f5 Annual Stockholders' meeting notes 4/29/2004
Here is what I remember from the stockholders' meeting. I took notes and got most of what they said but pardon my gaps and errors. When in doubt, call Investor Relations.
PRE-MEETING
Like in the last couple of years, f5 held the meeting in their headquarters. They moved out the pool table for us so I think they've maintained their sense of play and also know when to put on a stodgier image. The room had about 50 chairs and about a dozen were empty. In previous posts I've mentioned f5 being overlooked. Maybe such low attendance enforces that image. The average age in the crowd was younger than most companies. There were very few ties and a high percentage of jeans. In a break with tradition the meeting started late by about five minutes.
FORMAL MEETING
The CEO once again should get an award for the most efficient and quickest stockholders' meeting. It was over within a few minutes if not less than one. I forgot to get my stopwatch out. Within that short period he announced the annual changeover of the Chairman of the Board and that all proposals passed except one. Equity compensation failed. I don't know the details. I was remiss in not asking for a percentage of yea votes. Usually that sort of thing is passed along but he didn't mention it and I forgot to ask.
VIDEO
We were shown a very new video that the sales teams will be using. It was about two days old and will be made public very shortly. It did a very good job of describing the company, its products, how f5 solutions can be customized for customers, tie-ins with Microsoft and Oracle infrastructure and a few examples of scalability enabled by f5. I don't know if the video will be available to individuals. They reference something like 34,000 units sold across 6,000 organizations.
COMPANY OVERVIEW
The company is passing from the survival mode necessary for the last few years to a growth mode. They like their position within the network. Their core market is growing and they are gaining market share at the same time. The increased use of many simple servers creates a greater need for f5's products. They continue to see themselves as a product based company and will continue to spend about 15%-18% of revenue on R&D. The acquisition of URoam (sp?) increases their addressable market and could double their revenue in 3 years. They are also benefiting by working with Microsoft and Oracle. When f5 is part of a Microsoft or Oracle solution it provides f5 another opportunity to get into a customer's architecture that might otherwise be picked up by Cisco.
Fiscal year 2003 saw accelerated revenue growth, improved operating margins, and better sales globalization. The first half of FY04 saw their fifth quarter of profitability and the successful launch of Firepass (?), but the main number they talked from was the triply oversubscribed offering that netted $114M for acquisitions and an improved balance sheet.
New products to be released are Buffalo Jump, Application Gateway, and Montreal (which sounds like a box with a number of f5 components in it).
Market share for fixed switches and applications grew from the mid-20s to 34% and they expect that to grow.
An industry watcher, Gartner?, ranks f5 as the leader based on vision and execution, which is another way of saying the R&D is producing results and they are being implemented.
Recently they saw their addressable market projections grow from $400M to over $3B by 2006. (I remember the $400M number and thought it limited the company's potential. I sold a chunk based on that original estimate. Can I get that back? Ah, the risks of investing in a changing market and technology.)
Their 2004 goals reduce to 1) exceed plan and 2) have fun. Nice goals. I hope to do the same, but that is another story.
FINANCIAL OVERVIEW
The CFO put numbers to the words expressed by the CEO. From FY02 to FY03 revenue grew 7%. Gross margins improved from 72% to 77%. Day Sales Outstanding (DSO) improved from 68 down to 55 days. Cash Flow increased 50% from $9.5M to $14.6M but I can't remember if that is a monthly, quarterly, or yearly number.
Sales are 73% from products and the rest from services. One-third are international but that might increase to the mid-40's. They had 500 people at the end of FY03 and now have 550. 30% of them are in Product Development.
Income statement trends were displayed as a group of charts. I particularly liked the hockey stick growth in revenue. Let's hope the stick doesn't break. They expect to hold gross margins at about 77%. Operating margins and earnings per share are growing linearly. Earnings are growing faster than revenue which is a good thing.
Balance sheet trends were a slowly climbing inventory after a massive fall. DSO is down to 42 days but may creep back up to 44. Cash flow for 2Q04 was $10.2M and showed a recent ramp. The recent offering means they have no debt and lots of cash.
For 2Q04 they achieved or hoped for $40.2M revenue, 77% margin, and $10.2 cash flow which answers my question from above. They will not guide past the next quarter because, well I am guessing it is because there is very little ability to accurately predict the future. I certainly never know what's going on in my future so I am fine with that.
That was it for the formal and presentation parts of the meeting.
QUESTIONS & ANSWERS - The following are paraphrased to make my life simpler. I can't write fast enough to catch it all.
? Cash on the balance sheet is handy for the reasons given above and to aid sales. Big companies like to buy from healthy companies.
? Yes, the cash came from dilution but that was considered a good trade.
? They've added 50 employees since the end of FY03. (Included above.)
? URoam revenue for Calendar Year 2004 should be $12M to $15M and probably near the high end.
? International markets are growing faster than the domestic market. International sales could be about 45% of revenue. (Included above.)
? China is a good market but just getting started with its first million dollar (quarter/month?)
? International margins were the question but I missed the answer.
? There are only two legal actions. One is f5 protecting one of its patents and the other involves China. That case load is considered very small and therefore good.
? Something about IBM and f5 being the preferred supplier in Japan.
? Microchips usually are Broadcom and Intel. They are commodities and therefore the source is not as important.
? The traffic management has less competition than the security products.
? There are only about 4 people on the legal staff. They use outside help.
MY SUMMARY
The meeting was over in an hour. There almost weren't any questions until someone broke the silence. Things ran so smoothly that it was probably a mix of good communication, very little distracting fluff, lots of good news, no controversies, a product more technical than its audience, and a small crowd. When there are only three dozen people in the room and at least a dozen of them are management or corporate staff, that leaves a small crowd for asking questions. After the Q&A the officers and directors hung out but they mostly talked to each other because no one was approaching them. They continue to impress me with their business and communication skills.
The company story looks very good especially when compared to the environment they just went through. Their market is growing and their market share is growing. Isn't that the dream of small tech companies? I was particularly impressed with the addressable market growing to over $3B. Like I said before, had I known that I might not have sold that block or two.
CAVEATS
I will also claim ignorance when compared to an IT professional. I can not technically evaluate f5's products and would like to hear from end users. f5 is a small company and can get swallowed up (if they don't swallow their poison pill), or get overwhelmed by a company with resources like Cisco.
CONCLUSIONS FOR MY PORTFOLIO
I am more hesitant about selling and realize why some folks might buy. Simply based on the market growth from $400M to $3B by 2006 results in a very sizable potential growth in FFIV's price even if they don't grow market share as is likely. I will continue to hold. I might buy if I find some money. Let me go check my lottery ticket.
DISCLAIMER
LTBH since December 2000, but I've sold some because I needed some cash. I am not an IT or finance professional.
Good luck folks. |
