v2.4.0.8
Document and Entity Information
3 Months Ended
Dec. 31, 2013
Feb. 03, 2014
Document And Entity Information [Abstract]    
Entity Registrant Name F5 NETWORKS INC  
Entity Central Index Key 0001048695  
Current Fiscal Year End Date --09-30  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Period End Date Dec. 31, 2013  
Document Fiscal Year Focus 2014  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Entity Common Stock, Shares Outstanding   75,443,409
v2.4.0.8
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Sep. 30, 2013
ASSETS    
Cash and cash equivalents $ 231,328 $ 189,693
Short-term investments 346,863 352,450
Accounts receivable, net of allowances of $4,326 and $3,259 220,784 204,205
Inventories 19,051 19,026
Deferred tax assets 20,530 16,342
Other current assets 32,387 34,655
Total current assets 870,943 816,371
Property and equipment, net 62,157 63,522
Long-term investments 657,018 728,981
Deferred tax assets 25,714 22,389
Goodwill 523,727 523,727
Other assets, net 75,280 75,564
Total assets 2,214,839 2,230,554
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Accounts payable 38,151 37,313
Accrued liabilities 125,716 92,608
Deferred revenue 450,104 421,429
Total current liabilities 613,971 551,350
Other long-term liabilities 24,176 25,202
Deferred revenue, long-term 117,622 109,944
Deferred tax liabilities 5,000 5,346
Total long-term liabilities 146,798 140,492
Commitments and contingencies (Note 5)      
Shareholders’ equity    
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding 0 0
Common stock, no par value; 200,000 shares authorized, 76,040 and 78,090 shares issued and outstanding 109,949 262,505
Accumulated other comprehensive loss (7,548) (7,414)
Retained earnings 1,351,669 1,283,621
Total shareholders’ equity 1,454,070 1,538,712
Total liabilities and shareholders’ equity $ 2,214,839 $ 2,230,554
v2.4.0.8
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2013
Sep. 30, 2013
Statement of Financial Position [Abstract]    
Accounts receivable, allowances $ 4,326 $ 3,259
Preferred stock, par value (dollars per share) $ 0 $ 0
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares outstanding 0 0
Common stock, par value (dollars per share) $ 0 $ 0
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares issued 76,040,000 78,090,000
Common stock, shares outstanding 76,040,000 78,090,000
v2.4.0.8
Consolidated Income Statements (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Net revenues    
Products $ 218,601 $ 204,712
Services 187,851 160,739
Total 406,452 365,451
Cost of net revenues    
Products 37,244 31,792
Services 35,639 29,093
Total 72,883 60,885
Gross profit 333,569 304,566
Operating expenses    
Sales and marketing 134,803 122,268
Research and development 64,133 48,541
General and administrative 25,500 24,673
Total 224,436 195,482
Income from operations 109,133 109,084
Other income, net 246 1,550
Income before income taxes 109,379 110,634
Provision for income taxes 41,331 41,141
Net income $ 68,048 $ 69,493
Net income per share — basic (dollars per share) $ 0.88 $ 0.88
Weighted average shares — basic (shares) 77,438 78,789
Net income per share — diluted (dollars per share) $ 0.87 $ 0.88
Weighted average shares — diluted (shares) 77,822 79,278
v2.4.0.8
Consolidated Statements Of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Net income $ 68,048 $ 69,493
Other comprehensive loss:    
Foreign currency translation adjustment (576) (257)
Unrealized gains (losses) on securities, net of taxes of $(260) and $266 for the three months ended December 31, 2013 and 2012, respectively 480 (430)
Reclassification adjustment for realized gains included in net income, net of taxes of $22 and $14 for the three months ended December 31, 3013 and 2012, respectively (38) (23)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax 442 (453)
Total other comprehensive loss (134) (710)
Comprehensive income $ 67,914 $ 68,783
v2.4.0.8
Consolidated Statements Of Comprehensive Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Tax effect of unrealized gain (loss) on securities $ (260) $ 266
Tax effect of reclassification adjustment for realized (gains) losses $ 22 $ 14
v2.4.0.8
Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Operating activities    
Net income $ 68,048 $ 69,493
Adjustments to reconcile net income to net cash provided by operating activities:    
Realized (gain) loss on disposition of assets and investments (59) 26
Stock-based compensation 34,528 26,710
Provisions for doubtful accounts and sales returns 1,168 349
Depreciation and amortization 11,437 9,934
Deferred income taxes (8,702) (1,265)
Changes in operating assets and liabilities:    
Accounts receivable (17,746) (24,256)
Inventories (25) (1,313)
Other current assets 2,189 (4,979)
Other assets (1,876) 428
Accounts payable and accrued liabilities 33,611 36,411
Deferred revenue 36,353 33,268
Net cash provided by operating activities 158,926 144,806
Investing activities    
Purchases of investments (147,534) (313,114)
Maturities of investments 168,026 165,193
Sales of investments 54,660 23,020
Increase in restricted cash (6) (728)
Purchases of property and equipment (4,980) (7,788)
Net cash provided by (used in) investing activities 70,166 (133,417)
Financing activities    
Excess tax benefit from stock-based compensation 182 503
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan 13,188 11,583
Repurchase of common stock (200,000) (50,000)
Net cash used in financing activities (186,630) (37,914)
Net increase (decrease) in cash and cash equivalents 42,462 (26,525)
Effect of exchange rate changes on cash and cash equivalents (827) (93)
Cash and cash equivalents, beginning of period 189,693 211,181
Cash and cash equivalents, end of period $ 231,328 $ 184,563
v2.4.0.8
Summary of Significant Accounting Policies
3 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Description of Business
F5 Networks, Inc. (the “Company”) is the leading developer and provider of software-defined application services. The Company’s core technology is a full-proxy, programmable, highly-scalable software platform called TMOS, which supports the industry’s broadest array of features and functions designed to ensure that applications delivered over Internet Protocol (IP) networks are secure, fast and available. The Company’s TMOS-based offerings include software products for local and global traffic management, network and application security, access management, web acceleration and a number of other network and application services. These products are available as modules that can run individually or as part of an integrated solution on the Company’s high-performance, scalable, purpose-built BIG-IP appliances and VIPRION chassis-based hardware, or as software-only Virtual Editions designed to run on standard servers and major hypervisors. In connection with its products, the Company offers a broad range of services including consulting, training, installation, maintenance and other technical support services.
Basis of Presentation
The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair statement in conformity with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013.
Revenue Recognition
The Company sells products through distributors, resellers, and directly to end users. Revenue is recognized provided that all of the following criteria have been met:
Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of a purchase order issued pursuant to the terms and conditions of a distributor, reseller or end user agreement.
Delivery has occurred. The Company uses shipping or related documents, or written evidence of customer acceptance, when applicable, to verify delivery or completion of any performance terms.
The sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.
Collectability is reasonably assured. The Company assesses collectability primarily based on the creditworthiness of the customer as determined by credit checks and related analysis, as well as the Customer’s payment history.
Revenue from the sale of products is generally recognized when the product has been shipped and the customer is obligated to pay for the product. When rights of return are present and the Company cannot estimate returns, revenue is recognized when such rights of return lapse. Payment terms to domestic customers are generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120 days based on normal and customary trade practices in the individual markets. The Company offers extended payment terms to certain customers, in which case, revenue is recognized when payments are due.
Revenues for post-contract customer support (PCS) are recognized on a straight-line basis over the service contract term. PCS includes a limited period of telephone support, updates, repair or replacement of any failed product or component that fails during the term of the agreement, bug fixes and rights to upgrades, when and if available. Consulting services are customarily billed at fixed hourly rates, plus out-of-pocket expenses, and revenues are recognized when the consulting has been completed. Training revenue is recognized when the training has been completed.
Arrangement consideration is first allocated between software (consisting of nonessential and stand-alone software) and non-software deliverables. The majority of the Company’s products are hardware appliances which contain software essential to the overall functionality of the products. Hardware appliances are generally sold with PCS and on occasion, with consulting and/or training services. Arrangement consideration in such multiple element transactions is allocated to each element based on a fair value hierarchy, where the selling price for an element is based on vendor specific objective evidence (VSOE), if available, third-party evidence (TPE), if available and VSOE is not available; or the best estimate of selling price (BESP), if neither VSOE or TPE is available.
For software deliverables, the Company allocates revenue between multiple elements based on software revenue recognition guidance. Software revenue recognition guidance requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on VSOE. Where fair value of delivered elements is not available, revenue is recognized on the “residual method” based on the fair value of undelivered elements. If evidence of fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized at the earlier of the delivery of those elements or the establishment of fair value of the remaining undelivered elements.
The Company establishes VSOE for its products, PCS, consulting and training services based on the sales price charged for each element when sold separately. The sales price is discounted from the applicable list price based on various factors including the type of customer, volume of sales, geographic region and program level. The Company’s list prices are generally not fair value as discounts may be given based on the factors enumerated above. The Company uses historical sales transactions to determine whether VSOE can be established for each of the elements. In most instances, VSOE of fair value is the sales price of actual standalone (unbundled) transactions within the past 12 month period, when a substantial majority of transactions (more than 80%) are priced within a narrow range, which the Company has determined to be plus or minus 15% of the median sales price.
The Company believes that the VSOE of fair value of training and consulting services is represented by the billable rate per hour, based on the rates charged to customers when they purchase standalone training or consulting services. The price of consulting services is not based on the type of customer, volume of sales, geographic region or program level.
The Company is typically not able to determine VSOE or TPE for non-software products. TPE is determined based on competitor prices for similar elements when sold separately. Generally, the Company’s go-to-market strategy differs from that of other competitive products or services in its markets and the Company’s offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine the selling prices on a stand-alone basis of similar products offered by its competitors.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company has been able to establish BESP through the list price, less a discount deemed appropriate to maintain a reasonable gross margin. Management regularly reviews the gross margin information. Non-software product BESP is determined through the Company’s review of historical sales transactions within the past 12 month period. Additional factors considered in determining an appropriate BESP include, but are not limited to, cost of products, pricing practices, geographies, customer classes, and distribution channels.
The Company regularly validates the VSOE of fair value and BESP for elements in its multiple element arrangements. The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis and excluded these amounts from revenues.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. The Company tests goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified, and goodwill is written down when impaired. Goodwill was recorded in connection with the acquisition of Versafe Ltd. in September 2013, LineRate Systems, Inc. in February 2013, Traffix Systems in fiscal year 2012, Acopia Networks, Inc. in fiscal year 2007, Swan Labs, Inc. in fiscal year 2006, MagniFire Websystems, Inc. in fiscal year 2004 and uRoam, Inc. in fiscal year 2003. For its annual goodwill impairment test, the Company operates under one reporting unit and the fair value of its reporting unit is determined by the Company’s enterprise value. The Company performs its annual goodwill impairment test during the second fiscal quarter.
As part of the annual goodwill impairment test, the Company first performs a qualitative assessment to determine whether further impairment testing is necessary. If, as a result of its qualitative assessment, it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of the Company’s reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
Examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the Company’s reporting unit is less than its carrying amount, the provisions of authoritative guidance require that the Company perform a two-step impairment test on goodwill. The first step of the test identifies whether potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of goodwill exceeds its fair value. In March 2013, the Company completed a qualitative assessment of potential impairment indicators and concluded that it was more-likely-than-not that the fair value of its reporting unit exceeded its carrying amount.
Acquired in-process research and development (IPR&D) are intangible assets initially recognized at fair value and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be tested for impairment on an annual basis or more frequently if impairment indicators are identified. IPR&D was recorded in connection with the acquisition of LineRate Systems, Inc. in February 2013.
The Company considered potential impairment indicators of goodwill and acquired intangible assets at December 31, 2013 and noted no indicators of impairment.
Stock-Based Compensation
The Company accounts for stock-based compensation using the straight-line attribution method for recognizing compensation expense. The Company recognized $34.5 million and $26.7 million of stock-based compensation expense for the three months ended December 31, 2013 and 2012, respectively. As of December 31, 2013, there was $166.1 million of total unrecognized stock-based compensation cost, the majority of which will be recognized over the next two years. Going forward, stock-based compensation expenses may increase as the Company issues additional equity-based awards to continue to attract and retain key employees.
The Company issues incentive awards to its employees through stock-based compensation consisting of restricted stock units (RSUs). On October 29, 2013, the Company’s Compensation Committee approved 1,467,871 RSUs to employees and executive officers pursuant to the Company’s annual equity awards program. The value of RSUs is determined using the fair value method, which in this case, is based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.
The Company recognizes compensation expense for only the portion of restricted stock units that are expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior. Based on historical differences with forfeitures of stock-based awards granted to the Company’s executive officers and Board of Directors versus grants awarded to all other employees, the Company has developed separate forfeiture expectations for these two groups. The Company’s estimated forfeiture rate in the first quarter of fiscal year 2014 is 6.6% for grants awarded to the Company’s executive officers and Board of Directors, and 6.9% for grants awarded to all other employees. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
In November 2013, the Company granted 231,320 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2017. One-eighth of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2014. In each case, 70% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 30% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 37.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2015, 2016 and 2017 (12.5% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.
In November 2012, the Company granted 290,415 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2016. One-eighth of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2013. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 37.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2014, 2015 and 2016 (12.5% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.
In November 2011, as part of the annual review of executive compensation by the Compensation Committee of the Board of Directors and a change in the grant date for the Company’s annual equity awards program for the executive officers from August 1 to November 1, the Company granted 82,968 RSUs to certain current executive officers. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over three years, until such portion of the grant is fully vested on November 1, 2014. One-sixth of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2012. The remaining 33.33% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2013 and 2014 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.
In August 2011, the Company granted 170,390 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs granted as part of the annual equity awards program vest in equal quarterly increments over three years, until such portion of the grant is fully vested on August 1, 2014. One-sixth of the annual equity awards RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during the period beginning in the fourth quarter of fiscal year 2011 through the third quarter of fiscal year 2012. The remaining 33.33% of this annual equity awards RSU grant shall be subject to performance based vesting for each of the four quarter periods beginning with the fourth quarters of fiscal years 2012 and 2013 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.
The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs based on the probability assessment.
Common Stock Repurchase
On November 22, 2013, the Company announced that its Board of Directors authorized an additional $300 million for its common stock share repurchase program. This new authorization is incremental to the existing $800 million program, initially approved in October 2010 and expanded in August 2011, October 2011 and April 2013. Acquisitions for the share repurchase programs will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time.
Earnings Per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. The Company’s nonvested restricted stock awards and restricted stock units do not have nonforfeitable rights to dividends or dividend equivalents and are not considered participating securities that should be included in the computation of earnings per share under the two-class method.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
 
 
 
Three months ended
December 31,
 
 
2013
 
2012
Numerator
 
 
 
 
Net income
 
$
68,048

 
$
69,493

Denominator
 
 
 
 
Weighted average shares outstanding — basic
 
77,438

 
78,789

Dilutive effect of common shares from stock options and restricted stock units
 
384

 
489

Weighted average shares outstanding — diluted
 
77,822

 
79,278

Basic net income per share
 
$
0.88

 
$
0.88

Diluted net income per share
 
$
0.87

 
$
0.88


An immaterial amount of common shares potentially issuable from stock options for the three months ended December 31, 2013 and 2012, are excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of common stock for the respective period.
Comprehensive Income
Comprehensive income includes certain changes in equity that are excluded from net income. Specifically, unrealized gains or losses on securities and foreign currency translation adjustments are included in accumulated other comprehensive loss.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-2, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-2), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-2 requires presentation, either on the face of the financial statements or in the notes, of amounts reclassified out of accumulated other comprehensive income by component and by net income line item. ASU 2013-2 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted ASU 2013-2 in the first quarter of fiscal 2014. The adoption of ASU 2013-2 did not have a significant impact on the Company's consolidated financial statements, but did require additional disclosures.
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Fair Value Measurements
3 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances and expands disclosure about fair value measurements.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date, essentially the exit price.
The levels of fair value hierarchy are:
Level 1: Quoted prices in active markets for identical assets and liabilities at the measurement date that the Company has the ability to access.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Unobservable inputs for which there is little or no market data available. These inputs reflect management’s assumptions of what market participants would use in pricing the asset or liability.
Level 1 investments are valued based on quoted market prices in active markets and include the Company’s cash equivalent investments. Level 2 investments, which include investments that are valued based on quoted prices in markets that are not active, broker or dealer quotations, actual trade data, benchmark yields or alternative pricing sources with reasonable levels of price transparency, include the Company’s certificates of deposit, corporate bonds and notes, municipal bonds and notes, U.S. government securities and U.S. government agency securities. Fair values for the Company’s level 2 investments are based on similar assets without applying significant judgments. In addition, all of the Company’s level 2 investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments.
A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at December 31, 2013, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at December 31,
2013
Cash equivalents
 
$
37,071

 
$

 
$

 
$
37,071

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
111,705

 

 
111,705

Available-for-sale securities — municipal bonds and notes
 

 
60,906

 

 
60,906

Available-for-sale securities — U.S. government securities
 

 
5,000

 

 
5,000

Available-for-sale securities — U.S. government agency securities
 

 
169,252

 

 
169,252

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
274,196

 

 
274,196

Available-for-sale securities — municipal bonds and notes
 

 
26,307

 

 
26,307

Available-for-sale securities — U.S. government securities
 

 
12,395

 

 
12,395

Available-for-sale securities — U.S. government agency securities
 

 
344,120

 

 
344,120

Total
 
$
37,071

 
$
1,003,881

 
$

 
$
1,040,952


The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at September 30, 2013, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at
September 30,
2013
Cash equivalents
 
$
13,145

 
$

 
$

 
$
13,145

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
125,212

 

 
125,212

Available-for-sale securities — municipal bonds and notes
 

 
72,164

 

 
72,164

Available-for-sale securities — U.S. government securities
 

 
5,000

 
 
 
5,000

Available-for-sale securities — U.S. government agency securities
 

 
150,074

 

 
150,074

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
260,318

 

 
260,318

Available-for-sale securities — municipal bonds and notes
 

 
24,371

 

 
24,371

Available-for-sale securities — U.S. government securities
 

 
14,798

 

 
14,798

Available-for-sale securities — U.S. government agency securities
 

 
426,458

 

 
426,458

Available-for-sale securities — auction rate securities
 

 

 
3,036

 
3,036

Total
 
$
13,145

 
$
1,078,395

 
$
3,036

 
$
1,094,576


The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands):
 
 
 
Three months ended
December 31,
 
 
2013
 
2012
Balance, beginning of period
 
$
3,036

 
$
4,750

Total gains (losses) realized or unrealized:
 
 
 
 
Included in other comprehensive income
 
264

 
(150
)
Settlements
 
(3,300
)
 

Balance, end of period
 
$

 
$
4,600

Unrealized losses attributable to assets still held as of end of period
 

 
(150
)

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable or there is limited market activity such that the determination of fair value requires significant judgment or estimation.
The Company uses the fair value hierarchy for financial assets and liabilities. The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be carried at fair value on a recurring basis. These non-financial assets and liabilities are measured at fair value on a non-recurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. The Company reviews goodwill and intangible assets for impairment annually, during the second quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable. During the three months ended December 31, 2013, the Company did not recognize any impairment charges related to goodwill, intangible assets, or long-lived assets.
v2.4.0.8
Short-Term and Long-Term Investments
3 Months Ended
Dec. 31, 2013
Investments, Debt and Equity Securities [Abstract]  
Short-Term and Long-Term Investments
Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
 
December 31, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
111,530

 
$
182

 
$
(7
)
 
$
111,705

Municipal bonds and notes
 
60,859

 
58

 
(11
)
 
60,906

U.S. government securities
 
5,000

 

 

 
5,000

U.S. government agency securities
 
169,204

 
65

 
(17
)
 
169,252

 
 
$
346,593

 
$
305

 
$
(35
)
 
$
346,863

 
September 30, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
125,010

 
$
210

 
$
(8
)
 
$
125,212

Municipal bonds and notes
 
72,116

 
58

 
(10
)
 
72,164

U.S. government securities
 
4,998

 
2

 

 
5,000

U.S. government agency securities
 
150,069

 
15

 
(10
)
 
150,074

 
 
$
352,193

 
$
285

 
$
(28
)
 
$
352,450


Long-term investments consist of the following (in thousands):
 
December 31, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
273,876

 
$
541

 
$
(221
)
 
$
274,196

Municipal bonds and notes
 
26,277

 
35

 
(5
)
 
26,307

U.S. government securities
 
12,358

 
37

 

 
12,395

U.S. government agency securities
 
344,185

 
203

 
(268
)
 
344,120

 
 
$
656,696

 
$
816

 
$
(494
)
 
$
657,018

 
September 30, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
260,345

 
$
363

 
$
(390
)
 
$
260,318

Municipal bonds and notes
 
24,332

 
44

 
(5
)
 
24,371

Auction rate securities
 
3,300

 

 
(264
)
 
3,036

U.S. government securities
 
14,755

 
43

 

 
14,798

U.S. government agency securities
 
426,616

 
294

 
(452
)
 
426,458

 
 
$
729,348

 
$
744

 
$
(1,111
)
 
$
728,981


The amortized cost and fair value of fixed maturities at December 31, 2013, by contractual years-to-maturity, are presented below (in thousands):
 
 
 
Cost or
Amortized
Cost
 
Fair Value
One year or less
 
$
346,593

 
$
346,863

Over one year
 
656,696

 
657,018

 
 
$
1,003,289

 
$
1,003,881


The following table summarizes investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for more than 12 months as of December 31, 2013 (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
December 31, 2013
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
 
$
89,781

 
$
(223
)
 
$
15,393

 
$
(5
)
 
$
105,174

 
$
(228
)
Municipal bonds and notes
 
16,411

 
(16
)
 

 

 
16,411

 
(16
)
U.S. government agency securities
 
272,915

 
(263
)
 
23,497

 
(22
)
 
296,412

 
(285
)
Total
 
$
379,107

 
$
(502
)
 
$
38,890

 
$
(27
)
 
$
417,997

 
$
(529
)

The Company invests in securities that are rated investment grade or better. The Company reviews the individual securities in its portfolio to determine whether a decline in a security's fair value below the amortized cost basis is other-than-temporary. The Company determined that as of December 31, 2013, there were no investments in its portfolio that were other-than-temporarily impaired.
v2.4.0.8
Inventories
3 Months Ended
Dec. 31, 2013
Inventory Disclosure [Abstract]  
Inventories
Inventories
The Company outsources the manufacturing of its pre-configured hardware platforms to contract manufacturers, who assemble each product to the Company’s specifications. As protection against component shortages and to provide replacement parts for its service teams, the Company also stocks limited supplies of certain key product components. The Company reduces inventory to net realizable value based on excess and obsolete inventories determined primarily by historical usage and forecasted demand. Inventories consist of hardware and related component parts and are recorded at the lower of cost or market (as determined by the first-in, first-out method).
Inventories consist of the following (in thousands):
 
 
 
December 31,
2013
 
September 30,
2013
Finished goods
 
$
13,417

 
$
13,509

Raw materials
 
5,634

 
5,517

 
 
$
19,051

 
$
19,026

v2.4.0.8
Commitments and Contingencies
3 Months Ended
Dec. 31, 2013
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Guarantees and Product Warranties
In the normal course of business to facilitate sales of its products, the Company indemnifies other parties, including customers, resellers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to the Company’s agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.
The Company offers warranties of one year for hardware for those customers without service contracts, with the option of purchasing additional warranty coverage in yearly increments. The Company accrues for warranty costs as part of its cost of sales based on associated material product costs and technical support labor costs. Accrued warranty costs as of December 31, 2013 and December 31, 2012 were not material.
Commitments
As of December 31, 2013, the Company’s principal commitments consisted of obligations outstanding under operating leases. The Company leases its facilities under operating leases that expire at various dates through 2023. There have been no material changes in the Company’s principal lease commitments compared to those discussed in Note 8 to its annual financial statements.
The Company currently has arrangements with contract manufacturers and other suppliers for the manufacturing of its products. The arrangement with the primary contract manufacturer allows them to procure component inventory on the Company’s behalf based on a rolling production forecast provided by the Company. The Company is obligated to the purchase of component inventory that the contract manufacturer procures in accordance with the forecast, unless they give notice of order cancellation in advance of applicable lead times. There have been no material changes in the Company's inventory purchase obligations compared to those discussed in Note 8 to its annual financial statements.
Legal Proceedings
The Company is not aware of any pending legal proceedings that, individually or in the aggregate, are reasonably possible to have a material adverse effect on the Company’s business, operating results, or financial condition. The Company is subject to a variety of other claims and suits that arise from time to time in the ordinary course of business. Although management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
v2.4.0.8
Income Taxes
3 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The effective tax rate was 37.8% and 37.2% for the three months ended December 31, 2013 and 2012, respectively. The increase in the effective tax rate is primarily due to state income taxes and non-deductible stock-based compensation expense.
At December 31, 2013, the Company had $7.3 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. It is anticipated that the Company’s existing liabilities for unrecognized tax benefits will change within the next twelve months due to audit settlements or the expiration of statutes of limitations. The Company does not expect these changes to be material to the consolidated financial statements.  The Company recognizes interest and, if applicable, penalties for any uncertain tax positions as a component of income tax expense.
The Company and its subsidiaries are subject to U.S. federal income tax as well as the income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for fiscal years through September 30, 2009. The Company is in the process of completing an IRS audit for fiscal year 2011. The Company is also currently under audit by various states for fiscal years 2009 through 2012. Major jurisdictions where there are wholly owned subsidiaries of F5 Networks, Inc. which require income tax filings include the United Kingdom, Japan, Singapore and Australia. The earliest periods open for review by local taxing authorities are fiscal years 2012 for the United Kingdom, 2007 for Japan, 2008 for Singapore, and 2009 for Australia. Within the next four fiscal quarters, the statute of limitations will begin to close on the fiscal years 2009 and 2010 state income tax returns, and the fiscal year 2010 federal income tax return.
v2.4.0.8
Geographic Sales and Significant Customers
3 Months Ended
Dec. 31, 2013
Segment Reporting [Abstract]  
Geographic Sales and Significant Customers
Geographic Sales and Significant Customers
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Management has determined that the Company is organized as, and operates in, one reportable operating segment: the development, marketing and sale of application delivery networking products that optimize the security, performance and availability of network applications, servers and storage systems.
The Company does business in four main geographic regions: the Americas (primarily the United States); Europe, the Middle East, and Africa (EMEA); Japan; and the Asia Pacific region (APAC). The Company’s chief operating decision-making group reviews financial information presented on a consolidated basis accompanied by information about revenues by geographic region. The Company’s foreign offices conduct sales, marketing and support activities. Revenues are attributed by geographic location based on the location of the customer. The Company’s assets are primarily located in the United States. Therefore, geographic information is presented only for net revenue.
The following presents revenues by geographic region (in thousands):
 
 
 
Three months ended
December 31,
 
 
2013
 
2012
Americas:
 
 
 
 
United States
 
$
205,611

 
$
194,838

Other
 
21,046

 
18,179

Total Americas
 
226,657

 
213,017

EMEA
 
97,348

 
82,858

Japan
 
21,050

 
18,043

Asia Pacific
 
61,397

 
51,533

 
 
$
406,452

 
$
365,451


Three worldwide distributors of the Company’s products accounted for 14.3%, 17.9%, and 13.5% of total net revenue for the three month period ended December 31, 2013. Three worldwide distributors of the Company’s products accounted for 16.9%, 15.2%, and 11.0% of total net revenue for the three month period ended December 31, 2012. Three worldwide distributors accounted for 16.1%, 12.0% and 11.0% of the Company’s accounts receivable as of December 31, 2013. Two worldwide distributors accounted for 11.2% and 10.3% of the Company’s accounts receivable as of December 31, 2012. No other distributors accounted for more than 10% of total net revenue or receivables.
v2.4.0.8
Subsequent Events
3 Months Ended
Dec. 31, 2013
Subsequent Events [Abstract]  
Subsequent Events
8. Subsequent Events
On January 22, 2014, the Company announced that its Board of Directors authorized an additional $500 million for its common stock share repurchase program. This new authorization is incremental to the existing $1.1 billion program, initially approved in October 2010 and expanded in August 2011, October 2011, April 2013 and November 2013. Acquisitions for the share repurchase programs will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time. As of February 3, 2014, the Company had repurchased and retired 14,872,785 shares at an average price of $75.65 per share and the Company had $674.2 million remaining to purchase shares as part of its repurchase programs.
v2.4.0.8
Summary of Significant Accounting Policies (Policy)
3 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
Description of Business
Description of Business
F5 Networks, Inc. (the “Company”) is the leading developer and provider of software-defined application services. The Company’s core technology is a full-proxy, programmable, highly-scalable software platform called TMOS, which supports the industry’s broadest array of features and functions designed to ensure that applications delivered over Internet Protocol (IP) networks are secure, fast and available. The Company’s TMOS-based offerings include software products for local and global traffic management, network and application security, access management, web acceleration and a number of other network and application services. These products are available as modules that can run individually or as part of an integrated solution on the Company’s high-performance, scalable, purpose-built BIG-IP appliances and VIPRION chassis-based hardware, or as software-only Virtual Editions designed to run on standard servers and major hypervisors. In connection with its products, the Company offers a broad range of services including consulting, training, installation, maintenance and other technical support services.
Basis of Presentation
Basis of Presentation
The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair statement in conformity with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013.
Revenue Recognition
Revenue Recognition
The Company sells products through distributors, resellers, and directly to end users. Revenue is recognized provided that all of the following criteria have been met:
Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of a purchase order issued pursuant to the terms and conditions of a distributor, reseller or end user agreement.
Delivery has occurred. The Company uses shipping or related documents, or written evidence of customer acceptance, when applicable, to verify delivery or completion of any performance terms.
The sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.
Collectability is reasonably assured. The Company assesses collectability primarily based on the creditworthiness of the customer as determined by credit checks and related analysis, as well as the Customer’s payment history.
Revenue from the sale of products is generally recognized when the product has been shipped and the customer is obligated to pay for the product. When rights of return are present and the Company cannot estimate returns, revenue is recognized when such rights of return lapse. Payment terms to domestic customers are generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120 days based on normal and customary trade practices in the individual markets. The Company offers extended payment terms to certain customers, in which case, revenue is recognized when payments are due.
Revenues for post-contract customer support (PCS) are recognized on a straight-line basis over the service contract term. PCS includes a limited period of telephone support, updates, repair or replacement of any failed product or component that fails during the term of the agreement, bug fixes and rights to upgrades, when and if available. Consulting services are customarily billed at fixed hourly rates, plus out-of-pocket expenses, and revenues are recognized when the consulting has been completed. Training revenue is recognized when the training has been completed.
Arrangement consideration is first allocated between software (consisting of nonessential and stand-alone software) and non-software deliverables. The majority of the Company’s products are hardware appliances which contain software essential to the overall functionality of the products. Hardware appliances are generally sold with PCS and on occasion, with consulting and/or training services. Arrangement consideration in such multiple element transactions is allocated to each element based on a fair value hierarchy, where the selling price for an element is based on vendor specific objective evidence (VSOE), if available, third-party evidence (TPE), if available and VSOE is not available; or the best estimate of selling price (BESP), if neither VSOE or TPE is available.
For software deliverables, the Company allocates revenue between multiple elements based on software revenue recognition guidance. Software revenue recognition guidance requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on VSOE. Where fair value of delivered elements is not available, revenue is recognized on the “residual method” based on the fair value of undelivered elements. If evidence of fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized at the earlier of the delivery of those elements or the establishment of fair value of the remaining undelivered elements.
The Company establishes VSOE for its products, PCS, consulting and training services based on the sales price charged for each element when sold separately. The sales price is discounted from the applicable list price based on various factors including the type of customer, volume of sales, geographic region and program level. The Company’s list prices are generally not fair value as discounts may be given based on the factors enumerated above. The Company uses historical sales transactions to determine whether VSOE can be established for each of the elements. In most instances, VSOE of fair value is the sales price of actual standalone (unbundled) transactions within the past 12 month period, when a substantial majority of transactions (more than 80%) are priced within a narrow range, which the Company has determined to be plus or minus 15% of the median sales price.
The Company believes that the VSOE of fair value of training and consulting services is represented by the billable rate per hour, based on the rates charged to customers when they purchase standalone training or consulting services. The price of consulting services is not based on the type of customer, volume of sales, geographic region or program level.
The Company is typically not able to determine VSOE or TPE for non-software products. TPE is determined based on competitor prices for similar elements when sold separately. Generally, the Company’s go-to-market strategy differs from that of other competitive products or services in its markets and the Company’s offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine the selling prices on a stand-alone basis of similar products offered by its competitors.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company has been able to establish BESP through the list price, less a discount deemed appropriate to maintain a reasonable gross margin. Management regularly reviews the gross margin information. Non-software product BESP is determined through the Company’s review of historical sales transactions within the past 12 month period. Additional factors considered in determining an appropriate BESP include, but are not limited to, cost of products, pricing practices, geographies, customer classes, and distribution channels.
The Company regularly validates the VSOE of fair value and BESP for elements in its multiple element arrangements. The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis and excluded these amounts from revenues.
Goodwill and Acquired Intangible Assets
Goodwill and Acquired Intangible Assets
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. The Company tests goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified, and goodwill is written down when impaired. Goodwill was recorded in connection with the acquisition of Versafe Ltd. in September 2013, LineRate Systems, Inc. in February 2013, Traffix Systems in fiscal year 2012, Acopia Networks, Inc. in fiscal year 2007, Swan Labs, Inc. in fiscal year 2006, MagniFire Websystems, Inc. in fiscal year 2004 and uRoam, Inc. in fiscal year 2003. For its annual goodwill impairment test, the Company operates under one reporting unit and the fair value of its reporting unit is determined by the Company’s enterprise value. The Company performs its annual goodwill impairment test during the second fiscal quarter.
As part of the annual goodwill impairment test, the Company first performs a qualitative assessment to determine whether further impairment testing is necessary. If, as a result of its qualitative assessment, it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of the Company’s reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
Examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the Company’s reporting unit is less than its carrying amount, the provisions of authoritative guidance require that the Company perform a two-step impairment test on goodwill. The first step of the test identifies whether potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of goodwill exceeds its fair value. In March 2013, the Company completed a qualitative assessment of potential impairment indicators and concluded that it was more-likely-than-not that the fair value of its reporting unit exceeded its carrying amount.
Acquired in-process research and development (IPR&D) are intangible assets initially recognized at fair value and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be tested for impairment on an annual basis or more frequently if impairment indicators are identified. IPR&D was recorded in connection with the acquisition of LineRate Systems, Inc. in February 2013.
The Company considered potential impairment indicators of goodwill and acquired intangible assets at December 31, 2013 and noted no indicators of impairment.
Stock-Based Compensation
Stock-Based Compensation
The Company accounts for stock-based compensation using the straight-line attribution method for recognizing compensation expense. The Company recognized $34.5 million and $26.7 million of stock-based compensation expense for the three months ended December 31, 2013 and 2012, respectively. As of December 31, 2013, there was $166.1 million of total unrecognized stock-based compensation cost, the majority of which will be recognized over the next two years. Going forward, stock-based compensation expenses may increase as the Company issues additional equity-based awards to continue to attract and retain key employees.
The Company issues incentive awards to its employees through stock-based compensation consisting of restricted stock units (RSUs). On October 29, 2013, the Company’s Compensation Committee approved 1,467,871 RSUs to employees and executive officers pursuant to the Company’s annual equity awards program. The value of RSUs is determined using the fair value method, which in this case, is based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.
The Company recognizes compensation expense for only the portion of restricted stock units that are expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior. Based on historical differences with forfeitures of stock-based awards granted to the Company’s executive officers and Board of Directors versus grants awarded to all other employees, the Company has developed separate forfeiture expectations for these two groups. The Company’s estimated forfeiture rate in the first quarter of fiscal year 2014 is 6.6% for grants awarded to the Company’s executive officers and Board of Directors, and 6.9% for grants awarded to all other employees. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
In November 2013, the Company granted 231,320 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2017. One-eighth of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2014. In each case, 70% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 30% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 37.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2015, 2016 and 2017 (12.5% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.
In November 2012, the Company granted 290,415 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2016. One-eighth of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2013. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 37.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2014, 2015 and 2016 (12.5% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.
In November 2011, as part of the annual review of executive compensation by the Compensation Committee of the Board of Directors and a change in the grant date for the Company’s annual equity awards program for the executive officers from August 1 to November 1, the Company granted 82,968 RSUs to certain current executive officers. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over three years, until such portion of the grant is fully vested on November 1, 2014. One-sixth of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2012. The remaining 33.33% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2013 and 2014 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.
In August 2011, the Company granted 170,390 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs granted as part of the annual equity awards program vest in equal quarterly increments over three years, until such portion of the grant is fully vested on August 1, 2014. One-sixth of the annual equity awards RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during the period beginning in the fourth quarter of fiscal year 2011 through the third quarter of fiscal year 2012. The remaining 33.33% of this annual equity awards RSU grant shall be subject to performance based vesting for each of the four quarter periods beginning with the fourth quarters of fiscal years 2012 and 2013 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.
The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs based on the probability assessment.
Common Stock Repurchase
Common Stock Repurchase
On November 22, 2013, the Company announced that its Board of Directors authorized an additional $300 million for its common stock share repurchase program. This new authorization is incremental to the existing $800 million program, initially approved in October 2010 and expanded in August 2011, October 2011 and April 2013. Acquisitions for the share repurchase programs will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time.
Earnings Per Share
Earnings Per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. The Company’s nonvested restricted stock awards and restricted stock units do not have nonforfeitable rights to dividends or dividend equivalents and are not considered participating securities that should be included in the computation of earnings per share under the two-class method.
Comprehensive Income
Comprehensive Income
Comprehensive income includes certain changes in equity that are excluded from net income. Specifically, unrealized gains or losses on securities and foreign currency translation adjustments are included in accumulated other comprehensive loss.
Recent Accounting Pronouncements
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-2, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-2), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-2 requires presentation, either on the face of the financial statements or in the notes, of amounts reclassified out of accumulated other comprehensive income by component and by net income line item. ASU 2013-2 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted ASU 2013-2 in the first quarter of fiscal 2014. The adoption of ASU 2013-2 did not have a significant impact on the Company's consolidated financial statements, but did require additional disclosures.
v2.4.0.8
Summary of Significant Accounting Policies (Tables)
3 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
Schedule of Computation of Basic and Diluted Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
 
 
 
Three months ended
December 31,
 
 
2013
 
2012
Numerator
 
 
 
 
Net income
 
$
68,048

 
$
69,493

Denominator
 
 
 
 
Weighted average shares outstanding — basic
 
77,438

 
78,789

Dilutive effect of common shares from stock options and restricted stock units
 
384

 
489

Weighted average shares outstanding — diluted
 
77,822

 
79,278

Basic net income per share
 
$
0.88

 
$
0.88

Diluted net income per share
 
$
0.87

 
$
0.88

v2.4.0.8
Fair Value Measurements (Tables)
3 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
Schedule of Financial Assets Measured at Fair Value on a Recurring Basis
The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at December 31, 2013, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at December 31,
2013
Cash equivalents
 
$
37,071

 
$

 
$

 
$
37,071

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
111,705

 

 
111,705

Available-for-sale securities — municipal bonds and notes
 

 
60,906

 

 
60,906

Available-for-sale securities — U.S. government securities
 

 
5,000

 

 
5,000

Available-for-sale securities — U.S. government agency securities
 

 
169,252

 

 
169,252

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
274,196

 

 
274,196

Available-for-sale securities — municipal bonds and notes
 

 
26,307

 

 
26,307

Available-for-sale securities — U.S. government securities
 

 
12,395

 

 
12,395

Available-for-sale securities — U.S. government agency securities
 

 
344,120

 

 
344,120

Total
 
$
37,071

 
$
1,003,881

 
$

 
$
1,040,952


The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at September 30, 2013, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at
September 30,
2013
Cash equivalents
 
$
13,145

 
$

 
$

 
$
13,145

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
125,212

 

 
125,212

Available-for-sale securities — municipal bonds and notes
 

 
72,164

 

 
72,164

Available-for-sale securities — U.S. government securities
 

 
5,000

 
 
 
5,000

Available-for-sale securities — U.S. government agency securities
 

 
150,074

 

 
150,074

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
260,318

 

 
260,318

Available-for-sale securities — municipal bonds and notes
 

 
24,371

 

 
24,371

Available-for-sale securities — U.S. government securities
 

 
14,798

 

 
14,798

Available-for-sale securities — U.S. government agency securities
 

 
426,458

 

 
426,458

Available-for-sale securities — auction rate securities
 

 

 
3,036

 
3,036

Total
 
$
13,145

 
$
1,078,395

 
$
3,036

 
$
1,094,576

Schedule of Reconciliation of Items Measured at Fair Value on a Recurring Basis That Used Significant Unobservable Inputs (Level 3)
The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands):
 
 
 
Three months ended
December 31,
 
 
2013
 
2012
Balance, beginning of period
 
$
3,036

 
$
4,750

Total gains (losses) realized or unrealized:
 
 
 
 
Included in other comprehensive income
 
264

 
(150
)
Settlements
 
(3,300
)
 

Balance, end of period
 
$

 
$
4,600

Unrealized losses attributable to assets still held as of end of period
 

 
(150
)
v2.4.0.8
Short-Term and Long-Term Investments (Tables)
3 Months Ended
Dec. 31, 2013
Schedule of Investments [Line Items]  
Schedule of Amortized Cost and Fair Value of Fixed Maturities by Contractual Years-To-Maturity
The amortized cost and fair value of fixed maturities at December 31, 2013, by contractual years-to-maturity, are presented below (in thousands):
 
 
 
Cost or
Amortized
Cost
 
Fair Value
One year or less
 
$
346,593

 
$
346,863

Over one year
 
656,696

 
657,018

 
 
$
1,003,289

 
$
1,003,881

Schedule of Investments That Have Been in a Continuous Unrealized Loss Position
The following table summarizes investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for more than 12 months as of December 31, 2013 (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
December 31, 2013
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
 
$
89,781

 
$
(223
)
 
$
15,393

 
$
(5
)
 
$
105,174

 
$
(228
)
Municipal bonds and notes
 
16,411

 
(16
)
 

 

 
16,411

 
(16
)
U.S. government agency securities
 
272,915

 
(263
)
 
23,497

 
(22
)
 
296,412

 
(285
)
Total
 
$
379,107

 
$
(502
)
 
$
38,890

 
$
(27
)
 
$
417,997

 
$
(529
)
Short-Term Investments [Member]
 
Schedule of Investments [Line Items]  
Schedule of Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
 
December 31, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
111,530

 
$
182

 
$
(7
)
 
$
111,705

Municipal bonds and notes
 
60,859

 
58

 
(11
)
 
60,906

U.S. government securities
 
5,000

 

 

 
5,000

U.S. government agency securities
 
169,204

 
65

 
(17
)
 
169,252

 
 
$
346,593

 
$
305

 
$
(35
)