F5 Networks' CEO Discusses F2Q2012 Results - Earnings Call Transcript

F5 Networks, Inc. (FFIV)

F2Q2012 Results Earnings Call

April 18, 2012 4:30 PM ET

Executives

John Eldridge – Director, Investor Relations

John McAdam – President and CEO

Andy Reinland – Executive VP and CFO

Karl Triebes – EVP, Product Development and Chief Technology Officer

Manny Rivelo – EVP, Security and Strategic Solutions

Dan Matte – SVP, Marketing and Business Development

Analysts

Ittai Kidron – Oppenheimer

George Notter – Jefferies

Erik Suppiger – JMP Securities

Jason Ader – William Blair

Brian White – Topeka

Simon Leopold – Raymond James

Alex Kurtz – Sterne Agee

Stephen Patel – ISI Group

Alex Henderson – Miller Tabak

Nikos Theodosopoulos – UBS

Mark Sue – RBC Capital Markets

Troy Jensen – Piper Jaffray

Rajat Gupta – JPMorgan

Presentation

Operator

Good afternoon. And welcome to the F5 Second Quarter Financial Results Conference Call. At this time, all parties will be able to listen-only until the question-and-answer portion. Also today’s conference is being recorded. If anyone has any objections please disconnect at this time.

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

John Eldridge

Thank you, Carol. Welcome all of you to our conference call for second quarter of fiscal 2012. Speakers on today’s call are John McAdam, President and CEO; and Andy Reinland, Senior VP, sorry, Executive VP and Chief Finance Officer. Other members of our exec team are also with us to answer questions following our prepared comments. If you have questions following today’s call please direct them to me at 206-272-6571. If you don’t have a copy of today’s press release, you can assess one on our website at F5.com.

In addition, you can access an archived version of today’s live webcast from the Investor Relations Events Calendar page of our webpage -- website through July 18th. 4:30 p.m. today until midnight Pacific Time April 19th, you can also listen to a telephone replay at 866-503-3214 or 203-369-1863.

As we indicated in our press release, financial results for the second quarter reflect some changes in the way we report our non-GAAP measurements, prior to Q2, our non-GAAP results have excluded only stock-based compensation expense. Following the acquisition of Traffix Systems in February, we have decided to adopt common industry practice and exclude amortization of purchased intangibles and all acquisition-related charges as well.

Going forward, we believe this practice will provide investors for the more accurate representation of our operating business model. Before reconciliation of GAAP to non-GAAP results for Q2 and on Q3 earnings guidance is provided in our press release and the consolidated statements of operations is included in the press release and also posted on our website.

During today’s call, our discussion will contain forward-looking statements which include words such as believe, anticipate, expect and target. These forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in the quarterly press release and described in detail in our SEC filings.

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

Now, I’ll turn the call over to Andy Reinland.

Andy Reinland

Thank you, John. F5’s fiscal second quarter marked a return to product revenue acceleration as strong Telco sales and continued momentum in software and security drove revenue ahead of our guidance.

Revenue of $339.6 million, which exceeded the high-end of our $332 million to $337 million guided range, grew 5.3% from the prior quarter and 22.4% year-over-year. In line with our expectations Q2 revenue from Traffix Systems was not material to results.

GAAP EPS of $0.86 per diluted share was at the high-end of our guided range of $0.84 to $0.86. Non-GAAP EPS, which excludes stock-based compensation, amortization of purchased intangible assets and acquisition charges for Traffix was $1.09 per diluted share above our guidance of $1.05 to $1.07.

Product revenue of $205.2 million grew 18% year-over-year, and represented 60% of total revenue. Service revenue of $134.5 million grew 29% year-over-year, and accounted for 40% of total revenue. Book-to-bill for the quarter was greater than 1.

On the geographic basis, Americans revenue increased 21% from the second quarter of fiscal 2011 and accounted for 58% of total revenue. EMEA revenue which represented 21% of the total increased 19% from the second quarter of last year. APAC contributed 14% of revenue up 24% year-over-year and Japan accounted for 7% of revenue, a 47% increase year-over-year.

During Q2, our Application Delivery Networking business contributed $333.1 million in revenue. This compares to $316.9 million in Q1 and $270.5 million in the second quarter a year ago. Revenue from our ARX File Virtualization business was $6.5 million, compared to $5.5 million in Q1 and $7.1 million in Q2 of last year.

Telco was our strongest vertical in Q2, representing 27% of total sales. Financial was 16%, technology 19% and government was 12%, including U.S. Federal, which accounted for 6% of the total.

In Q2, we had two greater than 10% distributors, Avnet, which represented 16.6% of total revenue and Ingram Micro, which accounted for 13.9%.

Behind continued strong sales of software, GAAP gross margin improved in Q2 to 83%. Non-GAAP gross margin was 84.2%. GAAP operating expenses of $177.3 million were above our target range of $170.5 million to $174.5 million. Non-GAAP operating expenses were $155.7 million.

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