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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
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number
000-26041
F5 Networks, Inc.
(Exact name of Registrant as
specified in its charter)
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WASHINGTON
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91-1714307
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.
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)
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401 Elliott Ave West
Seattle, Washington 98119
(Address of principal executive
offices)
(206) 272-5555
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, no par value
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, no par value
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NASDAQ Stock Market LLC
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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
Act. Yes þ No o
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 o No þ
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 required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of March 31, 2007, the aggregate market value of the
Registrants Common Stock held by non-affiliates of the
Registrant was $2,767,489,254 based on the closing sales price
of the Registrants Common Stock on the Nasdaq Global
Market on that date.
As of November 16, 2007, the number of shares of the
Registrants common stock outstanding was 84,900,013.
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 Registrants
Definitive Proxy Statement for the Annual Shareholders Meeting
for fiscal year 2007, 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, 2007
Table of
Contents
1
Trademarks
and Tradenames
F5, F5 Networks, the F5 logo, BIG-IP, Application Security
Module, ASM, Local Traffic Manager, LTM, Global Traffic Manager,
GTM, Link Controller, LC, Enterprise Manager, EM, ControlPoint,
Application Accelerator, Traffic Management Operating System,
TMOS, WANJet, FirePass, WebAccelerator, TrafficShield, iControl,
TCP Express, Fast Application Proxy,
3-DNS,
iRules, Packet Velocity, Internet Control Architecture, IP
Application Switch, SYN Check, Control Your World, ZoneRunner,
OneConnect, Ask F5, Intelligent Compression, Transparent Data
Reduction, TDR, L7 Rate Shaping, IPv6 Gateway, Advanced Client
Authentication, SSL Acceleration, Advanced Routing, Fast Cache,
Message Security Module, MSM, The World Runs Better With F5,
Edge-FX, See It, GlobalSite, Acopia , Acopia Networks, ARX,
FreedomFabric and The Fabric of the Fan are trademarks or
service marks of F5 Networks, Inc., or its subsidiaries in the
U.S. and other countries. Any other trademarks, service
marks and/or
trade names appearing in this document are the property of their
respective owners.
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
2007 and fiscal 2007 refer to the fiscal year
ended September 30, 2007.
Forward-Looking
Statements
The statements contained in this report that are not purely
historical are 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. Because these forward-looking
statements 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 the heading Risk
Factors below and in other documents we file from time to
time with the Securities and Exchange Commission. All
forward-looking statements included in this report are based on
information available to us on the date hereof. Our business and
the associated risks may have changed since the date this report
was originally filed with the SEC. We assume no obligation to
update any such forward-looking statements.
General
F5 Networks is a leading provider of technology that optimizes
the delivery of network-based applications and the performance
and availability of servers, data storage devices and other
network resources.
Founded in 1996, F5 pioneered load-balancing technology that
distributes internet traffic evenly across multiple web servers,
making them look like a single server. Today, our BIG-IP
application delivery controllers sit in front of web and
application servers, balancing traffic and performing
compute-intensive functions such as encrypting and unencrypting
transmissions, screening traffic for security threats,
maintaining open connections with servers, speeding the flow of
traffic and a variety of other functions that improve the
performance, availability and security of applications and would
otherwise be performed by the servers themselves. By offloading
functions from servers, BIG-IP makes servers more efficient and
reduces the number of servers needed to run specific
applications. BIG-IP also supports software modules that manage
the flow of traffic between multiple data centers and across
multiple service provider connections, ensuring that it is
always routed to the most available resource. In addition, we
offer complementary products that provide secure remote access
to corporate networks and optimize the delivery of applications
over wide-area networks.
We believe our application delivery controllers and related
products are superior to competing technology in both
functionality and performance. The core of these products is our
full-proxy Traffic Management
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Operating System (TMOS) that enables them to inspect and modify
traffic flows to and from servers at network speed and supports
a broad array of functions that enhance the speed, performance
and availability of applications. iRules, a scripting language
based on TCL (Tools Command Language), is a unique feature of
TMOS that enables customers and third parties to write
customized rules to inspect and modify traffic. TMOS also
supports a common software interface called iControl, which
enables our products to communicate with one another and with
third-party products, including custom and commercial enterprise
applications. TMOS is designed to support the addition of new
functionality as software modules and to exploit the
performance-enhancing features of our purpose-built hardware
platforms. Correspondingly, our hardware architecture integrates
industry standard components with our own custom Packet Velocity
ASIC (Application Specific Integrated Circuit) in ways that
exploit the unique features and characteristics of TMOS to
deliver performance that is demonstrably superior to competing
products.
In September 2007, we acquired Acopia Networks, Inc.,
(Acopia) a leading provider of storage
virtualization technology. Just as our application delivery
controllers make many servers look like one, Acopias ARX
products sit in front of networked attached storage (NAS),
making multiple storage devices from different vendors look like
a single device to the individual clients, servers and
applications that use them. This frees users and storage
administrators from the time-consuming task of mapping
individual drives to specific clients and applications. In
addition, Acopia products simplify the migration of data between
storage devices, the addition of new storage devices, and the
distribution of data across tiers of storage that reflect the
relative importance or immediacy of the data.
In connection with our products, we offer a broad range of
services including consulting, training, installation,
maintenance and other technical support services.
F5 Networks was incorporated on February 26, 1996 in the
State of Washington. Our headquarters is in Seattle, Washington
and our mailing address is 401 Elliott Avenue West, Seattle,
Washington 98119. The telephone number at our executive offices
is
(206) 272-5555.
We have subsidiaries or branch offices in Australia, Canada,
China, France, Germany, Hong Kong, Israel, Japan, Malaysia,
Northern Ireland, Russia, Singapore, South Korea, Taiwan,
Thailand and the United Kingdom. Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports are available free of charge
on our website, www.f5.com, as soon as reasonably practicable
after such material is electronically filed with the Securities
and Exchange Commission.
Industry
Background
Growth of
IP Networks
Internet Protocol (IP) is a communications language used to
transmit data over the Internet. Since the late 1990s,
businesses have responded to the power, flexibility and
efficiency of the Internet by deploying new
IP-based
applications, upgrading their client-server applications to new
IP-enabled
versions, and enabling existing or legacy applications for use
over the Internet. At the same time, organizations have become
more geographically dispersed, and increasingly mobile
workforces depend on access to corporate applications and data
from remote locations and a variety of client devices such as
cellular telephones, personal digital assistants and notebook
computers.
Over the next several years, we believe these trends will
accelerate as more organizations discover the benefits of
IP-enabled
applications. In addition, we believe the growth of Internet
usage will continue to be driven by new applications, such as
Web Services and Voice over IP, and the growth of broadband
Internet access.
In conjunction with the growth of Internet traffic, the
proliferation of data and, in particular, unstructured data such
as voice, video, images, email, spreadsheets and formatted text
files, presents an enormous and increasing challenge to IT
organizations. In addition to unstructured data that is
business-critical and must be retained and readily accessible to
individuals and applications, new regulations mandate that
company email, web pages and other files must be retained
indefinitely. In response to this challenge, IT organizations
spend an increasing amount of their budget on NAS and other
types of storage systems.
3
Trend
Toward Virtualization
From a broad perspective, the goal of IT organizations is to
optimize the secure delivery of applications and data to users
wherever they are and whenever they need them. To achieve this
goal, organizations are embracing virtualization technologies
that enable them to group or partition data center resources to
meet user demand and reconfigure these virtual resources easily
and quickly as demand changes. Server virtualization, which
allows organizations to improve utilization of physical servers
by partitioning them into multiple virtual servers, is well
known and widely deployed. Application delivery controllers free
up server space by offloading common functions, such as
encryption and compression from multiple physical or virtual
servers, and dynamically manage the flow of traffic between
users and servers, making them look like a single resource to
the user. Sitting in front of storage systems, file
virtualization devices perform functions similar to application
delivery controllers, presenting the appearance of a single
resource to users and applications and dynamically managing the
transfer of files between users and applications and multiple
storage devices.
Application
Delivery Networking
Internet traffic passing between client devices and servers is
divided into discrete packets which travel by multiple routes to
their destination where they are reassembled. The disassembly,
routing, and reassembly of transmissions are relatively
straightforward and require little intelligence. By contrast,
application delivery networking managing,
inspecting, modifying and redirecting application traffic going
to and from servers requires intelligent systems
capable of performing a broad array of functions.
Basic application delivery networking (ADN) functions include
load-balancing (distributing traffic across multiple servers
while making them appear to be a single server), and
health-checking (monitoring the performance of servers and
applications to ensure that they are working properly before
routing traffic to them). In addition, ADN encompasses a growing
number of functions that have typically been performed by the
server or the application itself, or by point solutions running
on separate devices. This category includes a growing number of
functions, such as the following:
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SSL Acceleration using Secure Socket Layer (SSL)
encryption to secure traffic between the server and the browser
on an end users client device;
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Rate Shaping prioritizing transmissions according to
preset rules that give precedence to different types of traffic;
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Compression reducing the volume of data transmitted
to take maximum advantage of available bandwidth;
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TCP Optimization improving server efficiency by
maintaining an open connection with a server during interactive
sessions;
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IPv6 Translation enabling communication and
interoperability between networked devices using IPv6, the
newest version of the Internet Protocol, and those using the
older version IPv4;
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Application Security protecting critical web
applications from attacks such as Google hacking, cross-site
scripting, and parameter tampering;
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Web Acceleration enhancing the performance of web
applications over wide area networks by reducing latency,
eliminating errors, and resolving other issues that slow
delivery;
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WAN Optimization improving the performance of
applications accessed over wide area network links by reducing
the number of round trips required and ensuring maximum use of
available bandwidth.
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Global Traffic Management ensuring high
availability, maximum performance and global management for
applications running across multiple, globally-dispersed data
centers;
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Link Load Balancing monitoring availability and
performance of multiple WAN connections and intelligently
managing bi-directional traffic flows to ensure uninterrupted,
optimized Internet access.
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Since most large enterprises have hundreds if not
thousands of servers and applications, it isnt
practical to replicate these functions on each server or build
them into the applications themselves. Even if it were,
maintenance costs would be prohibitive and the net result would
be a negative impact on the overall performance of servers and
applications. Deploying point solutions in the network
eliminates those problems but creates a new set of challenges.
Using point solutions from multiple vendors can create
interoperability issues, and problems that do occur can be
difficult to troubleshoot. From a security standpoint, it is
also much more difficult to audit traffic passing through
multiple devices. As a result, enterprise customers are
increasingly demanding products that integrate ADN functions on
a single platform.
File
Virtualization
Along with other types of IP traffic, file-based information
created and accessed by Internet users and network applications
is growing significantly. According to some estimates, the
volume of unstructured files is expected to triple annually over
the next several years. The challenge of storing and managing
unstructured files is becoming increasingly costly and complex,
and reducing the cost and complexity is rapidly moving up the
list of data center priorities.
In many large organizations whose employees are geographically
dispersed, unstructured data is stored on local file servers,
which are difficult to manage, costly to maintain and generally
underutilized. Information on these devices is easy for local
users to access but often inaccessible to others in the
organization. To reduce the cost, complexity, and redundancy of
dispersed file systems, many IT organizations are consolidating
file storage on centralized NAS devices and other types of
storage systems. Migrating and consolidating files is difficult
and time-consuming, however, and centralized storage systems
pose a different set of problems.
Centralized storage of files can slow access for remote users
and applications, spurring interest in technology that can speed
the transfer of files across wide area networks (WANs). In
addition, only users and applications that are physically mapped
to a specific drive can store and access data on that drive. As
the drive fills up, files must be moved manually to a new drive
and affected users and applications must be remapped to that
drive. In large organizations, this often constitutes a
round-the-clock chore for many highly-skilled employees.
Another major storage problem stems from the fact that all files
are not created equal. Many businesses and other organizations
have policies or other obligations to retain email and other
files, increasing the volume of data to archive and, in some
cases, to keep indefinitely. Since it is unlikely that these
files will be accessed frequently, if at all, in the course of
normal business, it makes little sense to store them on
expensive, high-performance systems designed to provide
immediate access to business-critical information. As a result,
IT organizations are beginning to deploy tiers of storage
systems that match cost, capacity, and performance to the type
of information being stored, how frequently it is accessed, and
its relative importance to the business. Often, the most
cost-effective solution is a combination of storage systems from
different vendors, an approach that typically entails migrating
huge amounts of data between incompatible devices. Once that is
completed, organizations face the challenge of automating the
tiering process and the management of aging files.
Whether or not they deploy tiered file systems, many
organizations are beginning to address the mounting cost in time
and resources of backing up data stored on employee desktops,
local file servers, and other devices. According to some
estimates, approximately 80% of the files organizations back up
have not changed since the previous
back-up.
Worse yet, a large and growing percentage are music and video
files, family photographs, and other personal files.
Responding to increasing demand from IT organizations, a number
of storage vendors and a handful of other companies offer
solutions that address some or all of these issues and can be
loosely grouped under the heading of file virtualization.
Collectively, these solutions encompass a variety of
technological approaches designed to optimize and simplify the
storage of unstructured data.
5
F5
Solutions
Application
Delivery Networking
F5 is a leading provider of application delivery networking
products that ensure the security, optimization and availability
of applications for any user, anywhere. We believe our products
offer the most intelligent architecture and advanced
functionality in the marketplace along with performance,
flexibility and usability features that help organizations
improve the way they serve their employees, customers, and
partners while lowering operational costs.
Software Based Products. From inception, we
have been committed to the belief that the complexity of
application-level processing requires the flexibility of a
software-based solution. We believe our modular software
architecture enables us to deliver the broadest range of
integrated functionality in the market and facilitates the
addition and integration of new functionality. We also believe
that integrating our software with commodity hardware components
enables us to build products that deliver superior performance,
functionality and flexibility at competitive prices.
Full Proxy Architecture. The core of our
software technology is the Traffic Management Operating System
(TMOS) introduced in September 2004 as part of BIG-IP version 9.
We believe this is a major enhancement of our previous
technology that enables our products to deliver functionality
that is superior on many levels to any other application
delivery networking product in the market. With TMOS, our
products can inspect, modify and direct both inbound and
outbound traffic flows across multiple packets. This ability to
manage application traffic to and from servers adds value to
applications that pass through our devices in ways that are not
possible with other application delivery networking solutions.
Modular Functionality. In addition to its full
proxy architecture, TMOS is specifically designed to facilitate
the development and integration of application delivery
networking functions as modules that can be added to
BIG-IPs core functionality to keep pace with rapidly
evolving customer needs. Add-on modules currently available with
BIG-IP include: Intelligent Compression; SSL Acceleration; Rate
Shaping; Advanced Client Authentication; IPv6 Gateway; Caching;
and others. We also offer Application Security Manager (ASM),
Global Traffic Manager (GTM), Link Controller, and
WebAccelerator as software modules on BIG-IP.
Application Awareness. The open architecture
of TMOS includes an application programming interface (API)
called iControl that allows our products to communicate with one
another and with third-party software and devices. Through this
unique feature, third-party applications and network devices can
take an active role in shaping IP network traffic, directing
traffic based on exact business requirements defined by our
customers and solutions partners and tailored to specific
applications. This application awareness capability
is one of the most important features of our software-based
products and further differentiates our solutions from those of
our competitors.
Adaptive Intelligence. The full-proxy
capabilities of TMOS enable it to inspect or read
the entire contents of a transmission across multiple packets
and identify specific elements of that transmission, including
items such as names, dates, and any type of number or label. By
taking advantage of our unique scripting capability, based on
Tool Command Language (TCL), customers can use those elements as
variables to create iRules that modify the content and direct
the flow of traffic in ways tailored to the dynamic needs of
their applications. iRules is a unique feature of TMOS that
gives our products flexibility unmatched by competing products.
Integrated Application Layer Solutions. The
combination of our full proxy architecture and enhanced iRules
enables BIG-IP to intercept, inspect and act on the contents of
traffic from virtually every type of
IP-enabled
application. In addition, the modularity of the TMOS
architecture allows us to deliver tightly integrated solutions
that secure, optimize and ensure the availability of
applications and the networks they run on.
Data
Solutions
With the acquisition of Acopia Networks in September 2007, we
expanded our offerings to include intelligent file
virtualization solutions which address many of the problems
associated with managing todays
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rapidly expanding file storage infrastructure. Acopias ARX
product family represents a unique set of capabilities that
optimize the performance and utilization of NAS storage systems.
Non-disruptive Data Migration. ARX automates
the movement of files between heterogeneous storage devices
without affecting access and without requiring client
reconfiguration. Enterprises can perform seamless
hardware & software upgrades on file storage
platforms, server consolidation, even vendor switches, all
during business hours.
Automated Storage Tiering. ARX automates the
movement of data between tiers of storage, and the placement of
data on appropriate tiers of storage, irrespective of platform
or vendor. Organizations can lower the cost of storage and
shrink backup and recovery windows by automatically placing data
on appropriate storage devices without affecting access to the
data.
Dynamic Load Balancing. ARX dynamically
distributes application workload across multiple file storage
devices, eliminating hotspots or bottlenecks.
Companies can improve application performance and increase
productivity using the infrastructure that is already in place.
Efficient Data Replication. ARX provides the
ability to replicate files between heterogeneous storage
platforms for efficient and cost effective disaster recovery and
centralized backup applications.
Strategy
Our objective is to lead the industry in delivering the enabling
architectures that integrate IP networks with applications and
data. Integration allows organizations to improve costly and
time consuming business processes and develop new sources of
revenue through highly differentiated offerings. Key components
of our strategy include:
Offering
a complete, integrated application delivery product
suite.
Since the introduction of our TMOS architecture for application
delivery networking, we have developed TMOS-based versions of
our own legacy products, such as GTM and Link Controller, and
acquired technology, including Application Security Manager,
WebAccelerator, and WANJet. We are currently developing a
TMOS-based version of FirePass, which we plan to release in
early calendar year 2008. In fiscal 2007, we also introduced
Message Security Module, a third-party reputation-based,
anti-spam solution that runs on TMOS and is available as an
add-on module to BIG-IP LTM. We believe this approach sharply
differentiates our products from our competitors offerings
and provide customers with an expanding array of integrated
application delivery networking solutions that can be customized
to meet their specific needs.
Investing
in technology to continue to meet customer needs.
We continue to invest in research and development to provide our
customers with comprehensive, integrated solutions. In
application delivery networking, our product development efforts
leverage the unique attributes of our software-based platforms
to deliver new features and functions that address the complex
and changing needs of our customers. Our acquisition of Acopia
and our planned investments in ARX devices are aimed at
providing data solutions to the complex challenge of efficiently
storing and managing the huge and growing volume of unstructured
files created by network users and applications. For both our
application delivery networking and file virtualization
products, development of high-performance, proprietary hardware
is a key component of our investment strategy. In developing
these products, we will continue to use commodity hardware in
order to ensure performance and cost competitiveness.
Enhancing
channel sales and distribution model.
We continue to invest significant resources in developing and
expanding our indirect sales and distribution channels by
cultivating our relationships with our existing partners and
actively developing new relationships. Our efforts to recruit
new partners are aimed primarily at large value-added resellers,
systems integrators, and industry-leading systems manufacturers.
We are also recruiting new channel partners and leveraging our
existing channels to sell our WAN optimization and file
virtualization products.
7
Continuing
to build and expand relationships with strategic technology
partners.
To compete successfully against Cisco and other large
competitors who have an established presence in our target
accounts, we have developed strategic technology partnerships
with enterprise software vendors, such as Microsoft, Oracle and
SAP, who also have an established presence in those accounts. By
taking advantage of our open application programming interface,
called iControl, these vendors can enable their applications to
control our products in the network, enhancing overall
application performance. In addition, we have worked closely
with several of these vendors to develop configurations of our
products, called application ready networks, that are
specifically tuned to simplify deployment and optimize the
performance of their applications. In return, these vendors
provide us significant leverage in the selling process by
recommending our products to their customers. We plan to
continue building on our existing relationships and to extend
our competitive edge by developing new relationships with other
strategic partners.
Leveraging
DevCentral, our online community of network architects and
developers.
Customization of our products using iRules enhances their
stickiness by allowing customers to solve problems
in both their applications and their networks that would be
difficult if not impossible to solve by other means. To promote
the use of iRules, we host an online community where network
architects and developers can discuss and share the ways in
which they use iRules to solve problems and enhance the
security, performance and availability of applications. A
corollary benefit is that many of the iRules solutions posted by
DevCentral participants have become standard features in new
releases of TMOS.
Enhancing
our brand.
We plan to continue building awareness of F5 as a leading
provider of application delivery networking products that
optimize the security, performance and availability of network
applications, servers and storage systems. Our goal is to make
the F5 brand synonymous with superior technology, high-quality
customer service and ease of use.
Products
Our core technology is software for application delivery
networking, including application security, secure remote
access, and WAN optimization. With the acquisition of Acopia, we
have added complementary file virtualization technology.
All of our products, including the ARX family, are systems that
integrate our software with purpose-built hardware that combines
commodity components with our custom ASICs. Our BIG-IP product
family, which represents the bulk of our sales, supports a
growing number of features and functions as software
modules including GTM (Global Traffic Manager, Link
Controller, ASM (Application Security Manager) and
WebAccelerator. We also sell FirePass, WANJet and WebAccelerator
as separate, stand-alone appliances.
BIG-IP
Products in our family of BIG-IP application delivery
controllers differ primarily in the hardware configurations that
make up each system. Our current BIG-IP systems include five
hardware platforms: high-end (BIG-IP 8800 and 8400), mid-range
(BIG-IP 6800, 6400 and 3400), and an entry-level (BIG-IP 1500).
Each system uses one or more CPUs for application-level
processing, and all but the entry-level systems come equipped
with our own proprietary Packet Velocity ASIC for
high-performance packet assembly and disassembly; commodity
switch fabric for connectivity; and commodity ASICs for SSL
encryption and decryption and for compression. In addition to
local area traffic management, which is standard on every
system, BIG-IP supports a growing number of add-on software
products and features. Software products currently available on
BIG-IP include GTM, Link Controller, ASM, and WebAccelerator.
Available features include intelligent compression, L7 rate
shaping, iPv6 gateway, advanced client authentication, SSL
acceleration, advanced routing and fast caching.
8
FirePass
FirePass appliances provide SSL VPN access for remote users of
IP networks and any applications connected to those networks
from any standard Web browser on any device. The components of
FirePass include a dynamic policy engine, which manages user
authentication and authorization privileges, and special
components that enable corporations to give remote users
controlled access to the full array of applications and
resources within the network. FirePass also supports Application
Ready Access, providing full reverse-proxy services for
market-leading application portals including those of SAP,
Oracle, Microsoft, and others.
Currently, we sell three FirePass products: The FirePass
1200 appliance is designed for small to medium enterprises and
Branch Offices and supports from 10 to 100 concurrent users. The
FirePass 4100 controller is designed for medium size enterprises
and, from a price/performance standpoint, is recommended for up
to 500 concurrent users. The FirePass 4300 appliance is designed
for medium to large enterprises and service providers and
supports up to 2000 concurrent users.
Application
Security Manager (ASM)
Application Security Manager is a Web application firewall that
provides comprehensive, proactive, application-layer protection
against both generalized and targeted attacks. Available as a
software module, ASM employs a positive security model
(deny all unless allowed) combined with
signature-based detection. As a result, ASM can prevent
day-zero attacks in addition to known security
threats. ASM is available as an add-on software module for our
BIG-IP product family.
WebAccelerator
WebAccelerator speeds web transactions by optimizing individual
network object requests, connections, and end-to-end
transactions from the browser through to databases.
WebAccelerator enhances web application performance from any
location, speeding up interactive performance, improving
download times, utilizing bandwidth more efficiently, and
dramatically reducing the cost and response time of delivering
Web-enabled applications to distributed users where it is not
possible to deploy an end point device. WebAccelerator devices
can also be placed at key remote locations to provide
acceleration to end-users above and beyond TCP optimizations and
HTTP compression.
WebAccelerator is available as a software module on BIG-IP LTM
or as a stand-alone appliance (BIG-IP WebAccelerator 4500).
WANJet
WANJet combines WAN optimization and traffic-shaping in a single
device to accelerate file transfers, email, data replication,
and other applications over IP networks. It provides LAN-like
performance on any WAN, ensuring predictable application
performance for all users, and encrypts and secures all
transfers without performance penalties. WANJet is deployed as a
dual-sided (symmetric) solution that optimizes application
traffic to and from data centers and branch offices.
For data centers, the WANJet 500 features pass-through fault
tolerance and scalability for up to 20,000 optimized
connections. For branch offices, the WANJet 300 combines
pass-through fault tolerant features, silent operation, and
performance for up to 1,000 optimized connections. WANJet
solutions work seamlessly across all wide-area networks
including dedicated links, IP VPNs, frame relay, and even
satellite connections.
Enterprise
Manager
Enterprise Manager takes advantage of our iControl interface to
provide a single, centralized management console for our ADN
products. Enterprise Manager allows customers with dozens or
hundreds of our products to discover and view those products in
a single window, and to upgrade or modify the software on those
products simultaneously. This lowers the cost and simplifies the
task of deploying, managing and maintaining our products and
reduces the likelihood of error when blanket changes are
implemented.
9
Enterprise Manager 500 and Enterprise Manager 3000 are
appliance-based devices on dedicated, enterprise-grade
platforms. Enterprise Manager 500 provides control for up to 50
F5 devices, and Enterprise Manager 3000 provides control for up
to 300 F5 devices.
ARX
The ARX product family is a series of high performance,
enterprise-class intelligent file virtualization devices that
dramatically simplify the management of file storage
environments and lower total storage costs by automating data
management tasks and eliminating the disruption associated with
storage management operations. The ARX series is powered by the
FreedomFabric network operating system, which automates many
storage management tasks that are performed manually today, and
eliminates the disruption associated with those tasks.
FreedomFabrics unique suite of storage management policies
includes data migration, automated storage tiering, data
replication, and dynamic load balancing.
Currently, the ARX series includes three products. The ARX
500, the low end of the series, is a stand-alone device that can
manage more than 120 million files. The ARX 1000 is also a
stand-alone device and can manage more than 380 million
files. The high-end ARX 6000 is a chassis-based device with
multiple blades that can manage more than 2 billion files.
Enabling
Technologies
iControl is an application programming interface that allows
customers and independent software vendors to modify their
programs to communicate with our products, eliminating the need
for human involvement, lowering the cost of performing basic
network functions and reducing the likelihood of error. Although
we do not derive revenue from iControl itself, the sale of
iControl-enabled applications by independent software vendors
such as Microsoft and Oracle helps promote and often leads
directly to the sale of our other products.
iRules is a built-in feature of our TMOS architecture that
allows users customers to manipulate and manage any IP
application traffic that passes through out TMOS-based products.
iRules utilizes an easy-to-learn scripting syntax and enables
users to customize how they intercept, inspect, transform, and
direct inbound or outbound application traffic.
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. Our product development group employs a standard
process for the development, documentation and quality control
of software and systems that is designed to meet these goals.
This process includes working with management, product
management, customers and partners to identify new or improved
solutions that meet the evolving needs of our addressable
markets.
Our principal software engineering group is located in our
headquarters in Seattle, Washington. Our core product
development teams for FirePass, WANJet and WebAccelerator are
located in San Jose, California. We also have a smaller
development facility for WANJet and WebAccelerator in Belfast,
Northern Ireland. Our core Application Security Manager (ASM)
product development team is located in Tel Aviv, Israel. Our ARX
product development team is located in Lowell, Massachusetts.
Our hardware engineering group is located in Spokane,
Washington. In addition, we maintain a dedicated facility for
product testing and quality control in Tomsk, Russia. Members of
all these teams collaborate closely with one another to ensure
the interoperability and performance of our hardware and
software systems.
During the fiscal years ended September 30, 2007, 2006 and
2005, we had research and product development expenses of
$69.0 million, $49.2 million, and $31.5 million,
respectively.
Customers
Our customers include a wide variety of enterprise customers and
service providers who are Fortune 1000 or Business Week Global
1000 companies) including those in telecommunications,
financial services,
10
technology, manufacturing, transportation and government. In
fiscal year 2007, international sales represented 41.6% of our
net revenues. Refer to Note 9 of our consolidated financial
statements included in this Annual Report on
Form 10-K
for additional information regarding our revenues by geographic
area.
Sales and
Marketing
Sales
We sell our products and services to large enterprise customers
and service providers through a variety of channels, including
distributors, value-added resellers (VARs) and
systems integrators. A substantial amount of our revenue for
fiscal year 2007 was derived from these channel sales. Our sales
teams work closely with our channel partners and sell our
products and services directly to a limited number of major
accounts.
F5 sales teams. Our inside sales team
generates and qualifies leads for regional sales managers 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 four sales regions: the Americas;
Europe, the Middle East, and Africa (EMEA); Japan; and the Asia
Pacific region (APAC). Field sales personnel work closely with
our channel partners to assist them, as necessary, in the sale
of our products and services to their customers. We also sell
our products and services directly to a limited group of
customers, primarily large enterprises, whose accounts are
managed by our major account services team. Field systems
engineers support our regional sales managers and channel
partners by participating in joint sales calls and providing
pre-sale technical resources as needed.
With the purchase of Acopia, we acquired an existing sales team
with specialized knowledge of the storage market, data solutions
and the ARX product line. During fiscal year 2008 we plan to
expand the ARX sales team as we integrate sales and marketing of
ARX with our ADN products.
Distributors and VARs. Consistent with our
goal of building a strong channel sales model, we have
established relationships with large national and international
distributors, local and specialized distributors and VARs from
which we derive the majority of our sales.
Both distributors and VARs sell our products. In addition,
VARs assist their customers in network design, installation and
testing. Since the acquisition of Acopia, we have identified a
number of existing partners who are potential channels for ARX.
Our agreements with our channel partners are not exclusive and
do not prevent them from selling competitive products. These
agreements typically have terms of one year with no obligation
to renew, and typically do not provide for exclusive sales
territories or minimum purchase requirements.
For fiscal year 2007, sales to two of our distributors, Ingram
Micro, Inc., and Avnet Technologies, represented 11.6% and 13.2%
of our total revenues respectively. Our agreements with these
distributors are standard, non-exclusive distribution agreements
that renew automatically on an annual basis and can be
terminated by either party with 30 days prior written
notice. The agreements grant Ingram Micro and Avnet Technologies
the right to distribute our products to resellers in North
America and certain other territories internationally, with no
minimum purchase requirements.
Systems integrators. We also market our
products through strategic relationships with systems
integrators, who include our products as core components of
application 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 platform (ERP) or
customer relationship management (CRM) solutions, that
incorporate our products for high availability and enhanced
performance.
Marketing
Our marketing strategy is driven by the belief that our
continued success depends on our ability to understand and
anticipate the dynamic needs of our addressable markets and to
develop valuable solutions that meet those needs. In line with
this belief, our marketing organization works directly with
customers, partners
11
and our product development teams to identify and create
innovative solutions to further enhance our leadership position.
In addition, our business development team, which is a component
of our marketing organization, closely monitors technology
companies in adjacent and complementary markets for
opportunities to acquire or partner with those whose solutions
are complementary to ours and could enable us to expand our
addressable market.
Another key component of our marketing strategy is to develop
and expand our iControl partnerships. Working closely with our
partners, we have developed solution sets called Application
Ready Networks (ARNs) that help ensure the successful deployment
and delivery of their applications over the network. The result
of methodical testing and research, ARNs provide
architecture-based, best-practice documentation on how to deploy
F5 products with applications from major software vendors such
as Microsoft, Oracle and SAP, helping joint customers unlock the
full potential of those applications.
To support the growing number of developers using our products,
including network and application architects, we continue to
promote and expand DevCentral, our on-line community website
that provides technical resources to customers, prospects and
partners wanting to extend and optimize F5 solutions using
iRules. A key aspect of DevCentral is an on-line forum where
developers as well as application and network architects discuss
and share solutions they have written with iRules. At the end of
fiscal 2007, DevCentral had more than 19,500 registered members.
We also engage in a number of marketing programs and initiatives
aimed at promoting our brand and creating market awareness of
our technology and products. These include actively
participating in industry trade shows and joint marketing events
with channel and technology partners, and briefing industry
analysts and members of the trade press on our latest products,
business relationships and technology partnerships. In addition,
we market our products to chief information officers and other
information technology professionals through targeted
advertising, direct mail and high-profile Web events.
Backlog
At the end of fiscal years 2007 and 2006, we had product backlog
of approximately $9.9 million and $12.3 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
cancelled 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.
Customer
Service and Technical Support
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 customers. Accordingly
we offer a broad range of support services that include
installation, phone support, hardware repair and replacement,
software updates, consulting and training services. We deliver
these services directly to end users and also utilize a
multi-tiered support model, leveraging the capabilities of our
channel partners when applicable. Our technical support staff is
strategically located in regional service centers to support our
global customer base.
Prior to the installation of our products, our services
personnel work with customers to analyze their network needs and
determine the best way to deploy our products and configure
product features and functions to meet those needs. Our services
personnel also provide
on-site
installation and training services to help customers make
optimal use of product features and functions.
Our customers typically purchase a one-year maintenance contract
which entitles them to an array of services provided by our
technical support team. Maintenance services provided under the
contract include online updates, software error correction
releases, hardware repair and replacement, and remote support
through a 24 hours a day, 7 days a week help desk,
although not all service contracts entitle a customer to
round-the-clock call center support. Updates to our software are
only available to customers with a current
12
maintenance contract. Our technical support team also offers
seminars and training classes for customers on the configuration
and use of products, including local and wide area network
system administration and management. In addition, we have a
professional services team able to provide a full range of
fee-based consulting services, including comprehensive network
management, documentation and performance analysis, and capacity
planning to assist in predicting future network requirements.
During fiscal year 2007 we achieved ISO 2001 certification for
our Professional Services Organization.
We also offer, as part of our maintenance service, an online,
automated, self-help customer support function called Ask
F5 that allows customers to answer many commonly asked
questions without having to call our support desk. This allows
the customer to rapidly address issues and questions, while
significantly reducing the number of calls to our support desk.
This enables us to provide comprehensive customer support while
keeping our support-related expenses at a manageable, consistent
level.
Manufacturing
We outsource the manufacturing of our pre-configured hardware
platforms to contract manufacturer Solectron Corporation for
assembly according to our specifications. Our outsourcing
relationship will continue following the acquisition of
Solectron by Flextronics in October 2007.
Flextronics installs our software onto the hardware platforms
and conducts functionality testing, quality assurance and
documentation control prior to shipping our products. Our
agreement with Flextronics allows it to procure component
inventory on our behalf based upon a rolling production
forecast. Subcontractors supply Flextronics with standard parts
and components for our products based on our production
forecast. We are contractually obligated to purchase component
inventory that our contract manufacturer procures in accordance
with the forecast, unless we give notice of order cancellation
in advance of applicable lead times. As protection against
component shortages and to provide replacement parts for our
service teams, we also stock limited supplies of certain key
components for our products.
Hardware platforms for our products consist primarily of
commodity parts and certain custom components designed and
approved by our hardware engineering group. Most of our
components are purchased from sources which we believe are
readily available from other suppliers. However, several
components used in the assembly of our products are purchased
from single or limited sources such as our proprietary Packet
Velocity ASIC for Layer 4 processing that is manufactured for us
by a third-party contract semiconductor foundry.
Competition
The increasing breadth of our product offerings has enabled us
to address a growing array of opportunities, many of which are
outside the bounds of the traditional Layer 4-7 market. Within
what Gartner Group calls the Application Acceleration market, we
compete in the Application Delivery Controller (ADC) market,
which encompasses the traditional Layer 4-7 market, and the WAN
Optimization Controller market. Over the next year or two, we
believe these two market segments will merge as WAN optimization
effectively becomes a feature of Application Delivery. With the
availability of ASM and WebAccelerator as software modules on
BIG-IP, these products have already become features of our
overall ADN solution, and our strategic roadmap includes plans
to integrate FirePass with BIG-IP over the next 12 to
18 months. For the immediate future, however, the WAN
optimization and secure remote access application security
market segments will continue to be viewed as discrete markets.
In 2007, approximately 90 percent of our products and
services were sold into the ADC market where our primary
competitor is Cisco Systems, Inc. Other competitors in this
market include Citrix Systems, Inc., and to a lesser degree
Nortel Networks Corporation, Juniper Networks, Inc., Foundry
Networks, Inc. and Radware Ltd.
In the adjacent WAN Optimization market, WANJet competes mainly
with Riverbed Technology, Inc., Juniper, Packeteer, Inc., and to
a lesser extent Cisco and Citrix. None of our competitors offer
an integrated product with advanced features comparable to
WebAccelerator.
13
In the SSL VPN remote access market, we compete with Juniper,
Citrix, Aventail Corporation (acquired by SonicWall), Nokia,
Nortel, and Symantec and a number of smaller players. Because
SSL VPNs are a potential replacement for IPSec VPNs, the most
widely deployed solution for secure remote access today, we also
compete with Check Point Software Technologies, Ltd. which,
along with Juniper, is a market leader in IPSec VPNs. Citrix
introduced V8 of their Netscaler code which does offer the Teros
web firewall as a module.
Application firewalls represent an emerging market that is
populated mainly by private, early-development-stage companies.
Other companies that have acquired products similar to ASM
include Citrix Systems. None of our competitors offers a
high-performance product similar to our Application Security
Module, which is tightly integrated with our application
delivery products.
With the acquisition of Acopia, we have entered the nascent file
virtualization market. Although ARX is unique in terms of its
technology and the functionality it supports, large storage
vendors such as EMC, Network Appliance, Brocade, and Cisco offer
products with overlapping functionality.
Many of our competitors have a longer operating history and
greater financial, technical, marketing and other resources than
we do. These larger competitors also have a more extensive
customer base and broader customer relationships, including
relationships with many of our current and potential customers.
In addition, many have large, well-established, worldwide
customer support and professional services organizations and a
more extensive direct sales force and sales channels. Because of
our relatively smaller size, market presence and resources, our
larger competitors may be able to respond more quickly than we
can to new or emerging technologies and changes in customer
requirements. These companies may also adopt aggressive pricing
policies to gain market share. As a result, our competitors
could undermine our ability to win new customers and maintain
our existing customer base.
Intellectual
Property
We rely on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect our
intellectual property rights. We have obtained 23 patents in the
United States and have 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 do 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.
In addition to our own proprietary software, we incorporate
software licensed from several third-party sources into our
products. These licenses generally renew automatically on an
annual basis. We believe that alternative technologies for these
licenses are available both domestically and internationally.
Employees
As of September 30, 2007, we employed 1,582 full-time
persons, including 450 in product development, 669 in sales and
marketing, 279 in professional services and technical support
and 184 in finance, administration and operations. None of our
employees are represented by a labor union. We have experienced
no work stoppages and believe that our employee relations are
good.
14
Directors
and Executive Officers of the Registrant
The following table sets forth certain information with respect
to our executive officers and directors as of November 30,
2007:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
John McAdam
|
|
|
56
|
|
|
President, Chief Executive Officer and Director
|
Mark Anderson
|
|
|
45
|
|
|
Senior Vice President of Worldwide Sales
|
Jeffrey A. Christianson
|
|
|
50
|
|
|
Senior Vice President and General Counsel
|
Edward J. Eames
|
|
|
49
|
|
|
Senior Vice President of Business Operations
|
Christopher P. Lynch
|
|
|
44
|
|
|
Senior Vice President of Data Solutions
|
Dan Matte
|
|
|
41
|
|
|
Senior Vice President of Marketing and Business Development
|
Andy Reinland
|
|
|
43
|
|
|
Senior Vice President and Chief Finance Officer
|
John Rodriguez
|
|
|
47
|
|
|
Senior Vice President and Chief Accounting Officer
|
Karl Triebes
|
|
|
40
|
|
|
Senior Vice President of Product Development and Chief
Technology Officer
|
A. Gary Ames(2)(3)(4)
|
|
|
63
|
|
|
Director
|
Deborah L. Bevier(1)(2)(4)
|
|
|
56
|
|
|
Director
|
Keith D. Grinstein(1)(2)
|
|
|
47
|
|
|
Director
|
Karl D. Guelich(1)(3)
|
|
|
65
|
|
|
Director
|
Alan J. Higginson(2)(3)
|
|
|
60
|
|
|
Chairman of the Board of Directors
|
Rich Malone(1)(3)
|
|
|
59
|
|
|
Director
|
|
|
|
(1) |
|
Member of the Audit Committee. |
|
(2) |
|
Member of the Compensation Committee. |
|
(3) |
|
Member of the Governance and Nominating Committee. |
|
(4) |
|
Member of the Special Committee. |
John McAdam has served as our President, Chief Executive
Officer and a director since July 2000. Prior to joining us,
Mr. McAdam served as General Manager of the Web server
sales business at International Business Machines Corporation
from September 1999 to July 2000. From January 1995 until August
1999, Mr. McAdam served as the President and Chief
Operating Officer of Sequent Computer Systems, Inc., a
manufacturer of high-end open systems, which was sold to
International Business Machines Corporation in September 1999.
Mr. McAdam holds a B.S. in Computer Science from the
University of Glasgow, Scotland.
Mark Anderson has served as our Senior Vice President of
Worldwide Sales in October 2007. He joined F5 Networks in
October 2004 as Vice President of North American Sales. Prior to
joining F5, Mr. Anderson served as Executive Vice President
of North American Sales at Lucent Technologies from 2003 to
2004. From 2002 through 2003, Mr. Anderson was Vice
President of Business Development at RadioFrame Networks. From
1997 to 2001, he served as a Sales Director at Cisco Systems,
Inc. From 1986 to 1996, he was Vice President of Western
U.S. Sales at Comdisco. Mr. Anderson holds a B.A. in
Business and Economics from York University in Toronto.
Jeffrey A. Christianson has served as our Senior Vice
President and General Counsel of the Company since December
2006. From February 2000 to July 2006, Mr. Christianson was
Sr. Vice President and General Counsel of Western Wireless
Corporation, a wireless service. From March 1996 to January
2000, Mr. Christianson served as Sr. Vice President of
Business Development, General Counsel and Corporate Secretary at
Wizards of the Coast, Inc., a game and software company. From
September 1992 to March 1996, he served as General Counsel and
Secretary of Heart Technology, Inc., a medical device company.
From September 1990 to September 1992, he was Vice-President and
General Counsel of Spider Staging Corporation and Vice President
of Administration and Corporate Counsel for Flow International
Corporation after its acquisition of Spider Staging Corporation.
15
Mr. Christianson holds a B.A. from Whitman College and a
J.D. from the University of Washington, and serves on the Board
of Directors of the Northwest Childrens Fund, a
Seattle-based community foundation, Family Services, and the
Humane Society for Seattle/King County.
Edward J. Eames has served as our Senior Vice President
of Business Operations since January 2001 and as our Vice
President of Professional Services from October 2000 to January
2001. From September 1999 to October 2000, Mr. Eames served
as Vice President of
e-Business
Services for International Business Machines Corporation. From
June 1992 to September 1999, Mr. Eames served as the
European Services Director and the Worldwide Vice President of
Customer Service for Sequent Computer Systems, Inc., a
manufacturer of high-end open systems. Mr. Eames holds a
Higher National Diploma in Business Studies from Bristol
Polytechnic and in 1994 completed the Senior Executive Program
at the London Business School.
Christopher Lynch has served as our Senior Vice
President, Data Solutions since the acquisition of Acopia in
September 2007. Mr. Lynch served as President and Chief
Executive Officer of Acopia from July 2002 to September 2007.
Prior to joining Acopia, Mr. Lynch served as Vice President
of Worldwide Content Delivery Networking Sales at Cisco Systems.
From January 1998 to June 2002, he served as Vice President of
Worldwide Sales, Marketing, and Support at ArrowPoint
Communications, which was acquired by Cisco Systems. From
January 1997 to January 1998, Mr. Lynch served as Vice
President of North American sales at Prominet Corp., an Ethernet
switch manufacturer, which was acquired by Lucent.
Mr. Lynch holds a Masters in Business Administration
from Bentley College and a Bachelors in Business
Management from Suffolk University.
Dan Matte has served as our Senior Vice President of
Marketing since June 2004, and as Vice President of Product
Marketing and Management from March 2002 through May 2004. He
has served as our Senior Director of Product Marketing and
Management from February 2001 through February 2002. From March
1999 to February 2001, Mr. Matte served as our Director of
Product Management. He holds a Bachelor of Commerce from
Queenss University and an MBA from the University of
British Columbia.
Andy Reinland has served as our Senior Vice President and
Chief Finance Officer since October 2005. Mr. Reinland
joined F5 in 1998, serving as a senior financial analyst and,
most recently, Vice President of Finance. Prior to joining F5,
Mr. Reinland was Chief Financial Officer for RTIME, Inc., a
developer of real-time 3D software for Internet applications,
which was acquired by Sony. Mr. Reinland started his career
in public accounting. Mr. Reinland holds a B.A. in Business
from Washington State University.
John Rodriguez has served as our Senior Vice President
and Chief Accounting Officer since October 2005. For SEC
reporting purposes, Mr. Rodriguez is the principal
financial officer. Rodriguez joined F5 in 2001 as Corporate
Controller. His most recent position held was Vice President and
Corporate Controller. Prior to F5, Mr. Rodriguez was Vice
President and Chief Financial Officer of CyberSafe, a security
solutions company, and Senior Director of Finance and Operations
at Mosaix, which was acquired by Lucent Technologies.
Mr. Rodriguez started his career in public accounting.
Mr. Rodriguez holds a B.A. in Business from the University
of Washington.
Karl Triebes has served as our Senior Vice President of
Product Development and Chief Technology Officer since August
2004. Prior to joining us, Mr. Triebes served as Chief
Technology Officer and Vice President of Engineering of Foundry
Networks, Inc. from January 2003 to August 2004. From June 2001
to January 2003, he served as Foundrys Vice President of
Hardware Engineering. From May 2000 to June 2001,
Mr. Triebes was Vice President of Engineering at Alcatel
U.S.A., a telecommunications company. From December 1999 to May
2000, he was Assistant Vice President of Newbridge Networks
Corp., a networking company subsequently acquired by Alcatel.
Mr. Triebes holds a B.S. in Electrical Engineering from
San Diego State University.
A. Gary Ames was appointed as one of our directors
in July 2004. Mr. Ames served as President and Chief
Executive Officer of MediaOne International, a provider of
broadband and wireless communications from July 1995 until his
retirement in June of 2000. From January 1990 to July 1995, he
served as President and Chief Executive Officer of U S West
Communications, a regional provider of residential and business
telephone services, and operator and carrier services.
Mr. Ames also serves as director of SuperValu, Inc.,
Tektronix, Inc. and iPass, Inc.
16
Deborah L. Bevier was appointed as one of our directors
in July 2006. Ms. Bevier has been the principal of DL
Bevier Consulting LLC, an organizational and management
consulting firm, since 2004. Prior to that time, from 1996 until
2003, Ms. Bevier served as a director, president and chief
executive officer of Laird Norton Financial Group and its
predecessor companies, an independent financial advisory
services firm. From 1973 to 1996, Ms. Bevier held numerous
leadership positions with KeyCorp including chairman and chief
executive officer of Key Bank of Washington. Ms. Bevier
currently serves on the board of directors of Fisher
Communications, Inc., Coinstar, Inc., and Puget Sound Bank.
Ms. Bevier holds a B.S. in Economics from SUNY New Paltz
and a graduate degree from the Stonier Graduate School of
Banking at Rutgers University.
Keith D. Grinstein has served as one of our directors
since December 1999. Mr. Grinstein serves as a director of
Labor Ready, board chair for Coinstar, Inc., a coin counting
machine company, and as lead outside director for Nextera, Inc.
an economics-consulting firm. Mr. Grinstein is a partner of
Second Avenue Partners, LLC, a venture capital fund.
Mr. Grinsteins past experience includes serving as
President, Chief Executive Officer and Vice Chair of Nextel
International Inc., and as President and Chief Executive Officer
of the Aviation Communications Division of AT&T Wireless
Services Inc. Mr. Grinstein holds a B.A. from Yale
University and a J.D. from Georgetown University.
Karl D. Guelich has served as one of our directors since
June 1999 and as board chair from January 2003 through April
2004. Mr. Guelich has been in private practice as a
certified public accountant since his retirement from
Ernst & Young LLP in 1993, where he served as the Area
Managing Partner for the Pacific Northwest offices headquartered
in Seattle from October 1986 to November 1992. Mr. Guelich
holds a B.S. in Accounting from Arizona State University.
Alan J. Higginson has served as board chair since April
2004, and as one of our directors since May 1996.
Mr. Higginson is Chairman of Hubspan, Inc., an
e-business
infrastructure provider. He served as President and Chief
Executive Officer of Hubspan from August 2001 to September,
2007. From November 1995 to November 1998, Mr. Higginson
served as President of Atrieva Corporation, a provider of
advanced data backup and retrieval technology.
Mr. Higginson holds a B.S. in Commerce and an M.B.A. from
the University of Santa Clara.
Rich Malone has served as one of our directors since
August 2003. Mr. Malone joined Edward Jones Investments as
a General Principal in 1979. He served as a member of the
firms management committee from 1985 and the executive
committee from 1995 until his retirement in December 2006. He
also served as Chief Information Officer of Edward Jones
Investments from 1979 through December 2006.
In addition to the other information in this report, the
following risk factors should be carefully considered in
evaluating our company and its business.
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
We expect the application delivery networking and file
virtualization markets to be characterized by rapid
technological change, frequent new product introductions,
changes in customer requirements and evolving industry
standards. 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 for
those products and features to be accepted by our existing and
target customers. 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 life cycle of our products is typically 12 to
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
17
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 operating results.
Our
success depends on sales and continued innovation of our BIG-IP
product lines
For the fiscal year ended September 30, 2007, we derived
approximately 91% of our product revenues, or approximately 68%
of our total revenues, from sales of our BIG-IP family of
application delivery networking product lines. We continue to
expect to derive a significant portion of our net revenues from
sales of our BIG-IP products in the future. Implementation of
our strategy depends upon BIG-IP products being able to solve
critical network availability and performance problems of our
customers. If BIG-IP products are unable to solve these problems
for our customers or if we are unable to sustain the high levels
of innovation in BIG-IPs product feature set needed to
maintain leadership in what will continue to be a competitive
market environment, our business and results of operations will
be harmed.
We may
not be able to compete effectively in the emerging application
delivery networking and file virtualization
markets
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
delivery networking market include Cisco Systems, Inc., Nortel
Networks Corporation, Foundry Networks, Inc., Citrix Systems,
Inc., Radware Ltd. and Juniper Networks, Inc. In the adjacent
WAN Optimization market, we compete with Riverbed Technology,
Inc., Juniper Networks, Inc., Packeteer, Inc., Cisco Systems,
Inc. and Citrix systems, Inc. In the file virtualization market,
we compete with EMC, Network Appliance, Brocade and Cisco. 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 delivery
networking solutions and emerge as significant competitors.
Potential competitors may bundle their products or incorporate
an Internet traffic management or security component into
existing products in a manner that discourages users from
purchasing our products.
Our
quarterly and annual operating results are inherently
unpredictable and may cause our stock price to
fluctuate
Our quarterly and annual operating results have varied
significantly in the past and will vary significantly in the
future, which makes it difficult for us to predict our future
operating results. 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 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 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-tenants or major customers
creditworthiness or actual defaults are higher than expected
future resulting losses, if incurred, could harm our business
and have a material adverse effect on our operating results.
18
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.
The
average selling price of our products may decrease and our costs
may increase, which may negatively impact gross
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 or other factors. Therefore, in order
to maintain our gross 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 will
cause our net revenue and gross profits to decline, which will
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.
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 we have increasingly focused our sales efforts on
the enterprise market. Also, as our distribution strategy has
evolved into more of 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 corporations 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.
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 rely on third party contract manufacturers to assemble our
products. We outsource the manufacturing of our hardware
platforms to 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 our contract manufacturer 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, because we subcontract
substantially all of our manufacturing to a single contract
manufacturer, with whom we do not have a long-term contract, any
termination, loss or impairment in our arrangement with this
single source of hardware assembly, or any impairment of their
facilities or operations, would harm our business, financial
condition and results of operation.
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.
19
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.
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 could limit 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. For example, we will need to comply
with Waste Electrical and Electronic Equipment Directive laws,
which are being adopted by certain European Economic Area
countries on a
country-by-country
basis. Failure to comply with these and similar laws on a timely
basis, or at all, could have a material adverse effect on our
business, operating results and financial condition. 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 assure you that we will always
successfully defend ourselves against such 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. 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, 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
20
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.
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 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.
We may
not be able to sustain or develop new distribution relationships
and a reduction or delay in sales to a significant distribution
partner could hurt our business
Our sales strategy requires that we establish and maintain
multiple distribution channels in the United States and
internationally through leading industry resellers, systems
integrators, Internet 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. If we are unable to establish or
maintain our indirect sales channels, our business and results
of operations will be harmed. In addition, two domestic
distributors of our products together accounted for 24.8% and
25.2% of our total net revenue for the fiscal years 2007 and
2006, respectively. A substantial reduction or delay in sales of
our products to this or any other key distribution partner could
harm our business, operating results and financial condition.
Undetected
software or hardware errors may harm our business and results of
operations
Our products may 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. 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 vendors 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.
Adverse
economic conditions or reduced information technology spending
may adversely impact our business.
A substantial portion of our business depends on the demand for
information technology by large enterprise customers and service
providers, the overall economic health of our current and
prospective customers, and the continued growth and evolution of
the Internet. The purchase of our products is often
discretionary and may involve a significant commitment of
capital and other resources. Weak economic conditions, or a
reduction in information technology spending even if economic
conditions improve, would likely adversely impact our business,
operating results and financial condition in a number of ways,
including longer sales cycles, lower prices for our products and
services and reduced unit sales.
21
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. These
risks include risks related to potential recessions in economies
outside the United States, foreign currency exchange rates,
managing foreign sales offices, regulatory, political, or
economic conditions in specific countries, military conflict or
terrorist activities, changes in laws and tariffs, inadequate
protection of intellectual property rights in foreign countries,
foreign regulatory requirements, and natural disasters. All of
these factors could have a material adverse effect on our
business. We intend to continue expanding into international
markets. International sales represented 41.6% and 42.6% of our
net revenues for the fiscal years ended September 30, 2007
and 2006, respectively. In particular, in fiscal year 2007, we
derived 12.2% of our total revenue from the Japanese market.
This revenue is dependent on a number of factors outside our
control, including the viability and success of our resellers
and the strength of the Japanese economy.
Changes
in governmental regulations could negatively affect our
revenues
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.
Acquisitions,
including our recent acquisition of Acopia Networks, Inc.,
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 any any future acquisitions, 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
incorporating the acquired technologies or products with our
existing product lines. Our ongoing business and
managements 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 the 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.
Our
success depends on our key personnel and our ability to attract
and retain qualified sales and marketing, operations, product
development and professional services personnel
Our success depends to a significant degree upon the continued
contributions of our key management, product development, sales,
marketing and finance personnel, many of whom may be difficult
to replace. The complexity of our application delivery
networking 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
professional services, customer support and sales personnel.
Competition for qualified professional services, customer
support and sales personnel in our industry is intense because
of the limited number of people available with the necessary
technical skills and understanding of our products. Our ability
to retain and hire these personnel may be adversely affected by
volatility or reductions in the price of our common stock, since
these employees are generally granted restricted stock units or
stock options. The loss of services
22
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.
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 the lawsuits could adversely affect our business, results of
operations, or financial condition.
Our historical stock option practices and the restatement of our
prior financial statements have exposed us to greater risks
associated with litigation. Beginning in May 2006 several
derivative actions were filed against certain current and former
directors and officers (as discussed further in Item 3
Legal Proceedings) based on allegations relating to
our historical stock option practices. We cannot assure you that
this current litigation will result in the same conclusions
reached by the special committee of outside directors formed by
our Board of Directors to conduct a review of our stock option
practices (the Special Committee).
We may in the future be subject to additional litigation arising
in relation to our historical stock option practices and the
restatement of our prior financial statements. Litigation may be
time consuming, expensive and distracting for management from
the conduct of our business. The adverse resolution of any
lawsuit could have a material adverse effect on our business,
financial condition and results of operations. We cannot assure
you that any future litigation relating to our historical stock
option practices will result in the same conclusions reached by
the Special Committee. Furthermore, if we are subject to adverse
findings in any of these matters, we could be required to pay
damages or penalties or have other remedies imposed upon us
which could adversely affect our business, results of
operations, or financial condition.
The
matters relating to the Special Committees review of our
historical stock option practices and the restatement of our
consolidated financial statements has resulted in regulatory
proceedings against us and may result in future regulatory
proceedings, which could have a material adverse impact on our
financial condition
On November 8, 2006, we announced that the Special
Committee had completed its review of our historical stock
option practices. Upon completion of its review, the Special
Committee found that the recorded grant dates for certain stock
options granted during fiscal years 1999 to 2004 should be
adjusted as the measurement date for accounting purposes and the
accounting treatment used for the vesting of certain stock
options was incorrect. Based on the Special Committees
review, to correct the accounting treatment, we amended our
Annual Report on
Form 10-K/A
(as amended) for the year ended September 30, 2005 and our
Quarterly Reports on
Form 10-Q
for the three months ended December 31, 2005 and
March 31, 2006 to restate the consolidated financial
statements contained in those reports.
We have received notice from both the Securities and Exchange
Commission (SEC) and the United States
Attorneys Office for the Eastern District of New York (the
Department of Justice) that they are conducting
informal inquiries into our historical stock option practices,
and we have fully cooperated with both agencies. Considerable
legal and accounting expenses related to our historical stock
option practices have already been incurred to date and
significant expenditures may continue to be incurred in the
future. We may in the future be subject to additional regulatory
proceedings or actions arising in relation to our historical
stock option practices and the restatement of our prior period
financial statements. Any potential regulatory proceeding or
action may be time consuming, expensive and distracting for
management from the conduct of our business. The adverse
resolution of any potential regulatory proceeding or action
could adversely affect our business, results of operations, or
financial condition. We cannot assure you that the SEC and
Department of Justice inquiries, or any future regulatory action
relating to our historical stock option practices, will result
in the same conclusions reached by the Special Committee.
Furthermore, if we are subject to adverse findings in any of
these matters, we could be required to pay damages or penalties
or have other remedies imposed
23
upon us, including criminal penalties, which could adversely
affect our business, results of operations, or financial
condition.
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 shareholder
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
stockholders 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. In addition, our articles of incorporation provide
for a staggered board, which may make it more difficult for a
third party to gain control of our board of directors.
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.
Item 1B. Unresolved
Staff Comments
Not applicable.
Our principal administrative, sales, marketing, research and
development facilities are located in Seattle, Washington and
consist of approximately 165,000 square feet. In April
2000, we amended and restated the lease agreement on two of the
three buildings for our corporate headquarters. The lease
commenced in July 2000 on the first building; and the lease on
the second building commenced in September 2000. The lease for
both buildings expires in 2012 with an option for renewal. The
lease for the second building has been partially subleased
through 2012. We believe that our existing properties are in
good condition and suitable for the conduct of our business. We
also lease office space for our product development personnel in
Bellevue, Washington, Spokane, Washington, San Jose,
California, Lowell, Massachusetts, Israel, Northern Ireland, and
Russia and for our sales and support personnel in Illinois,
Washington D.C., New York, New Jersey, Hong Kong, Singapore,
China, Taiwan, Thailand, India, Malaysia, South Korea, Japan,
Australia, New Zealand, Germany, France, Belgium, Spain, Italy,
Netherlands and the United Kingdom. We believe that our future
growth can be accommodated by current facilities or by leasing
additional space if necessary.
On October 31, 2006 we entered into an office lease
agreement to lease a total of approximately 137,000 square
feet of office space in the building known as 333 Elliott West,
which is next to the three buildings that currently serve as our
corporate headquarters. The lease term is 10 years with an
option for renewal. We plan to occupy this new building during
the third quarter of fiscal 2008 after construction is completed
and currently expect to sublease a portion of this office space.
|
|
Item 3.
|
Legal
Proceedings
|
Regulatory
proceedings
Derivative Suits. Beginning on or about
May 24, 2006, several derivative actions were filed against
certain of our current and former directors and officers. These
derivative lawsuits were filed in: (1) the Superior Court
of King County, Washington, as In re F5 Networks, Inc. State
Court Derivative Litigation
(Case No. 06-2-17195-1
SEA), which consolidates Adams v. Amdahl, et al. (Case
No. 06-2-17195-1
SEA), Wright v. Amdahl, et al. (Case
No. 06-2-19159-5
SEA), and Sommer v. McAdam, et al. (Case
No. 06-2-26248-4
SEA) (the State Court Derivative Litigation); and
(2) in the U.S. District Court for the Western
District of Washington, as In re F5 Networks, Inc. Derivative
Litigation, Master File
No. C06-0794RSL,
which consolidates Hutton v. McAdam, et al. (Case
No. 06-794RSL),
Locals 302 and 612 of the International Union of Operating
Engineers-Employers
24
Construction Industry Retirement Trust v. McAdam et al.
(Case
No. C06-1057RSL),
and Easton v. McAdam et al. (Case
No. C06-1145RSL).
On August 2, 2007, another derivative lawsuit,
Barone v. McAdam et al. (Case
No. C07-1200P),
was filed in the U.S. District Court for the Western
District of Washington. It is expected that this lawsuit will be
consolidated with the other lawsuits pending in the
U.S. District Court for the Western District of Washington.
The complaints generally allege that certain of our current and
former directors and officers, including, in general, each of
our current outside directors (other than Deborah L. Bevier who
joined our Board of Directors in July 2006) breached their
fiduciary duties to the Company by engaging in alleged wrongful
conduct concerning the manipulation of certain stock option
grant dates. We are named solely as a nominal defendant against
whom the plaintiffs seek no recovery. Our combined motion to
consolidate and stay the State Court Derivative Litigation was
granted in a court order dated April 3, 2007. Our motion to
dismiss the consolidated federal derivative actions based on
plaintiffs failure to make demand on our Board of
Directors prior to filing suit was granted in a court order
dated August 6, 2007 with leave to amend the allegations in
plaintiffs complaint. Plaintiffs filed an amended
consolidated federal derivative action complaint on
September 14, 2007. We intend to vigorously pursue
dismissal of the amended complaint and has filed a motion to
dismiss based on plaintiffs failure to make demand on the
Companys Board of Directors prior to filing suit.
Although litigation is subject to inherent uncertainties, we do
not believe the results of these pending actions will,
individually or in the aggregate, have a material adverse impact
on our consolidated financial position or results of operations.
SEC and Department of Justice Inquiries. We
have received notice from both the SEC and the Department of
Justice that they are conducting informal inquiries into our
historical stock option practices, and have fully cooperated
with both agencies. Considerable legal and accounting expenses
related to our historical stock option practices have already
been incurred to date and significant expenditures may continue
to be incurred in the future. We may in the future be subject to
additional regulatory proceedings or actions arising in relation
to our historical stock option practices and the restatement of
our prior period financial statements. Although regulatory
proceedings are subject to inherent uncertainties, we do not
believe the results of any pending actions will, individually or
in the aggregate, have a material adverse impact on our
consolidated financial position or results of operations.
We are not aware of any other pending legal proceedings than
those mentioned above that, individually or in the aggregate,
would have a material adverse effect on our business, operating
results, or financial condition. We may in the future be party
to litigation arising in the ordinary course of business,
including claims that allegedly infringe upon third-party
trademarks or other intellectual property rights. Such claims,
even if not meritorious, could result in the expenditure of
significant financial and managerial resources.
|
|
Item 4.
|
Submission
of Matters to a Vote of Securities Holders
|
No matters were submitted to a vote of the shareholders during
the fourth quarter of fiscal 2007.
25
|
|
Item 5.
|
Market
for Registrants 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 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 Market as adjusted to reflect our two-for-one
stock split effective in August 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
Fiscal Year 2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
39.27
|
|
|
$
|
26.15
|
|
|
$
|
29.25
|
|
|
$
|
19.75
|
|
Second Quarter
|
|
$
|
40.42
|
|
|
$
|
33.27
|
|
|
$
|
37.00
|
|
|
$
|
28.10
|
|
Third Quarter
|
|
$
|
43.24
|
|
|
$
|
32.21
|
|
|
$
|
36.46
|
|
|
$
|
21.11
|
|
Fourth Quarter
|
|
$
|
46.93
|
|
|
$
|
34.32
|
|
|
$
|
30.42
|
|
|
$
|
20.27
|
|
The last reported sales price of our common stock on the Nasdaq
Global Market on November 16, 2007 was $29.69.
As of November 16, 2007, there were 86 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 to fund future growth.
Accordingly, we have not paid dividends and do not anticipate
declaring dividends on our common stock in the foreseeable
future.
Unregistered
Securities Sold in 2007
We did not sell any unregistered shares of our common stock
during the fiscal year 2007.
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, 2002, and ending
September 28, 2007.
Comparison
of Cumulative Total Return
On Investment Since September 30, 2002*
The Companys closing stock price on September 28,
2007, the last trading day of the Companys 2007 fiscal
year, was $37.19 per share.
|
|
|
* |
|
Assumes that $100 was invested September 30, 2002 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, 2007
and 2006 and the consolidated statement of operations data for
the years ended September 30, 2007, 2006 and 2005 are
derived from our audited financial statements and related notes
that are included elsewhere in this report. The consolidated
balance sheet data as of September 30, 2005, 2004 and 2003
and the consolidated statement of operations for the year ended
September 30, 2004 and 2003 are derived from our audited
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 Managements Discussion and
Analysis of Financial Condition and Results of Operations,
included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of Operations Data(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
392,921
|
|
|
$
|
304,878
|
|
|
$
|
219,603
|
|
|
$
|
126,169
|
|
|
$
|
84,197
|
|
Services
|
|
|
132,746
|
|
|
|
89,171
|
|
|
|
61,807
|
|
|
|
45,021
|
|
|
|
31,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
525,667
|
|
|
|
394,049
|
|
|
|
281,410
|
|
|
|
171,190
|
|
|
|
115,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
84,094
|
|
|
|
63,619
|
|
|
|
48,990
|
|
|
|
28,406
|
|
|
|
17,843
|
|
Services
|
|
|
34,230
|
|
|
|
24,534
|
|
|
|
16,194
|
|
|
|
10,993
|
|
|
|
9,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
118,324
|
|
|
|
88,153
|
|
|
|
65,184
|
|
|
|
39,399
|
|
|
|
26,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
407,343
|
|
|
|
305,896
|
|
|
|
216,226
|
|
|
|
131,791
|
|
|
|
88,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
175,555
|
|
|
|
127,478
|
|
|
|
89,866
|
|
|
|
66,446
|
|
|
|
54,897
|
|
Research and development
|
|
|
69,030
|
|
|
|
49,171
|
|
|
|
31,516
|
|
|
|
24,438
|
|
|
|
19,455
|
|
General and administrative
|
|
|
49,256
|
|
|
|
39,109
|
|
|
|
25,486
|
|
|
|
15,761
|
|
|
|
12,210
|
|
In-process research and development(2)
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
307,841
|
|
|
|
215,758
|
|
|
|
146,868
|
|
|
|
106,645
|
|
|
|
86,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
99,502
|
|
|
|
90,138
|
|
|
|
69,358
|
|
|
|
25,146
|
|
|
|
2,358
|
|
Other income, net
|
|
|
28,191
|
|
|
|
17,431
|
|
|
|
8,076
|
|
|
|
2,731
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
127,693
|
|
|
|
107,569
|
|
|
|
77,434
|
|
|
|
27,877
|
|
|
|
3,109
|
|
Provision (benefit) for income taxes
|
|
|
50,693
|
|
|
|
41,564
|
|
|
|
30,532
|
|
|
|
(8,451
|
)
|
|
|
853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
77,000
|
|
|
$
|
66,005
|
|
|
$
|
46,902
|
|
|
$
|
36,328
|
|
|
$
|
2,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic(3)
|
|
$
|
0.93
|
|
|
$
|
0.82
|
|
|
$
|
0.63
|
|
|
$
|
0.55
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic(3)
|
|
|
83,205
|
|
|
|
80,278
|
|
|
|
74,440
|
|
|
|
66,442
|
|
|
|
52,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted(3)
|
|
$
|
0.90
|
|
|
$
|
0.80
|
|
|
$
|
0.61
|
|
|
$
|
0.51
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted(3)
|
|
|
85,137
|
|
|
|
83,020
|
|
|
|
77,522
|
|
|
|
71,922
|
|
|
|
54,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and short-term investments(5)
|
|
$
|
258,465
|
|
|
$
|
374,173
|
|
|
$
|
236,181
|
|
|
$
|
140,501
|
|
|
$
|
44,878
|
|
Restricted cash(6)
|
|
|
3,959
|
|
|
|
3,929
|
|
|
|
3,871
|
|
|
|
6,243
|
|
|
|
6,000
|
|
Long-term investments(5)
|
|
|
216,366
|
|
|
|
118,003
|
|
|
|
128,834
|
|
|
|
81,792
|
|
|
|
34,132
|
|
Total assets
|
|
|
944,288
|
|
|
|
729,511
|
|
|
|
537,739
|
|
|
|
360,593
|
|
|
|
148,173
|
|
Long-term liabilities
|
|
|
20,301
|
|
|
|
13,416
|
|
|
|
9,964
|
|
|
|
6,228
|
|
|
|
1,735
|
|
Total shareholders equity
|
|
|
770,577
|
|
|
|
616,458
|
|
|
|
460,167
|
|
|
|
307,745
|
|
|
|
110,429
|
|
28
|
|
|
(1) |
|
Amortization of unearned compensation reported in fiscal years
2003 and 2004 has been reclassified to attribute amounts to the
respective categories within operating expenses. |
|
(2) |
|
In-process research and development (IPR&D)
expense represents the amount of IPR&D that we acquired in
the Acopia acquisition. |
|
(3) |
|
Share and per share amounts have been adjusted as appropriate to
reflect a two-for-one stock-split effective August 2007. |
|
(4) |
|
In our
Form 10-K/A
No. 2 (filed on December 12, 2006), we restated our
consolidated financial statements for the years ended
September 30, 2005, 2004 and 2003, and the selected
consolidated financial data as of and for the years ended
September 30, 2005, 2004, 2003, 2002 and 2001. In addition,
we restated our consolidated financial statements for the
quarters ended December 31, 2005 and March 31, 2006 in
our Quarterly Reports on
Form 10-Q/A
for the quarters ended December 31, 2005 and March 31,
2006, each of which was filed on December 13, 2006. All
financial information included in this Annual Report on
Form 10-K
reflects our restatement. |
|
(5) |
|
The combined overall increase in cash, cash equivalents,
short-term and long-term investments in fiscal 2004 was
primarily due to the net proceeds of $113.6 million
received from the sale of our common stock in a public offering
in November 2003. |
|
(6) |
|
Restricted cash represents escrow accounts established in
connection with lease agreements for our facilities. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The statements contained below that are not purely historical
are 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. Because these forward-looking
statements 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 the heading Risk
Factors herein and in other documents we file from time to
time with the Securities and Exchange Commission. All
forward-looking statements set forth below are based on
information available to us on the date hereof. Our business and
the associated risks may have changed since the date this report
was originally filed with the SEC. We assume no obligation to
update any such forward-looking statements.
Restatement
of Consolidated Financial Statements
In our Annual Report on
Form 10-K/A
No. 2 for the fiscal year ended September 30, 2005
(filed on December 12, 2006), we restated our consolidated
financial statements for the years ended September 30,
2005, 2004 and 2003, and the selected consolidated financial
data as of and for the years ended September 30, 2005,
2004, 2003, 2002 and 2001. In addition, we restated our
consolidated financial statements for the quarters ended
December 31, 2005 and March 31, 2006 in our Quarterly
Reports on
Form 10-Q/A
for the quarters ended December 31, 2005 and March 31,
2006, each of which was filed on December 13, 2006. All
financial information included in this Annual Report on
Form 10-K
reflects our restatement.
Overview
We are a global provider of software and hardware products and
services that help companies efficiently and securely manage
their Internet traffic. Our products enhance the delivery,
optimization and security of application traffic on
Internet-based networks. We market and sell our products
primarily through indirect sales channels in the Americas
(primarily the United States); Europe, the Middle East, and
Africa (EMEA); Japan; and the Asia Pacific region. Enterprise
customers (Fortune 1000 or Business Week Global
1000 companies) in
29
financial services, transportation, government and
telecommunications industries continue to make up the largest
percentage of our customer base.
Our management monitors and analyzes a number of key performance
indicators in order to manage our business and evaluate our
financial and operating performance. Those indicators include:
|
|
|
|
|
Revenues. The majority of our revenues are
derived from sales of our core products; BIG-IP Local Traffic
Manager; BIG-IP Global Traffic Manager; BIG-IP ISP Traffic
Manager; TrafficShield Application Firewall, WANJet,
WebAccelerator; FirePass SSL VPN servers; and ARX. We also
derive revenues from the sales of services including annual
maintenance contracts, installation, 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 key
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 over the past two years; however factors such
as sales price, product mix, inventory obsolescence, returns,
component price increases, and warranty costs could
significantly impact our gross margins from quarter to quarter
and represent the 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,
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
during the fiscal year 2007 was primarily due to net income from
operations, with operating activities providing cash of
$169.7 million. Going forward, we believe the primary
driver of cash flows will be net income from operations. On
September 12, 2007, we acquired all of the capital stock of
Acopia Networks for cash of $210.0 million. Capital
expenditures for fiscal year 2007 were comprised primarily of
tenant improvements and information technology infrastructure
and equipment to support the growth of 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.
|
|
|
|
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 due to the 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 2007 was 57 days. We expect to maintain this
metric in the mid
50-day range
going forward.
|
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 the following critical accounting policies affect the
more significant estimates and judgments used in the preparation
of our financial statements.
30
Revenue Recognition. We recognize revenue in
accordance with the guidance provided under Statement of
Position (SOP)
No. 97-2,
Software Revenue Recognition, and
SOP No. 98-9
Modification of
SOP No. 97-2,
Software Revenue Recognition, with Respect to Certain
Transactions, Statement of Financial Accounting
Standards (SFAS) No. 48, Revenue
Recognition When Right of Return Exists, and SEC Staff
Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements,
and SAB No. 104, Revenue
Recognition.
We sell products through distributors, resellers, and directly
to end users. We recognize product revenue upon shipment, net of
estimated returns, provided that collection is determined to be
probable and no significant obligations remain. In certain
regions where we do not have the ability to reasonably estimate
returns, revenue is recognized upon sale to the end user. In
this situation, we receive a sales report from the channel
partner to determine when the sales transaction to the end user
has occurred. Payment terms to domestic customers are generally
net 30 days to net 45 days. Payment terms to
international customers range from net 30 to 90 days
based on normal and customary trade practices in the individual
markets. We have offered extended payment terms ranging from
three to six months to certain customers, in which case, revenue
is recognized when payments are made.
Whenever a software license, hardware, installation and
post-contract customer support (PCS) elements are
combined into a package with a single bundled price,
a portion of the sales price is allocated to each element of the
bundled package based on their respective fair values as
determined when the individual elements are sold separately. We
determine fair value based on the type of customer and region in
which the package is sold. Where fair value of certain elements
are not available, we recognize revenue on the residual
method permitted under
SOP 98-9
based on the fair value of undelivered PCS. Revenues from the
license of software are recognized when the software has been
shipped and the customer is obligated to pay for the software.
When rights of return are present and we cannot estimate
returns, we recognize revenue when such rights of return lapse.
Revenues for PCS are recognized on a straight-line basis over
the service contract term. PCS includes rights to upgrades, when
and if available, a limited period of telephone support,
updates, and bug fixes. Installation revenue is recognized when
the product has been installed at the customers site.
Consulting services are customarily billed at fixed rates, plus
out-of-pocket expenses, and revenues are recognized when the
consulting has been completed. Training revenue is recognized
when the training has been completed.
Reserve for Doubtful Accounts. Estimates are
used in determining our allowance for doubtful accounts and are
based upon an assessment of selected accounts and as a
percentage of our remaining accounts receivable by aging
category. In determining these percentages, we evaluate
historical write-offs, current trends in the credit quality of
our customer base, as well as changes in the credit policies. We
perform ongoing credit evaluations of our customers
financial condition and do not require any collateral. If there
is deterioration of a major customers credit worthiness or
actual defaults are higher than our historical experience, our
allowance for doubtful accounts may not be sufficient.
Reserve for Product Returns. In some
instances, product revenue from distributors is subject to
agreements allowing rights of return. Product returns are
estimated based on historical experience and are recorded at the
time revenues are recognized. Accordingly, we reduce recognized
revenue for estimated future returns at the time revenue is
recorded. When rights of return are present and we cannot
estimate returns, revenue is recognized when such rights lapse.
The estimates for returns are adjusted periodically based upon
changes in historical rates of returns and other related
factors. It is possible that these estimates will change in the
future or that the actual amounts could vary from our estimates.
Reserve for Warranties. A warranty reserve is
established based on our historical experience and an estimate
of the amounts necessary to settle future and existing claims on
products sold as of the balance sheet date. While we believe
that our warranty reserve is adequate and that the judgment
applied is appropriate, such amounts estimated to be due and
payable could differ materially from what will actually
transpire in the future.
Accounting for Income Taxes. We utilize the
liability method of accounting for income taxes as set forth in
SFAS No. 109, Accounting for Income
Taxes (SFAS 109). Accordingly, we are
required to estimate our
31
income taxes in each of the jurisdictions in which we operate as
part of the process of preparing our consolidated financial
statements. This process involves estimating our actual current
tax exposure, including assessing the risks associated with tax
audits, together with assessing temporary differences resulting
from the different treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities. Due to the evolving nature and complexity of tax
rules combined with the large number of jurisdictions in which
we operate, it is possible that our estimates of our tax
liability could change in the future, which may result in
additional tax liabilities and adversely affect our results of
operations, financial condition and cash flows.
Stock-Based Compensation. We account for
stock-based compensation in accordance with Financial Accounting
Standards Board (FASB) Statement No. 123(R),
Share-Based Payment (FAS 123R), using
the straight-line attribution method for recognizing
compensation expense. We recognized $41.2 million and
$24.8 million of stock-based compensation expense for the
years ended September 30, 2007 and 2006, respectively. As
of September 30, 2007, there was $74.1 million of
total unrecognized stock-based compensation cost, the majority
of which will be recognized over the next two years. Going
forward, stock-based compensation expenses may increase as we
issue additional equity-based awards to continue to attract and
retain key employees.
We issue incentive awards to our employees through stock-based
compensation consisting of stock options and restricted stock
units (RSUs). 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
our common stock on the date of grant. Alternatively, in
determining the fair value of stock options, we use the
Black-Scholes option pricing model that employs the following
key assumptions. Expected volatility is based on the annualized
daily historical volatility of our stock price over the expected
life of the option. Expected term of the option is based on
historical employee stock option exercise behavior, the vesting
terms of the respective option and a contractual life of ten
years. Our stock price volatility and option lives involve
managements best estimates at that time, both of which
impact the fair value of the option calculated under the
Black-Scholes methodology and, ultimately, the expense that will
be recognized over the life of the option.
FAS 123R also requires that we recognize compensation
expense for only the portion of stock options or RSUs that
are expected to vest. Therefore, we apply estimated forfeiture
rates that are derived from historical employee termination
behavior. We reduced our forfeiture rate from 5% to 4% in the
second quarter of fiscal 2007 to better reflect our historical
behavior. If the actual number of forfeitures differs from those
estimated by management, additional adjustments to stock-based
compensation expense may be required in future periods.
Compensation cost recognized for the year ended
September 30, 2007 includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as
of July 1, 2005, based on the grant-date fair value
estimated in accordance with the original provisions of FASB
Statement No. 123, Accounting for Stock-Based
Compensation and (b) compensation cost for all
share-based payments granted subsequent to July 1, 2005,
based on the grant-date fair value estimated in accordance with
the provisions of FAS 123R.
In August 2007, the Company granted 276,400 RSUs to
certain current executive officers. Fifty percent of the
aggregate number of RSUs granted at such time vest in
equal quarterly increments over two years, until such portion of
the grant is fully vested on November 1, 2009. Twenty five
percent of the RSU grant is subject to the Company achieving
specified percentage increases in total revenue for fiscal year
2008, relative to fiscal year 2007. The remaining twenty five
percent is subject to the Company meeting specified performance
criteria for fiscal year 2009 to be set by the Compensation
Committee of the Companys Board of Directors.
In December 2006, the Company granted 456,000 RSUs to
certain current executive officers. Fifty percent of the
aggregate number of RSUs granted at such time vest in
equal quarterly increments over two years, until such portion of
the grant is fully vested on November 1, 2008. Twenty five
percent of the RSU grant was subject to the Company achieving
specified percentage increases in total revenue for fiscal year
2007, relative to fiscal year 2006. This twenty five percent was
fully earned in fiscal 2007. The remaining
32
twenty five percent is subject to the Company meeting specified
performance criteria for fiscal year 2008 to be set by the
Compensation Committee of the Companys Board of Directors.
We are required to recognize compensation costs for awards with
performance conditions when we conclude it is probable that the
performance condition will be acheived. We are required to
reassess the probability of vesting at each balance sheet date
and adjust compensation costs based on our probability
assessment.
Goodwill and intangible assets. We have a
significant amount of goodwill and intangible assets on our
balance sheet related to acquisitions. Intangible assets are
carried and reported at acquisition cost, net of accumulated
amortization subsequent to acquisition. Intangible assets are
amortized over the estimated useful lives, which generally range
from three to five years. Intangible assets are reviewed for
impairment whenever events or circumstances indicate impairment
might exist in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. Projected undiscounted net cash flows expected
to be derived from the use of those assets are compared to the
respective net carrying amounts to determine whether any
impairment exists. Impairment, if any, is based on the excess of
the carrying amount over the fair value of those assets.
The determination of the net carrying value of goodwill and
intangible assets and the extent to which, if any, there is
impairment are dependent on material estimates and judgments on
our part, including the useful life over which the intangible
assets are to be amortized, and the estimates of the value of
future net cash flows, which are based upon further estimates of
future revenues, expenses and operating margins. In applying
SFAS No. 142, Goodwill and Other Intangible
Assets, we review our goodwill annually for impairment
in the second fiscal quarter, or more frequently when indicators
of impairment are present.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except for percentages)
|
|
|
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
392,921
|
|
|
$
|
304,878
|
|
|
$
|
219,603
|
|
Services
|
|
|
132,746
|
|
|
|
89,171
|
|
|
|
61,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
525,667
|
|
|
$
|
394,049
|
|
|
$
|
281,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
74.7
|
%
|
|
|
77.4
|
%
|
|
|
78.0
|
%
|
Services
|
|
|
25.3
|
|
|
|
22.6
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues. Total net revenues increased
33.4% in fiscal year 2007 from fiscal year 2006, compared to an
increase of 40.0% in fiscal year 2006 from fiscal year 2005. The
continued revenue growth was due to increased demand for our
Application Traffic Management (ATM) products and higher
services revenues resulting from our increased installed base of
products. During fiscal year 2007, each of our primary
geographic regions reported higher revenues compared to the
prior year period. International revenues represented 41.6%,
42.6% and 40.5% of net revenues in fiscal years 2007, 2006 and
2005, respectively. We expect international sales will continue
to represent a significant portion of net revenues, although we
cannot provide assurance that international revenues as a
percentage of net revenues will remain at current levels.
Net product revenues increased 28.9% in fiscal year 2007 and
38.8% in fiscal year 2006 as compared to the previous fiscal
year, respectively. The increase in fiscal 2007 was primarily
due to absolute growth in the volume of product sales of our
BIG-IP product line as well as incremental revenues derived from
sales of our
33
TrafficShield and WAN Optimization product lines. Sales of our
BIG-IP family of application delivery networking products
represented 91.0%, 89.4% and 89.1% of total product revenues in
fiscal years 2007, 2006 and 2005, respectively.
Net service revenues increased 48.9% in fiscal year 2007
compared to a 44.3% increase for fiscal year 2006 from the prior
year, respectively. The increase of services revenues in
absolute dollars was the result of increased purchases and
renewals of maintenance contracts as our installed base of
products increased.
Ingram Micro Inc., one of our domestic distributors, accounted
for 11.6%, 13.6%, and 18.6% of our total net revenues in fiscal
years 2007, 2006 and 2005, respectively. Avnet Technology
Solutions, another domestic distributor accounted for 13.2% and
11.6% of our total net revenue in fiscal 2007 and 2006,
respectively. Avnet Technology Solutions accounted for 10.6% of
our accounts receivable as of September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except for percentages)
|
|
|
Cost of net revenues and Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
84,094
|
|
|
$
|
63,619
|
|
|
$
|
48,990
|
|
Services
|
|
|
34,230
|
|
|
|
24,534
|
|
|
|
16,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
118,324
|
|
|
|
88,153
|
|
|
|
65,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
407,343
|
|
|
$
|
305,896
|
|
|
$
|
216,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues and Gross margin (as a percentage of
related net revenue)
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
21.4
|
%
|
|
|
20.9
|
%
|
|
|
22.3
|
%
|
Services
|
|
|
25.8
|
|
|
|
27.5
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22.5
|
|
|
|
22.4
|
|
|
|
23.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
77.5
|
%
|
|
|
77.6
|
%
|
|
|
76.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. In absolute dollars, product cost increased
to $84.1 million in fiscal year 2007 as compared to
$63.6 million and $49.0 million in fiscal years 2006
and 2005, respectively. The year over year increases were
primarily due to the higher volume of units shipped compared
with the prior period. Fiscal 2007 increases also include an
increase in warranty expense and indirect manufacturing costs
over prior periods. Fiscal 2006 increase also included an
increase in indirect manufacturing cost primarily related to the
amortization charges of our acquired technology.
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 remained relatively stable at
25.8% in fiscal year 2007 as compared to 27.5% and 26.2% in
fiscal years 2006 and 2005, respectively. The increase in
absolute dollars year over year is primarily due to increased
salary and benefits attributed to growth in headcount.
Professional services headcount at the end of fiscal year 2007
increased to 279 from 205 at the end of fiscal year 2006 and 147
at the end of fiscal year 2005. In addition, stock compensation
expense increased to $2.4 million in fiscal year 2007 from
$1.5 million in fiscal year 2006. Going forward, we expect
to continue to increase our cost of service revenues to support
our expanded product lines and growing customer base.
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except for percentages)
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
175,555
|
|
|
$
|
127,478
|
|
|
$
|
89,866
|
|
Research and development
|
|
|
69,030
|
|
|
|
49,171
|
|
|
|
31,516
|
|
General and administrative
|
|
|
49,256
|
|
|
|
39,109
|
|
|
|
25,486
|
|
In-process research and development
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
307,841
|
|
|
$
|
215,758
|
|
|
$
|
146,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (as a percentage of net revenue)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
33.4
|
%
|
|
|
32.4
|
%
|
|
|
31.9
|
%
|
Research and development
|
|
|
13.1
|
|
|
|
12.5
|
|
|
|
11.2
|
|
General and administrative
|
|
|
9.4
|
|
|
|
9.9
|
|
|
|
9.1
|
|
In-process research and development
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58.6
|
%
|
|
|
54.8
|
%
|
|
|
52.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing. Sales and marketing
expenses consist of salaries, commissions and related benefits
of our sales and marketing staff, the costs of our marketing
programs, including public relations, advertising and trade
shows, travel, facilities and depreciation expenses. Sales and
marketing expense increased 37.7% in fiscal year 2007 as
compared to 41.9% and 35.2% in fiscal years 2006 and 2005,
respectively. The increase in sales and marketing expense was
primarily due to increased commissions and personnel costs of
$25.4 million and $21.0 million and $14.6 million
for fiscal years 2007, 2006 and 2005, respectively which is
consistent with the increased revenue and headcount for the
corresponding periods. Sales and marketing headcount at the end
of fiscal 2007 increased to 669 from 442 at the end of fiscal
2006 and 331 at the end of fiscal 2005. Stock-based compensation
charges of $15.8 million, $10.1 million and
$2.4 million also contributed to the overall increase in
fiscal years 2007, 2006 and 2005, respectively. We expect to
continue to increase sales and marketing expenses in absolute
dollars in order to grow revenues and increase our market share.
Research and Development. Research and
development expenses consist of the salaries and related
benefits for our product development personnel, prototype
materials and expenses related to the development of new and
improved products, facilities and depreciation expenses.
Research and development expenses increased 40.4% in fiscal year
2007 as compared to 56.0% and 29.0% in fiscal years 2006 and
2005, respectively. The increase in research and development
expense was primarily due to increased salary and benefit
expenses of $12.2 million, $8.4 million and
$3.2 million in fiscal years 2007, 2006 and 2005,
respectively which is consistent with the increased headcount
for the corresponding periods. Research and development
headcount at the end of fiscal 2007 increased to 450 from 287 at
the end of fiscal 2006 and 217 at the end of fiscal 2005. The
growth in employee headcount was primarily related to
enhancement of our current products and the development of new
advanced products. Stock-based compensation charges of
$10.2 million, $6.9 million and $1.5 million also
contributed to the overall increase in fiscal years 2007, 2006
and 2005, respectively. We expect to continue to increase
research and development expenses as our future success is
dependent on the continued development of our products.
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 expenses increased 25.9% in
fiscal year 2007 as compared with 53.5% in fiscal year 2006 and
61.7% in fiscal year 2005. The increase in fiscal year 2007 of
$10.1 million was due primarily to an increase in
stock-based compensation charges of $6.5 million, increased
salary and benefit expenses of $4.0 million and
$3.1 million of other general operating expenses. These
increases were partially offset by a decrease in expenses
incurred by third parties for legal, accounting, tax and other
professional services in connections with the Special Committee
investigation of $4.4 million. The increase in fiscal year
2006 is due primarily to expenses incurred
35
by third parties for legal, accounting, tax and other
professional services in connection with the Special Committee
investigation of $7.0 million, an increase in stock-based
compensation charges of $5.1 million and, increased salary
and benefit expenses of $2.7 million. The year over year
increase in salary and benefits is consistent with the growth in
headcount. General and administrative headcount at the end of
fiscal 2007 increased to 184 from 134 at the end of fiscal 2006
and 97 at the end of fiscal 2005 The increase in general and
administrative expenses is expected to remain at these increased
levels as the Company continues to build its infrastructure to
support the worldwide growth of our business.
In-process research and development. Acquired
in-process research and development (IPR&D)
expense was $14.0 million in 2007 and reflects the amount
allocated to IPR&D that we acquired in the Acopia
acquisition. IPR&D represents the present value of
estimated after-tax cash flows expected to be generated by
purchased technology, which, at the acquisition date, had not
yet reached technological feasibility. We based our estimates
and projections related to IPR&D on assumptions we believed
to be reasonable at the time of the acquisition but that are
inherently uncertain and unpredictable. If we do not
successfully develop this product, our business, operating
results and financial condition may be adversely affected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except for percentages)
|
|
|
Other Income and Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
99,502
|
|
|
$
|
90,138
|
|
|
$
|
69,358
|
|
Other income, net
|
|
|
28,191
|
|
|
|
17,431
|
|
|
|
8,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
127,693
|
|
|
|
107,569
|
|
|
|
77,434
|
|
Provision for income taxes
|
|
|
50,693
|
|
|
|
41,564
|
|
|
|
30,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
77,000
|
|
|
$
|
66,005
|
|
|
$
|
46,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Income Taxes (as percentage of net
revenue)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18.9
|
%
|
|
|
22.9
|
%
|
|
|
24.6
|
%
|
Other income, net
|
|
|
5.4
|
|
|
|
4.4
|
|
|
|
2.9
|
|
Income before income taxes
|
|
|
24.3
|
|
|
|
27.3
|
|
|
|
27.5
|
|
Provision for income taxes
|
|
|
9.6
|
|
|
|
10.5
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
14.6
|
%
|
|
|
16.8
|
%
|
|
|
16.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income, Net. Other income, net, consists
of interest income and foreign currency transaction gains and
losses. Other income, net, increased 61.7% in fiscal year 2007
and increased 115.8% in fiscal year 2006 as compared to the
previous fiscal year, respectively. The significant increase was
due to a combination of higher yields and increased investment
balances. The increased investment balances are the result of
cash provided from operating and financing activities during the
fiscal years 2006 and fiscal year 2005.
Provision for Income Taxes. We recorded a
39.7% provision for income taxes for the fiscal year 2007
compared to 38.6% in fiscal year 2006 and 39.4% in fiscal 2005.
The increase in the provision for income taxes is primarily due
to the write-off of acquired in-process research and
development. As of fiscal year-end 2007, we do not have a
valuation allowance on any of our deferred tax assets in any of
the jurisdictions in which we operate because we believe that
the assets are more likely than not to be realized. In making
this determination we have considered projected future taxable
income and ongoing prudent and feasible tax planning strategies
in assessing the appropriateness of a valuation allowance. Our
net deferred tax assets as of fiscal year end 2007, 2006 and
2005 were $43.3 million, $23.3 million and
$40.4 million, respectively. Our world wide effective tax
rate may fluctuate based on a number of factors including
variations in projected taxable income in our 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, 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
36
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and investments
|
|
$
|
474,831
|
|
|
$
|
492,176
|
|
|
$
|
365,015
|
|
Cash provided by operating activities
|
|
|
169,650
|
|
|
|
125,378
|
|
|
|
84,987
|
|
Cash used in investing activities
|
|
|
(188,141
|
)
|
|
|
(204,409
|
)
|
|
|
(126,760
|
)
|
Cash provided by financing activities
|
|
|
35,486
|
|
|
|
65,145
|
|
|
|
68,867
|
|
Cash and cash equivalents, short-term investments and long-term
investments totaled $474.8 million as of September 30,
2007 compared to $492.2 million as of September 30,
2006, representing a decrease of $17.4 million. The net
decrease was primarily due to cash requirements for the purchase
of Acopia Networks in the fourth quarter of fiscal 2007 which
were partially offset by cash flow from operations. In fiscal
year 2006, overall cash and investments increased
$127.2 million compared to the fiscal year 2005. The
increase was due to the cash flow from operations and cash from
employee stock option exercises.
Cash provided by operating activities during fiscal year 2007
was $169.7 million compared to $125.4 million in
fiscal year 2006 and $85.0 million in fiscal year 2005.
Cash provided by operating activities resulted primarily from
cash generated from net income, after adjusting for non-cash
charges and changes in operating assets and liabilities as
adjusted for various non-cash items including stock-based
compensation, depreciation and amortization charges.
Cash used in investing activities was $188.1 million for
the fiscal year 2007, $204.4 million for fiscal year 2006
and $126.8 million for fiscal year 2005. The cash used in
fiscal year 2007 was primarily the result of the purchase of
investments partially offset by the sale of investments and
$207.1 million of cash payments, net of cash acquired, to
shareholders of Acopia Networks, which was acquired in September
2007. The cash used in fiscal year 2006 was primarily due to the
purchase of investments and property and equipment, partially
offset by the sale of investments. The cash used in fiscal year
2005 was primarily due to the purchase of investments and
property and equipment partially offset by the sale of
investments
Cash provided by financing activities was $35.5 million for
fiscal year 2007 compared to $65.1 million and
$68.9 million in fiscal years 2006 and 2005, respectively.
During the fiscal years 2007, 2006 and 2005 our financing
activities consisted entirely of cash proceeds and tax benefits
received from the exercise of stock options and stock purchases
under our employee stock purchase plan.
We expect that our existing cash and investment balances and
cash from operations will be sufficient to meet our anticipated
working capital and capital expenditures for the foreseeable
future.
37
Obligations
and Commitments
The following table summarizes our contractual payment
obligations and commitments as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Obligations by Year
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Operating leases
|
|
$
|
14,371
|
|
|
$
|
16,500
|
|
|
$
|
15,424
|
|
|
$
|
12,214
|
|
|
$
|
9,765
|
|
|
$
|
31,442
|
|
|
$
|
99,716
|
|
Purchase obligations
|
|
|
17,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,281
|
|
|
$
|
16,500
|
|
|
$
|
15,424
|
|
|
$
|
12,214
|
|
|
$
|
9,765
|
|
|
$
|
31,442
|
|
|
$
|
117,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We lease our facilities under operating leases that expire at
various dates through 2014.
Purchase obligations are comprised of purchase commitments with
our contract manufacturers. The agreement with our primary
contract manufacturer allows them 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.
Recent
Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159),
which allows entities to measure eligible financial instruments
and certain other items at fair value. The Statement also
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective for the Companys
fiscal years beginning October 1, 2008. The Company is
currently assessing the potential effect if any of implementing
this standard.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 is
effective for the Companys fiscal years beginning
October 1, 2008, and interim periods within those fiscal
years. The Company is currently assessing the potential effect
if any of implementing this standard.
In September 2006, the SEC issued SAB No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which is
effective for fiscal years ending after November 15, 2006.
SAB 108 provides interpretive guidance on the consideration
of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality
assessment. The adoption of SAB 108 did not have a material
impact on the Companys consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the
application of SFAS No. 109, Accounting for
Income Taxes. The Interpretation addresses the
determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial
statements. Under FIN 48, 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, based on the technical merits of the
position. The tax benefits recognized in the financial
statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood
of being realized upon ultimate settlement. FIN 48 also
provides guidance on derecognition, classification, interest and
penalties on income taxes, accounting in interim periods and
requires increased disclosures. The provisions of FIN 48
are effective for the company beginning October 1, 2007.
The impact of the Companys reassessment of its tax
positions in accordance with the requirements of FIN 48 is
expected to yield no change in the liability for unrecognized
tax benefits.
38
|
|
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
securities, commercial paper 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 $9.5 million in our interest income for
the fiscal year 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Greater Than
|
|
|
|
|
|
|
|
|
|
or Less
|
|
|
to One Year
|
|
|
One Year
|
|
|
Total
|
|
|
Fair Value
|
|
|
|
(In thousands, except for percentages)
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
|
$
|
7,965
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,965
|
|
|
$
|
7,965
|
|
Weighted average interest rate
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments
|
|
$
|
123,044
|
|
|
$
|
81,125
|
|
|
$
|
|
|
|
$
|
204,169
|
|
|
$
|
204,169
|
|
Weighted average interest rates
|
|
|
5.3
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in long-term investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
216,366
|
|
|
$
|
216,366
|
|
|
$
|
216,366
|
|
Weighted average interest rates
|
|
|
|
|
|
|
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
|
$
|
7,852
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,852
|
|
|
$
|
7,852
|
|
Weighted average interest rate
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments
|
|
$
|
122,805
|
|
|
$
|
213,622
|
|
|
$
|
|
|
|
$
|
336,427
|
|
|
$
|
336,427
|
|
Weighted average interest rates
|
|
|
4.4
|
%
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in long-term investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
118,003
|
|
|
$
|
118,003
|
|
|
$
|
118,003
|
|
Weighted average interest rates
|
|
|
|
|
|
|
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
|
$
|
298
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
298
|
|
|
$
|
298
|
|
Weighted average interest rate
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments
|
|
$
|
89,015
|
|
|
$
|
95,299
|
|
|
$
|
|
|
|
$
|
184,314
|
|
|
$
|
184,314
|
|
Weighted average interest rates
|
|
|
2.6
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in long-term investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
128,834
|
|
|
$
|
128,834
|
|
|
$
|
128,834
|
|
Weighted average interest rates
|
|
|
|
|
|
|
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
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 September 30, 2007 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.
39
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
F5
NETWORKS, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
43
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
Supplementary Data
|
|
|
|
|
|
|
|
71
|
|
40
Report
of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders
of F5 Networks, Inc.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of F5 Networks, Inc. and its subsidiaries
at September 30, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2007 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. 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.
A companys 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 companys
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
companys assets that could have a material effect on the
financial statements.
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.
As described in Managements Report on Internal Control
over Financial Reporting appearing under Item 9A,
management has excluded Acopia Networks, Inc. from its
assessment of internal control over financial reporting as of
September 30, 2007 because it was acquired by the Company
in a purchase business combination during 2007. We have also
excluded Acopia Networks, Inc. from our audit of internal
control over financial reporting. Acopia Networks, Inc. is a
wholly-owned subsidiary whose total assets and total revenues
represent $5,327,000 and $1,637,000, respectively, of the
related consolidated financial statement amounts as of and for
the year ended September 30, 2007.
PricewaterhouseCoopers LLP
Seattle, Washington
November 16, 2007
41
F5
NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,296
|
|
|
$
|
37,746
|
|
Short-term investments
|
|
|
204,169
|
|
|
|
336,427
|
|
Accounts receivable, net of allowances of $3,161 and $2,858
|
|
|
91,774
|
|
|
|
62,750
|
|
Inventories
|
|
|
10,672
|
|
|
|
5,763
|
|
Deferred tax assets
|
|
|
5,305
|
|
|
|
4,682
|
|
Other current assets
|
|
|
20,434
|
|
|
|
15,607
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
386,650
|
|
|
|
462,975
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
3,959
|
|
|
|
3,929
|
|
Property and equipment, net
|
|
|
36,024
|
|
|
|
29,951
|
|
Long-term investments
|
|
|
216,366
|
|
|
|
118,003
|
|
Deferred tax assets
|
|
|
38,036
|
|
|
|
18,657
|
|
Goodwill
|
|
|
233,997
|
|
|
|
81,701
|
|
Other assets, net
|
|
|
29,256
|
|
|
|
14,295
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
944,288
|
|
|
$
|
729,511
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
25,525
|
|
|
$
|
13,174
|
|
Accrued liabilities
|
|
|
39,990
|
|
|
|
31,583
|
|
Deferred revenue
|
|
|
87,895
|
|
|
|
54,880
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
153,410
|
|
|
|
99,637
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
7,679
|
|
|
|
7,976
|
|
Deferred revenue, long-term
|
|
|
12,622
|
|
|
|
5,440
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
20,301
|
|
|
|
13,416
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; 10,000 shares authorized, no
shares outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value; 200,000 shares authorized,
84,379 and 81,556 shares issued and outstanding
|
|
|
598,436
|
|
|
|
521,791
|
|
Accumulated other comprehensive loss
|
|
|
(564
|
)
|
|
|
(1,038
|
)
|
Retained earnings
|
|
|
172,705
|
|
|
|
95,705
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
770,577
|
|
|
|
616,458
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
944,288
|
|
|
$
|
729,511
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
F5
NETWORKS, INC.
CONSOLIDATED
INCOME STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
392,921
|
|
|
$
|
304,878
|
|
|
$
|
219,603
|
|
Services
|
|
|
132,746
|
|
|
|
89,171
|
|
|
|
61,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
525,667
|
|
|
|
394,049
|
|
|
|
281,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
84,094
|
|
|
|
63,619
|
|
|
|
48,990
|
|
Services
|
|
|
34,230
|
|
|
|
24,534
|
|
|
|
16,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
118,324
|
|
|
|
88,153
|
|
|
|
65,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
407,343
|
|
|
|
305,896
|
|
|
|
216,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
175,555
|
|
|
|
127,478
|
|
|
|
89,866
|
|
Research and development
|
|
|
69,030
|
|
|
|
49,171
|
|
|
|
31,516
|
|
General and administrative
|
|
|
49,256
|
|
|
|
39,109
|
|
|
|
25,486
|
|
In-process research and development
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
307,841
|
|
|
|
215,758
|
|
|
|
146,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
99,502
|
|
|
|
90,138
|
|
|
|
69,358
|
|
Other income, net
|
|
|
28,191
|
|
|
|
17,431
|
|
|
|
8,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
127,693
|
|
|
|
107,569
|
|
|
|
77,434
|
|
Provision for income taxes
|
|
|
50,693
|
|
|
|
41,564
|
|
|
|
30,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
77,000
|
|
|
$
|
66,005
|
|
|
$
|
46,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.93
|
|
|
$
|
0.82
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
83,205
|
|
|
|
80,278
|
|
|
|
74,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
0.90
|
|
|
$
|
0.80
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
85,137
|
|
|
|
83,020
|
|
|
|
77,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
F5
NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Retained
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Income/(Loss)
|
|
|
(Deficit)
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance, September 30, 2004
|
|
|
69,544
|
|
|
$
|
326,278
|
|
|
$
|
(833
|
)
|
|
$
|
(498
|
)
|
|
$
|
(17,202
|
)
|
|
$
|
307,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of employee stock options
|
|
|
7,370
|
|
|
|
65,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,056
|
|
Issuance of stock under employee stock purchase plan
|
|
|
272
|
|
|
|
3,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,837
|
|
Tax benefit from employee stock transactions
|
|
|
|
|
|
|
32,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,153
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
833
|
|
|
|
|
|
|
|
|
|
|
|
833
|
|
Stock based compensation
|
|
|
|
|
|
|
4,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,573
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,902
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(771
|
)
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
|
77,186
|
|
|
$
|
431,897
|
|
|
$
|
|
|
|
$
|
(1,430
|
)
|
|
$
|
29,700
|
|
|
$
|
460,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of employee stock options
|
|
|
3,494
|
|
|
|
38,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,701
|
|
Issuance of stock under employee stock purchase plan
|
|
|
272
|
|
|
|
5,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,488
|
|
Issuance of restricted stock
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from employee stock transactions
|
|
|
|
|
|
|
20,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,887
|
|
Stock based compensation
|
|
|
|
|
|
|
24,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,818
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,005
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006
|
|
|
81,556
|
|
|
$
|
521,791
|
|
|
$
|
|
|
|
$
|
(1,038
|
)
|
|
$
|
95,705
|
|
|
$
|
616,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of employee stock options
|
|
|
1,257
|
|
|
|
15,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,690
|
|
Issuance of stock under employee stock purchase plan
|
|
|
288
|
|
|
|
7,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,546
|
|
Issuance of restricted stock
|
|
|
1,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from employee stock transactions
|
|
|
|
|
|
|
12,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,197
|
|
Stock based compensation
|
|
|
|
|
|
|
41,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,212
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,000
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(686
|
)
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,160
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
|
84,379
|
|
|
$
|
598,436
|
|
|
$
|
|
|
|
$
|
(564
|
)
|
|
$
|
172,705
|
|
|
$
|
770,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
F5
NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
77,000
|
|
|
$
|
66,005
|
|
|
$
|
46,902
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss on disposition of assets
|
|
|
134
|
|
|
|
446
|
|
|
|
569
|
|
Realized loss on sale of investments
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
41,212
|
|
|
|
24,818
|
|
|
|
5,406
|
|
Provision for doubtful accounts and sales returns
|
|
|
1,209
|
|
|
|
67
|
|
|
|
1,419
|
|
Depreciation and amortization
|
|
|
15,862
|
|
|
|
11,585
|
|
|
|
6,797
|
|
Deferred income taxes
|
|
|
6,429
|
|
|
|
18,946
|
|
|
|
(7,733
|
)
|
Tax benefit from employee stock option plans
|
|
|
|
|
|
|
|
|
|
|
32,153
|
|
In-process research and development
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of amounts
acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(30,004
|
)
|
|
|
(20,812
|
)
|
|
|
(20,456
|
)
|
Inventories
|
|
|
(2,366
|
)
|
|
|
(2,997
|
)
|
|
|
(1,002
|
)
|
Other current assets
|
|
|
(4,420
|
)
|
|
|
(5,578
|
)
|
|
|
(3,604
|
)
|
Other assets
|
|
|
(1,492
|
)
|
|
|
(957
|
)
|
|
|
(149
|
)
|
Accounts payable and accrued liabilities
|
|
|
16,592
|
|
|
|
13,088
|
|
|
|
13,426
|
|
Deferred revenue
|
|
|
35,488
|
|
|
|
20,767
|
|
|
|
11,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
169,650
|
|
|
|
125,378
|
|
|
|
84,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(902,250
|
)
|
|
|
(557,999
|
)
|
|
|
(407,533
|
)
|
Sales of investments
|
|
|
937,716
|
|
|
|
417,817
|
|
|
|
290,351
|
|
Investment of restricted cash
|
|
|
(9
|
)
|
|
|
(49
|
)
|
|
|
2,369
|
|
Acquisition of intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
(2,259
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(207,144
|
)
|
|
|
(42,778
|
)
|
|
|
(395
|
)
|
Purchases of property and equipment
|
|
|
(16,454
|
)
|
|
|
(21,400
|
)
|
|
|
(9,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(188,141
|
)
|
|
|
(204,409
|
)
|
|
|
(126,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from nonqualified stock options
|
|
|
12,197
|
|
|
|
20,887
|
|
|
|
|
|
Proceeds from the exercise of stock options and the purchase of
stock under employee stock purchase plan
|
|
|
23,289
|
|
|
|
44,258
|
|
|
|
68,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
35,486
|
|
|
|
65,145
|
|
|
|
68,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
16,995
|
|
|
|
(13,886
|
)
|
|
|
27,094
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(445
|
)
|
|
|
(235
|
)
|
|
|
(128
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
37,746
|
|
|
|
51,867
|
|
|
|
24,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
54,296
|
|
|
$
|
37,746
|
|
|
$
|
51,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
32,762
|
|
|
$
|
1,500
|
|
|
$
|
792
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
45
F5
NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Summary
of Significant Accounting Policies
|
The
Company
F5 Networks, Inc. (the Company) F5 Networks makes,
sells and services products that optimize the delivery of
network-based applications and the performance and availability
of servers, data storage devices and other network resources.
The Companys application delivery networking products
improve the performance, availability and security of
applications running on Internet-based networks by inspecting
and modifying traffic passing between servers running
applications and clients using these applications to ensure that
it is delivered securely and in a way that optimizes the
performance of both the network and the applications. With the
purchase of Acopia Networks in September 2007, the Company
acquired a line of file virtualization products that improve the
management and utilization of network attached storage (NAS)
systems. These products automate many storage management tasks
that are performed manually today, and eliminate the disruption
associated with data migration, automated storage tiering, data
replication, and dynamic load balancing. The Company also offers
a broad range of services such as consulting, training,
installation, maintenance, and other technical support services.
Stock
Split
On July 25, 2007, the Companys Board of Directors
declared a two-for-one split of the Companys common stock.
The stock split resulted in the issuance of one additional share
of common stock for every share of its common stock issued and
outstanding as of the record date of August 10, 2007. All
share and per-share data, as well as share-based award
information included in these Consolidated Financial Statements
and Notes thereto, have been retroactively adjusted to reflect
the stock split.
Accounting
Principles
The Companys 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.
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
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Estimates are
used in accounting for revenue recognition, reserves for
doubtful accounts, product returns, obsolete and excess
inventory, warranties, valuation allowances on deferred tax
assets and purchase price allocations. Actual results could
differ from those estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with
purchased maturities of three months or less to be cash
equivalents. The Company invests its cash and cash equivalents
in deposits with three major financial institutions, which, at
times, exceed federally insured limits. The Company has not
experienced any losses on its cash and cash equivalents.
46
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments
The Company classifies its investment securities as available
for sale. Investment securities, consisting of corporate and
municipal bonds and notes and United States 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 managements 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.
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.
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 and marked-to-market at each reporting period. The fair
value is determined using quoted market prices for the
securities held.
Inventories
The Company outsources the manufacturing of its pre-configured
hardware platforms to contract manufacturers, who assemble each
product to the Companys 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 or market (as determined by
the
first-in,
first-out method).
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Finished goods
|
|
$
|
7,703
|
|
|
$
|
2,610
|
|
Raw materials
|
|
|
2,969
|
|
|
|
3,153
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,672
|
|
|
$
|
5,763
|
|
|
|
|
|
|
|
|
|
|
Restricted
Cash
Restricted cash represents escrow accounts established in
connection with lease agreements for the Companys
corporate headquarters and, to a lesser extent, our
international facilities. Under the terms of the
47
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
lease for our corporate headquarters, the amount required to be
held in escrow reduces and eventually eliminates at various
dates throughout the duration of the lease term. During fiscal
year 2007, the amount required to be held in escrow was
$3.6 million as set forth in the lease agreement for our
corporate headquarters.
Property
and Equipment
Property and equipment is stated at cost. 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 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.
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Computer equipment
|
|
$
|
41,547
|
|
|
$
|
29,802
|
|
Office furniture and equipment
|
|
|
7,766
|
|
|
|
7,026
|
|
Leasehold improvements
|
|
|
21,048
|
|
|
|
16,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,361
|
|
|
|
52,946
|
|
Accumulated depreciation and amortization
|
|
|
(34,337
|
)
|
|
|
(22,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,024
|
|
|
$
|
29,951
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled approximately
$11.7 million, $7.6 million, and $4.8 million for
the fiscal years ended September 30, 2007, 2006 and 2005,
respectively.
Goodwill
Goodwill represents the excess purchase price over the estimated
fair value of net assets acquired as of the acquisition date. We
have adopted the requirements of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142).
SFAS No. 142 requires goodwill to be tested for
impairment on an annual basis and between annual tests in
certain circumstances, and written down when impaired. Goodwill
of $24.2 million was recorded in connection with the
acquisition of uRoam, Inc. in fiscal year 2003, goodwill of
$25.5 million was recorded in connection with the
acquisition of MagniFire Websystems Inc. in fiscal year 2004,
goodwill of $32.0 million was recorded in connection with
the acquisition of Swan Labs, Inc. (Swan Labs), and
goodwill of $152.3 million was recorded in connection with
the acquisition of Acopia Networks, Inc. in the fourth quarter
of 2007. In March 2007, we completed our annual impairment test
and concluded that there was no impairment of goodwill.
Other
Assets
Other assets primarily consist of software development costs and
acquired technology.
Software development costs are charged to research and
development expense until technological feasibility is
established. The Company accounts for internally-generated
software development costs in accordance with
SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise
Marketed. Thereafter, until the product is released for
sale, software development costs are capitalized and reported at
the lower of unamortized cost or net realizable value of each
product. The
48
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
establishment of technological feasibility and the ongoing
assessment of recoverability of costs require considerable
judgment by the Company with respect to certain internal and
external factors, including, but not limited to, anticipated
future gross product revenues, estimated economic life and
changes in hardware and software technology. The Company did not
capitalize any software development costs in fiscal year 2007,
2006 or 2005. Amortization costs related to previously
capitalize software development was $249,000, $272,000, and
$317,000 for fiscal years 2007, 2006, and 2005, respectively and
has been recorded as additional cost of product revenues.
Acquired technology and customer relationship assets are
recorded at cost and amortized over their estimated useful lives
of five years. Acquired technology of $15.0 million in
fiscal 2007, $8.6 million in fiscal 2006 and
$5.0 million in fiscal year 2004 was recorded in connection
with the acquisitions of Acopia, Swan Labs, Inc. and MagniFire,
respectively. Related amortization expense, which is charged to
cost of product revenues, totaled $3.4 million,
$3.2 million and $1.6 million during the fiscal years
2007, 2006 and 2005, respectively.
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 an impairment by comparing the anticipated undiscounted net
future cash flows to the related assets carrying value. If
an impairment exists, the asset is written down to its estimated
fair value.
Revenue
Recognition
The Companys products are integrated with software that is
essential to the functionality of the equipment. Accordingly,
the Company recognizes revenue in accordance with the guidance
provided under Statement of Position (SOP)
No. 97-2,
Software Revenue Recognition, and
SOP No. 98-9
Modification of
SOP No. 97-2,
Software Revenue Recognition, with Respect to Certain
Transactions, Statement of Financial Accounting Standards
(SFAS) No. 48, Revenue Recognition When
Right of Return Exists, and SEC Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition.
The Company sells products through distributors, resellers, and
directly to end users. The Company recognizes product revenue
upon shipment, net of estimated returns, provided that
collection is reasonably assured and no significant performance
obligations remain. In certain regions where the Company does
not have the ability to reasonably estimate returns, the Company
defers revenue on sales to its distributors until they have
received information from the channel partner indicating that
the distributor has sold the product to its customer. Payment
terms to domestic customers are generally net 30 to
45 days. Payment terms to international customers range
from net 30 to net 90 days based on normal and
customary trade practices in the individual markets. The Company
offers extended payment terms to certain customers, in which
case, revenue is recognized when payments are due.
Whenever a software license, hardware, installation and
post-contract customer support (PCS) elements are
sold together, a portion of the sales price is allocated to each
element based on their respective fair values as determined when
the individual elements are sold separately. We determine fair
value based on the type of customer and region in which the
package is sold. Where fair value of certain elements are not
available, we recognize revenue on the residual
method permitted under
SOP 98-9
based on the fair value of undelivered PCS. Revenues from the
license of software are recognized when the software has been
shipped and the customer is obligated to pay for the software.
When rights of return are present and the Company cannot
estimate returns, it recognizes revenue when such rights of
return lapse. Revenues for PCS are recognized on a straight-line
basis over the service contract term. PCS includes a limited
period of telephone support updates, bug fixes and rights to
upgrades, when and if available. Installation revenue is
recognized when the product
49
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
has been installed at the customers site. Consulting
services are customarily billed at fixed rates, plus
out-of-pocket expenses, and revenues are recognized when the
consulting has been completed. Training revenue is recognized
when the training has been completed.
Shipping
and Handling
Shipping and handling fees charged to our 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 Companys bylaws
contain similar indemnification obligations to the
Companys 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, 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. During the years ended
September 30, 2007, 2006 and 2005, warranty expense was
$3.7 million, $1.8 million and $2.2 million,
respectively.
The following table summarizes the activity related to product
warranties (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance, beginning of fiscal year
|
|
$
|
1,582
|
|
|
$
|
1,565
|
|
|
$
|
1,062
|
|
Provision for warranties issued
|
|
|
3,678
|
|
|
|
1,825
|
|
|
|
2,233
|
|
Payments
|
|
|
(3,503
|
)
|
|
|
(1,808
|
)
|
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of fiscal year
|
|
$
|
1,757
|
|
|
$
|
1,582
|
|
|
$
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and
depreciation expense. Research and development expenses are
reflected in the statements of income as incurred.
In-Process
Research and Development
Acquired in-process research and development,
(IPR&D) reflects the amount allocated to
IPR&D that the Company acquired in acquisitions. IPR&D
represents the present value of estimated after-tax cash flows
expected to be generated by purchased technology, which, at the
acquisition date, had not yet reached technological feasibility
and had no alternative future use. We recorded
$14.0 million of IPR&D cost in fiscal 2007 related to
our acquisition of Acopia.
50
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
Advertising costs are expensed as incurred. The Company incurred
$2.2 million, $1.3 million and $1.7 million in
advertising costs during the fiscal years 2007, 2006 and 2005,
respectively.
Income
Taxes
The Company utilizes the liability method of accounting for
income taxes as set forth by SFAS No. 109,
Accounting for Income Taxes
(SFAS 109). 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.
Foreign
Currency
The functional currency for the Companys foreign
subsidiaries is the local currency in which the respective
entity is located, with the exception of F5 Networks, Ltd., in
the United Kingdom that uses the U.S. dollar as its
functional currency. An entitys 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 in
accordance with SFAS No. 52 Foreign Currency
Translation. 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 a separate component of accumulated other
comprehensive income (loss) in shareholders equity.
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. The net effect of foreign currency gains
and losses were not significant during the fiscal years ended
September 30, 2007, 2006 and 2005.
Segments
The Company complies with the requirements of
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, which establishes
annual and interim reporting standards for an enterprises
operating segments and related disclosures about its products,
services, geographic areas and major customers. Management has
determined that the Company operated in one segment for fiscal
2007 and prior years and will continue to evaluate its reporting
structure prospectively.
Stock-Based
Compensation
On July 1, 2005, the Company adopted the fair value
recognition provisions of FASB Statement No. 123(R),
Share-Based Payment
(FAS 123R). Prior to July 1, 2005, the
Company accounted for share-based payments under the recognition
and measurement provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related
Interpretations, as permitted by FASB Statement No. 123,
Accounting for Stock-Based Compensation
(FAS 123). In accordance with APB 25, no
compensation cost was required to be recognized for options
granted that had an exercise price equal to the market value of
the underlying common stock on the date of grant.
The Company adopted FAS 123R using the
modified-prospective-transition method. Under that transition
method, compensation cost recognized in the fiscal year 2005 and
beyond includes: a) compensation cost for all share-based
payments granted prior to, but not yet vested as of July 1,
2005, based on the grant-date fair
51
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value estimated in accordance with the original provisions of
FAS 123, and b) compensation cost for all share-based
payments granted subsequent to July 1, 2005, based on the
grant-date fair value estimated in accordance with the
provisions of FAS 123R. The results for the prior periods
have not been restated.
Effective July 1, 2005 the Company adopted the
straight-line attribution method for recognizing compensation
expense. Previously under the disclosure-only provisions of
SFAS 123, the Company used the accelerated method of
expense recognition pursuant to FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans (FIN 28). For
all unvested options outstanding as of July 1, 2005, the
previously measured but unrecognized compensation expense, based
on the fair value at the original grant date, will be recognized
on an accelerated basis over the remaining vesting period. For
share-based payments granted subsequent to July 1, 2005,
compensation expense, based on the fair value on the date of
grant, will be recognized on a straight-line basis over the
vesting period.
The fair value of restricted stock units is based on the price
of a share of our common stock on the date of grant. However, in
determining the fair value of stock options, we use the
Black-Scholes option pricing model that employs the following
key assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plan
|
|
|
Employee Stock Purchase Plan
|
|
|
|
Years Ended September 30,
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
4.46
|
%
|
|
|
4.86
|
%
|
|
|
3.53
|
%
|
|
|
5.03
|
%
|
|
|
4.90
|
%
|
|
|
2.72
|
%
|
Expected dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
6.3 years
|
|
|
|
6.3 years
|
|
|
|
2.7 years
|
|
|
|
0.5 years
|
|
|
|
0.5 years
|
|
|
|
0.5 years
|
|
Expected volatility
|
|
|
65.76
|
%
|
|
|
51.07
|
%
|
|
|
68.17
|
%
|
|
|
42.62
|
%
|
|
|
45.35
|
%
|
|
|
52.48
|
%
|
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 our stock price commensurate with the expected
life of the option. Expected term of the option is based on an
evaluation of the historical employee stock option exercise
behavior, the vesting terms of the respective option and a
contractual life of ten years. Our stock price volatility and
option lives involve managements best estimates at that
time, both of which impact the fair value of the option
calculated under the Black-Scholes methodology and, ultimately,
the expense that will be recognized over the life of the option.
SFAS 123R also requires that we recognize compensation
expense for only the portion of options or stock units that are
expected to vest. Therefore, the Company applies estimated
forfeiture rates that are derived from historical employee
termination behavior. An estimated forfeiture rate of 4% was
used for fiscal 2007 and 5% for fiscal 2006 and fiscal 2005. If
the actual number of forfeitures differs from those estimated by
management, additional adjustments to compensation expense may
be required in future periods.
52
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the pro forma effect on the
Companys net income (loss) and net income (loss) per share
for the year ended September 30, 2005, had compensation
expense been determined based upon the fair value at the grant
date for awards consistent with the methodology prescribed by
SFAS 123. The Company adopted SFAS 123R on
July 1, 2005, the beginning of its fourth quarter of fiscal
2005; therefore, stock-based compensation expense shown in the
pro forma table relates to expense through June 30, 2005
while the Company was still under the disclosure only provisions
of SFAS 123. Stock-based compensation expense for the
fourth quarter of fiscal 2005 and fiscal 2006 has been included
in results of operations. These pro forma effects may not be
representative of expense in future periods since the estimated
fair value of stock options on the date of grant is amortized to
expense over the vesting period, and additional options may be
granted or options may be cancelled in future years:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30, 2005
|
|
|
Net income, as reported
|
|
$
|
46,902
|
|
Add: Stock-based employee compensation expense under APB
No. 25 included in reported net income, net of tax effect
|
|
|
833
|
|
Deduct: Total stock-based employee compensation expense
determined under the fair value methods, net of tax effect
|
|
|
7,161
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
40,574
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
As reported basic
|
|
$
|
0.63
|
|
Pro forma basic
|
|
$
|
0.55
|
|
As reported diluted
|
|
$
|
0.61
|
|
Pro forma diluted
|
|
$
|
0.53
|
|
Earnings
Per Share
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 following table sets forth the computation of basic and
diluted net income per share (in thousands, except per share
data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
77,000
|
|
|
$
|
66,005
|
|
|
$
|
46,902
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
83,205
|
|
|
|
80,278
|
|
|
|
74,440
|
|
Dilutive effect of common shares from stock options and
restricted stock units
|
|
|
1,932
|
|
|
|
2,742
|
|
|
|
3,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
85,137
|
|
|
|
83,020
|
|
|
|
77,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.93
|
|
|
$
|
0.82
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.90
|
|
|
$
|
0.80
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Approximately 0.2 million, 0.4 million, and
0.8 million of common shares potentially issuable from
stock options for the years ended September 30, 2007, 2006
and 2005 are excluded from the calculation of diluted earnings
per share because the exercise price was greater than the market
price.
Recent
Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159),
which allows entities to measure eligible financial instruments
and certain other items at fair value. The Statement also
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective for the Companys
fiscal years beginning October 1, 2008. The Company is
currently assessing the potential effect if any of implementing
this standard.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 is
effective for the Companys fiscal years beginning
October 1, 2008, and interim periods within those fiscal
years. The Company is currently assessing the potential effect
if any of implementing this standard.
In September 2006, the SEC issued SAB No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which is
effective for fiscal years ending after November 15, 2006.
SAB 108 provides interpretive guidance on the consideration
of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality
assessment. The adoption of SAB 108 did not have a material
impact on the Companys consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the
application of SFAS No. 109, Accounting for
Income Taxes. The Interpretation addresses the
determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial
statements. Under FIN 48, 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, based on the technical merits of the
position. The tax benefits recognized in the financial
statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood
of being realized upon ultimate settlement. FIN 48 also
provides guidance on derecognition, classification, interest and
penalties on income taxes, accounting in interim periods and
requires increased disclosures. The provisions of FIN 48
are effective for the company beginning October 1, 2007.
The impact of the Companys reassessment of its tax
positions in accordance with the requirements of FIN 48 is
expected to yield no change in the liability for unrecognized
tax benefits.
|
|
2.
|
Short-Term
and Long-Term Investments
|
Short-term investments consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes
|
|
$
|
17,923
|
|
|
$
|
20
|
|
|
$
|
(29
|
)
|
|
$
|
17,914
|
|
Municipal bonds and notes
|
|
|
79,100
|
|
|
|
2
|
|
|
|
|
|
|
|
79,102
|
|
U.S. government securities
|
|
|
107,185
|
|
|
|
38
|
|
|
|
(70
|
)
|
|
|
107,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
204,208
|
|
|
$
|
60
|
|
|
$
|
(99
|
)
|
|
$
|
204,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes
|
|
$
|
83,619
|
|
|
$
|
|
|
|
$
|
(475
|
)
|
|
$
|
83,144
|
|
Municipal bonds and notes
|
|
|
67,450
|
|
|
|
|
|
|
|
|
|
|
|
67,450
|
|
U.S. government securities
|
|
|
186,159
|
|
|
|
43
|
|
|
|
(369
|
)
|
|
|
185,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
337,228
|
|
|
$
|
43
|
|
|
$
|
(844
|
)
|
|
$
|
336,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes
|
|
$
|
2,648
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,648
|
|
Municipal bonds and notes
|
|
|
29,414
|
|
|
|
61
|
|
|
|
|
|
|
|
29,475
|
|
U.S. government securities
|
|
|
183,784
|
|
|
|
459
|
|
|
|
|
|
|
|
184,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
215,846
|
|
|
$
|
520
|
|
|
$
|
|
|
|
$
|
216,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes
|
|
$
|
10,823
|
|
|
$
|
22
|
|
|
$
|
(51
|
)
|
|
$
|
10,794
|
|
U.S. government securities
|
|
|
107,471
|
|
|
|
76
|
|
|
|
(338
|
)
|
|
|
107,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
118,294
|
|
|
$
|
98
|
|
|
$
|
(389
|
)
|
|
$
|
118,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of fixed maturities at
September 30, 2007, by contractual years-to-maturity, are
presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
One year or less
|
|
$
|
204,208
|
|
|
$
|
204,169
|
|
Over one year through five years
|
|
|
215,846
|
|
|
|
216,366
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
420,054
|
|
|
$
|
420,535
|
|
|
|
|
|
|
|
|
|
|
The Company invests in securities that are rated investment
grade or better. The unrealized losses on these investments were
caused by interest rate increases and not credit quality. The
Company has determined the unrealized losses are temporary as
the duration of the decline in value of investments has been
short, the extent of the decline, in both dollars and as a
percentage of costs, is not significant, and the Company has the
ability and intent to hold the investments until it recovers at
least substantially all of the cost of the investments.
55
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes investments that have unrealized
losses as of September 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months of Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes
|
|
$
|
4,628
|
|
|
$
|
2
|
|
|
$
|
5,001
|
|
|
$
|
27
|
|
|
$
|
9,629
|
|
|
$
|
29
|
|
U.S. government securities
|
|
|
10,899
|
|
|
|
5
|
|
|
|
28,534
|
|
|
|
65
|
|
|
|
39,433
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,527
|
|
|
$
|
7
|
|
|
$
|
33,535
|
|
|
$
|
92
|
|
|
$
|
49,062
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys acquisitions are accounted for under the
purchase method of accounting in accordance with
SFAS No. 141, Business Combinations.
The total purchase price is allocated to the tangible and
intangible assets acquired and the liabilities assumed based on
their estimated fair values. The excess of the purchase price
over those fair values is recorded as goodwill. The fair value
assigned to the tangible and intangible assets acquired and
liabilities assumed are based on estimates and assumptions
provided by management, and other information compiled by
management, including independent valuations, prepared by
valuation specialists that utilize established valuation
techniques appropriate for the technology industry. In
accordance with SFAS No. 142, Goodwill and
other Intangible Assets, goodwill is not amortized but
instead is tested for impairment at least annually.
Fiscal
Year 2007 Acquisition of Acopia Networks
On September 12, 2007, the Company acquired all of the
capital stock of Acopia Networks, Inc. (Acopia), a
privately held Delaware corporation headquartered in Lowell,
Massachusetts for $207.8 million in cash. The Company also
incurred $2.2 million of direct transaction costs for a
total purchase price of approximately $210.0 million.
Acopia provides high-performance, intelligent file
virtualization solutions. These solutions will be highly
complementary to Companys strategy of optimizing the
application infrastructure from the core of the datacenter to
the edge of the network. As a result of the merger, the Company
acquired all the assets of Acopia, all property, equipment and
other assets that Acopia used in its business and assumed all
the liabilities of Acopia. The results of operations of Acopia
have been included in the Companys consolidated financial
statements from the date of acquisition.
56
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price allocation is as follows (in thousands):
|
|
|
|
|
Assets acquired
|
|
|
|
|
Cash
|
|
$
|
1,855
|
|
Fair value of assets
|
|
|
4,364
|
|
Deferred tax assets, net
|
|
|
26,799
|
|
Developed technology, customer relationships and other
intangibles
|
|
|
17,500
|
|
In-process research and development
|
|
|
14,000
|
|
Goodwill
|
|
|
152,296
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
216,814
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
Accrued liabilities
|
|
$
|
(2,093
|
)
|
Deferred revenue
|
|
|
(4,708
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(6,801
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
210,013
|
|
|
|
|
|
|
Of the total estimated purchase price, $15.0 million was
allocated to developed technology, $14.0 million to
in-process research and development, $2.1 million to
customer relationships and $0.4 million to trade name and a
specific non-compete agreement. To determine the value of the
developed technology, a combination of cost and market
approaches were used. The cost approach required an estimation
of the costs required to reproduce the developed technology. The
market approach measures the fair value of the technology
through an analysis of recent comparable transactions. To
determine the value of customer relationships, the income
approach was used. The income approach estimates the fair value
based on the earnings and cash flow capacity of an asset.
Developed technology, customer relationships and trade name will
be amortized on a straight-line basis over their estimated
useful life of five years. The non-compete agreement will be
amortized on a straight-line basis over the thirty six month
term of the agreement.
Fiscal
Year 2006 Acquisition of Swan Labs
On October 4, 2005, the Company acquired all of the capital
stock of Swan Labs, a privately held Delaware corporation
headquartered in San Jose, California for
$43.0 million in cash. The Company also incurred
$3.2 million of direct transaction costs for a total
purchase price of approximately $46.2 million. As a result
of the merger, the Company acquired all the assets of Swan Labs,
all property, equipment and other assets that Swan Labs used in
its business and assumed all the liabilities of Swan Labs. Swan
Labs provides WAN (Wide Area Network) optimization and
application acceleration products and services. The addition of
Swan Labs is intended to allow us to quickly enter the WAN
optimization market, broaden the Companys customer base,
and augment the Companys existing product line. The
results of operations of Swan Labs have been included in the
Companys consolidated financial statements from the date
of acquisition.
57
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price allocation is as follows (in thousands):
|
|
|
|
|
Assets acquired
|
|
|
|
|
Cash
|
|
$
|
3,448
|
|
Fair value of assets
|
|
|
1,497
|
|
Deferred tax assets, net
|
|
|
2,341
|
|
Developed technology and customer relationships
|
|
|
8,589
|
|
Goodwill
|
|
|
31,975
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
47,850
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
Accrued liabilities
|
|
$
|
(1,405
|
)
|
Deferred revenue
|
|
|
(229
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(1,634
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
46,216
|
|
|
|
|
|
|
Of the total estimated purchase price, $8.0 million and
$0.6 million was allocated to developed technology and
customer relationships, respectively. To determine the value of
the developed technology, a combination of cost and market
approaches were used. The cost approach required an estimation
of the costs required to reproduce the developed technology. The
market approach measures the fair value of the technology
through an analysis of recent comparable transactions. To
determine the value of customer relationships, the income
approach was used. The income approach estimates the fair value
based on the earnings and cash flow capacity of an asset. The
$8.6 million allocated to developed technology and customer
relationships will be amortized on a straight-line basis over an
estimated useful life of five years.
Pro
Forma Results
The unaudited pro forma condensed combined consolidated summary
financial information below, presents the combined results of
operations as if the acquisitions had occurred at the beginning
of the previous fiscal year. For pro forma reporting purposes,
the fiscal year 2007 presentation includes the results of
operations of Acopia from October 1, 2006 through
September 12, 2007, the date of acquisition. The 2006
presentation included the results of operations of Acopia from
October 1, 2005 through September 30, 2006. The 2005
presentation includes the results of operations of Swan Labs
from October 1, 2004 through September 30, 2005.
Unaudited pro forma financial information is as follows (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net revenues pro forma
|
|
$
|
531,512
|
|
|
$
|
396,413
|
|
|
$
|
283,434
|
|
Net income pro forma
|
|
$
|
48,700
|
|
|
$
|
39,396
|
|
|
$
|
38,412
|
|
Net income per share basic pro forma
|
|
$
|
0.59
|
|
|
$
|
0.49
|
|
|
$
|
0.52
|
|
Net income per share diluted pro forma
|
|
$
|
0.57
|
|
|
$
|
0.47
|
|
|
$
|
0.50
|
|
The unaudited pro forma financial information does not reflect
integration costs, or cost savings or other synergies
anticipated as a result of the acquisition. This information
provided for illustrative purposes only and is not necessarily
indicative of the operating results that would have occurred if
the acquisition had been consummated on the date indicated nor
is it necessarily indicative of future operating results of the
combined enterprise.
58
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Assets
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Software development costs
|
|
$
|
|
|
|
$
|
249
|
|
Developed technology
|
|
|
21,711
|
|
|
|
10,159
|
|
Deposits and other
|
|
|
7,545
|
|
|
|
3,887
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,256
|
|
|
$
|
14,295
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to other assets was approximately
$4.2 million, $3.8 million, and $1.9 million for
the fiscal years ended September 30, 2007, 2006 and 2005,
respectively.
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Developed technology and software development cost
|
|
$
|
31,806
|
|
|
$
|
(10,095
|
)
|
|
$
|
21,711
|
|
|
$
|
16,806
|
|
|
$
|
(6,398
|
)
|
|
$
|
10,408
|
|
Customer relationships
|
|
|
2,699
|
|
|
|
(275
|
)
|
|
|
2,424
|
|
|
|
599
|
|
|
|
(120
|
)
|
|
|
479
|
|
Patents and trademarks
|
|
|
2,259
|
|
|
|
(780
|
)
|
|
|
1,479
|
|
|
|
2,259
|
|
|
|
(457
|
)
|
|
|
1,802
|
|
Trade names
|
|
|
200
|
|
|
|
(3
|
)
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete covenants
|
|
|
200
|
|
|
|
(6
|
)
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,164
|
|
|
$
|
(11,159
|
)
|
|
$
|
26,005
|
|
|
$
|
19,664
|
|
|
$
|
(6,975
|
)
|
|
$
|
12,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization expense for intangible assets for the
five succeeding fiscal years is as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
7,067
|
|
2009
|
|
$
|
6,234
|
|
2010
|
|
$
|
5,561
|
|
2011
|
|
$
|
3,783
|
|
2012
|
|
$
|
3,360
|
|
|
|
|
|
|
|
|
$
|
26,005
|
|
|
|
|
|
|
59
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued
Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Payroll and benefits
|
|
$
|
23,666
|
|
|
$
|
17,644
|
|
Sales and marketing
|
|
|
2,097
|
|
|
|
1,212
|
|
Warranty
|
|
|
1,757
|
|
|
|
1,582
|
|
Income taxes
|
|
|
4,755
|
|
|
|
4,490
|
|
Other
|
|
|
7,715
|
|
|
|
6,655
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,990
|
|
|
$
|
31,583
|
|
|
|
|
|
|
|
|
|
|
Other
Long Term Liabilities
Other long term liabilities consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Income taxes payable
|
|
$
|
4,161
|
|
|
$
|
4,201
|
|
Deferred rent and other
|
|
|
3,518
|
|
|
|
3,775
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,679
|
|
|
$
|
7,976
|
|
|
|
|
|
|
|
|
|
|
The United States and international components of income before
income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
121,596
|
|
|
$
|
104,167
|
|
|
$
|
73,797
|
|
International
|
|
|
6,098
|
|
|
|
3,402
|
|
|
|
3,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
127,694
|
|
|
$
|
107,569
|
|
|
$
|
77,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes (benefit) consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
42,439
|
|
|
$
|
43,041
|
|
|
$
|
33,827
|
|
State
|
|
|
2,240
|
|
|
|
2,458
|
|
|
|
2,451
|
|
Foreign
|
|
|
1,208
|
|
|
|
68
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
45,887
|
|
|
|
45,567
|
|
|
|
37,028
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
5,288
|
|
|
|
(4,371
|
)
|
|
|
(6,129
|
)
|
State
|
|
|
302
|
|
|
|
(144
|
)
|
|
|
(653
|
)
|
Foreign
|
|
|
(784
|
)
|
|
|
512
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,806
|
|
|
|
(4,003
|
)
|
|
|
(6,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,693
|
|
|
$
|
41,564
|
|
|
$
|
30,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate differs from the U.S. federal
statutory rate as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income tax provision at statutory rate
|
|
$
|
44,694
|
|
|
$
|
37,649
|
|
|
$
|
27,102
|
|
State taxes, net of federal benefit
|
|
|
2,432
|
|
|
|
2,468
|
|
|
|
1,874
|
|
Impact of international operations
|
|
|
(1,689
|
)
|
|
|
(655
|
)
|
|
|
2,417
|
|
Research and development and other credits
|
|
|
(4,795
|
)
|
|
|
(830
|
)
|
|
|
(2,057
|
)
|
In-process research and development write-down
|
|
|
5,180
|
|
|
|
|
|
|
|
|
|
Impact of stock compensation
|
|
|
3,482
|
|
|
|
2,158
|
|
|
|
470
|
|
Other
|
|
|
1,389
|
|
|
|
774
|
|
|
|
3,375
|
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(2,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,693
|
|
|
$
|
41,564
|
|
|
$
|
30,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of the temporary differences that give rise to
the deferred tax assets and liabilities are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
32,999
|
|
|
$
|
6,054
|
|
|
$
|
25,002
|
|
Allowance for doubtful accounts
|
|
|
1,044
|
|
|
|
860
|
|
|
|
915
|
|
Accrued compensation and benefits
|
|
|
2,539
|
|
|
|
1,442
|
|
|
|
1,140
|
|
Inventories and related reserves
|
|
|
286
|
|
|
|
248
|
|
|
|
417
|
|
Other accruals and reserves
|
|
|
11,101
|
|
|
|
9,113
|
|
|
|
6,097
|
|
Depreciation
|
|
|
2,024
|
|
|
|
1,079
|
|
|
|
462
|
|
Tax credit carry-forwards
|
|
|
3,664
|
|
|
|
8,643
|
|
|
|
7,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,657
|
|
|
|
27,439
|
|
|
|
41,664
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased intangibles and other
|
|
|
(10,316
|
)
|
|
|
(4,100
|
)
|
|
|
(1,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
43,341
|
|
|
$
|
23,339
|
|
|
$
|
40,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007, the Company had U.S. net
operating loss carry-forwards of approximately
$86.4 million, a portion of which begins to expire in
fiscal 2022 if not utilized. All U.S. net operating loss
carry-forwards relate to entities acquired by the Company and
are limited in use by I.R.C. Sec. 382. At September 30,
2007, the Company also had net operating loss carry-forwards of
approximately $2.4 million related to operations in the
United Kingdom that carry forward indefinitely. At
September 30, 2007 the Company also had federal research
and development credit carry-forwards and other federal credit
carry-forwards of approximately $2.4 million which if not
utilized will begin to expire in 2022 and state research and
development and investment carry-forwards of approximately
$1.2 million which if not utilized may begin to expire in
fiscal year 2017. At September 30, 2006 the Company had
approximately $10.8 million of net operating loss
carry-forwards of which approximately $6.7 million were
related to operations in the United Kingdom and approximately
$187,000 were related to operations in Israel, both of which
carry-forward indefinitely. At September 30, 2006, the
Company had federal research credit and other credit
carry-forwards of approximately $7.9 million and state
research credit carry-forwards of approximately $695,000.
United States income and foreign withholding taxes have not been
provided on approximately $6.6 million of undistributed
earnings from the Companys international subsidiaries. The
Company has not recognized a deferred tax liability for the
undistributed earnings of its foreign subsidiaries because the
Company currently does not expect to remit those earnings in the
foreseeable future. Determination of the amount of unrecognized
deferred tax liability related to undistributed earnings of
foreign subsidiaries is not practicable because such liability,
if any, is dependent on circumstances existing if and when
remittance occurs.
On December 20, 2006, the U.S. federal research credit
was extended for two years for qualified research expenses paid
or incurred after December 31, 2005, and before
January 1, 2008, as amended by the Tax Relief and Health
Care Act of 2006. In fiscal 2007, the Company experienced an
increase in its R&D credit available for use of
approximately $1.6 million due to this legislation.
62
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Common
Stock
Equity
Incentive Plans
In fiscal 2005, the Company modified the method in which it
issues incentive awards to its employees through stock-based
compensation. In prior years, stock-based compensation consisted
only of stock options. Beginning in 2005, the majority of awards
consisted of restricted stock unit awards 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 Companys stock options
expire 10 years from the date of grant. Restricted stock
units are payable in shares of the Companys 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 Companys 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 Companys common stock on the date
of grant. Alternatively, the Company uses 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.
1998 Equity Incentive Plan. In November 1998,
the Company adopted the 1998 Equity Incentive Plan, or the 1998
Plan, which provides for discretionary grants of non-qualified
and incentive stock options, stock purchase awards and stock
bonuses for employees and other service providers. Upon certain
changes in control of the Company, all outstanding and unvested
options or stock awards under the 1998 Plan will vest at the
rate of 50%, unless assumed or substituted by the acquiring
entity. During the fiscal year 2007, the Company issued no
non-qualified and incentive stock options or stock purchase
awards and issued 119,630 stock bonuses to employees. As of
September 30, 2007, there were options to purchase
969,498 shares outstanding and 4,168 shares available
for awards under the 1998 Plan.
1999 Employee Stock Purchase Plan. In May
1999, the board of directors approved the adoption of the 1999
Employee Stock Purchase Plan, or the Employee Stock Purchase
Plan. A total of 4,000,000 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 Companys common stock through
periodic payroll deductions of up to 15% of base compensation.
No employee may purchase more than $25,000 worth of stock,
determined at 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 Companys 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, 2007 there
were 1,465,772 shares available for awards under the
Employee Stock Purchase Plan.
2000 Equity Incentive Plan. In July 2000, the
Company adopted the 2000 Employee Equity Incentive Plan, or the
2000 Plan, which provides for discretionary grants of
non-qualified stock options, stock purchase awards and stock
bonuses for non-executive employees and other service providers.
A total of 7,000,000 shares of common stock have been
reserved for issuance under the 2000 Plan. Upon certain changes
in control of the Company, all outstanding and unvested options
or stock awards under the 2000 Plan will vest at the rate of
50%, unless assumed or substituted by the acquiring entity. As
of September 30, 2007, there were options to purchase
719,371 shares outstanding and 152,221 shares
available for awards under the 2000 Plan.
New Hire Incentive Plans. In October 2003, the
company adopted a non-qualified stock option plan, or the Hull
Plan, in connection with the hiring of Thomas Hull, the
Companys Senior Vice President of Worldwide Sales. The
Hull plan provided for a grant of 450,000 non-qualified stock
options for Mr. Hull. As of September 30, 2007, there
were options to purchase 230,000 shares outstanding and no
shares available for awards under the Hull Plan. In August 2004,
the Company adopted a non-qualified stock option plan, or the
63
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Triebes Plan, in connection with the hiring of Karl Triebes, the
Companys Senior Vice President of Product Development and
Chief Technology Officer. The Triebes Plan provided for a grant
of 600,000 non-qualified stock options for Mr. Triebes. As
of September 30, 2007, there were options to purchase
138,000 shares outstanding and no shares available for
awards under the Triebes Plan. Upon certain changes in control
of the Company, 100% of all outstanding and unvested options
remaining under the Hull Plan and the Triebes Plan will vest and
become immediately exercisable.
Acquisition Incentive Plans. In July 2003, the
Company adopted the uRoam Acquisition Equity Incentive Plan, or
the uRoam Plan, in connection with the hiring of the former
employees of uRoam, Inc. A total of 500,000 shares of
common stock were reserved for issuance under the uRoam Plan.
The plan provided for discretionary grants of non-qualified and
incentive stock options, stock purchase awards and stock
bonuses. The Company has not granted any stock purchase awards
or stock bonuses under this plan. As of September 30, 2007
there were options to purchase 31,172 shares outstanding
and no shares available for awards under the uRoam Plan.
In July 2004, the Company adopted the MagniFire Acquisition
Equity Incentive Plan, or the MagniFire Plan, in connection with
the hiring of the former employees of MagniFire Websystems, Inc.
A total of 830,000 shares of common stock were reserved for
issuance under the MagniFire Plan. The plan provides for
discretionary grants of non-qualified and incentive stock
options, stock purchase awards and stock bonuses. The Company
has not granted any stock purchase awards or stock bonuses under
this plan. As of September 30, 2007 there were options to
purchase 146,969 shares outstanding and no shares available
for awards under the MagniFire Plan.
In August 2007, the Company adopted the 2007 Acopia Acquisition
Equity Incentive Plan, or the 2007 Acopia Plan. The 2007 Acopia
Plan provides for discretionary grants of non-statutory stock
options and stock units for employees, directors and consultant
of Acopia to whom the Company offers employment in connection
with the Companys acquisition of Acopia. A total of
600,000 shares of common stock have been reserved for
issuance under the 2007 Acopia Plan. Upon certain changes in
control of the Company, the surviving entity will either assume
or substitute all outstanding Stock Awards under the 2007 Acopia
Plan. During the fiscal year 2007, the Company issued no stock
options or stock units under the 2007 Acopia Plan.
In connection with the Companys acquisition of Acopia, the
Company assumed the Acopia 2001 Stock Incentive Plan, or the
Acopia Plan. A total of 2,230,703 shares of common stock
were reserved for issuance under the Acopia Plan. The plan
provides for discretionary grants of non-qualified and incentive
stock options, restricted stock awards and other stock-based
awards to persons who were employees, officers, directors,
consultants or advisors to Acopia on or prior to
September 12, 2007. The Company has not granted any stock
options, stock purchase awards or stock bonuses under this plan.
As of September 30, 2007, there were options to purchase
421,680 shares outstanding and 1,809,023 shares
available for awards under the Acopia Plan.
Options that expire under the uRoam Plan or the MagniFire Plan,
whether due to termination of employment or otherwise, are not
available for future grant.
2005 Equity Incentive Plan. In December 2004,
the Company adopted the 2005 Equity Incentive Plan, or the 2005
Plan, which provides for discretionary grants of non-statutory
stock options and stock units for employees, including officers,
and other service providers. A total of 7,400,000 shares of
common stock have been reserved for issuance under the 2005
Plan. Upon certain changes in control of the Company, the
surviving entity will either assume or substitute all
outstanding Stock Awards under the 2005 Plan. During the fiscal
year 2007, the Company issued no stock options and 1,687,802
stock units under the 2005 Plan. As of September 30, 2007,
there were options to purchase 75,000 shares outstanding
and 3,473,618 shares available for awards under the 2005
Plan.
A majority of the restricted stock units granted in fiscal 2007,
2006 and 2005 vest quarterly over a two-year period. The
restricted stock units were granted during fiscal 2007 and 2006
with a per-share weighted
64
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
average fair value of $40.98 and $27.21, respectively.
Restricted stock units were granted during the fourth quarter of
fiscal year 2005 with a per share weighted average fair value of
$22.30. The fair value of restricted stock vested during fiscal
years 2007 and 2006 was $45.3 million and
$17.1 million, respectively.
A summary of restricted stock unit activity under the 2005 Plan
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Grant Date
|
|
|
|
Stock Units
|
|
|
Fair Value
|
|
|
Balance, September 30, 2004
|
|
|
|
|
|
$
|
|
|
Units granted
|
|
|
1,442,368
|
|
|
|
22.30
|
|
Units cancelled
|
|
|
(6,000
|
)
|
|
|
22.97
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
|
1,436,368
|
|
|
$
|
22.30
|
|
Units granted
|
|
|
1,023,750
|
|
|
|
27.21
|
|
Units vested
|
|
|
(604,270
|
)
|
|
|
28.27
|
|
Units cancelled
|
|
|
(144,884
|
)
|
|
|
22.76
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006
|
|
|
1,710,964
|
|
|
$
|
23.09
|
|
Units granted
|
|
|
1,687,562
|
|
|
|
40.81
|
|
Units vested
|
|
|
(1,278,456
|
)
|
|
|
34.34
|
|
Units cancelled
|
|
|
(151,654
|
)
|
|
|
24.92
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
|
1,968,416
|
|
|
$
|
30.84
|
|
65
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock option activity under all of the
Companys plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Balance, September 30, 2004
|
|
|
14,707,120
|
|
|
$
|
10.76
|
|
Options granted
|
|
|
448,200
|
|
|
|
21.86
|
|
Options exercised
|
|
|
(7,369,116
|
)
|
|
|
8.83
|
|
Options cancelled
|
|
|
(595,572
|
)
|
|
|
17.04
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
|
7,190,632
|
|
|
$
|
12.91
|
|
Options granted
|
|
|
147,000
|
|
|
|
25.54
|
|
Options exercised
|
|
|
(3,494,474
|
)
|
|
|
11.08
|
|
Options cancelled
|
|
|
(209,322
|
)
|
|
|
20.46
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
3,633,836
|
|
|
$
|
14.75
|
|
Options granted
|
|
|
446,321
|
|
|
|
19.35
|
|
Options exercised
|
|
|
(1,256,486
|
)
|
|
|
12.49
|
|
Options cancelled
|
|
|
(67,980
|
)
|
|
|
32.05
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
2,755,691
|
|
|
$
|
16.10
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair values per share at the date of grant
for options granted with exercise prices equal to market were
$15.95, $14.23, and $9.29 for the fiscal years 2007, 2006, and
2005, respectively. For fiscal years 2007, 2006 and 2005, there
were no options granted with exercise prices less than market.
The total intrinsic value of options exercised during fiscal
2007, 2006 and 2005 was $32.0 million, $62.1 million
and $105.2 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Price
|
|
|
Intrinsic
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life (in Years)
|
|
|
per Share
|
|
|
Value(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
$0.38 - $7.32
|
|
|
563,322
|
|
|
|
4.76
|
|
|
$
|
5.37
|
|
|
|
|
|
$7.70 - $11.41
|
|
|
611,257
|
|
|
|
7.14
|
|
|
$
|
10.08
|
|
|
|
|
|
$11.52 - $14.05
|
|
|
583,652
|
|
|
|
4.01
|
|
|
$
|
12.54
|
|
|
|
|
|
$14.09 - $27.07
|
|
|
564,567
|
|
|
|
5.22
|
|
|
$
|
20.99
|
|
|
|
|
|
$27.10 - $60.44
|
|
|
432,893
|
|
|
|
6.10
|
|
|
$
|
36.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.38 - $60.44
|
|
|
2,755,691
|
|
|
|
5.43
|
|
|
$
|
16.10
|
|
|
$
|
59,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
1,853,471
|
|
|
|
4.25
|
|
|
$
|
15.39
|
|
|
$
|
41,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
2,691,686
|
|
|
|
5.38
|
|
|
$
|
16.03
|
|
|
$
|
58,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Aggregate intrinsic value represents the difference between the
fair value of the Companys common stock underlying these
options at September 30, 2007 and the related exercise
prices. |
66
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2007, equity based awards (including
stock option and stock units) available for future issuance is
as follows:
|
|
|
|
|
|
|
Awards
|
|
|
|
Available for
|
|
|
|
Grant
|
|
|
Balance, September 30, 2004
|
|
|
243,040
|
|
Granted
|
|
|
(1,890,568
|
)
|
Exercised
|
|
|
|
|
Cancelled
|
|
|
601,572
|
|
Additional shares reserved (terminated), net
|
|
|
3,164,162
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
|
2,118,206
|
|
Granted
|
|
|
(1,170,750
|
)
|
Exercised
|
|
|
|
|
Cancelled
|
|
|
354,206
|
|
Additional shares reserved (terminated), net
|
|
|
(59,212
|
)
|
|
|
|
|
|
Balance, September 30, 2006
|
|
|
1,242,450
|
|
Granted
|
|
|
(2,253,753
|
)
|
Exercised
|
|
|
|
|
Cancelled
|
|
|
219,634
|
|
Additional shares reserved (terminated), net
|
|
|
6,830,698
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
|
6,039,029
|
|
|
|
|
|
|
As of September 30, 2007, there was $74.1 million of
total unrecognized compensation cost, related to unvested stock
options and restricted stock units, the majority of which will
be recognized ratably over the next two years. An assumption of
a four percent forfeiture rate is utilized when arriving at the
amount of stock compensation expense. The Company recognized
$41.2 million and $24.8 million of pre-tax stock
compensation expense for the years ended September 30, 2007
and 2006, respectively, and $4.6 million of pre-tax stock
compensation expense following the early adoption of
FAS 123R in the fourth quarter of fiscal year 2005.
67
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Commitments
and Contingencies
|
Operating
Leases
The majority of the Companys operating lease payments
relate to the Companys two building corporate headquarters
in Seattle, Washington. The lease on the first building
commenced in July 2000; and the lease on the second building
commenced in September 2000. The lease for both buildings expire
in 2012. The second building has been fully subleased until
2012. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Lease
|
|
|
Sublease
|
|
|
Net Lease
|
|
|
|
Payments
|
|
|
Income
|
|
|
Payments
|
|
|
2008
|
|
|
14,371
|
|
|
|
2,867
|
|
|
|
11,504
|
|
2009
|
|
|
16,500
|
|
|
|
2,944
|
|
|
|
13,556
|
|
2010
|
|
|
15,424
|
|
|
|
3,020
|
|
|
|
12,404
|
|
2011
|
|
|
12,214
|
|
|
|
3,097
|
|
|
|
9,117
|
|
2012
|
|
|
9,765
|
|
|
|
2,644
|
|
|
|
7,121
|
|
Thereafter
|
|
|
31,442
|
|
|
|
|
|
|
|
31,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
99,716
|
|
|
$
|
14,572
|
|
|
$
|
85,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense under non-cancelable operating leases amounted to
approximately $10.4 million, $8.2 million, and
$5.6 million for the fiscal years ended September 30,
2007, 2006, and 2005, respectively.
Litigation
Derivative Suits. Beginning on or about
May 24, 2006, several derivative actions were filed against
certain current and former directors and officers of the
Company. These derivative lawsuits were filed in: (1) the
Superior Court of King County, Washington, as In re F5 Networks,
Inc. State Court Derivative Litigation
(Case No. 06-2-17195-1
SEA), which consolidates Adams v. Amdahl, et al. (Case
No. 06-2-17195-1
SEA), Wright v. Amdahl, et al. (Case
No. 06-2-19159-5
SEA), and Sommer v. McAdam, et al. (Case
No. 06-2-26248-4
SEA) (the State Court Derivative Litigation); and
(2) in the U.S. District Court for the Western
District of Washington, as In re F5 Networks, Inc. Derivative
Litigation, Master File
No. C06-0794RSL,
which consolidates Hutton v. McAdam, et al. (Case
No. 06-794RSL),
Locals 302 and 612 of the International Union of Operating
Engineers-Employers Construction Industry Retirement
Trust v. McAdam et al. (Case
No. C06-1057RSL),
and Easton v. McAdam et al. (Case
No. C06-1145RSL).
On August 2, 2007, another derivative lawsuit,
Barone v. McAdam et al. (Case
No. C07-1200P),
was filed in the U.S. District Court for the Western
District of Washington. It is expected that this lawsuit will be
consolidated with the other lawsuits pending in the
U.S. District Court for the Western District of Washington.
The complaints generally allege that certain of the
Companys current and former directors and officers,
including, in general, each of the Companys current
outside directors (other than Deborah L. Bevier who joined the
Companys Board of Directors in July 2006) breached
their fiduciary duties to the Company by engaging in alleged
wrongful conduct concerning the manipulation of certain stock
option grant dates. The Company is named solely as a nominal
defendant against whom the plaintiffs seek no recovery. The
Companys combined motion to consolidate and stay the State
Court Derivative Litigation was granted in a court order dated
April 3, 2007. The Companys motion to dismiss the
consolidated federal derivative actions based on
plaintiffs failure to make demand on the Companys
Board of Directors prior to filing suit was granted in a court
order dated August 6, 2007 with leave to amend the
allegations in plaintiffs complaint. Plaintiffs filed an
amended consolidated federal derivative action complaint on
September 14, 2007. The Company intends to vigorously
pursue dismissal of the amended complaint and has
68
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
filed a motion to dismiss based on plaintiffs failure to
make demand on the Companys Board of Directors prior to
filing suit.
The Company is not aware of any additional pending legal
proceedings that, individually or in the aggregate, would have a
material adverse effect on the Companys business,
operating results, or financial condition. The Company may in
the future be party to litigation arising in the ordinary course
of business, including claims that allegedly infringe upon
third-party trademarks or other intellectual property rights.
Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
|
|
8.
|
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,
2007, 2006, and 2005 were approximately $2.5 million,
$1.3 million and $1.2 million, respectively.
Contributions made by the Company vest over four years.
|
|
9.
|
Geographic
Sales and Significant Customers
|
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. For fiscal years 2007, 2006 and 2005,
the Company was organized as, and operated in, one reportable
segment: the development, marketing and sale of application
delivery networking products that optimize the security,
performance & availability of network applications,
servers and storage systems. The Company manages its business
based on four geographic regions: the Americas (primarily the
United States); Europe, the Middle East, and Africa (EMEA);
Japan; and Asia Pacific. The Companys chief operating
decision-making group reviews financial information presented on
a consolidated basis accompanied by information about revenues
by geographic region. The Companys foreign offices conduct
sales, marketing and support activities. Management evaluates
performance based primarily on revenues in the geographic
locations in which the Company operates. Revenues are attributed
by geographic location based on the location of the customer.
The Companys assets are primarily located in the United
States and not allocated to any specific region. Therefore,
geographic information is presented only for net product revenue.
The following presents revenues by geographic region (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Americas
|
|
$
|
307,087
|
|
|
$
|
226,242
|
|
|
$
|
167,322
|
|
EMEA
|
|
|
92,674
|
|
|
|
70,716
|
|
|
|
47,198
|
|
Japan
|
|
|
64,346
|
|
|
|
51,560
|
|
|
|
38,435
|
|
Asia Pacific
|
|
|
61,560
|
|
|
|
45,531
|
|
|
|
28,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
525,667
|
|
|
$
|
394,049
|
|
|
$
|
281,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from international customers are primarily
denominated in U.S. dollars and totaled
$218.6 million, $167.8 million, and
$114.1 million for the years ended September 30, 2007,
2006 and 2005, respectively. One domestic distributor accounted
for 11.6%, 13.6% and 18.6% of total net revenue for the fiscal
years 2007, 2006 and 2005, respectively. This distributor
accounted for 6.6%, 8.5% and 26.2% of accounts receivable as of
September 30, 2007, 2006 and 2005, respectively. Another
domestic distributor accounted for 13.2% of net revenue for the
year ended September 30, 2007.
69
F5
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Quarterly
Results of Operations
|
The following presents the Companys unaudited quarterly
results of operations for the eight quarters ended
September 30, 2007. The information should be read in
conjunction with the Companys 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 our operating results for the
quarters presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
Dec. 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited and in thousands)
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
106,982
|
|
|
$
|
97,751
|
|
|
$
|
96,126
|
|
|
$
|
92,062
|
|
|
$
|
86,320
|
|
|
$
|
77,192
|
|
|
$
|
72,775
|
|
|
$
|
68,591
|
|
Services
|
|
|
38,625
|
|
|
|
34,674
|
|
|
|
31,479
|
|
|
|
27,968
|
|
|
|
25,397
|
|
|
|
22,937
|
|
|
|
21,341
|
|
|
|
19,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
145,607
|
|
|
|
132,425
|
|
|
|
127,605
|
|
|
|
120,030
|
|
|
|
111,717
|
|
|
|
100,129
|
|
|
|
94,116
|
|
|
|
88,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
23,683
|
|
|
|
20,770
|
|
|
|
20,425
|
|
|
|
19,216
|
|
|
|
17,716
|
|
|
|
15,869
|
|
|
|
15,441
|
|
|
|
14,593
|
|
Services
|
|
|
9,665
|
|
|
|
8,867
|
|
|
|
8,390
|
|
|
|
7,308
|
|
|
|
7,065
|
|
|
|
6,649
|
|
|
|
5,846
|
|
|
|
4,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
33,348
|
|
|
|
29,637
|
|
|
|
28,815
|
|
|
|
26,524
|
|
|
|
24,781
|
|
|
|
22,518
|
|
|
|
21,287
|
|
|
|
19,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
112,259
|
|
|
|
102,788
|
|
|
|
98,790
|
|
|
|
93,506
|
|
|
|
86,936
|
|
|
|
77,611
|
|
|
|
72,829
|
|
|
|
68,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
48,165
|
|
|
|
45,158
|
|
|
|
43,177
|
|
|
|
39,055
|
|
|
|
35,087
|
|
|
|
32,364
|
|
|
|
31,162
|
|
|
|
28,865
|
|
Research and development
|
|
|
19,929
|
|
|
|
17,476
|
|
|
|
17,086
|
|
|
|
14,539
|
|
|
|
13,900
|
|
|
|
12,517
|
|
|
|
12,276
|
|
|
|
10,478
|
|
General and administrative(2)
|
|
|
11,196
|
|
|
|
12,375
|
|
|
|
12,867
|
|
|
|
12,818
|
|
|
|
14,389
|
|
|
|
10,175
|
|
|
|
7,148
|
|
|
|
7,397
|
|
In-process research and development
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
93,290
|
|
|
|
75,009
|
|
|
|
73,130
|
|
|
|
66,412
|
|
|
|
63,376
|
|
|
|
55,056
|
|
|
|
50,586
|
|
|
|
46,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,969
|
|
|
|
27,779
|
|
|
|
25,660
|
|
|
|
27,094
|
|
|
|
23,560
|
|
|
|
22,555
|
|
|
|
22,243
|
|
|
|
21,780
|
|
Other income, net
|
|
|
7,355
|
|
|
|
7,175
|
|
|
|
7,230
|
|
|
|
6,431
|
|
|
|
5,825
|
|
|
|
4,759
|
|
|
|
3,877
|
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
26,324
|
|
|
|
34,954
|
|
|
|
32,890
|
|
|
|
33,525
|
|
|
|
29,385
|
|
|
|
27,314
|
|
|
|
26,120
|
|
|
|
24,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
13,442
|
|
|
|
13,145
|
|
|
|
12,934
|
|
|
|
11,172
|
|
|
|
11,633
|
|
|
|
10,349
|
|
|
|
10,053
|
|
|
|
9,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,882
|
|
|
$
|
21,809
|
|
|
$
|
19,956
|
|
|
$
|
22,353
|
|
|
$
|
17,752
|
|
|
$
|
16,965
|
|
|
$
|
16,067
|
|
|
$
|
15,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic(1)
|
|
$
|
0.15
|
|
|
$
|
0.26
|
|
|
$
|
0.24
|
|
|
$
|
0.27
|
|
|
$
|
0.22
|
|
|
$
|
0.21
|
|
|
$
|
0.20
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic(1)
|
|
|
84,305
|
|
|
|
83,614
|
|
|
|
82,834
|
|
|
|
82,062
|
|
|
|
81,448
|
|
|
|
81,106
|
|
|
|
80,240
|
|
|
|
78,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted(1)
|
|
$
|
0.15
|
|
|
$
|
0.26
|
|
|
$
|
0.24
|
|
|
$
|
0.26
|
|
|
$
|
0.21
|
|
|
$
|
0.20
|
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted(1)
|
|
|
85,792
|
|
|
|
85,310
|
|
|
|
84,780
|
|
|
|
84,636
|
|
|
|
83,290
|
|
|
|
83,318
|
|
|
|
83,254
|
|
|
|
81,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Share and per share amounts have been adjusted as appropriate to
reflect a two-for-one stock-split effective August 2007. |
|
(2) |
|
The fourth quarter of fiscal 2006, includes general and
administrative expenses of $5.0 million, related to third
parties cost for legal, accounting, tax and other professional
services in connection with the Special Committee investigation
and related restatement. |
70
F5
NETWORKS, INC.
VALUATION
AND QUALIFYING ACCOUNTS AND RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charges to
|
|
|
Charges to
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
at End
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
of Period
|
|
|
|
(In thousands)
|
|
|
Year Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
900
|
|
|
$
|
59
|
|
|
$
|
|
|
|
$
|
95
|
|
|
$
|
1,054
|
|
Allowance for sales returns
|
|
$
|
1,958
|
|
|
$
|
1,149
|
|
|
$
|
(3,036
|
)
|
|
$
|
2,036
|
|
|
$
|
2,107
|
|
Year Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,747
|
|
|
$
|
(854
|
)
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
900
|
|
Allowance for sales returns
|
|
$
|
1,222
|
|
|
$
|
920
|
|
|
$
|
921
|
|
|
$
|
(1,105
|
)
|
|
$
|
1,958
|
|
Year Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,594
|
|
|
$
|
653
|
|
|
$
|
|
|
|
$
|
(500
|
)
|
|
$
|
1,747
|
|
Allowance for sales returns
|
|
$
|
1,567
|
|
|
$
|
766
|
|
|
$
|
626
|
|
|
$
|
(1,737
|
)
|
|
$
|
1,222
|
|
Income tax valuation allowance
|
|
$
|
2,649
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(2,649
|
)
|
|
$
|
|
|
71
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
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 Accounting Officer, to allow timely decisions
regarding required disclosures.
Our management, with the participation of our Chief Executive
Officer and Chief Accounting Officer, evaluated the
effectiveness of our disclosure controls and procedures as of
September 30, 2007 and, based on this evaluation, our Chief
Executive Officer and Chief Accounting Officer have concluded
that our disclosure controls and procedures were effective as of
September 30, 2007.
Managements
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.
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk.
Management conducted an assessment of the effectiveness of our
internal control over financial reporting as of
September 30, 2007. 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. 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, 2007. Management has excluded
Acopia Networks, Inc. from its assessment of internal control
over financial reporting as of September 30, 2007 because
it was acquired by the Company in a purchase business
combination during 2007. Acopia Networks, Inc. is a wholly-owned
subsidiary whose total assets and total revenues represent
$5,327,000 and $1,637,000, respectively, of the related
consolidated financial statement amounts as of and for the year
ended September 30, 2007.
The effectiveness of the Companys internal control over
financial reporting as of September 30, 2007 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.
72
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
We intend to furnish to the SEC a definitive Proxy Statement no
later than 120 days after the close of the fiscal year
ended September 30, 2007 (the Proxy Statement).
Certain information required by this item is incorporated herein
by reference to the Proxy Statement. Also see Directors
and Executive Officers of the Registrant in Part I of
this Annual Report on
Form 10-K.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated herein by
reference to the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated herein by
reference to the Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this item is incorporated herein by
reference to the Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated herein by
reference to the Proxy Statement.
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as part of this report are as follows:
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements included under
Item 8 in Part II of this Annual Report on
Form 10-K.
2. 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.
73
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.
F5 Networks, Inc.
John McAdam
Chief Executive Officer and President
Dated: November 19, 2007
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.
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|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ JOHN
MCADAM
John
McAdam
|
|
Chief Executive Officer,
President, and Director
(principal executive officer)
|
|
November 19, 2007
|
|
|
|
|
|
|
|
By:
|
|
/s/ JOHN
RODRIGUEZ
John
Rodriguez
|
|
Senior Vice President,
Chief Accounting Officer
(principal financial officer)
|
|
November 19, 2007
|
|
|
|
|
|
|
|
By:
|
|
/s/ A.
GARY AMES
A.
Gary Ames
|
|
Director
|
|
November 19, 2007
|
|
|
|
|
|
|
|
By:
|
|
/s/ DEBORAH
L. BEVIER
Deborah
L. Bevier
|
|
Director
|
|
November 19, 2007
|
|
|
|
|
|
|
|
By:
|
|
/s/ KEITH
D. GRINSTEIN
Keith
D. Grinstein
|
|
Director
|
|
November 19, 2007
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|
|
|
|
|
|
|
By:
|
|
/s/ KARL
D. GUELICH
Karl
D. Guelich
|
|
Director
|
|
November 19, 2007
|
|
|
|
|
|
|
|
By:
|
|
/s/ ALAN
J. HIGGINSON
Alan
J. Higginson
|
|
Director
|
|
November 19, 2007
|
|
|
|
|
|
|
|
By:
|
|
/s/ RICH
MALONE
Rich
Malone
|
|
Director
|
|
November 19, 2007
|
74
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit Description
|
|
|
2
|
.1
|
|
|
|
Agreement and Plan of Merger dated as of May 31, 2004, by and
among the Registrant, Fire5, Inc., a wholly owned subsidiary of
the Registrant, MagniFire Websystems, Inc., and Lucent Venture
Partners III LLC(1)
|
|
2
|
.2
|
|
|
|
Agreement and Plan of Merger, dated September 6, 2005, among F5
Networks, Inc., Sparrow Acquisition Corp., Swan Labs Corporation
and the other parties referred to therein.(2)
|
|
2
|
.3
|
|
|
|
Agreement and Plan of Merger, dated August 6, 2007, among F5
Networks, Inc., Checkmate Acquisition Corp., Acopia networks,
Inc. and Charles River Ventures, LLC.(19)
|
|
3
|
.1
|
|
|
|
Second Amended and Restated Articles of Incorporation of the
Registrant(3)
|
|
3
|
.2
|
|
|
|
Amended and Restated Bylaws of the Registrant(3)
|
|
4
|
.1
|
|
|
|
Specimen Common Stock Certificate(3)
|
|
10
|
.1
|
|
|
|
Amended and Restated Office Lease Agreement dated April 3, 2000,
between the Registrant and 401 Elliott West LLC(4)
|
|
10
|
.2
|
|
|
|
Sublease Agreement dated March 30, 2001 between the Registrant
and Cell Therapeutics, Inc.(5)
|
|
10
|
.3
|
|
|
|
uRoam Acquisition Equity Incentive Plan(6)
|
|
10
|
.4
|
|
|
|
Form of Indemnification Agreement between the Registrant and
each of its directors and certain of its officers(3)
|
|
10
|
.5
|
|
|
|
1998 Equity Incentive Plan, as amended(7)
|
|
10
|
.6
|
|
|
|
Form of Option Agreement under the 1998 Equity Incentive Plan(3)
|
|
10
|
.7
|
|
|
|
Amended and Restated Directors Nonqualified Stock Option
Plan(3)
|
|
10
|
.8
|
|
|
|
Form of Option Agreement under the Amended and Restated
Directors Nonqualified Stock Option Plan(3)
|
|
10
|
.9
|
|
|
|
Amended and Restated 1996 Stock Option Plan(3)
|
|
10
|
.10
|
|
|
|
Form of Option Agreement under the Amended and Restated 1996
Stock Option Plan(3)
|
|
10
|
.11
|
|
|
|
1999 Non-Employee Directors Stock Option Plan(3)
|
|
10
|
.12
|
|
|
|
Form of Option Agreement under 1999 Non-Employee Directors
Stock Option Plan(3)
|
|
10
|
.13
|
|
|
|
NonQualified Stock Option Agreement between John McAdam and the
Registrant dated July 24, 2000(8)
|
|
10
|
.14
|
|
|
|
2000 Employee Equity Incentive Plan(9)
|
|
10
|
.15
|
|
|
|
Form of Option Agreement under the 2000 Equity Incentive Plan(10)
|
|
10
|
.16
|
|
|
|
NonQualified Stock Option Agreement between M. Thomas Hull and
the Registrant dated October 20, 2003(11)
|
|
10
|
.17
|
|
|
|
1999 Employee Stock Purchase Plan, as amended(12)
|
|
10
|
.18
|
|
|
|
MagniFire Acquisition Equity Incentive Plan(13)
|
|
10
|
.19
|
|
|
|
NonQualified Stock Option Agreement between Karl Triebes and the
Registrant dated August 16, 2004(13)
|
|
10
|
.20
|
|
|
|
Incentive Compensation Plan for Executive Officers(13)
|
|
10
|
.21
|
|
|
|
2005 Equity Incentive Plan(14)
|
|
10
|
.22
|
|
|
|
Form of Restricted Stock Unit agreement under the 2005 Equity
Incentive Plan (with acceleration upon change of control)(15)
|
|
10
|
.23
|
|
|
|
Form of Restricted Stock Unit agreement under the 2005 Equity
Incentive Plan (no acceleration upon change of control)(15)
|
|
10
|
.24
|
|
|
|
Amendment to F5 Networks, Inc. 2005 Equity Incentive Plan Award
Agreement, dated March 8, 2006, between the Registrant and John
Rodriquez(16)
|
|
10
|
.25
|
|
|
|
Amendment to F5 Networks, Inc. 2005 Equity Incentive Plan Award
Agreement, dated March 8, 2006, between the Registrant and Andy
Reinland(16)
|
|
10
|
.26
|
|
|
|
Compensation arrangement for current and future members to
special committees of the Registrants Board of Directors
effective September 1, 2006(17)
|
|
10
|
.27
|
|
|
|
Office Lease Agreement with Selig Real Estate Holdings IIX,
L.L.C. dated October 31, 2006(18)
|
|
10
|
.28
|
|
|
|
First Amendment to Sublease Agreement dated April 13, 2001
between the Registrant and Cell Therapeutics, Inc. (20)
|
75
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit Description
|
|
|
10
|
.29
|
|
|
|
Second Amendment to Sublease Agreement dated March 6, 2002
between the Registrant and Cell Therapeutics, Inc. (20)
|
|
10
|
.30
|
|
|
|
Third Amendment to Sublease Agreement dated as of December 22,
2005 between the Registrant and Cell Therapeutics, Inc. (20)
|
|
10
|
.31
|
|
|
|
Assumed Acopia Networks, Inc. 2001 Stock Incentive Plan (21)
|
|
10
|
.32
|
|
|
|
Acopia Acquisition Equity Incentive Plan (21)
|
|
10
|
.33*
|
|
|
|
Form of Restricted Stock Unit agreement under the Acopia
Acquisition Equity Incentive Plan (with acceleration upon change
of control)
|
|
10
|
.34*
|
|
|
|
Form of Restricted Stock Unit agreement under the Acopia
Acquisition Equity Incentive Plan (no acceleration upon change
of control)
|
|
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
|
|
|
|
* |
|
Filed herewith. |
|
(1) |
|
Incorporated by reference from Current Report on
Form 8-K
dated May 31, 2004 and filed with the SEC on June 2,
2004. |
|
(2) |
|
Incorporated by reference from Current Report on
Form 8-K
dated October 4, 2005 and filed with the SEC on
October 5, 2005. |
|
(3) |
|
Incorporated by reference from Registration Statement on
Form S-1,
File
No. 333-75817. |
|
(4) |
|
Incorporated by reference from Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003. |
|
(5) |
|
Incorporated by reference from Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2001. |
|
(6) |
|
Incorporated by reference from Registration Statement on
Form S-8,
File
No. 333-109895. |
|
(7) |
|
Incorporated by reference from Registration Statement on
Form S-8,
File
No. 333-104169. |
|
(8) |
|
Incorporated by reference from Annual Report on
Form 10-K
for the year ended September 30, 2000. |
|
(9) |
|
Incorporated by reference from Registration Statement on
Form S-8,
File
No. 333-51878. |
|
(10) |
|
Incorporated by reference from Annual Report on
Form 10-K
for the year ended September 30, 2001. |
|
(11) |
|
Incorporated by reference from Registration Statement on
Form S-8,
File
No. 333-112022. |
|
(12) |
|
Incorporated by reference from Registration Statement on
Form S-8,
File
No. 333-116187. |
|
(13) |
|
Incorporated by reference from Annual Report on
Form 10-K
for the year ended September 30, 2004. |
|
(14) |
|
Incorporated by reference from Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005. |
|
(15) |
|
Incorporated by reference from Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005. |
|
(16) |
|
Incorporated by reference from Current Report on
Form 8-K
dated March 8, 2006 and filed with the SEC on
March 10, 2006. |
|
(17) |
|
Incorporated by reference from Current Report on
Form 8-K
dated September 1, 2006 and filed with the SEC on
September 5, 2006. |
|
(18) |
|
Incorporated by reference from Current Report on
Form 8-K
dated October 31, 2006 and filed with the SEC on
November 3, 2006. |
|
(19) |
|
Incorporated by reference from Current Report on
Form 8-K
dated August 6, 2007 and filed with the SEC on
August 8, 2007. |
|
(20) |
|
Incorporated by reference from Annual Report on
Form 10-K
for the year ended September 30, 2006. |
|
(21) |
|
Incorporated by reference from Registration Statement on
Form S-8,
File
No. 333-146195. |
76