f5 2001 Annual Stockholder's meeting 3/7/02
Here's a summary of my notes from f5's stockholder's meeting. In general the meeting was well run and the company sounds fine. I won't be surprised if I missed some of the details. If anyone else could correct any errors I would appreciate it.
This year the meeting was held in the headquarters down on Seattle's waterfront. The room was set up for about 80 people and most of the chairs were filled. This crowd definitely dresses casual. The few suits and dresses stood out. Things are not radically different but the style is definitely modern and the pool table is not part of most conference rooms that I have been in.
FORMAL MEETING
As usual the CEO finished the formal part of the meeting in record time. He did so last year too. If it took more than 60 seconds I would be surprised. The only item to note was the appropriately young directors and the deal that allows Nokia to nominate a board member.
OVERVIEW
The CEO then went on to give an overview of the company and where it might be headed. It sounds like they intend to be the leading provider of Internet traffic and content management. Being just another player is not their goal. While for a while they had a lot of dotcom business, almost all of their business is now large corporations that are deploying applications throughout their workforce.
The f5 products can sell well because they are reducing the customer's cost and increasing their security. The way that f5 hardware and software integrate into networks allows for the products a unique view of what needs to be routed and optimized. Evidently the competitors products interface differently. I got lost on some of the technical details. When he got to talking about the various layers I couldn't keep up. That's my fault for not doing better research. he made an excellent point that clarified f5's advantage. What f5 does in one box costs twice as much and takes three boxes with Cisco's solution. Having SSL encryption integral to the box helps too.
The flexibility of the software side is where a lot of the competitive advantage is realized. Because so much of the functionality (and Intellectual Property) is in the software, it is easier to change, and I suspect upgrade, than the competitors products that rely on hardware. Along the software line they are also pleased with the icontrol architecture. It is a standard development kit that is provided free to those that want to integrate well with f5 products. It therefore indirectly creates demand for f5 products even though it does not generate its own revenue.
Additional cost savings to the customers are items like allowing the deployment of voice over Internet telephony for one-fifth the cost of conventional approaches. The SSL payback sounds like it is considered instantaneous and allows a ten-fold increase in speed.
He spent a lot of time talking about the blade servers. The product and market are so new that it is difficult to project revenue but it sounded like blade servers will be replacing the standard six foot cabinet full of components. The cost is much less(40% of normal), it takes up less floor space and is faster because the boards are all closer to each other. The market revenue number was generated by some industry type I think and it predicted a $1.2B market in 2006. They feel that they have a good chance of grabbing a large chunk of that market. He typified the plan as ambitious and realizable.
FINANCIAL
The CFO got up and talked past, present and future. Is there anything else?
The gross margin started off with last years 70% for products and 58% for services. That meant a total gross margin of 68% which was up from 53%. Because the revenue mix is sliding more towards software and services, the margins might improve enough to end FY02 around 70% or more.
DSO (I can't remember for sure if that is Days Sales Outstanding) dropped from 104 to 70. Looking back at last year's notes I thought they had it down to the mid 80's back then. In either case, things are looking better.
In general, the business is looking better. Despite flat revenues, market share went from 9.7% to 16.5%, they have been cash flow positive with no significant debt for the last three quarters, and like it says above they expect the margins to improve.
This next quarter may be a small loss (4-6 cents) and cash flow sounds about even but FY02 should end with 20% revenue growth, earnings of about 9 cents to 11 cents and margins at or over 70%. Q3 should be breakeven and most of the revenue growth will be in the second quarter.
For the future, wireless is expected to drive a lot of growth. Maybe that explains Nokia's interest.
QUESTIONS AND ANSWERS
This is all paraphrased.
> f5's opportunities with IBM are mainly through icontrol and maybe blade servers.
> The sales mix will be moving more towards indirect sellers such as DELL. Everything international is already indirect and the North American sales are expected to go that way more so too. FY03 will see lots of activity from blade servers but they won't have much visibility on that until about July.
> f5's blade servers have a unique competitive advantage because they are running f5 software on Intel hardware. (I admit to some confusion about this one. I thought f5 had some of the hardware side too.) The competition tends to sell proprietary systems which are less open.
> f5 management would not speculate on buyout possibilities because speculation does nothing to further the product or profitability. They consider it a great independent company and opportunity especially if they become the standard in blade servers.
> R&D is about $5M per quarter with 100 people working on software and 38 working on hardware (Spokane, WA?). The Blade server doesn't change that much.
> Contract manufacturers are used for the hardware.
> They emphasized the opportunity that 2.5G and 3G cell phones represent.
> various group's focuses
1) Marketing - scream from the rooftops about f5
2) Sales - top line revenue growth and market share
3) CFO - profitability, asset efficiency, and educating Wall Street
4) Product Development - technical superiority (he spread the credit)
5) missed the title - evaluating new technologies & build/make/buy decisions
6) Legal - Intellectual Property protection
7) CEO - people success (including stockholders) and tactics
> We were reassured that the accounting practices are conservative.
> Facilities and manpower won't change much.
> There is a class action lawsuit out for 300 companies that IPO'd about the same time. f5's exposure is unknown but because the stock price didn't dip below some target price during some window, there might not be much of a problem.
> They think they have a lot to offer Boeing and they'll keep working on that.
MY CONCLUSION
They come across as good company that has weathered the IT turmoil of the last two years rather well. I like their balance of business and technology expertise. They seem to be recognizing and taking advantage of the opportunities that they make or stumble across. Not all firms do that. They have cash, have been cash flow positive, have no significant debt, and have lots of opportunities that are more than just vaporware. Their issues are the size and entrenchment of their competitors but they seem to be making good headway there. There is also always the prospect of some new technology sprouting up out of nowhere, but that is true of any technology. In other words, their story sounds good and should start proving itself out even more in the next twelve months.
DISCLAIMER
LTBH though I only finally bought some about a year and a half ago. I probably won't be adding to our position because it has (fortunately) become one of our major holdings. Oh yeah and don't forget that I am not an expert in this technology or finance but thought folks might be interested in my notes. If there are any questions feel free to reply and I also recommend contacting Investor Relations. |
