F5 Networks Announces Results for Third Quarter of Fiscal 2008

GAAP net income was $19.1 million ($0.23 per diluted share), compared to $17.7 million ($0.21 per diluted share) in the prior quarter and $21.8 million ($0.26 per diluted share) in the third quarter a year ago.

Excluding the impact of stock-based compensation net of tax, non-GAAP net income was $30.2 million ($0.37 per diluted share), compared to $28.9 million ($0.35 per diluted share) in the prior quarter and $30.3 million ($0.36 per diluted share) in the third quarter of fiscal 2007.

A reconciliation of GAAP net income to non-GAAP net income is included on the attached Consolidated Statements of Operations.

"During the third quarter, we saw continued strengthening in our core application delivery controller (ADC) business," said John McAdam, F5 president and chief executive officer.

"As we anticipated, our chassis-based VIPRION controller was a key driver of product revenue growth. Sales of VIPRION were especially robust among large Internet content and service providers, and we continue to see strong demand heading into the close of fiscal 2008. With VIPRION contributing to strong sales at the high end of our product line, we believe our new entry-level ADC products, announced today, will have a positive impact on our low-end sales. BIG-IP 1600 and BIG-IP 3600 represent the first phase of a complete platform refresh that will roll out during fiscal 2009, delivering higher performance and more functionality across our ADC product line."

Along with solid revenue and earnings growth, balance sheet highlights for the third quarter included a 13 percent increase in deferred revenue to $139 million and $56 million in cash flow from operations. After repurchasing another $50 million of the company's outstanding common stock, F5 ended the quarter with $447 million in cash and investments.

Despite continuing uncertainty in the macroeconomic environment, McAdam said he is encouraged by the company's solid third quarter results and the prospect of further improvement driven by new products. For the current quarter, management has set a revenue goal of $172 million to $174 million with a GAAP earnings target of $0.19 to $0.20 per diluted share. Management's GAAP earnings target includes a charge of $5.3 million related to a loss on facility exit and sublease ($3.3 million net of tax). Excluding this charge and stock-based compensation expense, the company's non-GAAP earnings target is $0.38 to $0.39 per diluted share. A reconciliation of the company's expected GAAP and non-GAAP earnings is provided in the following table:

Three months ended September 30, 2008 Reconciliation of Expected Non- Low High GAAP Fourth Quarter Earnings ---------------------------------------------------------------------- Net income $ 15.5 $ 16.3 Stock-based compensation expense, net of tax 11.9 11.9 Loss on facility exit and sublease, net of tax 3.3 3.3 ---------------- ----------------- Pro forma net income $ 30.7 $ 31.5 ================ ================= Net income per share - diluted $ 0.19 $ 0.20 ================ ================= Pro forma net income per share - diluted $ 0.38 $ 0.39 ================ =================

About F5 Networks

F5 Networks is the global leader in Application Delivery Networking. F5 provides solutions that make applications secure, fast and available for everyone. By adding intelligence and manageability into the network to offload applications and optimize the data storage layer, F5 extends the power of intelligent networking to all levels of application delivery. F5's extensible architecture intelligently integrates application optimization, protects the application and the network, and delivers application reliability. Over 16,000 organizations and service providers worldwide trust F5 to keep their applications running. The company is headquartered in Seattle, Washington with offices worldwide. For more information, go to www.f5.com.

Forward Looking Statements

Statements in this press release concerning the continuing strength of F5's business, sequential growth, the target revenue and earnings range, share amount and share price assumptions, demand for application delivery networking and storage virtualization products and other statements that are not historical facts are forward-looking statements. Such forward-looking statements involve risks and uncertainties, as well as assumptions and other factors that, if they do not fully materialize or prove correct, could cause the actual results, performance or achievements of the company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: customer acceptance of our new traffic management, security, application delivery, WAN optimization and storage virtualization offerings; the timely development, introduction and acceptance of additional new products and features by F5 or its competitors; competitive pricing pressures; increased sales discounts; F5's ability to sustain, develop and effectively utilize distribution relationships; F5's ability to attract, train and retain qualified product development, marketing, sales, professional services and customer support personnel; F5's ability to expand in international markets; the unpredictability of F5's sales cycle; the share repurchase program; future prices of F5's common stock; and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission. All forward-looking statements in this press release are based on information available as of the date hereof and qualified in their entirety by this cautionary statement. F5 assumes no obligation to revise or update these forward-looking statements.

GAAP to non-GAAP Reconciliation

F5's management evaluates and makes operating decisions using various operating measures. These measures are generally based on the revenues of its products, services operations and certain costs of those operations, such as cost of revenues, research and development, sales and marketing and general and administrative expenses. One such measure is net income excluding stock-based compensation, which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended. This measure consists of GAAP net income excluding, as applicable, stock-based compensation. Net income excluding stock-based compensation (non-GAAP) is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability. Stock-based compensation is a non-cash expense that F5 has accounted for since July 1, 2005 in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment."

Management believes that net income excluding stock-based compensation (non-GAAP) provides useful supplemental information to management and investors regarding the performance of the company's business operations and facilitates comparisons to the company's historical operating results. Although F5's management finds this non-GAAP measure to be useful in evaluating the performance of the business, management's reliance on this measure is limited because items excluded from such measures could have a material effect on F5's earnings and earnings per share calculated in accordance with GAAP. Therefore, F5's management will use its non-GAAP earnings and earnings per share measures, in conjunction with GAAP earnings and earnings per share measures, to address these limitations when evaluating the performance of the company's business. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures in accordance with GAAP.

The reconciliation of the company's expected GAAP and non-GAAP fourth quarter earnings also excludes a loss on facility exit and sublease from net income (non-GAAP). This loss will be incurred during the quarter ending September 30, 2008 in connection with the closure of the company's office in Bellevue, Washington and the subleasing of a portion of the office space in the 333 Elliott West building in Seattle, Washington.

F5 believes that presenting its non-GAAP measure of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company's business, which management uses in its own evaluation of the company's performance. Investors are encouraged to look at GAAP results as the best measure of financial performance. For example, stock-based compensation is an obligation of the Company that should be considered and each line item is important to financial performance generally. However, while the GAAP results are more complete, the company provides investors this supplemental measure since, with reconciliation to GAAP, it may provide additional insight into its operational performance and financial results.

F5 Networks, Inc. Condensed Consolidated Balance Sheets (unaudited, in thousands) June 30, September 30, 2008 2007 ------------- ------------- Assets Current assets Cash and cash equivalents $ 109,184 $ 54,296 Short-term investments 158,112 204,169 Accounts receivable, net of allowances of $4,455 and $3,161 98,064 91,774 Inventories 9,662 10,672 Deferred tax assets 5,591 5,305 Other current assets 27,446 20,434 ------------- ------------- Total current assets 408,059 386,650 ------------- ------------- Restricted cash, long-term 2,774 3,959 Property and equipment, net 47,632 36,024 Long-term investments 179,592 216,366 Deferred tax assets 38,909 38,036 Goodwill 231,892 233,997 Other assets, net 25,615 29,256 ------------- ------------- Total assets $ 934,473 $ 944,288 ============= ============= Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 13,159 $ 25,525 Accrued liabilities 37,393 39,990 Deferred revenue 118,693 87,895 ------------- ------------- Total current liabilities 169,245 153,410 ------------- ------------- Other long-term liabilities 12,461 7,679 Deferred revenue, long-term 20,273 12,622 ------------- ------------- Total long-term liabilities 32,734 20,301 ------------- ------------- Commitments and contingencies Shareholders' equity Preferred stock, no par value; 10,000 shares authorized, no shares outstanding - - Common stock, no par value; 200,000 shares authorized 80,232 and 84,379 shares issued and outstanding 510,676 598,436 Accumulated other comprehensive loss (5,517) (564) Retained earnings 227,335 172,705 ------------- ------------- Total shareholders' equity 732,494 770,577 ------------- ------------- Total liabilities and shareholders' equity $ 934,473 $ 944,288 ============= =============

F5 Networks, Inc. Condensed Consolidated Statements of Operations (unaudited, in thousands, except per share amounts) Three Months Ended Nine Months Ended June 30, June 30, ------------------- ------------------- 2008 2007 2008 2007 ------------------- ------------------- Net revenues Products $114,786 $ 97,751 $337,139 $285,939 Services 50,799 34,674 141,771 94,121 --------- --------- --------- --------- Total 165,585 132,425 478,910 380,060 --------- --------- --------- --------- Cost of net revenues (1) Products 26,158 20,770 75,816 60,411 Services 12,020 8,867 34,289 24,565 --------- --------- --------- --------- Total 38,178 29,637 110,105 84,976 --------- --------- --------- --------- Gross Profit 127,407 102,788 368,805 295,084 Operating expenses (1) Sales and marketing 60,483 45,158 176,714 127,390 Research and development 26,277 17,476 77,027 49,101 General and administrative 13,459 12,375 41,369 38,060 --------- --------- --------- --------- Total 100,219 75,009 295,110 214,551 --------- --------- --------- --------- Income from operations 27,188 27,779 73,695 80,533 Other income, net 3,716 7,175 15,437 20,836 --------- --------- --------- --------- Income before income taxes 30,904 34,954 89,132 101,369 Provision for income taxes 11,770 13,145 34,502 37,251 --------- --------- --------- --------- Net Income $ 19,134 $ 21,809 $ 54,630 $ 64,118 ========= ========= ========= ========= Net income per share - basic $ 0.24 $ 0.26 $ 0.66 $ 0.77 Weighted average shares - basic 81,096 83,614 83,218 82,834 ========= ========= ========= ========= Net income per share - diluted $ 0.23 $ 0.26 $ 0.65 $ 0.76 Weighted average shares - diluted 81,951 85,310 84,308 84,832 ========= ========= ========= ========= Non-GAAP Financial Measures Net income as reported $ 19,134 $ 21,809 $ 54,630 $ 64,118 Stock-based compensation expense, net of tax (2) 11,037 8,481 33,310 24,689 --------- --------- --------- --------- Net income excluding stock- based compensation $ 30,171 $ 30,290 $ 87,940 $ 88,807 Net income per share excluding stock-based compensation (non- GAAP) - diluted $ 0.37 $ 0.36 $ 1.04 $ 1.05 ========= ========= ========= ========= Weighted average shares - diluted 81,951 85,310 84,308 84,832 ========= ========= ========= ========= (1) Includes stock-based compensation as follows: Cost of net revenues $ 1,065 $ 622 $ 3,170 $ 1,815 Sales and marketing 5,846 4,040 18,438 11,877 Research and development 4,116 2,562 12,220 7,541 General and administrative 3,790 3,349 11,992 9,774 Tax effect of stock based compensation (3,780) (2,092) (12,510) (6,318) --------- --------- --------- --------- 11,037 8,481 33,310 24,689 ========= ========= ========= ========= (2) Stock-based compensation is accounted for in accordance with Financial Accounting Standards Board Statement No. 123(R), "Share- Based Payments" using the attribution method for recognizing compensation expense. GAAP to non-GAAP Reconciliation --------------------------------------------------------------- F5's management evaluates and makes operating decisions using various operating measures. These measures are generally based on the revenues of its products, services operations and certain costs of those operations, such as costs of revenues, research and development, sales and marketing and general and administrative expenses. One such measure is net income excluding stock-based compensation, which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities and Exchange Act of 1934, as amended. This measure consists of GAAP net income excluding, as applicable, stock-based compensation. Net income excluding stock- based compensation (non-GAAP) is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non- GAAP results instead of GAAP results to calculate the company's tax liability. Stock-based compensation is a non-cash expense that F5 has accounted for since July 1, 2005 in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment." Management believes that net income excluding stock-based compensation (non-GAAP) provides useful supplemental information to management and investors regarding the performance of the company's business operations and facilitates comparisons to the company's historical operating results. Although F5's management finds this non-GAAP measure to be useful in evaluating the performance of the business, management's reliance on this measure is limited, because items excluded from such measures could have a material effect on F5's earnings and earnings per share calculated in accordance with GAAP. Therefore, F5's management will use its non-GAAP earnings and earnings per share measures, in conjunction with GAAP earnings and earnings per share measures, to address these limitations, when evaluating the performance of the company's business. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures in accordance with GAAP. F5 believes that presenting its non-GAAP measure of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company's business, which management uses in its own evaluation of the company's performance. Investors are encouraged to look at GAAP results as the best measure of financial performance. For example, stock-based compensation is an obligation of the company that should be considered and each line item is important to financial performance generally. However, while the GAAP results are more complete, the company provides investors this supplemental measure since, with reconciliation to GAAP, it may provide additional insight into its operational performance and financial results.

SOURCE: F5 Networks, Inc.

F5 Networks, Inc. Investor Relations John Eldridge, 206-272-6571 j.eldridge@f5.com or Public Relations Alane Moran, 206-272-6850 a.moran@f5.com