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EX-10.18 - EXHIBIT 10.18 - F5 NETWORKS INCffiv10kex10189302017.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     .
Commission File Number 000-26041
 
F5 Networks, Inc.
(Exact name of Registrant as specified in its charter)
 
WASHINGTON
 
91-1714307
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
401 Elliott Ave West
Seattle, Washington 98119
(Address of principal executive offices)
(206) 272-5555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Common stock, no par value
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
 
 
 
Accelerated filer  ¨
Non-accelerated filer    ¨
 
(Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
 
 
 
 
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of March 31, 2017, the aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was $9,105,335,415 based on the closing sales price of the Registrant’s Common Stock on the NASDAQ Global Select Market on that date.
As of October 30, 2017, the number of shares of the Registrant’s common stock outstanding was 62,593,522.
 
 
DOCUMENTS INCORPORATED BY REFERENCE
Information required in response to Part III of this Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to the specified portions of the Registrant’s Definitive Proxy Statement for the Annual Shareholders Meeting for fiscal year 2017, which Definitive Proxy Statement shall be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the fiscal year to which this Report relates.




F5 NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 2017
Table of Contents
 
 
 
Page
PART I
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
Item 15.
Item 16.


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Trademarks and Tradenames
3DNS, AAM, Access Policy Manager, Acopia, Acopia Networks, Advanced Client Authentication, Advanced Firewall Manager, Advanced Routing, AFM, APM, Application Acceleration Manager, Application Security Manager, Applications without Constraints, ARX, AskF5, ASM, BIG-IP, BIG-IP EDGE GATEWAY, BIG-IQ, Cloud Extender, CloudFucious, Clustered Multiprocessing, CMP, COHESION, Data Manager, DC (DESIGN), DDoS Hybrid Defender, Defense.Net, Defense.net [DESIGN], DevCentral, DNS, DNS Express, DSC, DSI, Edge Client, Edge Gateway, Edge Portal, ELEVATE, EM, ENGAGE, Enterprise Manager, F5, F5 [DESIGN], F5 Agility, F5 Analytics, F5 Application IQ, F5 Certified [DESIGN], F5 ELITE, F5 Labs, F5 Labs [DESIGN], F5 Management Pack, F5 Networks, F5 Synthesis [DESIGN], F5 TMOS, F5 World, Fast Application Proxy, Fast Cache, FirePass, Global Traffic Manager, GTM, GUARDIAN, HERCULON, iApps, IBR, iCall, iControl, iHealth, Intelligent Browser Referencing, Intelligent Compression, IPv6 Gateway, iQuery, iRules, iRules OnDemand, iSeries, iSession, iWorkflow, L7 Rate Shaping, LC, LineRate, LineRate [DESIGN], LROS, LTM, LineRate Operating System, LineRate Point, LineRate Precision, Link Controller, Local Traffic Manager, Message Security Manager, MobileSafe, MSM, Netcelera, OneConnect, Packet Velocity, PEM, Point Load Balancer, Policy Enforcement Manager, Protocol Security Manager, PSM, Ready Defense, Real Traffic Policy Builder, SalesXchange, SalesXchange [DESIGN], SAM, ScaleN, SDAS, SDC, Secure Access Manager, Signaling Delivery Controller, Silverline, Silverline Threat Intelligence, Software Defined Application Services, Solutions for an application world, SSL Acceleration, SSL Everywhere, SSL Orchestrator, StrongBox, SuperVIP, SYN Check, Synthesis, TCP Express, TDR, TechXchange, TechXchange [DESIGN], TMOS, TotALL, Traffic Management Operating System, TrafficShield, Traffix, Traffix [DESIGN], TrainingPass, Transparent Data Reduction, TurboFlex, UNITY, VAULT, VE F5 [DESIGN], Versafe, Versafe [DESIGN], VIPRION, vCMP, Virtual Clustered Multiprocessing, WA, WAF Express, WAN Optimization Manager, WAN Optimization Module, WANJet, WE MAKE APPS GO, WE MAKE APPS GO Faster. Smarter. Safer. [DESIGN], WebAccelerator, WebSafe, WOM, and ZoneRunner are trademarks or service marks of F5 Networks, Inc., or its subsidiaries in the U.S. and other countries. Any other trademarks, service marks and/or trade names appearing in this document are the property of their respective owners.
Unless the context otherwise requires, in this Annual Report on Form 10-K, the terms “F5 Networks,” “the Company,” “we,” “us,” and “our” refer to F5 Networks, Inc. and its subsidiaries. Our fiscal year ends on September 30, and fiscal years are referred to by the calendar year in which they end. For example, “fiscal year 2017” and “fiscal 2017” refer to the fiscal year ended September 30, 2017.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These statements include, but are not limited to, statements about our plans, objectives, expectations, strategies, intentions or other characterizations of future events or circumstances and are generally identified by the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions. These forward-looking statements are based on current information and expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially and adversely from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under “Item 1A. Risk Factors” below and in other documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to revise or update any such forward-looking statements.

Item 1.
Business
General
F5 Networks is the leading developer and provider of software defined application services designed to ensure that applications delivered over Internet Protocol (IP) networks are faster, smarter and safer for any user, anywhere, anytime, on any device. F5 solutions serve mid-to-large enterprise, the public sector, and top service providers around the globe.
Our core technology is a full-proxy, programmable, massively-scalable software platform called TMOS (Traffic Management Operating System). Introduced in 2004, the TMOS platform supports the industry’s broadest array of application services, including local and global traffic management, network and application security, access management, web acceleration and a number of other network and application services. These services are available as software modules that can run individually or as part of an integrated solution on our high-performance, scalable, purpose-built BIG-IP appliances and chassis-based VIPRION systems; or as software-only Virtual Editions that run on major hypervisors in public and private clouds. Our cloud-based Silverline software-as-a-service (SaaS) offerings allow customers to subscribe to online denial-of-service protection and application security services. In conjunction with our BIG-IQ management software, the availability of our application services as software on our purpose-built hardware, and also as software-only and Silverline subscription services gives customers the flexibility to create a dynamic secure hybrid infrastructure with consistent policies and centralized management across multiple cloud platforms as well as traditional data centers.

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The core features and functions of TMOS enable our products to inspect and modify the content of IP traffic flows at network speeds and sessions between users and applications and support a broad and growing array of services. iRules and iRules LX provide programmable capabilities that enable customers and third parties to write customized rules to inspect and modify traffic characteristics. TMOS also has an open software interface called iControl, which allows our products to communicate with one another and with third-party products; a set of powerful features called iApps that speed deployment of our services and give users an application-centric view of how applications are managed and delivered; and a scripting framework called iCall that lets users configure their F5 devices inline.
The majority of our revenue today is derived from sales of BIG-IP and VIPRION products, as well as associated professional services. Our hardware products include the BIG-IP family of appliances and our scalable VIPRION systems, and the Herculon line of security appliances. These purpose-built devices integrate industry-standard components, such as Intel based general-purpose processors, high performance cryptographic offload components, and FPGAs (Field-Programmable Gate Arrays). The architecture of these systems is designed to accelerate and optimize the performance of our software by offloading repetitive, compute-intensive functions such as encryption and compression to specific components, and enabling complex application-layer processing at network speed. Deployed throughout the IT infrastructure, our hardware products deliver massive performance and scalability that enable customers to consolidate multiple application services. This consolidation reduces their total cost of ownership and helps drive down operating costs by simplifying the management of servers and applications.
As information technology architecture continues to evolve, there is growing demand for cloud-based and software-only application services that can be deployed in virtual environments next to each instance of an application. Our Virtual Edition (VE) products are software-only versions of the same application delivery services we sell as modules on our purpose-built hardware. Designed to run on all standard hypervisors, they are portable across major cloud environments, deliver faster throughput than competing products, and offer the broadest array of integrated application services available. While VEs generally have lower performance than our hardware-based solutions, they give customers the flexibility to deploy a mix of integrated application services as needed, spin them up and down with each instance of an application, and move them easily between traditional data centers and multiple private or public cloud platforms-while also incorporating technologies such as microservices and container environments. In parallel, while our traditional customer base has largely consisted of enterprise and service provider organizations, our cloud and container-focused offerings are bringing the benefits of advanced application services to a broader range of users.
Whether they are deployed as VEs or as modules on our purpose-built hardware, our application delivery services can be centrally managed from our BIG-IQ management platform.

In addition to our VEs and hardware-based solutions, our cloud-based Silverline SaaS platform gives customers the option to subscribe to enterprise-grade application delivery services available online. Current Silverline services include distributed denial-of-service (DDoS) protection and application security. Subscriptions include 24/7 access to our Security Operations Center (SOC) support teams.
Our products also include solutions for Diameter signaling and routing, load balancing and gateway connectivity, designed to enable service providers to meet the multiple challenges associated with the growth of mobile data.
In connection with our products, we offer a broad range of professional services including consulting, training, installation, maintenance and other technical support services.
F5 Networks was incorporated on February 26, 1996 in the State of Washington. Our headquarters is in Seattle, Washington, and our mailing address is 401 Elliott Avenue West, Seattle, Washington 98119. The telephone number at our executive offices is (206) 272-5555. We have subsidiaries, branch offices or representative offices in Argentina, Australia, Austria, Belgium, Brazil, the British Virgin Islands, Canada, Chile, China, Colombia, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Hong Kong, India, Indonesia, Ireland, Israel, Italy, Japan, Kingdom of Saudi Arabia, Malaysia, Mexico, Netherlands, New Zealand, Norway, the Philippines, Poland, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom and Vietnam. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge on our website, www.f5.com, as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (www.sec.gov) that contains current, quarterly and annual reports, proxy and information statements and other information regarding issuers that file electronically.

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Industry Background
Growth and Evolution of IP-Based Infrastructures
Internet Protocol (IP) is a communications language used to deliver applications and data over the Internet. For more than two decades, large business and government organizations have been gradually replacing older data center architectures with IP-based infrastructures, deploying new IP-based applications and replacing or upgrading legacy applications with new IP-enabled versions. This trend has been accompanied by the proliferation of mobile devices such as smartphones, tablets and laptops that allow users to access data and applications from almost anywhere. At the same time, virtualization of data centers and networks and the emergence of public clouds have given rise to dynamic hybrid infrastructures where applications are increasingly hosted off-premises as well as in traditional data centers and can move freely between locations as demand or other circumstances require.
Emergence of the Dynamic Data Center and Hybrid IT Infrastructures
From a broad perspective, the goal of IT organizations is to optimize the secure delivery of applications to users wherever they are and whenever they need them, regardless of where those applications exist.
Dynamic Data Center. Server virtualization has enabled organizations to group or partition data center compute resources to meet user demand dynamically, and reconfigure these virtual resources easily and quickly as demand changes. More recently, software-defined networking (SDN) offers organizations a means to reduce costs, increase the flexibility, and simplify the deployment and management of IT infrastructure through network virtualization. F5 products play key roles in application delivery and security in both environments, where compute is virtualized and the network is virtualized.
Hybrid IT Infrastructures. Many organizations are also taking advantage of the growing availability of internal/external private and public cloud resources as a flexible, secure and reliable alternative to owning and managing static infrastructure components directly. F5 State of Application Delivery (SOAD) and other studies show that customers are increasingly moving towards hybrid IT, or even multi-cloud architectures, where applications on-premise must coexist and collaborate with applications in the cloud. F5 solutions can simplify the deployment, delivery, security and management of applications in such hybrid environments.
At the same time, these changes have created new challenges to the security of IP networks and the applications and data accessible over the Internet. With increasing frequency, sophisticated denial-of-service attacks have exposed a major vulnerability in the security perimeter of corporate networks by overwhelming firewalls and effectively shutting down the networks. In addition, many network-level security threats are directly related to the improper use of the same protocols applications depend on to transmit data. Intrusion detection and prevention devices, which rely on signature databases of known threats, afford some protection against these types of attacks. However, they offer no protection against many of the most common threats, including information leakage, content spoofing, cross-site request forgery or “zero-day” attacks designed to exploit a variety of application vulnerabilities.
In addition to preventing the threat of attacks designed to disrupt, destroy or block access to network applications, organizations are faced with the equally daunting challenge of controlling access to applications and data. The proliferation of mobile devices has given users with smart phones, tablets, and laptops the ability to access corporate private and public cloud data centers from virtually anywhere. This, in turn, has increased the difficulty of ensuring that mobile users are able to access applications and data for which they are authorized, and that applications and data are protected from access by unauthorized users.
Need to Optimize the Secure Delivery of Applications and Data
With the ongoing evolution and increasing complexity of IT infrastructures, there is a growing need to optimize the secure delivery of applications and data over IP networks. IP-based traffic passing between end-user devices, servers, and cloud resources is divided into discrete packets that travel by multiple routes to their destination where they are reassembled. The basic disassembly, routing, and reassembly of transmissions are relatively straightforward and require limited intelligence. By contrast, managing, inspecting, modifying, redirecting, and securing application traffic going to and from servers can require highly intelligent systems capable of performing an expanding array of functions. Broadly speaking, all of those functions are aspects of application delivery.
Application delivery services dynamically manage, secure, and optimize the flow of traffic between users and servers (physical or virtual), and cloud environments, freeing up other resources by offloading common network functions, such as encryption, IPv4/IPv6 translation, compression, authentication, rate-shaping, and a variety of specialized functions, including network and application security services, policy management, and WAN optimization, that would otherwise have to be coded into applications. Since most large enterprises have hundreds — if not thousands — of applications, it isn't practical to replicate these functions within each instance of an application and maintain consistent policies across a broad spectrum of different

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applications. In traditional data centers, it has been common practice to deploy an array of point products in front of server farms to provide various services, but that typically requires integrating, maintaining and upgrading disparate technologies from different vendors, a process that is time-consuming and expensive in terms of both capital and operating costs. From a security standpoint, it is also much more difficult to audit traffic passing through multiple devices. In such environments, a more practical and efficient solution is a comprehensive set of integrated application delivery services on a single, high-performance device. In virtual and cloud environments where flexibility is a priority, software designed to run on standard hypervisors provides the same services and many of the benefits associated with hardware-based solutions.
Although application delivery services are broadly applicable within enterprise and service provider IT infrastructures, service providers face unique challenges as they attempt to modernize and scale their networks to deal with the flood of data generated by smart phones, tablets, wearables, and other mobile devices. To cope with these challenges, many service providers are still migrating legacy 2G/3G infrastructures to 4G/LTE networks and Evolved Packet Core (EPC) data centers that require an array of network and application services. Today, most of those services are deployed on separate appliances from different vendors, and service providers are actively seeking solutions that will enable them to lower costs and improve reliability and performance by consolidating services and reducing the number of devices. Increasingly, they are also demanding software solutions designed to run on commodity hardware that can be repurposed as needed. To cope with the dramatic increase in signaling traffic associated with 4G/LTE networks, the challenges of migrating legacy infrastructure, and the need to integrate charging and enforcement functions with subscriber data, service providers have also adopted the Diameter signaling protocol as the de facto standard for communication within their evolving data centers.
F5’s Strategy
Our goal is to lead the industry in providing IP network services that ensure the safe, fast, and reliable delivery of applications to any user, anywhere, anytime-regardless of a user's location or where the application resides. These services include availability, security, performance, mobility, and identity. They also include managing and orchestrating resources, as well as coordinating services across multiple data centers, networks, and cloud-based resources. Our products are designed to provide strategic points of control throughout the IT infrastructure that allow business policies to be implemented where information is exchanged. Key components of our strategy include:
Offering a complete, integrated suite of application services.
Since the introduction of TMOS, we have developed TMOS-based versions of our own legacy products, such as Local Traffic Manager (LTM), BIG-IP DNS, and Link Controller; newer products, such as Advanced Firewall Manager (AFM), Carrier Grade Network Address Translation (CGNAT) and Policy Enforcement Manager (PEM); and products that incorporate acquired technology, including Application Security Manager (ASM), Access Policy Manager (APM) and our end-user protection services, WebSafe and MobileSafe. All of these products are currently available as integrated software modules on our BIG-IP and VIPRION hardware and as Virtual Editions that run on standard hypervisors. In 2016, we introduced our first stand-alone security appliances, DDoS Hybrid Defender and SSL Orchestrator. In addition, we offer online DDoS protection and application security as subscription services on our cloud-based Silverline SaaS platform. Regardless whether these services are deployed as software-only solutions or as modules running on our purpose-built hardware, our BIG-IQ management platform allows customers to apply and update consistent policies across their F5 services from a centralized resource. We believe this approach addresses the needs of today's evolving hybrid infrastructures and sharply differentiates our products from our competitors’ offerings.
Investing in technology to meet evolving customer needs.
We meet with our customers often, and maintain a customer advisory board to ensure that our development efforts are aligned with their needs. We continue to invest in research and development efforts that leverage the unique attributes of our TMOS platform as well as new technologies to deliver new features and functions that address the complex, changing needs of our customers. Although the bulk of our investment is software development, concurrent development of tightly integrated hardware that delivers consistent, guaranteed high-performance continues to be an appreciable element of our investment strategy. We also look for opportunities to acquire technologies that will enable us to broaden the scope of our offerings and expand into adjacent markets.

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Expanding our addressable market.
Since the introduction of TMOS, we have continually expanded our addressable market and the definition of application delivery through the acquisition and development of new technology. In 2003, for example, we entered the market for secure remote access through the acquisition of uRoam, Inc. and its FirePass SSL VPN technology that has become the core of our current Access Policy Manager (APM) offering. The following year we entered the web application firewall market with the acquisition of MagniFire Websystems, Inc. and its TrafficShield security appliance, which became the foundation of our Application Security Manager (ASM) product. In 2013, we introduced Advanced Firewall Manager (AFM), enabling enhanced network firewall capabilities. In 2013, we also continued to expand our security offerings with the acquisition of Versafe, a provider of web anti-fraud, anti-phishing, and anti-malware solutions, and in 2014 we acquired Defense.Net, a cloud-based DDoS protection service that complements our on-premise DDoS solution and is currently available on our Silverline SaaS platform. During fiscal year 2016, we added new standalone security appliances, DDoS Defender and SSL Orchestrator, to our family of security products-currently available within our Herculon product line. These products are components of our comprehensive approach to application security, and integrate with other features and functions available on our products. As a result of this strategy and our development and acquisition of technology in related markets such as Java Script programing, analytics, DDoS protection and web application firewalls, we believe our current addressable market is significantly broader and more diverse than the ADC market as industry analysts have historically defined it.
Continuing to build and expand relationships with strategic technology partners.
Early on, we developed strategic technology partnerships with enterprise software vendors, such as Microsoft, Oracle, VMware and others, who had an established presence in large enterprises. By taking advantage of iControl, our open application programming interface, and iCall, a scripting framework that provides the ability to define data plane events such as threshold breaches and adjust the behavior of our products accordingly, these vendors have been able to equip their applications and technologies to better interoperate with our products in the network, enhancing overall application performance. In return, they provided us significant leverage in the selling process by recommending our products to their customers. More recently, we have worked closely with several of these vendors to develop configurations of our products, called iApps, that are specifically designed to simplify deployment and optimize the performance of their applications. These solutions are available as templates which allow quick and easy configuration of our products for specific applications.
In recent years, we have developed partnerships with Cisco, HP, Microsoft and VMware to provide integrated application services for their software-defined networking (SDN) offerings. In addition, we have advanced partnership efforts around Amazon AWS, Microsoft Azure, Google Cloud Platform, VMware vCloud, Cisco ACI, and many other technologies to provide cloud-based application services and solutions for customers. We plan to continue building on our existing relationships and to extend our competitive edge by developing new strategic partnerships with other technology leaders and emerging players.
Leveraging DevCentral, our online community of network architects and developers.
Customization of our products' capabilities via iRules, iRules LX and related technologies enhances their “stickiness” by allowing customers to solve problems in both their applications and their networks that would be difficult if not impossible to solve by other means. Our online community, DevCentral, lets customers and partners discuss and share the ways in which they use F5's programmable technologies to solve problems and enhance the security, performance, and availability of applications. A corollary benefit is that a number of the solutions posted by DevCentral participants have become standard features in newer releases of TMOS. DevCentral also provides a valuable window into our customers’ constantly evolving needs that helps guide product development efforts.
F5 Solutions
F5 offers the industry’s most comprehensive set of application delivery and related security services for enterprises, governments, and service providers around the globe. These solutions may be deployed on-premise, in a private cloud (which could be hosted by a hosting provider), in a public cloud, or in a hybrid or multi-cloud environment.
Our integrated application services are available via software modules on our purpose-built hardware, as software-only Virtual Editions (VEs) that run on standard hypervisors, and as cloud-based services on our Silverline SaaS platform. These products function as strategic points of control in IP networks, inspecting, modifying and directing traffic to optimize the security, availability and delivery of applications and data to any user, anywhere, anytime and on any device. Our service provider solutions address the complex needs of service providers and complement our TMOS-based products by enabling fast, reliable communications among the elements of their legacy infrastructures and their evolving packet-based 4G/LTE networks and network functions virtualization (NFV) environments. We believe our products offer the most intelligent services and advanced functionality in the marketplace along with performance and flexibility that enable organizations to simplify management of their IP networks and data center operations by integrating disparate resources to reduce operating costs, enhance productivity, and improve service to employees, customers and partners.

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Since 2004 we have expanded the breadth of features and functionality we offer well beyond the scope of Application Delivery Networking as it has been traditionally defined. Today, we also offer solutions that include application security, secure remote access, enhanced firewall capabilities, optimization, access policy management, carrier-grade network address translation, Diameter signaling, policy enforcement, fraud detection and more, opening up large opportunities in several adjacent markets.
Operating System and Service Module Software
The core of our primary application delivery technology is TMOS, our Traffic Management Operating System, introduced in September 2004. The full-proxy characteristics of the TMOS architecture enable our products to intercept, inspect, and act on the contents of traffic from virtually every type of IP-enabled application. In addition, the modularity of the TMOS architecture allows us to deliver tightly integrated solutions that secure, optimize and ensure the availability of applications and the networks they run on.
Traffic Management Operating System (TMOS)
Since TMOS was launched, we have added thousands of new features designed to interpret and act on specific content in the traffic passing between users and applications. TMOS includes several features and functions that are unique to our products, with examples such as those listed below:
Programmability and customization of F5 products for applications (iApps), for control and management (iControl), for the data plane (iRules and iRules LX), and for threshold breaches and alerts (iCall). See more details below in the DevOps & Programmability sub-section.
ScaleN is a set of three unique capabilities that enhance the flexibility of our products:
Clustered Multiprocessing (CMP) allows customers to cluster and aggregate processors (cores) within BIG-IP appliances or VIPRION chassis products.
Virtual Clustered Multiprocessing (vCMP) enables the creation of separate virtual instances of TMOS within an appliance or chassis, each with a different configuration and assigned to a different application.
Device Service Clustering (DSC) gives customers the ability to group devices and services across an array of physical and virtual devices (BIG-IP appliances, VIPRION chassis, or Virtual Editions). Devices can be added to or removed from a DSC without disrupting application services, and application services can be independently managed within the cluster.
TMOS includes features that enhance the ability of our products to protect and hide networks and applications from denial-of-service attacks and other types of security threats. Other enhancements include gateway support for software-defined networks (SDN), symmetrical and asymmetrical application acceleration, subscriber and application aware enforcement for service providers, management and orchestration of multiple devices, and improved visibility that allows customers to monitor and record the performance of applications and users. The most recent versions of TMOS deliver leading application services with enhanced public cloud integration and more sophisticated security policies for on-premises and hybrid cloud environments. Enhancements in iRules LX enable programmability across traditional, cloud, and hybrid architectures and leverage an extensive Node.js library that allows DevOps teams to create customized services quickly and easily.
Software Modules
The features and functions embedded in F5 products provide integrated software services that cover a broad range of application-aware network functions from load balancing to security. These services are available as software modules designed to run on our purpose-built hardware, as software-only Virtual Editions with any standard hypervisor, and in a variety of cloud-based environments. Notable offerings in the BIG-IP product line include:
Local Traffic Manager (LTM) provides intelligent load balancing, traffic management, and application health checking.
BIG-IP DNS (DNS) improves the performance and availability of global applications by intelligently directing users to the closest or best-performing physical, virtual, or cloud environment. In addition, it enhances DNS security by automatically scaling to absorb a rapid increase in queries resulting from a denial-of-service attack and mitigates complex threats from malware and viruses by blocking access to malicious IP domains.
Advanced Firewall Manager (AFM) enables high-performance network firewall capabilities designed to ensure that traffic is not interrupted even under the most intense attacks. AFM scales to support millions of concurrent connections per second and uses the flexibility of iRules, sophisticated filtering, immediate blacklisting, and over a hundred built-in threat vectors

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to identify and mitigate DDoS attacks. We also offer a carrier-class version of AFM designed to meet the rigorous requirements of an S/Gi firewall in service provider networks.
Application Security Manager (ASM) is a web application firewall that provides comprehensive, proactive, application-layer protection against both generalized and targeted attacks. Combining a positive security model (“deny all unless allowed”) with signature-based detection, ASM can prevent “zero-day” attacks in addition to known security threats.
Access Policy Manager (APM) provides secure, granular, context-aware access to networks and applications while simplifying authentication, authorization, and accounting (AAA) management. Our endpoint security service validates client devices, including personal devices used by employees to access corporate applications and data, to protect organizations from viruses or malware infections, accidental data loss, and rogue device access. This allows users to apply repeatable access policies across many devices, networks, applications and servers with centralized visibility of their authorization infrastructure.
Carrier-Grade Network Address Translation (CGNAT) offers a broad set of tools that enables service providers to successfully migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content. BIG-IP CGNAT offers service providers tunneling solutions with Dual-Stack Lite capabilities as well as native network address translation solutions such as NAT44 and NAT64. It provides carrier-grade scalability by offering a very high number of IP address translations, very fast NAT translation setup rates, high throughput, and high-speed logging.
Policy Enforcement Manager (PEM) offers service providers a comprehensive set of traffic classification capabilities to accurately identify the specific applications and services subscribers are using and how they are using them. This information allows them to steer application and subscriber traffic to the most appropriate value-added services (such as web caching, video optimization, or parental control) and reduce the burden on other services. PEM also provides deep reporting, enabling service providers to build tailored services and packages based on subscribers’ application usage and traffic classification.
All software modules can be licensed individually. In addition, our “Better” and “Best” offerings bundle certain modules and are sold at a discount to the price customers would pay if each of the included items were purchased separately.
Cloud-Based Subscription Services
Silverline is a SaaS platform that allows customers to subscribe to security services running on our own high-performance, massively-scalable hardware in cloud-based points of presence around the globe. Two services are currently available on Silverline: Denial of Service (DoS) protection and Web Application Firewall (WAF). Depending on the level of protection they require, customers can route traffic through Silverline 24/7 or only when an attack is detected. For customers who want to minimize the upfront costs and expense of maintaining on-premise solutions, these services are simple to deploy and an affordable alternative. For large enterprises, subscribing to these services in conjunction with F5's on-premises DDoS solution (AFM) and Web Application Firewall (ASM) can provide a first line of defense against attacks before they have a significant down-time impact on their application or network services.
Other Subscription Services
WebSafe and MobileSafe are software modules that inject code into traffic between a large enterprise, such as a major financial institution, and its online customers or clients. The code is then downloaded transparently onto the client device and provides real-time protection against malware, phishing, and other cyberthreats, including fraud, without any impact to the user experience. WebSafe protects against all web-based threat types, and MobileSafe protects against advanced threats targeting the mobile user.
Secure Web Gateway Services is a function of APM that protects enterprises against both inbound and outbound malware. Integrated with cloud-based threat intelligence provided by Websense, Secure Web Gateway enables enterprises to manage user access to websites, as well as to hundreds of web-based applications, protocols, and videos, ensuring adherence to corporate acceptable use policies, and compliance regulations.
IP Intelligence uses contextual awareness and analysis of traffic and constantly refreshed data from a global threat-sensor network to block threats from a dynamic set of high-risk IP addresses.

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Service Provider Solutions
In addition to the solutions described above, F5 also offers a number of technologies specifically aimed at the service provider market, including:
GiLAN Solution
GiLAN solution is made up of BIG-IP LTM and DNS, Carrier-Grade Nework Address Translation (CGNAT) and Policy Enforcement Manager (PEM). The modules have been described above in this document.
Carrier-Grade Network Address Translation (CGNAT) offers a broad set of tools that enables service providers to successfully migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content. BIG-IP CGNAT offers service providers tunneling solutions with Dual-Stack Lite capabilities as well as native network address translation solutions such as NAT44 and NAT64. It provides carrier-grade scalability by offering a very high number of IP address translations, very fast NAT translation setup rates, high throughput, and high-speed logging.
Policy Enforcement Manager (PEM) offers service providers a comprehensive set of traffic classification capabilities to accurately identify the specific applications and services subscribers are using and how they’re using them. This information allows them to steer application and subscriber traffic to the most appropriate value-added services (such as web caching, video optimization, or parental control) and reduce the burden on other services. PEM also provides deep reporting, enabling service providers to build tailored services and packages based on subscribers’ application usage and traffic classification.
Network Function Virtualization (NFV)
All software modules BIG-IP LTM, AFM, PEM, CGNAT, DNS and others are available as Virtual Editions which make up the Virtual Network Functions (VNF) which can be licensed individually. In addition, our “Better” and “Best” offerings bundle certain modules or VEs and are sold at a discount to the price customers would pay if each of the included items were purchased separately. We also offer a variety of licensing options for VEs, including subscriptions, utility pricing, and volume licensing.
Our VNFs can be orchestrated with the service provider’s Orchestration engines through open APIs. Also the VNFs can be integrated with external SDN controllers.
Carrier Class Firewall (CCFW)
F5’s carrier-class network firewall provides end-to-end security. From customer billing and provisioning systems to protecting LTE network infrastructure and strengthening mobile device security including protection against DDoS attacks. Our multilayered redundant security platform supports new 4G-LTE, 5G, and VoLTE technologies and easily integrates with today’s NFV environments. Defending assets at scale, without impairing performance is the security approach that earns us trust by all ten of the Tier-1 operators.
Signaling Traffic Management
Service Provider networks use several key protocols like the Diameter signaling protocol which is a de facto standard adopted by service providers to deal with the massive increase in signaling traffic that has accompanied the mobile industry’s transition to 4G/LTE networks. F5’s BIG-IP platform supports load balancing of traffic associated with protocols like Diameter, SIP, GTP and also IoT protocols like MQTT that are widely used in service provider networks. Diameter, SIP and other Load Balancers deliver cost-effective connectivity, scalability, and control to service providers migrating from legacy infrastructures to LTE and IMS networks.
Hardware Platforms
All of our purpose-built hardware products are designed to enhance the performance of our software by leveraging a combination of custom FPGA logic and off the shelf silicon, providing a balance of cost and flexibility. Currently, we offer two types of hardware configurations: BIG-IP appliances; and our chassis-based VIPRION products. Both BIG-IP and VIPRION run TMOS and support our product software modules. We also sell specialty appliances that integrate specific software services and are only available as standalone products.
Data sheets for all of our hardware platforms are available in the products section of our website.
BIG-IP Appliances
Platforms in our family of BIG-IP appliances differ primarily in their performance and size characteristics resulting from the hardware components and configurations that make up these systems. Currently, BIG-IP appliances are available in two

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product lines: a standard series and the newer, cloud-ready iSeries (introduced in the second half of calendar year 2016). Enhancements in performance, scalability, and hardware programmability enable F5 products to run various software services, including F5's hypervisor technology called virtual clustered multiprocessing (vCMP), which allows complete segmentation of BIG-IP systems into independent virtual BIG-IPs.
VIPRION Chassis-Based Systems
Currently we offer four chassis-based systems: VIPRION 4800, VIPRION 4480, VIPRION 2400 and VIPRION 2200. VIPRION’s unique CMP architecture distributes traffic evenly across all available processors and allows customers to add or remove blades without disrupting traffic. It also helps customers simplify their networks by consolidating application delivery services with vCMP, saving management costs as well as power, space, and cooling in the datacenter. During the third quarter of fiscal year 2016, we introduced the VIPRION 4450 blade for VIPRION 4800 (8-blade chassis) and VIPRION 4480 (4-blade chassis). Each blade delivers greater than 100Gb of throughput, and a fully loaded VIPRION 4800 can support more than one billion concurrent connections.
Software Platforms
BIG-IP Virtual Edition (VE)
Virtual Edition (VE) is F5’s software ADC and Security services platform. VE was introduced in 2011 to enable customers to leverage F5’s services in virtualized and cloud based environments. Currently, VE is deployable on most hypervisors including VMware ESXi, KVM, Xen, and Microsoft Hyper-V and in various clouds such as Amazon AWS, Microsoft Azure, Google Cloud Platform, and OpenStack. VE is optimized for performance and interoperability in these environments, including a high-performance version supporting up to 40G throughput and integration into automation/orchestration frameworks (Ansible, Puppet, Terraform, OpenShift, and Cloud Foundry). F5 also provides tools and supported cloud templates based on our robust set of API’s in our GitHub repository to simplify and automate provisioning and configuration of our services. The same breadth of BIG-IP software modules can be deployed on VE, providing customers the ability to deliver consistent services and security policies for their applications and gain operational agility when deploying in multiple cloud environments. VE is offered in a variety of licensing options including as a subscription license, as part of an enterprise licensee agreement, as a perpetual license, and in a utility model through several F5 cloud partners. VE is the core platform for addressing the adoption of NFV, Cloud, and DevOps by Enterprise IT and Service Provider networks.
Management and Orchestration Software
BIG-IQ Centralized Management
F5 BIG-IQ Centralized Management provides a central point of control for F5 physical and virtual devices and for the solutions that run on them. BIG-IQ Centralized Management is available as a Virtual Edition or as an enterprise-grade appliance. It simplifies management, helps ensure compliance, and provides the tools to deliver applications securely and effectively across on-premises data centers and public and private clouds. From a single console, customers can:
Manage up to 400 physical and/or virtual BIG-IP devices, including inventory, status, reporting, backups, updates and upgrades, and handle licensing for up to 5,000 virtual devices.
Centrally manage configurations and policies for F5 security products, securing applications and providing insights via dashboard views, reports and alerts for recognized security events.
iWorkflow
iWorkflow is a software platform designed to accelerate the deployment of applications and services, while reducing exposure to the operational risk that comes with manual processes. Available as a virtual appliance, iWorkflow enables agile service deployment by allowing customers and users to automate and orchestrate:
Onboarding of F5 devices
Deployment of configurable, administrator-defined application policies, in the form of iApp templates
Collaboration between Network and Application teams through service catalog of application policies in a multi-tenant environment
Integration with third-party management and orchestration systems through its declarative REST APIs
Development and deployment of customized integrations as part of service provisioning workflows
Deployment of L4-7 services in Cisco ACI and VMware NSX environments

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DevOps & Programmability Software
F5’s DevOps & Programmability portfolio enables automation, orchestration, and partner integration capabilities across F5’s product lines. F5 programmability is provided across the following broad categories:
Automation and partner integrations via iControl REST APIs
Simplified application deployments via iApps
Customized application delivery via iRules and iRules LX
Event-based automation via iCall
Programmability extensibility via iControl LX / iApps LX
iControl REST is our platform API, built on REST (Representational State Transfer), which is a simple, stateless architecture delivered over HTTP(S). It uses JSON (JavaScript Object Notation), which is rapidly becoming the most commonly used format for transferring data pairs. Combined with the fact that iControl REST is effectively an extension of tmsh (our command line interface), it provides a low overhead solution, both in terms of operational expense, as well as time to learn. iControl LX allows for out-of-band customizations to the control plane just as iRules and iRules LX do for the data plane. It provides the foundation for F5’s programmable extensibility layer, enabling users to extend and create fundamentally new platform capabilities. It enables users to run Node.js “extensions” on BIG-IP which enable custom behaviors at new iControl REST API endpoints. These extensions can be initiated and controlled by calling their new REST API endpoints.
iApps is a set of portable, customizable, reusable templates that enable the rapid and predictable deployment of our products in front of dozens of applications from vendors including Cisco, Citrix, Microsoft, Oracle and VMware. iApps also allows customers and partners to create templates that simplify the deployment and provisioning of their own applications. iApps LX extends iControl LX by enabling a rich presentation layer (GUI) and JSON-based application templates.
iCall is a control plane scripting framework that provides the ability to define data plane events such as threshold breaches and adjust the behavior of our products accordingly. iCall enables administrators to react to specified data plane events by executing services on the management plane. It can also be used periodically to manage backups or repopulate DNS, or to provide regularly scheduled services such as configuration audits.
iRules is a powerful, built-in data plane scripting language that enables users to customize how our products intercept, inspect, transform, and direct inbound or outbound application traffic. iRules LX enables programmability across traditional, cloud, and hybrid architectures and leverages an extensive Node.js library that allows DevOps teams to create customized services quickly and easily.
Third-party orchestration systems such as Ansible, Terraform, Chef, and Puppet are critical for the DevOps community/application owners. F5 is primarily investing in Ansible and Python SDK module delivery to enable simplified and declarative BIG-IP onboarding and configuration.
Key fiscal 2017 programmability deliverables include the following:
iRules LX Streaming support
High-performance Node.js-native data plane programmability
Application Services Integration iApp
Enables customers to define and customize Application Service Catalogs for application owners/tenants as part of MANOVA solution
iApps LX framework to enable rich presentation layer for:
SSL Orchestrator
DDoS Hybrid Defender
APM Access Guided Configuration
Application Connector
F5 API Lifecycle
Ensures iControl REST API upgrade compatibility, prevents breaking changes
API provides visibility into endpoint lifecycle state (EA, GA, Internal, Test, Deprecated) to ensure customers use appropriate APIs and plan for upgrades
iControl LX General Availability for last-mile customizations
Enables customers to extend fundamental platform capabilities via custom REST API endpoints

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Incremental Ansible modules to provide comprehensive BIG-IP onboarding and configuration capabilities
Product Development
We believe our future success depends on our ability to maintain technology leadership by continuing to improve our products and by developing new products to meet the changing needs of our customers and partners. Our product development organization which along with product management encompasses our products and technology group (PTG), employs standard processes for the development, documentation, and quality control of software and systems that are designed to meet these goals. These processes include working with our business development and marketing teams, customers, and partners to identify technology innovation opportunities to better meet the evolving needs of our addressable markets.
More than 90 percent of our product development organization is engaged in software development. Our principal software engineering team is located at our headquarters in Seattle, Washington where the LTM, DNS, service provider products, management and orchestration products are engineered. Management product development is also done in Lowell Massachusetts as well as Tel Aviv Isreal. Product development for AFM, APM and PEM are located in San Jose, California. ASM, SDC, and WebSafe/MobileSafe product development is located in Tel Aviv, Israel. Our Tools and Opensource projects are primarily developed from our Boulder Colorado engineering location.
Our hardware engineering team is located in Spokane, Washington, San Jose, and Tel Aviv. In addition, more recently we opened a dedicated facility for product testing and quality control in Warsaw, Poland.
Members of all our product development teams collaborate closely with one another to ensure the interoperability and performance of our hardware and software systems.
During the fiscal years ended September 30, 2017, 2016 and 2015, we had research and product development expenses of $350.4 million, $334.2 million, and $296.6 million, respectively.
Customers
Our customers include a wide variety of enterprises and service providers among Fortune 1000 and Business Week Global 1000 companies, including those in technology, telecommunications, financial services, transportation, education, manufacturing, and healthcare, along with government customers. In fiscal year 2017, sales outside of the Americas represented 43.3% of our net revenues. Refer to Note 10 of our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our revenues by geographic area.
Sales and Marketing
Sales
We sell our products and services to large enterprise customers and service providers through a variety of channels, including distributors, value-added resellers (VARs) and systems integrators. A substantial amount of our revenue for fiscal year 2017 was derived from these channel sales. Our sales teams work closely with our channel partners and also sell our products and services directly to major accounts.
F5 sales teams. Our inside sales team generates and qualifies leads for regional sales managers and helps manage accounts by serving as a liaison between the field and internal corporate resources. Our field sales personnel are located in major cities in four sales regions: the Americas (primarily the United States); Europe, the Middle East, and Africa (EMEA); Japan; and the Asia Pacific region (APAC). Field sales personnel work closely with our channel partners to assist them, as necessary, in the sale of our products and services to their customers. We also sell our products and services directly to customers, primarily large enterprises, whose accounts are managed by our major account team. Field systems engineers support our regional sales managers and channel partners by participating in joint sales calls and providing pre-sale technical resources as needed.
Distributors and VARs. As a key component of our sales strategy, we have established relationships with a number of large national and international distributors, local and specialized distributors and VARs. We derive a majority of our product sales from VARs and rely on our large distributors primarily for fulfillment.
Our agreements with these channel partners are not exclusive and do not prevent them from selling competitive products. These agreements typically have terms of one year with no obligation to renew, and typically do not provide for exclusive sales territories or minimum purchase requirements.

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For fiscal year 2017, sales to four of our worldwide distributors, Westcon Group, Inc., Ingram Micro, Inc., Tech Data and Arrow ECS represented 17.7%, 16.1%, 12.4% and 10.4% of our total revenues, respectively. Our agreements with these distributors are standard, non-exclusive distribution agreements that renew automatically on an annual basis and generally can be terminated by either party with 30 days written notice prior to the start of any renewal term. The agreements grant Westcon Group, Inc., Ingram Micro, Inc., Tech Data, and Arrow ECS the right to distribute our products to resellers, with no minimum purchase requirements.
Systems integrators. We also market our products through strategic relationships with systems integrators, including Dell Services, HP Enterprise Services, and IBM Global Services, who include our products as core components of application deployments or network-based solutions they deploy for their customers. In most cases, systems integrators do not directly purchase our products for resale to their customers. Instead they typically recommend our products as part of broader solutions, such as enterprise resource planning (ERP) or customer relationship management (CRM) solutions that incorporate our products for high availability and enhanced performance.
Resellers and Technology Partners. Historically, our ability to compete with much larger companies has been strengthened through partnerships with large systems and software vendors. Currently we partner with Dell and Hewlett-Packard, who resell our products, and with other large technology companies, including Microsoft, Oracle, VMware and Cisco, who recommend our products to their customers. Management of these relationships is the responsibility of our business development team, which closely monitors technology companies in adjacent and complementary markets for opportunities to partner with those whose solutions are complementary to ours and could enable us to expand our addressable market.
Marketing
Our marketing strategy is driven by the belief that our continued success depends on our ability to understand and anticipate the dynamic needs of our addressable markets and to develop valuable solutions that meet those needs. In line with this belief, our marketing organization works directly with customers, partners, and our product development teams to identify and create innovative solutions to further enhance our leadership position.
To support the growing number of developers using our products, including network and application architects, we continue to promote and expand DevCentral, F5's online community site that provides technical resources to customers, prospects, and partners wanting to extend and optimize their use of our solutions. A key aspect of DevCentral is an online forum where developers as well as application and network architects discuss and share solutions they have written with iRules and iCall. At the end of fiscal year 2017, DevCentral had more than 319,000 registered members.
We also engage in a number of marketing programs and initiatives aimed at promoting our brand and creating market awareness of our technology and products. These include actively participating in industry trade shows and joint marketing events with channel and technology partners, and briefing industry analysts and members of the trade press on our latest products, business relationships, and technology partnerships. In addition, we market our products to chief information officers and other information technology professionals through targeted advertising, digital outreach, and social media efforts.
Backlog
At the end of fiscal years 2017 and 2016, we had product backlog of approximately $25.6 million and $33.4 million, respectively. Backlog represents orders confirmed with a purchase order for products to be shipped generally within 90 days to customers with approved credit status. Orders are subject to cancellation, rescheduling by customers, or product specification changes by customers. Although we believe that the backlog orders are firm, purchase orders may be canceled by the customer prior to shipment without significant penalty. For this reason, we believe that our product backlog at any given date is not a reliable indicator of future revenues.
Customer Service and Technical Support
We believe that our ability to provide consistent, high-quality customer service and technical support is a key factor in attracting and retaining large enterprise customers. Accordingly, we offer a broad range of support services that include installation, phone support, hardware repair and replacement, software updates, online tools, consulting, and training services.
We provide these services directly to end users and also utilize a multi-tiered support model, leveraging the capabilities of our channel partners when applicable. Our technical support staff is strategically located in regional service centers to support our global customer base.
Prior to the installation of our products, our services personnel work with customers to analyze their network needs and determine the best way to deploy our products and configure product features and functions to meet those needs. Our services

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personnel also provide onsite installation and training services to help customers make optimal use of product features and functions.
Our customers typically purchase a one-year maintenance contract which entitles them to an array of services provided by our technical support team. Maintenance services provided under the contract include online updates, software error correction releases, hardware repair and replacement, and, in the majority of cases, round-the-clock call center support. Free updates of our software are available to customers with a current maintenance contract. We also offer an online, automated, self-help customer support function called “AskF5” that provides answers to many commonly asked questions, allowing customers to get information and solve problems quickly while significantly reducing the number of calls to our support desk. This enables us to provide comprehensive customer support while keeping our support-related expenses at a manageable, consistent level. We also offer an online service called iHealth, which allows customers to diagnose up-to-the-minute snapshots of their BIG-IP systems. Diagnoses include tailored feedback about configuration issues or code defects, a description of the issue, recommendations for resolution, and a link to further information within the AskF5 knowledge base.
F5 offers training classes for customers on the configuration and use of products, including local and wide area network system administration and management. We also have a complete certification program that qualifies our partners and customers as having the appropriate skills to implement and use the functionality of our products. To provide our customers with onsite and remote help, we have a professional services team able to provide a full range of fee-based consulting services, including comprehensive network management, documentation and performance analysis, and capacity planning to assist in predicting future network requirements.
Manufacturing
We outsource the manufacturing of our pre-configured hardware platforms to third-party contract manufacturers for assembly according to our specifications.
Our purpose-built systems are manufactured by Flextronics International LTD. Subcontracting activity at Flextronics encompasses prototype builds, full production, and direct fulfillment. Flextronics also performs the following activities on our behalf: material procurement, PCB assembly and test, final assembly, system test, quality control, direct shipment, and warranty repairs. We provide a rolling forecast that allows our contract manufacturers to stock component parts and other materials, plan capacity and build finished goods inventory in anticipation of end user demand. Flextronics procures components in volumes consistent with our forecast, assembles the products and tests them according to our specifications. Products are then shipped to our distributors, value-added resellers, or end users. Generally, we do not own the components. Title to the products transfers from the contract manufacturers to us and then to our customers upon shipment from a designated fulfillment location. If the components are unused or the products are not sold within specified periods of time, we may incur carrying charges or obsolete material charges for components that our contract manufacturers purchased to build products to meet our forecast or customer orders.
Hardware components for our products consist primarily of commodity parts and certain custom components designed and approved by our hardware engineering group. Most of our components are purchased from sources which we believe are readily available from other suppliers. However, some components used in the assembly of our products are purchased from a single or limited source.
Testing of all sub-assemblies and assembled systems of our products are performed at Flextronics' facility in Zhuhai, China. The majority of our systems are shipped to Flextronics' Milpitas, California plant for configuration, final testing, and eventual distribution to our end users. We also have capabilities to complete this process for some of our products in Flextronics' Zhuhai, China plant for distribution to APAC and Japan end users.
Competition
The expanding capabilities of our product offerings have enabled us to address a growing array of market opportunities, many of which are outside the bounds of the Application Delivery Networking market as defined and measured by industry analysts such as Gartner, Dell’Oro, and others. In addition to server load balancing, traffic management, and other functions normally associated with application delivery, our suite of integrated product modules has expanded our addressable market into security, WAN optimization, application acceleration, policy management, and Diameter signaling and routing, where we compete with a growing number of companies not included among traditional ADC vendors. The ability to create customized, programmable services using iRules, iControl, iCall, and similar technologies has also enabled us, our customers, and our partners to design solutions to problems for which there is no off-the-shelf solution. As a result, we believe the traditional definitions of our market do not encompass all of the features, functions, and capabilities of our products, or accurately represent the addressable market for those products.

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Within the more narrowly defined traditional ADC market, several companies sell server load balancing products and capabilities. These include Brocade Communications Systems, Inc., Citrix Systems, Inc. and a number of other competitors that have a smaller market presence or limited feature set, such as: A10 Networks, Amazon Web Services, Microsoft, Array Networks, Inc., Avi Networks, Barracuda Networks, Inc., NGINX, HA Proxy, Kemp Technologies, and Radware Ltd.
In related markets, we compete with companies such as the following:
Cisco, Juniper Networks, and Checkpoint Systems for network firewall capabilities;
Cisco, Imperva, Citrix and Barracuda Networks in the web application firewall market;
Cisco, Juniper and A10 in Carrier Grade NAT;
Procera, Allot, Sandvine, and other DPI vendors with our PEM offering;
Oracle via the acquisition of Tekelec and Acme Packet in the Diameter signaling market;
IBM in end-user protection against malware, phishing, and other cyberthreats;
Akamai Networks in cloud-based DDoS protection; and
Symantec via the acquisition of Blue Coat Systems in protecting enterprises from inbound and outbound malware.
The principal competitive factors in the markets in which we compete include product features and performance, customer support, brand recognition, the scope of distribution and sales channels, and pricing. Certain of our competitors have employed and may in the future adopt aggressive pricing policies to gain market share. However, because of the superior performance, broad functionality, and unique capabilities of our products, which have resulted in high levels of customer satisfaction and growing brand awareness, we believe that we can and will compete effectively against such pricing policies.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. F5 holds 297 patents in the United States and has 22 international patents (with applications pending for various aspects of our technology). Our future success depends in part on our ability to protect our proprietary rights to the technologies used in our principal products. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. Any issued patent may not preserve our proprietary position, and competitors or others may develop technologies similar to or superior to our technology. Our failure to enforce and protect our intellectual property rights could harm our business, operating results, and financial condition.
In addition to our own proprietary software, we incorporate software licensed from several third-party sources into our products. These are generally term licenses which may renew annually and that generally provide for certain rights and licenses to support our customers post termination. While we may not be able to renew certain of these licenses in the future, we believe that alternative technologies for these licenses are available both domestically and internationally.
Employees
As of September 30, 2017, we had 4,366 full-time employees, including 1,192 in product development, 1,711 in sales and marketing, 895 in professional services and technical support and 471 in accounting and finance, administration and operations. None of our employees is represented by a labor union. We have experienced no work stoppages and believe that our employee relations are good.

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Executive Officers of the Registrant
The following table sets forth certain information with respect to our executive officers as of November 3, 2017:
 
Name
 
Age
 
Position
François Locoh-Donou
 
46

 
President, Chief Executive Officer, and Director
John DiLullo
 
51

 
Executive Vice President of Worldwide Sales
Benjamin Gibson
 
49

 
Executive Vice President and Chief Marketing Officer
Ryan Kearny
 
48

 
Executive Vice President of Product Development and Chief Technology Officer
Steve McMillan
 
46

 
Executive Vice President of Global Services
Andy Reinland
 
53

 
Executive Vice President and Chief Financial Officer
Scot Rogers
 
50

 
Executive Vice President and General Counsel
François Locoh-Donou has served as our President, Chief Executive Officer and member of our Board of Directors since April 2017. Prior to joining F5, Mr. Locoh-Donou served as Senior Vice President and Chief Operating Officer of Ciena Corporation. During his more than 15 years at Ciena, Mr. Locoh-Donou served in several leadership positions. From August 2011 to October 2015, he served as Ciena’s Senior Vice President, Global Products Group. Previously, he served as Ciena’s Vice President and General Manager, Europe, Middle East and Africa from June 2005 to August 2011. Mr. Locoh-Donou holds an M.B.A. from Stanford University, a 'Mastere' in Optical Telecommunications from the National Institute of Telecommunications of Paris (ENST), and a 'Diplome d'Ingenieur' in Physics Engineering from the National Institute of Physics in Marseille (ENSPM), France.
John DiLullo has served as our Executive Vice President of Worldwide Sales since October 2015. Responsible for F5’s global sales strategy, Mr. DiLullo brings over 25 years of experience in global business, sales, market and channel development, operations, and team management. Prior to joining F5, Mr. DiLullo ran the Worldwide Sales and Services team at Aruba Networks, through their acquisition by Hewlett-Packard. Before this role, he served Avaya Communications in three progressive General Manager roles-first as President of Asia-Pacific, then Latin America and Canada, and ultimately the entire Americas Theater. Before joining Avaya, Mr. DiLullo spent seven years at Cisco Systems, most recently as Vice President of Channels, and three years at SonicWALL as Vice President of Sales, Channels, and Field Operations. He holds a B.S. from Villanova University and was a Fellow and Ph.D. candidate at Stanford University.
Benjamin Gibson has served as our Executive Vice President and Chief Marketing Officer since August 2016. Prior to joining F5, Mr. Gibson was Chief Marketing Officer at Veritas, where he led the company’s rebranding efforts, following a spin-off from Symantec. Prior to Veritas, Mr. Gibson served as Chief Marketing Officer at Aruba Networks. During his five-year tenure, Aruba doubled in annual revenue as it expanded into new markets. Before joining Aruba, Mr. Gibson spent five years at Cisco Systems, most recently as Vice President of Data Center/Virtualization Marketing, where he ran the outbound marketing strategy and execution for a number of Cisco’s application networking products. Mr. Gibson has a B.A. in Journalism from California State University, Long Beach.
Ryan Kearny has served as our Executive Vice President of Product Development and Chief Technology Officer since October 2016.  Mr. Kearny is responsible for overseeing F5's products and technology roadmap and leading our engineering team. Mr. Kearny joined F5 in 1998 and was named Vice President of Product Development in May 2004 and Senior Vice President of Product Development in January 2012. Prior to joining F5, Mr. Kearny held a variety of software application architect positions with various Northwest companies. Mr. Kearny holds a B.S. in Electrical Engineering from the University of Washington.
Steve McMillan has served as our Executive Vice President of Global Services since October 2017. He is responsible for overseeing F5’s worldwide services organization, including global support, consulting, and services teams. Prior to joining F5, Mr. McMillan served as Senior Vice President, Customer Success and Managed Cloud Services at Oracle from September 2015 to October 2017, where he developed, oversaw, and expanded a customer success organization focused on the company’s strategic SaaS portfolio. Previously, Mr. McMillan served as Oracle’s Senior Vice President, Managed Cloud Services from July 2012 to September 2015. Prior to joining Oracle, McMillan spent 19 years at IBM, where he held a number of leadership roles focused on global managed services, consulting, and IT. Mr. McMillan holds a B.S. in Management and Computer Science from Aston University.

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Andy Reinland has served as Executive Vice President since October 2005 and Chief Financial Officer since October 2012. From October 2005 to October 2012, he served as our Chief Finance Officer. Mr. Reinland joined F5 in 1998 as a senior financial analyst and served as our Vice President of Finance from January 2004 to October 2005. Prior to joining F5, Mr. Reinland was Chief Financial Officer for RTIME, Inc., a developer of real-time 3D software for Internet applications, which was acquired by Sony. Mr. Reinland started his career in public accounting. Mr. Reinland holds a B.A. in Business from Washington State University.
Scot Rogers has served as our Executive Vice President and General Counsel since January 2014. Mr. Rogers has held a variety of positions in F5's legal department since 2005, including most recently as Senior Vice President and Associate General Counsel immediately prior to his promotion to Executive Vice President. From 2002 through 2005, Mr. Rogers was the General Counsel for Xpediate Consulting, a healthcare technology and consulting company located in the San Francisco Bay Area. Prior to becoming a corporate counsel, he spent eight years in private practice as a commercial litigator. Mr. Rogers is a graduate of the University of Texas and holds a J.D. from the Dedman School of Law of Southern Methodist University.
Item 1A.
Risk Factors
In addition to the other information in this report, the following risk factors should be carefully considered in evaluating our company and its business.
Our business could be adversely impacted by conditions affecting the information technology market
A substantial portion of our business depends on the demand for information technology by large enterprise customers and service providers. In addition to the challenges presented by new cloud computing models, we are dependent upon the overall economic health of our current and prospective customers and the continued growth and evolution of the Internet. International, national, regional and local economic conditions, such as recessionary economic cycles, protracted economic slowdown or further deterioration of the economy could adversely impact demand for our products. Demand for our products and services depends substantially upon the general demand for application delivery products and associated services, which fluctuates based on numerous factors, including capital spending levels and growth of our current and prospective customers, as well as general economic conditions. Moreover, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. Future economic projections for the information technology sector are uncertain as companies continue to reassess their spending for technology projects and embrace new models for delivery of IT services, such as cloud computing and highly orchestrated software defined networking environments. As a result, spending priorities for our current and future customers may vary and demand for our products and services may be impacted. In addition, customer buying patterns are changing over time and more customers seek to rent software on a subscription basis and to reduce their total cost of ownership. These evolving business models could lead to changes in demand and licensing strategies, which could have a material adverse effect on our business, results of operations and financial condition.
Cloud-based computing trends present competitive and execution risks
Customers are transitioning to a hybrid computing environment utilizing various cloud-based software and services accessed via various smart client devices. Pricing and delivery models are evolving and our competitors are developing and deploying cloud-based services for customers. In addition, new cloud infrastructures are enabling the emergence of new competitors including large cloud providers who offer their own ADC functionality as well as smaller companies targeting the growing numbers of "born in the cloud" applications. We are devoting significant resources to develop and deploy our own competing cloud-based software and services strategies. While we believe our expertise and investments in software and infrastructure for cloud-based services provides us with a strong foundation to compete, it is uncertain whether our strategies will attract the customers or generate the revenue required to be successful. In addition to software development costs, we are incurring costs to build and maintain infrastructure to support cloud-computing services. These costs may reduce the operating margins we have previously achieved. Whether we are successful in this new business model depends on our execution in a number of areas, including:
continuing to innovate and bring to market compelling cloud-based services that generate increasing traffic and market share;
maintaining the utility, compatibility and performance of our software on the growing array of cloud computing platforms and the enhanced interoperability requirements associated with orchestration of cloud computing environments; and
implementing the infrastructure to deliver our own cloud based services.
These new business models may reduce our revenues or operating margins and could have a material adverse effect on our business, results of operations and financial condition.

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Industry consolidation may result in increased competition
Some of our competitors have made acquisitions or entered into partnerships or other strategic relationships to offer a more comprehensive solution than they had previously offered. We have also entered into large, strategic partnerships to enhance our competitive position in the marketplace. As IT companies attempt to strengthen or maintain their market positions in the evolving application delivery, mobility, cloud networking and cloud platform markets, these companies continue to seek to deliver comprehensive IT solutions to end users and combine enterprise-level hardware and software solutions that may compete with our solutions and which could negatively impact our partnerships. These consolidators or potential consolidators may have significantly greater financial, technical and other resources than we do and may be better positioned to acquire and offer complementary products and services. The companies resulting from these possible combinations may create more compelling product and service offerings and be able to offer greater pricing flexibility or sales and marketing support for such offerings than we can. These heightened competitive pressures could result in a loss of customers or a reduction in our revenues or revenue growth rates, all of which could adversely affect our business, results of operations and financial condition.
We may not be able to compete effectively in the emerging application delivery networking market
The markets we serve are new, rapidly evolving and highly competitive, and we expect competition to persist and intensify in the future. Our principal competitors in the application delivery networking market include Brocade Communications Systems, Inc., Citrix Systems, Inc. and a number of other competitors that have a smaller market presence or limited feature set, such as: A10 Networks, Amazon Web Services, Microsoft, Array Networks, Inc., Avi Networks, Barracuda Networks, Inc., NGINX, HA Proxy, Kemp Technologies, and Radware Ltd.
In related markets, we compete with companies such as the following:
Cisco, Juniper Networks and Checkpoint Systems for network firewall capabilities;
Cisco, Imperva, Citrix and Barracuda Networks in the web application firewall market;
Cisco, Juniper and A10 in Carrier Grade NAT;
Procera, Allot, Sandvine and other DPI vendors with our PEM offerings;
Oracle via the acquisition of Tekelec and Acme Packet in the Diameter signaling market;
IBM in end-user protection against malware, phishing and other cyberthreats;
Akamai Networks in cloud-based DDoS protection; and
Symantec via the acquisition of Blue Coat Systems in protecting enterprises from inbound and outbound malware.
We expect to continue to face additional competition as new participants enter our markets. As we continue to expand globally, we may see new competitors in different geographic regions. In addition, larger companies with significant resources, brand recognition, and sales channels may form alliances with or acquire competing application delivery networking solutions from other companies and emerge as significant competitors. Potential competitors may bundle their products or incorporate an Internet traffic management or security component into existing products in a manner that discourages users from purchasing our products. Any of these circumstances may limit our opportunities for growth and negatively impact our financial performance.
Our success depends on our timely development of new products and features, market acceptance of new product offerings and proper management of the timing of the life cycle of our products
The markets for our products and services are characterized by:
rapid technological change;
evolving industry standards;
consolidation of network and application functions into existing network infrastructure products;
requirements that our products interoperate with those of other IT vendors to enable ease of management;
fluctuations in customer demand;
changes in customer requirements; and
frequent new product and service introductions and enhancements.
Our continued success depends on our ability to identify and develop new products and new features for our existing products to meet the demands of these changes, and the acceptance of those products and features by our existing and target

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customers. In addition, our products must interoperate with our end customers’ IT infrastructure, which often have different specifications, deploy products from multiple vendors, and utilize multiple protocol standards. Our customers’ IT infrastructure is becoming more complex and we may be reliant on orchestration and interoperability with third party vendors on whom we are reliant for testing and support of new product versions and configurations. If we are unable to identify, develop and deploy new products and new product features on a timely basis, our business and results of operations may be harmed.
The current development cycle for our products is on average 12-24 months. The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction, and may cause customers to defer purchasing our existing products in anticipation of the new products. This could harm our operating results by decreasing sales, increasing our inventory levels of older products and exposing us to greater risk of product obsolescence. We have also experienced, and may in the future experience, delays in developing and releasing new products and product enhancements. This has led to, and may in the future lead to, delayed sales, increased expenses and lower quarterly revenue than anticipated. Also, in the development of our products, we have experienced delays in the prototyping of our products, which in turn has led to delays in product introductions. In addition, complexity and difficulties in managing product transitions at the end-of-life stage of a product can create excess inventory of components associated with the outgoing product that can lead to increased expenses. Any or all of the above problems could materially harm our business and results of operations.
Our success depends on sales and continued innovation of our application delivery networking product lines
For the fiscal year ended September 30, 2017, we derived approximately 99.7% of our net product revenues, or approximately 46.0% of our total net revenues, from sales of our application delivery networking (ADN) product lines. We expect to continue to derive a significant portion of our net revenues from sales of our ADN products in the future. Implementation of our strategy depends upon these products being able to solve critical network availability, performance and security problems for our customers. If our ADN products are unable to solve these problems for our customers or if we are unable to sustain the high levels of innovation in our ADN product feature set needed to maintain leadership in what will continue to be a competitive market environment, our business and results of operations will be harmed.
Undetected software or hardware errors or security vulnerabilities may harm our business and results of operations
Our products may contain undetected errors or defects when first introduced or as new versions are released. We have experienced these errors or defects in the past in connection with new products and product upgrades. As our products and customer IT infrastructures become increasingly complex, customers may experience unforeseen errors in implementing our products into their IT environments. We expect that these errors or defects will be found from time to time in new or enhanced products after commencement of commercial shipments. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. We may also be subject to liability claims for damages related to product errors or defects. While we carry insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted. A material product liability claim may harm our business and results of operations.
Our products must successfully operate with products from other vendors. As a result, when problems occur in a network, it may be difficult to identify the source of the problem. The occurrence of software or hardware problems, whether caused by our products or another vendor’s products, may result in the delay or loss of market acceptance of our products. The occurrence of any of these problems may harm our business and results of operations.
Our products are used to manage critical applications and data for customers and third parties may attempt to exploit security vulnerabilities in our products as well as our internal IT systems. As we continue to focus on the development and marketing of security solutions, we become a bigger target for malicious computer hackers who wish to exploit security vulnerabilities in our products or IT systems. These problems may cause us to incur significant remediation costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. Adverse publicity related to security vulnerabilities or damage to a customer’s operations due to exploitation of security vulnerability in our products or IT systems may harm our business and results of operations.
Any errors, defects or vulnerabilities in our products or IT systems could result in:
expenditures of significant financial and product development resources in efforts to analyze, correct, eliminate, or work-around errors and defects or to address and eliminate vulnerabilities;
loss of existing or potential customers or channel partners;
negative publicity and damage to our reputation;

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delayed or lost revenue;
delay or failure to attain market acceptance;
an increase in warranty claims compared with our historical experience, or an increased cost of servicing warranty claims, either of which would adversely affect our gross margins; and
litigation, regulatory inquiries, or investigations that may be costly and harm our reputation.
We are dependent on various information technology systems, and failures of or interruptions to those systems could harm our business
Many of our business processes depend upon our IT systems, the systems and processes of third parties, and on interfaces with the systems of third parties. For example, our order entry system provides information to the systems of our contract manufacturers, which enables them to build and ship our products. If those systems fail or are interrupted, or if our ability to connect to or interact with one or more networks is interrupted, our processes may function at a diminished level or not at all. This would harm our ability to ship products, and our financial results may be harmed.
In addition, reconfiguring our IT systems or other business processes in response to changing business needs may be time-consuming and costly. To the extent this impacted our ability to react timely to specific market or business opportunities, our financial results may be harmed.
Our failure to adequately protect personal information could have a material adverse effect on our business
A wide variety of local, state, national, and international laws, directives and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data. These data protection and privacy-related laws and regulations continue to evolve and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions and increased costs of compliance. Certain safe-harbor exemptions upon which the Company relies for data transfers have been challenged and may no longer be available to us in the future. Our failure to comply with applicable laws and regulations, or to protect such data, could result in enforcement action against us, including fines, imprisonment of company officials and public censure, claims for damages by end-customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing end-customers and prospective end-customers), any of which could have a material adverse effect on our operations, financial performance, and business. Changing definitions of personal data and personal information, within the European Union, the United States, and elsewhere, especially relating to classification of IP addresses, machine identification, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. The evolving data protection regulatory environment may require significant management attention and financial resources to analyze and modify our IT infrastructure to meet these changing requirements all of which could reduce our operating margins and impact our operating results and financial condition.
Our success depends on our key personnel and our ability to hire, retain and motivate qualified executives, sales and marketing, operations, product development and professional services personnel
Our success depends, in large part, on our ability to attract, engage, retain, and integrate qualified executives and other key employees throughout all areas of our business. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash- and equity-based compensation. If we do not obtain the stockholder approval needed to continue granting equity compensation in a competitive manner, our ability to attract, retain, and motivate executives and key employees could be weakened. Failure to successfully hire executives and key employees or the loss of any executives and key employees could have a significant impact on our operations. Further, changes in our management team may be disruptive to our business, and any failure to successfully integrate key new hires or promoted employees could adversely affect our business and results of operations. In addition, we recently announced John McAdam's retirement as CEO and the appointment of François Locoh-Donou as CEO effective April 3, 2017. Transitioning to a new chief executive could be disruptive to our business and could adversely affect our business and results of operations. The complexity of our application delivery networking products and their integration into existing networks and ongoing support, as well as the sophistication of our sales and marketing effort, requires us to retain highly trained developers, professional services, customer support and sales personnel. Competition for qualified developers, professional services, customer support and sales personnel in our industry is intense, especially in Silicon Valley and Seattle where we have substantial operations and a need for highly skilled personnel, because of the limited number of people available with the necessary technical skills and understanding of our products. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited, that they have divulged proprietary or other confidential information, that they have violated non-compete obligations to their prior employers, or that their former employers own their inventions or other work product. Our ability to hire and retain these personnel may be adversely affected

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by volatility or reductions in the price of our common stock or our ability to get approval from shareholders to offer additional common stock to our employees, since these employees are generally granted restricted stock units. The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future or delays in hiring qualified personnel may harm our business and results of operations.
The average selling price of our products may decrease and our costs may increase, which may negatively impact revenues and profits
It is possible that the average selling prices of our products will decrease in the future in response to competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors, as well as the shift to more software consumption based and “as a service based” models, or other factors. Therefore, in order to maintain our profits, we must develop and introduce new products and product enhancements on a timely basis and continually reduce our product costs. Our failure to do so could cause our revenue and profits to decline, which would harm our business and results of operations. In addition, we may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices.
Our business may be harmed if our contract manufacturers are not able to provide us with adequate supplies of our products or if a single source of hardware assembly is lost or impaired
We outsource the manufacturing of our hardware platforms to third party contract manufacturers who assemble these hardware platforms to our specifications. We have experienced minor delays in shipments from contract manufacturers in the past. However, if we experience major delays in the future or other problems, such as inferior quality and insufficient quantity of product, any one or a combination of these factors may harm our business and results of operations. The inability of our contract manufacturers to provide us with adequate supplies of our products or the loss of one or more of our contract manufacturers may cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer and may harm our business and results of operations. In particular, we currently subcontract manufacturing of our application delivery networking products to a single contract manufacturer with whom we do not have a long-term contract. If our arrangement with this single source of hardware assembly was terminated or otherwise impaired, and we were not able to engage another contract manufacturer in a timely manner, our business, financial condition and results of operation could be adversely affected.
If the demand for our products grows, we will need to increase our raw material and component purchases, contract manufacturing capacity and internal test and quality control functions. Any disruptions in product flow may limit our revenue, may harm our competitive position and may result in additional costs or cancellation of orders by our customers.
Our business could suffer if there are any interruptions or delays in the supply of hardware components from our third-party sources
We currently purchase several hardware components used in the assembly of our products from a number of single or limited sources. Lead times for these components vary significantly. The unavailability of suitable components, any interruption or delay in the supply of any of these hardware components or the inability to procure a similar component from alternate sources at acceptable prices within a reasonable time, may delay assembly and sales of our products and, hence, our revenues, and may harm our business and results of operations.
It is difficult to predict our future operating results because we have an unpredictable sales cycle
Our products have a lengthy sales cycle and the timing of our revenue is difficult to predict. Historically, our sales cycle has ranged from approximately two to three months and has tended to lengthen as our products become increasingly complex. Also, as our distribution strategy is focused on a channel model, utilizing value-added resellers, distributors and systems integrators, the level of variability in the length of sales cycle across transactions has increased and made it more difficult to predict the timing of many of our sales transactions. Sales of our products require us to educate potential customers in their use and benefits. Sales of our products are subject to delays from the lengthy internal budgeting, approval and competitive evaluation processes that large enterprises and governmental entities may require. For example, customers frequently begin by evaluating our products on a limited basis and devote time and resources to testing our products before they decide whether or not to purchase. Customers may also defer orders as a result of anticipated releases of new products or enhancements by our competitors or us. As a result, our products have an unpredictable sales cycle that contributes to the uncertainty of our future operating results.

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We may not be able to sustain or develop new distribution relationships, and a reduction or delay in sales to significant distribution partners could hurt our business
We sell our products and services through multiple distribution channels in the United States and internationally, including leading industry distributors, value-added resellers, systems integrators, service providers and other indirect channel partners. We have a limited number of agreements with companies in these channels, and we may not be able to increase our number of distribution relationships or maintain our existing relationships. Recruiting and retaining qualified channel partners and training them in our technologies requires significant time and resources. These channel partners may also market, sell and support products and services that are competitive with ours and may devote more resources to the marketing, sales and support of such competitive products. Our indirect sales channel structure could subject us to lawsuits, potential liability, and reputational harm if, for example, any of our channel partners misrepresent the functionality of our products or services to customers or violate laws or our corporate policies. If we are unable to establish or maintain our indirect sales channels, our business and results of operations will be harmed. In addition, four worldwide distributors of our products accounted for 56.6% of our total net revenue for fiscal year 2017. Four worldwide distributors of our products accounted for 57.0% of our total net revenue for fiscal year 2016. A substantial reduction or delay in sales of our products to these distribution partners, if not replaced by sales to other indirect channel partners and distributors, could harm our business, operating results and financial condition.
A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks
Sales to U.S. and foreign, federal, state, and local governmental agency end-customers account for a significant portion of our revenues and we may in the future increase sales to government entities. Sales to government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive, and time consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. The substantial majority of our sales to date to government entities have been made indirectly through our channel partners. Government certification requirements for products like ours may change, thereby restricting our ability to sell into the federal government sector until we have attained the revised certification. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services. Government entities may have statutory, contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact our future operating results. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our products and services, a reduction of revenue or fines or civil or criminal liability if the audit uncovers improper or illegal activities, which could adversely impact our operating results in a material way. Finally, for purchases by the U.S. government, the government may require certain products to be manufactured in the United States and other relatively high cost manufacturing locations, and we may not manufacture all products in locations that meet the requirements of the U.S. government, affecting our ability to sell these products to the U.S. government.
Misuse of our products could harm our reputation
Our products may be misused by end-customers or third parties that obtain access to our products. For example, our products could be used to censor private access to certain information on the Internet. Such use of our products for censorship could result in negative publicity and damage to our reputation. In addition, as many of our products are subject to export control regulations, diversion of our products to restricted third parties by others could result in investigations, penalties, fines, trade restrictions and negative publicity that could damage our reputation and materially impact our business, operating results, and financial condition.
Our quarterly and annual operating results may fluctuate in future periods, which may cause our stock price to fluctuate
Our quarterly and annual operating results have varied significantly in the past and could vary significantly in the future, which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, including the changing and recently volatile U.S. and global economic environment, which may cause our stock price to fluctuate. In particular, we anticipate that the size of customer orders may increase as we continue to focus on larger business accounts. A delay in the recognition of revenue, even from just one account, may have a significant negative impact on our results of operations for a given period. In the past, a majority of our sales have been realized near the end of a quarter. Accordingly, a delay in an anticipated sale past the end of a particular quarter may negatively impact our results of operations for that quarter, or in some cases, that fiscal year. Additionally, we have exposure to the credit risks of some of our customers and sub-tenants. Although we have programs in place that are designed to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing our credit risks

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adequately. We monitor individual payment capability in granting credit arrangements, seek to limit the total credit to amounts we believe our customers can pay and maintain reserves we believe are adequate to cover exposure for potential losses. If there is a deterioration of a sub-tenant’s or a major customer’s creditworthiness or actual defaults are higher than expected, future losses, if incurred, could harm our business and have a material adverse effect on our operating results. Further, our operating results may be below the expectations of securities analysts and investors in future quarters or years. Our failure to meet these expectations will likely harm the market price of our common stock. Such a decline could occur, and has occurred in the past, even when we have met our publicly stated revenue and/or earnings guidance.
Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels
As a result of customer buying patterns and the efforts of our sales force and channel partners to meet or exceed their sales objectives, we have historically received a substantial portion of sales orders and generated a substantial portion of revenue during the last few weeks of each fiscal quarter. In addition, any significant interruption in our information technology systems, which manage critical functions such as order processing, revenue recognition, financial forecasts, inventory and supply chain management, and trade compliance reviews, could result in delayed order fulfillment and decreased revenue for that fiscal quarter. If expected revenue at the end of any fiscal quarter is delayed for any reason, including the failure of anticipated purchase orders to materialize, our third party contract manufacturers’ inability to manufacture and ship products prior to fiscal quarter-end to fulfill purchase orders received near the end of the fiscal quarter, our failure to manage inventory to meet demand, our inability to release new products on schedule, any failure of our systems related to order review and processing, or any delays in shipments based on trade compliance requirements, our revenue for that quarter could fall below our expectations, resulting in a decline in the trading price of our common stock.
Changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported results of operations
A change in accounting policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New pronouncements and varying interpretations of existing pronouncements have occurred with frequency and may occur in the future. Changes to existing rules, or changes to the interpretations of existing rules, could lead to changes in our accounting practices, and such changes could adversely affect our reported financial results or the way we conduct our business.
If we are unable to maintain effective internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected
As a public company, we are required to design and maintain proper and effective internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on the internal controls over financial reporting, which must be attested to by our independent registered public accounting firm. We have an ongoing program to review the design of our internal controls framework in keeping with changes in business needs, implement necessary changes to our controls design and test the system and process controls necessary to comply with these requirements. If in the future, our internal controls over financial reporting are determined to be not effective resulting in a material weakness, investor perceptions regarding the reliability of our financial statements may be adversely affected which could cause a decline in the market price of our stock and otherwise negatively affect our liquidity and financial condition.
We may have exposure to greater than anticipated tax liabilities
Our provision for income taxes is subject to volatility and could be adversely affected by nondeductible stock-based compensation, changes in the research and development tax credit laws, earnings being lower than anticipated in jurisdictions where we have lower statutory rates and being higher than anticipated in jurisdictions where we have higher statutory rates, transfer pricing adjustments, not meeting the terms and conditions of tax holidays or incentives, changes in the valuation of our deferred tax assets and liabilities, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles or interpretations thereof, including changes to the tax laws applicable to corporate multinationals. The U.S., the European Union and its member states, and a number of other countries are actively pursuing changes in this regard. In addition, like other companies, we may be subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. While we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision for income taxes, there can be no assurance that such provision is sufficient and that a determination by a tax authority will not have an adverse effect on our results of operations. We do not provide for U.S. income taxes on certain foreign subsidiaries in which we intend to indefinitely reinvest such earnings outside the U.S. If our intent changes or if

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these funds are needed for U.S. operations, we would be required to accrue or pay U.S. taxes on some or all of these undistributed earnings and our effective tax rate would be adversely affected. Additionally, any changes in U.S. tax laws that would limit the ability to defer taxation on earnings outside of the U.S. could affect the tax treatment of our foreign earnings.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets
Our products are subject to U.S. export controls and may be exported outside the U.S. only with the required level of export license or through an export license exception because we incorporate encryption technology into our products. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, operating results and financial condition.
We may not be able to adequately protect our intellectual property, and our products may infringe on the intellectual property rights of third parties
We rely on a combination of patent, copyright, trademark and trade secret laws, and restrictions on disclosure of confidential and proprietary information to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In the ordinary course of our business, we are involved in disputes and licensing discussions with others regarding their claimed proprietary rights and cannot provide assurance that we will always successfully defend ourselves against such claims and such matters are subject to many uncertainties and outcomes are not predictable with assurance. We expect that infringement claims may increase as the number of products and competitors in our market increases and overlaps occur. Also, as we have gained greater visibility, market exposure and competitive success, we face a higher risk of being the subject of intellectual property infringement claims. If we are found to infringe the proprietary rights of others, or if we otherwise settle such claims, we could be compelled to pay damages or royalties and either obtain a license to those intellectual property rights or alter our products so that they no longer infringe upon such proprietary rights. Any license could be very expensive to obtain or may not be available at all or may require us to make royalty payments which could adversely affect gross margins in future periods. The actual liability in any such matters may be materially different from our estimate, if any, which could result in the need to adjust the liability and record additional expenses. Similarly, changing our products or processes to avoid infringing upon the rights of others may be costly or impractical. In addition, we have initiated, and may in the future initiate, claims or litigation against third parties for infringement of our proprietary rights, or to determine the scope and validity of our proprietary rights or those of our competitors. Any of these claims, whether claims that we are infringing the proprietary rights of others, or vice versa, with or without merit, may be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to cease using infringing technology, develop non-infringing technology or enter into royalty or licensing agreements. Further, our license agreements typically require us to indemnify our customers, distributors and resellers for infringement actions related to our technology, which could cause us to become involved in infringement claims made against our customers, distributors or resellers. Any of the above-described circumstances relating to intellectual property rights disputes could result in our business and results of operations being harmed.
We incorporate open source software into our products. Although we monitor our use of open source closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. We could also be subject to similar conditions or restrictions should there be any changes in the licensing terms of the open source software incorporated into our products. In either event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot

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be accomplished on a timely or successful basis, any of which could adversely affect our business, operating results and financial condition.
Many of our products include intellectual property licensed from third parties. In the future, it may be necessary to renew licenses for third party intellectual property or obtain new licenses for other technology. These third party licenses may not be available to us on acceptable terms, if at all. The inability to obtain certain licenses, or litigation regarding the interpretation or enforcement of license rights and related intellectual property issues, could have a material adverse effect on our business, operating results and financial condition. Furthermore, we license some third party intellectual property on a non-exclusive basis and this may limit our ability to protect our intellectual property rights in our products.
Our operating results are exposed to risks associated with international commerce
As our international sales increase, our operating results become more exposed to international operating risks. Additionally, our international sales and operations are subject to a number of risks, including the following:
greater difficulty in enforcing contracts and accounts receivable collection and longer collection periods;
the uncertainty of protection for intellectual property rights in some countries;
greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;
risks associated with trade restrictions and foreign legal requirements, including the importation, certification, and localization of our products required in foreign countries;
greater risk of a failure of foreign employees, partners, distributors, and resellers to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act, and any trade regulations ensuring fair trade practices;
heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities in, financial statements;
increased expenses incurred in establishing and maintaining office space and equipment for our international operations;
greater difficulty in recruiting local experienced personnel, and the costs and expenses associated with such activities;
management communication and integration problems resulting from cultural and geographic dispersion;
fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;
economic uncertainty around the world, including continued economic uncertainty as a result of sovereign debt issues in Europe; and
general economic and political conditions in these foreign markets.
In addition, in June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union (commonly referred to as Brexit). Subsequently, in March 2017, the United Kingdom's government invoked Article 50 of the Treaty on European Union, which formally triggered the two-year negotiation process to exit the European Union. The uncertainty surrounding the terms of the United Kingdom's withdrawal and its consequences, may cause our customers to closely monitor their costs and reduce their spending on our products and services.
We must hire and train experienced personnel to staff and manage our foreign operations. To the extent that we experience difficulties in recruiting, training, managing, and retaining an international staff, and specifically staff related to sales management and sales personnel, we may experience difficulties in sales productivity in foreign markets. We also enter into strategic distributor and reseller relationships with companies in certain international markets where we do not have a local presence. If we are not able to maintain successful strategic distributor relationships internationally or recruit additional companies to enter into strategic distributor relationships, our future success in these international markets could be limited. Business practices in the international markets that we serve may differ from those in the United States and may require us in the future to include terms other than our standard terms in customer contracts. We intend to continue expanding into international markets. Sales outside of the Americas represented 43.3% and 43.6% of our net revenues for the fiscal years ended September 30, 2017 and 2016, respectively.
These factors and other factors could harm our ability to gain future international revenues and, consequently, materially impact our business, operating results, and financial condition. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. Our failure to successfully manage our international operations and the associated risks effectively could limit the future growth of our business.

26


Changes in governmental regulations could negatively affect our revenues
Many of our products are subject to various regulations promulgated by the United States and various foreign governments including, but not limited to, environmental regulations and regulations implementing export license requirements and restrictions on the import or export of some technologies, especially encryption technology. Changes in governmental regulation and our inability or failure to obtain required approvals, permits or registrations could harm our international and domestic sales and adversely affect our revenues, business and operations.
New regulations related to conflict minerals may force us to incur additional expenses and could limit the supply and increase the costs of certain metals and minerals used in the manufacturing of our products
In August 2012, the SEC adopted new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (or the Dodd-Frank Act) for companies that use certain minerals and derivative metals (referred to as conflict minerals, regardless of their country of origin) in their products, whether or not these products are manufactured by third parties. The Dodd-Frank Act requires companies to perform due diligence and disclose whether or not such minerals originate from the Democratic Republic of Congo or adjoining countries. We filed a report on Form SD with the SEC regarding such matters on May 31, 2017. These requirements could adversely affect the sourcing, availability and pricing of minerals or metals used in the manufacture of our products and the numerous components that go into our products all of which could adversely affect our business, financial condition, and operating results. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any relevant minerals and metals used in our products. We have a complex supply chain and many components are sourced through our contract manufacturer and we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement. As a result, we may face reputational challenges with our customers and other stakeholders and possible regulatory risk.
We face litigation risks
We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Responding to lawsuits has been, and will likely continue to be, expensive and time-consuming for us. An unfavorable resolution of these lawsuits could adversely affect our business, results of operations or financial condition.
Acquisitions present many risks and we may not realize the financial and strategic goals that are contemplated at the time of the transaction
With respect to our past acquisitions, as well as any other future acquisitions we may undertake, we may find that the acquired businesses, products or technologies do not further our business strategy as expected, that we paid more than what the assets are later worth or that economic conditions change, all of which may generate future impairment charges. Our acquisitions may be viewed negatively by customers, financial markets or investors. There may be difficulty integrating the operations and personnel of the acquired business, and we may have difficulty retaining the key personnel of the acquired business. We may have difficulty in integrating the acquired technologies or products with our existing product lines. Our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations. We may have difficulty maintaining uniform standards, controls, procedures and policies across locations. We may experience significant problems or liabilities associated with product quality, technology and other matters.
Our inability to successfully operate and integrate newly-acquired businesses appropriately, effectively and in a timely manner, or to retain key personnel of any acquired business, could have a material adverse effect on our ability to take advantage of further growth in demand for integrated traffic management and security solutions and other advances in technology, as well as on our revenues, gross margins and expenses.
Anti-takeover provisions could make it more difficult for a third party to acquire us
Our Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. The rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of our company without further action by our shareholders and may adversely affect the voting and other rights of the holders of common stock. Further, certain provisions of our bylaws, including a provision limiting the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice, may have the

27


effect of delaying or preventing changes in control or management of our company, which could have an adverse effect on the market price of our common stock. Similarly, state anti-takeover laws in the State of Washington related to corporate takeovers may prevent or delay a change of control of our company.
Our stock price could be volatile, particularly during times of economic uncertainty and volatility in domestic and international stock markets
Our stock price has been volatile and has fluctuated significantly in the past. The trading price of our stock is likely to continue to be volatile and subject to fluctuations in the future. Some of the factors that could significantly affect the market price of our stock include:
Actual or anticipated variations in operating and financial results;
Analyst reports or recommendations;
Rumors, announcements or press articles regarding our competitors’ operations, management, organization, financial condition or financial statements; and
Other events or factors, many of which are beyond our control.
The stock market in general and the market for technology companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to operating performance. The fluctuations may continue in the future and this could significantly impact the value of our stock and your investment.
If securities or industry analysts publish inaccurate or unfavorable research about our business, or discontinue publishing research about our business, the price and trading volume of our securities could decline
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our business, our market or our competitors. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price of our securities would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our securities could decrease, which might cause the price and trading volume of our securities to decline.
We face risks associated with having operations and employees located in Israel
We have offices and employees located in Israel. As a result, political, economic, and military conditions in Israel directly affect our operations. The future of peace efforts between Israel and its Arab neighbors remains uncertain. There has been a significant increase in hostilities and political unrest in Israel in the past year. The effects of these hostilities and violence on the Israeli economy and our operations in Israel are unclear, and we cannot predict the effect on us of further increases in these hostilities or future armed conflict, political instability or violence in the region. In addition, many of our employees in Israel are obligated to perform annual reserve duty in the Israeli military and are subject to being called for active duty under emergency circumstances. We cannot predict the full impact of these conditions on us in the future, particularly if emergency circumstances or an escalation in the political situation occurs. If many of our employees in Israel are called for active duty for a significant period of time, our operations and our business could be disrupted and may not be able to function at full capacity. Current or future tensions and conflicts in the Middle East could adversely affect our business, operating results, financial condition and cash flows.
Our business is subject to the risks of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by man-made problems such as terrorism
A significant natural disaster, such as an earthquake, a fire, a flood, or a significant power outage could have a material adverse impact on our business, operating results, and financial condition. We have an administrative and product development office and a third party contract manufacturer located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our supply chain, manufacturing vendors, or logistics providers’ ability to provide materials and perform services such as manufacturing products or assisting with shipments on a timely basis. In the event our or our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in missed financial targets, such as revenue and shipment targets, for a particular quarter. In addition, cyber-attacks, acts of terrorism, or other geo-political unrest could cause disruptions in our business or the business of our supply chain, manufacturers, logistics providers, partners, or end-customers or the economy as a whole. Any disruption in the business of our supply chain, manufacturers, logistics providers, partners or end-customers that impacts sales at the end of a fiscal quarter could have a significant adverse impact on our quarterly results. All of the aforementioned risks may be further increased if the disaster recovery plans for us and our suppliers prove to be inadequate. To

28


the extent that any of the above should result in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our products, our business, financial condition and operating results would be adversely affected.
In addition to other risks listed in this “Risk Factors” section, factors that may affect our operating results include, but are not limited to:
fluctuations in demand for our products and services due to changing market conditions, pricing conditions, technology evolution, seasonality, or other changes in the global economic environment;
changes or fluctuations in sales and implementation cycles for our products and services;
changes in the mix of our products and services, including increases in subscription based offerings;
changes in the growth rate of the application delivery market;
reduced visibility into our customers’ spending and implementation plans;
reductions in customers’ budgets for data center and other IT purchases or delays in these purchases;
changes in end-user customer attach rates and renewal rates for our services;
fluctuations in our gross margins, including the factors described herein, which may contribute to such fluctuations;
our ability to control costs, including operating expenses, the costs of hardware and software components, and other manufacturing costs;
our ability to develop, introduce and gain market acceptance of new products, technologies and services, and our success in new and evolving markets;
any significant changes in the competitive environment, including the entry of new competitors or the substantial discounting of products or services;
the timing and execution of product transitions or new product introductions, and related inventory costs;
variations in sales channels, product costs, or mix of products sold;
our ability to establish and manage our distribution channels, and the effectiveness of any changes we make to our distribution model;
the ability of our contract manufacturers and suppliers to provide component parts, hardware platforms and other products in a timely manner;
benefits anticipated from our investments in sales, marketing, product development, manufacturing or other activities;
impacts on our overall tax rate caused by any reorganization in our corporate structure;
changes in tax laws or regulations, or other accounting rules; and
general economic conditions, both domestically and in our foreign markets.

Item 1B.
Unresolved Staff Comments
Not applicable.

Item 2.
Properties
We lease our principal administrative, sales, marketing, research and development facilities, which are located in Seattle, Washington and consist of approximately 320,000 square feet. In April 2010, we amended and restated the lease agreement for three of the buildings that serve as our corporate headquarters. The lease commenced in April, July and August of 2010 for various sections of the first building; and August 2010 for the second and third buildings. The lease for these three buildings will expire in 2022 with an option for renewal. In January 2016, we entered into an agreement to lease approximately 20,000 square feet of additional space in a building near our corporate headquarters. This lease commenced in July of 2016 and will expire in 2022 with an option for renewal. In October 2006, we entered into an agreement to lease a building adjacent to the buildings that serve as our corporate headquarters. This lease will expire in 2018. We are currently subleasing all floors of this building to two subtenants.
On May 3, 2017, we entered into an agreement to lease approximately 515,000 square feet of office space in Seattle, Washington that will serve as our new corporate headquarters. The initial term of the lease is 14.5 years and is expected to

29


commence on the latter of (i) April 1, 2019 or (ii) 10 months after the substantial completion date of the construction of the Premises. This lease will expire in 2033 with an option for renewal.
We believe that our existing properties are in good condition and suitable for the conduct of our business. We also lease office space for our product development personnel in Spokane, Washington and Bellevue, Washington, San Jose, California, Louisville, Colorado, Lowell, Massachusetts, Israel, and Poland and for our sales and support personnel in California, Florida, Georgia, Illinois, Kansas, Missouri, New York, Tennessee, Washington D.C., Argentina, Australia, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Malaysia, Mexico, Netherlands, New Zealand, the Philippines, Poland, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sweden, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom and Vietnam. We believe that our future growth can be accommodated by our current facilities or by leasing additional space if necessary.

Item 3.
Legal Proceedings
See Note 7 - Commitments and Contingencies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for information regarding legal proceedings in which we are involved.

Item 4.
Mine Safety Disclosures
Not applicable.


30


PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Prices of Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol “FFIV.” The following table sets forth the high and low sales prices of our common stock as reported on the Nasdaq Global Select Market.
 
 
 
Fiscal Year 2017
 
Fiscal Year 2016
 
 
High
 
Low
 
High
 
Low
First Quarter
 
$
148.34

 
$
114.45

 
$
123.25

 
$
94.51

Second Quarter
 
$
149.50

 
$
130.61

 
$
106.86

 
$
86.03

Third Quarter
 
$
142.92

 
$
124.27

 
$
124.91

 
$
93.64

Fourth Quarter
 
$
130.00

 
$
114.76

 
$
127.13

 
$
110.86

The last reported sales price of our common stock on the Nasdaq Global Select Market on October 30, 2017 was $119.63.
As of October 30, 2017, there were 52 holders of record of our common stock. As many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of beneficial holders of our common stock represented by these record holders.
Dividend Policy
Our policy has been to retain cash to fund future growth. Accordingly, we have not paid dividends and do not anticipate declaring dividends on our common stock in the foreseeable future.
Unregistered Securities Sold in 2017
We did not sell any unregistered shares of our common stock during the fiscal year 2017.
Issuer Purchases of Equity Securities
On April 20, 2016, we announced that our Board of Directors authorized an additional $1.0 billion for our common stock share repurchase program. This new authorization is incremental to the existing $2.4 billion program, initially approved in October 2010 and expanded in each fiscal year. 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. During fiscal year 2017, we repurchased and retired 4,561,213 shares at an average price of $131.56 per share and as of September 30, 2017, we had $173.7 million remaining authorized to purchase shares.

31


Shares repurchased and retired as of September 30, 2017 are as follows (in thousands, except shares and per share data):
 
 
 
Total Number
of Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
per the Publicly
Announced Plan
 
Approximate Dollar
Value of Shares
that May Yet be
Purchased
Under the Plan
October 1, 2016 — October 31, 2016
 

 
$

 

 
$
773,743

November 1, 2016 — November 30, 2016
 
1,055,640

 
$
142.11

 
1,055,640

 
$
623,722

December 1, 2016 — December 31, 2016
 

 
$

 

 
$
623,722

 
 
 
 
 
 
 
 
 
January 1, 2017 — January 31, 2017
 

 
$

 

 
$
623,722

February 1, 2017 — February 28, 2017
 
1,085,862

 
$
138.16

 
1,085,862

 
$
473,700

March 1, 2017 — March 31, 2017
 

 
$

 

 
$
473,700

 
 
 
 
 
 
 
 
 
April 1, 2017 — April 30, 2017
 

 
$

 

 
$
473,700

May 1, 2017 — May 31, 2017
 
1,159,665

 
$
129.37

 
1,159,665

 
$
323,677

June 1, 2017 — June 30, 2017
 

 
$

 

 
$
323,677

 
 
 
 
 
 
 
 
 
July 1, 2017 — July 31, 2017
 

 
$

 

 
$
323,677

August 1, 2017 — August 31, 2017
 
1,260,046

 
$
119.06

 
1,260,046

 
$
173,652

September 1, 2017 — September 30, 2017
 

 
$

 

 
$
173,652


32


Performance Measurement Comparison of Shareholder Return
The following graph compares the annual percentage change in the cumulative total return on shares of our common stock, the Nasdaq Composite Index and the Nasdaq Computer Index for the period commencing September 30, 2012, and ending September 30, 2017.
Comparison of Cumulative Total Return
On Investment Since September 30, 2012*
 
ffiv10k9-30_chartx20834a06.jpg

The Company’s closing stock price on September 29, 2017, the last trading day of the Company’s 2017 fiscal year, was $120.56 per share.

*
Assumes that $100 was invested September 30, 2012 in shares of Common Stock and in each index, and that all dividends were reinvested. Shareholder returns over the indicated period should not be considered indicative of future shareholder returns.


33


Item 6.
Selected Financial Data
The following selected consolidated historical financial data are derived from our audited financial statements. The consolidated balance sheet data as of September 30, 2017 and 2016 and the consolidated income statement data for the years ended September 30, 2017, 2016 and 2015 are derived from our audited consolidated financial statements and related notes that are included elsewhere in this report. The consolidated balance sheet data as of September 30, 2015, 2014 and 2013 and the consolidated income statement data for the years ended September 30, 2014 and 2013 are derived from our audited consolidated financial statements and related notes which are not included in this report. The information set forth below should be read in conjunction with our historical financial statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this report.
 
 
 
Years Ended September 30,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(In thousands, except per share data)
Consolidated Income Statement Data
 
 
 
 
 
 
 
 
 
 
Net revenues
 
 
 
 
 
 
 
 
 
 
Products
 
$
964,662

 
$
944,469

 
$
991,539

 
$
936,130

 
$
798,856

Services
 
1,125,379

 
1,050,565

 
928,284

 
795,916

 
682,458

Total
 
2,090,041

 
1,995,034

 
1,919,823

 
1,732,046

 
1,481,314

Cost of net revenues
 
 
 
 
 
 
 
 
 
 
Products
 
176,032

 
166,624

 
174,225

 
158,788

 
129,066

Services
 
177,453

 
170,581

 
158,036

 
151,171

 
123,981

Total
 
353,485

 
337,205

 
332,261

 
309,959

 
253,047

Gross profit
 
1,736,556

 
1,657,829

 
1,587,562

 
1,422,087

 
1,228,267

Operating expenses
 
 
 
 
 
 
 
 
 
 
Sales and marketing
 
652,239

 
628,743

 
602,540

 
558,284

 
483,041

Research and development
 
350,365

 
334,227

 
296,583

 
263,792

 
209,614

General and administrative
 
156,887

 
138,431

 
135,540

 
106,454

 
102,401

Loss on facility sublease (1)
 

 

 

 

 
2,393

Litigation expense (2)
 
391

 
9,051

 

 

 

Restructuring charges (3)
 
12,718

 

 

 

 

Total
 
1,172,600

 
1,110,452

 
1,034,663

 
928,530

 
797,449

Income from operations
 
563,956

 
547,377

 
552,899

 
493,557

 
430,818

Other income, net
 
11,561

 
2,514

 
8,445

 
3,785

 
7,274

Income before income taxes
 
575,517

 
549,891

 
561,344

 
497,342

 
438,092

Provision for income taxes
 
154,756

 
184,036

 
196,330

 
186,159

 
160,778

Net income
 
$
420,761

 
$
365,855

 
$
365,014

 
$
311,183

 
$
277,314

Net income per share — basic
 
$
6.56

 
$
5.43

 
$
5.07

 
$
4.13

 
$
3.53

Weighted average shares — basic
 
64,173

 
67,433

 
71,944

 
75,395

 
78,565

Net income per share — diluted
 
$
6.50

 
$
5.38

 
$
5.03

 
$
4.09

 
$
3.50

Weighted average shares — diluted
 
64,775

 
67,984

 
72,547

 
76,092

 
79,136

Consolidated Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and short-term investments
 
$
1,016,928

 
$
882,395

 
$
774,342

 
$
645,379

 
$
542,143

Restricted cash (4)
 
1,224

 
1,151

 
1,149

 
798

 
860

Long-term investments
 
284,802

 
276,375

 
397,656

 
482,917

 
728,981

Total assets
 
2,480,800

 
2,306,323

 
2,312,290

 
2,184,950

 
2,230,554

Long-term liabilities
 
316,807

 
276,823

 
240,439

 
178,659

 
140,492

Total shareholders’ equity
 
1,229,392

 
1,185,262

 
1,316,728

 
1,369,310

 
1,538,712

 
(1)
Loss on facility sublease expense represents a charge related to the consolidation of certain subleases at our corporate headquarters in Seattle, Washington.
(2)
Litigation expense primarily represents a patent-related jury verdict and legal fees associated with the litigation.
(3)
Restructuring charges represent severance and other employee-related costs associated with a workforce reduction that took place in the fourth quarter of fiscal 2017.
(4)
Restricted cash represents escrow accounts established in connection with lease agreements for our facilities.

34


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These statements include, but are not limited to, statements about our plans, objectives, expectations, strategies, intentions or other characterizations of future events or circumstances and are generally identified by the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions. These forward-looking statements are based on current information and expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under “Item 1A. Risk Factors” herein and in other documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to revise or update any such forward-looking statements.
Overview
We are a global provider of software-defined application delivery services designed to ensure the fast, secure and reliable delivery of applications and data. Our products include hardware-based software, software-only solutions, cloud-based subscription services and a common management framework that enable customers to accelerate, optimize, secure and manage applications across hybrid computing infrastructures that combine traditional networks and data centers with software-defined networks, virtualized data centers and cloud-based resources. We market and sell our products primarily through multiple indirect sales channels in the Americas (primarily the United States); Europe, the Middle East, and Africa (EMEA); Japan; and the Asia Pacific region (APAC). Enterprise customers (Fortune 1000 or Business Week Global 1000 companies) in the technology, telecommunications, financial services, transportation, education, manufacturing and health care industries, along with government customers, continue to make up the largest percentage of our customer base.
Our management team monitors and analyzes a number of key performance indicators in order to manage our business and evaluate our financial and operating performance on a consolidated basis. Those indicators include:
Revenues. The majority of our revenues are derived from sales of our application delivery networking (ADN) products including our BIG-IP appliances and high end VIPRION chassis and related software modules and our software-only Virtual Editions; Local Traffic Manager (LTM), DNS Services (formerly Global Traffic Manager); Advanced Firewall Manager (AFM) and Policy Enforcement Manager (PEM), that leverage the unique performance characteristics of our hardware and software architecture; and products that incorporate acquired technology, including Application Security Manager (ASM) and Access Policy Manager (APM); signaling delivery controller products (SDC); and the WebSafe, MobileSafe, Secure Web Gateway and Silverline DDoS and Application security offerings which are sold to customers on a subscription basis. We also derive revenues from the sales of services including annual maintenance contracts, training and consulting services. We carefully monitor the sales mix of our revenues within each reporting period. We believe customer acceptance rates of our new products and feature enhancements are indicators of future trends. We also consider overall revenue concentration by customer and by geographic region as additional indicators of current and future trends.
Cost of revenues and gross margins. We strive to control our cost of revenues and thereby maintain our gross margins. Significant items impacting cost of revenues are hardware costs paid to our contract manufacturers, third-party software license fees, amortization of developed technology and personnel and overhead expenses. Our margins have remained relatively stable; however, factors such as sales price, product and services mix, inventory obsolescence, returns, component price increases and warranty costs could significantly impact our gross margins from quarter to quarter and represent significant indicators we monitor on a regular basis.
Operating expenses. Operating expenses are substantially driven by personnel and related overhead expenses. Existing headcount and future hiring plans are the predominant factors in analyzing and forecasting future operating expense trends. Other significant operating expenses that we monitor include marketing and promotions, travel, professional fees, computer costs related to the development of new products and provision of services, facilities and depreciation expenses.
Liquidity and cash flows. Our financial condition remains strong with significant cash and investments and no long term debt. The increase in cash and investments for fiscal year 2017 was primarily due to cash provided by operating activities of $740.3 million, partially offset by cash used to repurchase outstanding common stock under our share repurchase program of $600.1 million and capital expenditures of $38.7 million. Going forward, we believe the primary driver of cash flows will be net income from operations. Capital expenditures for fiscal year 2017 were primarily related to the expansion of our facilities to support our operations worldwide as well as investments in information technology infrastructure and equipment purchases to support our core business activities. We will continue to evaluate possible acquisitions of, or investments in businesses, products, or technologies that we believe are strategic, which may require the use of cash.

35


Balance sheet. We view cash, short-term and long-term investments, deferred revenue, accounts receivable balances and days sales outstanding as important indicators of our financial health. Deferred revenues continued to increase in fiscal 2017 due to growth in the amount of annual maintenance contracts purchased on new products and maintenance renewal contracts related to our existing product installation base. Our days sales outstanding for the fourth quarter of fiscal year 2017 was 49.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the more significant estimates and judgments used in the preparation of our financial statements.
Revenue Recognition. We sell 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. We use 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. We assess 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. We assess 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 we cannot estimate returns, revenue is recognized when such rights of return lapse. Payment terms to domestic customers are generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120 days based on normal and customary trade practices in the individual markets.
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 our 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, we allocate 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.
We establish VSOE for our 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. Our list prices are generally not fair value as discounts

36


may be given based on the factors enumerated above. We use 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 we have determined to be plus or minus 15% of the median sales price.
We believe 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.
We are typically not able to determine VSOE or TPE for non-software products. TPE is determined based on competitor prices for similar elements when sold separately. Generally, our go-to-market strategy differs from that of other competitive products or services in its markets and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine the selling prices on a stand-alone basis of similar products offered by our competitors.
When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We have been able to establish BESP through the list price, less a discount deemed appropriate to maintain a reasonable gross margin. Management regularly reviews gross margin information at the consolidated level. Non-software product BESP is determined through our 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.
We regularly validate the VSOE of fair value and BESP for elements in its multiple element arrangements. We account for taxes collected from customers and remitted to governmental authorities on a net basis and excluded these amounts from revenues.
Reserve for Doubtful Accounts. Estimates are used in determining our allowance for doubtful accounts and are based upon an assessment of selected accounts and as a percentage of our remaining accounts receivable by aging category. In determining these percentages, we evaluate historical write-offs, current trends in the credit quality of our customer base, as well as changes in the credit policies. We perform ongoing credit evaluations of our customers’ financial condition and do not require any collateral. If there is deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our allowance for doubtful accounts may not be sufficient.
Reserve for Product Returns. In some instances, product revenue from distributors is subject to agreements allowing rights of return. Product returns are estimated based on historical experience and are recorded at the time revenues are recognized. Accordingly, we reduce recognized revenue for estimated future returns at the time revenue is recorded. When rights of return are present and we cannot estimate returns, revenue is recognized when such rights lapse. The estimates for returns are adjusted periodically based upon changes in historical rates of returns and other related factors. It is possible that these estimates will change in the future or that the actual amounts could vary from our estimates.
Accounting for Income Taxes. We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our consolidated financial statements. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Due to the evolving nature and complexity of tax rules combined with the large number of jurisdictions in which we operate, it is possible that our estimates of our tax liability could change in the future, which may result in additional tax liabilities and adversely affect our results of operations, financial condition and cash flows.
Stock-based Compensation. We account for stock-based compensation using the straight-line attribution method for recognizing compensation expense over the requisite service period of the related award. We recognized $175.3 million and $156.8 million of stock-based compensation expense for the years ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was $126.1 million of total unrecognized stock-based compensation cost, the majority of which will be recognized over the next two years. Going forward, stock-based compensation expenses may increase as we issue additional equity-based awards to continue to attract and retain key employees.
We issue incentive awards to our 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 our common stock on the date of grant. In determining the fair value of shares issued under the Employee Stock Purchase Plan (ESPP), we use the Black-Scholes option pricing model. We recognize compensation expense related to shares issued pursuant to the ESPP on a straight-line basis over the offering period. 

37


We recognize compensation expense for only the portion of RSUs that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior. Based on historical differences with forfeitures of stock-based awards granted to our executive officers and Board of Directors versus grants awarded to all other employees, we developed separate forfeiture expectations for these two groups.
We recognize compensation costs for awards with performance conditions when we conclude it is probable that the performance condition will be achieved. We reassess the probability of vesting at each balance sheet date and adjust compensation costs based on our probability assessment.
Common stock repurchase. On April 20, 2016, we announced that our Board of Directors authorized an additional $1.0 billion for our common stock share repurchase program. This new authorization is incremental to the existing $2.4 billion program, initially approved in October 2010 and expanded in each fiscal year. 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. During fiscal year 2017, we repurchased and retired 4,561,213 shares at an average price of $131.56 per share and as of September 30, 2017, we had $173.7 million remaining authorized to purchase shares.
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. We test goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified. Goodwill is written down when impaired. Goodwill was recorded in connection with various acquisitions in fiscal year 2014 and prior years. For our annual goodwill impairment test in all periods to date, we have operated under one reporting unit and the fair value of the reporting unit has been determined by the Company’s enterprise value. We perform our annual goodwill impairment test during the second fiscal quarter.
As part of the annual goodwill impairment test, we have the option to perform 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 our reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required. If we choose to bypass the qualitative assessment, we complete a quantitative assessment in performing our annual impairment test.
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 our reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we 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. During the year, we performed our goodwill impairment assessment and concluded that it was more-likely-than-not that the fair value of our reporting unit exceeded its carrying amount. We considered potential impairment indicators of goodwill and acquired intangible assets at September 30, 2017 and noted no indicators of impairment.
Software development costs. The authoritative guidance requires certain internal software development costs related to software to be sold to be capitalized upon the establishment of technological feasibility. Our software development costs incurred subsequent to achieving technological feasibility have not been significant, and all software development costs have been expensed as research and development activities as incurred.
Internal use software. In accordance with the authoritative guidance, we capitalize application development stage costs associated with the development of new functionality for internal-use software and software developed related to our SaaS-based product offerings. The capitalized costs are then amortized over the estimated useful life of the software, which is generally three to five years, and are included in property and equipment in the accompanying consolidated balance sheets.
Investments. Our investments are diversified among high-credit quality debt securities in accordance with our investment policy. We classify our investments as available-for-sale, which are reported at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income or loss in stockholders’ equity. Realized gains and losses and declines in value of these investments judged to be other than temporary are included in other income (expense). To date, we have not deemed it necessary to record any charges related to other-than-temporary declines in the estimated fair values of our marketable debt securities. However, the fair value of our investments is subject to volatility. Declines in the fair value of our investments judged to be other than temporary could adversely affect our future operating results.

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Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
 
 
 
Years Ended September 30,
 
 
2017
 
2016
 
2015
 
 
(in thousands, except percentages)
Net Revenues
 
 
 
 
 
 
Products
 
$
964,662

 
$
944,469

 
$
991,539

Services
 
1,125,379

 
1,050,565

 
928,284

Total
 
$
2,090,041

 
$
1,995,034

 
$
1,919,823

Percentage of net revenues
 
 
 
 
 
 
Products
 
46.2
%
 
47.3
%
 
51.6
%
Services
 
53.8

 
52.7

 
48.4

Total
 
100.0
%
 
100.0
%
 
100.0
%
Net Revenues. Total net revenues increased 4.8% in fiscal year 2017 from fiscal year 2016, compared to an increase of 3.9% in fiscal year 2016 from the prior year. Overall revenue growth for the year ended September 30, 2017 was primarily due to increased demand for our core ADN products and increased service revenues as a result of our increased installed base of products. International revenues represented 48.6%, 48.9% and 47.7% of net revenues in fiscal years 2017, 2016 and 2015, respectively. We expect international sales will continue to represent a significant portion of net revenues, although we cannot provide assurance that international revenues as a percentage of net revenues will remain at current levels.
Net product revenues increased 2.1% in fiscal year 2017 from fiscal year 2016, compared to a decrease of 4.7% in fiscal year 2016 from the prior year. The increase of $20.2 million in net product sales for fiscal year 2017 was due to an increase of $27.7 million in sales of our ADN products. In particular, growth in sales of our security solutions and software-only Virtual Editions contributed to the increase in product revenue for fiscal year 2017. The decrease of $47.1 million in net product sales for fiscal year 2016 was primarily due to a $47.5 million decrease in the volume of sales of our ADN products.
Net service revenues increased 7.1% in fiscal year 2017 from fiscal year 2016, compared to an increase of 13.2% in fiscal year 2016 from the prior year. The increases in service revenue were the result of increased purchases or renewals of maintenance contracts driven by additions to our installed base of products.
The following distributors of our products accounted for more than 10% of total net revenue:
 
 
Years Ended September 30,
 
 
2017
 
2016
 
2015
Westcon Group, Inc. 2
 
17.7
%
 
18.7
%
 
17.6
%
Ingram Micro, Inc.
 
16.1
%
 
14.9
%
 
16.1
%
Tech Data 1
 
12.4
%
 
13.3
%
 
13.8
%
Arrow ECS
 
10.4
%
 
10.1
%
 
10.4
%
 
 
 
 
 
 
 
(1)
On February 27, 2017, Tech Data completed the acquisition of Avnet Technology Solutions. Revenues for the year ended September 30, 2017 represent combined revenues for Tech Data and Avnet while revenues for years ended September 30, 2016 and 2015 represent revenues from Avnet only.
(2)
On September 1, 2017, Synnex Corporation completed the acquisition of Westcon Americas.

39


The following distributors of our products accounted for more than 10% of total receivables:
 
 
 
September 30,
 
 
2017
 
2016
Westcon Group, Inc.
 
%
 
18.0
%
Ingram Micro, Inc.
 
%
 
15.5
%
Synnex Corporation 1
 
13.6
%
 
%
Arrow ECS
 
11.5
%
 
%
 
 
 
 
 
(1)
On September 1, 2017, Synnex Corporation completed the acquisition of Westcon Americas.
No other distributors accounted for more than 10% of total net revenue or receivables. 
 
 
Years Ended September 30,
 
 
2017
 
2016
 
2015
 
 
(in thousands, except percentages)
Cost of net revenues and Gross Margin
 
 
 
 
 
 
Products
 
$
176,032

 
$
166,624

 
$
174,225

Services
 
177,453

 
170,581

 
158,036

Total
 
353,485

 
337,205

 
332,261

Gross profit
 
$
1,736,556

 
$
1,657,829

 
$
1,587,562

Percentage of net revenues and Gross Margin (as a percentage of related net revenue)
 
 
 
 
 
 
Products
 
18.2
%
 
17.6
%
 
17.6
%
Services
 
15.8

 
16.2

 
17.0

Total
 
16.9

 
16.9

 
17.3

Gross profit
 
83.1
%
 
83.1
%
 
82.7
%
Cost of Net Product Revenues. Cost of net product revenues consist of finished products purchased from our contract manufacturers, manufacturing overhead, freight, warranty, provisions for excess and obsolete inventory and amortization expenses in connection with developed technology from acquisitions. Cost of net product revenues increased to $176.0 million in fiscal year 2017, up 5.6% from the prior year, primarily due to a higher volume of hardware and software sales as well as an increase in sales of our subscription-based Silverline services. Cost of net product revenues decreased to $166.6 million in fiscal year 2016 from $174.2 million in fiscal year 2015, primarily due to a reduction in the volume of product sales.
Cost of Net Service Revenues. Cost of net service revenues consist of the salaries and related benefits of our professional services staff, travel, facilities and depreciation expenses. Cost of net service revenues as a percentage of net service revenues decreased to 15.8% in fiscal year 2017 compared to 16.2% in fiscal year 2016 and 17.0% in fiscal year 2015, primarily due to the scalability of our existing customer support infrastructure and increased revenue from maintenance contracts. Professional services headcount at the end of fiscal 2017 decreased to 895 from 903 at the end of fiscal 2016 due to a reduction in workforce that took place in the fourth quarter of fiscal 2017. Professional services headcount at the end of fiscal year 2016 increased to 903 from 877 at the end of fiscal 2015. In addition, cost of net service revenues included stock-based compensation expense of $19.3 million, $16.6 million and $12.7 million for fiscal years 2017, 2016 and 2015, respectively.

40


 
 
Years Ended September 30,
 
 
2017
 
2016
 
2015
 
 
(in thousands, except percentages)
Operating expenses
 
 
 
 
 
 
Sales and marketing
 
$
652,239

 
$
628,743

 
$
602,540

Research and development
 
350,365

 
334,227

 
296,583

General and administrative
 
156,887

 
138,431

 
135,540

Litigation expense
 
391

 
9,051

 

Restructuring charges
 
12,718

 

 

Total
 
$
1,172,600

 
$
1,110,452

 
$
1,034,663

Operating expenses (as a percentage of net revenue)
 
 
 
 
 
 
Sales and marketing
 
31.2
%
 
31.5
%
 
31.4
%
Research and development
 
16.8

 
16.8

 
15.4

General and administrative
 
7.5

 
6.9

 
7.1

Litigation expense
 

 
0.5

 

Restructuring charges
 
0.6

 

 

Total
 
56.1
%
 
55.7
%
 
53.9
%
Sales and Marketing. Sales and marketing expenses consist of the salaries, commissions and related benefits of our sales and marketing staff, the costs of our marketing programs, including public relations, advertising and trade shows, travel, facilities, and depreciation expenses. Sales and marketing expense increased 3.7% in fiscal year 2017 from the prior year, as compared to a year over year increase of 4.3% in fiscal year 2016. The increase in sales and marketing expense for fiscal year 2017 was primarily due to increases in commissions and personnel costs of $15.7 million, compared to the prior year. The increases in commissions and personnel costs were driven by growth in sales and marketing employee headcount during fiscal year 2017. However, sales and marketing headcount at the end of fiscal year 2017 decreased to 1,711 from 1,741 at the end of fiscal year 2016 due to a reduction in workforce that took place in the fourth quarter of fiscal year 2017. In fiscal year 2016, the increase in sales and marketing expense was primarily due to increases in commissions and personnel costs of $22.6 million, compared to the prior year. The increases in commissions and personnel costs were driven by growth in sales and marketing employee headcount and increased sales volume for fiscal year 2016 over the prior year. Sales and marketing headcount at the end of fiscal year 2016 increased to 1,741 from 1,705 at the end of fiscal year 2015. Sales and marketing expense included stock-based compensation expense of $69.7 million, $61.2 million and $56.8 million for fiscal years 2017, 2016 and 2015, respectively.
Research and Development. Research and development expenses consist of the salaries and related benefits of our product development personnel, prototype materials and other expenses related to the development of new and improved products, facilities and depreciation expenses. Research and development expense increased 4.8% in fiscal year 2017, compared to the prior year. The increase in research and development expense for fiscal year 2017 was primarily due to increased personnel costs of $13.3 million, compared to the prior year. The increase in personnel costs were driven by growth in research and development employee headcount during fiscal year 2017. However, research and development headcount at the end of fiscal year 2017 decreased to 1,192 from 1,211 at the end of fiscal year 2016 due to a reduction in workforce that took place in the fourth quarter of fiscal year 2017. In fiscal year 2016, research and development expense increased 12.7%, compared to the prior year. The increase in research and development expense for fiscal year 2016 was primarily due to increased personnel costs of $28.2 million, compared to the prior year. Research and development headcount at the end of fiscal year 2016 increased to 1,211 from 1,098 at the end of fiscal year 2015. Research and development expense included stock-based compensation expense of $53.4 million, $52.6 million and $46.1 million for fiscal years 2017, 2016 and 2015, respectively. We expect research and development expenses to be consistent as a percentage of net revenue in the foreseeable future.
General and Administrative. General and administrative expenses consist of the salaries, benefits and related costs of our executive, finance, information technology, human resource and legal personnel, third-party professional service fees, bad debt charges, facilities and depreciation expenses. General and administrative expense increased 13.3% in fiscal year 2017, compared to the prior year. The increase in general and administrative expense for fiscal year 2017 was primarily due to an increase in personnel costs of $7.4 million, compared to the prior year. In fiscal year 2016, general and administrative expense increased 2.1% compared to the prior year. The increase in general and administrative expense for fiscal year 2016 was primarily due to an increase in personnel costs of $8.1 million, compared to the prior year. General and administrative headcount at the end of fiscal year 2017 increased to 471 from 447 at the end of fiscal year 2016 and 417 at the end of fiscal

41


year 2015. General and administrative expense included stock-based compensation expense of $30.8 million, $24.5 million and $28.5 million for fiscal years 2017, 2016 and 2015, respectively.
Litigation expense. In the second quarter of fiscal 2016, we accrued a litigation expense of $8.9 million, which included a patent-related jury verdict for $6.4 million and $2.5 million in legal fees and other costs associated with the litigation. The accrual was adjusted by immaterial amounts in the third and fourth quarters of fiscal 2016 and the second and third quarters of fiscal year 2017 to better reflect our total expected litigation expense. See Note 7 - Commitments and Contingencies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for additional information regarding this litigation.
Restructuring charges. In September 2017, we initiated a restructuring plan to reduce our operating expenses and better align our workforce and costs with market opportunities, product development and business strategies. As a result of these initiatives, we recorded a restructuring charge of $12.7 million in the fourth quarter of fiscal year 2017 related to a reduction in workforce.
 
 
Years Ended September 30,
 
 
2017
 
2016
 
2015
 
 
(in thousands, except percentages)
Other income and income taxes
 
 
 
 
 
 
Income from operations
 
$
563,956

 
$
547,377

 
$
552,899

Other income, net
 
11,561

 
2,514

 
8,445

Income before income taxes
 
575,517

 
549,891

 
561,344

Provision for income taxes
 
154,756

 
184,036

 
196,330

Net income
 
$
420,761

 
$
365,855

 
$
365,014

Other income and income taxes (as percentage of net revenue)
 
 
 
 
 
 
Income from operations
 
27.0
%
 
27.4
%
 
28.8
%
Other income, net
 
0.5

 
0.1

 
0.4

Income before income taxes
 
27.5

 
27.5

 
29.2

Provision for income taxes
 
7.4

 
9.2

 
10.2

Net income
 
20.1
%
 
18.3
%
 
19.0
%
Other Income, Net. Other income, net, consists primarily of interest income and foreign currency transaction gains and losses. Other income, net increased $9.0 million in fiscal year 2017, as compared to fiscal year 2016 and decreased $5.9 million in fiscal year 2016, as compared to fiscal year 2015. Interest income was $8.5 million, $6.6 million and $5.4 million for fiscal years 2017, 2016 and 2015, respectively. The increase in other income, net for fiscal year 2017 was primarily due to $7.0 million in foreign currency gains, compared to the prior year. The decrease in other income, net for fiscal year 2016 as compared to fiscal year 2015 was primarily due to $7.2 million in foreign currency losses, compared to the prior year.
Provision for Income Taxes. We recorded a 26.9% provision for income taxes for fiscal year 2017, compared to 33.5% in fiscal year 2016 and 35.0% in fiscal year 2015. The decrease in the effective tax rate from fiscal year 2016 to 2017 was primarily due to the impact of foreign income, and foreign tax credits from a one time distribution of prior year foreign earnings, partially offset with a benefit recorded in fiscal year 2016 from the retroactive extension of the United States Federal Credit for Increasing Research Activities. The decrease in the effective tax rate from fiscal year 2015 to 2016 was primarily due to the impact of foreign income, and the permanent extension of the United States Federal Credit for Increasing Research Activities.
We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more-likely-than-not to be realized. In making these determinations we consider historical and projected taxable income, and ongoing prudent and feasible tax planning strategies in assessing the appropriateness of a valuation allowance. The net increase in the valuation allowance of $3.9 million for fiscal year 2017 and $4.2 million for fiscal year 2016 was primarily related to tax net operating losses incurred in certain foreign jurisdictions, and state tax credit carryforwards. Our net deferred tax assets as of September 30, 2017, 2016 and 2015 were $53.2 million, $49.4 million and $55.7 million, respectively.
Our worldwide effective tax rate may fluctuate based on a number of factors, including variations in projected taxable income in the various geographic locations in which we operate, changes in the valuation of our net deferred tax assets, resolution of potential exposures, tax positions taken on tax returns filed in the various geographic locations in which we operate, and the introduction of new accounting standards or changes in tax laws or interpretations thereof in the various geographic locations in which we operate. We have recorded liabilities to address potential tax exposures related to business and income tax positions we have taken that could be challenged by taxing authorities. The ultimate resolution of these

42


potential exposures may be greater or less than the liabilities recorded which could result in an adjustment to our future tax expense.
Liquidity and Capital Resources
We have funded our operations with our cash balances, cash generated from operations and proceeds from public offerings of our securities.
 
 
 
Years Ended September 30,
 
 
2017
 
2016
 
2015
 
 
(in thousands)
Liquidity and Capital Resources
 
 
 
 
 
 
Cash and cash equivalents and investments
 
$
1,301,730

 
$
1,158,770

 
$
1,171,998

Cash provided by operating activities
 
740,281

 
711,535

 
684,541

Cash (used in) provided by investing activities
 
(32,285
)
 
62,720

 
(10,699
)
Cash used in financing activities
 
(546,032
)
 
(652,647
)
 
(556,902
)
Cash and cash equivalents, short-term investments and long-term investments totaled $1,301.7 million as of September 30, 2017, compared to $1,158.8 million as of September 30, 2016, representing an increase of $143.0 million. The increase was primarily due to cash provided by operating activities of $740.3 million, partially offset by $600.1 million of cash required for the repurchase of outstanding common stock under our share repurchase program in fiscal year 2017 and $38.7 million of capital expenditures related to the expansion of our facilities to support our operations worldwide. As of September 30, 2017, 37.7% of our cash and cash equivalents and investment balances were outside of the U.S., which may be subject to U.S. taxes if repatriated. The cash and cash equivalents and investment balances outside of the U.S. are subject to fluctuation based on the settlement of intercompany balances. In fiscal year 2016, the decrease to cash and cash equivalents, short-term investments and long-term investments from the prior year was primarily due to $700.1 million of cash required for the repurchase of outstanding common stock under our share repurchase program, and $63.5 million of capital expenditures related to the expansion of our facilities to support our operations worldwide, partially offset by cash provided by operating activities of $711.5 million. As of September 30, 2016, 30.7% of our cash and cash equivalents and investment balances were outside of the U.S., which may be subject to U.S. taxes if repatriated.
Cash provided by operating activities during fiscal year 2017 was $740.3 million compared to $711.5 million in fiscal year 2016 and $684.5 million in fiscal year 2015. Cash provided by operating activities resulted primarily from cash generated from net income, after adjusting for non-cash charges such as stock-based compensation, depreciation and amortization charges and changes in operating assets and liabilities.
Cash used in investing activities during fiscal year 2017 was $32.3 million compared to cash provided by investing activities of $62.7 million in fiscal year 2016 and cash used in investing activities of $10.7 million in fiscal year 2015. Cash used in investing activities for fiscal year 2017 was primarily the result of the purchase of investments and capital expenditures related to maintaining our operations worldwide, partially offset by the sale and maturity of investments. Cash provided by investing activities for fiscal year 2016 was primarily the result of the sale and maturity of investments partially offset by the purchase of investments and capital expenditures related to maintaining our operations worldwide. Cash used in investing activities for fiscal year 2015 was primarily the result of the purchase of investments and capital expenditures related to the expansion of our facilities to support our operations worldwide, partially offset by the sale and maturity of investments.
Cash used in financing activities was $546.0 million for fiscal year 2017, compared to $652.6 million for fiscal year 2016 and $556.9 million for fiscal year 2015. Cash used in financing activities for fiscal year 2017 included $600.1 million to repurchase common stock under our share repurchase program, which was partially offset by cash received from the exercise of employee stock options and stock purchases under our employee stock purchase plan of $47.0 million and excess tax benefits related to share-based compensation of $7.0 million. Cash used in financing activities for fiscal year 2016 included $700.1 million to repurchase common stock under our share repurchase program, which was partially offset by cash received from the exercise of employee stock options and stock purchases under our employee stock purchase plan of $44.9 million and excess tax benefits related to share-based compensation of $2.6 million. Cash used in financing activities for fiscal year 2015 included $606.9 million to repurchase common stock under our share repurchase program, which was partially offset by cash received from the exercise of employee stock options and stock purchases under our employee stock purchase plan of $40.4 million and excess tax benefits related to share-based compensation of $9.5 million.
Based on our current operating and capital expenditure forecasts, we believe that our existing cash and investment balances, together with cash generated from operations should be sufficient to meet our operating requirements for the next

43


twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of expansion into new territories, the timing of introductions of new products and enhancements of existing products, and the continuing market acceptance of our products.
Obligations and Commitments
The following table summarizes our contractual payment obligations and commitments as of September 30, 2017:
 
 
 
Payment Obligations by Year
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
 
 
(in thousands)
Operating leases
 
$
27,713

 
$
24,864

 
$
40,892

 
$
38,764

 
$
37,250

 
$
298,605

 
$
468,088

Purchase obligations
 
20,274

 

 

 

 

 

 
20,274

Total
 
$
47,987

 
$
24,864

 
$
40,892

 
$
38,764

 
$
37,250

 
$
298,605

 
$
488,362

We lease our facilities under operating leases that expire at various dates through 2033.
As of September 30, 2017, we had approximately $24.3 million of tax liabilities, including interest and penalties, related to uncertain tax positions (See Note 5 to our Consolidated Financial Statements). Because of the high degree of uncertainty regarding the settlement of these liabilities, we are unable to estimate the years in which future cash outflows may occur.
Purchase obligations are comprised of purchase commitments with our contract manufacturers. The agreement with our primary contract manufacturer allows it to procure component inventory on our behalf based on our production forecast. We are obligated to purchase component inventory that the contract manufacturer procures in accordance with the forecast, unless cancellation is given within applicable lead times.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 and the related amendments outline a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are continuing to evaluate the transition methods. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The updated standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 with early adoption permitted for annual reporting periods beginning after December 15, 2016.
We currently plan to adopt ASU 2014-09 in the first quarter of fiscal 2019. We have initiated an assessment of our systems, data and processes related to the implementation of this accounting standard. Under the new standard, we expect to defer and amortize incremental costs to obtain a contract, which are primarily commission costs, over the expected product life rather than expensing them as incurred under current practice. Additionally, under the new standard,we would be required to recognize a portion of term license revenues upfront, at the time of delivery rather than ratably over the related contract period. We are continuing to evaluate the impact that this updated standard and the related amendments will have on our consolidated financial statements and footnote disclosures.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which changes the subsequent measurement of inventory from lower of cost or market to lower of cost and net realizable value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We will adopt this standard in the first quarter of fiscal year 2018, and do not expect the adoption to have a material impact on our consolidated financial statements and footnote disclosures.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which requires that all deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We will adopt this standard in the first quarter of fiscal year 2018, and do not expect the adoption to have a material impact on our consolidated financial statements and footnote disclosures.

44


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a corresponding lease liability for all leases with terms greater than twelve months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and is required to be applied with a modified retrospective approach. Early adoption is permitted. We are currently assessing the impact that this updated standard will have on our consolidated financial statements and footnote disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We will adopt this standard in the first quarter of fiscal year 2018. As permitted under the updated standard, we will continue to estimate forfeitures at each period and will not elect an accounting policy change to record forfeitures as they occur. Further, we do not expect the adoption to have a material impact within the accounting for income taxes, statutory tax withholding requirements, or in classification of the statement of cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. We are currently assessing the impact that this updated standard will have on our consolidated financial statements and footnote disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which will require a company’s cash flow statement to explain the changes during a reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents. Additionally, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents if the cash flow statement includes a reconciliation of the total cash balances for a reporting period. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which provides a more robust framework to use in determining when a set of assets and activities is considered a business. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for certain transactions. We are currently assessing the impact that this updated standard will have on our consolidated financial statements and footnote disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the goodwill impairment process by eliminating Step 2 from the quantitative goodwill impairment test. Under this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for annual goodwill impairment tests performed after January 1, 2017. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08), which shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

45


In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (ASU 2017-09), which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

46


Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk. Our cash equivalents consist of high-quality securities, as specified in our investment policy guidelines. The policy limits the amount of credit exposure to any one issue or issuer to a maximum of 5% of the total portfolio with the exception of U.S. treasury and agency securities, commercial paper and money market funds, which are exempt from size limitation. The policy requires investments in securities that mature in three years or less, with the average maturity being no greater than one and a half years. These securities are subject to interest rate risk and will decrease in value if interest rates increase. A decrease of one percent in the average interest rate would have resulted in a decrease of approximately $7.3 million in our interest income for the fiscal year 2017.
 
 
 
Maturing in
 
 
Three Months
or Less
 
Three Months
to One Year
 
Greater Than
One Year
 
Total
 
Fair Value
 
 
(in thousands, except for percentages)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
Included in cash and cash equivalents
 
$
16,909

 
$

 
$

 
$
16,909

 
$
16,909

Weighted average interest rate
 
0.5
%
 

 

 

 

Included in short-term investments
 
$
105,713

 
$
237,987

 
$

 
$
343,700

 
$
343,700

Weighted average interest rates
 
0.9
%
 
1.1
%
 

 

 

Included in long-term investments
 
$

 
$

 
$
284,802

 
$
284,802

 
$
284,802

Weighted average interest rate
 

 

 
1.4
%
 

 

September 30, 2016
 
 
 
 
 
 
 
 
 
 
Included in cash and cash equivalents
 
$
56,525

 
$

 
$

 
$
56,525

 
$
56,525

Weighted average interest rate
 
0.3
%
 

 

 

 

Included in short-term investments
 
$
78,969

 
$
288,855

 
$

 
$
367,824

 
$
367,824

Weighted average interest rates
 
0.4
%
 
0.6
%
 

 

 

Included in long-term investments
 
$

 
$

 
$
276,375

 
$
276,375

 
$
276,375

Weighted average interest rate
 

 

 
1.0
%
 

 

September 30, 2015
 
 
 
 
 
 
 
 
 
 
Included in cash and cash equivalents
 
$
60,144

 
$

 
$

 
$
60,144

 
$
60,144

Weighted average interest rate
 
0.1
%
 

 

 

 

Included in short-term investments
 
$
74,744

 
$
309,138

 
$

 
$
383,882

 
$
383,882

Weighted average interest rates
 
0.5
%
 
0.5
%
 

 

 

Included in long-term investments
 
$

 
$

 
$
397,656

 
$
397,656

 
$
397,656

Weighted average interest rate
 

 

 
0.9
%
 

 

Foreign Currency Risk. The majority of our sales and expenses are denominated in U.S. dollars and as a result, we have not experienced significant foreign currency transaction gains and losses to date. While we have conducted some transactions in foreign currencies during the fiscal year ended September 30, 2017 and expect to continue to do so, we do not anticipate that foreign currency transaction gains or losses will be significant at our current level of operations. However, as we continue to expand our operations internationally, transaction gains or losses may become significant in the future. We have not engaged in foreign currency hedging to date. However, we may do so in the future.

47


Item 8.
Financial Statements and Supplementary Data
F5 NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 


48


Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of F5 Networks, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of F5 Networks, Inc. and its subsidiaries as of September 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
November 3, 2017




49


F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
 
September 30,
 
 
2017
 
2016
ASSETS
Current assets
 
 
 
 
Cash and cash equivalents
 
$
673,228

 
$
514,571

Short-term investments
 
343,700

 
367,824

Accounts receivable, net of allowances of $1,815 and $2,062
 
291,924

 
268,175

Inventories
 
29,834

 
34,051

Deferred tax assets
 
53,084

 
51,601

Other current assets
 
67,538

 
52,579

Total current assets
 
1,459,308

 
1,288,801

Property and equipment, net
 
122,420

 
123,248

Long-term investments
 
284,802

 
276,375

Deferred tax assets
 
4,530

 
2,044

Goodwill
 
555,965

 
555,965

Other assets, net
 
53,775

 
59,890

Total assets
 
$
2,480,800

 
$
2,306,323

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
 
 
 
 
Accounts payable
 
$
50,760

 
$
34,117

Accrued liabilities
 
187,379

 
178,353

Deferred revenue
 
696,404

 
631,768

Deferred tax liabilities
 
58

 

Total current liabilities
 
934,601

 
844,238

Other long-term liabilities
 
44,589

 
34,138

Deferred revenue, long-term
 
267,902

 
238,473

Deferred tax liabilities
 
4,316

 
4,212

Total long-term liabilities
 
316,807

 
276,823

Commitments and contingencies (Note 7)
 

 

Shareholders’ equity
 
 
 
 
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding
 

 

Common stock, no par value; 200,000 shares authorized, 62,594 and 65,315 shares issued and outstanding
 
17,627

 
13,191

Accumulated other comprehensive loss
 
(17,997
)
 
(13,194
)
Retained earnings
 
1,229,762

 
1,185,265

Total shareholders’ equity
 
1,229,392

 
1,185,262

Total liabilities and shareholders’ equity
 
$
2,480,800

 
$
2,306,323

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

50


F5 NETWORKS, INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
 
 
 
Years Ended September 30,
 
 
2017
 
2016
 
2015
Net revenues
 
 
 
 
 
 
Products
 
$
964,662

 
$
944,469

 
$
991,539

Services
 
1,125,379

 
1,050,565

 
928,284

Total
 
2,090,041

 
1,995,034

 
1,919,823

Cost of net revenues
 
 
 
 
 
 
Products
 
176,032

 
166,624

 
174,225

Services