e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-26041
F5 NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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WASHINGTON
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91-1714307 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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401 Elliott Avenue West
Seattle, Washington 98119
(Address of principal executive offices and zip code)
(206) 272-5555
(Registrants telephone number, including area code)
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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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
The number of shares outstanding of the registrants common stock as of May 4, 2009 was 78,553,503.
F5 NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2009
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
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March 31, |
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September 30, |
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2009 |
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2008 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
119,688 |
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$ |
78,303 |
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Short-term investments |
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138,833 |
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111,883 |
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Accounts receivable, net of allowances of $4,891 and $4,348 |
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90,067 |
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97,057 |
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Inventories |
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15,036 |
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10,148 |
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Deferred tax assets |
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5,808 |
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5,910 |
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Other current assets |
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26,991 |
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20,068 |
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Total current assets |
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396,423 |
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323,369 |
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Restricted cash |
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2,703 |
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2,748 |
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Property and equipment, net |
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42,852 |
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47,557 |
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Long-term investments |
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240,572 |
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261,086 |
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Deferred tax assets |
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44,474 |
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46,917 |
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Goodwill |
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231,892 |
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231,892 |
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Other assets, net |
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24,047 |
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25,654 |
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Total assets |
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$ |
982,963 |
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$ |
939,223 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
20,781 |
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$ |
13,092 |
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Accrued liabilities |
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43,225 |
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48,051 |
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Deferred revenue |
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135,038 |
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125,678 |
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Total current liabilities |
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199,044 |
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186,821 |
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Other long-term liabilities |
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13,966 |
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14,822 |
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Deferred revenue, long-term |
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25,436 |
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19,321 |
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Total long-term liabilities |
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39,402 |
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34,143 |
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Commitments and contingencies (Note 6) |
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Shareholders equity |
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Preferred stock, no par value; 10,000 shares authorized, no shares outstanding |
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Common stock, no par value; 200,000 shares authorized, 78,134 and 79,094
shares issued and outstanding |
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460,944 |
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477,299 |
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Accumulated other comprehensive loss |
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(3,872 |
) |
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(6,076 |
) |
Retained earnings |
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287,445 |
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247,036 |
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Total shareholders equity |
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744,517 |
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718,259 |
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Total liabilities and shareholders equity |
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$ |
982,963 |
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$ |
939,223 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
F5 NETWORKS, INC.
CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except per share data)
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Three months ended |
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Six months ended |
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March 31, |
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March 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net revenues |
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Products |
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$ |
94,135 |
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$ |
112,148 |
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$ |
202,030 |
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$ |
222,353 |
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Services |
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60,014 |
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46,993 |
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117,688 |
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90,972 |
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Total |
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154,149 |
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159,141 |
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319,718 |
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313,325 |
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Cost of net revenues |
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Products |
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25,037 |
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24,969 |
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48,960 |
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49,658 |
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Services |
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11,545 |
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11,719 |
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23,645 |
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22,269 |
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Total |
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36,582 |
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36,688 |
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72,605 |
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71,927 |
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Gross profit |
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117,567 |
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122,453 |
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247,113 |
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241,398 |
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Operating expenses |
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Sales and marketing |
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51,933 |
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58,053 |
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111,371 |
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116,231 |
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Research and development |
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25,977 |
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26,418 |
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53,079 |
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50,750 |
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General and administrative |
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12,055 |
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14,484 |
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27,860 |
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27,910 |
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Restructuring charges |
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4,329 |
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4,329 |
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Total |
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94,294 |
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98,955 |
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196,639 |
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194,891 |
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Income from operations |
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23,273 |
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23,498 |
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50,474 |
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46,507 |
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Other income, net |
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2,136 |
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5,589 |
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5,015 |
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11,721 |
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Income before income taxes |
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25,409 |
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29,087 |
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55,489 |
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58,228 |
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Provision for income taxes |
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6,423 |
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11,342 |
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15,080 |
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22,732 |
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Net income |
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$ |
18,986 |
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$ |
17,745 |
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$ |
40,409 |
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$ |
35,496 |
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Net income per share basic |
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$ |
0.24 |
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$ |
0.21 |
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$ |
0.51 |
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$ |
0.42 |
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Weighted average shares basic |
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78,925 |
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82,974 |
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79,133 |
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83,919 |
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Net income per share diluted |
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$ |
0.24 |
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$ |
0.21 |
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$ |
0.51 |
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$ |
0.42 |
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Weighted average shares diluted |
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79,570 |
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83,805 |
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79,920 |
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85,018 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
F5 NETWORKS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(unaudited, in thousands)
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Six Months Ended March 31, 2009 |
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Accumulated |
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Other |
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Total |
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Common Stock |
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Comprehensive |
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Retained |
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Shareholders |
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Shares |
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Amount |
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Gain(Loss) |
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Earnings |
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Equity |
|
Balance, September 30, 2008 |
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|
79,094 |
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$ |
477,299 |
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$ |
(6,076 |
) |
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$ |
247,036 |
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$ |
718,259 |
|
Exercise of employee stock options |
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|
112 |
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|
856 |
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|
856 |
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Issuance of stock under employee stock
purchase plan |
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243 |
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5,058 |
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5,058 |
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Issuance of restricted stock |
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|
899 |
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Repurchase of common stock |
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(2,214 |
) |
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(47,437 |
) |
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|
|
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(47,437 |
) |
Tax loss from employee stock transactions |
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|
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(3,002 |
) |
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|
|
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(3,002 |
) |
Stock-based compensation |
|
|
|
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|
28,170 |
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|
28,170 |
|
Comprehensive income: |
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Net income |
|
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|
|
|
|
|
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|
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|
40,409 |
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Foreign currency translation adjustment |
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(364 |
) |
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Unrealized gain on securities, net of tax |
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2,568 |
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|
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|
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|
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Comprehensive income |
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|
|
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|
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42,613 |
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Balance, March 31, 2009 |
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|
78,134 |
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|
$ |
460,944 |
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|
$ |
(3,872 |
) |
|
$ |
287,445 |
|
|
$ |
744,517 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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Six months ended |
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|
March 31, |
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|
|
2009 |
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|
2008 |
|
Operating activities |
|
|
|
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|
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|
|
Net income |
|
$ |
40,409 |
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|
$ |
35,496 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
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Loss (gain) on disposition of assets and investments |
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13 |
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(31 |
) |
Stock-based compensation |
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|
28,170 |
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|
31,003 |
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Provisions for doubtful accounts and sales returns |
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|
2,889 |
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1,473 |
|
Depreciation and amortization |
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|
14,188 |
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|
11,326 |
|
Deferred income taxes |
|
|
975 |
|
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|
219 |
|
Gain on auction rate securities put option |
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|
(4,177 |
) |
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|
Loss on trading auction rate securities |
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|
4,177 |
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|
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|
Changes in operating assets and liabilities, net of amounts acquired: |
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|
|
|
Accounts receivable |
|
|
4,101 |
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|
(11,402 |
) |
Inventories |
|
|
(4,888 |
) |
|
|
2,094 |
|
Other current assets |
|
|
(7,066 |
) |
|
|
(8,652 |
) |
Other assets |
|
|
105 |
|
|
|
(1,323 |
) |
Accounts payable and accrued liabilities |
|
|
2,755 |
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|
|
(3,360 |
) |
Deferred revenue |
|
|
15,475 |
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|
|
22,100 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
97,126 |
|
|
|
78,943 |
|
|
|
|
|
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|
|
Investing activities |
|
|
|
|
|
|
|
|
Purchases of investments |
|
|
(166,610 |
) |
|
|
(268,448 |
) |
Maturities of investments |
|
|
163,041 |
|
|
|
380,306 |
|
Investment of restricted cash |
|
|
22 |
|
|
|
(4 |
) |
Acquisition of intangible assets |
|
|
(704 |
) |
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
|
|
|
|
|
(995 |
) |
Purchases of property and equipment |
|
|
(6,457 |
) |
|
|
(10,438 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(10,708 |
) |
|
|
100,421 |
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Tax (expense) benefit from nonqualified stock options |
|
|
(3,002 |
) |
|
|
635 |
|
Proceeds from the exercise of stock options and purchases of stock under
employee stock purchase plan |
|
|
5,884 |
|
|
|
9,492 |
|
Repurchase of common stock |
|
|
(47,437 |
) |
|
|
(100,000 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(44,555 |
) |
|
|
(89,873 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
41,863 |
|
|
|
89,491 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(478 |
) |
|
|
(1,031 |
) |
Cash and cash equivalents, beginning of period |
|
|
78,303 |
|
|
|
54,296 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
119,688 |
|
|
$ |
142,756 |
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
|
|
Unrealized loss on investments |
|
$ |
4,395 |
|
|
$ |
2,877 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Summary of Significant Accounting Policies
Description of Business
F5 Networks, Inc. (the Company) provides products and services to help companies manage
their Internet Protocol (IP) traffic and file storage infrastructure efficiently and securely. The
Companys application delivery networking products improve the performance, availability and
security of applications on Internet-based networks. Internet traffic between network-based
applications and clients passes through these devices where the content is inspected to ensure that
it is safe and modified as necessary to ensure that it is delivered securely and in a way that
optimizes the performance of both the network and the applications. The Companys storage
virtualization products simplify and reduce the cost of managing files and file storage devices,
and ensure fast, secure, easy access to files for users and applications. The Company also offers a
broad range of services that include consulting, training, maintenance and other technical support
services.
Basis of Presentation
The year end consolidated balance sheet data was derived from audited financial statements,
but does not include all disclosures required by accounting principles generally accepted in the
United States of America. In the opinion of management, the unaudited consolidated financial
statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for
their fair statement in conformity with accounting principles generally accepted in the United
States of America. Certain information and footnote disclosures normally included in annual
financial statements have been condensed or omitted in accordance with the rules and regulations of
the Securities and Exchange Commission. The information included in this Form 10-Q should be read
in conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and financial statements and notes thereto included in the Companys Annual Report on
Form 10-K for the fiscal year ended September 30, 2008.
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 determined to be probable 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 been notified that the
distributor has sold the product. Payment terms to domestic customers are generally net 30 days to
net 45 days. Payment terms to international customers range from net 30 days to net 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 product, training 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. The Company determines fair value based on the type of
customer and region in which the package is sold. When fair value of all elements sold within a
specific region to a certain customer type cannot be established, the Company recognizes revenue on
the residual method permitted under SOP 98-9 based on the fair value of undelivered elements.
Revenues from the sale of product are recognized when the product has been shipped and the customer
is obligated to pay for the product. 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, repair or replacement of any failed product or component that fails
during the term of the agreement, bug fixes and rights to upgrades, when and if available.
7
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.
In accordance with Emerging Issues Task Force (EITF) 06-03, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation), the Company accounts for taxes collected from customers
and remitted to governmental authorities on a net basis and excluded from revenues.
Goodwill
Goodwill represents the excess purchase price over the estimated fair value of net assets
acquired as of the acquisition date. The Company has 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 $150.2 million was
recorded in connection with the acquisition of Acopia Networks, Inc. (Acopia) in the fourth
quarter of 2007, goodwill of $32.0 million was recorded in connection with the acquisition of Swan
Labs, Inc. (Swan Labs) in fiscal year 2006, goodwill of $25.5 million was recorded in connection
with the acquisition of MagniFire Websystems, Inc. in fiscal year 2004 and goodwill of $24.2
million was recorded in connection with the acquisition of uRoam, Inc. in fiscal year 2003.
The Company performs its annual goodwill impairment test in accordance with SFAS No. 142
during the second fiscal quarter, or whenever events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable. The first step of the test identifies whether
potential impairment may have occurred, while the second step of the test measures the amount of
the impairment, if any. Impairment is recognized when the carrying amount of goodwill exceeds its
fair value. For purposes of the annual impairment test, the Company considers its market
capitalization on the date of the impairment test since it has only one reporting unit. In March
2009, the Company completed its annual impairment test and concluded that there was no impairment
of goodwill.
Stock-Based Compensation
The Company accounts 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. The Company recognized $13.3
million and $15.7 million of stock-based compensation expense for the three months ended March 31,
2009 and 2008, respectively, and $28.2 million and $31.0 million for the six months ended March 31,
2009 and 2008, respectively. As of March 31, 2009, there was $52.9 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 the Company issues additional
equity-based awards to continue to attract and retain key employees.
The Company issues incentive awards to its employees through stock-based compensation
consisting of stock options and restricted stock units (RSUs). On August 1, 2008, the Company
awarded approximately 1.5 million RSUs to employees and executive officers pursuant to the
Companys annual equity awards program. The value of RSUs is determined using the fair value
method, which in this case, is based on the number of shares granted and the quoted price of the
Companys common stock on the date of grant. Alternatively, in determining the fair value of stock
options, the Company uses the Black-Scholes option pricing model that employs the following key
assumptions. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of
grant. The Company does not anticipate declaring dividends in the foreseeable future. Expected
volatility is based on the annualized daily historical volatility of the Companys 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. The Companys 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 the Company to 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. Based on
historical differences with forfeitures of stock-based awards granted to the Companys executive
officers and Board of Directors versus grants awarded to all other employees, the Company has
developed separate forfeiture expectations for these two groups. The Companys estimated forfeiture
rate in the second quarter of fiscal 2009 is 4.3% for grants awarded to the
8
Companys executive officers and Board of Directors, and 11.1% for grants awarded to all other
employees. If the actual number of forfeitures differs from those estimated by management,
additional adjustments to compensation expense may be required in future periods.
Compensation cost recognized for the three and six month periods ended March 31, 2009
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 or modified subsequent to July 1, 2005,
based on the grant-date fair value estimated in accordance with the provisions of FAS 123R.
In August 2008, the Company granted 383,400 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 August 1, 2010. Twenty-five
percent of the RSU grant, or a portion thereof, is subject to the Company achieving specified
percentage increases in total revenue during the period beginning in the fourth quarter of fiscal
year 2008 through the third quarter of fiscal year 2009, relative to the same periods in fiscal
years 2007 and 2008 (the 2008 Performance Award). The executive officers can earn 125% of the
2008 Performance Award if the revenue increase is 20%, 100% of the 2008 Performance Award if the
revenue increase is 11%, and 75% of the 2008 Performance Award if the revenue increase is 6%. No
portion of the 2008 Performance Award is earned if the revenue increase is less than 6%. The
remaining twenty-five percent is subject to the Company achieving specified percentage increases in
total revenue during the period beginning in the fourth quarter of fiscal year 2009 through the
third quarter of fiscal year 2010, relative to the same periods in fiscal years 2008 and 2009, as
will be set by the Compensation Committee of the Companys Board of Directors.
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 August 1, 2009. Twenty-five
percent of the RSU grant is subject to the Company achieving specified percentage increases in
total revenue during the period beginning in the fourth quarter of fiscal year 2007 through the
third quarter of fiscal year 2008, relative to the same periods in fiscal years 2006 and 2007. This
twenty-five percent was fully earned in fiscal 2008. The remaining twenty-five percent is subject
to the Company achieving specified percentage increases in total revenue during the period
beginning in the fourth quarter of fiscal year 2008 through the third quarter of fiscal year 2009,
relative to the same periods in fiscal years 2007 and 2008, set by the Compensation Committee of
the Companys Board of Directors for the 2008 Performance Award.
The Company recognizes compensation costs for awards with performance conditions when it
concludes it is probable that the performance condition will be achieved. The Company reassesses
the probability of vesting at each balance sheet date and adjusts compensation costs based on the
probability assessment. Performance conditions for these awards were not met in the second fiscal
quarter of 2009 and as such, no compensation cost was incurred.
On October 22, 2008, the Company announced that its Board of Directors approved a new program
to repurchase up to an additional $200 million of the Companys outstanding common stock.
Acquisitions for the share repurchase program will be made from time to time in private
transactions or open market purchases as permitted by securities laws and other legal requirements.
The program may be discontinued at any time. As of May 4, 2009, the Company had repurchased and
retired 2,213,726 shares at an average price of $21.38 per share in fiscal 2009.
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.
9
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,986 |
|
|
$ |
17,745 |
|
|
$ |
40,409 |
|
|
$ |
35,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
78,925 |
|
|
|
82,974 |
|
|
|
79,133 |
|
|
|
83,919 |
|
Dilutive effect of common shares from stock
options and restricted stock units |
|
|
645 |
|
|
|
831 |
|
|
|
787 |
|
|
|
1,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
79,570 |
|
|
|
83,805 |
|
|
|
79,920 |
|
|
|
85,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.24 |
|
|
$ |
0.21 |
|
|
$ |
0.51 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.24 |
|
|
$ |
0.21 |
|
|
$ |
0.51 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 0.7 million and 0.9 million of common shares potentially issuable from stock
options for the three months ended March 31, 2009 and 2008, respectively, are excluded from the
calculation of diluted earnings per share because the exercise price was greater than the average
market price of common stock for the respective period. Approximately 0.7 million and 0.6 million
of common shares potentially issuable from stock options for the six months ended March 31, 2009
and 2008, respectively, are excluded from the calculation of diluted earnings per share because the
exercise price was greater than the average market price of the Companys common stock for the
respective period.
Comprehensive Income
Comprehensive income includes certain changes in equity that are excluded from net income.
Specifically, unrealized gains (losses) on securities and foreign currency translation adjustments
are included in accumulated other comprehensive loss. Comprehensive income and its components were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net Income |
|
$ |
18,986 |
|
|
$ |
17,745 |
|
|
$ |
40,409 |
|
|
$ |
35,496 |
|
Unrealized (loss) gain on securities, net of tax |
|
|
(335 |
) |
|
|
(1,850 |
) |
|
|
2,568 |
|
|
|
(1,732 |
) |
Foreign currency translation adjustment |
|
|
(335 |
) |
|
|
(283 |
) |
|
|
(364 |
) |
|
|
(888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
18,316 |
|
|
$ |
15,612 |
|
|
$ |
42,613 |
|
|
$ |
32,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of Accounting Research Bulletin No. 51 (SFAS 160), which
amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is
effective for the Companys fiscal years beginning October 1, 2010. The Company does not expect the
adoption of SFAS 160 to have a material impact on its consolidated financial position, results of
operations or cash flows.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which
establishes principles and requirements for recognizing and measuring identifiable assets and
goodwill acquired, liabilities assumed, and any noncontrolling interest in an acquisition, at their
fair value as of the acquisition date. SFAS 141R is effective for business combinations for which
the acquisition date is on or after October 1, 2009. This standard will change the Companys
accounting treatment for business combinations on a prospective basis.
In April 2008, the FASB issued Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors to be considered in assumptions used
to determine the useful lives of recognized intangible assets recognized under SFAS No. 142. The
new guidance applies to intangible assets with contractual lives that are acquired individually or
with a group of assets as well as those assets acquired in a business combination. The new guidance
is effective for fiscal years beginning after December 15, 2008 and interim periods. The Company
will adopt the statement on October 1, 2009 which is the beginning of its fiscal year 2010. The
Company does not expect the adoption of FSP 142-3 to have a significant impact on its consolidated
financial position, results of operations or cash flows.
In April 2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP 157-4). FSP 157-4 provides guidance on how to determine
the fair value of assets and liabilities when the volume and level of activity for the
asset/liability has significantly decreased. FSP 157-4 also provides guidance on identifying
circumstances that indicate a transaction is
10
not orderly. In addition, FSP 157-4 requires disclosure in interim and annual periods of the
inputs and valuation techniques used to measure fair value and a discussion of changes in valuation
techniques. FSP 157-4 is effective for the Company beginning in the third quarter of fiscal year
2009. The Company does not expect the adoption of FSP 157-4 to have a material impact on its
consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued Staff Position No. 115-2 and 124-2, Recognition and
Presentation of Other-Than-Temporary Impairment (FSP 115-2/124-2). FSP 115-2/124-2 amends the
requirements for the recognition and measurement of other-than-temporary impairments for debt
securities by modifying the pre-existing intent and ability indicator. Under FSP 115-2/124-2, an
other-than-temporary impairment is triggered when there is an intent to sell the security, it is
more likely than not that the security will be required to be sold before recovery, or the security
is not expected to recover the entire amortized cost basis of the security. Additionally, FSP
115-2/124-2 changes the presentation of an other-than-temporary impairment in the income statement
for those impairments involving credit losses. The credit loss component will be recognized in
earnings and the remainder of the impairment will be recorded in other comprehensive income. FSP
115-2/124-2 is effective for the Company beginning in the third quarter of fiscal year 2009. The
Company does not expect the adoption of FSP 115-2/124-2 to have a material impact on its
consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, Interim Disclosure
about Fair Value of Financial Instruments (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1 requires
interim disclosures regarding the fair values of financial instruments that are within the scope of
FAS 107, Disclosures about the Fair Value of Financial Instruments. Additionally, FSP 107-1/APB
28-1 requires disclosure of the methods and significant assumptions used to estimate the fair value
of financial instruments on an interim basis as well as changes of the methods and significant
assumptions from prior periods. FSP 107-1/APB 28-1 does not change the accounting treatment for
these financial instruments and is effective for the Company beginning in the third quarter of
fiscal year 2009.
2. Restructuring Charges
In January 2009, the Company initiated a restructuring plan to reduce its operating expenses
which included the consolidation of facilities, accelerated depreciation on tenant improvements and
a reduction in workforce in accordance with Statement of Financial Accounting Standards (SFAS)
No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). These
initiatives are intended to conserve or generate cash in response to the uncertainties associated
with the recent deterioration in the global economy. As a result of these initiatives, the Company
recorded a restructuring charge of $4.3 million in the second quarter of fiscal 2009. Of the total
restructuring charges, $2.1 million was paid out during the quarter ended March 31, 2009, and the
remaining $2.2 million accrued will offset future lease payments through September 2012.
Restructuring charges consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closure/ |
|
|
Employee |
|
|
|
|
|
|
Consolidation |
|
|
Severance, Benefits |
|
|
|
|
|
|
of Facilities |
|
|
and Related Costs |
|
|
Total |
|
Accrued expenses, January 1, 2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Restructuring charges |
|
|
2.2 |
|
|
|
2.1 |
|
|
|
4.3 |
|
Cash payments |
|
|
|
|
|
|
(2.1 |
) |
|
|
(2.1 |
) |
Non-cash charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses, March 31, 2009 |
|
$ |
2.2 |
|
|
$ |
|
|
|
$ |
2.2 |
|
|
|
|
|
|
|
|
|
|
|
3. Fair Value Measurements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, provides a framework for measuring fair value, and expands the disclosures
required for assets and liabilities measured at fair value. SFAS 157 applies to existing accounting
pronouncements that require fair value measurements, but it does not require any new fair value
measurements. In February 2008, the FASB issued Staff Position No. 157-2, which deferred the
effective date of SFAS 157 as it relates to nonfinancial assets and liabilities.
11
As a basis for categorizing these inputs, SFAS 157 establishes the following hierarchy, which
prioritizes the inputs used to measure fair value from market based assumptions to entity specific
assumptions:
Level 1: Quoted prices in active markets for identical assets and liabilities at the
measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets; quoted prices for identical or similar assets
and liabilities in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Unobservable inputs for which there is little or no market data available. These
inputs reflect managements assumptions of what market participants would use in pricing the asset
or liability.
The Company adopted the effective portions of SFAS 157 on October 1, 2008, the first day of
fiscal 2009. The adoption did not have a material effect on the consolidated financial statements.
The Company is currently evaluating the impact of SFAS 157 on its non-financial assets and
liabilities, which will be effective at the beginning of fiscal year 2010.
The Companys financial assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS 157 at March 31, 2009, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
Identical Securities |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
|
Fair Value at |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
March 31, 2009 |
|
Cash equivalents |
|
$ |
26,744 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
26,744 |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities |
|
|
|
|
|
|
138,833 |
|
|
|
|
|
|
|
138,833 |
|
Long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities |
|
|
|
|
|
|
199,048 |
|
|
|
|
|
|
|
199,048 |
|
Available for sale securities auction
rate securities |
|
|
|
|
|
|
|
|
|
|
15,190 |
|
|
|
15,190 |
|
Trading securities auction rate securities |
|
|
|
|
|
|
|
|
|
|
26,334 |
|
|
|
26,334 |
|
Put option (Note 4) |
|
|
|
|
|
|
|
|
|
|
1,216 |
|
|
|
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26,744 |
|
|
$ |
337,881 |
|
|
$ |
42,740 |
|
|
$ |
407,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the auction failures of the Companys auction rate securities (ARS) that began in the
second quarter of fiscal 2008, there are still no quoted prices in active markets for identical
assets as of March 31, 2009. Therefore, the Company has classified its ARS as level 3 financial
assets. The following table provides a reconciliation between the beginning and ending balances of
items measured at fair value on a recurring basis in the table above that used significant
unobservable inputs (Level 3) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
Significant |
|
|
|
Unobservable Inputs |
|
|
Unobservable Inputs |
|
|
|
(Level 3) (1) |
|
|
(Level 3) (2) |
|
Balance, beginning of period |
|
$ |
43,606 |
|
|
$ |
53,350 |
|
Total losses realized or unrealized: |
|
|
|
|
|
|
|
|
Included in earnings |
|
|
4,177 |
|
|
|
(1,216 |
) |
Included in other comprehensive income |
|
|
(66 |
) |
|
|
(3,810 |
) |
Recognition of put option |
|
|
(4,177 |
) |
|
|
1,216 |
|
Purchases, issuances and settlements |
|
|
(800 |
) |
|
|
(6,800 |
) |
Transfers into and/or out of level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009 |
|
$ |
42,740 |
|
|
$ |
42,740 |
|
|
|
|
|
|
|
|
|
Total gains (losses) for the period
included in earnings (other income, net)
or change in net assets attributable to
the change in unrealized gains or losses
relating to assets still held at March
31, 2009 |
|
$ |
4,177 |
|
|
$ |
(1,216 |
) |
12
|
|
|
(1) |
|
Beginning balance represents the fair value of the Companys investments in ARS as of
December 31, 2008 |
|
(2) |
|
Beginning balance represents the fair value (par value) of the Companys investments in ARS
as of February 1, 2008 prior to auction failures |
Financial assets are considered Level 3 when their fair values are determined using pricing
models, discounted cash flow methodologies or similar techniques and at least one significant model
assumption or input is unobservable. Level 3 financial assets also include certain investment
securities for which there is limited market activity such that the determination of fair value
requires significant judgment or estimation. Level 3 investment securities primarily include
certain ARS for which there was a decrease in the observation of market pricing. At March 31, 2009,
these securities were valued primarily using internal cash flow valuation that incorporates
transaction details such as contractual terms, maturity, timing and amount of future cash flows, as
well as assumptions about liquidity and credit valuation adjustments of marketplace participants at
March 31, 2009.
4. Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
17,315 |
|
|
$ |
|
|
|
$ |
(389 |
) |
|
$ |
16,926 |
|
Municipal bonds and notes |
|
|
69,754 |
|
|
|
637 |
|
|
|
|
|
|
|
70,391 |
|
U.S. government securities |
|
|
51,281 |
|
|
|
239 |
|
|
|
(4 |
) |
|
|
51,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
138,350 |
|
|
$ |
876 |
|
|
$ |
(393 |
) |
|
$ |
138,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
3,033 |
|
|
$ |
|
|
|
$ |
(69 |
) |
|
$ |
2,964 |
|
Municipal bonds and notes |
|
|
40,587 |
|
|
|
138 |
|
|
|
(30 |
) |
|
|
40,695 |
|
U.S. government securities |
|
|
68,301 |
|
|
|
38 |
|
|
|
(115 |
) |
|
|
68,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
111,921 |
|
|
$ |
176 |
|
|
$ |
(214 |
) |
|
$ |
111,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
15,927 |
|
|
$ |
40 |
|
|
$ |
(149 |
) |
|
$ |
15,818 |
|
Municipal bonds and notes |
|
|
86,935 |
|
|
|
1,386 |
|
|
|
(3 |
) |
|
|
88,318 |
|
Auction rate securities |
|
|
45,334 |
|
|
|
|
|
|
|
(3,810 |
) |
|
|
41,524 |
|
U.S. government securities |
|
|
94,488 |
|
|
|
464 |
|
|
|
(40 |
) |
|
|
94,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
242,684 |
|
|
$ |
1,890 |
|
|
$ |
(4,002 |
) |
|
$ |
240,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
12,815 |
|
|
$ |
|
|
|
$ |
(456 |
) |
|
$ |
12,359 |
|
Municipal bonds and notes |
|
|
100,154 |
|
|
|
57 |
|
|
|
(361 |
) |
|
|
99,850 |
|
Auction rate securities |
|
|
52,250 |
|
|
|
|
|
|
|
(4,728 |
) |
|
|
47,522 |
|
U.S. government securities |
|
|
101,534 |
|
|
|
111 |
|
|
|
(290 |
) |
|
|
101,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
266,753 |
|
|
$ |
168 |
|
|
$ |
(5,835 |
) |
|
$ |
261,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The cost or amortized cost and fair value of fixed maturities at March 31, 2009, by contractual
years-to-maturity, are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
Cost |
|
|
Fair Value |
|
One year or less |
|
$ |
138,350 |
|
|
$ |
138,833 |
|
Over one year through five years |
|
|
242,684 |
|
|
|
240,572 |
|
|
|
|
|
|
|
|
|
|
$ |
381,034 |
|
|
$ |
379,405 |
|
|
|
|
|
|
|
|
The following table summarizes investments that have been in a continuous unrealized loss
position for less than 12 months and those that have been in a continuous unrealized loss position
for more than 12 months as of March 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
26,433 |
|
|
$ |
538 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
26,433 |
|
|
$ |
538 |
|
Municipal bonds and notes |
|
|
4,017 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
4,017 |
|
|
|
3 |
|
Auction rate securities |
|
|
|
|
|
|
|
|
|
|
15,190 |
|
|
|
3,810 |
|
|
|
15,190 |
|
|
|
3,810 |
|
U.S. government securities |
|
|
31,842 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
31,842 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
62,292 |
|
|
$ |
585 |
|
|
$ |
15,190 |
|
|
$ |
3,810 |
|
|
$ |
77,482 |
|
|
$ |
4,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company invests in securities that are rated investment grade or better. The unrealized
losses on investments for the first six months of fiscal 2009 were primarily caused by reductions
in the values of the ARS due to the illiquid markets and were partially offset by unrealized gains
related to interest rate decreases.
ARS are variable-rate debt securities. The Company limits its investments in ARS to securities
that carry an AAA (or equivalent) rating from recognized rating agencies and limits the amount of
credit exposure to any one issuer. At the time of the Companys initial investment and at the date
of this report, all ARS remain AAA rated. In the past, the auction process allowed investors to
obtain immediate liquidity if so desired by selling the securities at their face amounts. Liquidity
for these securities has historically been provided by an auction process that resets interest
rates on these investments on average every 7-35 days. However, as has been reported in the
financial press, the disruptions in the credit markets adversely affected the auction market for
these types of securities.
Beginning in February 2008, auctions failed for approximately $53.4 million in par value of
municipal ARS the Company held because sell orders exceeded buy orders. The funds associated with
failed auctions will not be accessible until a successful auction occurs or a buyer is found
outside the auction process. The Company believes that the appropriate presentation of these
securities is long-term investments as reflected in the Companys consolidated balance sheet at
March 31, 2009, as the Company does not believe it will be able to liquidate these securities in
the next twelve months.
In October 2008, the Company entered into an agreement (the Agreement) with UBS whereby UBS
would purchase eligible ARS it sold to the Company prior to February 13, 2008. Under the terms of
the Agreement, and at the Companys discretion, UBS will purchase eligible ARS from the Company at
par value (Put Option) during the period of June 30, 2010 through July 2, 2012. The Company
expects to sell its eligible ARS under the Agreement. However, if the Company does not exercise its
rights to sell its eligible ARS under the Agreement before July 2, 2012 this Put Option will expire
and UBS will have no further rights or obligations to buy the Companys ARS. So long as the Company
holds its ARS, they will continue to accrue interest as determined by the auction process or the
terms of the ARS if the auction process fails. The Company elected to measure the Put Option under
the fair value option of SFAS No. 159, and recorded a benefit of approximately $1.2 million pre-tax
for the six months ended March 31, 2009 and recorded a corresponding long term investment. The
Company transferred these ARS from available-for-sale to trading investment securities. As a result
of accepting the Put Option and reclassifying the ARS from available-for-sale to trading investment
securities, the Company recognized an other-than-temporary impairment loss of approximately $1.2
million pre-tax as of March 31, 2009, reflecting a reversal of the related unrealized loss that was
previously recorded in other comprehensive loss. The recording of the fair value of the Put Option
and the recognition of the other-than-temporary impairment loss resulted in no impact to the
consolidated income statement for the six months ended March 31, 2009.
The Company partially liquidated one ARS at par value for $800,000 in the second quarter of
fiscal 2009.
14
5. 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):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Finished goods |
|
$ |
11,338 |
|
|
$ |
6,391 |
|
Raw materials |
|
|
3,698 |
|
|
|
3,757 |
|
|
|
|
|
|
|
|
|
|
$ |
15,036 |
|
|
$ |
10,148 |
|
|
|
|
|
|
|
|
6. Commitments and Contingencies
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 for those customers without service
contracts, with the option of purchasing additional warranty coverage in yearly increments. The
Company accrues for warranty costs as part of its cost of sales based on associated material
product costs and technical support labor costs. Accrued warranty costs as of March 31, 2009 and
March 31, 2008 were not material.
Purchase Commitments
The Company currently has arrangements with contract manufacturers and other suppliers for the
manufacturing of its products. The arrangement with the primary contract manufacturer allows them
to procure component inventory on their behalf based on a rolling production forecast provided by
the Company. The Company is obligated to the purchase of component inventory that the contract
manufacturer procures in accordance with the forecast, unless they give notice of order
cancellation in advance of applicable lead times. As of March 31, 2009, the Company was committed
to purchase approximately $15.3 million of such inventory during the next quarter.
Legal Proceedings
Derivative Suits. Beginning on or about May 24, 2006, several derivative actions were filed
against certain of the Companys 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 Construction Industry Retirement Trust v. McAdam et al. (Case No. C06-1057RSL),
and Easton v. McAdam et al. (Case No. C06-1145RSL) (the Federal
15
Court Derivative Litigation). 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. The Barone lawsuit was designated a related case to the Federal Court Derivative
Litigation on September 4, 2007. 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 and Scott Thompson who joined the Board of
Directors in July 2006 and January 2008, respectively) 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 filed a motion
to dismiss the amended complaint based on plaintiffs failure to make demand on the Companys Board
of Directors prior to filing suit. On July 3, 2008, before ruling on the Companys pending
dismissal motion, the federal court entered an order certifying certain issues of Washington state
law to the Washington Supreme Court for resolution. The hearing in the Washington Supreme Court was
held on March 24, 2009 and the federal derivative actions are stayed pending resolution of the
certification proceeding. The Company intends to continue to vigorously pursue dismissal of the
derivative actions.
SEC and Department of Justice Inquiries. In May 2006, the Company received notice from both
the SEC and the Department of Justice that they were conducting informal inquiries into the
Companys historical stock option practices, and have fully cooperated with both agencies.
Considerable legal and accounting expenses related to the Companys historical stock option
practices have been incurred to date. The Company may in the future be subject to additional
regulatory proceedings or actions arising in relation to the Companys historical stock option
practices and the restatement of the Companys prior period financial statements. Although
regulatory proceedings are subject to inherent uncertainties, the Company does not believe the
results of any pending actions will, individually or in the aggregate, have a material adverse
impact on the Companys consolidated financial position or results of operations.
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 we 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.
7. Income Taxes
The effective tax rate was 25.3% and 39.0% for the three months ended March 31, 2009 and 2008,
respectively, and 27.2% and 39.0% for the six months ended March 31, 2009 and 2008, respectively.
During the quarter ended March 31, 2009 the Company began deducting for tax purposes compensation
related to equity awards in a major foreign tax jurisdiction resulting in a reduction to its
effective tax rate for the quarter of approximately 9.3%.
As of March 31, 2009, there have been no material changes to the Companys uncertain tax
positions as disclosed in Note 5 of the 2008 Annual Report and on Form 10-K. At March 31, 2009 the
Company has classified approximately $3.9 million of unrecognized tax liabilities as a non-current
liability. The Company does not anticipate that total unrecognized tax benefits will significantly
change within the next twelve months.
The Company recognizes interest and, if applicable, penalties for any uncertain tax positions.
This interest and penalty expense will be a component of income tax expense. At the adoption of
FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes An Interpretation of FASB
Statement No. 109 (FIN 48), the Company had not accrued any interest or penalties on
unrecognized tax benefits. In the three months ended March 31, 2009, the Company accrued an
immaterial amount of interest expense related to its liability for unrecognized tax benefits under
FIN 48. All unrecognized tax benefits, if recognized, would affect the effective tax rate.
The Company and its subsidiaries are subject to U.S. federal income tax as well as the income
tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income
tax matters for fiscal years through September 30, 2004 and is currently under examination by the
Internal Revenue Service for the fiscal year ending September 30, 2007. Major jurisdictions where
16
there are wholly owned subsidiaries of F5 Networks, Inc. which require income tax filings
include the United Kingdom, Japan, Australia and Germany. Periods open for review by local taxing
authorities are fiscal years 2006, 2003, 2004 and 2003 for the United Kingdom, Japan, Australia and
Germany, respectively. Within the next four fiscal quarters, the statute of limitations will begin
to close on the fiscal years ended 2004 and 2005 tax returns filed in various states and the fiscal
year ended 2005 federal income tax return.
8. 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. The
Company is 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 the Asia Pacific region (APAC). 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Americas |
|
$ |
84,565 |
|
|
$ |
86,799 |
|
|
$ |
173,989 |
|
|
$ |
174,649 |
|
EMEA |
|
|
35,952 |
|
|
|
35,989 |
|
|
|
76,064 |
|
|
|
69,106 |
|
Japan |
|
|
13,899 |
|
|
|
16,047 |
|
|
|
28,505 |
|
|
|
32,696 |
|
Asia Pacific |
|
|
19,733 |
|
|
|
20,306 |
|
|
|
41,160 |
|
|
|
36,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
154,149 |
|
|
$ |
159,141 |
|
|
$ |
319,718 |
|
|
$ |
313,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from international customers are primarily denominated in U.S. dollars and
totaled $69.6 million and $72.3 million for the three months ended March 31, 2009 and 2008,
respectively, and $145.7 million and $138.7 million for the six months ended March 31, 2009 and
2008, respectively. One domestic distributor accounted for 15.5% and 16.3% of total net revenue for
the three and six month periods ended March 31, 2009. One domestic distributor accounted for 12.0%
of total net revenue for the three month period ended March 31, 2008. Two domestic distributors
accounted for 23.5% of total net revenue for the six month period ended March 31, 2008.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations contains
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934
and Section 27A of the Securities Act of 1933. These statements include, but are not limited to,
statements about our plans, objectives, expectations, strategies, intentions or other
characterizations of future events or circumstances and are generally identified by the words
expects, anticipates, intends, plans, believes, seeks, estimates, and similar
expressions. These forward-looking statements are based on current information and expectations and
are subject to a number of risks and uncertainties. Our actual results could differ materially from
those expressed or implied by these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed under Item 1A.
Risk Factors herein and in other documents we file from time to time with the Securities and
Exchange Commission. We assume no obligation to revise or update any such forward-looking
statements.
Overview
We are a global provider of software and hardware products and services that help companies
efficiently and securely manage the delivery, optimization and security of application and data
traffic on Internet-based networks, and to optimize the performance and utilization of data storage
infrastructure and other network resources. We market and sell our products primarily through
multiple
17
indirect sales channels in the Americas (primarily the United States); Europe, the Middle
East, and Africa (EMEA); Japan; and the Asia Pacific region (APAC). Enterprise customers (Fortune
1000 or Business Week Global 1000 companies) in technology, telecommunications, financial services,
transportation, and manufacturing industries, along with government customers, 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 Application Delivery
Networking (ADN) products; BIG-IP Local Traffic Manager, BIG-IP Global Traffic Manager,
BIG-IP ISP Traffic Manager, TrafficShield Application Firewall, WANJet, and WebAccelerator;
FirePass SSL VPN servers; and our ARX file virtualization products. We also derive revenues
from the sales of services including annual maintenance contracts, training and consulting
services. We carefully monitor the sales mix of our revenues within each reporting period.
We believe customer acceptance rates of our new products and feature enhancements are 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 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 for the first
six months of fiscal year 2009 was primarily due to net income from operations, with
operating activities providing cash of $97.1 million. This increase was partially offset by
$47.4 million of cash used to repurchase outstanding common stock under our stock repurchase
program in the first half of fiscal 2009. Going forward, we believe the primary driver of
cash flows will be net income from operations. Capital expenditures for the first six months
of fiscal year 2009 were comprised primarily of 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
second quarter of fiscal year 2009 was 53. We expect to maintain this metric in the mid
50-day range going forward. |
Summary of Critical Accounting Policies and Estimates
The preparation of our financial condition and results of operations requires us to make
judgments and estimates that may have a significant impact upon our financial results. We believe
that, of our significant accounting policies, the following require estimates and assumptions that
require complex, subjective judgments by management, which can materially impact reported results:
revenue recognition; reserve for doubtful accounts; reserve for product returns; reserve for
warranties; accounting for income taxes; stock-based compensation; investments; goodwill
impairment; and the fair value measurements of financial assets and liabilities. None of these
accounting policies and estimates have significantly changed since our annual report on Form 10-K
for the year ended September 30, 2008 (Form 10-K), except for the accounting for fair value
measurements of financial assets and liabilities and the related disclosures, which is further
discussed in Item 1, Note 3 of Part I of this Form 10-Q. Critical accounting policies and estimates
18
are more fully described in Managements Discussion and Analysis of Financial Condition and
Results of Operations in the Form 10-K. Actual results may differ from these estimates under
different assumptions or conditions.
Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated
financial statements, related notes and risk factors included elsewhere in this Quarterly Report on
Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except percentages) |
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
94,135 |
|
|
$ |
112,148 |
|
|
$ |
202,030 |
|
|
$ |
222,353 |
|
Services |
|
|
60,014 |
|
|
|
46,993 |
|
|
|
117,688 |
|
|
|
90,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
154,149 |
|
|
$ |
159,141 |
|
|
$ |
319,718 |
|
|
$ |
313,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
61.1 |
% |
|
|
70.5 |
% |
|
|
63.2 |
% |
|
|
71.0 |
% |
Services |
|
|
38.9 |
|
|
|
29.5 |
|
|
|
36.8 |
|
|
|
29.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues. Total net revenues decreased 3.1% for the three months ended March 31, 2009 from
the same period in the prior year, and increased 2.0% for the six months ended March 31, 2009 from
the same period in the prior year. The decrease in overall revenue for the three months ended March
31, 2009 was primarily due to a reduction in the volume of product sales in response to the slowing
economic environment. Overall revenue growth for the six months ended March 31, 2009 was primarily
due to increased service revenues as a result of our increased installed base of products.
International revenues were 45.1% and 45.6% of total net revenues for the three and six months
ended March 31, 2009, respectively, compared to 45.5% and 44.3% for the same periods in the prior
year, 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 decreased 16.1% and 9.1% for the three and six months ended March 31,
2009, respectively, from the same periods in the prior year. The decrease in the three and six
months ended March 31, 2009 was primarily due to a reduction in the volume of products sales of our
ARX file virtualization product of $2.8 million and $6.1 million, respectively, from the same
periods in the prior year. Sales of our ADN products represented 93.2% and 94.0% of product
revenues for the three and six months ended March 31, 2009, respectively, compared to 90.1% and
90.3% for the same periods in the prior year, respectively.
Net service revenues increased 27.7% and 29.4% for the three and six months ended March 31,
2009, respectively, from the same periods in the prior year. The increase in services revenue was
primarily due to increases in the purchase or renewal of maintenance contracts as well as additions
to our installed base of products.
Avnet Technology Solutions, one of our domestic distributors, accounted for 15.5% and 16.3% of
our total net revenue for the three and six months ended March 31, 2009, respectively. Avnet
Technology Solutions accounted for 12.0% and 12.9% of our total net revenue for the three and six
months ended March 31, 2008, respectively. Ingram Micro Inc., another domestic distributor,
accounted for 10.6% of our total net revenue for the six months ended March 31, 2008. Avnet
Technology Solutions accounted for 11.3% of our accounts receivable as of March 31, 2009. No other
distributors accounted for more than 10% of total net revenue or receivables.
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except percentages) |
|
Cost of net revenues and Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
25,037 |
|
|
$ |
24,969 |
|
|
$ |
48,960 |
|
|
$ |
49,658 |
|
Services |
|
|
11,545 |
|
|
|
11,719 |
|
|
|
23,645 |
|
|
|
22,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
36,582 |
|
|
|
36,688 |
|
|
|
72,605 |
|
|
|
71,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
117,567 |
|
|
$ |
122,453 |
|
|
$ |
247,113 |
|
|
$ |
241,398 |
|
Percentage of net revenues and Gross
Margin (as a percentage of related
net revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
26.6 |
% |
|
|
22.3 |
% |
|
|
24.2 |
% |
|
|
22.3 |
% |
Services |
|
|
19.2 |
|
|
|
24.9 |
|
|
|
20.1 |
|
|
|
24.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
23.7 |
|
|
|
23.1 |
|
|
|
22.7 |
|
|
|
23.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
76.3 |
% |
|
|
76.9 |
% |
|
|
77.3 |
% |
|
|
77.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net product revenues. Cost of net product revenues consist of finished products
purchased from our contract manufacturers, manufacturing overhead, freight, warranty, provisions
for excess and obsolete inventory and amortization expenses in connection with developed technology
from acquisitions. Cost of net product revenues remained relatively flat for the three and six
months ended March 31, 2009 as compared to the same periods in the prior year. The increase in
cost of net product revenues as a percentage of related net product revenues is primarily due to a
$2.1 million charge to increase our inventory reserve related to components of our legacy platforms
and a patent related legal settlement of $1.3 million in the second fiscal quarter of 2009.
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. For the
three and six months ended March 31, 2009, cost of net service revenues as a percentage of net
service revenues decreased to 19.2% and 20.1%, respectively, compared to 24.9% and 24.5% for the
same periods in the prior year, respectively, primarily due to the scalability of our existing
customer support infrastructure and increased revenue from maintenance contracts. Professional
services headcount at the end of March 2009 decreased to 313 from 320 at the end of March 2008. In
addition, cost of net service revenues includes stock compensation expense of $1.2 million and $2.3
million for the three and six months ended March 31, 2009, respectively, compared to $0.9 million
and $1.9 million for the same periods in the prior year, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except percentages) |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
51,933 |
|
|
$ |
58,053 |
|
|
$ |
111,371 |
|
|
$ |
116,231 |
|
Research and development |
|
|
25,977 |
|
|
|
26,418 |
|
|
|
53,079 |
|
|
|
50,750 |
|
General and administrative |
|
|
12,055 |
|
|
|
14,484 |
|
|
|
27,860 |
|
|
|
27,910 |
|
Restructuring charges |
|
|
4,329 |
|
|
|
|
|
|
|
4,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
94,294 |
|
|
$ |
98,955 |
|
|
$ |
196,639 |
|
|
$ |
194,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (as a percentage of net revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
33.7 |
% |
|
|
36.5 |
% |
|
|
34.8 |
% |
|
|
37.1 |
% |
Research and development |
|
|
16.9 |
|
|
|
16.6 |
|
|
|
16.6 |
|
|
|
16.2 |
|
General and administrative |
|
|
7.8 |
|
|
|
9.1 |
|
|
|
8.7 |
|
|
|
8.9 |
|
Restructuring charges |
|
|
2.8 |
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
61.2 |
% |
|
|
62.2 |
% |
|
|
61.5 |
% |
|
|
62.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 expenses decreased 10.5% and 4.2% for the three and six months ended March 31, 2009,
respectively, from the comparable periods in the prior year. The decrease in sales and marketing
expense was primarily due to cost reduction initiatives we implemented in response to the slowing
economic environment and a $3.7 million decrease in commissions expense corresponding to the
decrease in revenue for the three months ended March 31, 2009, compared to the same period in the
prior year. Sales and marketing headcount at the end of March 2009 decreased to 679 from 694 at
the end of March 2008. The decrease in headcount was primarily related to a reduction in workforce
that took place in the second fiscal quarter as part of our
20
restructuring program. Sales and marketing expense included stock-based compensation expense
of $5.4 million and $11.4 million for the three and six months ended March 31, 2009, respectively,
compared to $6.2 million and $12.6 million for the same periods in the prior year.
Research and development. Research and development expenses consist of the salaries and
related benefits for our product development personnel, prototype materials and other expenses
related to the development of new and improved products, facilities and depreciation expenses.
Research and development expenses decreased 1.7% for the three months ended March 31, 2009 from the
comparable period in the prior year and increased 4.6% for the six months ended March 31, 2009 from
the comparable period in the prior year. The increase in research and development expense for the
first six months of fiscal 2009 was primarily due to an increase of $1.8 million in personnel costs
compared to the same period in the prior year. Research and development headcount at the end of
March 2009 decreased to 427 from 461 at the end of March 2008. The decrease in headcount was
primarily related to the reduction in workforce that took place in the second fiscal quarter of
2009. Research and development expense included stock-based compensation expense of $4.1 million
and $8.4 million for the three and six months ended March 31, 2009, compared to $4.1 million and
$8.1 million for the same periods in the prior year. We expect research and development expenses to
remain consistent as a percentage of net revenue in the foreseeable future.
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 decreased 16.8% and 0.2% for the three
and six months ended March 31, 2009, respectively, from the comparable periods in the prior year.
The decrease in general and administrative expenses for the three months ended March 31, 2009 as
compared to the same period in the prior year was primarily due to a decrease in stock-based
compensation expense of $1.8 million. Stock-based compensation expense was $2.5 million and $5.9
million for the three and six months ended March 31, 2009, compared to $4.3 million and $8.2
million for the same periods in the prior year. General and administrative headcount at the end of
March 2009 decreased to 184 from 191 at the end of March 2008. The decrease in headcount was
primarily related to a reduction in workforce that took place in the second fiscal quarter as part
of our restructuring program.
Restructuring. Beginning in the second quarter of fiscal 2009 we implemented a comprehensive
restructuring program as part of an overall initiative to reduce certain operating expenses.
Restructuring actions included the consolidation of facilities, accelerated depreciation on tenant
improvements and a reduction in workforce. For the three months ended March 31, 2009, we recorded
restructuring expenses of $4.3 million, which included a $2.1 million charge for severance and
related costs and a $2.2 million charge for the exit of certain offices worldwide. We had $2.2
million of accrued restructuring cost at March 31, 2009, which we expect to offset future rent
expenses through September 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except percentages) |
|
Other Income and Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
23,273 |
|
|
$ |
23,498 |
|
|
$ |
50,474 |
|
|
$ |
46,507 |
|
Other income, net |
|
|
2,136 |
|
|
|
5,589 |
|
|
|
5,015 |
|
|
|
11,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
25,409 |
|
|
|
29,087 |
|
|
|
55,489 |
|
|
|
58,228 |
|
Provision for income taxes |
|
|
6,423 |
|
|
|
11,342 |
|
|
|
15,080 |
|
|
|
22,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,986 |
|
|
$ |
17,745 |
|
|
$ |
40,409 |
|
|
$ |
35,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and income taxes (as percentage of revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
15.1 |
% |
|
|
14.8 |
% |
|
|
15.8 |
% |
|
|
14.9 |
% |
Other income, net |
|
|
1.4 |
|
|
|
3.5 |
|
|
|
1.6 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
16.5 |
|
|
|
18.3 |
|
|
|
17.4 |
|
|
|
18.6 |
|
Provision for income taxes |
|
|
4.2 |
|
|
|
7.1 |
|
|
|
4.7 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
12.3 |
% |
|
|
11.2 |
% |
|
|
12.7 |
% |
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net. Other income, net, consists of interest income and foreign currency
transaction gains and losses. Other income, net, decreased 61.8% and 57.2% for the three and six
months ended March 31, 2009, respectively, compared to the same periods in the prior year. The
decrease was primarily due to a decrease of $2.6 million and $4.9 million in interest income for
the three and six months ended March 31, 2009, respectively, as interest rates continued to decline
in the first half of fiscal 2009. In addition, foreign
21
currency transaction losses increased $0.9 million and $1.9 million for the three and six
months ended March 31, 2009, respectively, compared to the same periods in the prior year.
Provision for Income taxes. We recorded a 25.3% provision for income taxes for the three month
period ended March 31, 2009. During the quarter ended March 31, 2009 we began deducting for tax
purposes compensation related to equity awards in a major foreign tax jurisdiction resulting in a
reduction to our effective tax rate for the quarter of approximately 9.3%. As of March 31, 2009, we estimate
our effective tax rate will be 31.2% for the fiscal year ended September 30, 2009. At March 31, 2009, we
did 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 these 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 at March 31, 2009 and March 31, 2008 were $50.3 million and $44.7 million,
respectively. Our worldwide effective tax rate may fluctuate based on a number of factors including
variations in projected taxable income in the various geographic locations in which we operate,
changes in the valuation of our net deferred tax assets, resolution of potential exposures, tax
positions taken on tax returns filed in the various geographic locations in which we operate, and
the introduction of new accounting standards or changes in tax laws or interpretations thereof in
the various geographic locations in which we operate. We have recorded liabilities to address
potential tax exposures related to business and income tax positions we have taken that could be
challenged by taxing authorities. The ultimate resolution of these potential exposures may be
greater or less than the liabilities recorded which could result in an adjustment to our future tax
expense.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and long-term investments totaled $499.1
million as of March 31, 2009 compared to $451.3 million as of September 30, 2008, representing an
increase of $47.8 million. The increase was primarily due to cash provided by operating activities
of $97.1 million for the six months ended March 31, 2009 compared to $78.9 million for the same
period in the prior year, which was partially offset by $47.4 million of additional cash required
for the repurchase of outstanding common stock under our stock repurchase program. The increase in
cash flow from operations for the first six months of fiscal year 2009 resulted from increased net
income combined with changes in operating assets and liabilities, as adjusted for various non-cash
items including stock-based compensation, depreciation and amortization charges. Based on our
current operating and capital expenditure forecasts, we believe that our existing cash and
investment balances, excluding auction rate securities (ARS), together with cash generated from
operations should be sufficient to meet our operating requirements for the foreseeable future.
At March 31, 2009, we held $46.6 million (par value) of long-term investments comprised of
tax-exempt ARS, which are variable-rate debt securities and have a long-term maturity with the
interest being reset through Dutch auctions that are typically held every 7, 28 or 35 days. The
securities have historically traded at par and are callable at par at the option of the issuer.
Interest is typically paid at the end of each auction period or semi-annually. We limit our
investments in ARS to securities that carry a AAA (or equivalent) rating from recognized rating
agencies and limit the amount of credit exposure to any one issuer. At the time of initial
investment and at the date of this Quarterly Report on Form 10-Q, all of our ARS remain AAA rated.
Beginning in February 2008, auctions failed for approximately $53.4 million in par value of
municipal ARS we held because sell orders exceeded buy orders. When these auctions failed to clear,
higher interest rates for those securities went into effect. However, the funds associated with
these failed auctions will not be accessible until the issuer calls the security, a successful
auction occurs, a buyer is found outside of the auction process or the security matures. The
underlying assets of the municipal ARS we hold, including the securities for which auctions have
failed, are generally student loans which are guaranteed by the U.S. government.
We have no reason to believe that any of the underlying issuers of our ARS are presently at
risk of default. Through March 31, 2009, we have continued to receive interest payments on the ARS
in accordance with their terms. We believe we will be able to liquidate our investments without
significant loss primarily due to the government guarantee of the underlying securities. However,
due to recent changes and uncertainty in the ARS market, we believe these investments may remain
illiquid for longer than twelve months and as a result, we have classified these investments as
long-term as of March 31, 2009.
In October 2008, we entered into an agreement (the Agreement) with UBS whereby UBS would
purchase eligible ARS it sold to us prior to February 13, 2008. Under the terms of the Agreement,
and at our discretion, UBS will purchase eligible ARS from us at par value (Put Option) during
the period of June 30, 2010 through July 2, 2012. We expect to sell our eligible ARS under the
Agreement. However, if we do not exercise our rights to sell our eligible ARS under the Agreement
before July 2, 2012 the Put Option will expire and UBS will have no further rights or obligations
to buy our ARS. So long as we hold our ARS, they will continue to
22
accrue interest as determined by the auction process or the terms of the ARS if the auction
process fails. We elected to measure the Put Option under the fair value option of SFAS No. 159,
and recorded a benefit of approximately $1.2 million pre-tax for the six months ended March 31,
2009, and recorded a corresponding long term investment. We transferred these ARS from
available-for-sale to trading investment securities. As a result of accepting the Put Option and
reclassifying the ARS from available-for-sale to trading investment securities, we recognized an
other-than-temporary impairment loss of approximately $1.2 million pre-tax as of March 31, 2009,
reflecting a reversal of the related unrealized loss that was previously recorded in other
comprehensive loss. The recording of the fair value of the Put Option and the recognition of the
other-than-temporary impairment loss resulted in no impact to the consolidated income statement for
the six months ended March 31, 2009.
We partially liquidated one additional ARS at par value for $800,000 in the second quarter of
fiscal 2009.
Cash used in investing activities was $10.7 million for the six months ended March 31, 2009
compared to cash provided by investing activities of $100.4 million for the same period in the
prior year. Investing activities include purchases and maturities of available-for-sale securities,
capital expenditures and changes in restricted cash requirements. The amount of cash used in
investing activities for the first six months of fiscal year 2009 was primarily due to the purchase
of investments and capital expenditures related to maintaining our operations worldwide partially
offset by the maturity of investments.
Cash used in financing activities for the six months ended March 31, 2009 was $44.6 million
compared to $89.9 million for the same period in the prior year. Our financing activities for the
six months ended March 31, 2009 consisted primarily of cash required for the repurchase of
outstanding common stock under our stock repurchase program of $47.4 million, partially offset by
cash received from the exercise of employee stock options and warrants of $5.9 million.
Obligations and Commitments
As of March 31, 2009, our principal commitments consisted of obligations outstanding under
operating leases. We lease our facilities under operating leases that expire at various dates
through 2018. There have been no material changes in our principal lease commitments compared to
those discussed in the Form 10-K. In connection with the lease agreement for our corporate
headquarters, we established a restricted escrow account collateralized by a certificate of deposit
that has been included on our balance sheet as a component of restricted cash. The total amount
required in escrow reduces at various dates as set forth by the lease agreement. The amount
required in escrow at March 31, 2009 was $2.4 million as set forth by the lease agreement.
We outsource the manufacturing of our pre-configured hardware platforms to contract
manufacturers who assemble each product to our specifications. Our agreement with our largest
contract manufacturer allows them to procure component inventory on our behalf based upon a rolling
production forecast. We are contractually obligated to purchase the component inventory in
accordance with the forecast, unless we give notice of order cancellation in advance of applicable
lead times. As of March 31, 2009, we were committed to purchase approximately $15.3 million of such
inventory during the next quarter.
Recent Accounting Pronouncements
The anticipated impact of recent accounting pronouncements is discussed in Note 1 to the
accompanying Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Risk Factors that May Affect Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and
uncertainties. Our business, operating results, financial performance and share price may be
materially adversely affected by a number of factors, including but not limited to the following
risk factors, any one of which could cause actual results to vary materially from anticipated
results or from those expressed in any forward-looking statements made by us in this Quarterly
Report on Form 10-Q or in other reports, press releases or other statements issued from time to
time. Additional factors that may cause such a difference are set forth elsewhere in this Quarterly
Report on Form 10-Q.
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
23
The application delivery networking and file virtualization markets are 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
the acceptance of those products and features 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 greater risk of product obsolescence. We have
also experienced, and may in the future experience, delays in developing and releasing new products
and product enhancements. This has led to, and may in the future lead to, delayed sales, increased
expenses and lower quarterly revenue than anticipated. Also, in the development of our products, we
have experienced delays in the prototyping of our products, which in turn has led to delays in
product introductions. In addition, complexity and difficulties in managing product transitions at
the end-of-life stage of a product can create excess inventory of components associated with the
outgoing product that can lead to increased expenses. Any or all of the above problems could
materially harm our business and results of operations.
Our success depends on sales and continued innovation of our Application Delivery Networking
product lines
For the fiscal year ended September 30, 2008 and the three months ended March 31, 2009, we
derived approximately 92.0% and 93.2%, respectively, of our net product revenues, or approximately
64.1% and 56.9%, respectively, of our total net revenues, from sales of our Application Delivery
Networking (ADN) product lines. We continue to expect to derive a significant portion of our net
revenues from sales of our ADN products in the future. Implementation of our strategy depends upon
these products being able to solve critical network availability and performance problems of our
customers. If our ADN products are unable to solve these problems for our customers or if we are
unable to sustain the high levels of innovation in our ADN 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, Nortel, Citrix, and Radware. In the adjacent WAN
Optimization market, we compete with Riverbed, Juniper, Blue Coat Systems, Cisco and Citrix. In the
file virtualization market, we compete with EMC, Net-App, 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 from other companies 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. Any of these circumstances may limit our opportunities for growth and
negatively impact our financial performance.
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 fiscal year. Additionally, we have exposure
to the credit risks of some of our customers and sub-tenants. Although we have programs in place
that are designed to monitor and mitigate the associated risk, there can be no assurance that such
programs will be effective in reducing our credit risks adequately. We monitor individual payment
capability in granting credit arrangements, seek to limit the total credit to amounts 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 a major
24
customers creditworthiness or actual defaults are higher than expected, future losses, if
incurred, could harm our business and have a material adverse effect on our operating results.
Further, our operating results may be below the expectations of securities analysts and
investors in future quarters or years. Our failure to meet these expectations will likely harm the
market price of our common stock. Such a decline could occur, and has occurred in the past, even
when we have met our publicly stated revenue and/or earnings guidance.
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 outsource the manufacturing of our hardware platforms to third party contract manufacturers
who assemble these hardware platforms to our specifications. We have experienced minor delays in
shipments from contract manufacturers in the past. However, if we experience major delays in the
future or other problems, such as inferior quality and insufficient quantity of product, any one or
a combination of these factors may harm our business and results of operations. The inability of
our contract manufacturers to provide us with adequate supplies of our products or the loss of one
or more of our contract manufacturers may cause a delay in our ability to fulfill orders while we
obtain a replacement manufacturer and may harm our business and results of operations. In
particular, we currently subcontract manufacturing of our application delivery networking products
to a single contract manufacturer with whom we do not have a long-term contract. If our arrangement
with this single source of hardware assembly was terminated or otherwise impaired, and we were not
able to engage another contract manufacturer in a timely manner, our business, financial condition
and results of operation could be adversely affected.
If the demand for our products grows, we will need to increase our raw material and component
purchases, contract manufacturing capacity and internal test and quality control functions. Any
disruptions in product flow may limit our revenue, may harm our competitive position and may result
in additional costs or cancellation of orders by our customers.
Our business could suffer if there are any interruptions or delays in the supply of hardware
components from our third-party sources
We currently purchase several hardware components used in the assembly of our products from a
number of single or limited sources. Lead times for these components vary significantly. The
unavailability of suitable components, any interruption or delay in the supply of any of these
hardware components or the inability to
procure a similar component from alternate sources at acceptable
25
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 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, or
to determine the scope and validity of our proprietary rights or those of our competitors. Any of
these claims, whether claims that we are infringing the proprietary rights of others, or vice
versa, with or without merit, may be time-consuming, result in costly litigation and diversion of
technical and management personnel or require us to cease using infringing technology, develop
non-infringing technology or enter into royalty or licensing agreements. Further, our license
agreements typically require us to indemnify our customers, distributors and resellers for
infringement actions related to our technology, which could cause us to become involved in
infringement claims made against our customers, distributors or resellers. Any of the
above-described circumstances relating to intellectual property rights disputes could result in our
business and results of operations being harmed.
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.
26
We may not be able to sustain or develop new distribution relationships and a reduction or delay in
sales to significant distribution partners could hurt our business
We sell our products and services through multiple distribution channels in the United States
and internationally, including leading industry distributors, value-added resellers, systems
integrators, 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 24.5%
and 24.8% of our total net revenue for the fiscal years 2008 and 2007, respectively. One domestic
distributor of our products accounted for 15.5% of our total net revenue for the three months ended
March 31, 2009. A substantial reduction or delay in sales of our products to these distribution
partners, if not replaced by sales to other indirect channel partners and distributors, could harm
our business, operating results and financial condition.
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 general 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. National, regional
and local economic conditions, such as recessionary economic cycles, protracted economic slowdown
or further deterioration of the economy could adversely impact demand for our products. The
purchase of our products is often discretionary and may involve a significant commitment of capital
and other resources. Continued weak economic conditions or a reduction in information technology
spending even if economic conditions improve would likely result in longer sales cycles and reduced
product sales, each of which would adversely impact our business, results of operations and
financial condition.
Our investments in auction rate securities are subject to risks that may cause losses and affect
the liquidity of these investments
At March 31, 2009, the fair value of our AAA rated municipal auction rate securities (ARS)
was approximately $41.5 million. Beginning in February 2008, auctions failed for approximately
$53.4 million in par value of municipal ARS we held because sell orders exceeded buy orders. We may
not be able to liquidate these investments and realize their full carrying value unless the issuer
calls the security, a successful auction occurs, a buyer is found outside of the auction process,
or the security matures. While we do not believe the decline in the carrying values of these
municipal ARS is permanent, if the issuers of these securities are unable to successfully close
future auctions and their credit ratings are lowered, we may be required to record future
impairment charges related to these investments, which would harm our results of operations. We
believe these investments may remain illiquid for longer than twelve months and as a result, we
have classified these investments as long-term as of March 31, 2009.
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 recessionary economic cycles or
protracted slowdowns in economies outside the United States, foreign currency
27
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 42.5% and 41.6% of our net revenues for the fiscal years ended September 30, 2008 and
2007, respectively, and 45.1% for the three months ended March 31, 2009. In particular, in fiscal
year 2008, we derived 9.0% 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 present many risks and we may not realize the financial and strategic goals that are
contemplated at the time of the transaction
With respect to our past acquisitions, as well as any other future acquisitions we may
undertake, we may find that the acquired businesses, products or technologies do not further our
business strategy as expected, that we paid more than what the assets are later worth or that
economic conditions change, all of which may generate future impairment charges. Our acquisitions
may be viewed negatively by customers, financial markets or investors. There may be difficulty
integrating the operations and personnel of the acquired business, and we may have difficulty
retaining the key personnel of the acquired business. We may have difficulty in integrating the
acquired technologies or products with our existing product lines. Our ongoing business and
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 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 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 these lawsuits could adversely affect our
business, results of operations or financial condition.
28
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 1, Note 6, Commitments and Contingencies 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.
In May 2006, we 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 were conducting informal inquiries into our historical stock option practices.
We have fully cooperated with both agencies. Considerable legal and accounting expenses related to
our historical stock option practices have been incurred and 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 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 shareholders and may adversely affect the voting and other rights of the
holders of common stock. Further, certain provisions of our bylaws, including a provision limiting
the ability of 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.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2009, the fair value of our AAA rated municipal ARS was approximately $41.5
million. ARS are collateralized long-term debt instruments that provide liquidity through a Dutch
auction process that resets the applicable interest rate at pre-determined intervals, typically
every 7, 28 or 35 days. Beginning in February 2008, auctions failed for approximately $53.4 million
in par value of municipal ARS we held because sell orders exceeded buy orders. When these auctions
failed to clear, higher interest rates for those securities went into effect. However, the funds
associated with these failed auctions will not be accessible until the issuer calls the security, a
successful auction occurs, a buyer is found outside of the auction process or the security matures.
The underlying assets of the municipal ARS we hold, including the securities for which auctions
have failed, are generally student loans which are guaranteed by the U.S. government. Based on our
expected operating cash flows and our other sources of cash, we do not believe that any reduction
in liquidity of our municipal ARS will have a material impact on our overall ability to meet our
liquidity needs. We have the intent and ability to hold these securities until liquidation. These
securities have been classified as long-term at March 31, 2009 based on the fact that we believe it
could take longer than twelve months to liquidate the positions.
Management believes there have been no other material changes to our quantitative and
qualitative disclosures about market risk during the six month period ended March 31, 2009,
compared to those discussed in our Annual Report on Form 10-K for the year ended September 30,
2008.
Item 4. Controls and Procedures
Our 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)) are designed to ensure that
required information is properly recorded, processed, summarized and reported within the required
timeframe, as specified in the rules set forth by the SEC. Our disclosure controls and procedures
are also designed to ensure that information required to be disclosed is accumulated and
communicated to management, including our 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 March 31,
2009. Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer have
concluded that our disclosure controls and procedures were effective as of March 31, 2009.
There were no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15d-15(f) of the Exchange Act) during the period covered by this quarterly report that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
30
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are not aware of any pending legal proceedings 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.
Reference is made to Item 1, Note 6, Commitments and Contingencies Legal Proceedings, of
Part I of this Quarterly Report on Form 10-Q and Item 3, Legal Proceedings, in the Form 10-K, filed
November 21, 2008 for descriptions of our legal proceedings. We continue to believe that the
resolution of these legal proceedings will not have a material adverse effect on us and there have
been no material developments since the time of the Form 10-K filing, except as noted in Item 1,
Note 6 of Part I of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
Information regarding risk factors appears in Part I Item 2 of this Quarterly Report on
Form 10-Q, Managements Discussion and Analysis of Financial Condition and Results of Operations
Risk Factors that May Affect Future Results and in Part I Item 1A of the Form 10-K. There
have been no material changes from the risk factors previously disclosed in the Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 22, 2008, the Company announced that its Board of Directors approved a new program
to repurchase up to an additional $200 million of the Companys outstanding common stock.
Acquisitions for the share repurchase program will be made from time to time in private
transactions or open market purchases as permitted by securities laws and other legal requirements.
The program may be discontinued at any time. As of May 4, 2009, the Company had repurchased and
retired 2,213,726 shares at an average price of $21.38 per share in fiscal 2009.
Shares repurchased during the first and second quarters of fiscal 2009 are as follows (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
Total Number |
|
|
|
|
|
Shares Purchased |
|
Value of Shares that |
|
|
of Shares |
|
Average Price |
|
per the Publicly |
|
May Yet be Purchased |
|
|
Purchased (1) |
|
Paid per Share |
|
Announced Plan |
|
Under the Plan |
October 1, 2008 October 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
200,000 |
|
November 1, 2008 November 30, 2008 |
|
|
543,100 |
|
|
$ |
22.87 |
|
|
|
543,100 |
|
|
$ |
187,553 |
|
December 1, 2008 December 31, 2008 |
|
|
329,920 |
|
|
$ |
22.84 |
|
|
|
329,920 |
|
|
$ |
180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2009 January 31, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
180,000 |
|
February 1, 2009 February 28, 2009 |
|
|
636,895 |
|
|
$ |
21.34 |
|
|
|
636,895 |
|
|
$ |
166,377 |
|
March 1, 2009 March 31, 2009 |
|
|
703,811 |
|
|
$ |
19.58 |
|
|
|
703,811 |
|
|
$ |
152,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2009 April 30, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
152,563 |
|
|
|
|
(1) |
|
These amounts include shares purchased as part of the publicly announced programs described
in Part I of this report. |
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on March 12, 2009. The following matters were voted
upon at the Annual Meeting and received the number of votes indicated:
31
|
1. |
|
To elect one Class I director to hold office until the Annual meeting of
Shareholders for fiscal year end 2011 and until their successors are elected and
qualified. The Class I nominee is Karl D. Guelich. |
|
|
|
|
|
For: |
|
|
70,609,004 |
|
Against: |
|
|
981,111 |
|
Abstain: |
|
|
38,280 |
|
|
2. |
|
To approve an Amendment to the 2005 Equity Incentive Plan. |
|
|
|
|
|
For: |
|
|
46,488,062 |
|
Against: |
|
|
17,591,207 |
|
Abstain: |
|
|
473,658 |
|
|
3. |
|
To approve an Amendment to the 1999 Employee Stock Purchase Plan. |
|
|
|
|
|
For: |
|
|
62,198,931 |
|
Against: |
|
|
1,880,903 |
|
Abstain: |
|
|
473,093 |
|
|
4. |
|
To ratify the selection of PricewaterhouseCoopers LLP as our independent auditor
for fiscal year 2009. |
|
|
|
|
|
For: |
|
|
66,381,350 |
|
Against: |
|
|
5,230,634 |
|
Abstain: |
|
|
16,411 |
|
In addition, the following persons continued as directors after the Annual Meeting:
Class II Term Expiring in Fiscal Year 2010
Deborah L. Bevier
Alan J. Higginson
John McAdam
Class III Term Expiring in Fiscal Year 2011
A. Gary Ames
Scott Thompson
32
Item 6. Exhibits
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Exhibit Description |
|
|
|
|
|
3.1
|
|
|
|
Second Amended and Restated Articles of Incorporation of the Registrant (1) |
|
|
|
|
|
3.2
|
|
|
|
Third Amended and Restated Bylaws of the Registrant |
|
|
|
|
|
4.1
|
|
|
|
Specimen Common Stock Certificate (1) |
|
|
|
|
|
10.17*
|
|
|
|
1999 Employee Stock Purchase Plan, as amended |
|
|
|
|
|
10.21*
|
|
|
|
2005 Equity Incentive Plan, as amended |
|
|
|
|
|
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 Registration Statement on Form S-1, File No. 333-75817. |
33
SIGNATURES
Pursuant to the requirements 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 on this
8th day of May, 2009.
|
|
|
|
|
|
F5 NETWORKS, INC.
|
|
|
By: |
/s/ JOHN RODRIGUEZ
|
|
|
|
John Rodriguez |
|
|
|
Senior Vice President, Chief Accounting Officer
(principal financial officer) |
|
34
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Exhibit Description |
|
|
|
|
|
3.1
|
|
|
|
Second Amended and Restated Articles of Incorporation of the Registrant (1) |
|
|
|
|
|
3.2
|
|
|
|
Third Amended and Restated Bylaws of the Registrant |
|
|
|
|
|
4.1
|
|
|
|
Specimen Common Stock Certificate (1) |
|
|
|
|
|
10.17*
|
|
|
|
1999 Employee Stock Purchase Plan, as amended |
|
|
|
|
|
10.21*
|
|
|
|
2005 Equity Incentive Plan, as amended |
|
|
|
|
|
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 Registration Statement on Form S-1, File No. 333-75817. |
35