UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

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, 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.)

801 5th Avenue

Seattle, Washington 98104

(Address of principal executive offices and zip code)

(206) 272-5555

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, no par value	FFIV	NASDAQ Global Select Market

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  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☑    No  ☐

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	☑	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  ☑

The number of shares outstanding of the registrant’s common stock as of April 28, 2023 was 60,468,009.

F5, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2023

Table of Contents

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	4
Consolidated Balance Sheets	4
Consolidated Income Statements	5
Consolidated Statements of Comprehensive Income	6
Consolidated Statements of Shareholders' Equity	7
Consolidated Statements of Cash Flows	9
Notes to Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 4. Mine Safety Disclosures	31
Item 5. Other Information	31
Item 6. Exhibits	31
SIGNATURES	32

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

F5, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands)

	March 31, 2023		September 30, 2022
ASSETS
Current assets
Cash and cash equivalents	$	734,544	$	758,012
Short-term investments	20,710		126,554
Accounts receivable, net of allowances of $5,181 and $6,020	485,622		469,979
Inventories	50,745		68,365
Other current assets	533,554		489,314
Total current assets	1,825,175		1,912,224
Property and equipment, net	169,771		168,182
Operating lease right-of-use assets	216,293		227,475
Long-term investments	4,736		9,544
Deferred tax assets	235,109		183,365
Goodwill	2,288,635		2,259,282
Other assets, net	483,532		516,122
Total assets	$	5,223,251	$	5,276,194
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	69,952	$	113,178
Accrued liabilities	295,533		309,819
Deferred revenue	1,160,118		1,067,182
Current portion of long-term debt	—		349,772
Total current liabilities	1,525,603		1,839,951
Deferred tax liabilities	3,401		2,781
Deferred revenue, long-term	636,194		624,398
Operating lease liabilities, long-term	259,916		272,376
Other long-term liabilities	72,578		67,710
Total long-term liabilities	972,089		967,265
Commitments and contingencies (Note 8)
Shareholders' equity
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding	—		—
Common stock, no par value; 200,000 shares authorized, 60,465 and 59,860 shares issued and outstanding	190,592		91,048
Accumulated other comprehensive loss	(22,977)		(26,176)
Retained earnings	2,557,944		2,404,106
Total shareholders' equity	2,725,559		2,468,978
Total liabilities and shareholders' equity	$	5,223,251	$	5,276,194

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

4

F5, INC.

CONSOLIDATED INCOME STATEMENTS

(unaudited, in thousands, except per share data)

	Three months ended March 31,				Six months ended March 31,
	2023		2022		2023		2022
Net revenues
Products	$	340,581	$	297,518	$	681,139	$	640,667
Services	362,594		336,706		722,414		680,657
Total	703,175		634,224		1,403,553		1,321,324
Cost of net revenues
Products	99,795		71,234		198,650		152,896
Services	55,859		55,125		112,011		108,536
Total	155,654		126,359		310,661		261,432
Gross profit	547,521		507,865		1,092,892		1,059,892
Operating expenses
Sales and marketing	233,076		228,826		466,181		462,861
Research and development	141,363		135,838		283,686		266,109
General and administrative	67,036		68,554		137,027		134,215
Restructuring charges	—		—		8,740		7,909
Total	441,475		433,218		895,634		871,094
Income from operations	106,046		74,647		197,258		188,798
Other income (expense), net	2,737		(1,934)		7,439		(4,365)
Income before income taxes	108,783		72,713		204,697		184,433
Provision for income taxes	27,347		16,477		50,859		34,638
Net income	$	81,436	$	56,236	$	153,838	$	149,795
Net income per share — basic	$	1.35	$	0.93	$	2.55	$	2.47
Weighted average shares — basic	60,330		60,573		60,211		60,693
Net income per share — diluted	$	1.34	$	0.92	$	2.54	$	2.43
Weighted average shares — diluted	60,691		61,405		60,537		61,661

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

5

F5, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

	Three months ended March 31,				Six months ended March 31,
	2023		2022		2023		2022
Net income	$	81,436	$	56,236	$	153,838	$	149,795
Other comprehensive income (loss):
Foreign currency translation adjustment	(266)		(79)		1,984		(596)
Available-for-sale securities:
Unrealized gains (losses) on securities, net of taxes of $118 and $(148) for the three months ended March 31, 2023 and 2022, respectively, and $232 and $(222) for the six months ended March 31, 2023 and 2022, respectively	1,060		(1,294)		1,827		(1,915)
Reclassification adjustment for realized losses included in net income, net of taxes of $58 and $12 for the three months ended March 31, 2023 and 2022, respectively, and $78 and $14 for the six months ended March 31, 2023 and 2022, respectively	(552)		(40)		(612)		(44)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax	508		(1,334)		1,215		(1,959)
Total other comprehensive income (loss)	242		(1,413)		3,199		(2,555)
Comprehensive income	$	81,678	$	54,823	$	157,037	$	147,240

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

6

F5, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited, in thousands)

	Common Stock			Accumulated Other Comprehensive Loss		Retained Earnings		Total Shareholders’ Equity
	Shares	Amount
	Three months ended March 31, 2022
Balances, December 31, 2021	60,711	$	145,189	$	(21,215)	$	2,281,387	$	2,405,361
Exercise of employee stock options	46	1,048		—		—		1,048
Issuance of restricted stock	334	—		—		—		—
Repurchase of common stock	(610)	(125,012)		—		—		(125,012)
Taxes paid related to net share settlement of equity awards	(16)	(3,222)		—		—		(3,222)
Stock-based compensation	—	64,130		—		—		64,130
Net income	—	—		—		56,236		56,236
Other comprehensive loss	—	—		(1,413)		—		(1,413)
Balances, March 31, 2022	60,465	$	82,133	$	(22,628)	$	2,337,623	$	2,397,128
	Three months ended March 31, 2023
Balances, December 31, 2022	60,117	$	129,060	$	(23,219)	$	2,476,508	$	2,582,349
Exercise of employee stock options	12	281		—		—		281
Issuance of restricted stock	355	—		—		—		—
Taxes paid related to net share settlement of equity awards	(19)	(2,788)		—		—		(2,788)
Stock-based compensation	—	64,039		—		—		64,039
Net income	—	—		—		81,436		81,436
Other comprehensive income	—	—		242		—		242
Balances, March 31, 2023	60,465	$	190,592	$	(22,977)	$	2,557,944	$	2,725,559

7

	Six months ended March 31, 2022
Balances, September 30, 2021	60,652	$	192,458	$	(20,073)	$	2,187,828	$	2,360,213
Exercise of employee stock options	96	2,303		—		—		2,303
Issuance of stock under employee stock purchase plan	169	26,325		—		—		26,325
Issuance of restricted stock	775	—		—		—		—
Repurchase of common stock	(1,148)	(250,023)		—		—		(250,023)
Taxes paid related to net share settlement of equity awards	(79)	(16,816)		—		—		(16,816)
Stock-based compensation	—	127,886		—		—		127,886
Net income	—	—		—		149,795		149,795
Other comprehensive loss	—	—		(2,555)		—		(2,555)
Balances, March 31, 2022	60,465	$	82,133	$	(22,628)	$	2,337,623	$	2,397,128
	Six months ended March 31, 2023
Balances, September 30, 2022	59,860	$	91,048	$	(26,176)	$	2,404,106	$	2,468,978
Exercise of employee stock options	26	716		—		—		716
Issuance of stock under employee stock purchase plan	179	21,745		—		—		21,745
Issuance of restricted stock	731	—		—		—		—
Repurchase of common stock	(263)	(40,005)		—		—		(40,005)
Taxes paid related to net share settlement of equity awards	(68)	(9,825)		—		—		(9,825)
Stock-based compensation	—	126,913		—		—		126,913
Net income	—	—		—		153,838		153,838
Other comprehensive income	—	—		3,199		—		3,199
Balances, March 31, 2023	60,465	$	190,592	$	(22,977)	$	2,557,944	$	2,725,559

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

8

F5, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Six months ended March 31,
	2023		2022
Operating activities
Net income	$	153,838	$	149,795
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation	126,913		127,886
Depreciation and amortization	54,817		59,798
Non-cash operating lease costs	20,231		19,363
Deferred income taxes	(49,492)		(15,832)
Impairment of assets	—		6,175
Other	1,878		(439)
Changes in operating assets and liabilities (excluding effects of the acquisition of businesses):
Accounts receivable	(14,317)		(72,777)
Inventories	17,620		(5,828)
Other current assets	(43,547)		(60,896)
Other assets	9,354		(27,893)
Accounts payable and accrued liabilities	(59,534)		(35,649)
Deferred revenue	102,933		99,303
Lease liabilities	(22,140)		(26,131)
Net cash provided by operating activities	298,554		216,875
Investing activities
Purchases of investments	(689)		(53,715)
Maturities of investments	95,773		96,349
Sales of investments	16,085		78,988
Acquisition of businesses, net of cash acquired	(35,006)		(67,911)
Purchases of property and equipment	(23,793)		(15,792)
Net cash provided by investing activities	52,370		37,919
Financing activities
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan	22,461		28,628
Repurchase of common stock	(40,005)		(250,023)
Payments on term debt agreement	(350,000)		(10,000)
Taxes paid related to net share settlement of equity awards	(9,825)		(16,816)
Net cash used in financing activities	(377,369)		(248,211)
Net (decrease) increase in cash, cash equivalents and restricted cash	(26,445)		6,583
Effect of exchange rate changes on cash, cash equivalents and restricted cash	2,979		(997)
Cash, cash equivalents and restricted cash, beginning of period	762,207		584,333
Cash, cash equivalents and restricted cash, end of period	$	738,741	$	589,919
Supplemental disclosures of cash flow information
Cash paid for amounts included in the measurement of operating lease liabilities	$	27,200	$	30,346
Cash paid for interest on long-term debt	2,970		2,383
Supplemental disclosures of non-cash activities
Right-of-use assets obtained in exchange for lease obligations	$	9,577	$	818

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

9

F5, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Summary of Significant Accounting Policies

Description of Business

F5, Inc. (the "Company") is a leading provider of multi-cloud application security and delivery solutions which enable its customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. The Company's cloud, software, and hardware solutions enable its customers to deliver digital experiences to their customers faster, reliably, and at scale. The Company's enterprise-grade application services are available as cloud-based, software-as-a-service, and software-only solutions optimized for multi-cloud environments, with modules that can run independently, or as part of an integrated solution on its high-performance appliances. In connection with its solutions, the Company offers a broad range of professional services, including consulting, training, installation, maintenance, and other technical support services.

Basis of Presentation

The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair statement in conformity with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

There have been no changes to the Company's significant accounting policies as of and for the three and six months ended March 31, 2023.

New Accounting Pronouncements

There have been no material changes in recently issued or adopted accounting standards from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

2. Revenue from Contracts with Customers

Capitalized Contract Acquisition Costs

The table below shows significant movements in capitalized contract acquisition costs (current and noncurrent) for the six months ended March 31, 2023 and 2022 (in thousands):

	Six months ended March 31,
	2023		2022
Balance, beginning of period	$	77,220	$	77,836
Additional capitalized contract acquisition costs	13,123		18,530
Amortization of capitalized contract acquisition costs	(19,134)		(19,092)
Balance, end of period	$	71,209	$	77,274

Amortization of capitalized contract acquisition costs was $9.4 million and $9.7 million for the three months ended March 31, 2023 and 2022, respectively, and $19.1 million for the six months ended March 31, 2023 and 2022, and is recorded in Sales and Marketing expense in the accompanying consolidated income statements. There was no impairment of any capitalized contract acquisition costs during any period presented.

Contract Balances

Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to the Company's contracts with customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction

10

of performance obligations, or for contracts with customers that contain the Company's unconditional rights to consideration, for which the customer has not been billed. These liabilities are classified as current and non-current deferred revenue.

The table below shows significant movements in the deferred revenue balances (current and noncurrent) for the six months ended March 31, 2023 and 2022 (in thousands):

	Six months ended March 31,
	2023		2022
Balance, beginning of period	$	1,691,580	$	1,489,841
Amounts added but not recognized as revenues	785,122		723,631
Deferred revenue acquired through acquisition of businesses	1,800		10,591
Revenues recognized related to the opening balance of deferred revenue	(682,190)		(624,327)
Balance, end of period	$	1,796,312	$	1,599,736

Remaining Performance Obligations

Remaining performance obligations represent the amount of the transaction price under contracts with customers that are attributable to performance obligations that are unsatisfied or partially satisfied at the reporting date. The composition of unsatisfied performance obligations consists mainly of deferred service revenue, and to a lesser extent, deferred product revenue, for which the Company has an obligation to perform, and has not yet recognized as revenue in the consolidated financial statements. As of March 31, 2023, the total non-cancelable remaining performance obligations under the Company's contracts with customers was $1.8 billion and the Company expects to recognize revenues on approximately 64.6% of these remaining performance obligations over the next 12 months, 22.5% in year two, and the remaining balance thereafter.

See Note 12, Segment Information, for disaggregated revenue by significant customer and geographic region, as well as disaggregated product revenue by systems and software.

3. Fair Value Measurements

In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances and expands disclosure about fair value measurements.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date, essentially the exit price.

The levels of fair value hierarchy are:

Level 1: Quoted prices in active markets for identical assets and liabilities at the measurement date that the Company has the ability to access.

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Unobservable inputs for which there is little or no market data available. These inputs reflect management's assumptions of what market participants would use in pricing the asset or liability.

Level 1 investments are valued based on quoted market prices in active markets and include the Company's cash equivalent investments. Level 2 investments, which include investments that are valued based on quoted prices in markets that are not active, broker or dealer quotations, actual trade data, benchmark yields or alternative pricing sources with reasonable levels of price transparency, include the Company's certificates of deposit, corporate bonds and notes, municipal bonds and notes, U.S. government securities, U.S. government agency securities and international government securities. Fair values for the Company's level 2 investments are based on similar assets without applying significant judgments. In addition, all of the Company's level 2 investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments.

11

A financial instrument's level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes "observable" requires significant judgment by the Company. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The Company's financial assets measured at fair value on a recurring basis subject to the disclosure requirements at March 31, 2023 and September 30, 2022, were as follows (in thousands):

				Gross Unrealized						Classification on Balance Sheet
As of March 31, 2023	Fair Value Level	Cost or Amortized Cost		Gains		Losses		Aggregate Fair Value		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
Changes in fair value recorded in other comprehensive income (loss)
Money Market Funds	Level 1	$	160,242	$	—	$	—	$	160,242	$	160,242	$	—	$	—
Corporate bonds and notes	Level 2	15,044		—		(260)		14,784		—		14,012		772
Municipal bonds and notes	Level 2	2,172		—		(59)		2,113		—		2,113		—
U.S. government securities	Level 2	4,361		—		(60)		4,301		1,463		2,838		—
U.S. government agency securities	Level 2	1,784		—		(37)		1,747		—		1,747		—
Total debt investments		$	183,603	$	—	$	(416)	$	183,187	$	161,705	$	20,710	$	772
Changes in fair value recorded in other net income (expense)
Equity investments	*							$	3,964	$	—	$	—	$	3,964
Total equity investments								3,964		—		—		3,964
Total investments								$	187,151	$	161,705	$	20,710	$	4,736

 * The fair value of this equity investment is measured at net asset value (NAV) which approximates fair value and is not classified within the fair value hierarchy.

				Gross Unrealized						Classification on Balance Sheet
As of September 30, 2022	Fair Value Level	Cost or Amortized Cost		Gains		Losses		Aggregate Fair Value		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
Changes in fair value recorded in other comprehensive income (loss)
Money Market Funds	Level 1	$	276,294	$	—	$	—	$	276,294	$	276,294	$	—	$	—
Corporate bonds and notes	Level 2	50,828		—		(950)		49,878		912		44,356		4,610
Municipal bonds and notes	Level 2	5,018		—		(102)		4,916		—		3,812		1,104
U.S. government securities	Level 2	84,734		—		(660)		84,074		10,120		73,954		—
U.S. government agency securities	Level 2	5,825		—		(75)		5,750		606		4,432		712
Total debt investments		$	422,699	$	—	$	(1,787)	$	420,912	$	287,932	$	126,554	$	6,426
Changes in fair value recorded in other net income (expense)
Equity investments	*							$	3,118	$	—	$	—	$	3,118
Total equity investments								3,118		—		—		3,118
Total investments								$	424,030	$	287,932	$	126,554	$	9,544

* The fair value of this equity investment is measured at NAV which approximates fair value and is not classified within the fair value hierarchy.

12

The Company uses the fair value hierarchy for financial assets and liabilities. The carrying amounts of other current financial assets and other current financial liabilities approximate fair value due to their short-term nature.

Interest income from investments was not material for the three and six months ended March 31, 2023 and 2022. Interest income is included in other income (expense), net on the Company's consolidated income statements. Unrealized losses on investments held for a period greater than 12 months at March 31, 2023 and September 30, 2022 were not material.

The Company invests in debt securities that are rated investment grade. The Company reviews the individual debt securities in its portfolio to determine whether a credit loss exists by comparing the extent to which the fair value is less than the amortized cost and considering any changes to ratings of a debt security by a ratings agency. The Company determined that as of March 31, 2023, there were no credit losses on any investments within its portfolio.

Assets Measured and Recorded at Fair Value on a Non-Recurring Basis

The Company's non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be carried at fair value on a recurring basis. These non-financial assets and liabilities are measured at fair value on a non-recurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. The Company reviews goodwill for impairment annually, during the second quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of tangible and intangible long-lived assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable.

The Company did not recognize any impairment charges related to its intangible assets during the three months ended March 31, 2023 and 2022, or in the six months ended March 31, 2023. In the first quarter of fiscal 2022, as a result of a planned change in the use of the asset, the Company recorded an impairment of $6.2 million against the Shape trade name intangible asset, which was reflected in the Sales and Marketing line item on the Company's consolidated income statement.

During the three and six months ended March 31, 2023 and 2022, the Company did not recognize any impairment charges related to goodwill or long-lived assets.

4. Business Combinations

Fiscal Year 2023 Acquisition of Lilac Cloud, Inc.

On January 22, 2023, the Company entered into a Merger Agreement (the “Lilac Merger Agreement”) with Lilac Cloud, Inc. ("Lilac"), a provider of innovative application delivery services. The transaction closed on February 1, 2023 with Lilac becoming a wholly-owned subsidiary of F5. The addition of Lilac’s Content Delivery Network ("CDN") technologies will enhance F5’s portfolio of solutions that secure and optimize any application and Application Programming Interface ("API") anywhere. The acquisition of Lilac did not have a material impact to the Company's operating results. 

Fiscal Year 2022 Acquisition of Threat Stack, Inc.

In September 2021, the Company entered into a Merger Agreement (the “Threat Stack Merger Agreement”) with Threat Stack, Inc. ("Threat Stack"), a provider of cloud security and workload protection solutions. The transaction closed on October 1, 2021 with Threat Stack becoming a wholly-owned subsidiary of F5. The addition of Threat Stack’s cloud security capabilities to F5’s application and API protection solutions is expected to enhance visibility across application infrastructure and workloads to deliver more actionable security insights for customers.

Pursuant to the Threat Stack Merger Agreement, at the effective time of the Merger, the capital stock of Threat Stack and the vested outstanding and unexercised stock options in Threat Stack were cancelled and converted to the right to receive approximately $68.9 million in cash, subject to certain adjustments and conditions set forth in the Threat Stack Merger Agreement. Transaction costs associated with the acquisition were not material.

As a result of the acquisition, the Company acquired all the assets and assumed all the liabilities of Threat Stack. The goodwill related to the Threat Stack acquisition is comprised primarily of expected synergies from combining operations and the acquired intangible assets that do not qualify for separate recognition. Goodwill related to the Threat Stack acquisition was not deductible for tax purposes. The results of operations of Threat Stack have been included in the Company's consolidated financial statements from the date of acquisition. 

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The allocated purchase consideration to assets acquired and liabilities assumed based on preliminary estimated fair values is presented in the following table (in thousands):

			Estimated
			Useful Life
Assets acquired
Deferred tax assets	$	14,041
Other net tangible assets acquired, at fair value	5,481
Cash, cash equivalents, and restricted cash	911
Identifiable intangible assets:
Developed technology	11,400		5 years
Customer relationships	4,400		5 years
Goodwill	43,282
Total assets acquired	$	79,515
Liabilities assumed
Deferred revenue	$	(10,591)
Total liabilities assumed	$	(10,591)
Net assets acquired	$	68,924

The measurement period for the Threat Stack acquisition lapsed during the first quarter of fiscal 2023. The Company recorded immaterial adjustments to consideration exchanged for the purchase of Threat Stack within the post-close measurement period.

The developed technology intangible asset is amortized on a straight-line basis over its estimated useful life of five years and included in cost of net product revenues. The customer relationships intangible asset is amortized on a straight-line basis over its estimated useful life of five years and included in sales and marketing expenses. The weighted-average life of the amortizable intangible assets recognized from the Threat Stack acquisition was five years as of October 1, 2021, the date the transaction closed. The estimated useful lives for the acquired intangible assets were based on the expected future cash flows associated with the respective asset.

The pro forma financial information, as well as the revenue and earnings generated by Threat Stack, were not material to the Company's operations for the periods presented.

5. Balance Sheet Details

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of the Company's cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash shown in the Company's consolidated statements of cash flows for the periods presented (in thousands):

	March 31, 2023		September 30, 2022
Cash and cash equivalents	$	734,544	$	758,012
Restricted cash included in other assets, net	4,197		4,195
Total cash, cash equivalents and restricted cash	$	738,741	$	762,207

Inventories

Inventories consist of the following (in thousands):

	March 31, 2023		September 30, 2022
Finished goods	$	9,697	$	10,164
Raw materials	41,048		58,201
	$	50,745	$	68,365

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Other Current Assets

Other current assets consist of the following (in thousands):

	March 31, 2023		September 30, 2022
Unbilled receivables	$	339,029	$	319,707
Prepaid expenses	87,430		57,340
Capitalized contract acquisition costs	33,031		34,658
Other1	74,064		77,609
	$	533,554	$	489,314

(1)     As of March 31, 2023 and September 30, 2022, includes a deposit of $47.5 million and $57.0 million, respectively, used to support the working capital needs of the Company’s primary contract manufacturer's procurement of components used in the manufacturing of system hardware.

Other Assets

Other assets, net consist of the following (in thousands):

	March 31, 2023		September 30, 2022
Intangible assets	$	178,099	$	200,288
Unbilled receivables	216,244		224,780
Capitalized contract acquisition costs	38,178		42,561
Other	51,011		48,493
	$	483,532	$	516,122

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	March 31, 2023		September 30, 2022
Payroll and benefits	$	162,588	$	165,437
Operating lease liabilities, current	43,215		42,523
Income and other tax accruals	38,375		41,217
Other	51,355		60,642
	$	295,533	$	309,819

Other Long-term Liabilities

Other long-term liabilities consist of the following (in thousands):

	March 31, 2023		September 30, 2022
Income taxes payable	$	64,151	$	59,553
Other	8,427		8,157
	$	72,578	$	67,710

6. Debt Facilities

Term Credit Agreement

In connection with the acquisition of Shape, on January 24, 2020, the Company entered into a Term Credit Agreement ("Term Credit Agreement") with certain institutional lenders that provides for a senior unsecured term loan facility in an aggregate principal amount of $400.0 million (the "Term Loan Facility"). The Term Loan Facility had an original maturity date of January 24, 2023 with quarterly installments equal to 1.25% of the original principal amount. Borrowings under the Term Loan Facility bore interest at a rate equal to LIBOR, plus an applicable margin of 1.125% to 1.75% depending on the Company's leverage ratio. The proceeds from the Term Loan Facility were primarily used to finance the acquisition of Shape and related expenses. In connection with the Term Loan Facility, the Company incurred $2.2 million in debt issuance costs, which were recorded as a reduction to the carrying value of the principal amount of the debt.

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On December 15, 2022, the Company voluntarily prepaid, in full, all borrowings under the Term Loan Facility, including the outstanding principal balance of $350.0 million, and all accrued, but unpaid interest outstanding of $3.0 million. All remaining debt issuance costs were amortized to interest expense associated with the prepayment. As a result of the payoff of its Term Loan Facility, the Company was released of any and all obligations, maintenance of covenants, and indebtedness under the Term Credit Agreement. The weighted average interest rate on the principal amount under the Term Loan Facility outstanding balance was 4.072% for the period of October 1, 2022 to December 15, 2022.

As of September 30, 2022, $350.0 million of principal amount under the Term Loan Facility was outstanding, excluding unamortized debt issuance costs of $0.2 million. The weighted average interest rate on the principal amount under the Term Loan Facility outstanding balance was 1.282% for the three and six months ended March 31, 2022, respectively.

Revolving Credit Agreement

On January 31, 2020, the Company entered into a Revolving Credit Agreement (the "Revolving Credit Agreement") that provides for a senior unsecured revolving credit facility in an aggregate principal amount of $350.0 million (the "Revolving Credit Facility"). The Company has the option to increase commitments under the Revolving Credit Facility from time to time, subject to certain conditions, by up to $150.0 million. Borrowings under the Revolving Credit Facility bear interest at a rate equal to, at the Company's option, (a) LIBOR, adjusted for customary statutory reserves, plus an applicable margin of 1.125% to 1.75% depending on the Company's leverage ratio, or (b) an alternate base rate determined in accordance with the Revolving Credit Agreement, plus an applicable margin of 0.125% to 0.750% depending on the Company's leverage ratio. The Revolving Credit Agreement also requires payment of a commitment fee calculated at a rate per annum of 0.125% to 0.300% depending on the Company's leverage ratio on the undrawn portion of the Revolving Credit Facility. Commitment fees incurred during the three and six months ended March 31, 2023 were not material.

The Revolving Credit Facility matures on January 31, 2025, at which time any remaining outstanding principal of borrowings under the Revolving Credit Facility is due. The Company has the option to request up to two extensions of the maturity date in each case for an additional period of one year. Among certain affirmative and negative covenants provided in the Revolving Credit Agreement, there is a financial covenant that requires the Company to maintain a leverage ratio, calculated as of the last day of each fiscal quarter, of consolidated total indebtedness to consolidated EBITDA. As of March 31, 2023, the Company was in compliance with all covenants. As of March 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility, and the Company had available borrowing capacity of $350.0 million.

7. Leases

The majority of the Company's operating lease payments relate to its corporate headquarters in Seattle, Washington, which includes approximately 515,000 square feet of office space. The lease commenced in April 2019 and expires in 2033 with an option for renewal. The Company also leases additional office and lab space for product development and sales and support personnel in the United States and internationally. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The components of the Company's operating lease expenses for the three and six months ended March 31, 2023 and 2022 were as follows (in thousands):

	Three months ended March 31,				Six months ended March 31,
	2023		2022		2023		2022
Operating lease expense	$	12,181	$	11,870	$	24,697	$	23,784
Short-term lease expense	744		619		1,399		1,175
Variable lease expense	5,650		6,034		10,986		12,278
Total lease expense	$	18,575	$	18,523	$	37,082	$	37,237

Variable lease expense primarily consists of common area maintenance, real estate taxes and parking expenses.

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Supplemental balance sheet information related to the Company's operating leases was as follows (in thousands, except lease term and discount rate):

	March 31, 2023			September 30, 2022
Operating lease right-of-use assets, net	$	216,293		$	227,475
Operating lease liabilities, current1	43,215			42,523
Operating lease liabilities, long-term	259,916			272,376
Total operating lease liabilities	$	303,131		$	314,899
Weighted average remaining lease term (in years)	8.8			9.2
Weighted average discount rate	2.73		%	2.66		%

(1)Current portion of operating lease liabilities is included in accrued liabilities on the Company's consolidated balance sheets.

As of March 31, 2023, the future operating lease payments for each of the next five years and thereafter is as follows (in thousands):

Fiscal Years Ending September 30:	Operating Lease Payments
2023 (remainder)	$	25,738
2024	49,002
2025	41,249
2026	31,530
2027	30,310
2028	28,444
Thereafter	138,797
Total lease payments	345,070
Less: imputed interest	(41,939)
Total lease liabilities	$	303,131

Operating lease liabilities above do not include sublease income. As of March 31, 2023, the Company expects to receive sublease income of approximately $18.3 million, which consists of $3.9 million to be received for the remainder of fiscal 2023 and $14.4 million to be received over the three fiscal years thereafter. There were no impairments against right-of-use assets for the three and six months ended March 31, 2023 and 2022.

As of March 31, 2023, the Company had no significant operating leases that were executed but not yet commenced.

8. Commitments and Contingencies

Guarantees and Product Warranties

In the normal course of business to facilitate sales of its products, the Company indemnifies other parties, including customers, resellers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The Company has entered into indemnification agreements with its officers and directors and certain other employees, and the Company's bylaws contain similar indemnification obligations to the Company's agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.

The Company generally offers warranties of one year for hardware for those customers without service contracts, with the option of purchasing additional warranty coverage in yearly increments. The Company accrues for warranty costs as part of its cost of sales based on associated material product costs and technical support labor costs. Accrued warranty costs as of March 31, 2023 and September 30, 2022 were not material.

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Commitments

In October 2022, the Company entered into an unconditional purchase commitment with one of its suppliers for the delivery of systems components. Under the terms of the agreement, the Company is obligated to purchase $10 million of component inventory annually, with a total committed amount of $40 million over a four-year term. As of March 31, 2023, the Company has $1.2 million of remaining purchases under the first year of its commitment. The Company's total non-cancelable long-term purchase commitments outstanding as of March 31, 2023 was $31.2 million.

The Company leases its facilities under operating leases that expire at various dates through 2033. There have been no material changes in the Company's lease obligations compared to those discussed in Note 7 to its annual consolidated financial statements.

Legal Proceedings

Lynwood Investment CY Limited v. F5 Networks et al.

On June 8, 2020, Lynwood Investment CY Limited (“Lynwood”) filed a lawsuit in the United States District Court for the Northern District of California against the Company and certain affiliates, along with other defendants. In its complaint, Lynwood claims to be the assignee of all rights and interests of Rambler Internet Holding LLC (“Rambler”), and alleges that the intellectual property in the NGINX software originally released by the co-founder of NGINX in 2004 belongs to Rambler (and therefore Lynwood, by assignment) because the software was created and developed while the co-founder was employed by Rambler. Lynwood asserted 26 causes of action against the various defendants, including copyright infringement, violation of trademark law, tortious interference, conspiracy, and fraud. The complaint sought damages, disgorgement of profits, declarations of copyright and trademark ownership, trademark cancellations, and injunctive relief. Lynwood also initiated several trademark opposition and cancellation proceedings before the Trademark Trial and Appeal Board of the United States Patent and Trademark Office, which have all since been suspended.

In August and October 2020, the Company and the other defendants filed motions to dismiss Lynwood’s case. On March 25 and 30, 2021, the Court granted the Company’s and the other defendants’ motions to dismiss with leave to amend. Lynwood filed its amended complaint on April 29, 2021, seeking the same relief against the Company and other defendants. On May 27, 2021, the Company and other defendants filed a consolidated motion to dismiss.

The Court granted the consolidated motion to dismiss without leave to amend on August 16, 2022 and entered final judgment against Lynwood on September 9, 2022. On September 14, 2022, Lynwood filed a notice of appeal to the Ninth Circuit Court of Appeals to appeal the dismissal. Lynwood filed its opening brief on December 16, 2022. The Company filed its opening appellate brief on April 10, 2023. Lynwood’s reply brief is due May 31, 2023.

Following the Court’s order granting the consolidated motion to dismiss and final judgment in the Company’s favor, on September 30, 2022, the Company filed a motion for an award of attorneys’ fees and costs incurred in defending against Lynwood’s claim of direct copyright infringement and related claims that were dismissed by the Court. The Company’s motion for attorneys’ fees was granted on December 19, 2022 and after further briefing, the Court ruled on April 11, 2023 that the Company is entitled to an award of $0.8 million in attorneys’ fees.

In addition to the above matters, the Company is subject to a variety of legal proceedings, claims, investigations, and litigation arising in the ordinary course of business, including intellectual property litigation. Management believes that the Company has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, the Company is unable to currently determine if an unfavorable outcome is probable or estimate any potential amount or range of possible loss of these or similar matters. There are many uncertainties associated with any litigation and these actions or other third-party claims against the Company may cause it to incur costly litigation and/or substantial settlement charges that could have a material adverse effect on the Company's business, financial condition, results of operations, and cash flows.

The Company records an accrual for loss contingencies for legal proceedings when it believes that an unfavorable outcome is both (a) probable and (b) the amount or range of any possible loss is reasonably estimable. The Company has not recorded any accrual for loss contingencies associated with such legal proceedings or the investigations discussed above.

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9. Income Taxes

The Company's tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items in the related period.

The effective tax rate was 25.1% and 24.8% for the three and six months ended March 31, 2023, respectively, compared to 22.7% and 18.8% for the three and six months ended March 31, 2022, respectively. The change in the effective tax rate for the three and six months ended March 31, 2023, as compared to the three and six months ended March 31, 2022, is primarily due to the tax impact of stock-based compensation.

At March 31, 2023, the Company had $70.5 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. It is anticipated that the Company’s existing liabilities for unrecognized tax benefits will change within the next twelve months due to audit settlements or the expiration of statutes of limitations. The Company does not expect these changes to be material to the consolidated financial statements. The Company recognizes interest and, if applicable, penalties for any uncertain tax positions as a component of income tax expense.

The Company and its subsidiaries are subject to U.S. federal income tax as well as the income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for fiscal years through September 30, 2018. Major jurisdictions where there are wholly owned subsidiaries of F5, Inc. which require income tax filings include the United Kingdom, Singapore, Israel, and India. The earliest periods open for review by local taxing authorities are fiscal years 2020 for the United Kingdom, 2018 for Singapore, 2013 for Israel, and 2019 for India. The Company is currently under audit by various states for fiscal years 2015 through 2021, and by various foreign jurisdictions including Germany for fiscal years 2016 to 2019, India for fiscal years 2019 to 2020, Israel for fiscal years 2013 to 2017, Saudi Arabia for fiscal years 2015 to 2020, and Singapore for fiscal years 2019 to 2020.

10. Shareholders' Equity

Common Stock Repurchase

On July 25, 2022, the Company announced that its Board of Directors authorized an additional $1.0 billion for its common stock share repurchase program. This authorization is incremental to the existing $5.4 billion program, initially approved in October 2010 and expanded in subsequent fiscal years. Acquisitions for the share repurchase programs will be made from time to time in private transactions, accelerated share repurchase programs, or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time.

The following table summarizes the Company's repurchases and retirements of its common stock under its Stock Repurchase Program (in thousands, except per share data):

	Three months ended March 31,				Six months ended March 31,
	2023		2022		2023		2022
Shares repurchased	—		610		263		1,148
Average price per share	$	—	$	204.96	$	151.87	$	217.71
Amount repurchased	$