v2.4.0.8
Document and Entity Information
9 Months Ended
Jun. 30, 2013
Aug. 02, 2013
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 Jun. 30, 2013  
Document Fiscal Year Focus 2013  
Document Fiscal Period Focus Q3  
Amendment Flag false  
Entity Common Stock, Shares Outstanding   78,303,641
v2.4.0.8
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2013
Sep. 30, 2012
ASSETS    
Cash and cash equivalents $ 198,280 $ 211,181
Short-term investments 353,045 320,970
Accounts receivable, net of allowances of $3,094 and $3,254 205,138 185,172
Inventories 18,260 17,410
Deferred tax assets 10,617 10,362
Other current assets 48,969 30,986
Total current assets 834,309 776,081
Property and equipment, net 63,720 59,604
Long-term investments 714,331 662,803
Deferred tax assets 33,085 35,478
Goodwill 447,799 348,239
Other assets, net 54,559 28,996
Total assets 2,147,803 1,911,201
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Accounts payable 28,691 27,026
Accrued liabilities 89,780 86,409
Deferred revenue 411,477 352,594
Total current liabilities 529,948 466,029
Other long-term liabilities 21,391 21,078
Deferred revenue, long-term 108,278 94,694
Total long-term liabilities 129,669 115,772
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, 78,305 and 78,715 shares issued and outstanding 290,143 326,922
Accumulated other comprehensive loss (9,347) (3,829)
Retained earnings 1,207,390 1,006,307
Total shareholders’ equity 1,488,186 1,329,400
Total liabilities and shareholders’ equity $ 2,147,803 $ 1,911,201
v2.4.0.8
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jun. 30, 2013
Sep. 30, 2012
Statement of Financial Position [Abstract]    
Accounts receivable, allowances $ 3,094 $ 3,254
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 78,305,000 78,715,000
Common stock, shares outstanding 78,305,000 78,715,000
v2.4.0.8
Consolidated Income Statements (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Net revenues        
Products $ 196,746 $ 207,118 $ 586,565 $ 608,837
Services 173,556 145,516 499,420 405,851
Total 370,302 352,634 1,085,985 1,014,688
Cost of net revenues        
Products 32,350 34,482 93,915 101,350
Services 32,567 25,805 92,189 72,137
Total 64,917 60,287 186,104 173,487
Gross profit 305,385 292,347 899,881 841,201
Operating expenses        
Sales and marketing 121,906 112,064 363,205 329,297
Research and development 54,075 46,985 155,150 129,675
General and administrative 25,327 23,298 75,889 67,760
Total 201,308 182,347 594,244 526,732
Income from operations 104,077 110,000 305,637 314,469
Other income, net 2,874 1,713 6,542 5,002
Income before income taxes 106,951 111,713 312,179 319,471
Provision for income taxes 38,773 39,377 111,096 112,002
Net income $ 68,178 $ 72,336 $ 201,083 $ 207,469
Net income per share — basic (dollars per share) $ 0.87 $ 0.91 $ 2.56 $ 2.62
Weighted average shares — basic (shares) 78,516 79,135 78,636 79,188
Net income per share — diluted (dollars per share) $ 0.86 $ 0.91 $ 2.54 $ 2.60
Weighted average shares — diluted (shares) 78,864 79,655 79,207 79,834
v2.4.0.8
Consolidated Statements Of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Statement of Other Comprehensive Income [Abstract]        
Net income $ 68,178 $ 72,336 $ 201,083 $ 207,469
Other comprehensive income:        
Foreign currency translation adjustment (1,728) (287) (3,220) (460)
Unrealized (loss) gain on securities, net of tax (1,710) 516 (2,297) 1,049
Total other comprehensive (loss) income (3,438) 229 (5,517) 589
Comprehensive income $ 64,740 $ 72,565 $ 195,566 $ 208,058
v2.4.0.8
Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Operating activities    
Net income $ 201,083 $ 207,469
Adjustments to reconcile net income to net cash provided by operating activities:    
Realized (gain) loss on disposition of assets and investments (190) 552
Stock-based compensation 82,181 69,005
Provisions for doubtful accounts and sales returns 584 1,061
Depreciation and amortization 29,705 24,987
Deferred income taxes (3,601) (1,057)
Changes in operating assets and liabilities, net of amounts acquired:    
Accounts receivable (20,550) (28,229)
Inventories (850) 111
Other current assets (18,069) (13,852)
Other assets 1,517 (244)
Accounts payable and accrued liabilities 7,420 (3,089)
Deferred revenue 72,468 90,168
Net cash provided by operating activities 351,698 346,882
Investing activities    
Purchases of investments (744,557) (780,493)
Maturities of investments 509,381 584,085
Sales of investments 138,171 76,444
Increase in restricted cash (713) (30)
Acquisition of intangible assets 0 (250)
Acquisition of businesses, net of cash acquired (124,918) (128,335)
Purchases of property and equipment (21,434) (18,544)
Net cash used in investing activities (244,070) (267,123)
Financing activities    
Excess tax benefit from stock-based compensation 3,656 9,426
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan 29,405 24,942
Repurchase of common stock (150,000) (134,776)
Net cash used in financing activities (116,939) (100,408)
Net decrease in cash and cash equivalents (9,311) (20,649)
Effect of exchange rate changes on cash and cash equivalents (3,590) (528)
Cash and cash equivalents, beginning of period 211,181 216,784
Cash and cash equivalents, end of period $ 198,280 $ 195,607
v2.4.0.8
Summary of Significant Accounting Policies
9 Months Ended
Jun. 30, 2013
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Description of Business
F5 Networks, Inc. (the “Company”) provides products and services to help companies manage their Internet Protocol (IP) traffic and file storage infrastructure efficiently and securely. The Company’s application delivery networking products improve the performance, availability and security of servers and other network resources. Internet traffic between network-based applications and clients passes through these devices where the content is inspected to ensure that it is safe and modified as necessary to ensure that it is delivered securely and in a way that optimizes the performance of both the network and the applications. The Company’s principal products are application delivery controllers that include the BIG-IP family of appliances and a line of scalable VIPRION systems. The Company’s recently acquired line of Diameter signaling and routing products enable full connectivity, enhanced scalability, and comprehensive control of signaling traffic in service providers’ evolving packet core networks. The Company’s storage virtualization products simplify and reduce the cost of managing files and file storage devices, and ensure fast, secure, easy access to files for users and applications. In February 2013, the Company acquired LineRate Systems, Inc., a developer of software defined network services technology. The Company also offers a broad range of services that include consulting, training, maintenance and other technical support services.
Basis of Presentation
The year-end condensed 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, 2012.
Certain prior year amounts, specifically relating to cash flows in connection with the disposition of investments, have been reclassified from sales of investments to maturities of investments to conform to the current year presentation in the Consolidated Statement of Cash Flows. There was no change to the net cash used in investing activities as a result of this reclassification. This reclassification did not affect total revenue, operating income or net income.
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. In certain regions where the Company does not have the ability to reasonably estimate returns, the Company defers revenue on sales to its distributors until information is received from the channel partner indicating that the product has been sold to the end-user customer. 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 its 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 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 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.
Stock-Based Compensation
The Company accounts for stock-based compensation using the straight-line attribution method for recognizing compensation expense. The Company recognized $27.9 million and $23.5 million of stock-based compensation expense for the three months ended June 30, 2013 and 2012, respectively, and $82.2 million and $69.0 million for the nine months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, there was $100.8 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). 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 third quarter of fiscal year 2013 is 5.8% for grants awarded to the Company’s executive officers and Board of Directors, and 7.9% 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 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.
In August 2010, the Company granted 181,334 and 83,000 RSUs to certain current executive officers as part of the annual equity and retention awards programs, respectively. 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, 2013.
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 April 24, 2013, the Company announced that its Board of Directors authorized an additional $200 million for its common stock share repurchase program. This new authorization is incremental to the existing $600 million program, initially approved in October 2010 and expanded in August 2011 and October 2011. 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 August 2, 2013, the Company had repurchased and retired 10,919,493 shares at an average price of $70.68 per share and the Company had $227.8 million remaining to purchase shares as part of its repurchase programs.
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
June 30,
 
Nine months ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
Numerator
 
 
 
 
 
 
 
 
Net income
 
$
68,178

 
$
72,336

 
$
201,083

 
$
207,469

Denominator
 
 
 
 
 
 
 
 
Weighted average shares outstanding — basic
 
78,516

 
79,135

 
78,636

 
79,188

Dilutive effect of common shares from stock options and restricted stock units
 
348

 
520

 
571

 
646

Weighted average shares outstanding — diluted
 
78,864

 
79,655

 
79,207

 
79,834

Basic net income per share
 
$
0.87

 
$
0.91

 
$
2.56

 
$
2.62

Diluted net income per share
 
$
0.86

 
$
0.91

 
$
2.54

 
$
2.60


An immaterial amount of common shares potentially issuable from stock options for the three and nine months ended June 30, 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 will adopt ASU 2013-2 in the first quarter of fiscal 2014 and does not expect the adoption of this standard to have an impact on its consolidated financial statements.
v2.4.0.8
Fair Value Measurements
9 Months Ended
Jun. 30, 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 June 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 June 30,
2013
Cash equivalents
 
$
26,263

 
$

 
$

 
$
26,263

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

 
155,174

 

 
155,174

Available-for-sale securities — municipal bonds and notes
 

 
63,861

 

 
63,861

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

 
4,998

 

 
4,998

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

 
129,012

 

 
129,012

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

 
230,509

 

 
230,509

Available-for-sale securities — municipal bonds and notes
 

 
29,050

 

 
29,050

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

 
12,358

 

 
12,358

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

 
438,366

 

 
438,366

Available-for-sale securities — auction rate securities
 

 

 
4,048

 
4,048

Total
 
$
26,263

 
$
1,063,328

 
$
4,048

 
$
1,093,639


The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at September 30, 2012, 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,
2012
Cash equivalents
 
$
35,658

 
$

 
$

 
$
35,658

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — certificates of deposit
 

 
3,533

 

 
3,533

Available-for-sale securities — corporate bonds and notes
 

 
193,990

 

 
193,990

Available-for-sale securities — municipal bonds and notes
 

 
63,422

 
 
 
63,422

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

 
60,025

 

 
60,025

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

 
229,441

 

 
229,441

Available-for-sale securities — municipal bonds and notes
 

 
30,307

 

 
30,307

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

 
4,995

 

 
4,995

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

 
393,310

 

 
393,310

Available-for-sale securities — auction rate securities
 

 

 
4,750

 
4,750

Total
 
$
35,658

 
$
979,023

 
$
4,750

 
$
1,019,431


Due to the auction failures of the Company’s auction rate securities (ARS) that began in the second quarter of fiscal year 2008, there are still no quoted prices in active markets for similar assets as of June 30, 2013. Therefore, the Company has classified its ARS as level 3 financial assets. The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands):
 
 
 
Three months ended
June 30,
 
Nine months ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
 
$
4,048

 
$
13,193

 
$
4,750

 
$
13,010

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

 
914

 
(102
)
 
1,097

Settlements
 

 
(5,000
)
 
(600
)
 
(5,000
)
Balance, end of period
 
$
4,048

 
$
9,107

 
$
4,048

 
$
9,107

Unrealized gains (losses) attributable to assets still held as of end of period
 

 
914

 
(102
)
 
1,097


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. Level 3 investment securities primarily include certain ARS for which there was a decrease in the observation of market pricing. At June 30, 2013, the values of these securities were estimated primarily using discounted cash flow analysis that incorporated transaction details such as contractual terms, maturity, timing and amount of future cash flows, as well as assumptions about liquidity and credit valuation adjustments of marketplace participants at June 30, 2013. Significant fluctuations in any of these inputs in isolation would result in changes in the fair value of the Company’s ARS.
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 June 30, 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
9 Months Ended
Jun. 30, 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):
 
June 30, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
154,949

 
$
274

 
$
(49
)
 
$
155,174

Municipal bonds and notes
 
63,795

 
71

 
(5
)
 
63,861

U.S. government securities
 
4,997

 
1

 

 
4,998

U.S. government agency securities
 
129,008

 
29

 
(25
)
 
129,012

 
 
$
352,749

 
$
375

 
$
(79
)
 
$
353,045

 
September 30, 2012
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Certificates of deposit
 
$
3,528

 
$
5

 
$

 
$
3,533

Corporate bonds and notes
 
193,548

 
482

 
(40
)
 
193,990

Municipal bonds and notes
 
63,371

 
61

 
(10
)
 
63,422

U.S. government agency securities
 
60,010

 
15

 

 
60,025

 
 
$
320,457

 
$
563

 
$
(50
)
 
$
320,970


Long-term investments consist of the following (in thousands):
 
June 30, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
231,182

 
$
231

 
$
(904
)
 
$
230,509

Municipal bonds and notes
 
29,049

 
33

 
(32
)
 
29,050

Auction rate securities
 
4,400

 

 
(352
)
 
4,048

U.S. government securities
 
12,348

 
10

 

 
12,358

U.S. government agency securities
 
439,537

 
102

 
(1,273
)
 
438,366

 
 
$
716,516

 
$
376

 
$
(2,561
)
 
$
714,331

 
September 30, 2012
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
228,438

 
$
1,063

 
$
(60
)
 
$
229,441

Municipal bonds and notes
 
30,177

 
138

 
(8
)
 
30,307

Auction rate securities
 
5,000

 

 
(250
)
 
4,750

U.S. government securities
 
4,983

 
12

 

 
4,995

U.S. government agency securities
 
392,959

 
389

 
(38
)
 
393,310

 
 
$
661,557

 
$
1,602

 
$
(356
)
 
$
662,803


The amortized cost and fair value of fixed maturities at June 30, 2013, by contractual years-to-maturity, are presented below (in thousands):
 
 
 
Cost or
Amortized
Cost
 
Fair Value
One year or less
 
$
352,749

 
$
353,045

Over one year
 
716,516

 
714,331

 
 
$
1,069,265

 
$
1,067,376


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 June 30, 2013 (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
June 30, 2013
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
 
$
196,715

 
$
(952
)
 
$
7,851

 
$
(1
)
 
$
204,566

 
$
(953
)
Municipal bonds and notes
 
14,787

 
(37
)
 

 

 
14,787

 
(37
)
Auction rate securities
 

 

 
4,048

 
(352
)
 
4,048

 
(352
)
U.S. government agency securities
 
433,541

 
(1,297
)
 
3,330

 
(1
)
 
436,871

 
(1,298
)
Total
 
$
645,043

 
$
(2,286
)
 
$
15,229

 
$
(354
)
 
$
660,272

 
$
(2,640
)

The Company invests in securities that are rated investment grade or better. The unrealized losses on investments for the first nine months of fiscal year 2013 were primarily caused by reductions in the values of the ARS due to the illiquid markets.
ARS are variable-rate debt securities. The Company limits its investments in ARS to securities that carry an AAA/A- (or equivalent) rating from recognized rating agencies and limits the amount of credit exposure to any one issuer. At the time of the Company’s initial investment and at the date of this report, all ARS were in compliance with the Company’s investment policy. In the past, the auction process allowed investors to obtain immediate liquidity if so desired by selling the securities at their face amounts. Liquidity for these securities has historically been provided by an auction process that resets interest rates on these investments on average every 7-35 days. However, as has been reported in the financial press, the disruptions in the credit markets adversely affected the auction market for these types of securities. The Company does not intend to sell nor is it more likely than not that it will be required to sell these investments before their anticipated recovery.
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 June 30, 2013, there were no investments in its portfolio that were other-than-temporarily impaired.
v2.4.0.8
Inventories
9 Months Ended
Jun. 30, 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):
 
 
 
June 30,
2013
 
September 30,
2012
Finished goods
 
$
13,287

 
$
13,565

Raw materials
 
4,973

 
3,845

 
 
$
18,260

 
$
17,410

v2.4.0.8
Commitments and Contingencies
9 Months Ended
Jun. 30, 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 June 30, 2013 and June 30, 2012 were not material.
Commitments
As of June 30, 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 the Form 10-K.
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. As of June 30, 2013, the Company was committed to purchase approximately $15.9 million of such inventory during the next 30 day period.
Legal Proceedings
The Company is not aware of any pending legal proceedings that, individually or in the aggregate, would have a material adverse effect on the Company’s business, operating results, or financial condition. The Company may in the future be party to litigation arising in the ordinary course of business, including claims that the Company allegedly infringes upon third-party intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
v2.4.0.8
Income Taxes
9 Months Ended
Jun. 30, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The effective tax rate was 36.3% and 35.2% for the three months ended June 30, 2013 and 2012, respectively. The effective tax rate was 35.6% and 35.1% for the nine months ended June 30, 2013 and 2012, respectively. The increase in effective tax rate is primarily due to state income taxes.
As of June 30, 2013, the Company has $6.3 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. It is reasonably possible that the Company’s existing liabilities for unrecognized tax benefits may change within the next twelve months primarily due to the expiration of statutes of limitations. 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. 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 2011 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 fiscal year 2008 and 2009 state income tax returns, and the fiscal year 2010 federal income tax return.
v2.4.0.8
Geographic Sales and Significant Customers
9 Months Ended
Jun. 30, 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. 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 and not allocated to any specific region. Therefore, geographic information is presented only for net revenue.
The following presents revenues by geographic region (in thousands):
 
 
 
Three months ended
June 30,
 
Nine months ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
Americas:
 
 
 
 
 
 
 
 
United States
 
$
198,635

 
$
187,404

 
$
565,883

 
$
539,609

Other
 
15,471

 
14,053

 
51,031

 
49,287

Total Americas
 
214,106

 
201,457

 
616,914

 
588,896

EMEA
 
77,627

 
74,720

 
241,415

 
214,140

Japan
 
21,846

 
23,474

 
61,741

 
66,623

Asia Pacific
 
56,723

 
52,983

 
165,915

 
145,029

 
 
$
370,302

 
$
352,634

 
$
1,085,985

 
$
1,014,688


Three worldwide distributors of the Company’s products accounted for 13.9%, 15.6%, and 11.2% of total net revenue for the three month period ended June 30, 2013. Three worldwide distributors of the Company’s products accounted for 15.7%, 14.8%, and 11.1% of total net revenue for the nine month period ended June 30, 2013. Two worldwide distributors of the Company’s products accounted for 17.3% and 14.8% of total net revenue for the three month period ended June 30, 2012. Two worldwide distributors accounted for 17.3% and 14.2% of total net revenue for the nine month period ended June 30, 2012. One worldwide distributor accounted for 16.6% of the Company’s accounts receivable as of June 30, 2013. Two worldwide distributors accounted for 11.0% and 13.5% of the Company’s accounts receivable as of June 30, 2012. No other distributors accounted for more than 10% of total net revenue or receivables.
v2.4.0.8
Business Combinations
9 Months Ended
Jun. 30, 2013
Business Combinations [Abstract]  
Business Combinations
Business Combinations
The Company’s acquisitions are accounted for under the acquisition method. The total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. The fair value assigned to the tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions provided by management. Goodwill is not amortized but instead is tested for impairment at least annually, as described in Note 1.
Fiscal Year 2013 Acquisition of LineRate Systems, Inc.
On February 11, 2013, the Company acquired all issued and outstanding shares of LineRate Systems, Inc. (LineRate Systems), a privately held Delaware corporation headquartered in Louisville, Colorado for $125.3 million. Direct transaction costs associated with the acquisition were approximately $0.3 million and were expensed in the second quarter of fiscal 2013. LineRate Systems is a developer of software defined network service solutions for packet core operators, and cloud and web service providers. Through this acquisition, the Company gains access to LineRate Systems’ layer 7+ networking services technology, intellectual property, and engineering talent. As a result of the acquisition, the Company acquired all the assets and assumed all the liabilities of LineRate Systems. The results of operations of LineRate Systems have been included in the Company’s consolidated financial statements from the date of acquisition. Pro forma results of operations for this acquisition have not been presented as this transaction is not considered a material acquisition and the effects were not material to the Company’s financial results for the three and nine months ended June 30, 2013.
The purchase price allocation is as follows (in thousands):
 
Assets acquired
 
Cash
$
82

Current assets
556

Property and equipment, net
415

In-process research and development
29,853

Goodwill
99,560

Total assets acquired
$
130,466

Liabilities assumed
 
Accrued liabilities
$
(396
)
Deferred tax liabilities, net
(4,763
)
Total liabilities assumed
(5,159
)
Net assets acquired
$
125,307


Of the total estimated purchase price, $29.9 million was allocated to in-process research and development (IPR&D), which consists of existing research and development projects at the time of acquisition. IPR&D acquired from LineRate Systems is included in other assets, net on the balance sheet as of June 30, 2013. IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition date, this asset will not be amortized as charges to earnings; instead this asset will be subject to periodic impairment testing. Upon successful completion of the development process for the acquired IPR&D project, the asset would then be considered a finite-lived intangible asset and amortization of the asset will commence. The Company expects to complete the IPR&D project in 2014, at which point amortization will begin over its estimated useful life of ten years. To determine the fair value of IPR&D, the multi-period excess earnings method under the income approach was used, which included estimates and assumptions provided by LineRate Systems and Company management. The income approach estimates the fair value of an asset based on its earnings and cash flow capacity, which are discounted to present value. A discount rate of 35% was used to value the project based on the implied rate of return of the transaction, adjusted to reflect additional risks inherent in the acquired project. Goodwill generated from this transaction is primarily related to expected synergies, and is not expected to be deductible for federal tax purposes.
The fair value of replacement stock-based compensation awards issued by the Company attributable to precombination services was immaterial and has not been reflected in the consideration transferred.
v2.4.0.8
Summary of Significant Accounting Policies (Policy)
9 Months Ended
Jun. 30, 2013
Accounting Policies [Abstract]  
Description of Business
Description of Business
F5 Networks, Inc. (the “Company”) provides products and services to help companies manage their Internet Protocol (IP) traffic and file storage infrastructure efficiently and securely. The Company’s application delivery networking products improve the performance, availability and security of servers and other network resources. Internet traffic between network-based applications and clients passes through these devices where the content is inspected to ensure that it is safe and modified as necessary to ensure that it is delivered securely and in a way that optimizes the performance of both the network and the applications. The Company’s principal products are application delivery controllers that include the BIG-IP family of appliances and a line of scalable VIPRION systems. The Company’s recently acquired line of Diameter signaling and routing products enable full connectivity, enhanced scalability, and comprehensive control of signaling traffic in service providers’ evolving packet core networks. The Company’s storage virtualization products simplify and reduce the cost of managing files and file storage devices, and ensure fast, secure, easy access to files for users and applications. In February 2013, the Company acquired LineRate Systems, Inc., a developer of software defined network services technology. The Company also offers a broad range of services that include consulting, training, maintenance and other technical support services.
Basis of Presentation
Basis of Presentation
The year-end condensed 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, 2012.
Certain prior year amounts, specifically relating to cash flows in connection with the disposition of investments, have been reclassified from sales of investments to maturities of investments to conform to the current year presentation in the Consolidated Statement of Cash Flows. There was no change to the net cash used in investing activities as a result of this reclassification. This reclassification did not affect total revenue, operating income or net income.
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. In certain regions where the Company does not have the ability to reasonably estimate returns, the Company defers revenue on sales to its distributors until information is received from the channel partner indicating that the product has been sold to the end-user customer. 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 its 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 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 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.
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 $27.9 million and $23.5 million of stock-based compensation expense for the three months ended June 30, 2013 and 2012, respectively, and $82.2 million and $69.0 million for the nine months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, there was $100.8 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). 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 third quarter of fiscal year 2013 is 5.8% for grants awarded to the Company’s executive officers and Board of Directors, and 7.9% 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 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.
In August 2010, the Company granted 181,334 and 83,000 RSUs to certain current executive officers as part of the annual equity and retention awards programs, respectively. 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, 2013.
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 April 24, 2013, the Company announced that its Board of Directors authorized an additional $200 million for its common stock share repurchase program. This new authorization is incremental to the existing $600 million program, initially approved in October 2010 and expanded in August 2011 and October 2011. 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 August 2, 2013, the Company had repurchased and retired 10,919,493 shares at an average price of $70.68 per share and the Company had $227.8 million remaining to purchase shares as part of its repurchase programs.
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 will adopt ASU 2013-2 in the first quarter of fiscal 2014 and does not expect the adoption of this standard to have an impact on its consolidated financial statements.
v2.4.0.8
Summary of Significant Accounting Policies (Tables)
9 Months Ended
Jun. 30, 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
June 30,
 
Nine months ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
Numerator
 
 
 
 
 
 
 
 
Net income
 
$
68,178

 
$
72,336

 
$
201,083

 
$
207,469

Denominator
 
 
 
 
 
 
 
 
Weighted average shares outstanding — basic
 
78,516

 
79,135

 
78,636

 
79,188

Dilutive effect of common shares from stock options and restricted stock units
 
348

 
520

 
571

 
646

Weighted average shares outstanding — diluted
 
78,864

 
79,655

 
79,207

 
79,834

Basic net income per share
 
$
0.87

 
$
0.91

 
$
2.56

 
$
2.62

Diluted net income per share
 
$
0.86

 
$
0.91

 
$
2.54

 
$
2.60

v2.4.0.8
Fair Value Measurements (Tables)
9 Months Ended
Jun. 30, 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 June 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 June 30,
2013
Cash equivalents
 
$
26,263

 
$

 
$

 
$
26,263

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

 
155,174

 

 
155,174

Available-for-sale securities — municipal bonds and notes
 

 
63,861

 

 
63,861

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

 
4,998

 

 
4,998

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

 
129,012

 

 
129,012

Long-term investments