F5 10-Q 2023-06-30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-26041

F5, INC.

(Exact name of registrant as specified in its charter)

Washington						91-1714307
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

801 5th Avenue

Seattle, Washington 98104

(Address of principal executive offices and zip code)

(206) 272-5555

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common stock, no par value			FFIV			NASDAQ Global Select Market

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer						☑						Accelerated Filer						☐
Non-accelerated Filer						☐ (Do not check if a smaller reporting company)						Smaller Reporting Company						☐
												Emerging Growth Company						☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares outstanding of the registrant’s common stock as of July 27, 2023 was 59,306,423.

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F5, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2023

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			Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)			4
Consolidated Balance Sheets			4
Consolidated Income Statements			5
Consolidated Statements of Comprehensive Income			6
Consolidated Statements of Shareholders' Equity			7
Consolidated Statements of Cash Flows			9
Notes to Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 4. Mine Safety Disclosures			32
Item 5. Other Information			32
Item 6. Exhibits			32
SIGNATURES			33

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PART I. FINANCIAL INFORMATION

F5, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands)

						June 30, 2023						September 30, 2022
ASSETS
Current assets
Cash and cash equivalents						$	677,498					$	758,012
Short-term investments						13,109						126,554
Accounts receivable, net of allowances of $5,172 and $6,020						439,518						469,979
Inventories						46,102						68,365
Other current assets						537,557						489,314
Total current assets						1,713,784						1,912,224
Property and equipment, net						171,147						168,182
Operating lease right-of-use assets						204,196						227,475
Long-term investments						5,887						9,544
Deferred tax assets						271,171						183,365
Goodwill						2,288,678						2,259,282
Other assets, net						464,293						516,122
Total assets						$	5,119,156					$	5,276,194
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable						$	65,499					$	113,178
Accrued liabilities						274,255						309,819
Deferred revenue						1,149,787						1,067,182
Current portion of long-term debt						—						349,772
Total current liabilities						1,489,541						1,839,951
Deferred tax liabilities						3,883						2,781
Deferred revenue, long-term						641,647						624,398
Operating lease liabilities, long-term						250,077						272,376
Other long-term liabilities						76,505						67,710
Total long-term liabilities						972,112						967,265
Commitments and contingencies (Note 8)
Shareholders' equity
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding						—						—
Common stock, no par value; 200,000 shares authorized, 59,296 and 59,860 shares issued and outstanding						32,519						91,048
Accumulated other comprehensive loss						(21,936)						(26,176)
Retained earnings						2,646,920						2,404,106
Total shareholders' equity						2,657,503						2,468,978
Total liabilities and shareholders' equity						$	5,119,156					$	5,276,194

The accompanying notes are an integral part of these consolidated financial statements.

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F5, INC.

CONSOLIDATED INCOME STATEMENTS

(unaudited, in thousands, except per share data)

						Three months ended June 30,												Nine months ended June 30,
						2023						2022						2023						2022
Net revenues
Products						$	328,175					$	326,482					$	1,009,314					$	967,149
Services						374,467						348,006						1,096,881						1,028,663
Total						702,642						674,488						2,106,195						1,995,812
Cost of net revenues
Products						87,940						73,558						286,590						226,454
Services						53,743						57,175						165,754						165,711
Total						141,683						130,733						452,344						392,165
Gross profit						560,959						543,755						1,653,851						1,603,647
Operating expenses
Sales and marketing						207,202						226,731						673,383						689,592
Research and development						128,765						138,737						412,451						404,846
General and administrative						64,775						70,823						201,802						205,038
Restructuring charges						56,648						—						65,388						7,909
Total						457,390						436,291						1,353,024						1,307,385
Income from operations						103,569						107,464						300,827						296,262
Other income (expense), net						2,896						(6,221)						10,335						(10,586)
Income before income taxes						106,465						101,243						311,162						285,676
Provision for income taxes						17,489						18,224						68,348						52,862
Net income						$	88,976					$	83,019					$	242,814					$	232,814
Net income per share — basic						$	1.48					$	1.38					$	4.04					$	3.85
Weighted average shares — basic						59,977						59,965						60,133						60,450
Net income per share — diluted						$	1.48					$	1.37					$	4.02					$	3.80
Weighted average shares — diluted						60,314						60,460						60,463						61,345

The accompanying notes are an integral part of these consolidated financial statements.

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F5, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

						Three months ended June 30,												Nine months ended June 30,
						2023						2022						2023						2022
Net income						$	88,976					$	83,019					$	242,814					$	232,814
Other comprehensive incom

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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 Distributed Cloud Services 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. 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.

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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 into fiscal 2023, we saw changes in customer buying patterns due to the uncertain macroeconomic environment and resulting customer budget constraints. The impact of these buying patterns has led to softer demand for both our software and systems products and services. We believe the current demand environment is temporary based on several factors, notably the fact that demand for our products and services stems from the growth of applications and APIs. In addition, our stronger than normal maintenance renewals signal delays in purchases as customers extend their maintenance contracts over the products they currently own. This softer demand for new products is brought on by the current macroeconomic uncertainties and related customer budget constraints, rather than architectural shifts or losses to competitors. 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 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 nine 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, $290.0 million of cash was used for the repurchase of outstanding common stock during the nine months ended June 30, 2023. The decrease was partially offset by cash provided by operating activities of $463.6 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 June 30, 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 increased to $1.79 billion as of June 30, 2023 from $1.69 billion as of September 30, 2022 due to an increase in maintenance renewal contracts related to our existing product installation base and the growth of our subscriptions business. Our days sales outstanding for the third quarter of fiscal year 2023 was 56. 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.

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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.

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 June 30,												Nine months ended June 30,
						2023						2022						2023						2022
						(in thousands, except percentages)
Net revenues
Products						$	328,175					$	326,482					$	1,009,314					$	967,149
Services						374,467						348,006						1,096,881						1,028,663
Total						$	702,642					$	674,488					$	2,106,195					$	1,995,812
Percentage of net revenues
Products						46.7		%				48.4		%				47.9		%				48.5		%
Services						53.3						51.6						52.1						51.5
Total						100.0		%				100.0		%				100.0		%				100.0		%

Net Revenues. Total net revenues increased 4.2% and 5.5% for the three and nine months ended June 30, 2023, respectively, from the comparable periods in the prior year. The increase in total net revenues for the three months ended June 30, 2023 was primarily due to an increase in service revenue as a result of continued growth in maintenance contract renewals. Overall revenue growth for the nine months ended June 30, 2023 was primarily due to increases in both product and service revenue. International revenues represented 46.8% and 47.3% of total net revenues for the three and nine months ended June 30, 2023, respectively, compared to 46.0% and 45.6% for the same periods in the prior year, respectively.

Net Product Revenues. Net product revenues increased 0.5% and 4.4% for the three and nine months ended June 30, 2023, respectively, from the comparable periods in the prior year. The increase in net product revenues for the nine months ended June 30, 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 June 30,												Nine months ended June 30,
						2023						2022						2023						2022
						(in thousands, except percentages)
Net product revenues
Systems revenue						$	154,659					$	147,540					$	536,379					$	473,671
Software revenue						173,516						178,942						472,935						493,478
Total net product revenue						$	328,175					$	326,482					$	1,009,314					$	967,149
Percentage of net product revenues
Systems revenue						47.1		%				45.2		%				53.1		%				49.0		%
Software revenue						52.9						54.8						46.9						51.0
Total net product revenue						100.0		%				100.0		%				100.0		%				100.0		%

Net Service Revenues. Net service revenues increased 7.6% and 6.6% for the three and nine months ended June 30, 2023, respectively, from the comparable periods in the prior year. The increase in net service revenues for the three and nine months ended June 30, 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 seeing the benefits of price increases put in place in fiscal 2022.

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

			Three months ended June 30,												Nine months ended June 30,
			2023						2022						2023						2022
Ingram Micro, Inc.			14.3		%				20.7		%				16.1		%				19.9		%
Synnex Corporation			15.8		%				13.4		%				14.7		%				13.3		%
Carahsoft Technology Corporation			10.7		%				—						—						—

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

			June 30, 2023						September 30, 2022
Ingram Micro, Inc.			11.5		%				12.9		%
Synnex Corporation			15.4		%				12.6		%
Carahsoft Technology Corporation			10.7		%				16.2		%

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

						Three months ended June 30,												Nine months ended June 30,
						2023						2022						2023						2022
						(in thousands, except percentages)
Cost of net revenues and gross profit
Products						$	87,940					$	73,558					$	286,590					$	226,454
Services						53,743						57,175						165,754						165,711
Total						141,683						130,733						452,344						392,165
Gross profit						$	560,959					$	543,755					$	1,653,851					$	1,603,647
Percentage of net revenues and gross margin (as a percentage of related net revenue)
Products						26.8		%				22.5		%				28.4		%				23.4		%
Services						14.4						16.4						15.1						16.1
Total						20.2						19.4						21.5						19.6
Gross margin						79.8		%				80.6		%				78.5		%				80.4		%

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 $14.4 million, or 19.6% for the three months ended June 30, 2023 and increased $60.1 million, or 26.6% for the nine months ended June 30, 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 nine months ended June 30, 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 three quarters 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 nine months ended June 30, 2023, cost of net service revenues as a percentage of net service revenues was 14.4% and 15.1%, respectively, compared to 16.4% and 16.1% for the comparable periods in the prior year, respectively. Professional services headcount at the end of June 2023 decreased to 1,045 from 1,083 at the end of June 2022.

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						Three months ended June 30,												Nine months ended June 30,
						2023						2022						2023						2022
						(in thousands, except percentages)
Operating expenses
Sales and marketing						$	207,202					$	226,731					$	673,383					$	689,592
Research and development						128,765						138,737						412,451						404,846
General and administrative						64,775						70,823						201,802						205,038
Restructuring charges						56,648						—						65,388						7,909
Total						$	457,390					$	436,291					$	1,353,024					$	1,307,385
Operating expenses (as a percentage of net revenue)
Sales and marketing						29.5		%				33.6		%				32.0		%				34.5		%
Research and development						18.3						20.6						19.6						20.3
General and administrative						9.2						10.5						9.5						10.3
Restructuring charges						8.1						—						3.1						0.4
Total						65.1		%				64.7		%				64.2		%				65.5		%

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 $19.5 million, or 8.6% for the three months ended June 30, 2023 and decreased $16.2 million, or 2.4% for the nine months ended June 30, 2023 from the comparable periods in the prior year. The decrease in sales and marketing expense for the three and nine months ended June 30, 2023 was primarily due to a decrease of $10.1 million and $8.2 million, respectively, in personnel costs from the comparable periods in the prior year. The decrease in sales and marketing expense for the three and nine months ended June 30, 2023 was also due to a decrease of $2.6 million and $6.6 million, respectively, in marketing spend 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 June 2023 decreased to 2,194 from 2,452 at the end of June 2022. Sales and marketing expenses included stock-based compensation expense of $22.6 million and $75.2 million for the three and nine months ended June 30, 2023, respectively, compared to $25.6 million and $79.9 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 decreased $10.0 million, or 7.2% for the three months ended June 30, 2023 and increased $7.6 million, or 1.9% for the nine months ended June 30, 2023 from the comparable periods in the prior year. The decrease in research and development expense for the three months ended June 30, 2023 was primarily due to a decrease of $7.0 million in personnel costs from the comparable period in the prior year. The increase in research and development expense for the nine months ended June 30, 2023 was primarily related to an increase of $10.1 million in personnel costs from the comparable period in the prior year. Research and development headcount at the end of June 2023 decreased to 2,052 from 2,093 at the end of June 2022. Research and development expenses included stock-based compensation expense of $16.3 million and $53.5 million for the three and nine months ended June 30, 2023, respectively, compared to $17.5 million and $54.3 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 resources and legal personnel, third-party professional service fees, facilities and depreciation expenses. General and administrative expenses decreased $6.0 million, or 8.5% for the three months ended June 30, 2023 and decreased $3.2 million, or 1.6% for the nine months ended June 30, 2023 from the comparable periods in the prior year. General and administrative headcount at the end of June 2023 decreased to 858 from 951 at the end of June 2022. General and administrative expenses included stock-based compensation expense of $10.3 million and $32.2 million for the three and nine months ended June 30, 2023, respectively, compared to $11.6 million and $33.4 million for the same periods in the prior year, respectively.

Restructuring Charges. In the third quarter of fiscal 2023, we initiated a restructuring plan to better align strategic and financial objectives, optimize operations, and drive efficiencies for long-term growth and profitability. We estimate the expenses associated with the headcount reductions will result in annualized savings of approximately $130 million. As a result of these initiatives, we recorded a restructuring charge of $56.7 million related to a reduction in workforce and exit of leased space that is reflected in our results for the three and nine months ended June 30, 2023.

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In the first fiscal quarters of 2023 and 2022, we initiated restructuring plans to align strategic and financial objectives and optimize resources for long term growth. As a result of these initiatives, we recorded restructuring charges of $8.7 million and $7.9 million related to a reduction in workforce that is reflected in our results for the nine months ended June 30, 2023 and 2022, respectively.

						Three months ended June 30,												Nine months ended June 30,
						2023						2022						2023						2022
						(in thousands, except percentages)
Other income and income taxes
Income from operations						$	103,569					$	107,464					$	300,827					$	296,262
Other income (expense), net						2,896						(6,221)						10,335						(10,586)
Income before income taxes						106,465						101,243						311,162						285,676
Provision for income taxes						17,489						18,224						68,348						52,862
Net income						$	88,976					$	83,019					$	242,814					$	232,814
Other income and income taxes (as percentage of net revenue)
Income from operations						14.8		%				15.9		%				14.3		%				14.8		%
Other expense, net						0.4						(0.9)						0.5						(0.5)
Income before income taxes						15.2						15.0						14.8						14.3
Provision for income taxes						2.5						2.7						3.3						2.6
Net income						12.7		%				12.3		%				11.5		%				11.7		%

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 June 30, 2023 was primarily due to an increase in interest income of $5.2 million from our investments and a decrease in interest expense of $2.2 million compared to the same period in the prior year. The increase in other income (expense), net for the nine months ended June 30, 2023 was primarily due to an increase in interest income of $10.9 million from our investments and an increase in foreign currency gains of $8.5 million compared to the same period in the prior year.

Provision for Income Taxes. The effective tax rate was 16.4% and 22.0% for the three and nine months ended June 30, 2023, respectively, compared to 18.0% and 18.5% for the three and nine months ended June 30, 2022, respectively. The decrease in the effective tax rate for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 is primarily due to a discrete impact from filing the Company’s fiscal year 2022 U.S. federal income tax return during the period ended June 30, 2023. The increase in the effective tax rate for the nine months ended June 30, 2023 as compared to the nine months ended June 30, 2022 is primarily due to the tax impact of stock-based compensation and foreign operations, partially offset by a discrete impact from filing the Company’s fiscal year 2022 U.S. federal income tax return during the period ended June 30, 2023.

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 June 30, 2023 and September 30, 2022 were $267.3 million and $180.6 million, respectively. The net deferred tax assets include valuation allowances of $46.0 million and $46.1 million as of June 30, 2023 and September 30, 2022, respectively, which are primarily related to certain state and foreign net operating loss 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.

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Liquidity and Capital Resources

Cash and cash equivalents, short-term investments and long-term investments totaled $696.5 million as of June 30, 2023, compared to $894.1 million as of September 30, 2022, representing a decrease of $197.6 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, $290.0 million of cash was used for the repurchase of outstanding common stock during the nine months ended June 30, 2023. The decrease was partially offset by cash provided by operating activities of $463.6 million for the nine months ended June 30, 2023.

Cash provided by operating activities for the first nine months of fiscal year 2023 resulted from net income of $242.8 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 nine 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 $44.0 million for the nine months ended June 30, 2023, compared to cash provided by investing activities of $147.4 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 nine months ended June 30, 2023 was primarily the result of $103.5 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 $38.8 million in capital expenditures related to maintaining our operations worldwide.

Cash used in financing activities was $591.9 million for the nine months ended June 30, 2023, compared to cash used in financing activities of $470.2 million for the same period in the prior year. Our financing activities for the nine months ended June 30, 2023 primarily consisted of $350.0 million of cash used for the voluntary prepayment of the Term Loan Facility, as well as $290.0 million of cash used to repurchase shares. In addition, $11.4 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 $59.5 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 June 30, 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 June 30, 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 June 30, 2023, we had no remaining purchase commitments under the first year of the agreement. Our total non-cancelable long-term purchase commitments outstanding as of June 30, 2023 was $30.0 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.

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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.

Interest Rate Risk. We maintain an investment portfolio of various holdings, types, and maturities. Our primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. At any time, a sharp rise in market interest rates could have a material adverse impact on the fair value of our fixed income investment portfolio. Conversely, declines in interest rates, including the impact from lower credit spreads, could have a material adverse impact on interest income for our investment portfolio. Our fixed income investments are held for purposes other than trading. Our fixed income investments were not leveraged as of June 30, 2023. We monitor our interest rate and credit risks, including our credit exposures to specific rating categories and to individual issuers. As of June 30, 2023, 2% of our fixed income securities balance consisted of U.S. government and U.S. government agency securities. We believe the overall credit quality of our portfolio is strong.

Inflation Risk. We are actively monitoring the current inflationary environment, but we do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. If the current inflationary environment constrains our customers’ ability to procure goods and services from us, we may see customers reprioritize these investment decisions. These macroeconomic conditions could harm our business, financial condition and results of operations.

Foreign Currency Risk. The majority of our sales, cost of net revenues, and operating expenses are denominated in U.S. dollars and as a result, we have not experienced significant foreign currency transaction gains and losses to date. While we conduct transactions in foreign currencies and expect to continue to do so, we do not anticipate that foreign currency transaction gains or losses will be significant at our current level of operations. However, as we continue to expand our operations internationally, transaction gains or losses may become significant in the future.

Management believes there have been no material changes to our quantitative and qualitative disclosures about market risk during the nine month period ended June 30, 2023, compared to those discussed in our Annual Report on Form 10-K for the year ended September 30, 2022.

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) which are designed to ensure that required information is recorded, processed, summarized and reported within the required timeframe, as specified in the rules set forth by the Securities Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023 and, based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II — OTHER INFORMATION

**Item 1.**Legal Proceedings

See Note 8 - Commitments and Contingencies of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding legal proceedings in which we are involved.

The following information updates, and should be read in conjunction with, the information discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. The risks discussed below and in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. These are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be insignificant also may materially and adversely affect our business, financial condition or operating results in the future.

Continued macroeconomic downturns or uncertainties may harm our industry, business, and results of operations.

We operate globally and as a result, our business, revenues, and profitability may be impacted global macroeconomic conditions. The continuing adverse global macroeconomic conditions and related market uncertainties have, among other things, softened customer demand and customer purchase decisions, which may in turn, limit our ability to forecast future business activities involving our products and services. Prolonged adverse macroeconomic conditions both in the U.S. and abroad, including, but not limited to, rising interest rates to combat inflationary pressures of goods and services, challenges in the financial and credit markets, labor shortages, supply chain disruptions, trade uncertainty, adverse changes in global taxation and tariffs, sanctions, outbreaks of pandemic diseases such as COVID-19, political unrest and social strife, armed conflicts, such as the Russian invasion of Ukraine, or other impacts from the macroeconomic environment have led to a slowing of global economic growth. Continued worsening of macroeconomic conditions could adversely affect our business, financial condition, results of operations and cash flows through, among others, softer demand of our products and services as well as unfavorable increases to our operating costs, which could negatively impact our profitability.

**Item 2.**Unregistered Sales of Equity Securities and Use of Proceeds

On July 25, 2022, the Company announced that its Board of Directors authorized an additional $1.0 billion for its common stock share repurchase program. This authorization is incremental to the existing $5.4 billion program, initially approved in October 2010 and expanded in subsequent fiscal years. Acquisitions for the share repurchase programs will be made from time to time in private transactions, accelerated share repurchase programs, or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time. As of June 30, 2023, the Company had $982 million remaining authorized to purchase shares under its share repurchase program.

Shares repurchased and retired for the three months ended June 30, 2023 are as follows (in thousands, except shares and per share data):

						Total Number of Shares Purchased****1						Average Price Paid per Share						Total Number of Shares Purchased per the Publicly Announced Plan						Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan****2
April 1, 2023 — April 30, 2023						76,271						$	131.13					76,271						$	1,222,481
May 1, 2023 — May 31, 2023						1,611,454						$	137.48					1,599,964						$	1,002,479
June 1, 2023 — June 30, 2023						135,811						$	147.50					135,811						$	982,447

(1)Includes 11,490 shares withheld from restricted stock units that vested in the third quarter of fiscal 2023 to satisfy minimum tax withholding obligations that arose on the vesting of restricted stock units.

(2)Shares withheld from restricted stock units that vested to satisfy minimum tax withholding obligations that arose on the vesting of such awards do not deplete the dollar amount available for purchases under the repurchase program.

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**Item 4.**Mine Safety Disclosures

Not applicable.

Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements

During the three months ended June 30, 2023, certain of our officers and directors adopted or terminated Rule 10b5-1 trading arrangements as follows:

On May 1, 2023, Scot Rogers, EVP, General Counsel, adopted a written plan intended to satisfy the affirmative defense of Rule 10b5-1(c) that is designed to be in effect until March 15, 2024 with respect to the sale of 4,500 Company shares.

On May 1, 2023, Chad Whalen, EVP, Worldwide Sales, adopted a written plan intended to satisfy the affirmative defense of Rule 10b5-1(c) that is designed to be in effect until April 29, 2024 with respect to the sale of 5,585 Company shares (assuming the vesting of the maximum number of shares under certain performance-based equity awards based on maximum performance).

Exhibit Number									Exhibit Description
31.1*			—						Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*			—						Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*			—						Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*			—						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*			—						Inline XBRL Taxonomy Extension Schema Document
101.CAL*			—						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*			—						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*			—						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*			—						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*			—						Cover Page Interactive Data File (embedded within the Inline XBRL document)

• Filed herewith.

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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 4th day of August, 2023.

			F5, INC.
			By:						/s/ FRANCIS J. PELZER
									Francis J. Pelzer
									Executive Vice President,
									Chief Financial Officer
									(principal financial officer and principal accounting officer)