also provides an affordable and straightforward
deployment alternative for customers who want to minimize the upfront costs and expense of maintaining on-premises
solutions. For large enterprises, subscribing to Silverline Managed Services in conjunction with our on-premises DDoS Hybrid
Defender and Advanced WAF can provide the first line of defense against attacks, and prevent them from having a significant
downtime impact on their application or network services.
Service Provider Solutions
In addition to the solutions described above, F5 also offers solutions for fixed and mobile service provider customers to
optimize, secure and monetize their networks. These solutions include intelligent traffic management services to classify and
manipulate network traffic and migrate successfully from IPv4 to IPv6 at scale; carrier-class network firewall services to
mitigate DDoS, IOT and signaling threats; and signaling services for traffic management and security for protocols like
Diameter, SIP, and GTP, as well as IoT protocols. All F5 software solutions can be delivered on dedicated F5 hardware and as
Virtual Network Functions (VNFs) that can use F5 VNF Manager or other industry solutions to deploy and manage VNF
instances.
Competition
As F5 expands its reach and role into a broader set of multi-cloud application services, the companies that we consider as
competitors changes too. In addition to server load balancing, traffic management, and other functions normally associated with
application delivery, our suite of application services has expanded our addressable market into security, and policy
management, where we compete with a number of companies focused on niche areas of application security. The ability to
create customized, programmable services (e.g., using iRules) enables our customers and our partners to design solutions to
problems for which there is no off-the-shelf solution. As a result, we believe the traditional definitions of our market do not
encompass all of the features, functions, and capabilities of our products, or accurately represent the addressable market for our
solutions.
Within the more narrowly defined traditional ADC market, several companies sell server load balancing products and
capabilities. These include Citrix Systems, Inc., Radware Ltd., and a number of other competitors that have a smaller market
presence or limited feature set, such as: A10 Networks, Amazon Web Services, Array Networks, Inc., Barracuda Networks,
Inc., HAProxy, Kemp Technologies, Microsoft Azure, and VMware.
In application security, we compete with companies that provide web application firewalls, bot detection and mitigation,
carrier-grade firewall, carrier-grade NAT, SSL orchestration, access policy management, and DDoS protection. Competitors
include A10, Akamai, Cisco, Citrix, Imperva, Juniper, Radware, and Symantec/Blue Coat.
The principal competitive factors in the markets in which we compete include form factor, consumption model,
ecosystem integrations, features and performance, customer support, brand recognition, scope of distribution and sales
channels, and pricing. Some of our competitors have already tried or plan to adopt aggressive pricing policies to gain market
share. However, because F5 offers superior performance, broad functionality, and lighter-weight options with NGINX and F5
Cloud Services, coupled with the unique capabilities of our products, we believe that we can and will compete effectively
against such pricing policies.
Corporate Functions
Customer Services and Technical Support
In connection with our products, we offer a broad range of professional services including consulting, training,
installation, maintenance, and other technical support services.
We believe that our ability to provide consistent, high-quality customer service and technical support is a key factor in
attracting and retaining large enterprise and service provider customers. Accordingly, we offer a broad range of support services
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that includes installation, phone and online technical support, hardware repair and replacement, software updates, online tools,
consulting, and training services.
We provide these services directly to end users and also utilize a multi-tiered support model, leveraging the capabilities of
our channel partners. Our technical support staff is strategically located in regional service centers to support our global
customer base.
Product Development
We believe our future success depends on our ability to maintain technology leadership by continuing to improve our
products and by developing new products to meet the changing needs of our customers and partners. Our engineering
organization uses standard processes for the development, documentation, and quality control of services, software, and
systems that are designed to meet these goals. These processes include working with our business development and marketing
teams, customers, and partners to identify technology innovation opportunities to better meet the evolving needs of our
addressable markets.
Over 90 percent of our engineers are engaged in software development in eight major locations. The BIG-IP LTM, DNS,
and Automation Tool Chain offerings are primarily developed in Seattle, Washington. Development of security products is
centered in Tel Aviv, Israel and San Jose, California with our web application firewall and WebSafe/MobileSafe centered in Tel
Aviv, and our core firewall (AFM) and identity and access products and technologies developed in San Jose. Policy
Enforcement Manager is also developed in San Jose. NGINX products are developed in San Francisco, California; Cork,
Ireland; and Moscow, Russia.
Our hardware engineering team is located in Spokane, Washington; San Jose, California; and Tel Aviv, Israel.
Smaller development sites including Boulder, Colorado; Warsaw, Poland; and Lowell, Massachusetts also support the
core development teams in the larger centers. Additionally, we have recently opened a dedicated facility to continue to scale
and extend engineering across the portfolio in Hyderabad, India.
Members of all our engineering teams collaborate closely with one another to ensure the interoperability and performance
of our solutions.
We believe that robust and constant innovation is a necessity for F5, so we are also innovating in new ways. For more
than a year now, we have had dedicated teams focused on testing new disruptive innovations in technology, business models, or
customer segments. We expect innovations resulting from the work of these teams will be complementary to our goal of
delivering the broadest and most consistent portfolio of application services across cloud and on-premises environments.
During the first quarter of our fiscal 2019, we announced one of the first innovations to come from this program, an open
beta of our Aspen Mesh solution. With the shift from monolithic to microservice architectures, a rapidly increasing number of
applications are being deployed in container environments. Yet, there is still a need for services that help enterprises monitor,
manage, and control microservice-based applications at runtime. Aspen Mesh provides critical enterprise features in a platform
built on top of Istio, so organizations can enjoy the benefits of an open source approach without foregoing the features, support,
and guarantees needed to power enterprise applications.
During that same quarter, we also introduced the customer early access preview of F5 Cloud Services, a software as a
service (SaaS) portfolio. F5 Cloud Services provide high-availability, self-service, and fully managed SaaS solutions that are
easily provisioned and configured within minutes through an intuitive user interface via declarative APIs. As enterprise-grade
offerings, they are designed to support modern deployment scenarios such as cloud-native applications, microservices, and
container-based environments. Consumed as a utility through a pay-as-you-go model, F5 Cloud Services offer predictable
pricing, flexibility, and the ability to auto-scale to meet application workload demands. They also deliver foundational security
capabilities and will offer additional protections through future services that allow companies to configure and automate
defenses for multiple attack vectors. Offering F5 capabilities through a SaaS delivery model provides an extensible framework
to deliver additional services as needed over time, and throughout an application’s development and production lifecycle.
We rely on a combination of patent, copyright, trademark, and trade secret laws and restrictions on disclosure to protect
our intellectual property rights. F5 holds 320 patents in the United States and has 43 international patents (with applications
pending for various aspects of our technology). Our future success depends in part on our ability to protect our proprietary
rights to the technologies used in our principal products. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as
proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as the laws of the
United States. Any issued patent may not preserve our proprietary position, and competitors or others may develop
technologies similar to or superior to our technology. Our failure to enforce and protect our intellectual property rights could
harm our business, operating results, and financial condition.
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In addition to our own proprietary software, we incorporate software licensed from several third-party sources into our
products. These are generally term licenses which may renew annually and that generally provide for certain rights and licenses
to support our customers post termination. While we may not be able to renew all of these licenses in the future, we believe that
alternative technologies for these licenses are available both domestically and internationally.
During the fiscal years ended September 30, 2019, 2018 and 2017, we had research and product development expenses of
$408.1 million, $366.1 million, and $350.4 million, respectively.
Sales and Marketing
Our customers include a wide variety of enterprises and service providers among Fortune 1000 and Business Week
Global 1000 companies, including those in technology, telecommunications, financial services, transportation, education,
manufacturing, healthcare, and government. In fiscal year 2019, sales outside of the Americas represented 44.5% of our net
revenues. Refer to Note 14 of our consolidated financial statements included in this Annual Report on Form 10-K for additional
information regarding our revenues by geographic area.
Sales
We sell our products and services to large enterprise customers and service providers through a variety of channels. Our
sales teams sell our products and services directly to major accounts and work closely with our channel partners including
distributors, value-added resellers (VARs), managed service providers (MSPs), and systems integrators.
F5 sales teams. Our inside sales team generates and qualifies leads and helps manage accounts by serving as a liaison
between the field and internal corporate resources. Our field sales personnel are located in major cities in three sales regions:
the Americas (primarily the United States); Europe, the Middle East, and Africa (EMEA); and the Asia Pacific region (APAC).
Field sales personnel work closely with our channel partners to sell our products and services to their customers. We reward
partners that identify new business and provide sales expertise for our portfolio of products and solutions through various
incentive programs. Our major account team sells our products and services directly to customers, primarily large enterprises.
Systems engineers, with deep technical domain expertise, support our regional sales account managers and channel partners
providing pre-sale technical solution engineering and support, as needed.
Distributors, VARs, and MSPs. As a key component of our sales strategy, we have established relationships with a
number of large national and international distributors, local and specialized distributors, VARs, and MSPs. We derive a
majority of our product sales from VARs and MSPs, relying on our large distributors for fulfillment, training, and partner
enablement.
Our agreements with our channel partners are not exclusive and do not prevent them from selling competitive products.
These agreements typically have one-year terms with no obligation to renew, and typically do not provide for exclusive sales
territories or minimum purchase requirements.
For fiscal year 2019, sales to three of our worldwide distributors, Ingram Micro, Inc., Tech Data, and Westcon Group,
Inc. represented 18.2%, 10.2%, and 10.0% of our total revenues, respectively. Our agreements with these distributors are
standard, non-exclusive distribution agreements that renew automatically on an annual basis and generally can be terminated by
either party with 90 days written notice prior to the start of any renewal term. The agreements grant Ingram Micro, Inc., Tech
Data and Westcon Group, Inc. the right to distribute our products to resellers, with no minimum purchase requirements.
Systems integrators. We also market our products through strategic relationships with systems integrators, including Dell
Services, HP Enterprise Services, and IBM Global Services, who include our products as core components of application
deployments or network-based solutions they deploy for their customers. In most cases, systems integrators do not directly
purchase our products for resale to their customers. Instead they typically recommend our products as part of broader solutions,
such as enterprise resource planning (ERP) or customer relationship management (CRM) solutions that incorporate our
products for high availability and enhanced performance.
Resellers and technology partners. Historically, our ability to compete with much larger companies has been strengthened
through partnerships with large systems and software vendors. Currently, we partner with Dell and HP, who resell our products,
and with other large technology companies, including Microsoft, Oracle, VMware and Cisco, who recommend our products to
their customers. Our business development team manages these relationships and closely monitors adjacent and complementary
markets for opportunities to partner with those whose solutions are complementary to ours and could enable us to expand our
addressable market.
Marketing
As we continue to expand our offerings and our range of consumption models, we are focused on driving F5’s
compelling and unique value proposition among our existing customers as well as with new buying centers. In addition to
revitalizing our brand in the market, our expansion into new buying centers (DevOps for example) at existing customers,
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exploration of new routes to market (such as public cloud marketplaces), and acquisition of net new customers, compels us to
increase our focus and investments in more digitally-enabled, personalized, and effortless experiences at scale.
We are increasing our focus on efforts to drive momentum behind our brand and reputation to deliver clarity, guidance
and inspiration among our existing customers, future customers, partners, and employees around our evolving strategy
and F5’s unique offering. Additionally, to best support our growth as we transform our role in driving value for our customers,
we are transforming marketing from a cost center to a revenue center that can serve as a meaningful and predictable source of
opportunities, customer growth, and ultimately, revenues. The critical success factors in this shift are increased investments in
digital technologies, requisite competencies, and shifting our culture to adopt an agile mindset as we use data to constantly
improve our contributions to our customers.
Manufacturing
We outsource the manufacturing of our pre-configured hardware platforms to a third-party contract manufacturer, Flex
LTD, for building, assembling, and testing according to our specifications at Flex's facilities in Guadalajara, Mexico and
Zhuhai, China. Flex also performs the following activities on our behalf: material procurement, PCB assembly and test, final
assembly, system test, quality control, and direct shipment.
We provide a rolling forecast that allows Flex to stock component parts and other materials, plan capacity, and build
finished goods inventory in anticipation of end-user demand. Flex procures components in volumes consistent with our
forecast, assembles the products, and tests them according to our specifications. Generally, we do not own the system
components. Hardware components for our products consist primarily of commodity parts and certain custom components.
Most of our components are purchased from sources which we believe are readily available from other suppliers. However,
some components are purchased from a single or limited source. If the components are unused or the products are not sold
within specified periods of time, we may incur carrying charges or obsolete material charges for components that our contract
manufacturers purchased to build products to meet our forecast or customer orders.
Systems built in Guadalajara are shipped to the Flex fulfillment center in Milpitas, California for distribution primarily to
distributors, value-added resellers, or end users in EMEA and the Americas. Systems built and fulfilled in Zhuhai are for
distribution to partners and customers in APAC. Title to the products transfers from Flex to us and then to our customers upon
shipment from a designated fulfillment location.
Employees
As of September 30, 2019, we had 5,325 full-time employees. None of our employees are represented by a labor union.
We have experienced no work stoppages and believe that our employee relations are good.
Executive Officers of the Registrant
The following table sets forth certain information with respect to our executive officers as of November 15, 2019:
Name
Age
Position
François Locoh-Donou
Tom Fountain
Geng Lin
Steve McMillan
Frank Pelzer
Gus Robertson
Scot Rogers
Kara Sprague
Chad Whalen
Ana White
Mika Yamamoto
48
43
55
48
49
50
52
39
48
46
47
President, Chief Executive Officer, and Director
Executive Vice President and Chief Strategy Officer
Executive Vice President and Chief Technology Officer
Executive Vice President of Global Services
Executive Vice President and Chief Financial Officer
Senior Vice President and General Manager of NGINX
Executive Vice President and General Counsel
Executive Vice President and General Manager, Application Services
Executive Vice President, Worldwide Sales
Executive Vice President and Chief Human Resources Officer
Executive Vice President and Chief Marketing and Customer Experience Officer
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François Locoh-Donou has served as our President, Chief Executive Officer and member of our Board of Directors since
April 2017. Prior to joining F5, Mr. Locoh-Donou served as Senior Vice President and Chief Operating Officer of Ciena
Corporation. During his more than 15 years at Ciena, Mr. Locoh-Donou served in several leadership positions. From August
2011 to October 2015, he served as Ciena’s Senior Vice President, Global Products Group. Previously, he served as Ciena’s
Vice President and General Manager, Europe, Middle East and Africa from June 2005 to August 2011. He holds an M.B.A.
from Stanford University, a 'Mastere' in Optical Telecommunications from the National Institute of Telecommunications of
Paris (ENST), and a 'Diplome d'Ingenieur' in Physics Engineering from the National Institute of Physics in Marseille
(ENSPM), France. Mr. Locoh-Donou serves on the board of Capital One Financial Corporation (NYSE: COF). He is also the
co-founder of Cajou Espoir, a cashew-processing facility that employs several hundred people in rural Togo, 80 percent of
whom are women. Cajou Espoir exports more than 400 tons of cashew kernels annually to the U.S. and Europe.
Tom Fountain has served as our Executive Vice President and Chief Strategy Officer since January 2018. Mr. Fountain is
responsible for corporate strategy, corporate development, technology partnerships, our service provider business, and new
business incubations. From November 2012 to January 2018, Mr. Fountain served as Senior Vice President for Strategy and
Corporate Development at McAfee LLC, Vice President of Strategy and Operations at Intel Corporation, and Senior Vice
President for Strategy and Corporate Development at McAfee Incorporated. Previously, Mr. Fountain served as Vice President
and General Manager of the Content and Media Business Unit at Juniper Networks from December 2011 to November 2012
and Vice President of Corporate Strategy at Juniper Networks from February 2009 to December 2011. Earlier in his career, Mr.
Fountain was a venture capitalist at Mayfield Fund from June 2003 to February 2009 and co-founder and engineering leader at
Ingrian Networks from December 1999 to June 2004. He holds an M.B.A., an M.S. in Computer Science, an M.S. in Electrical
Engineering, and a B.S. in Computer Systems Engineering, each from Stanford University.
Geng Lin joined F5 as our Executive Vice President and Chief Technology Officer in July 2019. Mr. Lin is responsible for
the technical vision for the company with a focus on next-generation technological capabilities through organic and inorganic
innovation, including advanced research initiatives and strategic partnerships. Prior to joining F5, Mr. Lin was the Managing
Director, Chief Development Officer and Head of Engineering for consumer and community banking for J.P. Morgan Chase
from September 2017 to June 2019. Previously, he served as Head of Service Engineering for Next Billion Users, CTO of
Corporate Networks at Google, CTO of Network Business at Dell and CTO of Cisco’s IBM Alliance. Mr. Lin is an industry-
leading expert in distributed systems, software-defined infrastructure, and cloud services. He is a contributing author of two
books on cloud and data-intensive computing and holds nine U.S. patents. Mr. Lin received B.Sc. and M.Sc. degrees in
Computer Science from Peking University and a Ph.D. degree in Computer Science from University of British Columbia.
Steve McMillan has served as our Executive Vice President of Global Services since October 2017. He is responsible for
overseeing F5’s worldwide services organization, including global support, consulting, and services teams. Prior to joining F5,
Mr. McMillan served as Senior Vice President, Customer Success and Managed Cloud Services at Oracle from September 2015
to October 2017, where he developed, oversaw, and expanded a customer success organization focused on the company’s
strategic SaaS portfolio. Previously, Mr. McMillan served as Oracle’s Senior Vice President, Managed Cloud Services from
July 2012 to September 2015. Prior to joining Oracle, McMillan spent 19 years at IBM, where he held leadership roles focused
on global managed services, consulting, and IT. He holds a B.S. in Management and Computer Science from Aston University.
Frank Pelzer has served as our Executive Vice President and Chief Financial Officer since May 2018. He oversees F5's
worldwide financial planning, analysis, accounting, reporting, and internal auditing procedures, as well as investor relations.
Prior to joining F5, Mr. Pelzer served as President and Chief Operating Officer of the Cloud Business Group at SAP,
responsible for the execution of strategy and operations of the company's Software as a Service (SaaS) portfolio including
Concur, Ariba, Fieldglass, SuccessFactors, and Hybris. Prior to that, he served as Chief Financial Officer of Concur
Technologies, before it was acquired by SAP in 2014. Mr. Pelzer has also held senior leadership positions at Deutsche Bank
and Credit Suisse Group. Mr. Pelzer serves on the board of directors for Benefitfocus, Limeade, and Modumetal. He holds a
B.A. from Dartmouth College and an M.B.A. from the Tuck School of Business at Dartmouth College.
Scot Rogers has served as our Executive Vice President and General Counsel since January 2014. Mr. Rogers has held a
variety of positions in F5's legal department since 2005, including most recently as Senior Vice President and Associate
General Counsel immediately prior to his promotion to Executive Vice President. From 2002 through 2005, Mr. Rogers was the
General Counsel for Xpediate Consulting, a healthcare technology and consulting company located in the San Francisco Bay
Area. Prior to becoming a corporate counsel, he spent eight years in private practice as a commercial litigator. He is a graduate
of the University of Texas and holds a J.D. from the Dedman School of Law of Southern Methodist University.
Kara Sprague is Executive Vice President and General Manager, Application Services. She is responsible for F5’s BIG-IP
ADC and Security product portfolio management, products and solutions. Prior to joining F5 in 2017, Ms. Sprague held
various leadership positions across the technology practice of McKinsey and Company. Most recently she led the Technology,
Media, and Telecom Practice for the Western Region. Prior to McKinsey, Ms. Sprague was on the engineering staff of Oracle,
11
Agilent Technologies, and Hewlett-Packard. She holds a bachelor's degree and two master's degrees from Massachusetts
Institute of Technology and serves on the board of Girls Who Code.
Gus Robertson joined F5 as Senior Vice President and General Manager of NGINX following the Company’s May 2019
acquisition of Nginx, Inc., where he was Chief Executive Officer. Mr. Robertson joined NGINX as CEO in 2012, raising more
than $100 million in venture capital from such investors as Goldman Sachs and New Enterprise Associates. Prior to joining
NGINX, he led Global Business Development at Red Hat and ran the Asia Pacific region for Visio, prior to its acquisition by
Microsoft in 2000. Mr. Robertson studied Marketing at Charles Sturt University in Australia and completed the Advanced
Management Program at Duke University’s Fuqua School of Business.
Chad Whalen has served as our Executive Vice President of Worldwide Sales since July 2018. He is responsible for F5’s
global sales strategy and brings over 20 years of experience leading global teams across Europe, Asia, and North and South
America in network infrastructure, security, and SaaS. Mr. Whalen joined F5 in 2017 to lead the Cloud Sales team. Prior to
joining F5, he ran strategic alliances at Fortinet, worldwide sales and services at Jasper, Americas sales and field operations at
Ciena and global sales and marketing at World Wide Packets (WWP). He holds a B.A. in Business Administration and
Management from Eastern Washington University.
Ana White has served as our Executive Vice President and Chief Human Resources Officer since January 2018. She is
responsible for the F5’s people, practices, and professional growth programs; recruiting; diversity and inclusion; organizational
development; and employee advocacy initiatives. Ms. White comes to F5 from Microsoft, where she led global Human
Resources teams for over 18 years across multiple business units. Most recently, she acted as General Manager, Human
Resources for Microsoft’s Business Development, Finance, HR and Legal organizations with responsibility for their teams’ HR
strategy, talent management, diversity and inclusion, and organizational capability as well as HR Business Insights across
Microsoft. Prior to that, Ms. White led HR for the Marketing and Consumer Business organization. Prior to Microsoft, she was
a Compensation and Benefits Consultant at Willis Towers Watson. She holds a B.S. in Mathematics from Seattle University,
and serves on the taskforce for both the Seattle University Center for Science and Innovation and the board of Childhaven.
Mika Yamamoto joined F5 in May 2019 in the newly created role of Executive Vice President and Chief Marketing and
Customer Experience Officer. In this role, she is responsible for leading the company’s marketing strategies across segments,
channels, and geographies, and ensuring customers remain at the forefront of the company’s Digital Transformation initiative.
Prior to joining F5, Ms. Yamamoto served as Global President of Marketo, where she led the company’s go-to-market strategy
after it was acquired by Adobe. Ms. Yamamoto previously served as Chief Digital Marketing Officer and CMO for SAP. In
addition, she has held senior leadership roles at Amazon Books, Microsoft Windows and Microsoft Stores, Gartner Research
and Accenture. She holds a B.A. in Commerce, Economics and Marketing from Queen’s University in Canada and serves on
the board of the Rainier Valley Food Bank.
Item 1A.
Risk Factors
In addition to the other information in this report, the following risk factors should be carefully considered in evaluating
our company and operations.
Our business could be adversely impacted by conditions affecting the information technology market
A substantial portion of our business depends on the demand for information technology by large enterprise customers
and service providers. In addition to the challenges presented by new cloud computing models, we are dependent upon the
overall economic health of our current and prospective customers and the continued growth and evolution of the Internet.
International, national, regional and local economic conditions, such as recessionary economic cycles, protracted economic
slowdown or further deterioration of the economy could adversely impact demand for our products. Demand for our products
and services depends substantially upon the general demand for application delivery products and associated services, which
fluctuates based on numerous factors, including capital spending levels and growth of our current and prospective customers, as
well as general economic conditions. Moreover, the purchase of our products is often discretionary and may involve a
significant commitment of capital and other resources. Future economic projections for the information technology sector are
uncertain as companies continue to reassess their spending for technology projects and embrace new models for delivery of IT
services, such as cloud computing and highly orchestrated software defined networking environments. As a result, spending
priorities for our current and future customers may vary and demand for our products and services may be impacted. In
addition, customer buying patterns are changing over time and more customers seek to rent software on a subscription basis
and to reduce their total cost of ownership. These evolving business models could lead to changes in demand and licensing
strategies, which could have a material adverse effect on our business, results of operations and financial condition.
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Cloud-based computing trends present competitive and execution risks
Customers are transitioning to a hybrid computing environment utilizing various cloud-based software and services
accessed via various smart client devices. Pricing and delivery models are evolving and our competitors are developing and
deploying cloud-based services for customers. In addition, new cloud infrastructures are enabling the emergence of new
competitors including large cloud providers who offer their own ADC functionality as well as smaller companies targeting the
growing numbers of "born in the cloud" applications. We are devoting significant resources to develop and deploy our own
competing cloud-based software and services strategies. While we believe our expertise and investments in software and
infrastructure for cloud-based services provides us with a strong foundation to compete, it is uncertain whether our strategies
will attract the customers or generate the revenue required to be successful. In addition to software development costs, we are
incurring costs to build and maintain infrastructure to support cloud-computing services. These costs may reduce the operating
margins we have previously achieved. Whether we are successful in this new business model depends on our execution in a
number of areas, including:
• continuing to innovate and bring to market compelling cloud-based services that generate increasing traffic and market
share;
• maintaining the utility, compatibility and performance of our software on the growing array of cloud computing platforms
and the enhanced interoperability requirements associated with orchestration of cloud computing environments; and
•
implementing the infrastructure to deliver our own cloud-based services.
These new business models may reduce our revenues or operating margins and could have a material adverse effect on
our business, results of operations and financial condition.
Industry consolidation may result in increased competition
Some of our competitors have made acquisitions or entered into partnerships or other strategic relationships to offer a
more comprehensive solution than they had previously offered. We have also entered into large, strategic partnerships to
enhance our competitive position in the marketplace. As IT companies attempt to strengthen or maintain their market positions
in the evolving application delivery, mobility, cloud networking and cloud platform markets, these companies continue to seek
to deliver comprehensive IT solutions to end users and combine enterprise-level hardware and software solutions that may
compete with our solutions and which could negatively impact our partnerships. These consolidators or potential consolidators
may have significantly greater financial, technical and other resources than we do and may be better positioned to acquire and
offer complementary products and services. The companies resulting from these possible combinations may create more
compelling product and service offerings and be able to offer greater pricing flexibility or sales and marketing support for such
offerings than we can. These heightened competitive pressures could result in a loss of customers or a reduction in our revenues
or revenue growth rates, all of which could adversely affect our business, results of operations and financial condition.
We may not be able to compete effectively in the emerging application services market
The markets we serve are new, rapidly evolving and highly competitive, and we expect competition to persist and
intensify in the future. Our principal competitors in the application services market include Citrix Systems, Inc., Radware Ltd.,
and a number of other competitors that have a smaller market presence or limited feature set, such as: A10 Networks, Amazon
Web Services, Array Networks, Inc., Barracuda Networks, Inc., HAProxy, Kemp Technologies, Microsoft Azure, and VMware.
In related markets, we compete with companies such as the following:
• Cisco, Juniper Networks, and A10 for carrier-grade firewall capabilities;
• Akamai, Imperva, Citrix, and Barracuda Networks in the web application firewall market;
• Cisco, Juniper, and A10 in Carrier Grade NAT;
• Symantec / Blue Coat and A10 in SSL Orchestration;
• Pulse Security for Access Policy Manager;
• Procera, Allot, Sandvine, and other DPI vendors with our PEM offering; and
• Akamai, Arbor, and Radware in DDoS protection.
We expect to continue to face additional competition as new participants enter our markets. As we continue to expand
globally, we may see new competitors in different geographic regions. In addition, larger companies with significant resources,
brand recognition, and sales channels may form alliances with or acquire competing application services solutions from other
companies and emerge as significant competitors. Potential competitors may bundle their products or incorporate an Internet
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traffic management or security component into existing products in a manner that discourages users from purchasing our
products. Any of these circumstances may limit our opportunities for growth and negatively impact our financial performance.
Our success depends on our timely development of new products and features, market acceptance of new product
offerings and proper management of the timing of the life cycle of our products
The markets for our products and services are characterized by:
•
rapid technological change;
• evolving industry standards;
• consolidation of network and application functions into existing network infrastructure products;
•
•
requirements that our products interoperate with those of other IT vendors to enable ease of management;
fluctuations in customer demand;
• changes in customer requirements; and
•
frequent new product and service introductions and enhancements.
Our continued success depends on our ability to identify and develop new products and new features for our existing
products to meet the demands of these changes, and the acceptance of those products and features by our existing and target
customers. In addition, our products must interoperate with our end customers’ IT infrastructure, which often have different
specifications, deploy products from multiple vendors, and utilize multiple protocol standards. Our customers’ IT infrastructure
is becoming more complex and we may be reliant on orchestration and interoperability with third party vendors on whom we
are reliant for testing and support of new product versions and configurations. If we are unable to identify, develop and deploy
new products and new product features on a timely basis, our business and results of operations may be harmed.
The current development cycle for our products is on average 12-24 months. The introduction of new products or product
enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby
offsetting the benefit of even a successful product introduction, and may cause customers to defer purchasing our existing
products in anticipation of the new products. This could harm our operating results by decreasing sales, increasing our
inventory levels of older products and exposing us to greater risk of product obsolescence. We have also experienced, and may
in the future experience, delays in developing and releasing new products and product enhancements. This has led to, and may
in the future lead to, delayed sales, increased expenses and lower quarterly revenue than anticipated. Also, in the development
of our products, we have experienced delays in the prototyping of our products, which in turn has led to delays in product
introductions. In addition, complexity and difficulties in managing product transitions at the end-of-life stage of a product can
create excess inventory of components associated with the outgoing product that can lead to increased expenses. Any or all of
the above problems could materially harm our business and results of operations.
Our success depends on sales and continued innovation of our Application Delivery Controller and Application Security
product lines
We expect to derive a significant portion of our net revenues from sales of our Application Delivery Controller (ADC)
and Application Security products in the future. Implementation of our strategy depends upon these products being able to
solve critical network availability, performance and security problems for our customers. If our products are unable to solve
these problems for our customers or if we are unable to sustain the high levels of innovation in product feature sets needed to
maintain leadership in what will continue to be a competitive market environment, our business and results of operations will
be harmed.
Security vulnerabilities in our IT systems or products as well as unforeseen product errors could have a material adverse
impact on our business results of operations, financial condition and reputation
In the ordinary course of business, we store sensitive data, including intellectual property, personal data, our proprietary
business information and that of our customers, suppliers and business partners on our networks. In addition, we store sensitive
data through cloud-based services that may be hosted by third parties and in data center infrastructure maintained by third
parties. The secure maintenance of this information is critical to our operations and business strategy. Our information systems
and those of our partners and customers are subject to the increasing threat of intrusions by a wide range of actors including
computer programmers, hackers or sophisticated nation-state and nation-state supported actors or they may be compromised
due to employee error or wrongful conduct, malfeasance, or other disruptions. Despite our security measures, and those of our
third-party vendors, our information technology and infrastructure has experienced breaches or disruptions and may be
vulnerable in the future to breach, attacks or disruptions. If any breach or attack compromises our networks, creates system
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disruptions or slowdowns or exploits security vulnerabilities of our products, the information stored on our networks or those of
our customers could be accessed and modified, publicly disclosed, lost or stolen, and we may be subject to liability to our
customers, suppliers, business partners and others, and suffer reputational and financial harm.
In addition, our products are used to manage critical applications and data for customers and third parties may attempt to
exploit security vulnerabilities in our products as well as our internal IT systems. As we continue to focus on the development
and marketing of security solutions, we become a bigger target for malicious computer hackers, including sophisticated nation-
state and nation-state supported actors who wish to exploit security vulnerabilities in our products or IT systems.
We devote significant resources to addressing security vulnerabilities in our IT systems, product solutions and services
through our efforts to engineer more secure solutions and services, enhance security and reliability features in our solutions and
services, deploy security updates to address security vulnerabilities and seek to respond to known security incidents in
sufficient time to minimize any potential adverse impact. Despite our efforts to harden our infrastructure and build secure
solutions, from time to time, we experience attacks and other cyber-threats. These attacks can seek to exploit, among other
things, known or unknown vulnerabilities in technology included in our IT infrastructure, solutions and services. While we
have undertaken efforts to mitigate these vulnerabilities, they could render our internal systems, products, and solutions and
services susceptible to a cyber-attack.
Our products may also contain undetected errors or defects when first introduced or as new versions are released. We
have experienced these errors or defects in the past in connection with new products and product upgrades. As our products and
customer IT infrastructures become increasingly complex, customers may experience unforeseen errors in implementing our
products into their IT environments. We expect that these errors or defects will be found from time to time in new or enhanced
products after commencement of commercial shipments. These problems may cause us to incur significant warranty and repair
costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer
relations problems. We may also be subject to liability claims for damages related to product errors or defects. While we carry
insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted.
A material product liability claim may harm our business and results of operations.
Our products must successfully operate with products from other vendors. As a result, when problems occur in a network,
it may be difficult to identify the source of the problem. The occurrence of software or hardware problems, whether caused by
our products or another vendor’s products, may result in the delay or loss of market acceptance of our products. The occurrence
of any of these problems may harm our business and results of operations.
Any errors, defects or vulnerabilities in our products or IT systems could result in:
• expenditures of significant financial and product development resources in efforts to analyze, correct, eliminate, or work-
around errors and defects or to address and eliminate vulnerabilities;
•
•
•
•
•
remediation costs, such as liability for stolen assets or information, repairs or system damage;
increased cybersecurity protection costs which may include systems and technology changes, training, and engagement of
third party experts and consultants;
increased insurance premiums;
loss of existing or potential customers or channel partners;
loss of proprietary information leading to lost competitive positioning and lost revenues;
• negative publicity and damage to our reputation;
• delayed or lost revenue;
• delay or failure to attain market acceptance;
• an increase in warranty claims compared with our historical experience, or an increased cost of servicing warranty claims,
either of which would adversely affect our gross margins; and
•
litigation, regulatory inquiries, or investigations that may be costly and harm our reputation.
We are dependent on various information technology systems, and failures of or interruptions to those systems could
harm our business
Many of our business processes depend upon our IT systems, the systems and processes of third parties, and on interfaces
with the systems of third parties. For example, our order entry system provides information to the systems of our contract
manufacturers, which enables them to build and ship our products. If those systems fail or are interrupted, or if our ability to
15
connect to or interact with one or more networks is interrupted, our processes may function at a diminished level or not at all.
This would harm our ability to ship products, and our financial results may be harmed.
In addition, reconfiguring our IT systems or other business processes in response to changing business needs may be
time-consuming and costly. To the extent this impacted our ability to react timely to specific market or business opportunities,
our financial results may be harmed.
Our failure to adequately protect personal information could have a material adverse effect on our business
A wide variety of local, state, national, and international laws, directives and regulations apply to the collection, use,
retention, protection, disclosure, transfer, and other processing of personal data. These data protection and privacy-related laws
and regulations continue to evolve and may result in ever-increasing regulatory and public scrutiny and escalating levels of
enforcement and sanctions and increased costs of compliance. Certain safe-harbor exemptions upon which the Company relies
for data transfers have been challenged and may no longer be available to us in the future. Our failure to comply with
applicable laws and regulations, or to protect such data, could result in enforcement action against us, including fines,
imprisonment of company officials and public censure, claims for damages by end-customers and other affected individuals,
damage to our reputation and loss of goodwill (both in relation to existing end-customers and prospective end-customers), any
of which could have a material adverse effect on our operations, financial performance, and business. Changing definitions of
personal data and personal information, within the European Union, the United States, and elsewhere, especially relating to
classification of IP addresses, machine identification, location data, and other information, may limit or inhibit our ability to
operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. The evolving data
protection regulatory environment may require significant management attention and financial resources to analyze and modify
our IT infrastructure to meet these changing requirements all of which could reduce our operating margins and impact our
operating results and financial condition.
Our success depends on our key personnel and our ability to hire, retain and motivate qualified executives, sales and
marketing, operations, product development and professional services personnel
Our success depends, in large part, on our ability to attract, engage, retain, and integrate qualified executives and other
key employees throughout all areas of our business. In order to attract and retain executives and other key employees in a
competitive marketplace, we must provide a competitive compensation package, including cash- and equity-based
compensation. If we do not obtain the stockholder approval needed to continue granting equity compensation in a competitive
manner, our ability to attract, retain, and motivate executives and key employees could be weakened. Failure to successfully
hire executives and key employees or the loss of any executives and key employees could have a significant impact on our
operations. We have recently experienced changes in our senior leadership team, including the appointment of Mika Yamamoto
as the Company's Chief Marketing and Customer Experience Officer effective May 6, 2019, Gus Robertson as the General
Manager of NGINX effective May 8, 2019 and Geng Lin as the Chief Technology Officer effective July 1, 2019, and we expect
to continue to see changes as we build the team that is needed to execute our strategy. Changes in our management team may
be disruptive to our business, and any failure to successfully integrate key new hires or promoted employees could adversely
affect our business and results of operations. The complexity of our products and their integration into existing networks and
ongoing support, as well as the sophistication of our sales and marketing effort, requires us to retain highly trained developers,
professional services, customer support and sales personnel. Competition for qualified developers, professional services,
customer support and sales personnel in our industry is intense, especially in Silicon Valley and Seattle where we have
substantial operations and a need for highly skilled personnel, because of the limited number of people available with the
necessary technical skills and understanding of our products. Also, to the extent we hire personnel from competitors, we may
be subject to allegations that they have been improperly solicited, that they have divulged proprietary or other confidential
information, that they have violated non-compete obligations to their prior employers, or that their former employers own their
inventions or other work product. Our ability to hire and retain these personnel may be adversely affected by volatility or
reductions in the price of our common stock or our ability to get approval from shareholders to offer additional common stock
to our employees, since these employees are generally granted restricted stock units. The loss of services of any of our key
personnel, the inability to retain and attract qualified personnel in the future or delays in hiring qualified personnel may harm
our business and results of operations. In addition, we recently announced a restructuring to re-align our workforce to match
strategic and financial objectives and optimize resources for long term growth, including a reduction in force program
impacting a number of employees. This restructuring could lead to increased attrition amongst those employees who were not
directly affected by the reduction in force program.
We recently implemented a restructuring program, which we cannot guarantee will achieve its intended result
In July 2018, we announced a restructuring program to match strategic and financial objectives and optimize resources for
long term growth. We incur substantial costs to implement restructuring plans, and our restructuring activities may subject us to
16
litigation risks and expenses. Our past restructuring plans do not provide any assurance that additional restructuring plans will
not be required or implemented in the future. In addition, our restructuring plans may have other consequences, such as attrition
beyond our planned reduction in workforce, a negative effect on employee morale and productivity or our ability to attract
highly skilled employees. Our competitors may also use our restructuring plans to seek to gain a competitive advantage over us.
As a result, our restructuring plans may affect our revenue and other operating results in the future.
The average selling price of our products may decrease and our costs may increase, which may negatively impact
revenues and profits
It is possible that the average selling prices of our products will decrease in the future in response to competitive pricing
pressures, increased sales discounts, new product introductions by us or our competitors, as well as the shift to more software
consumption based and “as a service based” models, or other factors. Therefore, in order to maintain our profits, we must
develop and introduce new products and product enhancements on a timely basis and continually reduce our product costs. Our
failure to do so could cause our revenue and profits to decline, which would harm our business and results of operations. In
addition, we may experience substantial period-to-period fluctuations in future operating results due to the erosion of our
average selling prices.
Our business may be harmed if our contract manufacturers are not able to provide us with adequate supplies of our
products or if a single source of hardware assembly is lost or impaired
We outsource the manufacturing of our hardware platforms to third party contract manufacturers who assemble these
hardware platforms to our specifications. We have experienced minor delays in shipments from contract manufacturers in the
past. However, if we experience major delays in the future or other problems, such as inferior quality and insufficient quantity
of product, any one or a combination of these factors may harm our business and results of operations. The inability of our
contract manufacturers to provide us with adequate supplies of our products or the loss of one or more of our contract
manufacturers may cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer and may harm our
business and results of operations. In particular, we currently subcontract manufacturing of our products to a single contract
manufacturer with whom we do not have a long-term contract. If our arrangement with this single source of hardware assembly
was terminated or otherwise impaired, and we were not able to engage another contract manufacturer in a timely manner, our
business, financial condition and results of operation could be adversely affected.
If the demand for our products grows, we will need to increase our raw material and component purchases, contract
manufacturing capacity and internal test and quality control functions. Any disruptions in product flow may limit our revenue,
may harm our competitive position and may result in additional costs or cancellation of orders by our customers.
Our business could suffer if there are any interruptions or delays in the supply of hardware components from our third-
party sources
We currently purchase several hardware components used in the assembly of our products from a number of single or
limited sources. Lead times for these components vary significantly. The unavailability of suitable components, any
interruption or delay in the supply of any of these hardware components or the inability to procure a similar component from
alternate sources at acceptable prices within a reasonable time, may delay assembly and sales of our products and, hence, our
revenues, and may harm our business and results of operations.
It is difficult to predict our future operating results because we have an unpredictable sales cycle
Our products have a lengthy sales cycle and the timing of our revenue is difficult to predict. Historically, our sales cycle
has ranged from approximately two to three months and has tended to lengthen as our products become increasingly complex.
Also, as our distribution strategy is focused on a channel model, utilizing value-added resellers, distributors and systems
integrators, the level of variability in the length of sales cycle across transactions has increased and made it more difficult to
predict the timing of many of our sales transactions. Sales of our products require us to educate potential customers in their use
and benefits. Sales of our products are subject to delays from the lengthy internal budgeting, approval and competitive
evaluation processes that large enterprises and governmental entities may require. For example, customers frequently begin by
evaluating our products on a limited basis and devote time and resources to testing our products before they decide whether or
not to purchase. Customers may also defer orders as a result of anticipated releases of new products or enhancements by our
competitors or us. As a result, our products have an unpredictable sales cycle that contributes to the uncertainty of our future
operating results.
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We may not be able to sustain or develop new distribution relationships, and a reduction or delay in sales to significant
distribution partners could hurt our business
We sell our products and services through multiple distribution channels in the United States and internationally,
including leading industry distributors, value-added resellers, systems integrators, service providers and other indirect channel
partners. We have a limited number of agreements with companies in these channels, and we may not be able to increase our
number of distribution relationships or maintain our existing relationships. Recruiting and retaining qualified channel partners
and training them in our technologies requires significant time and resources. These channel partners may also market, sell and
support products and services that are competitive with ours and may devote more resources to the marketing, sales and support
of such competitive products. Our indirect sales channel structure could subject us to lawsuits, potential liability, and
reputational harm if, for example, any of our channel partners misrepresent the functionality of our products or services to
customers or violate laws or our corporate policies. If we are unable to establish or maintain our indirect sales channels, our
business and results of operations will be harmed. In addition, three worldwide distributors of our products accounted for
38.4% of our total net revenue for fiscal year 2019. A substantial reduction or delay in sales of our products to these distribution
partners, if not replaced by sales to other indirect channel partners and distributors, could harm our business, operating results
and financial condition.
A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and
risks
Sales to U.S. and foreign, federal, state, and local governmental agency end-customers account for a significant portion
of our revenues and we may in the future increase sales to government entities. Sales to government entities are subject to a
number of risks. Selling to government entities can be highly competitive, expensive, and time consuming, often requiring
significant upfront time and expense without any assurance that these efforts will generate a sale. The substantial majority of
our sales to date to government entities have been made indirectly through our channel partners. Government certification
requirements for products like ours may change, thereby restricting our ability to sell into the federal government sector until
we have attained the revised certification. Government demand and payment for our products and services may be impacted by
public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector
demand for our products and services. Government entities may have statutory, contractual or other legal rights to terminate
contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact
our future operating results. Governments routinely investigate and audit government contractors’ administrative processes, and
any unfavorable audit could result in the government refusing to continue buying our products and services, a reduction of
revenue or fines or civil or criminal liability if the audit uncovers improper or illegal activities, which could adversely impact
our operating results in a material way. Finally, for purchases by the U.S. government, the government may require certain
products to be manufactured in the United States and other relatively high cost manufacturing locations, and we may not
manufacture all products in locations that meet the requirements of the U.S. government, affecting our ability to sell these
products to the U.S. government.
Misuse of our products could harm our reputation
Our products may be misused by end-customers or third parties that obtain access to our products. For example, our
products could be used to censor private access to certain information on the Internet. Such use of our products for censorship
could result in negative publicity and damage to our reputation. In addition, as many of our products are subject to export
control regulations, diversion of our products to restricted third parties by others could result in investigations, penalties, fines,
trade restrictions and negative publicity that could damage our reputation and materially impact our business, operating results,
and financial condition.
Our quarterly and annual operating results may fluctuate in future periods, which may cause our stock price to fluctuate
Our quarterly and annual operating results have varied significantly in the past and could vary significantly in the future,
which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of
factors, many of which are outside of our control, including the changing and recently volatile U.S. and global economic
environment, which may cause our stock price to fluctuate. In particular, we anticipate that the size of customer orders may
increase as we continue to focus on larger business accounts. A delay in the recognition of revenue, even from just one account,
may have a significant negative impact on our results of operations for a given period. In the past, a majority of our sales have
been realized near the end of a quarter. Accordingly, a delay in an anticipated sale past the end of a particular quarter may
negatively impact our results of operations for that quarter, or in some cases, that fiscal year. Additionally, we have exposure to
the credit risks of some of our customers and sub-tenants. Although we have programs in place that are designed to monitor and
mitigate the associated risk, there can be no assurance that such programs will be effective in reducing our credit risks
adequately. We monitor individual payment capability in granting credit arrangements, seek to limit the total credit to amounts
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we believe our customers can pay and maintain reserves we believe are adequate to cover exposure for potential losses. If there
is a deterioration of a sub-tenant’s or a major customer’s creditworthiness or actual defaults are higher than expected, future
losses, if incurred, could harm our business and have a material adverse effect on our operating results. Further, our operating
results may be below the expectations of securities analysts and investors in future quarters or years. Our failure to meet these
expectations will likely harm the market price of our common stock. Such a decline could occur, and has occurred in the past,
even when we have met our publicly stated revenue and/or earnings guidance.
Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected
levels
As a result of customer buying patterns and the efforts of our sales force and channel partners to meet or exceed their
sales objectives, we have historically received a substantial portion of sales orders and generated a substantial portion of
revenue during the last few weeks of each fiscal quarter. In addition, any significant interruption in our information technology
systems, which manage critical functions such as order processing, revenue recognition, financial forecasts, inventory and
supply chain management, and trade compliance reviews, could result in delayed order fulfillment and decreased revenue for
that fiscal quarter. If expected revenue at the end of any fiscal quarter is delayed for any reason, including the failure of
anticipated purchase orders to materialize, our third party contract manufacturers’ inability to manufacture and ship products
prior to fiscal quarter-end to fulfill purchase orders received near the end of the fiscal quarter, our failure to manage inventory
to meet demand, our inability to release new products on schedule, any failure of our systems related to order review and
processing, or any delays in shipments based on trade compliance requirements, our revenue for that quarter could fall below
our expectations, resulting in a decline in the trading price of our common stock.
Changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported
results of operations
A change in accounting policies can have a significant effect on our reported results and may even affect our reporting of
transactions completed before the change is effective. New pronouncements and varying interpretations of existing
pronouncements have occurred with frequency and may occur in the future. Changes to existing rules, or changes to the
interpretations of existing rules, could lead to changes in our accounting practices, and such changes could adversely affect our
reported financial results or the way we conduct our business.
If we are unable to maintain effective internal control over financial reporting, the accuracy and timeliness of our financial
reporting may be adversely affected
As a public company, we are required to design and maintain proper and effective internal controls over financial
reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002
requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a
management report on the internal controls over financial reporting, which must be attested to by our independent registered
public accounting firm. We have an ongoing program to review the design of our internal controls framework in keeping with
changes in business needs, implement necessary changes to our controls design and test the system and process controls
necessary to comply with these requirements. If in the future, our internal controls over financial reporting are determined to be
not effective resulting in a material weakness, investor perceptions regarding the reliability of our financial statements may be
adversely affected which could cause a decline in the market price of our stock and otherwise negatively affect our liquidity
and financial condition.
We may have exposure to greater than anticipated tax liabilities
Our provision for income taxes is subject to volatility and could be affected by changes in our business operations,
including acquisitions, new offerings, and changes in the jurisdictions in which we operate. The provision for income taxes
may also be impacted by changes in stock-based compensation, changes in the research and development tax credit laws,
earnings being lower than anticipated in jurisdictions where we have lower statutory rates and being higher than anticipated in
jurisdictions where we have higher statutory rates, transfer pricing adjustments, not meeting the terms and conditions of tax
holidays or incentives, changes in the valuation of our deferred tax assets and liabilities, changes in actual results versus our
estimates, or changes in tax laws, regulations, accounting principles or interpretations thereof, including changes to the tax laws
applicable to corporate multinationals. Our results of operations and cash flows could be affected by future guidance
implementing the provisions of the Tax Cuts and Jobs Act. In addition, we may be subject to examination of our income tax
returns by the U.S. Internal Revenue Service and other tax authorities. While we regularly assess the likelihood of adverse
outcomes from such examinations and the adequacy of our provision for income taxes, there can be no assurance that such
provision is sufficient and that a determination by a tax authority will not have an adverse effect on our results of operations
and cash flows.
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We are subject to governmental export and import controls that could subject us to liability or impair our ability to
compete in international markets
Our products are subject to U.S. export controls and may be exported outside the U.S. only with the required level of
export license or through an export license exception because we incorporate encryption technology into our products. In
addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our
ability to distribute our products or our customers’ ability to implement our products in those countries. Changes in our
products or changes in export and import regulations may create delays in the introduction of our products in international
markets, prevent our customers with international operations from deploying our products throughout their global systems or,
in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import
regulations or related legislation, shift in approach to the enforcement or scope of existing regulations or change in the
countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our
decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased
use of our products or limitation on our ability to export or sell our products would likely adversely affect our business,
operating results and financial condition.
We may not be able to adequately protect our intellectual property, and our products may infringe on the intellectual
property rights of third parties
We rely on a combination of patent, copyright, trademark and trade secret laws, and restrictions on disclosure of
confidential and proprietary information to protect our intellectual property rights. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as
fully as in the United States.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation
regarding patent and other intellectual property rights. In the ordinary course of our business, we are involved in disputes and
licensing discussions with others regarding their claimed proprietary rights and cannot provide assurance that we will always
successfully defend ourselves against such claims and such matters are subject to many uncertainties and outcomes are not
predictable with assurance. We expect that infringement claims may increase as the number of products and competitors in our
market increases and overlaps occur. Also, as we have gained greater visibility, market exposure and competitive success, we
face a higher risk of being the subject of intellectual property infringement claims. If we are found to infringe the proprietary
rights of others, or if we otherwise settle such claims, we could be compelled to pay damages or royalties and either obtain a
license to those intellectual property rights or alter our products so that they no longer infringe upon such proprietary rights.
Any license could be very expensive to obtain or may not be available at all or may require us to make royalty payments which
could adversely affect gross margins in future periods. The actual liability in any such matters may be materially different from
our estimate, if any, which could result in the need to adjust the liability and record additional expenses. Similarly, changing our
products or processes to avoid infringing upon the rights of others may be costly or impractical. In addition, we have initiated,
and may in the future initiate, claims or litigation against third parties for infringement of our proprietary rights, or to determine
the scope and validity of our proprietary rights or those of our competitors. Any of these claims, whether claims that we are
infringing the proprietary rights of others, or vice versa, with or without merit, may be time-consuming, result in costly
litigation and diversion of technical and management personnel or require us to cease using infringing technology, develop non-
infringing technology or enter into royalty or licensing agreements. Further, our license agreements typically require us to
indemnify our customers, distributors and resellers for infringement actions related to our technology, which could cause us to
become involved in infringement claims made against our customers, distributors or resellers. Any of the above-described
circumstances relating to intellectual property rights disputes could result in our business and results of operations being
harmed.
We incorporate open source software into our products. Although we monitor our use of open source closely, the terms of
many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in
a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. We could also
be subject to similar conditions or restrictions should there be any changes in the licensing terms of the open source software
incorporated into our products. In either event, we could be required to seek licenses from third parties in order to continue
offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot
be accomplished on a timely or successful basis, any of which could adversely affect our business, operating results and
financial condition.
Many of our products include intellectual property licensed from third parties. In the future, it may be necessary to renew
licenses for third party intellectual property or obtain new licenses for other technology. These third party licenses may not be
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available to us on acceptable terms, if at all. The inability to obtain certain licenses, or litigation regarding the interpretation or
enforcement of license rights and related intellectual property issues, could have a material adverse effect on our business,
operating results and financial condition. Furthermore, we license some third party intellectual property on a non-exclusive
basis and this may limit our ability to protect our intellectual property rights in our products.
Our operating results are exposed to risks associated with international commerce
As our international sales increase, our operating results become more exposed to international operating risks.
Additionally, our international sales and operations are subject to a number of risks, including the following:
• greater difficulty in enforcing contracts and accounts receivable collection and longer collection periods;
•
the uncertainty of protection for intellectual property rights in some countries;
• greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;
•
risks associated with trade restrictions and foreign legal requirements, including the importation, certification, and
localization of our products required in foreign countries;
• greater risk of a failure of foreign employees, partners, distributors, and resellers to comply with both U.S. and foreign laws,
including antitrust regulations, the U.S. Foreign Corrupt Practices Act, and any trade regulations ensuring fair trade
practices;
• heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales
arrangements that may impact financial results and result in restatements of, or irregularities in, financial statements;
•
increased expenses incurred in establishing and maintaining office space and equipment for our international operations;
• greater difficulty in recruiting local experienced personnel, and the costs and expenses associated with such activities;
• management communication and integration problems resulting from cultural and geographic dispersion;
•
fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;
• economic uncertainty around the world, including continued economic uncertainty as a result of sovereign debt issues in
Europe; and
• general economic and political conditions in these foreign markets.
In addition, in June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European
Union (commonly referred to as Brexit). The uncertainty surrounding the terms of the United Kingdom's withdrawal and its
consequences, may cause our customers to closely monitor their costs and reduce their spending on our products and services.
We must hire and train experienced personnel to staff and manage our foreign operations. To the extent that we
experience difficulties in recruiting, training, managing, and retaining an international staff, and specifically staff related to
sales management and sales personnel, we may experience difficulties in sales productivity in foreign markets. We also enter
into strategic distributor and reseller relationships with companies in certain international markets where we do not have a local
presence. If we are not able to maintain successful strategic distributor relationships internationally or recruit additional
companies to enter into strategic distributor relationships, our future success in these international markets could be limited.
Business practices in the international markets that we serve may differ from those in the United States and may require us in
the future to include terms other than our standard terms in customer contracts. We intend to continue expanding into
international markets. Sales outside of the Americas represented 44.5% and 44.3% of our net revenues for the fiscal years
ended September 30, 2019 and 2018, respectively.
These factors and other factors could harm our ability to gain future international revenues and, consequently, materially
impact our business, operating results, and financial condition. The expansion of our existing international operations and entry
into additional international markets will require significant management attention and financial resources. Our failure to
successfully manage our international operations and the associated risks effectively could limit the future growth of our
business.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and
results of operations
Our sales contracts are denominated in U.S. dollars, and therefore, substantially all of our revenue is not subject to foreign
currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our solutions to our end customers
outside of the United States, which could adversely affect our financial condition and operating results. In addition, an
21
increasing portion of our operating expenses is incurred outside the United States, is denominated in foreign currencies, and is
subject to fluctuations due to changes in foreign currency exchange rates. If we become more exposed to currency fluctuations
and are not able to successfully hedge against the risks associated with currency fluctuations, our operating results could be
adversely affected. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other
derivative instruments.
Changes in governmental regulations could negatively affect our revenues
Many of our products are subject to various regulations promulgated by the United States and various foreign
governments including, but not limited to, environmental regulations and regulations implementing export license requirements
and restrictions on the import or export of some technologies, especially encryption technology. Changes in governmental
regulation and our inability or failure to obtain required approvals, permits or registrations could harm our international and
domestic sales and adversely affect our revenues, business and operations.
New regulations related to conflict minerals may force us to incur additional expenses and could limit the supply and
increase the costs of certain metals and minerals used in the manufacturing of our products
In August 2012, the SEC adopted new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (or the Dodd-Frank Act) for companies that use certain minerals and derivative metals (referred to as conflict
minerals, regardless of their country of origin) in their products, whether or not these products are manufactured by third
parties. The Dodd-Frank Act requires companies to perform due diligence and disclose whether or not such minerals originate
from the Democratic Republic of Congo or adjoining countries. We filed a report on Form SD with the SEC regarding such
matters on May 31, 2019. These requirements could adversely affect the sourcing, availability and pricing of minerals or metals
used in the manufacture of our products and the numerous components that go into our products all of which could adversely
affect our business, financial condition, and operating results. In addition, we will incur additional costs to comply with the
disclosure requirements, including costs related to determining the source of any relevant minerals and metals used in our
products. We have a complex supply chain and many components are sourced through our contract manufacturer and we may
not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence
procedures that we implement. As a result, we may face reputational challenges with our customers and other stakeholders and
possible regulatory risk.
We face litigation risks
We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and
securities litigation in particular, can be expensive, lengthy and disruptive to normal business operations. Moreover, the results
of complex legal proceedings are difficult to predict. Responding to lawsuits has been, and will likely continue to be, expensive
and time-consuming for us. An unfavorable resolution of these lawsuits could adversely affect our business, results of
operations or financial condition.
Acquisitions present many risks and we may not realize the financial and strategic goals that are contemplated at the
time of the transaction
With respect to our past acquisitions, as well as any other future acquisitions we may undertake, we may find that the
acquired businesses, products or technologies do not further our business strategy as expected, that we paid more than what the
assets are later worth or that economic conditions change, all of which may generate future impairment charges. Our
acquisitions may be viewed negatively by customers, financial markets or investors. There may be difficulty integrating the
operations and personnel of the acquired business, and we may have difficulty retaining the key personnel of the acquired
business. We may have difficulty in integrating the acquired technologies or products with our existing product lines. Our
ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the
complexity of managing geographically and culturally diverse locations. We may have difficulty maintaining uniform
standards, controls, procedures and policies across locations. We may experience significant problems or liabilities associated
with product quality, technology and other matters.
Our inability to successfully operate and integrate newly-acquired businesses appropriately, effectively and in a timely
manner, or to retain key personnel of any acquired business, could have a material adverse effect on our ability to take
advantage of further growth in demand for integrated traffic management and security solutions and other advances in
technology, as well as on our revenues, gross margins and expenses.
22
Anti-takeover provisions could make it more difficult for a third party to acquire us
Our Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the
shareholders. The rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control of our company without further action by our shareholders and may adversely affect
the voting and other rights of the holders of common stock. Further, certain provisions of our bylaws, including a provision
limiting the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice, may have the
effect of delaying or preventing changes in control or management of our company, which could have an adverse effect on the
market price of our common stock. Similarly, state anti-takeover laws in the State of Washington related to corporate takeovers
may prevent or delay a change of control of our company.
Our stock price could be volatile, particularly during times of economic uncertainty and volatility in domestic and
international stock markets
Our stock price has been volatile and has fluctuated significantly in the past. The trading price of our stock is likely to
continue to be volatile and subject to fluctuations in the future. Some of the factors that could significantly affect the market
price of our stock include:
• Actual or anticipated variations in operating and financial results;
• Analyst reports or recommendations;
• Rumors, announcements or press articles regarding our competitors’ operations, management, organization, financial
condition or financial statements; and
• Other events or factors, many of which are beyond our control.
The stock market in general and the market for technology companies in particular, have experienced extreme price and
volume fluctuations. These fluctuations have often been unrelated or disproportionate to operating performance. The
fluctuations may continue in the future and this could significantly impact the value of our stock and your investment.
If securities or industry analysts publish inaccurate or unfavorable research about our business, or discontinue publishing
research about our business, the price and trading volume of our securities could decline
The trading market for our common stock is influenced by the research and reports that industry or securities analysts
publish about us, our business, our market or our competitors. If one or more of the analysts who cover us downgrade our
common stock or publish inaccurate or unfavorable research about our business, the price of our securities would likely
decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our
securities could decrease, which might cause the price and trading volume of our securities to decline.
We face risks associated with having operations and employees located in Israel
We have offices and employees located in Israel. As a result, political, economic, and military conditions in Israel directly
affect our operations. The future of peace efforts between Israel and its Arab neighbors remains uncertain. There has been a
significant increase in hostilities and political unrest in Israel in the past year. The effects of these hostilities and violence on the
Israeli economy and our operations in Israel are unclear, and we cannot predict the effect on us of further increases in these
hostilities or future armed conflict, political instability or violence in the region. In addition, many of our employees in Israel
are obligated to perform annual reserve duty in the Israeli military and are subject to being called for active duty under
emergency circumstances. We cannot predict the full impact of these conditions on us in the future, particularly if emergency
circumstances or an escalation in the political situation occurs. If many of our employees in Israel are called for active duty for
a significant period of time, our operations and our business could be disrupted and may not be able to function at full capacity.
Current or future tensions and conflicts in the Middle East could adversely affect our business, operating results, financial
condition and cash flows.
Our business is subject to the risks of earthquakes, fire, power outages, floods, and other catastrophic events, and to
interruption by man-made problems such as terrorism
A significant natural disaster, such as an earthquake, a fire, a flood, or a significant power outage could have a material
adverse impact on our business, operating results, and financial condition. We have an administrative and product development
office and a third party contract manufacturer located in the San Francisco Bay Area, a region known for seismic activity. In
addition, natural disasters could affect our supply chain, manufacturing vendors, or logistics providers’ ability to provide
23
materials and perform services such as manufacturing products or assisting with shipments on a timely basis. In the event our
or our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the
events discussed above, shipments could be delayed, resulting in missed financial targets, such as revenue and shipment targets,
for a particular quarter. In addition, cyber-attacks, acts of terrorism, or other geo-political unrest could cause disruptions in our
business or the business of our supply chain, manufacturers, logistics providers, partners, or end-customers or the economy as a
whole. Any disruption in the business of our supply chain, manufacturers, logistics providers, partners or end-customers that
impacts sales at the end of a fiscal quarter could have a significant adverse impact on our quarterly results. All of the
aforementioned risks may be further increased if the disaster recovery plans for us and our suppliers prove to be inadequate. To
the extent that any of the above should result in delays or cancellations of customer orders, or the delay in the manufacture,
deployment or shipment of our products, our business, financial condition and operating results would be adversely affected.
In addition to other risks listed in this “Risk Factors” section, factors that may affect our operating results include, but
are not limited to:
•
fluctuations in demand for our products and services due to changing market conditions, pricing conditions, technology
evolution, seasonality, or other changes in the global economic environment;
• changes or fluctuations in sales and implementation cycles for our products and services;
• changes in the mix of our products and services, including increases in subscription-based offerings;
• changes in the growth rate of the application delivery market;
•
•
reduced visibility into our customers’ spending and implementation plans;
reductions in customers’ budgets for data center and other IT purchases or delays in these purchases;
• changes in end-user customer attach rates and renewal rates for our services;
•
fluctuations in our gross margins, including the factors described herein, which may contribute to such fluctuations;
• our ability to control costs, including operating expenses, the costs of hardware and software components, and other
manufacturing costs;
• our ability to develop, introduce and gain market acceptance of new products, technologies and services, and our success in
new and evolving markets;
• any significant changes in the competitive environment, including the entry of new competitors or the substantial
discounting of products or services;
•
the timing and execution of product transitions or new product introductions, and related inventory costs;
• variations in sales channels, product costs, or mix of products sold;
• our ability to establish and manage our distribution channels, and the effectiveness of any changes we make to our
distribution model;
•
the ability of our contract manufacturers and suppliers to provide component parts, hardware platforms and other products
in a timely manner;
• benefits anticipated from our investments in sales, marketing, product development, manufacturing or other activities;
•
impacts on our overall tax rate caused by any reorganization in our corporate structure;
• changes in tax laws or regulations, or other accounting rules; and
• general economic conditions, both domestically and in our foreign markets.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
We lease our principal administrative, sales, marketing, research and development facilities, which are located in Seattle,
Washington and consist of approximately 515,000 square feet. In May 2017, we entered into a lease agreement for the building
in Seattle, Washington that now serves as our corporate headquarters. This lease will expire in 2033 with an option for renewal.
24
We also lease a total of approximately 320,000 square feet of space at another location in Seattle, which served as our
previous corporate headquarters through June 2019, when we relocated to our current location. The leases for the three
buildings that served as our previous corporate headquarters expire in July 2022 and are being actively marketed for sublease.
We believe that our existing properties are in good condition and suitable for the conduct of our business. We also lease
additional office space for product development and sales and support personnel in the United States and internationally. We
believe that our future growth can be accommodated by our current facilities or by leasing additional space if necessary.
Item 3.
Legal Proceedings
See Note 11 - Commitments and Contingencies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K)
for information regarding legal proceedings in which we are involved.
Item 4.
Mine Safety Disclosures
Not applicable.
25
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Prices of Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol “FFIV.” The following table sets forth
the high and low sales prices of our common stock as reported on the Nasdaq Global Select Market.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2019
Fiscal Year 2018
High
Low
High
Low
$
$
$
$
195.41
173.44
168.94
153.99
$
$
$
$
149.87
148.91
131.53
121.36
$
$
$
$
136.35
153.91
183.27
199.71
$
$
$
$
114.63
131.31
138.67
168.77
The last reported sales price of our common stock on the Nasdaq Global Select Market on November 11, 2019 was
$147.69.
As of November 11, 2019, there were 45 holders of record of our common stock. As many of our shares of common
stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of
beneficial holders of our common stock represented by these record holders.
Dividend Policy
Our policy has been to retain cash for use in our business, for investment in acquisitions and to repurchase shares of our
common stock. Accordingly, we have not paid dividends and do not anticipate declaring dividends on our common stock in the
foreseeable future.
Unregistered Securities Sold in 2019
We did not sell any unregistered shares of our common stock during the fiscal year 2019.
Issuer Purchases of Equity Securities
On October 31, 2018, we announced that our Board of Directors authorized an additional $1.0 billion for our common
stock share repurchase program. This new authorization is incremental to the existing $4.4 billion program, initially approved
in October 2010 and expanded in each fiscal year. Acquisitions for the share repurchase programs will be made from time to
time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The
programs can be terminated at any time. During fiscal year 2019, we repurchased and retired 1,185,881 shares at an average
price of $169.53 per share and as of September 30, 2019, we had $1.4 billion remaining authorized to purchase shares.
In the second quarter of fiscal 2019, we announced that, in connection with our acquisition of NGINX, we were
suspending the automatic component of our common stock share repurchase program. Management will continue to evaluate
market conditions and other factors including our capital requirements in determining when and whether to repurchase shares
and when and whether to re-implement an automatic component of our repurchase program. The program does not require the
purchase of any minimum number of shares and the program may be modified, suspended or discontinued at any time. As a
result of this suspension, no shares were repurchased and retired in the fourth quarter of fiscal 2019.
26
Performance Measurement Comparison of Shareholder Return
The following graph compares the annual percentage change in the cumulative total return on shares of our common
stock, the Nasdaq Composite Index and the Nasdaq Computer Index for the period commencing September 30, 2014, and
ending September 30, 2019. In addition, we have added the S&P 500 Index as we believe this is a more commonly used index
in our industry. We do not plan to include the NASDAQ Computer Index in our Annual Report on Form 10-K for the year
ended September 30, 2020.
Comparison of Cumulative Total Return
On Investment Since September 30, 2014*
The Company’s closing stock price on September 30, 2019, the last trading day of the Company’s 2019 fiscal year, was
$140.42 per share.
* Assumes that $100 was invested September 30, 2014 in shares of Common Stock and in each index, and that all
dividends were reinvested. Shareholder returns over the indicated period should not be considered indicative of future
shareholder returns.
27
Item 6.
Selected Financial Data
The following selected consolidated historical financial data are derived from our audited financial statements. The
consolidated balance sheet data as of September 30, 2019 and 2018 and the consolidated income statement data for the years
ended September 30, 2019, 2018 and 2017 are derived from our audited consolidated financial statements and related notes that
are included elsewhere in this report. The consolidated balance sheet data as of September 30, 2017, 2016 and 2015 and the
consolidated income statement data for the years ended September 30, 2016 and 2015 are derived from our audited
consolidated financial statements and related notes which are not included in this report. The information set forth below
should be read in conjunction with our historical financial statements, including the notes thereto, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this report.
Consolidated Income Statement Data
Net revenues
Products
Services
Total
Cost of net revenues
Products
Services
Total
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Litigation expense (1)
Restructuring charges (2)
Total
Income from operations
Other income, net
Income before income taxes
Provision for income taxes
Net income
Net income per share — basic
Weighted average shares — basic
Net income per share — diluted
Weighted average shares — diluted
Consolidated Balance Sheet Data
Cash, cash equivalents, and short-term investments
Restricted cash (3)
Long-term investments
Total assets
Long-term liabilities
Total shareholders’ equity
Years Ended September 30,
2019 (4)
2018
2017
2016
2015
(In thousands, except per share data)
$
985,591
1,256,856
2,242,447
$
960,108
1,201,299
2,161,407
$
964,662
1,125,379
2,090,041
$
944,469
1,050,565
1,995,034
$
991,539
928,284
1,919,823
174,986
181,591
356,577
1,885,870
748,619
408,058
210,730
—
—
1,367,407
518,463
22,648
541,111
113,377
427,734
7.12
60,044
7.08
60,456
972,282
3,035
358,402
3,390,275
523,252
1,761,497
$
$
$
$
181,061
180,420
361,481
1,799,926
664,135
366,084
160,382
—
18,426
1,209,027
590,899
12,861
603,760
150,071
453,689
7.41
61,262
7.32
62,013
$
$
$
176,032
177,453
353,485
1,736,556
652,239
350,365
156,887
391
12,718
1,172,600
563,956
11,561
575,517
154,756
420,761
6.56
64,173
6.50
64,775
$
$
$
$ 1,039,412
1,187
411,184
2,605,476
365,551
1,285,492
$ 1,016,928
1,224
284,802
2,476,489
312,554
1,229,392
166,624
170,581
337,205
1,657,829
628,743
334,227
138,431
9,051
—
1,110,452
547,377
2,514
549,891
184,036
365,855
5.43
67,433
5.38
67,984
882,395
1,151
276,375
2,306,323
276,823
1,185,262
$
$
$
$
174,225
158,036
332,261
1,587,562
602,540
296,583
135,540
—
—
1,034,663
552,899
8,445
561,344
196,330
365,014
5.07
71,944
5.03
72,547
774,342
1,149
397,656
2,312,290
240,439
1,316,728
$
$
$
$
(1) Litigation expense primarily represents a patent-related jury verdict and legal fees associated with the litigation.
(2) Restructuring charges represent severance and other employee-related costs associated with workforce reductions that
took place in the fourth quarters of fiscal 2018 and 2017.
(3) Restricted cash represents escrow accounts established in connection with lease agreements for our facilities.
(4) Selected financial data for fiscal year 2019 contains effects from the adoption of ASC 606, and differs in comparability to
previous years due to those effects. See Note 2 - Revenue from Contracts with Customers for more details.
28
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These
statements include, but are not limited to, statements about our plans, objectives, expectations, strategies, intentions or other
characterizations of future events or circumstances and are generally identified by the words “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions. These forward-looking statements are based on
current information and expectations and are subject to a number of risks and uncertainties. Our actual results could differ
materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under “Item 1A. Risk Factors” herein and in other documents we file
from time to time with the Securities and Exchange Commission. We assume no obligation to revise or update any such
forward-looking statements.
Overview
F5 is a leading provider of multi-cloud application services which enable our customers to develop, deploy, operate,
secure, and govern applications in any architecture, from on-premises to the public cloud. Our enterprise-grade application
services are available as cloud-based, software-as-a-service, and software-only solutions optimized for multi-cloud
environments, with modules that can run independently, or as part of an integrated solution on our high-performance
appliances. We market and sell our products primarily through multiple indirect sales channels in the Americas (primarily the
United States); Europe, the Middle East, and Africa (EMEA); and the Asia Pacific region (APAC). Enterprise customers
(Fortune 1000 or Business Week Global 1000 companies) in the technology, telecommunications, financial services,
transportation, education, manufacturing, and health care industries, along with government customers, continue to make up the
largest percentage of our customer base.
On May 8, 2019, we completed the acquisition of NGINX, the open source leader in application delivery for modern
applications. The combined company will enable multi-cloud application services across all environments, providing the ease-
of-use and flexibility developers require while also delivering the scale, security, reliability and enterprise readiness network
operations teams demand.
Our management team monitors and analyzes a number of key performance indicators in order to manage our business
and evaluate our financial and operating performance on a consolidated basis. Those indicators include:
• Revenues. The majority of our revenues are derived from sales of our application delivery controller (ADC) products
including our BIG-IP appliances and VIPRION chassis and related software modules and our software-only Virtual
Editions; Local Traffic Manager (LTM), DNS Services (formerly Global Traffic Manager); Advanced Firewall Manager
(AFM) and Policy Enforcement Manager (PEM), that leverage the unique performance characteristics of our hardware and
software architecture; and products that incorporate acquired technology, including Application Security Manager (ASM)
and Access Policy Manager (APM); and the WebSafe, MobileSafe, Secure Web Gateway and Silverline DDoS and
Application security offerings which are sold to customers on a subscription basis. We also derive revenues from the sales
of services including annual maintenance contracts, training and consulting services. We carefully monitor the sales mix of
our revenues within each reporting period. We believe customer acceptance rates of our new products and feature
enhancements are indicators of future trends. We also consider overall revenue concentration by customer and by
geographic region as additional indicators of current and future trends.
• Cost of revenues and gross margins. We strive to control our cost of revenues and thereby maintain our gross margins.
Significant items impacting cost of revenues are hardware costs paid to our contract manufacturers, third-party software
license fees, amortization of developed technology and personnel and overhead expenses. Our margins have remained
relatively stable; however, factors such as sales price, product and services mix, inventory obsolescence, returns, component
price increases and warranty costs could significantly impact our gross margins from quarter to quarter and represent
significant indicators we monitor on a regular basis.
• Operating expenses. Operating expenses are substantially driven by personnel and related overhead expenses. Existing
headcount and future hiring plans are the predominant factors in analyzing and forecasting future operating expense trends.
Other significant operating expenses that we monitor include marketing and promotions, travel, professional fees, computer
costs related to the development of new products and provision of services, facilities and depreciation expenses.
• Liquidity and cash flows. Our financial condition remains strong with significant cash and investments and no long term
debt. The increase in cash and investments for fiscal year 2019 was primarily due to cash provided by operating activities of
$747.8 million, partially offset by cash used to repurchase outstanding common stock under our share repurchase program
of $201.0 million and capital expenditures of $103.5 million. Going forward, we believe the primary driver of cash flows
will be net income from operations. Capital expenditures for fiscal year 2019 were primarily related to the expansion of our
29
facilities to support our operations worldwide as well as investments in information technology infrastructure and
equipment purchases to support our core business activities. 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 or other
financing arrangements.
• 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 fiscal 2019
due to growth in the amount of annual maintenance contracts purchased on new products and maintenance renewal
contracts related to our existing product installation base. Our days sales outstanding for the fourth quarter of fiscal year
2019 was 49.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies, which are described in Note 1 of the notes to the consolidated
financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these
are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition
and results of operations.
Revenue Recognition. On October 1, 2018, we adopted the new revenue recognition standard by applying the modified
retrospective approach to those contracts which were not completed as of October 1, 2018. Results for reporting periods
beginning after October 1, 2018 are presented under the new revenue recognition standard, while prior period amounts are not
adjusted and continue to be reported under the accounting standards in effect for the prior periods.
We sell products through distributors, resellers, and directly to end users. Revenue related to our contracts with customers
is recognized by following a five-step process:
•
•
Identify the contract(s) with a customer. Evidence of a contract generally consists of a purchase order issued pursuant to the
terms and conditions of a distributor, reseller or end user agreement.
Identify the performance obligations in the contract. Performance obligations are identified in our contracts and include
hardware, hardware-based software, software-only solutions, cloud-based subscription services as well as a broad range of
service performance obligations including consulting, training, installation and maintenance.
• Determine the transaction price. The purchase price stated in an agreed upon purchase order is generally representative of
the transaction price. We offer several programs in which customers are eligible for certain levels of rebates if certain
conditions are met. When determining the transaction price, we consider the effects of any variable consideration.
• Allocate the transaction price to the performance obligations in the contract. The transaction price in a contract is allocated
based upon the relative standalone selling price of each distinct performance obligation identified in the contract.
• Recognize revenue when (or as) the entity satisfies a performance obligation. We satisfy performance obligations either over
time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance
obligation is satisfied by transferring control of promised products and services to a customer.
The following is a description of the principal activities from which we generate revenue:
Product
Revenue from the sale of our hardware and perpetual software products is generally recognized at a point in time when
the product has been fulfilled and the customer is obligated to pay for the product. When rights of return are present and we
cannot estimate returns, revenue is recognized when such rights of return lapse. Payment terms to domestic customers are
generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120 days based on
normal and customary trade practices in the individual markets.
30
Subscription
We also offer several products by subscription, either through term-based license agreements or as a service through our
cloud-based Silverline platform. Revenue for term-based license agreements is recognized at a point in time, when we deliver
the software license to the customer and the subscription term has commenced. For our software-as-a-service Silverline
offerings, revenue is recognized ratably as the services are provided.
Support and professional services
Revenues for post-contract customer support (PCS) are recognized on a straight-line basis over the service contract term.
PCS includes a limited period of telephone support, updates, repair or replacement of any failed product or component that fails
during the term of the agreement, bug fixes and rights to upgrades, when and if available. Consulting services are customarily
billed at fixed hourly rates, plus out-of-pocket expenses, and revenues are recognized as the consulting is completed. Similarly,
training revenue is recognized as the training is completed.
Contract acquisition costs
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract
with a customer. Sales commissions for initial service contracts and subscription offerings are deferred and then amortized as
an expense on a straight-line basis over the period of benefit which management has determined to be 4.5 years and 3 years,
respectively.
Significant Judgments
We enter into certain contracts with customers, including enterprise license arrangements, with non-standard terms and
conditions. Management exercises significant judgment in assessing contractual terms in these arrangements to identify and
evaluate performance obligations and total consideration. Management allocates consideration to each performance obligation
based on relative fair value using standalone selling price and recognizes associated revenue as control is transferred to the
customer.
Business Combinations. Our business combinations are accounted for under the acquisition method. We allocate the fair
value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated
fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with
respect to intangible assets.
On May 8, 2019, we completed our acquisition of Nginx, Inc. for a total purchase price of $643.2 million, of which
approximately $62.5 million of finite-lived developed technology was recorded. Management valued the developed technology
using the relief-from-royalty method under the income approach. This method reflects the present value of the projected cash
flows that are expected to be generated from the licensing of the asset to third-parties. Management applied significant
judgment in estimating the fair value of the acquired developed technology, which involved the use of a significant assumption
with respect to the royalty rate.
Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K.
Net Revenues
Products
Services
Total
Percentage of net revenues
Products
Services
Total
Years Ended September 30,
2019
2018
2017
(in thousands, except percentages)
$
985,591
1,256,856
$ 2,242,447
$
960,108
1,201,299
$ 2,161,407
$
964,662
1,125,379
$ 2,090,041
44.0%
56.0
100.0%
44.4%
55.6
100.0%
46.2%
53.8
100.0%
31
Net Revenues. Total net revenues increased 3.7% in fiscal year 2019 from fiscal year 2018, compared to an increase of
3.4% in fiscal year 2018 from the prior year. Overall revenue growth for the year ended September 30, 2019 was primarily due
to increased software revenue including our subscription-based products and increased service revenues as a result of our
increased installed base of products. International revenues represented 49.3%, 49.6% and 48.6% of net revenues in fiscal years
2019, 2018 and 2017, respectively.
Net product revenues increased 2.7% in fiscal year 2019 from fiscal year 2018, compared to a decrease of 0.5% in fiscal
year 2018 from the prior year. The increase of $25.5 million in net product sales for fiscal year 2019 was due to an increase in
software sales compared to the same period in the prior year, partially offset by a decrease in systems revenue. The decrease of
$4.6 million in net product sales for fiscal year 2018 was primarily due to a decrease in systems revenue, partially offset by an
increase in software revenue.
Net service revenues increased 4.6% in fiscal year 2019 from fiscal year 2018, compared to an increase of 6.7% in fiscal
year 2018 from the prior year. The increases in service revenue were the result of increased purchases or renewals of
maintenance contracts driven by additions to our installed base of products.
The following distributors of our products accounted for more than 10% of total net revenue:
Ingram Micro, Inc.
Tech Data1
Westcon Group, Inc.2
Synnex Corporation2
Arrow ECS
Years Ended September 30,
2019
2018
2017
18.2%
10.2%
10.0%
—
—
16.6%
11.6%
10.4%
10.8%
10.7%
16.1%
12.4%
17.7%
—
10.4%
(1) On February 27, 2017, Tech Data completed the acquisition of Avnet Technology Solutions. Revenues for the year ended
September 30, 2017 represent combined revenues for Tech Data and Avnet.
(2) On September 1, 2017, Synnex Corporation completed the acquisition of Westcon Americas.
The following distributors of our products accounted for more than 10% of total receivables:
Synnex Corporation
Ingram Micro, Inc.
Carahsoft Technology
No other distributors accounted for more than 10% of total net revenue or receivables.
September 30,
2019
2018
12.9%
12.4%
11.5%
10.3%
16.6%
—
Cost of net revenues and Gross Margin
Products
Services
Total
Gross profit
Percentage of net revenues and Gross Margin (as a percentage of related
net revenue)
Products
Services
Total
Gross profit
32
Years Ended September 30,
2019
2018
2017
(in thousands, except percentages)
$
174,986
181,591
356,577
$ 1,885,870
$
181,061
180,420
361,481
$ 1,799,926
$
176,032
177,453
353,485
$ 1,736,556
17.8%
14.4
15.9
84.1%
18.9%
15.0
16.7
83.3%
18.2%
15.8
16.9
83.1%
Cost of Net Product Revenues. Cost of net product revenues consist of finished products purchased from our contract
manufacturers, manufacturing overhead, freight, warranty, provisions for excess and obsolete inventory and amortization
expenses in connection with developed technology from acquisitions. Cost of net product revenues decreased to $175.0 million
in fiscal year 2019, down 3.4% from the prior year, primarily due to a change in product mix. Cost of net product revenues
increased to $181.1 million in fiscal year 2018 from $176.0 million in fiscal year 2017, primarily due to an increase in
payments to our contract manufacturers due to global memory shortages, as well as an increase in sales of our subscription-
based Silverline services.
Cost of Net Service Revenues. Cost of net service revenues consist of the salaries and related benefits of our professional
services staff, travel, facilities and depreciation expenses. Cost of net service revenues as a percentage of net service revenues
decreased to 14.4% in fiscal year 2019 compared to 15.0% in fiscal year 2018 and 15.8% in fiscal year 2017, primarily due to
the scalability of our existing customer support infrastructure and increased revenue from maintenance contracts. Professional
services headcount at the end of fiscal 2019 increased to 925 from 891 at the end of fiscal 2018. Professional services
headcount at the end of fiscal year 2018 decreased to 891 from 895 at the end of fiscal 2017. In addition, cost of net service
revenues included stock-based compensation expense of $18.3 million, $18.8 million and $19.3 million for fiscal years 2019,
2018 and 2017, respectively.
Operating expenses
Sales and marketing
Research and development
General and administrative
Litigation expense
Restructuring charges
Total
Operating expenses (as a percentage of net revenue)
Sales and marketing
Research and development
General and administrative
Litigation expense
Restructuring charges
Total
Years Ended September 30,
2019
2018
2017
(in thousands, except percentages)
$
748,619
408,058
210,730
—
—
$ 1,367,407
$
664,135
366,084
160,382
—
18,426
$ 1,209,027
$
652,239
350,365
156,887
391
12,718
$ 1,172,600
33.4%
18.2
9.4
—
—
61.0%
30.7%
16.9
7.4
—
0.9
55.9%
31.2%
16.8
7.5
—
0.6
56.1%
Sales and Marketing. Sales and marketing expenses consist of the 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 expense increased 12.7% in fiscal year 2019 from the prior year, as
compared to a year-over-year increase of 1.8% in fiscal year 2018. The increase in sales and marketing expense for fiscal year
2019 was primarily due to increases in commissions and personnel costs of $43.3 million, compared to the prior year. The
increases in commissions and personnel costs were driven by growth in sales and marketing employee headcount during fiscal
year 2019, including employees from the acquisition of NGINX, as well as higher commissions related to software sales. Sales
and marketing headcount at the end of fiscal year 2019 increased to 2,146 from 1,682 at the end of fiscal year 2018. In addition,
facilities costs increased $9.4 million during fiscal year 2019, compared to the prior year, primarily due to the move of our
corporate headquarters which began in April 2019. In fiscal year 2018, the increase in sales and marketing expense was
primarily due to increases in commissions and personnel costs of $11.4 million, compared to the prior year. The increases in
commissions and personnel costs were driven by growth in sales and marketing employee headcount during fiscal year 2018
over the prior year. However, sales and marketing headcount at the end of fiscal year 2018 decreased to 1,682 from 1,711 at the
end of fiscal year 2017 due to a reduction in workforce that took place in the fourth quarter of fiscal year 2018. Sales and
marketing expense included stock-based compensation expense of $69.5 million, $61.5 million and $69.7 million for fiscal
years 2019, 2018 and 2017, respectively.
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 expense increased 11.5% in fiscal year 2019,
compared to the prior year. The increase in research and development expense for fiscal year 2019 was primarily due to
increased personnel costs of $25.0 million, compared to the prior year. The increase in personnel costs were driven by growth
33
in research and development employee headcount during fiscal year 2019, including employees from the acquisition of
NGINX. Research and development headcount at the end of fiscal year 2019 increased to 1,556 from 1,268 at the end of fiscal
year 2018. In addition, facilities costs increased $11.7 million during fiscal year 2019, compared to the prior year, primarily due
to the move of our corporate headquarters which began in April 2019. In fiscal year 2018, research and development expense
increased 4.5%, compared to the prior year. The increase in research and development expense for fiscal year 2018 was
primarily due to increased personnel costs of $5.4 million, compared to the prior year. The increase in personnel costs were
driven by growth in research and development employee headcount during fiscal year 2018. Research and development
headcount at the end of fiscal year 2018 increased to 1,268 from 1,192 at the end of fiscal year 2017. Research and
development expense included stock-based compensation expense of $40.9 million, $47.3 million and $53.4 million for fiscal
years 2019, 2018 and 2017, respectively.
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, bad debt
charges, facilities and depreciation expenses. General and administrative expense increased 31.4% in fiscal year 2019,
compared to the prior year. The increase in general and administrative expense for fiscal year 2019 was primarily due to an
increase of $18.1 million in fees paid to outside consultants for legal, accounting and tax services, primarily related to the
acquisition of NGINX. In addition, personnel costs increased $6.5 million, compared to the prior year due to growth in general
and administrative headcount, including employees from the acquisition of NGINX. General and administrative expense for
fiscal year 2019 also included an impairment charge of $6.3 million related to capitalized internal-use software costs, and an
increase in facilities cost of $8.7 million, compared to the prior year, primarily due to the move of our corporate headquarters
which began in April 2019. In fiscal year 2018, general and administrative expense increased 2.2% compared to the prior year.
The increase in general and administrative expense for fiscal year 2018 was primarily due to an increase in personnel costs of
$1.7 million, compared to the prior year, and an increase in taxes of $3.1 million, compared to the prior year. General and
administrative headcount at the end of fiscal year 2019 increased to 593 from 475 at the end of fiscal year 2018 and 471 at the
end of fiscal year 2017. General and administrative expense included stock-based compensation expense of $32.2 million,
$27.9 million and $30.8 million for fiscal years 2019, 2018 and 2017, respectively.
Restructuring charges. In September 2018, we initiated a restructuring plan to match strategic and financial objectives
and optimize resources for long term growth. As a result of these initiatives, we recorded a restructuring charge of $18.4
million in the fourth quarter of fiscal year 2018 related to a reduction in workforce. In September 2017, we initiated a
restructuring plan to reduce our operating expenses and better align our workforce and costs with market opportunities, product
development and business strategies. As a result of these initiatives, we recorded a restructuring charge of $12.7 million in the
fourth quarter of fiscal year 2017 related to a reduction in workforce.
Other income and income taxes
Income from operations
Other income, net
Income before income taxes
Provision for income taxes
Net income
Other income and income taxes (as percentage of net revenue)
Income from operations
Other income, net
Income before income taxes
Provision for income taxes
Net income
Years Ended September 30,
2019
2018
2017
(in thousands, except percentages)
$
$
518,463
22,648
541,111
113,377
427,734
$
$
590,899
12,861
603,760
150,071
453,689
$
$
563,956
11,561
575,517
154,756
420,761
23.1%
1.0
24.1
5.0
19.1%
27.3%
0.6
27.9
6.9
21.0%
27.0%
0.5
27.5
7.4
20.1%
Other Income, Net. Other income, net, consists primarily of interest income and foreign currency transaction gains and
losses. Other income, net increased $9.8 million in fiscal year 2019, as compared to fiscal year 2018 and increased $1.3 million
in fiscal year 2018, as compared to fiscal year 2017. Interest income was $25.3 million, $17.0 million and $8.5 million for
fiscal years 2019, 2018 and 2017, respectively. The increase in other income, net for fiscal year 2019 was primarily due to an
increase of $8.3 million in interest income, compared to the prior year, and foreign currency gains of $1.8 million, compared to
the prior year. The increase in other income, net for fiscal year 2018 as compared to fiscal year 2017 was primarily due to an
34
increase of $8.5 million in interest income, compared to the prior year, partially offset by foreign currency losses of $7.5
million, compared to the prior year.
Provision for Income Taxes. We recorded a 21.0% provision for income taxes for fiscal year 2019, compared to 24.9% in
fiscal year 2018 and 26.9% in fiscal year 2017. The decrease in the effective tax rate from fiscal year 2018 to 2019 is primarily
due to a further reduction in the U.S. federal income tax rate to 21%, the non-recurring tax expense recorded in fiscal year 2018
for deemed repatriation of undistributed foreign earnings and remeasurement of net deferred tax assets, partially offset by a
decrease in tax deductible stock compensation. The decrease in the effective tax rate from fiscal year 2017 to 2018 was
primarily due to the impacts of the Tax Cuts and Jobs Act enacted on December 22, 2017, partially offset with foreign tax
credits from a one-time distribution in fiscal year 2017.
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. The net increase in the valuation allowance of
$0.7 million for fiscal year 2019 and $4.6 million for fiscal year 2018 was primarily related to tax net operating losses incurred
in certain foreign jurisdictions and state tax credit carryforwards. Our net deferred tax assets as of September 30, 2019, 2018
and 2017 were $27.4 million, $33.4 million and $53.2 million, respectively.
Our worldwide effective tax rate may fluctuate based on a number of factors, including variations in projected taxable
income in the various geographic locations in which we operate, changes in the valuation of our net deferred tax assets,
resolution of potential exposures, tax positions taken on tax returns filed in the various geographic locations in which we
operate, and the introduction of new accounting standards or changes in tax laws or interpretations thereof in the various
geographic locations in which we operate. We have recorded liabilities to address potential tax exposures related to business
and income tax positions we have taken that could be challenged by taxing authorities. The ultimate resolution of these
potential exposures may be greater or less than the liabilities recorded which could result in an adjustment to our future tax
expense.
Liquidity and Capital Resources
We have funded our operations with our cash balances, cash generated from operations and proceeds from public
offerings of our securities.
Liquidity and Capital Resources
Cash and cash equivalents and investments
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Years Ended September 30,
2019
2018
2017
(in thousands)
$ 1,330,684
747,841
(414,634)
(155,447)
$ 1,450,596
761,068
(456,023)
(551,263)
$ 1,301,730
740,281
(32,212)
(546,032)
Cash and cash equivalents, short-term investments and long-term investments totaled $1,330.7 million as of
September 30, 2019, compared to $1,450.6 million as of September 30, 2018, representing a decrease of $119.9 million. The
decrease was primarily due to $611.6 million in cash paid for the acquisition of NGINX in the third quarter of fiscal 2019 as
well as $201.0 million of cash required for the repurchase of outstanding common stock under our share repurchase program in
fiscal year 2019 and $103.5 million of capital expenditures related to the expansion of our facilities to support our operations
worldwide. The decrease was partially offset by cash provided by operating activities of $747.8 million. As of September 30,
2019, 55.8% of our cash and cash equivalents and investment balances were outside of the U.S. The cash and cash equivalents
and investment balances outside of the U.S. are subject to fluctuation based on the settlement of intercompany balances. In
fiscal year 2018, the increase to cash and cash equivalents, short-term investments and long-term investments from the prior
year was primarily due to cash provided by operating activities of $761.1 million, partially offset by $600.1 million of cash
required for the repurchase of outstanding common stock under our share repurchase program and $53.5 million of capital
expenditures related to the expansion of our facilities to support our operations worldwide. As of September 30, 2018, 37.6% of
our cash and cash equivalents and investment balances were outside of the U.S.
Cash provided by operating activities during fiscal year 2019 was $747.8 million compared to $761.1 million in fiscal
year 2018 and $740.3 million in fiscal year 2017. Cash provided by operating activities resulted primarily from cash generated
from net income, after adjusting for non-cash charges such as stock-based compensation, depreciation and amortization charges
and changes in operating assets and liabilities.
35
Cash used in investing activities during fiscal year 2019 was $414.6 million compared to cash used in investing activities
of $456.0 million in fiscal year 2018 and cash used in investing activities of $32.2 million in fiscal year 2017. Cash used in
investing activities for fiscal year 2019 was primarily the result of $611.6 million in cash paid for the acquisition of NGINX,
along with capital expenditures related to the build-out of our new corporate headquarters and the purchase of investments,
partially offset by the maturity and sale of investments. Cash used in investing activities for fiscal years 2018 and 2017 was
primarily the result of the purchase of investments and capital expenditures related to maintaining our operations worldwide,
partially offset by the sale and maturity of investments.
Cash used in financing activities was $155.4 million for fiscal year 2019, compared to $551.3 million for fiscal year 2018
and $546.0 million for fiscal year 2017. Cash used in financing activities for fiscal year 2019 included $201.0 million to
repurchase common stock under our share repurchase program, which was partially offset by cash received from the exercise of
employee stock options and stock purchases under our employee stock purchase plan of $45.6 million. Cash used in financing
activities for fiscal year 2018 included $600.1 million to repurchase common stock under our share repurchase program, which
was partially offset by cash received from the exercise of employee stock options and stock purchases under our employee
stock purchase plan of $48.8 million. Cash used in financing activities for fiscal year 2017 included $600.1 million to
repurchase common stock under our share repurchase program, which was partially offset by cash received from the exercise of
employee stock options and stock purchases under our employee stock purchase plan of $47.0 million and excess tax benefits
related to share-based compensation of $7.0 million.
Based on our current operating and capital expenditure forecasts, we believe that our existing cash and investment
balances, together with cash generated from operations should be sufficient to meet our operating requirements for the next
twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the
expansion of our sales and marketing activities, the timing and extent of expansion into new territories, the timing of
introductions of new products and enhancements of existing products, the continuing market acceptance of our products and
cash paid for future acquisitions.
Obligations and Commitments
The following table summarizes our contractual payment obligations and commitments as of September 30, 2019:
2020
2021
2022
2023
2024
Thereafter
Total
Payment Obligations by Year
Operating leases
Purchase obligations
Total
$
$
54,046
20,801
74,847
$
$
50,712
—
50,712
$
$
47,550
—
47,550
(in thousands)
36,514
$
—
36,514
$
$
$
33,971
—
33,971
$ 242,826
—
$ 242,826
$ 465,619
20,801
$ 486,420
We lease our facilities under operating leases that expire at various dates through 2033.
As of September 30, 2019, we had approximately $46.3 million of tax liabilities, including interest and penalties, related
to uncertain tax positions (See Note 7 to our Consolidated Financial Statements). Because of the high degree of uncertainty
regarding the settlement of these liabilities, we are unable to estimate the years in which future cash outflows may occur.
Purchase obligations are comprised of purchase commitments with our contract manufacturers. The agreement with our
primary contract manufacturer allows it to procure component inventory on our behalf based on our production forecast. We are
obligated to purchase component inventory that the contract manufacturer procures in accordance with the forecast, unless
cancellation is given within applicable lead times.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU
2014-09 and the related amendments outline a new, single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. The new model requires revenue recognition to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration a company expects to receive in exchange for those goods or services. We adopted this
new accounting standard and the related amendments on October 1, 2018 using the modified retrospective method. See Note 2
- Revenue from Contracts with Customers for further details.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU
2016-18), which requires a company’s cash flow statement to explain the changes during a reporting period of the totals for
36
cash, cash equivalents, restricted cash and restricted cash equivalents. Additionally, amounts for restricted cash and restricted
cash equivalents are to be included with cash and cash equivalents if the cash flow statement includes a reconciliation of the
total cash balances for a reporting period. We adopted this new accounting standard on October 1, 2018, which resulted in an
immaterial reclassification of beginning and ending cash, cash equivalents and restricted cash for the periods presented within
the statement of cash flows. Upon adoption of this new standard, restricted cash activity is no longer separately presented
within the investing activities in the statement of cash flows. The overall adoption of the standard did not have a material
impact to our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a
Business (ASU 2017-01), which provides a more robust framework to use in determining when a set of assets and activities is
considered a business. We adopted this new accounting standard on October 1, 2018.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (ASU 2017-09), which provides
clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment
award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should
only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the
changes are considered non-substantive. We adopted this new accounting standard on October 1, 2018.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to
recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a
corresponding lease liability for all leases with terms greater than twelve months. Our leases primarily consist of operating
leases for our offices and lab spaces. The guidance also requires qualitative and quantitative disclosures designed to assess the
amount, timing and uncertainty of cash flows arising from leases. Adoption of the new lease standard requires measurement of
leases at the beginning of the earliest period presented on a modified retrospective basis. The new standard will be effective for
us beginning October 1, 2019. We anticipate that our long-term leases for office space will be recognized as lease liabilities and
corresponding right-of-use assets, and will have a material impact on our consolidated balance sheet upon adoption.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) (ASU 2018-11), which provides an optional transition
method to adopt ASU 2016-02, Leases (Topic 842) by allowing lessees to apply the new standard at the adoption date and
recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Comparative
periods will still be presented under current GAAP (ASC 840), along with the applicable Topic 840 disclosures for those
comparative periods. The new standard is effective at the same time as adoption of ASU 2016-02, Leases (Topic 842), which
we are planning to adopt in the first quarter of fiscal year 2020. We plan to adopt the transitional provisions allowed
under ASU 2018-11.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (ASU 2016-13), which replaces the incurred loss impairment methodology in current GAAP
with a methodology that reflects expected credit losses. The new standard is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We do not anticipate that the
adoption of this standard will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic
350-40) (ASU 2018-15), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement
that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software, and hosting arrangements that include an internal-use software license. The accounting for the service element of a
hosting arrangement that is a service contract is not affected by the amendments in this update. The new standard is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.
We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
37
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk. Our cash equivalents consist of high-quality securities, as specified in our investment policy
guidelines. The policy limits the amount of credit exposure to any one issue or issuer to a maximum of 5% of the total portfolio
with the exception of U.S. treasury and agency securities and money market funds, which are exempt from size limitation. The
policy requires investments in securities that mature in three years or less, with the average maturity being no greater than one
and a half years. These securities are subject to interest rate risk and will decrease in value if interest rates increase. A decrease
of one percent in the average interest rate would have resulted in a decrease of approximately $12.2 million in our interest
income for the fiscal year 2019.
September 30, 2019
Included in cash and cash equivalents
Weighted average interest rate
Included in short-term investments
Weighted average interest rates
Included in long-term investments
Weighted average interest rate
September 30, 2018
Included in cash and cash equivalents
Weighted average interest rate
Included in short-term investments
Weighted average interest rates
Included in long-term investments
Weighted average interest rate
September 30, 2017
Included in cash and cash equivalents
Weighted average interest rate
Included in short-term investments
Weighted average interest rates
Included in long-term investments
Weighted average interest rate
Three Months
or Less
Three Months
to One Year
Maturing in
Greater Than
One Year
Total
Fair Value
(in thousands, except for percentages)
$
$
$
$
$
$
$
$
$
293,642
2.1%
98,811
$
$
— $
—
274,252
$
2.1%
— $
—
2.2%
— $
—
54,336
1.1%
146,376
$
$
— $
—
468,329
$
1.4%
— $
—
1.7%
— $
—
16,909
0.5%
105,713
$
$
— $
—
237,987
$
0.9%
— $
—
1.1%
— $
—
— $
—
— $
—
358,402
$
2.5%
— $
—
— $
—
411,184
$
1.9%
— $
—
— $
—
284,802
$
1.4%
293,642
—
373,063
—
358,402
—
54,336
—
614,705
—
411,184
—
16,909
—
343,700
—
284,802
—
$
$
$
$
$
$
$
$
$
293,642
—
373,063
—
358,402
—
54,336
—
614,705
—
411,184
—
16,909
—
343,700
—
284,802
—
Foreign Currency Risk. The majority of our sales and expenses are denominated in U.S. dollars and as a result, we have
not experienced significant foreign currency transaction gains and losses to date. While we have conducted some transactions
in foreign currencies during the fiscal year ended 2019 and expect to continue to do so, we do not anticipate that foreign
currency transaction gains or losses will be significant at our current level of operations. However, as we continue to expand
our operations internationally, transaction gains or losses may become significant in the future. We have not engaged in foreign
currency hedging to date. However, we may do so in the future.
38
Item 8.
Financial Statements and Supplementary Data
F5 NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
40
43
44
45
46
47
48
39
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of F5 Networks, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of F5 Networks, Inc. and its subsidiaries (the “Company”) as
of September 30, 2019 and 2018, and the related consolidated statements of income, of comprehensive income, of
shareholders’ equity and of cash flows for each of the three years in the period ended September 30, 2019, including the related
notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control
over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 2019 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
revenues from contracts with customers in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
40
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue recognition - Identification and evaluation of contractual terms in certain customer arrangements
As described in Note 1 to the consolidated financial statements, the Company enters into certain contracts with customers,
including enterprise license arrangements, with non-standard terms and conditions. Management exercises significant judgment
in assessing contractual terms in these arrangements to identify and evaluate performance obligations and total consideration.
Management allocates consideration to each performance obligation based on relative fair value using standalone selling price
and recognizes associated revenue as control is transferred to the customer.
The principal considerations for our determination that performing procedures relating to the-- identification and evaluation of
contractual terms in certain customer arrangements is a critical audit matter are there was significant judgment by management
in identifying and evaluating contractual terms in customer arrangements and determining the appropriate revenue recognition.
This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures relating to identifying
and evaluating the contractual terms used in the identification of performance obligations and total consideration, including
management’s judgments regarding revenue recognition.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
revenue recognition process, including controls related to the identification and evaluation of contractual terms used in the
identification of performance obligations. These procedures also included, among others, on a sample basis (i) testing the
completeness and accuracy of management’s identification of the contractual terms by evaluating customer arrangements, and
(ii) testing management’s process for determining the appropriate amount and timing of revenue recognition based on the
contractual terms identified in the customer arrangements.
Acquisition of Nginx, Inc. - Fair value of the acquired developed technology
As described in Note 3 to the consolidated financial statements, on May 8, 2019, the Company completed its acquisition of
Nginx, Inc. for a total purchase price of $643.2 million, of which approximately $62.5 million of finite-lived developed
technology was recorded. As disclosed by management, the developed technology was valued using the relief-from-royalty
method under the income approach. This method reflects the present value of the projected cash flows that are expected to be
generated from the licensing of the asset to third-parties. Management applied significant judgment in estimating the fair value
of the acquired developed technology, which involved the use of a significant assumption with respect to the royalty rate.
The principal considerations for our determination that performing procedures relating to the fair value of the acquired
developed technology is a critical audit matter are there was significant judgment by management in estimating the fair value of
the finite-lived developed technology. This in turn led to a high degree of auditor judgment, subjectivity, and effort in
performing procedures and in evaluating management’s fair value measurement of the finite-lived developed technology,
including the royalty rate assumption.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
acquisition accounting, including controls over the fair value of the acquired finite-lived developed technology and controls
over development of the royalty rate assumption. These procedures also included, among others, (i) reading the merger
agreement, and (ii) testing management’s process for estimating the fair value of the acquired finite-lived developed
technology, including evaluating the appropriateness of the valuation method and the reasonableness of the royalty rate
assumption used by management. Evaluating management’s royalty rate assumption involved evaluating whether the
assumption used was reasonable considering industry data, benchmarking of peer comparisons, and other historical
41
transactions. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the
royalty rate assumption used by management.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
November 15, 2019
We have served as the Company’s auditor since 1996.
42
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $3,259 and $2,040
Inventories
Other current assets
Total current assets
Property and equipment, net
Long-term investments
Deferred tax assets
Goodwill
Other assets, net
Total assets
Current liabilities
Accounts payable
Accrued liabilities
Deferred revenue
Total current liabilities
Other long-term liabilities
Deferred revenue, long-term
Deferred tax liabilities
LIABILITIES AND SHAREHOLDERS’ EQUITY
Total long-term liabilities
Commitments and contingencies (Note 11)
Shareholders’ equity
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding
Common stock, no par value; 200,000 shares authorized, 60,367 and 60,215 shares issued and
outstanding
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
September 30,
2019
2018
$
599,219
373,063
322,029
34,401
182,874
1,511,586
223,426
358,402
27,701
1,065,379
203,781
$ 3,390,275
$
424,707
614,705
295,352
30,568
52,326
1,417,658
145,042
411,184
33,441
555,965
42,186
$ 2,605,476
$
$
62,627
235,869
807,030
1,105,526
131,853
391,086
313
523,252
57,757
180,979
715,697
954,433
65,892
299,624
35
365,551
—
—
142,597
(19,190)
1,638,090
1,761,497
$ 3,390,275
20,427
(22,178)
1,287,243
1,285,492
$ 2,605,476
The accompanying notes are an integral part of these consolidated financial statements.
43
F5 NETWORKS, INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
Net revenues
Products
Services
Total
Cost of net revenues
Products
Services
Total
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Litigation expense
Restructuring charges
Total
Income from operations
Other income, net
Income before income taxes
Provision for income taxes
Net income
Net income per share — basic
Weighted average shares — basic
Net income per share — diluted
Weighted average shares — diluted
Years Ended September 30,
2019
2018
2017
$
985,591
1,256,856
2,242,447
$
960,108
1,201,299
2,161,407
$
964,662
1,125,379
2,090,041
174,986
181,591
356,577
1,885,870
748,619
408,058
210,730
—
—
1,367,407
518,463
22,648
541,111
113,377
427,734
7.12
60,044
7.08
60,456
$
$
$
181,061
180,420
361,481
1,799,926
664,135
366,084
160,382
—
18,426
1,209,027
590,899
12,861
603,760
150,071
453,689
7.41
61,262
7.32
62,013
176,032
177,453
353,485
1,736,556
652,239
350,365
156,887
391
12,718
1,172,600
563,956
11,561
575,517
154,756
420,761
6.56
64,173
6.50
64,775
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
44
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income (loss):
Foreign currency translation adjustment
Available-for-sale securities:
Unrealized gains (losses) on securities, net of taxes of $954, $(869), and
$(493) for the years ended September 30, 2019, 2018, and 2017,
respectively
Reclassification adjustment for realized losses (gains) included in net
income, net of taxes of $(35), $(4), and $186 for the years ended
September 30, 2019, 2018, and 2017, respectively
Net change in unrealized gains (losses) on available-for-sale securities,
net of tax
Total other comprehensive income (loss)
Comprehensive income
Years Ended September 30,
2019
2018
2017
$
427,734
$
453,689
$
420,761
(837)
(1,415)
(3,671)
3,715
(2,775)
(822)
110
9
(310)
3,825
2,988
430,722
$
(2,766)
(4,181)
449,508
$
(1,132)
(4,803)
415,958
$
The accompanying notes are an integral part of these consolidated financial statements.
45
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Balance, September 30, 2016
Exercise of employee stock options
Issuance of stock under employee stock
purchase plan
Issuance of restricted stock
Repurchase of common stock
Tax benefit from employee stock transactions
Stock-based compensation
Net income
Other comprehensive loss
Balance, September 30, 2017
Exercise of employee stock options
Issuance of stock under employee stock
purchase plan
Issuance of restricted stock
Repurchase of common stock
Stock-based compensation
Net income
Other comprehensive loss
Balance, September 30, 2018
Cumulative effect adjustment from adoption
of ASC 606
Exercise of employee stock options
Issuance of stock under employee stock
purchase plan
Issuance of restricted stock
Repurchase of common stock
Stock-based compensation
Net income
Other comprehensive income
Balance, September 30, 2019
Common Stock
Shares
Amount
Accumulated
Other
Comprehensive
Income/(Loss)
Retained
Earnings
Total
Shareholders’
Equity
65,315
$
13,191
$
9
201
(13,194) $ 1,185,265
—
—
$ 1,185,262
201
469
1,362
(4,561)
—
—
—
—
46,838
—
(223,826)
5,897
175,326
—
—
62,594
$
17,627
$
1
3
475
1,219
(4,074)
—
—
—
48,815
—
(203,873)
157,855
—
—
60,215
$
20,427
$
—
6
334
998
(1,186)
—
—
—
—
159
45,439
—
(88,110)
164,682
—
—
60,367
$
142,597
$
—
—
—
—
—
—
—
(376,264)
—
—
420,761
—
(4,803)
—
(17,997) $ 1,229,762
—
—
46,838
—
(600,090)
5,897
175,326
420,761
(4,803)
$ 1,229,392
3
—
—
—
—
—
—
(396,208)
—
48,815
—
(600,081)
157,855
453,689
—
(4,181)
—
(22,178) $ 1,287,243
453,689
(4,181)
$ 1,285,492
—
—
—
—
—
—
—
36,048
—
—
—
(112,935)
—
427,734
2,988
—
(19,190) $ 1,638,090
36,048
159
45,439
—
(201,045)
164,682
427,734
2,988
$ 1,761,497
The accompanying notes are an integral part of these consolidated financial statements.
46
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Realized loss (gain) on disposition of assets and investments
Stock-based compensation
Provisions for doubtful accounts and sales returns
Depreciation and amortization
Deferred income taxes
Impairment of assets
Non-cash provisions for exit costs
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Other assets
Accounts payable and accrued liabilities
Deferred revenue
Net cash provided by operating activities
Investing activities
Purchases of investments
Maturities of investments
Sales of investments
Acquisition of intangible assets
Acquisition of businesses, net of cash acquired
Cash provided by sale of fixed asset
Purchases of property and equipment
Net cash used in investing activities
Financing activities
Years Ended September 30,
2019
2018
2017
$
427,734
$
453,689
$
420,761
1,106
162,914
556
68,507
7,440
6,273
8,211
(18,305)
(3,832)
(75,449)
(22,742)
74,710
110,718
747,841
(602,987)
625,201
278,244
—
(611,550)
—
(103,542)
(414,634)
(267)
157,855
1,461
59,491
20,810
—
—
(4,889)
(734)
15,607
446
6,583
51,016
761,068
(855,424)
439,130
12,736
—
—
1,000
(53,465)
(456,023)
(439)
175,326
366
61,148
(4,626)
—
—
(24,115)
4,218
(14,890)
(2,056)
30,524
94,064
740,281
(446,838)
390,449
66,858
(4,000)
—
—
(38,681)
(32,212)
Excess tax benefit from stock-based compensation
Proceeds from the exercise of stock options and purchases of stock under
employee stock purchase plan
Repurchase of common stock
Net cash used in financing activities
Net increase (decrease) cash, cash equivalents and
restricted cash
Effect of exchange rate changes on cash, cash equivalents and restricted
cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
Supplemental disclosures of cash flow information
Cash paid for taxes, net of refunds
Supplemental disclosures of non-cash activities
Capitalized leasehold improvements paid directly by landlord
—
—
7,019
45,598
(201,045)
(155,447)
48,818
(600,081)
(551,263)
47,039
(600,090)
(546,032)
177,760
(246,218)
162,037
(1,400)
425,894
602,254
100,569
34,948
$
$
$
(2,340)
674,452
425,894
104,878
9,958
$
$
$
(3,307)
515,722
674,452
162,944
—
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
47
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
F5 Networks, Inc. (the “Company”) is a leading provider of multi-cloud application services which enable its customers
to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. The
Company's cloud, software, and hardware solutions enable its customers to deliver digital experiences to their customers faster,
reliably, and at scale. The Company's enterprise-grade application services are available as cloud-based, software-as-a-service,
and software-only solutions optimized for multi-cloud environments, with modules that can run independently, or as part of an
integrated solution on its high-performance appliances. In connection with its solutions, the Company offers a broad range of
professional services, including consulting, training, installation, maintenance, and other technical support services.
The Company’s core technology is a full-proxy, programmable, highly-scalable software platform called TMOS, which
supports a broad array of features and functions designed to ensure that applications delivered over Internet Protocol (IP)
networks are secure, fast and available. The Company’s offerings include software products for local and global traffic
management, network and application security, identity and access management, web acceleration and a number of other
network and application services. In connection with its products, the Company offers a broad range of support and services
including consulting, training, installation and maintenance.
Accounting Principles
The Company’s consolidated financial statements and accompanying notes are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles in the United States of America (GAAP).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Examples of estimates and assumptions include: revenue
recognition, identifying and evaluating the performance obligations of contracts with non-standard terms, and the allocation of
purchase consideration based on the relative fair value standalone sales price of these performance obligations; business
combinations, the determination of fair value for acquired developed technology assets, including the evaluation and selection
of significant assumptions such as royalty rates; obsolete and excess inventory; and valuation allowances on deferred tax assets.
Actual results and outcomes may differ from management's estimates and assumptions.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original maturities of three months or less to be cash
equivalents. The Company invests its cash and cash equivalents in deposits with five major financial institutions, which, at
times, exceed federally insured limits. The Company has not experienced any losses on its cash and cash equivalents. Amounts
included in restricted cash represent those for which the Company's use is restricted by a contractual agreement.
Investments
The Company classifies its investment securities as available-for-sale. Investment securities, consisting of certificates of
deposit, corporate and municipal bonds and notes, the United States government and agency securities and international
government securities are reported at fair value with the related unrealized gains and losses included as a component of
accumulated other comprehensive income (loss) in shareholders’ equity. Realized gains and losses and declines in value of
securities judged to be other than temporary are included in other income (expense). The cost of investments for purposes of
computing realized and unrealized gains and losses is based on the specific identification method. Investments in securities
with maturities of less than one year or where management’s intent is to use the investments to fund current operations are
classified as short-term investments. Investments with maturities of greater than one year are classified as long-term
investments.
48
Concentration of Credit Risk
The Company extends credit to customers and is therefore subject to credit risk. The Company performs initial and
ongoing credit evaluations of its customers’ financial condition and does not require collateral. An allowance for doubtful
accounts is recorded to account for potential bad debts. Estimates are used in determining the allowance for doubtful accounts
and are based upon an assessment of selected accounts and as a percentage of remaining accounts receivable by aging category.
In determining these percentages, the Company evaluates historical write-offs, and current trends in customer credit quality, as
well as changes in credit policies. At September 30, 2019, Synnex Corporation, Ingram Micro, Inc. and Carahsoft Technology
accounted for 12.9%, 12.4% and 11.5% of the Company’s accounts receivable, respectively. At September 30, 2018, Ingram
Micro, Inc. and Synnex Corporation accounted for 16.6% and 10.3% of the Company’s accounts receivable, respectively. No
other customers accounted for more than 10% of total receivables as of September 30, 2019 and 2018.
The Company maintains its cash and investment balances with high credit quality financial institutions.
Fair Value of Financial Instruments
Short-term and long-term investments are recorded at fair value as the underlying securities are classified as available-
for-sale with any unrealized gain or loss being recorded to other comprehensive income. The fair value for securities held is
determined using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of
price transparency.
Inventories
The Company outsources the manufacturing of its pre-configured hardware platforms to contract manufacturers, who
assemble each product to the Company’s specifications. As protection against component shortages and to provide replacement
parts for its service teams, the Company also stocks limited supplies of certain key product components. The Company reduces
inventory to net realizable value based on excess and obsolete inventories determined primarily by historical usage and
forecasted demand. Inventories consist of hardware and related component parts and are recorded at the lower of cost and net
realizable value (as determined by the first-in, first-out method).
Property and Equipment
Property and equipment are stated at net book value. Depreciation of property and equipment are provided using the
straight-line method over the estimated useful lives of the assets, ranging from two to five years. Leasehold improvements are
amortized over the lesser of the remaining lease term or the estimated useful life of the improvements. The cost of normal
maintenance and repairs is charged to expense as incurred and expenditures for major improvements are capitalized at cost.
Gains or losses on the disposition of assets are reflected in the income statements at the time of disposal.
Business Combinations
The Company’s business combinations are accounted for under the acquisition method. Management allocates the fair
value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated
fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with
respect to intangible assets.
Goodwill
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition
date. The Company tests goodwill for impairment on an annual basis and between annual tests when impairment indicators are
identified, and goodwill is written down when impaired. For its annual goodwill impairment test in all periods to date, the
Company has operated under one reporting unit and the fair value of its reporting unit has been determined by the Company’s
enterprise value. The Company performs its annual goodwill impairment test during the second fiscal quarter.
For its annual impairment test performed in the second quarter of fiscal 2019, the Company completed a quantitative
assessment and determined that there was no impairment of goodwill. The Company also considered potential impairment
indicators of goodwill at September 30, 2019 and noted no indicators of impairment.
Intangible Assets
Intangible assets with finite lives consist of acquired developed technologies, customer relationships, patents and
trademarks, trade names, and non-compete covenants acquired through business combination or asset acquisition. Intangible
49
assets acquired through business combination are recorded at their respective estimated fair values upon acquisition close.
Other intangible assets acquired through asset acquisition are recorded at their respective cost. The Company determines the
estimated useful lives for acquired intangible assets based on the expected future cash flows associated with the respective
asset. The Company's intangible assets with finite lives are amortized using the straight-line method over their estimated useful
lives, ranging from two to fifteen years. Amortization expense related to acquired developed technologies are charged to cost of
product revenues. Amortization expense related to customer relationships, trade names, and non-compete covenants are
charged to sales and marketing activities. Amortization expense related to patents and trademarks are charged to general and
administrative activities. The Company evaluates the recoverability of intangible assets periodically by taking into account
events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Software Development Costs
The authoritative guidance requires certain internal software development costs related to software to be sold to be
capitalized upon the establishment of technological feasibility. Capitalized software development costs are amortized over the
remaining estimated economic life of the product. The Company's software development costs incurred subsequent to
achieving technological feasibility have not been significant and, as a result, all software development costs have been
expensed as research and development activities as incurred.
Internal-Use Software
The Company capitalizes costs incurred during the application development stage associated with the development of
internal-use software systems. The capitalized costs are then amortized over the estimated useful life of the software, which is
generally three to five years, and are included in property and equipment in the accompanying consolidated balance sheets.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived assets whenever events or changes in business circumstances
indicate that the carrying amount of an asset may not be recoverable. When such events occur, management determines whether
there has been impairment by comparing the anticipated undiscounted net future cash flows to the related asset’s carrying
value. If impairment exists, the asset is written down to its estimated fair value.
Revenue Recognition
On October 1, 2018, the Company adopted the new revenue recognition standard by applying the modified retrospective
approach to those contracts which were not completed as of October 1, 2018. Results for reporting periods beginning after
October 1, 2018 are presented under the new revenue recognition standard, while prior period amounts are not adjusted and
continue to be reported under the accounting standards in effect for the prior periods.
The Company sells products through distributors, resellers, and directly to end users. Revenue related to the Company's
contracts with customers is recognized by following a five-step process:
•
•
Identify the contract(s) with a customer. Evidence of a contract generally consists of a purchase order issued pursuant to the
terms and conditions of a distributor, reseller or end user agreement.
Identify the performance obligations in the contract. Performance obligations are identified in the Company's contracts and
include hardware, hardware-based software, software-only solutions, cloud-based subscription services as well as a broad
range of service performance obligations including consulting, training, installation and maintenance.
• Determine the transaction price. The purchase price stated in an agreed upon purchase order is generally representative of
the transaction price. The Company offers several programs in which customers are eligible for certain levels of rebates if
certain conditions are met. When determining the transaction price, the Company considers the effects of any variable
consideration.
• Allocate the transaction price to the performance obligations in the contract. The transaction price in a contract is allocated
based upon the relative standalone selling price of each distinct performance obligation identified in the contract.
• Recognize revenue when (or as) the entity satisfies a performance obligation. The Company satisfies performance
obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the
related performance obligation is satisfied by transferring control of promised products and services to a customer.
The following is a description of the principal activities from which the Company generates revenue:
50
Product
Revenue from the sale of the Company's hardware and perpetual software products is generally recognized at a point in
time when the product has been fulfilled and the customer is obligated to pay for the product. When rights of return are present
and the Company cannot estimate returns, revenue is recognized when such rights of return lapse. Payment terms to domestic
customers are generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120
days based on normal and customary trade practices in the individual markets.
Subscription
The Company also offers several products by subscription, either through term-based license agreements or as a service
through its cloud-based Silverline platform. Revenue for term-based license agreements is recognized at a point in time, when
the Company delivers the software license to the customer and the subscription term has commenced. For the Company's
software-as-a-service Silverline offerings, revenue is recognized ratably as the services are provided.
Support and professional services
Revenues for post-contract customer support (PCS) are recognized on a straight-line basis over the service contract term.
PCS includes a limited period of telephone support, updates, repair or replacement of any failed product or component that fails
during the term of the agreement, bug fixes and rights to upgrades, when and if available. Consulting services are customarily
billed at fixed hourly rates, plus out-of-pocket expenses, and revenues are recognized as the consulting is completed. Similarly,
training revenue is recognized as the training is completed.
Contract acquisition costs
Sales commissions earned by the Company's sales force are considered incremental and recoverable costs of obtaining a
contract with a customer. Sales commissions for initial service contracts and subscription offerings are deferred and then
amortized as an expense on a straight-line basis over the period of benefit which management has determined to be 4.5 years
and 3 years, respectively.
Significant Judgments
The Company enters into certain contracts with customers, including enterprise license arrangements, with non-standard
terms and conditions. Management exercises significant judgment in assessing contractual terms in these arrangements to
identify and evaluate performance obligations and total consideration. Management allocates consideration to each
performance obligation based on relative fair value using standalone selling price and recognizes associated revenue as control
is transferred to the customer.
Shipping and Handling
Shipping and handling fees charged to the Company’s customers are recognized as product revenue in the period shipped
and the related costs for providing these services are recorded as a cost of sale.
Guarantees and Product Warranties
In the normal course of business to facilitate sales of its products, the Company indemnifies other parties, including
customers, resellers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company
has agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or out of
intellectual property infringement or other claims made against certain parties. These agreements may limit the time within
which an indemnification claim can be made and the amount of the claim. The Company has entered into indemnification
agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to the
Company’s agents. It is not possible to determine the maximum potential amount under these indemnification agreements due
to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular
agreement.
The Company offers warranties of one year for hardware for those customers without service contracts, with the option of
purchasing additional warranty coverage in yearly increments. The Company accrues for warranty costs as part of its cost of
sales based on associated material product costs and technical support labor costs. Accrued warranty costs as of September 30,
2019 and 2018 were not considered material.
51
Research and Development
Research and development expenses consist of salaries and related benefits of product development personnel, prototype
materials and expenses related to the development of new and improved products, and an allocation of facilities, depreciation
and amortization expense. Research and development expenses are reflected in the income statements as incurred.
Advertising
Advertising costs are expensed as incurred. The Company incurred $4.7 million, $4.6 million and $3.5 million in
advertising costs during the fiscal years 2019, 2018 and 2017, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined based upon differences between the financial statement and
income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. The realization of deferred tax assets is based on historical tax positions and estimates of future taxable income. A
valuation allowance is recorded when it is more-likely-than-not that some of the deferred tax assets will not be realized.
The Company assesses whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-
not that the tax position will be sustained on examination by the taxing authorities, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. The tax benefits to be recognized in the financial
statements from such a position is measured as the largest amount of benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement. The Company adjusts these liabilities based on a variety of factors, including the
evaluation of information not previously available. These adjustments are reflected as increases or decreases to income tax
expense in the period in which new information is available.
The Company has made an accounting policy election to treat taxes under the global intangible low-taxed income
(GILTI) provision as a current period expense.
Foreign Currency
The functional currency for the Company’s foreign subsidiaries is either the U.S. dollar or the local currency depending
on the assessment of management. An entity’s functional currency is determined by the currency of the economic environment
in which the majority of cash is generated and expended by the entity. The financial statements of all majority-owned
subsidiaries and related entities, with a functional currency other than the U.S. dollar, have been translated into U.S. dollars. All
assets and liabilities of the respective entities are translated at year-end exchange rates and all revenues and expenses are
translated at average rates during the respective period. Translation adjustments are reported as other comprehensive income
(loss) in the consolidated statements of comprehensive income.
Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions
denominated in currencies other than the functional currency, including U.S. dollars. Gains and losses on those foreign
currency transactions are included in determining net income or loss for the period of exchange and are recorded in other
income, net. The net effect of foreign currency gains and losses was not significant during the fiscal years ended September 30,
2019, 2018 and 2017.
Segments
Management has determined that the Company is organized as, and operates in, one reportable operating segment: the
development, marketing and sale of application services that optimize the security, performance and availability of network
applications, servers and storage systems.
Stock-based Compensation
The Company accounts for stock-based compensation using the straight-line attribution method for recognizing
compensation expense. The Company recognized $162.9 million, $157.9 million and $175.3 million of stock-based
compensation expense for the fiscal years ended September 30, 2019, 2018 and 2017, respectively. The income tax
benefit recognized on stock-based compensation within income tax expense was $4.5 million, $9.4 million and $2.1 million for
the fiscal years ended September 30, 2019, 2018 and 2017, respectively. As of September 30, 2019, there was $168.7 million of
total unrecognized stock-based compensation cost, which will be recognized over approximately two years. Going forward,
stock-based compensation expenses may increase as the Company issues additional equity-based awards to continue to attract
and retain key employees.
52
The Company issues incentive awards to its employees through stock-based compensation consisting of restricted stock
units (RSUs). On October 31, 2019, the Company’s Board of Directors and Compensation Committee approved 1,050,018
RSUs to employees and executive officers pursuant to the Company’s annual equity awards program. The value of RSUs is
determined using the fair value method, which in this case, is based on the number of shares granted and the quoted price of the
Company’s common stock on the date of grant. All stock options granted in fiscal year 2019 were replacement awards of those
assumed as part of the acquisition of NGINX. No stock options were granted in fiscal years 2018 and 2017. In determining the
fair value of shares issued under the Employee Stock Purchase Plan (ESPP), the Company uses the Black-Scholes option
pricing model that employs the following key assumptions.
Risk-free interest rate
Expected dividend
Expected term
Expected volatility
Employee Stock Purchase Plan
Years Ended September 30,
2019
2018
2017
1.97%
—
0.5 years
26.32%
2.25%
—
0.5 years
18.14%
1.14%
—
0.5 years
22.03%
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not anticipate
declaring dividends in the foreseeable future. Expected volatility is based on the annualized daily historical volatility of the
Company’s stock price commensurate with the expected life of the ESPP option. Expected term of the ESPP option is based on
an offering period of six months. The assumptions above are based on management’s best estimates at that time, which impact
the fair value of the ESPP option calculated under the Black-Scholes methodology and, ultimately, the expense that will be
recognized over the life of the ESPP option.
The Company recognizes compensation expense for only the portion of restricted stock units that are expected to vest.
Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior.
Based on historical differences with forfeitures of stock-based awards granted to the Company’s executive officers and Board
of Directors versus grants awarded to all other employees, the Company has developed separate forfeiture expectations for
these two groups.
The Company issues incentive awards to certain current executive officers as part of its annual equity awards
program. Fifty percent of the aggregate number of RSUs issued to executive officers vest in equal quarterly increments,
and 50% are subject to the Company achieving specified performance goals.
For the performance stock awards granted prior to fiscal 2018, attainment is based on the Company achieving specific
quarterly revenue and EBITDA targets. In each case, 70% of the quarterly performance stock grant is based on achieving at
least 80% of the quarterly revenue goal set by the Company's Board of Directors, and the other 30% is based on achieving at
least 80% of the quarterly EBITDA goal set by the Company's Board of Directors. The quarterly performance stock grant is
paid linearly over 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly
performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement
threshold and the 100% over-achievement threshold. Each goal is also capped at achievement of 200% above target.
For the fiscal 2018 and 2019 performance stock awards, the Company's Compensation Committee adopted a new set of
metrics that are differentiated from the quarterly revenue and EBITDA measures, including (1) 50% of the annual performance
stock grant is based on achieving 80% of the annual revenue goal set by the Company’s Board of Directors; (2) 25% of the
annual performance stock grant is based on achieving at least an 18% increase in annual software revenue compared to the
prior year; and (3) 25% of the annual performance stock grant is based on relative total shareholder return benchmarked to the
S&P 500 index. In each case, no vesting or payment with respect to a performance goal shall occur unless a minimum threshold
is met for the applicable goal. Vesting and payment with respect to the performance goal is linear above the threshold of the
applicable goal and is capped at achievement of 200% above target.
53
As of September 30, 2019, the following annual equity grants for executive officers or a portion thereof are outstanding:
Grant Date
RSUs Granted
November 1, 2018
November 1, 2017
November 1, 2016
November 2, 2015
144,066
140,135
115,347
145,508
Vesting Schedule
Quarterly, Annually1
Quarterly, Annually1
Quarterly
Quarterly
Vesting Period
Date Fully Vested
3 years
4 years
4 years
4 years
November 1, 2021
November 1, 2021
November 1, 2020
November 1, 2019
(1) 50% of the annual equity grant vests in equal quarterly increments and 50% is subject to the Company achieving
specified annual performance goals.
The Company recognizes compensation costs for awards with performance conditions and market conditions on a
straight-line basis over the requisite service period for each separately vesting portion of the award and, for awards with
performance conditions, when it concludes it is probable that the performance condition will be achieved. The Company
reassesses the probability of vesting at each balance sheet date and adjusts compensation costs based on the probability
assessment.
Comprehensive Income
Comprehensive income includes certain changes in equity that are excluded from net income. Specifically, unrealized
gains or losses on securities and foreign currency translation adjustments. These changes are included in accumulated other
comprehensive income or loss.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU
2014-09 and the related amendments outline a new, single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. The new model requires revenue recognition to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration a company expects to receive in exchange for those goods or services. The Company
adopted this new accounting standard and the related amendments on October 1, 2018 using the modified retrospective method.
See Note 2 - Revenue from Contracts with Customers for further details.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU
2016-18), which requires a company’s cash flow statement to explain the changes during a reporting period of the totals for
cash, cash equivalents, restricted cash and restricted cash equivalents. Additionally, amounts for restricted cash and restricted
cash equivalents are to be included with cash and cash equivalents if the cash flow statement includes a reconciliation of the
total cash balances for a reporting period. The Company adopted this new accounting standard on October 1, 2018, which
resulted in an immaterial reclassification of beginning and ending cash, cash equivalents and restricted cash for the periods
presented within the statement of cash flows. Upon adoption of this new standard, restricted cash activity is no longer
separately presented within the investing activities in the statement of cash flows. The overall adoption of the standard did not
have a material impact to the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a
Business (ASU 2017-01), which provides a more robust framework to use in determining when a set of assets and activities is
considered a business. The Company adopted this new accounting standard on October 1, 2018.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (ASU 2017-09), which provides
clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment
award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should
only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the
changes are considered non-substantive. The Company adopted this new accounting standard on October 1, 2018.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to
recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a
corresponding lease liability for all leases with terms greater than twelve months. The Company’s leases primarily consist of
operating leases for its offices and lab spaces. The guidance also requires qualitative and quantitative disclosures designed to
assess the amount, timing and uncertainty of cash flows arising from leases. Adoption of the new lease standard requires
54
measurement of leases at the beginning of the earliest period presented on a modified retrospective basis. The new standard will
be effective for the Company beginning October 1, 2019. The Company anticipates that its long-term leases for office space
will be recognized as lease liabilities and corresponding right-of-use assets, and will have a material impact on its consolidated
balance sheets upon adoption.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) (ASU 2018-11), which provides an optional transition
method to adopt ASU 2016-02, Leases (Topic 842) by allowing lessees to apply the new standard at the adoption date and
recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Comparative
periods will still be presented under current GAAP (ASC 840), along with the applicable Topic 840 disclosures for those
comparative periods. The new standard is effective at the same time as adoption of ASU 2016-02, Leases (Topic 842), which
the Company is planning to adopt in the first quarter of fiscal year 2020. The Company plans to adopt the transitional
provisions allowed under ASU 2018-11.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (ASU 2016-13), which replaces the incurred loss impairment methodology in current GAAP
with a methodology that reflects expected credit losses. The new standard is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate
that the adoption of this standard will have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic
350-40) (ASU 2018-15), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement
that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software, and hosting arrangements that include an internal-use software license. The accounting for the service element of a
hosting arrangement that is a service contract is not affected by the amendments in this update. The new standard is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.
The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial
statements.
2. Revenue from Contracts with Customers
The following table summarizes the impact of adopting ASC 606 on the Company's consolidated balance sheet as of the
date of adoption, October 1, 2018. This table does not represent the full consolidated balance sheet as it only reflects the
accounts impacted by the adoption of ASC 606.
Assets
Other current assets1
Other assets, net1
Deferred tax assets
Liabilities and Shareholders' Equity
Deferred revenue
Deferred revenue, long-term
Retained earnings2
Ending Balance as of
September 30, 2018
(ASC 605)
ASC 606 Adjustments
Beginning Balance as of
October 1, 2018
(ASC 606)
$
$
$
$
$
$
52,326
42,186
33,441
715,697
299,624
1,287,243
$
$
$
$
$
$
50,558
$
59,676
$
(7,902) $
35,464
32,614
36,048
$
$
$
102,884
101,862
25,539
751,161
332,238
1,323,291
(1) Upon the adoption of ASC 606, capitalized contract acquisition costs and unbilled accounts receivable are reported as part
of other current assets and other assets, net.
(2) The net increase to retained earnings of $36.0 million was primarily related to the capitalization of contract acquisition
costs of $54.6 million, partially offset by a decrease of $8.8 million due to changes in deferred revenue and a decrease of
$7.9 million from the impact on deferred income taxes.
As a result of an increase in sales of the Company's software solutions sold as Enterprise License Agreements and annual
subscriptions, the adoption of ASC 606 had a material impact to the Company's consolidated balance sheet as of September 30,
2019 and consolidated income statements for the year ended September 30, 2019.
55
The following table summarizes the impact of adopting ASC 606 on the Company's consolidated balance sheet as of
September 30, 2019 (in thousands):
As Reported
(ASC 606)
Impacts Subsequent
to the Date of Adoption
Impacts on the
Date of Adoption
(October 1, 2018)
Without Adoption
(ASC 605)
September 30, 2019
Assets
Other current assets
Other assets, net
Deferred tax assets
Total assets
$
$
$
$
Liabilities and Shareholders' Equity
Accrued liabilities
Deferred revenue
Deferred revenue, long-term
Total liabilities
Retained earnings
Total liabilities and
shareholders' equity
$
$
$
$
$
$
182,874
203,781
27,701
3,390,275
235,869
807,030
391,086
1,628,778
1,638,090
3,390,275
$
$
$
$
$
$
$
$
$
$
50,938
$
25,555
$
(2,654) $
$
73,839
11,986
$
14,112
$
(9,284) $
$
16,814
55,231
72,045
$
$
50,558
$
59,676
$
(7,902) $
$
102,332
— $
35,464
32,614
68,078
36,048
104,126
$
$
$
$
$
81,378
118,550
38,257
3,214,104
223,883
757,454
367,756
1,543,886
1,546,811
3,214,104
The following table summarizes the impact of adopting ASC 606 on the Company's consolidated income statement for
the year ended September 30, 2019 (in thousands):
Total net revenues
Total cost of net revenues
Gross profit
Total operating expenses
Income before income taxes
Provision for income taxes
Net income
Net income per share — basic
Net income per share — diluted
Year Ended September 30, 2019
As Reported
(ASC 606)
Effect of Adoption of
ASC 606
Without Adoption
(ASC 605)
$
$
$
$
$
$
$
$
$
2,242,447
356,577
1,885,870
1,367,407
541,111
113,377
427,734
$
$
$
$
$
$
$
7.12
7.08
72,246
4,004
$
$
68,242
$
(1,629) $
$
69,871
14,640
55,231
$
$
$
$
2,170,201
352,573
1,817,628
1,369,036
471,240
98,737
372,503
6.20
6.16
The adoption of ASC 606 did not have a material impact to cash from or used in operating, financing, or investing
activities on the Company’s consolidated statement of cash flows for the year ended September 30, 2019.
56
Capitalized Contract Acquisition Costs
The table below shows significant movements in capitalized contract acquisition costs (current and noncurrent) for the
year ended September 30, 2019 (in thousands):
Balance, September 30, 2018
Impacts from adoption of ASC 606
Additional capitalized contract acquisition costs deferred
Amortization of capitalized contract acquisition costs
Balance, September 30, 2019
$
$
$
$
$
—
54,608
33,925
(29,087)
59,446
Amortization of capitalized contract acquisition costs is recorded in Sales and Marketing expense in the accompanying
consolidated income statements for the year ended September 30, 2019. There was no impairment of any capitalized contract
acquisition costs.
Contract Balances
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts
related to our contracts with customers. We record assets for amounts related to performance obligations that are satisfied but
not yet billed and/or collected, in addition to contracts that have started, but not yet been fully billed. These assets are recorded
as contract assets rather than receivables when receipt of the consideration is conditional on something other than the passage
of time. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. These
liabilities are classified as current and non-current deferred revenue.
The table below shows significant movements in contract assets (current and noncurrent) for the year ended
September 30, 2019 (in thousands):
Balance, September 30, 2018
Impacts from adoption of ASC 606
Revenue recognized during period but not yet billed
Contract asset net additions
Contract assets reclassified to accounts receivable
Balance, September 30, 2019
$
$
$
$
$
$
—
57,499
27,459
88,068
(40,534)
132,492
As of September 30, 2019, contract assets that are expected to be reclassified to receivables within the next 12 months are
included in other current assets, with those expected to be transferred to receivables in more than 12 months included in other
assets. There were no impairments of contract assets during the year ended September 30, 2019.
The impacts to deferred revenue from the adoption of ASC 606 are primarily related to unbilled accounts receivable now
being capitalized and included as contract assets on the balance sheet. The table below shows significant movements in the
deferred revenue balances (current and noncurrent) for the year ended September 30, 2019 (in thousands):
Balance, September 30, 2018
Impacts from adoption of ASC 606
Amounts billed but not recognized as revenues
Revenues recognized related to the opening balance of deferred revenue
Balance, September 30, 2019
$
$
$
$
$
1,015,321
68,078
866,142
(751,425)
1,198,116
Our contract assets and liabilities are reported in a net position on a contract by contract basis at the end of each reporting
period.
57
Remaining Performance Obligations
Remaining performance obligations represent the amount of the transaction price under contracts with customers that are
attributable to performance obligations that are unsatisfied or partially satisfied at the reporting date. The Company expects to
recognize this amount as revenue over the following time periods (in thousands):
Revenue expected to be recognized on remaining performance
obligations
$
808,980
$
237,175
$
151,961
$ 1,198,116
2020
2021
Thereafter
Total
See Note 14 - Segment Information, for disaggregated revenue by significant customer and geographic region.
3. Business Combinations
Fiscal Year 2019 Acquisition of Nginx, Inc.
On March 9, 2019, the Company entered into a Merger Agreement (the “Merger Agreement”) with Nginx, Inc.
("NGINX"), a provider of open source web server software and application delivery solutions. The transaction closed on
May 8, 2019 with NGINX becoming a wholly-owned subsidiary of F5.
Pursuant to the Merger Agreement, at the effective time of the Merger, the capital stock of NGINX and the vested
outstanding and unexercised stock options in NGINX were cancelled and converted to the right to receive approximately
$643.2 million in cash, subject to certain adjustments and conditions set forth in the Merger Agreement, and the unvested stock
options and restricted stock units in NGINX held by continuing employees of NGINX were assumed by F5, on the terms and
conditions set forth in the Merger Agreement. Included in cash consideration was $19.0 million of transaction costs paid by F5
on behalf of NGINX. In addition, the Company incurred an additional $1.0 million of transaction costs associated with the
acquisition which was included in General and Administrative expenses for fiscal 2019.
NGINX is an open source leader in application delivery. The combined company will enable multi-cloud application
services across all environments, providing the ease-of-use and flexibility developers require while also delivering the scale,
security, reliability and enterprise readiness network operations teams demand. As a result of the acquisition, the Company
acquired all the assets and assumed all the liabilities of NGINX. The goodwill related to the NGINX acquisition is comprised
primarily of expected synergies from combining operations and the acquired intangible assets that do not qualify for separate
recognition. The results of operations of NGINX have been included in the Company’s consolidated financial statements from
the date of acquisition.
The purchase price allocation is as follows (in thousands):
Assets acquired
Cash and cash equivalents
Fair value of tangible assets:
Accounts receivable
Other current assets
Property and equipment, net
Deferred tax assets
Intangible assets
Goodwill
Total assets acquired
Liabilities assumed
Accounts payable
Deferred revenue
Other liabilities
Total liabilities assumed
Net assets acquired
58
$
29,911
7,306
4,214
1,822
10,357
89,300
509,414
652,324
(1,081)
(4,000)
(4,035)
(9,116)
643,208
$
$
$
$
The allocation of the purchase price and the estimated useful lives associated with certain assets is as follows (in
thousands):
Net tangible assets
Identifiable intangible assets:
Developed technologies
Customer relationships
Trade name
Non-competition agreements
Goodwill
Total purchase price
Amount
Estimated
Useful Life
$
44,494
—
62,500
12,000
14,500
300
509,414
643,208
7 years
15 years
7 years
2 years
—
$
The developed technology intangible asset will be amortized on a straight-line basis over its estimated useful life of seven
years and included in cost of net product revenues. The trade names and customer relationships intangible assets will be
amortized on a straight-line basis over their estimated useful lives of seven years and fifteen years, respectively, and included in
sales and marketing expenses. The weighted average life of the amortizable intangible assets recognized from the NGINX
merger was 8.1 years. The estimated useful lives for the acquired intangible assets were based on the expected future cash
flows associated with the respective asset. Tax deductible goodwill based on the Company's preliminary calculation is $450.7
million.
Since the NGINX acquisition was completed on May 8, 2019, the F5 and NGINX teams have been rapidly executing a
plan to integrate ongoing operations. The pro forma financial information, as well as the revenue and earnings generated by
NGINX, were not considered material for disclosure purposes.
4. Fair Value Measurements
In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Company
determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed based
on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about
market participant assumptions developed based on the best information available in the circumstances and expands disclosure
about fair value measurements.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date,
essentially the exit price.
The levels of fair value hierarchy are:
Level 1: Quoted prices in active markets for identical assets and liabilities at the measurement date that the Company has
the ability to access.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.
Level 3: Unobservable inputs for which there is little or no market data available. These inputs reflect management’s
assumptions of what market participants would use in pricing the asset or liability.
Level 1 investments are valued based on quoted market prices in active markets and include the Company’s cash
equivalent investments. Level 2 investments, which include investments that are valued based on quoted prices in markets that
are not active, broker or dealer quotations, actual trade data, benchmark yields or alternative pricing sources with reasonable
levels of price transparency, include the Company’s certificates of deposit, corporate bonds and notes, municipal bonds and
notes, U.S. government securities, U.S. government agency securities and international government securities. Fair values for
the Company’s level 2 investments are based on similar assets without applying significant judgments. In addition, all of the
Company’s level 2 investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate
for these investments.
59
A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant
to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by
the Company. The Company considers observable data to be market data which is readily available, regularly distributed or
updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant
market.
The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at
September 30, 2019, were as follows (in thousands):
Cash equivalents
Short-term investments
Available-for-sale securities — certificates of deposit
Available-for-sale securities — corporate bonds and notes
Available-for-sale securities — municipal bonds and notes
Available-for-sale securities — U.S. government securities
Available-for-sale securities — U.S. government agency
securities
Long-term investments
Available-for-sale securities — corporate bonds and notes
Available-for-sale securities — municipal bonds and notes
Available-for-sale securities — U.S. government securities
Available-for-sale securities — U.S. government agency
securities
Total
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
140,238
$
153,404
$
— $
Fair Value at
September 30,
2019
293,642
—
—
—
—
—
—
—
—
249
259,547
12,129
78,992
22,146
298,916
2,524
5,515
—
—
—
—
—
—
—
—
249
259,547
12,129
78,992
22,146
298,916
2,524
5,515
—
140,238
$
51,447
884,869
$
$
51,447
—
— $ 1,025,107
The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at
September 30, 2018, were as follows (in thousands):
Cash equivalents
Short-term investments
Available-for-sale securities — certificates of deposit
Available-for-sale securities — corporate bonds and notes
Available-for-sale securities — municipal bonds and notes
Available-for-sale securities — U.S. government securities
Available-for-sale securities — U.S. government agency
securities
Long-term investments
Available-for-sale securities — corporate bonds and notes
Available-for-sale securities — municipal bonds and notes
Available-for-sale securities — U.S. government securities
Available-for-sale securities — U.S. government agency
securities
Total
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
41,468
$
13,118
$
— $
Fair Value at
September 30,
2018
54,586
—
—
—
—
—
—
—
—
2,970
393,750
22,524
120,078
75,383
367,710
24,286
12,771
—
—
—
—
—
—
—
—
2,970
393,750
22,524
120,078
75,383
367,710
24,286
12,771
—
41,468
$
6,417
1,039,007
$
6,417
—
— $ 1,080,475
$
The Company uses the fair value hierarchy for financial assets and liabilities. The carrying amounts of other current
financial assets and other current financial liabilities approximate fair value due to their short-term nature.
60
The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are
not required to be carried at fair value on a recurring basis. These non-financial assets and liabilities are measured at fair value
on a non-recurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is
recognized. The Company reviews goodwill and intangible assets for impairment annually, during the second quarter of each
fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of long-lived
assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable.
During the year ended September 30, 2019, the Company recorded impairment of capitalized internal-use software costs
of $6.3 million. The charge was reflected in the general and administrative expense line item on the Company’s consolidated
income statement. No impairment of long-lived assets was noted as of and for the years ended September 30, 2018 and 2017.
5. Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
September 30, 2019
Certificates of deposit
Corporate bonds and notes
Municipal bonds and notes
U.S. government securities
U.S. government agency securities
September 30, 2018
Certificates of deposit
Corporate bonds and notes
Municipal bonds and notes
U.S. government securities
U.S. government agency securities
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
$
$
249
259,242
12,128
78,988
22,138
372,745
Cost or
Amortized
Cost
2,970
394,684
22,588
120,283
75,587
616,112
$
$
$
$
— $
402
6
18
9
435
$
— $
(97)
(5)
(14)
(1)
(117) $
Gross
Unrealized
Gains
Gross
Unrealized
Losses
— $
9
1
—
—
10
$
— $
(943)
(65)
(205)
(204)
(1,417) $
Fair Value
249
259,547
12,129
78,992
22,146
373,063
Fair Value
2,970
393,750
22,524
120,078
75,383
614,705
Long-term investments consist of the following (in thousands):
September 30, 2019
Corporate bonds and notes
Municipal bonds and notes
U.S. government securities
U.S. government agency securities
September 30, 2018
Corporate bonds and notes
Municipal bonds and notes
U.S. government securities
U.S. government agency securities
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Cost or
Amortized
Cost
298,888
$
2,528
5,515
51,463
$
469
$
2
3
5
$
358,394
$
479
$
(441) $
(6)
(3)
(21)
(471) $
298,916
2,524
5,515
51,447
358,402
Cost or
Amortized
Cost
370,377
24,468
12,956
6,500
414,301
$
$
$
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
25
—
—
—
25
$
$
(2,692) $
(182)
(185)
(83)
(3,142) $
Fair Value
367,710
24,286
12,771
6,417
411,184
61
Interest income from investments was $25.3 million, $17.0 million and $8.5 million for fiscal years 2019, 2018 and 2017,
respectively. Interest income is included in other income, net on the Company's consolidated income statements.
The following table summarizes investments that have been in a continuous unrealized loss position for less than
12 months and those that have been in a continuous unrealized loss position for more than 12 months as of September 30, 2019
(in thousands):
Less Than 12 Months
12 Months or Greater
Total
September 30, 2019
Corporate bonds and notes
Municipal bonds and notes
U.S. government securities
U.S. government agency securities
Total
Fair Value
$
$
237,747
864
27,095
30,946
296,652
$
$
Gross
Unrealized
Losses
(434) $
—
(12)
(22)
(468) $
Fair
Value
109,613
7,800
9,991
—
127,404
$
$
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
(104) $
(11)
(5)
—
(120) $
347,360
8,664
37,086
30,946
424,056
$
$
(538)
(11)
(17)
(22)
(588)
The following table summarizes investments that have been in a continuous unrealized loss position for less than 12
months and those that have been in a continuous unrealized loss position for more than 12 months as of September 30, 2018 (in
thousands):
Less Than 12 Months
12 Months or Greater
Total
September 30, 2018
Corporate bonds and notes
Municipal bonds and notes
U.S. government securities
U.S. government agency securities
Total
Fair Value
$
$
543,729
26,846
103,470
44,812
718,857
$
$
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
(1,800) $
(123)
(281)
(110)
(2,314) $
152,097
14,363
29,379
36,987
232,826
$
$
(1,835) $
(124)
(109)
(177)
(2,245) $
695,826
41,209
132,849
81,799
951,683
$
$
(3,635)
(247)
(390)
(287)
(4,559)
The Company invests in securities that are rated investment grade. The unrealized losses on investments for fiscal year
2019 were primarily caused by interest rate increases.
The Company reviews the individual securities in its portfolio to determine whether a decline in a security's fair value
below the amortized cost basis is other-than-temporary. The Company determined that as of September 30, 2019, there were no
investments in its portfolio that were other-than-temporarily impaired.
6. Balance Sheet Details
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of the Company’s cash and cash equivalents and restricted cash reported
within the consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash shown in the Company’s
consolidated statements of cash flows for the periods presented (in thousands):
Cash and cash equivalents
Restricted cash included in other assets, net
Total cash, cash equivalents and restricted cash
September 30,
2019
599,219
3,035
602,254
$
$
2018
424,707
1,187
425,894
$
$
62
Inventories
Inventories consist of the following (in thousands):
Finished goods
Raw materials
Other Current Assets
Other current assets consist of the following (in thousands):
Contract assets
Prepaid expenses
Capitalized contract acquisition costs
Other
Property and Equipment
Property and equipment consist of the following (in thousands):
Computer equipment
Software
Office furniture and equipment
Leasehold improvements
Accumulated depreciation and amortization
September 30,
2019
2018
22,441
11,960
34,401
$
$
21,339
9,229
30,568
September 30,
2019
2018
79,407
49,051
28,228
26,188
182,874
$
$
—
39,531
—
12,795
52,326
September 30,
2019
142,372
85,866
38,892
151,055
418,185
(194,759)
223,426
$
$
2018
135,176
59,671
31,625
107,615
334,087
(189,045)
145,042
$
$
$
$
$
$
Depreciation and amortization expense totaled approximately $58.0 million, $45.9 million, and $44.6 million for the
fiscal years ended September 30, 2019, 2018 and 2017, respectively.
During the year ended September 30, 2019, the Company recorded impairment of capitalized internal-use software costs
of $6.3 million. The charge was reflected in the general and administrative expense line item on the Company’s consolidated
statement of operations.
63
Goodwill
Changes in the carrying amount of goodwill during fiscal year 2019 are summarized as follows (in thousands):
Balance, September 30, 2018
Acquisition of Nginx, Inc.
Balance, September 30, 2019
There was no change in the carrying amount of goodwill during fiscal year 2018.
Other Assets
Other assets consist of the following (in thousands):
Intangible assets
Contract assets
Capitalized contract acquisition costs
Other
$
555,965
509,414
$ 1,065,379
September 30,
2019
108,903
53,085
31,218
10,575
203,781
$
$
2018
31,259
—
—
10,927
42,186
$
$
Intangible assets are included in other assets on the balance sheet and consist of the following (in thousands):
Developed technology
Customer relationships
Patents and trademarks
Trade names
Non-compete covenants
2019
2018
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
126,173
20,242
19,160
15,473
2,260
183,308
$
$
(53,213) $
(5,533)
(11,800)
(1,836)
(2,023)
(74,405) $
72,960
14,709
7,360
13,637
237
108,903
$
$
63,672
8,242
18,971
973
1,960
93,818
$
$
(46,031) $
(4,376)
(9,219)
(973)
(1,960)
(62,559) $
17,641
3,866
9,752
—
—
31,259
Amortization expense related to intangible assets was approximately $11.8 million, $11.1 million, and $12.3 million for
the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
Estimated amortization expense for intangible assets for the five succeeding fiscal years is as follows (in thousands):
2020
2021
2022
2023
2024
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Payroll and benefits
Income and other tax accruals
Other
64
$
$
18,331
18,137
16,844
16,047
14,360
83,719
September 30,
2019
138,453
31,801
65,615
235,869
$
$
2018
104,815
27,656
48,508
180,979
$
$
Other Long-term Liabilities
Other long-term liabilities consist of the following (in thousands):
Deferred rent
Income taxes payable
Other
7. Income Taxes
September 30,
2019
2018
$
$
66,103
42,324
23,426
131,853
$
$
31,151
30,864
3,877
65,892
The United States and international components of income before income taxes are as follows (in thousands):
United States
International
Years Ended September 30,
2019
360,648
180,463
541,111
$
$
2018
441,336
162,424
603,760
$
$
2017
452,869
122,648
575,517
$
$
The provision for income taxes (benefit) consists of the following (in thousands):
Current
U.S. federal
State
Foreign
Total
Deferred
U.S. federal
State
Foreign
Total
Years Ended September 30,
2019
2018
2017
$
$
43,039
13,864
49,197
106,100
8,716
1,617
(3,056)
7,277
113,377
$
$
78,454
9,800
41,040
129,294
21,259
725
(1,207)
20,777
150,071
$
$
113,105
10,381
34,679
158,165
964
99
(4,472)
(3,409)
154,756
The effective tax rate differs from the U.S. federal statutory rate as follows (in thousands):
Income tax provision at statutory rate
State taxes, net of federal benefit
Tax impact of foreign operations
Research and development and other credits
Domestic manufacturing deduction
Stock-based and other compensation
Impacts of the Tax Cuts and Jobs Act
Other
Years Ended September 30,
2019
113,633
14,206
(9,161)
(12,760)
—
6,771
—
688
113,377
$
$
2018
147,921
9,349
(6,696)
(13,159)
(9,722)
(150)
21,015
1,513
150,071
$
$
2017
201,431
9,235
(40,606)
(12,795)
(15,802)
12,688
—
605
154,756
$
$
The provision for income taxes for fiscal year 2019 and 2018 includes various impacts from the Tax Cuts and Jobs Act
enacted on December 22, 2017. Significant impacts for fiscal year 2019 include a further reduction of the U.S. federal income
tax rate to 21%, a deduction for foreign derived intangible income, a tax on global intangible low taxed income, and repeal of
65
the deduction for income attributable to domestic production activities. Significant impacts for fiscal year 2018 include a
reduction of the U.S. federal income tax rate to 24.5%, a tax for deemed repatriation of undistributed foreign earnings, and an
expense from the remeasurement of the Company's net deferred tax assets to reflect the change in the U.S. federal income tax
rate when temporary differences are expected to reverse.
Effective January 1, 2018, the U.S. tax law provides a deduction for the foreign-source portion of dividends received
from specified foreign corporations. The Company no longer maintains an indefinite reinvestment assertion on unremitted
foreign earnings and has recorded a deferred tax liability for any estimated foreign, federal, or state tax liabilities associated
with a future repatriation of foreign earnings.
The Company benefits from a tax incentive arrangement in certain foreign jurisdictions, which are effective through
fiscal year 2021. The tax incentive agreements are conditional upon meeting certain operational, employment and investment
requirements. These arrangements decreased foreign taxes by $8.1 million, $6.4 million and $6.9 million, and increased diluted
earnings per common share by $0.13, $0.10 and $0.11 for the years ended September 30, 2019, 2018 and 2017, respectively.
The tax effects of the temporary differences that give rise to the deferred tax assets and liabilities are as follows (in
thousands):
Deferred tax assets
Net operating loss carry-forwards
Allowance for doubtful accounts
Accrued compensation and benefits
Inventories and related reserves
Stock-based compensation
Deferred revenue
Lease liabilities
Other accruals and reserves
Tax credit carryforwards
Depreciation
Valuation allowance
Deferred tax liabilities
Purchased intangibles and other
Depreciation
Deferred costs
Other accruals and reserves
$
Years Ended September 30,
2019
2018
$
12,269
587
13,478
526
7,144
35,247
17,313
14,673
13,783
592
115,612
(23,495)
92,117
(10,560)
(39,910)
(10,656)
(3,603)
(64,729)
11,540
368
8,202
324
5,570
29,290
3,662
10,747
12,177
671
82,551
(22,780)
59,771
(10,678)
(12,277)
—
(3,410)
(26,365)
Net deferred tax assets
$
27,388
$
33,406
At September 30, 2019, the Company had foreign net operating loss carry-forwards of approximately $60.4 million that
can be carried forward indefinitely and $3.5 million that will expire in fiscal year 2026. The Company had $3.4 million of
federal net operating loss carryforwards, the annual utilization of which is limited under Internal Revenue Code Section 382,
and can be carried forward indefinitely. In addition, there are $3.6 million of foreign credit carryforwards that will expire in
fiscal years 2020 to 2024, $0.6 million of federal credit carryforwards that will expire in fiscal years 2038 to 2039, $12.4
million of state tax credit carryforwards that can be carried forward indefinitely and $3.6 million that will expire in fiscal years
2030 to 2034. Management believes that it is more-likely-than-not that the benefit from certain foreign net operating loss
carryforwards and state tax carryforwards will not be realized. In recognition of this risk, the Company has provided a
valuation allowance on the deferred tax assets relating to these carryforwards. The net change in the total valuation allowance
was an increase of $0.7 million and $4.6 million for the years ended September 30, 2019 and 2018, respectively.
The Company recognizes the financial statement impact of a tax position only after determining that the relevant tax
authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-
66
not threshold, the amount recognized in the financial statements is the largest impact that has a greater than fifty percent
likelihood of being realized upon ultimate settlement with the relevant tax authority.
The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits in fiscal
years 2019, 2018 and 2017 (in thousands):
Balance, beginning of period
Gross increases related to prior period tax positions
Gross decreases related to prior period tax positions
Gross increases related to current period tax positions
Decreases relating to settlements with tax authorities
Reductions due to lapses of statute of limitations
Balance, end of period
2019
2018
2017
31,672
5,129
(287)
7,756
—
(1,983)
42,287
$
$
23,135
2,715
—
8,230
—
(2,408)
31,672
$
$
13,687
2,769
—
8,507
(240)
(1,588)
23,135
$
$
The total amount of gross unrecognized tax benefits was $42.3 million, $31.7 million, and $23.1 million as of
September 30, 2019, 2018, and 2017, respectively, of which, $29.4 million, $23.1 million, and $18.3 million, if recognized,
would affect the effective tax rate. There is a reasonable possibility that the Company’s unrecognized tax benefits will change
within twelve months due to audit settlements or the expiration of statute of limitations, but the Company does not expect the
change to be material to the consolidated financial statements.
The Company recognizes interest and, if applicable, penalties (not included in the “unrecognized tax benefits” table
above) for any uncertain tax positions. Interest and penalties are recorded as a component of income tax expense. In the years
ended September 30, 2019, 2018 and 2017, the Company recorded approximately $2.4 million, $0.4 million and $0.3 million,
respectively, of interest and penalty expense related to uncertain tax positions. As of September 30, 2019 and 2018, the
Company had a cumulative balance of accrued interest and penalties on unrecognized tax positions of $4.0 million and $1.6
million, respectively.
The Company and its subsidiaries are subject to U.S. federal income tax as well as the income tax of multiple state and
foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for fiscal years through September 30,
2015. The Company is currently under audit by various states for fiscal years 2014 through 2017, and by Israel for fiscal years
2013 to 2017. Major jurisdictions where there are wholly owned subsidiaries of F5 Networks, Inc. which require income tax
filings include the United Kingdom, Japan, Singapore, Australia and Israel. The earliest periods open for review by local taxing
authorities are fiscal years 2018 for the United Kingdom, 2013 for Japan, 2014 for Singapore, 2015 for Australia and 2013 for
Israel. Within the next four fiscal quarters, the statute of limitations will begin to close on the fiscal year 2016 federal income
tax return, fiscal years 2014, 2015 and 2016 state income tax returns, and fiscal years 2013 to 2018 foreign income tax returns.
8. Shareholders' Equity
Common Stock Repurchase
On October 31, 2018, the Company announced that its Board of Directors authorized an additional $1.0 billion for its
common stock share repurchase program. This new authorization is incremental to the existing $4.4 billion program, initially
approved in October 2010 and expanded in each fiscal year. Acquisitions for the share repurchase programs will be made from
time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The
programs can be terminated at any time. During fiscal year 2019, the Company repurchased and retired 1,185,881 shares at an
average price of $169.53 per share and as of September 30, 2019, the Company had $1.4 billion remaining authorized to
purchase shares.
In the second quarter of fiscal 2019, the Company announced that, in connection with its acquisition of NGINX, it was
suspending the automatic component of its common stock share repurchase program. Management will continue to evaluate
market conditions and other factors including the Company’s capital requirements in determining when and whether to
repurchase shares and when and whether to re-implement an automatic component of its repurchase program. The program
does not require the purchase of any minimum number of shares and the program may be modified, suspended or discontinued
at any time.
9. Stock-based Compensation
The majority of awards consist of restricted stock units and to a lesser degree, stock options. Employees vest in restricted
stock units and stock options ratably over the corresponding service term, generally one to four years. The Company’s stock
67
options expire ten years from the date of grant. Restricted stock units are payable in shares of the Company’s common stock as
the periodic vesting requirements are satisfied. The value of a restricted stock unit is based upon the fair market value of the
Company’s common stock on the date of grant. The value of restricted stock units is determined using the intrinsic value
method and is based on the number of shares granted and the quoted price of the Company’s common stock on the date of
grant. Alternatively, the Company used the Black-Scholes option pricing model to determine the fair value of its stock options.
Compensation expense related to restricted stock units and stock options is recognized over the vesting period. The Company
has adopted a number of stock-based compensation plans as discussed below.
2011 Employee Stock Purchase Plan. In April 2012, the Board of Directors amended and restated the Company’s 1999
Employee Stock Purchase Plan, or the Employee Stock Purchase Plan. A total of 10,000,000 shares of common stock have been
reserved for issuance under the Employee Stock Purchase Plan. The Employee Stock Purchase Plan permits eligible employees
to acquire shares of the Company’s common stock through periodic payroll deductions of up to 15% of base compensation. No
employee may purchase more than 10,000 shares during an offering period. In addition, no employee may purchase more than
$25,000 worth of stock, determined by the fair market value of the shares at the time such option is granted, in one calendar
year. The Employee Stock Purchase Plan has been implemented in a series of offering periods, each 6 months in duration. The
price at which the common stock may be purchased is 85% of the lesser of the fair market value of the Company’s common
stock on the first day of the applicable offering period or on the last day of the respective purchase period. As of September 30,
2019 there were 2,318,325 shares available for awards under the Employee Stock Purchase Plan.
Acquisition Related Incentive Plans. In connection with the Company’s acquisition of Traffix Systems in the second
quarter of fiscal year 2012, the Company assumed the Traffix 2007 Israeli Employee Share Option Plan, or the Traffix Plan.
Unvested options to acquire Traffix’s common stock were converted into options to acquire the Company’s common stock in
connection with the acquisition. A total of 106,829 shares of common stock were reserved for issuance under the Traffix Plan.
The plan provided for grants of stock options to persons who were employees, officers, directors, consultants or advisors to
Traffix on or prior to February 21, 2012. During the fiscal year 2019, the Company issued no stock options or restricted stock
units under the Traffix Plan. As of September 30, 2019, there were options to purchase 49 shares outstanding and no shares
available for additional awards under the Traffix Plan. The Company terminated the Traffix Plan effective January 3, 2014 and
no additional shares may be issued from the Traffix Plan.
In connection with the Company’s acquisition of Defense.Net, Inc. in the third quarter of fiscal year 2014, the Company
assumed the Defense.Net, Inc. 2012 Stock Option and Grant Plan, or the Defense.Net Plan. Unvested options to acquire
Defense.Net's common stock were converted into options to acquire the Company’s common stock in connection with the
acquisition. A total of 84,375 shares of common stock were reserved for issuance under the Defense.Net Plan. The plan
provided for grants of stock options to persons who were employees, officers, directors, consultants or advisors to Defense.Net,
Inc. on or prior to May 22, 2014. During the fiscal year 2019, the Company issued no stock options or restricted stock units
under the Defense.Net Plan. As of September 30, 2019, there were options to purchase 113 shares outstanding and no shares
available for additional awards under the Defense.Net Plan. The Company terminated the Defense.Net Plan effective January 5,
2015 and no additional shares may be issued from the Defense.Net Plan.
In May 2019, the Company adopted the Nginx Acquisition Equity Incentive Plan, or the Nginx Acquisition Plan. The
Nginx Acquisition Plan provided for discretionary grants of stock options and stock units for employees, directors and
consultants of Nginx, Inc. to whom the Company offered employment in connection with the Company’s acquisition of Nginx.
A total of 183,061 shares of common stock were reserved for issuance under the Nginx Acquisition Plan. Upon certain changes
in control of the Company, the surviving entity will either assume or substitute all outstanding stock awards under the Nginx
Acquisition Plan or the vesting of 50% of the stock awards shall be accelerated. During the fiscal year 2019, the Company
issued no stock options and 178,334 restricted stock units under the Nginx Acquisition Plan. As of September 30, 2019, there
were no options outstanding and 176,908 stock units outstanding. The Company terminated the Nginx Acquisition Plan
effective October 31, 2019 and no additional shares may be issued from the Nginx Acquisition Plan.
In connection with the Company’s acquisition of Nginx, Inc. in the third quarter of fiscal year 2019, the Company
assumed the Nginx Inc. 2011 Share Plan, or the Nginx Plan. Unvested options to acquire Nginx's common stock and unvested
stock units with respect to Nginx’s common stock were converted into options to acquire the Company’s common stock and
stock units with respect to the Company’s stock in connection with the acquisition. A total of 302,634 shares of common stock
were reserved for issuance under the Nginx Plan (including converted options and stock units). The Nginx Plan provided for
grants of stock options, stock awards and stock units to persons who were employees, officers, directors and consultants to
Nginx, Inc. prior to May 8, 2019. During the fiscal year 2019, the Company issued (including conversions to Company awards)
215,767 stock options and 40,044 stock units under the Nginx Plan. As of September 30, 2019, there were options to purchase
207,597 shares outstanding and 37,102 stock units outstanding. The Company terminated the Nginx Acquisition Plan effective
October 31, 2019 and no additional shares may be issued from the Nginx Acquisition Plan.
68
2014 Incentive Plan. In March 2014, the Company adopted the 2014 Incentive Plan, or the 2014 Plan, which amended
and restated the 2005 Equity Incentive Plan. The 2014 Plan provides for discretionary grants of stock options, stock units and
other equity and cash-based awards for employees, including officers, directors and consultants. A total of 20,480,000 shares of
common stock have been reserved for issuance under the 2014 Plan. Upon certain changes in control of the Company, all
outstanding and unvested options or stock awards under the 2014 Plan will vest at the rate of 50%, unless assumed or
substituted by the acquiring entity. During the fiscal year 2019, the Company issued no stock options, 62,154 performance
stock units and 997,309 restricted stock units under the 2014 Plan. As of September 30, 2019, there were no options
outstanding, 55,184 performance stock units outstanding, 1,041,889 restricted stock units outstanding and 2,881,829 shares
available for new awards under the 2014 Plan.
A majority of the restricted stock units the Company grants to its employees vest quarterly over a two-year period. The
performance stock units, restricted stock units and stock options under all plans were granted during fiscal years 2019, 2018
and 2017 with a per-share weighted average fair value of $165.64, $126.86 and $134.35, respectively. The fair value of
performance stock units and restricted stock units vested during fiscal years 2019, 2018 and 2017 was $159.6 million, $182.6
million and $176.8 million, respectively.
A summary of restricted stock unit activity under the 2014 Plan is as follows:
Balance, September 30, 2018
Units granted
Units vested
Units cancelled
Balance, September 30, 2019
Performance Stock Units
Restricted Stock Units
Outstanding
Performance
Stock Units
Weighted
Average
Grant Date
Fair Value
Outstanding
Restricted
Stock Units
Weighted
Average
Grant Date
Fair Value
24,079
62,154
(25,618)
(5,431)
55,184
$
$
119.01
173.46
165.89
162.74
165.83
1,150,870
997,309
(972,116)
(134,174)
1,041,889
$
$
129.35
173.00
158.92
150.94
158.10
A summary of stock option activity under all of the Company’s plans is as follows:
Balance, September 30, 2018
Options granted
Options exercised
Options cancelled
Balance, September 30, 2019
Options Outstanding
Number of
Shares
Weighted
Average
Exercise Price
per Share
162
215,767
(5,943)
(2,227)
207,759
$
$
3.76
24.49
26.84
22.40
24.43
All stock options granted in fiscal year 2019 were replacement awards of those assumed as part of the acquisition of
NGINX. No stock options were granted in fiscal years 2018 and 2017.
The total intrinsic value of options exercised during fiscal 2019, 2018 and 2017 was $0.7 million, $0.1 million and $1.0
million, respectively.
A summary of options outstanding that are exercisable and that have vested and are expected to vest as of September 30,
2019 is as follows:
Stock options outstanding
Exercisable
Vested and expected to vest
Weighted
Average
Remaining
Contractual
Life (in Years)
Weighted
Average
Exercise
Price
per Share
8.13
7.61
8.10
$
$
$
24.43
22.58
24.33
Aggregate
Intrinsic
Value(1)
(In thousands)
24,098
$
4,420
$
22,221
$
Number of
Shares
207,759
37,512
191,414
69
(1) Aggregate intrinsic value represents the difference between the fair value of the Company’s common stock underlying
these options at September 30, 2019 and the related exercise prices.
As of September 30, 2019, equity based awards (including stock options and restricted stock units) are available for
future issuance as follows:
Balance, September 30, 2018
Granted
Cancelled
Additional shares reserved (terminated), net
Balance, September 30, 2019
10. Net Income Per Share
Awards
Available for
Grant
2,051,687
(1,493,608)
146,200
2,235,695
2,939,974
Basic net income per share is computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average
number of common and dilutive common stock equivalent shares outstanding during the period. The Company’s nonvested
restricted stock units do not have nonforfeitable rights to dividends or dividend equivalents and are not considered participating
securities that should be included in the computation of earnings per share under the two-class method.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share
data):
Numerator
Net income
Denominator
Weighted average shares outstanding — basic
Dilutive effect of common shares from stock options and restricted stock
units
Weighted average shares outstanding — diluted
Basic net income per share
Diluted net income per share
Years Ended September 30,
2019
2018
2017
$
427,734
$
453,689
$
420,761
60,044
61,262
64,173
412
60,456
7.12
7.08
$
$
751
62,013
7.41
7.32
$
$
602
64,775
6.56
6.50
$
$
Anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were immaterial for the
years ended September 30, 2019, 2018 and 2017.
11. Commitments and Contingencies
Operating Leases
The majority of the Company’s operating lease payments relate to the Company’s corporate headquarters in Seattle,
Washington. On May 3, 2017, the Company entered into an agreement to lease approximately 515,000 square feet of office
space in Seattle, Washington that now serves as its corporate headquarters. This lease will expire in 2033 with an option for
renewal. As a result of the headquarters move as well as other non-recurring lease activity, the Company incurred lease exit
costs of $8.2 million in fiscal 2019. As of September 30, 2019, $4.6 million of accrued lease exit costs are accrued in current
and $6.2 million are accrued in other long-term liabilities.
70
The Company also leases additional office space for product development and sales and support personnel in the United
States and internationally. Future minimum operating lease payments, net of sublease income, are as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Gross Lease
Payments
Sublease
Income
Net Lease
Payments
$
$
54,046
50,712
47,550
36,514
33,971
242,826
465,619
$
$
683
1,051
1,082
368
—
—
3,184
$
$
53,363
49,661
46,468
36,146
33,971
242,826
462,435
Rent expense under non-cancelable operating leases amounted to approximately $39.8 million, $30.0 million, and $30.2
million for the fiscal years ended September 30, 2019, 2018, and 2017, respectively.
Purchase Obligations
Purchase obligations are comprised of purchase commitments with the Company’s contract manufacturers. The
agreement with the Company’s primary contract manufacturer allows them to procure component inventory on the Company’s
behalf based on the Company’s production forecast. The Company is obligated to purchase component inventory that the
contract manufacturer procures in accordance with the forecast, unless cancellation is given within applicable lead times. As of
September 30, 2019, the Company’s remaining unfulfilled purchase obligations were $20.8 million.
Litigation
On April 4, 2016, the Company sued Radware, Inc. in the United States District Court for the Western District of
Washington (the case was subsequently moved to the Northern District of California) accusing Radware of infringing three
Company patents. The Company’s complaint sought a jury trial and an unspecified amount of monetary damages, as well as
interest, costs, and injunctive relief. Radware moved to dismiss the allegations of one patent, but the motion was denied.
Radware filed inter partes review (IPR) petitions on all of the asserted Company patents, but the US Patent Office dismissed all
of the petitions. Radware also filed a counterclaim asserting that the Company infringed one of its now-expired patents. The
Company filed an IPR petition against Radware’s counterclaim patent that resulted in cancellation of all but four of the patent’s
claims by the Patent Office. The Court then held that F5 does not infringe the four remaining claims. Both parties subsequently
dismissed all remaining claims and counterclaims to resolve the lawsuit in fiscal year 2019 pursuant to a settlement agreement,
the terms of which are confidential. The settlement did not have a material impact to the Company's consolidated financial
statements.
In addition to the above referenced matters, the Company is subject to other legal proceedings, claims, and litigation
arising in the ordinary course of business. Management believes that the Company has meritorious defenses to the allegations
made in its pending cases and intends to vigorously defend these lawsuits; however, the Company is unable currently to
determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. There are many
uncertainties associated with any litigation and these actions or other third-party claims against the Company may cause it to
incur costly litigation and/or substantial settlement charges that could have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.
The Company records an accrual for loss contingencies for legal proceedings when it believes that an unfavorable
outcome is both (a) probable and (b) the amount or range of any possible loss is reasonably estimable. The Company has not
recorded an accrual for loss contingencies associated with the legal proceedings or the investigations discussed above.
12. Restructuring Charges
In July 2018, the Company initiated a restructuring plan to match strategic and financial objectives and optimize
resources for long term growth, including a reduction in force program affecting approximately 215 employees. The Company
recorded a restructuring charge of $18.4 million in the fourth quarter of fiscal 2018. All severance restructuring costs had been
incurred as of September 30, 2019 and the plan was complete.
71
13. Employee Benefit Plans
The Company has a 401(k) savings plan whereby eligible employees may voluntarily contribute a percentage of their
compensation. The Company may, at its discretion, match a portion of the employees’ eligible contributions. Contributions by
the Company to the plan during the years ended September 30, 2019, 2018, and 2017 were approximately $10.5 million, $10.5
million and $10.5 million, respectively. Contributions made by the Company vest over four years.
14. Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available and
evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and
in assessing performance. Management has determined that the Company is organized as, and operates in, one reportable
operating segment: the development, marketing and sale of application services that optimize the security, performance and
availability of network applications, servers and storage systems.
Revenues by Geographic Location and Other Information
The Company does business in three main geographic regions: the Americas (primarily the United States); Europe, the
Middle East, and Africa (EMEA); and the Asia Pacific region (APAC). The Company’s chief operating decision-maker reviews
financial information presented on a consolidated basis accompanied by information about revenues by geographic region. The
Company’s foreign offices conduct sales, marketing and support activities. Revenues are attributed by geographic location
based on the location of the customer.
The following presents revenues by geographic region (in thousands):
Americas:
United States
Other
Total Americas
EMEA
Asia Pacific
Years Ended September 30,
2018
2017
2019
$ 1,137,556
108,112
1,245,668
553,701
443,078
$ 2,242,447
$ 1,088,270
116,073
1,204,343
546,239
410,825
$ 2,161,407
$ 1,075,222
110,298
1,185,520
506,571
397,950
$ 2,090,041
The following distributors of the Company's products accounted for more than 10% of total net revenue:
Ingram Micro, Inc.
Tech Data1
Westcon Group, Inc.2
Synnex Corporation2
Arrow ECS
Years Ended September 30,
2018
2017
2019
18.2%
10.2%
10.0%
—
—
16.6%
11.6%
10.4%
10.8%
10.7%
16.1%
12.4%
17.7%
—
10.4%
(1) On February 27, 2017, Tech Data completed the acquisition of Avnet Technology Solutions. Revenues for the year ended
September 30, 2017 represent combined revenues for Tech Data and Avnet.
(2) On September 1, 2017, Synnex Corporation completed the acquisition of Westcon Americas.
The Company tracks assets by physical location. Long-lived assets consist of property and equipment, net, and are shown
below (in thousands):
United States
EMEA
Other countries
September 30,
2019
194,176
13,451
15,799
223,426
$
$
2018
126,790
12,538
5,714
145,042
$
$
72
15. Quarterly Results of Operations (Unaudited)
The following presents the Company’s unaudited quarterly results of operations for the eight quarters ended
September 30, 2019. The information should be read in conjunction with the Company’s financial statements and related notes
included elsewhere in this report. This unaudited information has been prepared on the same basis as the audited financial
statements and includes all adjustments, consisting only of normal recurring adjustments that were considered necessary for a
fair statement of the Company’s operating results for the quarters presented.
Sept. 30,
2019 (1)
June 30,
2019 (1)
Three Months Ended
Sept. 30,
Dec. 31,
2018
2018 (1)
March 31,
2019 (1)
(unaudited and in thousands, except per share data)
June 30,
2018
March 31,
2018
Dec. 31,
2017
Net revenues
Products
Services
Total
Cost of net revenues
Products
Services
Total
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Restructuring charges
Total operating expenses
Income from operations
Other income, net
Income before income taxes
Provision for income taxes
Net income
Net income per share —
basic
Weighted average shares —
basic
Net income per share —
diluted
Weighted average shares —
diluted
$ 264,926
$ 248,929
$ 237,859
$ 233,877
$ 256,412
$ 238,835
$ 237,558
$ 227,303
325,462
590,388
314,465
563,394
307,036
544,895
309,893
543,770
306,297
562,709
303,368
542,203
295,746
533,304
295,888
523,191
44,693
46,225
90,918
44,336
46,431
90,767
43,547
44,631
88,178
42,410
44,304
86,714
48,505
44,935
93,440
45,164
45,845
91,009
44,127
45,518
89,645
43,265
44,122
87,387
499,470
472,627
456,717
457,056
469,269
451,194
443,659
435,804
217,554
102,812
64,390
—
384,756
114,714
3,397
195,852
116,894
57,141
—
369,887
102,740
4,722
170,954
164,259
160,425
165,806
169,970
167,934
96,314
46,656
—
313,924
142,793
7,434
92,038
42,543
—
298,840
158,216
7,095
95,078
41,748
18,426
315,677
153,592
5,667
94,061
39,374
—
299,241
151,953
2,259
91,056
39,276
—
300,302
143,357
2,790
85,889
39,984
—
293,807
141,997
2,145
118,111
107,462
150,227
165,311
159,259
154,212
146,147
144,142
23,274
21,557
34,140
34,406
26,378
31,469
36,511
55,713
$ 94,837
$ 85,905
$ 116,087
$ 130,905
$ 132,881
$ 122,743
$ 109,636
$ 88,429
$
1.57
$
1.43
$
1.94
$
2.17
$
2.20
$
2.01
$
1.79
$
1.42
60,283
59,981
59,686
60,216
60,462
60,970
61,420
62,195
$
1.57
$
1.43
$
1.93
$
2.16
$
2.18
$
1.99
$
1.77
$
1.41
60,448
60,196
60,029
60,645
61,070
61,633
62,059
62,550
(1) Quarterly results of operations for fiscal year 2019 contain effects from the adoption of ASC 606, and differ in
comparability to previous years due to those effects. See Note 2 - Revenue from Contracts with Customers for more
details.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
73
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that required information is
recorded, processed, summarized and reported within the required timeframe, as specified in the rules set forth by the Securities
Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be
disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of September 30, 2019 and, based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of
September 30, 2019.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of our internal control over financial reporting as of September 30,
2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control — Integrated Framework (2013). Based on the results of this assessment and on
those criteria, management concluded that our internal control over financial reporting was effective as of September 30, 2019.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2019, has been audited
by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears
herein.
Changes in Internal Control over Financial Reporting
During the fourth fiscal quarter, there were no changes to our internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B.
Other Information
None.
74
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Certain information required by this item regarding the Company’s directors and executive officers is incorporated herein
by reference to the sections entitled “Board of Directors — Nominees and Continuing Directors,” “Corporate Governance —
Committees of the Board — Audit Committee” and “— Code of Ethics for Senior Financial Officers” and “— Director
Nomination,” and “Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership
Reporting Compliance” in the Company’s definitive Proxy Statement that will be furnished to the SEC no later than
January 28, 2020 (the “Proxy Statement”). Additional information regarding the Company’s directors and executive officers is
set forth in Item 1 of Part I of this Annual Report on Form 10-K under the caption “Directors and Executive Officers of the
Registrant.”
Item 11.
Executive Compensation
The information required by this item is incorporated by reference to the sections entitled “Executive Compensation” and
“Corporate Governance — Committees of the Board — Compensation Committee” and “— Compensation Committee
Interlocks and Insider Participation” and “— Compensation Committee Report” in the Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item is incorporated by reference to the section entitled “Security Ownership of Certain
Beneficial Owners and Management” in the Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the sections entitled “Board of Directors — Director
Independence” and “Corporate Governance — Related Person Transactions Policy and Procedures” and “— Certain
Relationships and Related Person Transactions” in the Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the section entitled “Executive Compensation —
Fees Paid to PricewaterhouseCoopers LLP” and “— Audit Committee Pre-Approval Procedures” and “— Annual
Independence Determination” in the Proxy Statement.
75
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report are as follows:
1. Consolidated Financial Statements:
Our Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements.
2. Financial Statement Schedule:
Financial statement schedules have been omitted because the information required to be set forth therein is not
applicable, material, or is shown in the Consolidated Financial Statements or the notes hereto.
3. Exhibits:
The required exhibits are included at the end of this Annual Report on Form 10-K and are described in the
Exhibit Index immediately preceding the first exhibit.
Item 16.
Form 10-K Summary
Not applicable.
76
EXHIBIT INDEX
Exhibit Description
— Merger Agreement dated as of March 9, 2019, by and among the Registrant, Nginx, Inc., Neva Merger Sub
Limited, and Fortis Advisors LLC(1)
— Third Amended and Restated Articles of Incorporation of the Registrant(2)
— Sixth Amended and Restated Bylaws of the Registrant(3)
Exhibit
Number
2.1
3.1
3.2
4.1 * — Description of the Registrant's Securities
4.2
10.1
— Specimen Common Stock Certificate(4)
— Second Amended and Restated Office Lease Agreement dated April 5, 2010, between the Registrant and
CLP--Elliott West, L.P.(5)
10.2
— Office Lease Agreement between the Registrant and Selig Real Estate Holdings XXV, L.L.C. dated
October 31, 2006(6)
10.3
— Office Lease Agreement between the Registrant and Fifth & Columbia Investors, LLC dated May 3,
2017(7)
10.4 — Form of Indemnification Agreement between the Registrant and each of its directors and certain of its
officers(8) §
10.5 — F5 Networks, Inc. 2011 Employee Stock Purchase Plan (Amended and Restated effective March 14, 2019)
(9) §
10.6 — Form of Change of Control Agreement between the Registrant and the executive officers(10) §
10.7 — Traffix Communication Systems Ltd. 2007 Israeli Employee Share Option Plan(11) §
10.8 — Traffix Communication Systems Ltd. Acquisition Equity Incentive Plan(11) §
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
— Versafe Ltd. Acquisition Equity Incentive Plan(12) §
— F5 Networks, Inc. 2014 Incentive Plan (Amended and Restated effective March 14, 2019) (13) §
— Defense.Net, Inc. 2012 Stock Option and Grant Plan(14) §
— Defense.Net Acquisition Equity Incentive Plan(14) §
— Nginx, Inc. 2011 Share Plan(15) §
— Nginx, Inc. Acquisition Equity Incentive Plan(15) §
— Nginx, Inc. Acquisition Equity Incentive Plan Award Agreement(16) §
— Form of 2014 Incentive Plan Award Agreement (Accelerated Vesting) as revised November 2014(17) §
— Form of 2014 Incentive Plan Award Agreement (Accelerated Vesting) as revised October 2017(18) §
— Offer Letter from the Registrant to François Locoh-Donou(19) §
— Offer Letter from the Registrant to Francis J. Pelzer(20) §
— Separation Agreement and General Release of all Claims between the Registrant and John DiLullo(20) §
10.20
21.1 * — Subsidiaries of the Registrant
23.1 * — Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
31.1 * — Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 * — Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 * — Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS * — XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document
101.SCH * — Inline XBRL Taxonomy Extension Schema Document
101.CAL * — Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF * — Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB * — Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE * — Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 * — Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Filed herewith.
77
§
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Indicates a management contract or compensatory plan or arrangement.
Incorporated by reference from Current Report on Form 8-K dated March 11, 2019 and filed with the SEC on March 11,
2019.
Incorporated by reference from Current Report on Form 8-K dated March 19, 2013 and filed with the SEC on March 19,
2013.
Incorporated by reference from Current Report on Form 8-K dated January 9, 2019 and filed with the SEC on January 9,
2019.
Incorporated by reference from Exhibit 4.1 of Registration Statement on Form S-1, File No. 333-75817.
Incorporated by reference from Current Report on Form 8-K dated April 5, 2010 and filed with the SEC on April 8, 2010.
Incorporated by reference from Current Report on Form 8-K dated October 31, 2006 and filed with the SEC on
November 3, 2006.
Incorporated by reference from Current Report on Form 8-K dated May 3, 2017 and filed with the SEC on May 3, 2017.
Incorporated by reference from Exhibit 10.1 of Registration Statement on Form S-1, File No. 333-75817.
Incorporated by reference from Current Report on Form 8-K dated March 14, 2019 and filed with the SEC on March 14,
2019.
(10) Incorporated by reference from Current Report on Form 8-K dated April 29, 2009 and filed with the SEC on May 4, 2009.
(11) Incorporated by reference from Registration Statement on Form S-8 File No. 333-179794.
(12) Incorporated by reference from Registration Statement on Form S-8 File No. 333-191773.
(13) Incorporated by reference from Current Report on Form 8-K dated March 14, 2019 and filed with the SEC on March 14,
2019.
(14) Incorporated by reference from Registration Statement on Form S-8 File No. 333-196405.
(15) Incorporated by reference from Registration Statement on Form S-8 File No. 333-231802.
(16) Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
(17) Incorporated by reference from Annual Report on Form 10-K for the year ended September 30, 2014.
(18) Incorporated by reference from Annual Report on Form 10-K for the year ended September 30, 2017.
(19) Incorporated by reference from Current Report on Form 8-K dated January 27, 2017 and filed with the SEC on January
30, 2017.
(20) Incorporated by reference from Current Report on Form 8-K dated April 20, 2018 and filed with the SEC on April 25,
2018.
78
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
F5 NETWORKS, INC.
By:
/s/ FRANÇOIS LOCOH-DONOU
François Locoh-Donou
Chief Executive Officer and President
Dated: November 15, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
By:
By:
/s/ FRANÇOIS LOCOH-DONOU
François Locoh-Donou
/S/ FRANCIS J. PELZER
Francis J. Pelzer
Chief Executive Officer, President, and
Director (principal executive officer)
November 15, 2019
Executive Vice President, Chief Financial
Officer (principal financial officer and
principal accounting officer)
November 15, 2019
By:
/S/ ALAN J. HIGGINSON
Director
November 15, 2019
Alan J. Higginson
By:
/S/ A. GARY AMES
Director
November 15, 2019
A. Gary Ames
By:
/S/ SANDRA BERGERON
Sandra Bergeron
Director
November 15, 2019
By:
/S/ DEBORAH L. BEVIER
Director
November 15, 2019
Deborah L. Bevier
By:
/S/ MICHEL COMBES
Michel Combes
Director
November 15, 2019
By:
/S/ MICHAEL L. DREYER
Director
November 15, 2019
Michael L. Dreyer
By:
/S/ PETER KLEIN
Director
November 15, 2019
By:
By:
By:
Peter Klein
/S/ JOHN MCADAM
John McAdam
/S/ NIKHIL MEHTA
Nikhil Mehta
/S/ MARIE MYERS
Marie Myers
Director
November 15, 2019
Director
November 15, 2019
Director
November 15, 2019
79
BOARD OF DIRECTORS
CORPORATE OFFICERS
SHAREHOLDERS’ INFORMATION
Annual Shareholders Meeting
March 12, 2020
11:00 a.m.
Location: 801 5th Ave
Seattle, WA 98104
Parking: Corporate Headquarters
Corporate Headquarters
801 5th Ave
Seattle, WA 98104
206.272.5555
NASDAQ Listing
NASDAQ Symbol – FFIV
Investor Relations
206.272.7049
s.dulong@f5.com
www.f5.com
Independent Auditor
PricewaterhouseCoopers LLP
Seattle, WA
Transfer Agent
American Stock Transfer
800.937.5449
Gary Ames
Retired President and Chief
Executive Officer,
MediaOne International
Sandra Bergeron
Board Member,
Sophos Group PLC
Deborah Bevier
Principal,
DL Bevier Consulting LLC
Michel Combes
Chief Executive Officer,
Sprint
Michael Dreyer
Retired Chief Operations Officer,
Silicon Valley Bank
Alan Higginson
Chairman of the Board,
Former Chairman,
Hubspan, Inc.
Peter Klein
Retired Chief Financial Officer,
Microsoft
François Locoh-Donou
President and Chief Executive Officer,
F5 Networks, Inc.
John McAdam
Board Member
Nikhil Mehta
Chief Executive Officer,
Gainsight, Inc.
Marie E. Myers
Board Member
François Locoh-Donou
President and Chief Executive Officer
Tom Fountain
Executive Vice President and Chief
Strategy Officer
Geng Lin
Executive Vice President and Chief
Technology Officer
Steve McMillan
Executive Vice President of Global
Services
Frank Pelzer
Executive Vice President and Chief
Financial Officer
Gus Robertson
Senior Vice President and General
Manager of NGINX
Scot Rogers
Executive Vice President and General
Counsel
Kara Sprague
Executive Vice President and General
Manager, Application Services
Chad Whalen
Executive Vice President,
Worldwide Sales
Ana White
Executive Vice President and Chief
Human Resources Officer
Mika Yamamoto
Executive Vice President and Chief
Marketing and Customer Experience
Officer
ABOUT F5 NETWORKS
F5 (NASDAQ: FFIV) powers applications from development through their entire life cycle, across any multi-cloud environment, so our customers—
enterprise businesses, service providers, governments, and consumer brands—can deliver differentiated, high-performing, and secure digital
experiences. For more information, go to f5.com. You can also follow @f5networks on Twitter or visit us on LinkedIn and Facebook for more information
about F5, its partners, and technologies.
F5 Networks, Inc. | 801 5th Avenue | Seattle, WA 98104 | 206.272.5555 | www.f5.com