Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These statements include, but are not limited to, statements about our plans, objectives, expectations, strategies, intentions or other characterizations of future events or circumstances and are generally identified by the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions. These forward-looking statements are based on current information and expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 1A. "Risk Factors" herein and in other documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to revise or update any such forward-looking statements.

Overview

F5 is a leading provider of multi-cloud application security and delivery solutions which enable our customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. Our enterprise-grade application services are available as cloud-based, software-as-a-service, and software-only solutions optimized for multi-cloud environments, with modules that can run independently, or as part of an integrated solution on our high-performance appliances. We market and sell our products primarily through multiple indirect sales channels in the Americas; Europe, the Middle East, and Africa (EMEA); and the Asia Pacific region (APAC). Enterprise customers (Fortune 1000 or Business Week Global 1000 companies) in the technology, telecommunications, financial services, transportation, education, manufacturing and health care industries, along with government customers, continue to make up the largest percentage of our customer base.

Our management team monitors and analyzes a number of key performance indicators in order to manage our business and evaluate our financial and operating performance on a consolidated basis. Those indicators include:

• Revenues. Our revenue is derived from the sales of both global services and products. Our global services revenue includes annual maintenance contracts, training and consulting services. The majority of our product revenues are derived from sales of our application security and delivery solutions including our BIG-IP software and systems, F5 NGINX software, and our F5 Silverline offerings. Our BIG-IP software solutions are sold both on a perpetual license and a subscription basis. We sell F5 NGINX on a subscription basis. Our Silverline solution is a managed services offering, also sold on a subscription basis. F5 Distributed Cloud Services provides security, multi-cloud networking, and edge-based computing solutions, encompassing software solutions from what were previously branded as our Shape, Volterra, and Silverline product offerings. F5 Distributed Cloud Services are offered on a subscription basis, under a unified software-as-a-service ("SaaS") platform.

We monitor the sales mix of our revenues within each reporting period. We believe customer acceptance rates of our new products, feature enhancements and consumption models are indicators of future trends. We also consider overall revenue concentration by geographic region as an additional indicator of current and future trends. Toward the end of fiscal 2022, and continuing through the first half of fiscal 2023, we saw changes in customer buying patterns due to the uncertain macroeconomic environment. In our second quarter of fiscal 2023, the impact of these buying patterns have led to softer demand in customer orders for both our software and systems products and services. We believe the current demand environment is temporary based on several factors, notably our products and services unique market position relative to our peers, the softer demand being a matter of customer budget constraints rather than competitive pressures or architectural shifts, and our stronger than normal maintenance renewals, which signal delays in purchases rather than decisions, which are typical indicators we have witnessed in times of macroeconomic uncertainty. We will continue to closely monitor the macroeconomic environment and its impacts on our business.

• 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, software-as-a-service infrastructure costs, amortization of developed technology and personnel and overhead expenses. In addition, factors such as sales price, product and services mix, inventory obsolescence, returns, component price increases, warranty costs, global supply chain constraints, and the remaining uncertainty surrounding the COVID-19 pandemic could significantly impact our gross margins from quarter to quarter.

• 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

Table of Contents

fees, computer costs related to the development of new products and provision of services, facilities and depreciation expenses.

• Liquidity and cash flows. Our financial condition remains strong with significant cash and investments. The decrease in cash and investments for the first six months of fiscal year 2023 was primarily due to cash used for the voluntary prepayment of the Term Loan Facility, including the outstanding principal balance of $350.0 million, and all accrued, but unpaid interest outstanding of $3.0 million. In addition, $40.0 million of cash was used for the repurchase of outstanding common stock in the first quarter of fiscal 2023. The decrease was partially offset by cash provided by operating activities of $298.6 million. Going forward, we believe the primary driver of cash flows will be net income from operations. We will continue to evaluate possible acquisitions of, or investments in businesses, products, or technologies that we believe are strategic, which may require the use of cash. Additionally, on January 31, 2020, we entered into a Revolving Credit Agreement (the "Revolving Credit Agreement") that provides for a senior unsecured revolving credit facility in an aggregate principal amount of $350.0 million (the "Revolving Credit Facility"). We have the option to increase commitments under the Revolving Credit Facility from time to time, subject to certain conditions, by up to $150.0 million. As of March 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility, and we had available borrowing capacity of $350.0 million.

• Balance sheet. We view cash, short-term and long-term investments, deferred revenue, accounts receivable balances and days sales outstanding as important indicators of our financial health. Deferred revenues continued to increase in the second quarter of fiscal year 2023 due to the growth of our subscriptions business. Our days sales outstanding for the second quarter of fiscal year 2023 was 62. Days sales outstanding is calculated by dividing ending accounts receivable by revenue per day for a given quarter.

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, accounting for business combinations and accounting for leases. Actual results may differ from these estimates under different assumptions or conditions.

There were no material changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K for the fiscal year ended September 30, 2022. Refer to the "Recently Adopted Accounting Standards" section of Note 1 in this Quarterly Report on Form 10-Q for a summary of the new accounting policies.

Impact of Current Macroeconomic Conditions

Our overall performance depends in part on worldwide economic and geopolitical conditions and their impacts on customer behavior. Worsening economic conditions, including inflation, higher interest rates, slower growth, fluctuations in foreign exchange rates, and developments related to the COVID-19 pandemic, and other changes in economic conditions, may adversely affect our results of operations and financial performance. For further discussion of the potential impacts of recent macroeconomic events on our business, financial condition, and operating results, see Part 1, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q.

Table of Contents

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 March 31,												Six months ended March 31,
						2023						2022						2023						2022
						(in thousands, except percentages)
Net revenues
Products						$	340,581					$	297,518					$	681,139					$	640,667
Services						362,594						336,706						722,414						680,657
Total						$	703,175					$	634,224					$	1,403,553					$	1,321,324
Percentage of net revenues
Products						48.4		%				46.9		%				48.5		%				48.5		%
Services						51.6						53.1						51.5						51.5
Total						100.0		%				100.0		%				100.0		%				100.0		%

Net Revenues. Total net revenues increased 10.9% and 6.2% for the three and six months ended March 31, 2023, respectively, from the comparable periods in the prior year. The increase in total net revenues for the three months ended March 31, 2023 was primarily due to an increase in product revenue from stronger systems sales through greater availability of product compared to supply constraints in the previous year. In addition, service revenue increased largely based on continued growth in maintenance contract renewals. Overall revenue growth for the six months ended March 31, 2023 was primarily due to increases in both product and service revenue. International revenues represented 48.8% and 47.6% of total net revenues for the three and six months ended March 31, 2023, respectively, compared to 46.5% and 45.5% for the same periods in the prior year, respectively.

Net Product Revenues. Net product revenues increased 14.5% and 6.3% for the three and six months ended March 31, 2023, respectively, from the comparable periods in the prior year. The increase in net product revenues for the three months ended March 31, 2023 was primarily due to an increase in systems revenue, partially offset by a decrease in software revenue from a decline in sales of new term-based subscriptions. The increase in net product revenues for the six months ended March 31, 2023 was due to an increase in systems revenue compared to the same period in the prior year.

The following presents net product revenues by systems and software:

						Three months ended March 31,												Six months ended March 31,
						2023						2022						2023						2022
						(in thousands, except percentages)
Net product revenues
Systems revenue						$	208,689					$	145,975					$	381,721					$	326,132
Software revenue						131,892						151,543						299,418						314,535
Total net product revenue						$	340,581					$	297,518					$	681,139					$	640,667
Percentage of net product revenues
Systems revenue						61.3		%				49.1		%				56.0		%				50.9		%
Software revenue						38.7						50.9						44.0						49.1
Total net product revenue						100.0		%				100.0		%				100.0		%				100.0		%

Net Service Revenues. Net service revenues increased 7.7% and 6.1% for the three and six months ended March 31, 2023, respectively, from the comparable periods in the prior year. The increase in net service revenues for the three and six months ended March 31, 2023 was the result of increased purchases or renewals of maintenance contracts driven by delayed purchase decisions in new product purchases by our install base and additions to our installed base of products. In addition, we are starting to see the benefits of price increases put in place in fiscal 2022.

Table of Contents

The following distributors of our products accounted for more than 10% of total net revenue:

			Three months ended March 31,												Six months ended March 31,
			2023						2022						2023						2022
Ingram Micro, Inc.			16.5		%				20.3		%				17.1		%				19.5		%
Synnex Corporation			14.7		%				14.3		%				14.2		%				13.2		%

The following distributors of our products accounted for more than 10% of total receivables:

			March 31, 2023						September 30, 2022
Ingram Micro, Inc.			—						12.9		%
Synnex Corporation			13.9		%				12.6		%
Carahsoft Technology			—						16.2		%

No other distributors accounted for more than 10% of total net revenue or receivables.

						Three months ended March 31,												Six months ended March 31,
						2023						2022						2023						2022
						(in thousands, except percentages)
Cost of net revenues and gross profit
Products						$	99,795					$	71,234					$	198,650					$	152,896
Services						55,859						55,125						112,011						108,536
Total						155,654						126,359						310,661						261,432
Gross profit						$	547,521					$	507,865					$	1,092,892					$	1,059,892
Percentage of net revenues and gross margin (as a percentage of related net revenue)
Products						29.3		%				23.9		%				29.2		%				23.9		%
Services						15.4						16.4						15.5						15.9
Total						22.1						19.9						22.1						19.8
Gross margin						77.9		%				80.1		%				77.9		%				80.2		%

Cost of Net Product Revenues. Cost of net product revenues consists of finished products purchased from our contract manufacturers, manufacturing overhead, freight, warranty, provisions for excess and obsolete inventory, software-as-a-service infrastructure costs and amortization expenses in connection with developed technology from acquisitions. Cost of net product revenues increased $28.6 million, or 40.1% for the three months ended March 31, 2023 and increased $45.8 million, or 29.9% for the six months ended March 31, 2023 from the comparable periods in the prior year. The increase in cost of net product revenues was primarily due to systems product revenue growth for the three and six months ended March 31, 2023 from the comparable periods in the prior year. In addition, cost of product revenues increased due to component cost increases, expedite fees, and other sourcing-related costs in the first half of fiscal 2023, from the comparable period in the prior year.

Cost of Net Service Revenues. Cost of net service revenues consists of the salaries and related benefits of our professional services staff, travel, facilities and depreciation expenses. For the three and six months ended March 31, 2023, cost of net service revenues as a percentage of net service revenues was 15.4% and 15.5%, respectively, compared to 16.4% and 15.9% for the comparable periods in the prior year, respectively. Professional services headcount at the end of March 2023 increased to 1,072 from 1,059 at the end of March 2022.

Table of Contents

						Three months ended March 31,												Six months ended March 31,
						2023						2022						2023						2022
						(in thousands, except percentages)
Operating expenses
Sales and marketing						$	233,076					$	228,826					$	466,181					$	462,861
Research and development						141,363						135,838						283,686						266,109
General and administrative						67,036						68,554						137,027						134,215
Restructuring charges						—						—						8,740						7,909
Total						$	441,475					$	433,218					$	895,634					$	871,094
Operating expenses (as a percentage of net revenue)
Sales and marketing						33.2		%				36.1		%				33.2		%				35.0		%
Research and development						20.1						21.4						20.2						20.1
General and administrative						9.5						10.8						9.8						10.2
Restructuring charges						—						—						0.6						0.6
Total						62.8		%				68.3		%				63.8		%				65.9		%

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 increased $4.3 million, or 1.9% for the three months ended March 31, 2023 and increased $3.3 million, or 0.7% for the six months ended March 31, 2023 from the comparable periods in the prior year. The increase in sales and marketing expense for the three months ended March 31, 2023 was primarily due to an increase of $6.7 million in commissions from the comparable period in the prior year. The increase in sales and marketing expense for the six months ended March 31, 2023 was primarily due to an increase of $8.0 million in employee travel and customer outreach as well as an increase in commissions of $6.6 million from the comparable period in the prior year. The increase in sales and marketing expense for the six months ended March 31, 2023 was partially offset by a decrease in marketing spend of $4.0 million as part of cost reductions implemented by management. In addition, sales and marketing expenses for the first quarter of fiscal 2022 included an impairment charge of $6.2 million related to the write-off of the Shape trade name intangible asset which offset the year-over-year increase. Sales and marketing headcount at the end of March 2023 increased to 2,480 from 2,437 at the end of March 2022. Sales and marketing expenses included stock-based compensation expense of $26.9 million and $52.6 million for the three and six months ended March 31, 2023, respectively, compared to $27.6 million and $54.4 million for the same periods in the prior year, respectively.

Research and Development. Research and development expenses consist of the salaries and related benefits of our product development personnel, prototype materials and other expenses related to the development of new and improved products, facilities and depreciation expenses. Research and development expenses increased $5.5 million, or 4.1% for the three months ended March 31, 2023 and increased $17.6 million, or 6.6% for the six months ended March 31, 2023 from the comparable periods in the prior year. The increase in research and development expense for the three months ended March 31, 2023 was primarily due to an increase of $5.3 million in personnel costs from the comparable period in the prior year. The increase in research and development expense for the six months ended March 31, 2023 was primarily related to an increase of $17.1 million in personnel costs from the comparable period in the prior year. Research and development headcount at the end of March 2023 increased to 2,212 from 2,019 at the end of March 2022. Research and development expenses included stock-based compensation expense of $18.7 million and $37.2 million for the three and six months ended March 31, 2023, respectively, compared to $18.2 million and $36.8 million for the same periods in the prior year, respectively.

General and Administrative. General and administrative expenses consist of the salaries, benefits and related costs of our executive, finance, information technology, human resource and legal personnel, third-party professional service fees, facilities and depreciation expenses. General and administrative expenses decreased $1.5 million, or 2.2% for the three months ended March 31, 2023 and increased $2.8 million, or 2.1% for the six months ended March 31, 2023 from the comparable periods in the prior year. General and administrative headcount at the end of March 2023 increased to 972 from 905 at the end of March 2022. General and administrative expenses included stock-based compensation expense of $10.9 million and $21.9 million for the three and six months ended March 31, 2023, respectively, compared to $10.9 million and $21.8 million for the same periods in the prior year, respectively.

Restructuring Charges. In the first fiscal quarters of 2023 and 2022, we completed restructuring plans to align strategic and financial objectives and optimize resources for long term growth. As a result of these initiatives, we recorded restructuring

Table of Contents

charges of $8.7 million and $7.9 million related to a reduction in workforce that is reflected in our results for the six months ended March 31, 2023 and 2022, respectively.

						Three months ended March 31,												Six months ended March 31,
						2023						2022						2023						2022
						(in thousands, except percentages)
Other income and income taxes
Income from operations						$	106,046					$	74,647					$	197,258					$	188,798
Other income (expense), net						2,737						(1,934)						7,439						(4,365)
Income before income taxes						108,783						72,713						204,697						184,433
Provision for income taxes						27,347						16,477						50,859						34,638
Net income						$	81,436					$	56,236					$	153,838					$	149,795
Other income and income taxes (as percentage of net revenue)
Income from operations						15.1		%				11.8		%				14.1		%				14.3		%
Other expense, net						0.4						(0.3)						0.5						(0.3)
Income before income taxes						15.5						11.5						14.6						14.0
Provision for income taxes						3.9						2.6						3.6						2.7
Net income						11.6		%				8.9		%				11.0		%				11.3		%

Other Income (Expense), Net. Other income (expense), net consists primarily of interest income and expense and foreign currency transaction gains and losses. The increase in other income (expense), net for the three months ended March 31, 2023 was primarily due to an increase in interest income of $2.7 million from our investments and a decrease in interest expense of $1.3 million compared to the same period in the prior year. The increase in other income (expense), net for the six months ended March 31, 2023 was primarily due to an increase in foreign currency gains of $6.6 million and an increase in interest income of $5.7 million from our investments compared to the same period in the prior year.

Provision for Income Taxes. The effective tax rate was 25.1% and 24.8% for the three and six months ended March 31, 2023, respectively, compared to 22.7% and 18.8% for the three and six months ended March 31, 2022, respectively. The change in the effective tax rate for the three and six months ended March 31, 2023, as compared to the three and six months ended March 31, 2022, is primarily due to the tax impact of stock-based compensation.

We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In making these determinations we consider historical and projected taxable income, and ongoing prudent and feasible tax planning strategies in assessing the appropriateness of a valuation allowance. Our net deferred tax assets at March 31, 2023 and September 30, 2022 were $231.7 million and $180.6 million, respectively. The net deferred tax assets include valuation allowances of $46.7 million and $46.1 million as of March 31, 2023 and September 30, 2022, respectively, which are primarily related to certain state and foreign net operating losses and tax credit carryforwards.

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, the impact of stock-based compensation, 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 $760.0 million as of March 31, 2023, compared to $894.1 million as of September 30, 2022, representing a decrease of $134.1 million. The decrease was primarily due to cash used for the voluntary prepayment of the Term Loan Facility, including the outstanding principal balance of $350.0 million, and all accrued, but unpaid interest outstanding of $3.0 million. In addition, $40.0 million of cash was used for the repurchase of outstanding common stock in the first quarter of fiscal 2023. The decrease was partially offset by cash provided by operating activities of $298.6 million for the six months ended March 31, 2023.

Table of Contents

Cash provided by operating activities for the first six months of fiscal year 2023 resulted from net income of $153.8 million combined with changes in operating assets and liabilities, as adjusted for various non-cash items including stock-based compensation, deferred revenue, depreciation, impairment and amortization charges. Cash provided by operating activities for the first six months of fiscal year 2023 increased from the comparable period in the prior year primarily due to an increase in cash received from customers, which partially offset strong billings and an increase in the balance of accounts receivable.

Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the risks detailed in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q. However, we anticipate our current cash, cash equivalents and investment balances, anticipated cash flows generated from operations, and available borrowing capacity on the Revolver Credit Facility will be sufficient to meet our liquidity needs.

Cash provided by investing activities was $52.4 million for the six months ended March 31, 2023, compared to cash provided by investing activities of $37.9 million for the same period in the prior year. Investing activities include purchases, sales and maturities of available-for-sale securities, business acquisitions and capital expenditures. The amount of cash provided by investing activities for the six months ended March 31, 2023 was primarily the result of $95.8 million in maturities of investments and $16.1 million in sales of investments, partially offset by $35.0 million in cash paid for acquisitions and $23.8 million in capital expenditures related to maintaining our operations worldwide.

Cash used in financing activities was $377.4 million for the six months ended March 31, 2023, compared to cash used in financing activities of $248.2 million for the same period in the prior year. Our financing activities for the six months ended March 31, 2023 primarily consisted of $350.0 million of cash used for the voluntary prepayment of the Term Loan Facility, as well as $40.0 million of cash used to repurchase shares. In addition, $9.8 million in cash was used for taxes related to net share settlement of equity awards. Cash used in financing activities was partially offset by cash received from the exercise of employee stock options and stock purchases under our employee stock purchase plan of $22.5 million.

On January 31, 2020, we entered into a Revolving Credit Agreement (the "Revolving Credit Agreement") that provides for a senior unsecured revolving credit facility in an aggregate principal amount of $350.0 million (the "Revolving Credit Facility"). We have the option to increase commitments under the Revolving Credit Facility from time to time, subject to certain conditions, by up to $150.0 million. As of March 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility, and we had available borrowing capacity of $350.0 million.

Obligations and Commitments

As of March 31, 2023, our principal commitments consisted of obligations outstanding under operating leases and purchase obligations with one of our component suppliers.

We lease our facilities under operating leases that expire at various dates through 2033. There have been no material changes in our principal lease commitments compared to those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

In October 2022, we entered into an unconditional purchase commitment with one of our suppliers for the delivery of systems components. Under the terms of the agreement, we are obligated to purchase $10 million of component inventory annually, with a total committed amount of $40 million over a four-year term. As of March 31, 2023, we have $1.2 million of remaining purchases under the first year of our commitment. Our total non-cancelable long-term purchase commitments outstanding as of March 31, 2023 was $31.2 million.

We have a contractual obligation to purchase inventory components procured by our primary contract manufacturer in accordance with our annual build forecast. The contractual terms of the obligation contain cancellation provisions, which reduce our liability to purchase inventory components for periods greater than one year. In order to support our build forecast, we will, from time-to-time prepay our primary contract manufacturer for inventory purchases.

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.

Table of Contents