v2.4.0.8
Document And Entity Information (USD $)
12 Months Ended
Sep. 30, 2013
Nov. 15, 2013
Mar. 28, 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-K    
Document Period End Date Sep. 30, 2013    
Document Fiscal Year Focus 2013    
Document Fiscal Period Focus FY    
Amendment Flag false    
Entity Common Stock, Shares Outstanding   77,608,639  
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Public Float     $ 6,962,311,879
v2.4.0.8
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2013
Sep. 30, 2012
ASSETS    
Cash and cash equivalents $ 189,693 $ 211,181
Short-term investments 352,450 320,970
Accounts receivable, net of allowances of $3,259 and $3,254 204,205 185,172
Inventories 19,026 17,410
Deferred tax assets 16,342 10,362
Other current assets 34,655 30,986
Total current assets 816,371 776,081
Property and equipment, net 63,522 59,604
Long-term investments 728,981 662,803
Deferred tax assets 22,389 35,478
Goodwill 523,727 348,239
Other assets, net 75,564 28,996
Total assets 2,230,554 1,911,201
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Accounts payable 37,313 27,026
Accrued liabilities 92,608 86,409
Deferred revenue 421,429 352,594
Total current liabilities 551,350 466,029
Other long-term liabilities 25,202 21,078
Deferred revenue, long-term 109,944 94,694
Deferred tax liabilities 5,346 0
Total long-term liabilities 140,492 115,772
Commitments and contingencies (Note 8)      
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, 78,090 and 78,715 shares issued and outstanding 262,505 326,922
Accumulated other comprehensive loss (7,414) (3,829)
Retained earnings 1,283,621 1,006,307
Total shareholders’ equity 1,538,712 1,329,400
Total liabilities and shareholders’ equity $ 2,230,554 $ 1,911,201
v2.4.0.8
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Sep. 30, 2013
Sep. 30, 2012
Statement of Financial Position [Abstract]    
Accounts receivable, allowances $ 3,259 $ 3,254
Preferred stock, par value (USD per share) $ 0 $ 0
Preferred stock, shares authorized 10,000 10,000
Preferred stock, shares outstanding 0 0
Common stock, par value (USD per share) $ 0 $ 0
Common stock, shares authorized 200,000 200,000
Common stock, shares issued 78,090 78,715
Common stock, shares outstanding 78,090 78,715
v2.4.0.8
Consolidated Income Statements (USD $)
In Thousands, except Per Share data, unless otherwise specified
1 Months Ended 3 Months Ended 12 Months Ended
Aug. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2011
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2011
Net revenues                        
Products   $ 212,291 $ 196,746 $ 185,107 $ 204,712 $ 209,718 $ 207,118 $ 205,165 $ 196,554 $ 798,856 $ 818,555 $ 721,975
Services   183,038 173,556 165,125 160,739 152,841 145,516 134,457 125,878 682,458 558,692 429,859
Total   395,329 370,302 350,232 365,451 362,559 352,634 339,622 322,432 1,481,314 1,377,247 1,151,834
Cost of net revenues                        
Products   35,151 32,350 29,773 31,792 35,752 34,482 33,668 33,200 129,066 137,102 129,325
Services   31,792 32,567 30,529 29,093 26,929 25,805 23,926 22,406 123,981 99,066 78,679
Total   66,943 64,917 60,302 60,885 62,681 60,287 57,594 55,606 253,047 236,168 208,004
Gross profit   328,386 305,385 289,930 304,566 299,878 292,347 282,028 266,826 1,228,267 1,141,079 943,830
Operating expenses                        
Sales and marketing   119,836 121,906 119,031 122,268 116,298 112,064 110,995 106,238 483,041 445,595 370,735
Research and development   54,464 54,075 52,534 48,541 47,731 46,985 43,568 39,122 209,614 177,406 138,910
General and administrative   26,512 25,327 25,889 24,673 24,015 23,298 22,785 21,677 102,401 91,775 83,523
Loss on facility sublease 2,393 2,393 0 0 0 0 0 0 0 2,393 0 0
Total   203,205 201,308 197,454 195,482 188,044 182,347 177,348 167,037 797,449 714,776 593,168
Income from operations   125,181 104,077 92,476 109,084 111,834 110,000 104,680 99,789 430,818 426,303 350,662
Other income, net   732 2,874 2,118 1,550 909 1,713 1,428 1,861 7,274 5,911 10,089
Income before income taxes   125,913 106,951 94,594 110,634 112,743 111,713 106,108 101,650 438,092 432,214 360,751
Provision for income taxes   49,682 38,773 31,182 41,141 45,026 39,377 37,467 35,158 160,778 157,028 119,354
Net income   $ 76,231 $ 68,178 $ 63,412 $ 69,493 $ 67,717 $ 72,336 $ 68,641 $ 66,492 $ 277,314 $ 275,186 $ 241,397
Net income per share - basic (USD per share)   $ 0.97 $ 0.87 $ 0.81 $ 0.88 $ 0.86 $ 0.91 $ 0.87 $ 0.84 $ 3.53 $ 3.48 $ 2.99
Weighted average shares - basic (shares)   78,353 78,516 78,601 78,789 78,980 79,135 79,156 79,272 78,565 79,135 80,658
Net income per share - diluted (USD per share)   $ 0.97 $ 0.86 $ 0.80 $ 0.88 $ 0.85 $ 0.91 $ 0.86 $ 0.83 $ 3.50 $ 3.45 $ 2.96
Weighted average shares - diluted (shares)   78,674 78,864 79,114 79,278 79,425 79,655 79,775 79,822 79,136 79,780 81,482
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Consolidated Statements of Comprehensive Income Statement (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2011
Statement of Other Comprehensive Income [Abstract]      
Net income $ 277,314 $ 275,186 $ 241,397
Foreign currency transaction adjustment (2,407) 295 (2,366)
Unrealized (loss) gain on securities, net of taxes of $692, $(1,350) and $472 for the years ended September 30, 2013, 2012 and 2011, respectively (1,178) 2,298 (815)
Total other comprehensive (loss) income (3,585) 2,593 (3,181)
Comprehensive income $ 273,729 $ 277,779 $ 238,216
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Consolidated Statements of Comprehensive Income (Parentheticals) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2011
Statement of Other Comprehensive Income [Abstract]      
Tax effect of unrealized gain (loss) on securities $ 692 $ (1,350) $ 472
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Consolidated Statement Of Shareholders' Equity And Comprehensive Income (USD $)
In Thousands, except Share data
Total
Common Stock [Member]
Accumulated Other Comprehensive Income/(Loss) [Member]
Retained Earnings [Member]
Balance at Sep. 30, 2010 $ 1,003,698 $ 517,215 $ (3,241) $ 489,724
Balance, shares at Sep. 30, 2010   80,355,000    
Exercise of employee stock options 2,293 2,293    
Exercise of employee stock options, shares   150,000    
Issuance of stock under employee stock purchase plan 18,932 18,932    
Issuance of stock under employee stock purchase plan, shares   257,000    
Issuance of restricted stock, shares   1,370,000    
Repurchase of common stock (271,526) (271,526)    
Repurchase of common stock, shares   (2,987,000)    
Tax benefit from employee stock transactions 24,076 24,076    
Stock-based compensation 89,747 89,747    
Net income 241,397     241,397
Other comprehensive loss (3,181)   (3,181)  
Balance at Sep. 30, 2011 1,105,436 380,737 (6,422) 731,121
Balance, shares at Sep. 30, 2011   79,145,000    
Exercise of employee stock options 1,130 1,130    
Exercise of employee stock options, shares   120,000    
Issuance of stock under employee stock purchase plan 24,043 24,043    
Issuance of stock under employee stock purchase plan, shares   281,000    
Issuance of restricted stock, shares   832,000    
Repurchase of common stock (184,776) (184,776)    
Repurchase of common stock, shares   (1,663,000)    
Tax benefit from employee stock transactions 10,440 10,440    
Stock-based compensation 95,348 95,348    
Net income 275,186     275,186
Other comprehensive loss 2,593   2,593  
Balance at Sep. 30, 2012 1,329,400 326,922 (3,829) 1,006,307
Balance, shares at Sep. 30, 2012 78,715,000 78,715,000    
Exercise of employee stock options 1,341 1,341    
Exercise of employee stock options, shares 125,701 126,000    
Issuance of stock under employee stock purchase plan 28,251 28,251    
Issuance of stock under employee stock purchase plan, shares   422,000    
Issuance of restricted stock, shares   1,094,000    
Repurchase of common stock (200,000) (200,000)    
Repurchase of common stock, shares   (2,267,000)    
Tax benefit from employee stock transactions 1,779 1,779    
Stock-based compensation 104,212 104,212    
Net income 277,314     277,314
Other comprehensive loss (3,585)   (3,585)  
Balance at Sep. 30, 2013 $ 1,538,712 $ 262,505 $ (7,414) $ 1,283,621
Balance, shares at Sep. 30, 2013 78,090,000 78,090,000    
v2.4.0.8
Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2011
Operating activities      
Net income $ 277,314 $ 275,186 $ 241,397
Adjustments to reconcile net income to net cash provided by operating activities:      
Realized (gain) loss on disposition of assets and investments (187) 546 (163)
Stock-based compensation 104,212 95,348 89,747
Provisions for doubtful accounts and sales returns 1,025 1,572 982
Depreciation and amortization 40,005 35,139 20,887
Deferred income taxes 474 (4,293) 4,487
Changes in operating assets and liabilities, net of amounts acquired:      
Accounts receivable (18,867) (20,207) (54,526)
Inventories (1,617) (262) 1,666
Other current assets (3,614) (998) 8,000
Other assets 683 (134) 81
Accounts payable and accrued liabilities 16,790 9,953 20,476
Deferred revenue 83,475 103,587 83,904
Net cash provided by operating activities 499,693 495,437 416,938
Investing activities      
Purchases of investments (938,571) (1,059,853) (979,597)
Maturities of investments 613,927 784,601 795,142
Sales of investments 212,011 81,444 80,877
(Increase) decrease in restricted cash (612) (19) 19
Acquisition of intangible assets 0 (250) (5,715)
Acquisition of businesses, net of cash acquired (212,642) (128,335) 0
Purchases of property and equipment (26,583) (29,867) (30,445)
Net cash used in investing activities (352,470) (352,279) (139,719)
Financing activities      
Excess tax benefit from stock-based compensation 4,091 10,371 23,623
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan 29,591 25,174 21,239
Repurchase of common stock (200,000) (184,776) (271,526)
Net cash used in financing activities (166,318) (149,231) (226,664)
Net (decrease) increase in cash and cash equivalents (19,095) (6,073) 50,555
Effect of exchange rate changes on cash and cash equivalents (2,393) 470 (2,525)
Cash and cash equivalents, beginning of year 211,181 216,784 168,754
Cash and cash equivalents, end of year 189,693 211,181 216,784
Supplemental information      
Cash paid for taxes $ 156,833 $ 145,874 $ 84,753
v2.4.0.8
Summary Of Significant Accounting Policies
12 Months Ended
Sep. 30, 2013
Accounting Policies [Abstract]  
Summary Of Significant Accounting Policies
Summary of Significant Accounting Policies
The Company
F5 Networks, Inc. (the “Company”)  is the leading developer and provider of application delivery 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. During fiscal year 2013, the Company acquired LineRate Systems, Inc. (LineRate Systems), an early-stage developer of software-defined application services that complement its current offerings, and Versafe Ltd. (Versafe), which offers subscription services that protect communications between end-user devices and web and mobile applications. In connection with its products, the Company offers a broad range of services including consulting, training, installation, maintenance and other technical support services.
Accounting Principles
The Company’s consolidated financial statements and accompanying notes are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (GAAP).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
In Note 6, Income Taxes, certain prior year amounts have been reclassified to conform to the current year presentation. There was no change to the total amount of income tax expense or net deferred tax asset as a result of the reclassifications.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used in accounting for revenue recognition, reserves for doubtful accounts, product returns, obsolete and excess inventory and valuation allowances on deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company invests its cash and cash equivalents in deposits with four major financial institutions, which, at times, exceed federally insured limits. The Company has not experienced any losses on its cash and cash equivalents.
Investments
The Company classifies its investment securities as available-for-sale. Investment securities, consisting of certificates of deposit, corporate and municipal bonds and notes and United States government and agency securities, are reported at fair value with the related unrealized gains and losses included as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Realized gains and losses and declines in value of securities judged to be other than temporary are included in other income (expense). The cost of investments for purposes of computing realized and unrealized gains and losses is based on the specific identification method. Investments in securities with maturities of less than one year or where management’s intent is to use the investments to fund current operations are classified as short-term investments. Investments with maturities of greater than one year are classified as long-term investments.
Concentration of Credit Risk
The Company extends credit to customers and is therefore subject to credit risk. The Company performs initial and ongoing credit evaluations of its customers’ financial condition and does not require collateral. An allowance for doubtful accounts is recorded to account for potential bad debts. Estimates are used in determining the allowance for doubtful accounts and are based upon an assessment of selected accounts and as a percentage of remaining accounts receivable by aging category. In determining these percentages, the Company evaluates historical write-offs, and current trends in customer credit quality, as well as changes in credit policies. At September 30, 2013, Ingram Micro, Inc. accounted for 18.6% of the Company’s accounts receivable. At September 30, 2012, Avnet Technology Solutions and Ingram Micro, Inc. accounted for 13.4% and 12.0% of the Company’s accounts receivable, respectively.
The Company maintains its cash and investment balances with high credit quality financial institutions.
Fair Value of Financial Instruments
Short-term and long-term investments are recorded at fair value as the underlying securities are classified as available-for-sale with any unrealized gain or loss being recorded to other comprehensive income. The fair value for securities held is determined using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
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):
 
 
 
September 30,
 
 
2013
 
2012
Finished goods
 
$
13,509

 
$
13,565

Raw materials
 
5,517

 
3,845

 
 
$
19,026

 
$
17,410


Property and Equipment
Property and equipment is stated at cost. Depreciation of property and equipment are provided using the straight-line method over the estimated useful lives of the assets, ranging from two to five years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the improvements. The cost of normal maintenance and repairs is charged to expense as incurred and expenditures for major improvements are capitalized at cost. Gains or losses on the disposition of assets are reflected in the income statements at the time of disposal.
Property and equipment consist of the following (in thousands):
 
 
 
September 30,
 
 
2013
 
2012
Computer equipment
 
$
93,326

 
$
95,987

Office furniture and equipment
 
13,391

 
12,335

Leasehold improvements
 
54,972

 
43,957

 
 
161,689

 
152,279

Accumulated depreciation and amortization
 
(98,167
)
 
(92,675
)
 
 
$
63,522

 
$
59,604


Depreciation and amortization expense totaled approximately $22.3 million, $19.0 million, and $16.6 million for the fiscal years ended September 30, 2013, 2012 and 2011, respectively.
Goodwill
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. The Company also considered potential impairment indicators at September 30, 2013 and noted no indicators of impairment.
Other Assets
Other assets primarily consist of acquired and developed technology, software development costs and customer relationships.
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.
Acquired and developed technology is recorded at cost and amortized over its estimated useful life of five years. The estimated useful life of these assets is assessed and evaluated for reasonableness periodically. Acquired technology of $15.4 million in fiscal year 2013 and $14.9 million in fiscal 2012 was recorded in connection with the acquisitions of Versafe and Traffix Systems, respectively. Amortization expense related to acquired technology, which is charged to cost of product revenues, totaled $3.8 million, $5.3 million and $3.1 million during the fiscal years 2013, 2012 and 2011, respectively.
Software development costs are charged to research and development expense in the period incurred until technological feasibility is established. Thereafter, until the product is released for sale, software development costs are capitalized and reported at the lower of unamortized cost or net realizable value of each product. Capitalized software development costs are amortized over the remaining estimated economic life of the product. The establishment of technological feasibility and the ongoing assessment of recoverability of costs require considerable judgment by the Company with respect to certain internal and external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life and changes in hardware and software technology. The Company did not capitalize any software development costs in fiscal years 2013, 2012 and 2011. Amortization expense related to capitalized software development was immaterial for fiscal years 2013, 2012, and 2011.
The Company's intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives, ranging from three to ten years. The Company evaluates the recovery of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. Amortization expense of all other intangible assets, including customer relationships, patents and trademarks was not material during the fiscal years 2013, 2012 and 2011.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived assets whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable. When such events occur, management determines whether there has been impairment by comparing the anticipated undiscounted net future cash flows to the related asset’s carrying value. If impairment exists, the asset is written down to its estimated fair value. No impairment of long-lived assets was noted as of and for the 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. 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, 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.
Shipping and Handling
Shipping and handling fees charged to the Company’s customers are recognized as product revenue in the period shipped and the related costs for providing these services are recorded as a cost of sale.
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 September 30, 2013, 2012 and 2011 were not considered material.
Research and Development
Research and development expenses consist of salaries and related benefits of product development personnel, prototype materials and expenses related to the development of new and improved products, and an allocation of facilities and depreciation expense. Research and development expenses are reflected in the statements of income as incurred.
Advertising
Advertising costs are expensed as incurred. The Company incurred $2.8 million, $1.8 million and $2.2 million in advertising costs during the fiscal years 2013, 2012 and 2011, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and estimates of future taxable income. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.
The Company assesses whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefits to be recognized in the financial statements from such a position is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company adjusts these liabilities based on a variety of factors, including the evaluation of information not previously available. These adjustments are reflected as increases or decreases to income tax expense in the period in which new information is available.
Foreign Currency
The functional currency for the Company’s foreign subsidiaries is the local currency in which the respective entity is located, with the exception of F5 Networks Ltd. in the United Kingdom and F5 Networks (Israel) Ltd., Traffix Communication Systems Ltd. and Versafe Ltd. in Israel, that use the U.S. dollar as their functional currency. An entity’s functional currency is determined by the currency of the economic environment in which the majority of cash is generated and expended by the entity. The financial statements of all majority-owned subsidiaries and related entities, with a functional currency other than the U.S. dollar, have been translated into U.S. dollars. All assets and liabilities of the respective entities are translated at year-end exchange rates and all revenues and expenses are translated at average rates during the respective period. Translation adjustments are reported as other comprehensive income (loss) in the consolidated statements of comprehensive income.
Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. Gains and losses on those foreign currency transactions are included in determining net income or loss for the period of exchange. The net effect of foreign currency gains and losses was not significant during the fiscal years ended September 30, 2013, 2012 and 2011.
Segments
Management has determined that the Company was organized as, and operated in, one reportable operating segment for fiscal year 2013 and prior years: the development, marketing and sale of application delivery networking products that optimize the security, performance and availability of network applications, servers and storage systems.
Stock-Based Compensation
The Company accounts for stock-based compensation using the straight-line attribution method for recognizing compensation expense. The Company recognized $104.2 million, $95.3 million and $89.7 million of stock-based compensation expense for the fiscal years ended September 30, 2013, 2012 and 2011, respectively. As of September 30, 2013, there was $82.5 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. All stock options granted in fiscal years 2013 and 2012 were assumed as part of the acquisitions of LineRate Systems and Traffix Systems, respectively, in the second fiscal quarter of each year. No stock options were granted in fiscal year 2011. In determining the fair value of shares issued under the Employee Stock Purchase Plan (ESPP), the Company uses the Black-Scholes option pricing model that employs the following key assumptions.
 
 
 
Employee Stock Purchase Plan
Years Ended September 30,
 
 
2013
 
2012
 
2011
Risk-free interest rate
 
0.06
%
 
0.14
%
 
0.10
%
Expected dividend
 

 

 

Expected term
 
0.5 years

 
0.5 years

 
0.5 years

Expected volatility
 
42.92
%
 
45.20
%
 
53.87
%

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not anticipate declaring dividends in the foreseeable future. Expected volatility is based on the annualized daily historical volatility of the Company’s stock price commensurate with the expected life of the ESPP option. Expected term of the ESPP option is based on an offering period of six months. The assumptions above are based on management’s best estimates at that time, which impact the fair value of the ESPP option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the ESPP option.
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 estimated forfeiture rate for grants awarded to the Company’s executive officers and Board of Directors was approximately 7% and the estimated forfeiture rate for grants awarded to all other employees was approximately 8% in fiscal 2013. 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, was 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 vested in equal quarterly increments over three years, until such portion of the grant was 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 November 15, 2013, the Company had repurchased and retired 12,289,015 shares at an average price of $72.18 per share and the Company had $112.5 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.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
 
 
 
Years Ended September 30,
 
 
2013
 
2012
 
2011
Numerator
 
 
 
 
 
 
Net income
 
$
277,314

 
$
275,186

 
$
241,397

Denominator
 
 
 
 
 
 
Weighted average shares outstanding — basic
 
78,565

 
79,135

 
80,658

Dilutive effect of common shares from stock options and restricted stock units
 
571

 
645

 
824

Weighted average shares outstanding — diluted
 
79,136

 
79,780

 
81,482

Basic net income per share
 
$
3.53

 
$
3.48

 
$
2.99

Diluted net income per share
 
$
3.50

 
$
3.45

 
$
2.96



An immaterial amount of common shares potentially issuable from stock options for the years ended September 30, 2013, 2012 and 2011 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.
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
12 Months Ended
Sep. 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 September 30, 2013, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
Fair Value at
September 30,
2013
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level  1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
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 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
 
Fair Value at
September 30,
2012
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
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 September 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 tables above that used significant unobservable inputs (Level 3) (in thousands):
 
 
 
2013
 
2012
Balance, beginning of period
 
$
4,750

 
$
13,010

Total (losses) gains realized or unrealized:
 
 
 
 
Included in other comprehensive income
 
(14
)
 
1,740

Settlements
 
(1,700
)
 
(10,000
)
Balance, end of period
 
$
3,036

 
$
4,750

Unrealized (losses) gains attributable to assets still held as of the end of the period
 
(14
)
 
112


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 September 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 September 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 year ended September 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
12 Months Ended
Sep. 30, 2013
Investments [Abstract]  
Short-Term And Long-Term Investments
Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
 
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

 
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):
 
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

 
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 September 30, 2013, by contractual years-to-maturity, are presented below (in thousands):
 
September 30, 2013
 
Cost or
Amortized
Cost
 
Fair Value
One year or less
 
$
352,193

 
$
352,450

Over one year
 
729,348

 
728,981

 
 
$
1,081,541

 
$
1,081,431


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 September 30, 2013 (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
September 30, 2013
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
 
$
171,144

 
$
(397
)
 
$
3,181

 
$
(1
)
 
$
174,325

 
$
(398
)
Municipal bonds and notes
 
20,080

 
(15
)
 

 

 
20,080

 
(15
)
Auction rate securities
 

 

 
3,036

 
(264
)
 
3,036

 
(264
)
U.S. government agency securities
 
317,773

 
(462
)
 

 

 
317,773

 
(462
)
Total
 
$
508,997

 
$
(874
)
 
$
6,217

 
$
(265
)
 
$
515,214

 
$
(1,139
)

The Company invests in securities that are rated investment grade or better. The unrealized losses on investments for fiscal year 2013 were primarily caused by reductions in the values of the ARS due to the illiquid markets and were partially offset by unrealized gains related to interest rate decreases.
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 September 30, 2013, there were no investments in its portfolio that were other-than-temporarily impaired.
v2.4.0.8
Business Combinations
12 Months Ended
Sep. 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 as general and administrative expenses 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 year ended September 30, 2013 individually or in aggregate with Versafe.
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 September 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.
Fiscal Year 2013 Acquisition of Versafe Ltd.
On September 17, 2013, the Company acquired all issued and outstanding shares of Versafe Ltd. (Versafe), a privately held Israeli company headquartered in Rishon LeZion, Israel for $91.7 million. Direct transaction costs associated with the acquisition were approximately $0.4 million and were expensed as general and administrative expenses in the fourth quarter of fiscal 2013. Versafe is a provider of web anti-fraud, anti-phishing, and anti-malware solutions. Through this acquisition, the Company gains access to Versafe's web and mobile protection solutions and security operations center, their intellectual property and engineering talent. As a result of the acquisition, the Company acquired all the assets and assumed all the liabilities of Versafe. The results of operations of Versafe 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 year ended September 30, 2013 individually or in aggregate with LineRate Systems.
The purchase price allocation is as follows (in thousands):
 
Assets acquired
 
Cash
$
4,020

Current assets
1,309

Property and equipment, net
41

Developed technology, customer relationships and other intangibles
21,260

Goodwill
75,937

Total assets acquired
$
102,567

Liabilities assumed
 
Accrued liabilities
$
(4,877
)
Deferred revenue
(611
)
Deferred tax liabilities, net
(5,335
)
Total liabilities assumed
(10,823
)
Net assets acquired
$
91,744


Of the total estimated purchase price, $15.4 million was allocated to developed technology and $5.9 million to customer relationships and other intangibles. To determine the fair value of developed technology, the multi-period excess earnings method under the income approach was used, which included estimates and assumptions provided by Versafe 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 25% was applied to the value of developed technology based on the implied rate of return of the transaction, adjusted to reflect additional risks and uncertainty in future cash flows. A combination of the income and cost approaches were used to determine the fair value of customer relationships and other intangibles. The cost approach requires an estimation of the costs required by a market participant to reproduce the asset. Goodwill generated from this transaction is primarily related to expected synergies of the technology and expanded breadth of the Company's existing security solutions. Goodwill and other intangibles associated with the Versafe transaction will not be deductible for Israeli tax purposes unless certain qualifications are met, and necessary rulings are obtained from the Israeli Tax Authority.
Developed technology will be amortized on a straight-line basis over its estimated useful life of five years and included in cost of net product revenues. Customer relationships will be amortized on a straight-line basis over its estimated useful life of ten years and included in sales and marketing expenses. The weighted average life of the amortizable intangible assets recognized from the Versafe acquisition was 5.5 years. The estimated useful lives for the acquired intangible assets were based on the expected future cash flows associated with the respective asset.
v2.4.0.8
Balance Sheet Details
12 Months Ended
Sep. 30, 2013
Balance Sheet Details [Abstract]  
Balance Sheet Details
Balance Sheet Details
Goodwill
Changes in the carrying amount of Goodwill during fiscal years 2013 and 2012 are summarized as follows (in thousands):
 
Balance, September 30, 2011
$
234,691

Acquisition of Traffix Systems
113,210

Other
338

Balance, September 30, 2012
348,239

Acquisition of LineRate Systems
99,560

Acquisition of Versafe
75,937

Other
(9
)
Balance, September 30, 2013
$
523,727



Other Assets
Other assets consist of the following (in thousands):
 
 
 
September 30,
 
 
2013
 
2012
Acquired and developed technology and software development costs
 
$
59,453

 
$
18,129

Deposits and other
 
15,251

 
10,688

Restricted cash
 
860

 
179

 
 
$
75,564

 
$
28,996


Amortization expense related to other assets was approximately $4.3 million, $6.4 million, and $4.3 million for the fiscal years ended September 30, 2013, 2012 and 2011, respectively.
Intangible assets are included in other assets on the balance sheet and consist of the following (in thousands):
 
 
 
2013
 
2012
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Acquired and developed technology and software development costs
 
$
99,463

 
$
(40,010
)
 
$
59,453

 
$
54,240

 
$
(36,111
)
 
$
18,129

Customer relationships
 
8,399

 
(3,123
)
 
5,276

 
5,379

 
(2,855
)
 
2,524