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Table of Contents
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.

Table of Contents
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

Table of Contents
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

Table of Contents
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

Table of Contents
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

Table of Contents
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 |

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|  | 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.
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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.
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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
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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.
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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.
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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 |
Other 1 |  | 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, current 1 |  | 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 |  | $ | — |  |  | $ | 125,012 |  |  | $ | 40,005 |  |  | $ | 250,023 |

As of March 31, 2023, the Company had $1,232 million remaining authorized to purchase shares under its share repurchase program.
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11. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. The Company's nonvested restricted stock units do not have nonforfeitable rights to dividends or dividend equivalents and are not considered participating securities that should be included in the computation of earnings per share under the two-class method.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):

|  | Three months ended March 31, |  | Six months ended March 31,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Numerator |  |  |  |  |  |  |  |
Net income |  | $ | 81,436 |  |  | $ | 56,236 |  |  | $ | 153,838 |  |  | $ | 149,795 |
Denominator |  |  |  |  |  |  |  |
Weighted average shares outstanding — basic |  | 60,330 |  |  | 60,573 |  |  | 60,211 |  |  | 60,693 |
Dilutive effect of common shares from stock options and restricted stock units |  | 361 |  |  | 832 |  |  | 326 |  |  | 968 |
Weighted average shares outstanding — diluted |  | 60,691 |  |  | 61,405 |  |  | 60,537 |  |  | 61,661 |
Basic net income per share |  | $ | 1.35 |  |  | $ | 0.93 |  |  | $ | 2.55 |  |  | $ | 2.47 |
Diluted net income per share |  | $ | 1.34 |  |  | $ | 0.92 |  |  | $ | 2.54 |  |  | $ | 2.43 |

Anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were not material for the three and six months ended March 31, 2023 and 2022.
12. Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Management has determined that the Company is organized as, and operates in, one reportable operating segment.
Revenues by Geographic Location and Other Information
The Company does business in three main geographic regions: the Americas (primarily the United States); Europe, the Middle East, and Africa (EMEA); and the Asia Pacific region (APAC). The Company's chief operating decision-maker reviews financial information presented on a consolidated basis accompanied by information about revenues by geographic region. The Company's foreign offices conduct sales, marketing and support activities. Revenues are attributed by geographic location based on the location of the customer.
The following presents revenues by geographic region (in thousands):

|  | Three months ended March 31, |  | Six months ended March 31,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Americas: |  |  |  |  |  |  |  |
United States |  | $ | 359,906 |  |  | $ | 339,231 |  |  | $ | 735,654 |  |  | $ | 720,520 |
Other |  | 23,197 |  |  | 19,324 |  |  | 49,607 |  |  | 41,026 |
Total Americas |  | 383,103 |  |  | 358,555 |  |  | 785,261 |  |  | 761,546 |
EMEA |  | 190,439 |  |  | 156,374 |  |  | 374,554 |  |  | 318,435 |
Asia Pacific |  | 129,633 |  |  | 119,295 |  |  | 243,738 |  |  | 241,343 |
|  | $ | 703,175 |  |  | $ | 634,224 |  |  | $ | 1,403,553 |  |  | $ | 1,321,324 |

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The Company continues to offer its products through a range of consumption models, from physical systems to software solutions and managed services. The following presents net product revenues by systems and software (in thousands):

|  | Three months ended March 31, |  | Six months ended March 31,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Net product revenues |  |  |  |  |  |  |  |
Systems revenue |  | $ | 208,689 |  |  | $ | 145,975 |  |  | $ | 381,721 |  |  | $ | 326,132 |
Software revenue |  | 131,892 |  |  | 151,543 |  |  | 299,418 |  |  | 314,535 |
Total net product revenue |  | $ | 340,581 |  |  | $ | 297,518 |  |  | $ | 681,139 |  |  | $ | 640,667 |

The following distributors of the Company's products accounted for more than 10% of total net revenue:

|  | Three months ended March 31, |  | Six months ended March 31,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Ingram Micro, Inc. |  | 16.5 | % |  | 20.3 | % |  | 17.1 | % |  | 19.5 | %
Synnex Corporation |  | 14.7 | % |  | 14.3 | % |  | 14.2 | % |  | 13.2 | %

The Company tracks assets by physical location. Long-lived assets consist of property and equipment, net, and are shown below (in thousands):

|  | March 31, 2023 |  | September 30, 2022 |  |  |  |
United States |  | $ | 128,440 |  |  | $ | 134,699 |  |  |  |  |
EMEA |  | 23,399 |  |  | 17,376 |  |  |  |  |
Other countries |  | 17,932 |  |  | 16,107 |  |  |  |  |
|  | $ | 169,771 |  |  | $ | 168,182 |  |  |  |  |

13. Restructuring Charges
In the first quarters of fiscal 2023 and 2022, the Company initiated restructuring plans to match strategic and financial objectives and optimize resources for long term growth, including a reduction in force program. In the first quarter of fiscal 2023, the Company recorded a restructuring charge of $8.7 million. The Company does not expect to record any significant future charges related to the first quarter of fiscal 2023 restructuring plan. In the first quarter of fiscal 2022, the Company recorded a restructuring charge of $7.9 million. The Company did not record any significant subsequent charges related to the first quarter of fiscal 2022 restructuring plan.
During the six months ended March 31, 2023 and 2022, the following activity was recorded (in thousands):

|  | Six months ended March 31,
|  | 2023 |  | 2022
Employee Severance, Benefits and Related Costs |  |  |  |
Accrued expenses, beginning of period |  | $ | — |  |  | $ | — |
Restructuring charges |  | 8,740 |  |  | 7,909 |
Cash payments |  | (8,130) |  |  | (6,644) |
Accrued expenses, end of period |  | $ | 610 |  |  | $ | 1,265 |

14. Subsequent Events
On April 19, 2023, the Company initiated a restructuring plan to better align strategic and financial objectives, optimize operations, and drive efficiencies for long-term growth and profitability, including a reduction in force affecting approximately 620 employees, or approximately 9% of the Company’s global workforce as of April 19, 2023.
The Company expects it will incur approximately $45.0 million in severance benefits costs related to restructuring and other charges related to these actions in fiscal year 2023. The Company will also reduce some of its leased facilities space,
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consisting of lease termination and other facility costs. The Company is not able to estimate the cost of the reductions to leased facilities at this time.
Item 2.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 in Part II, 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
F5 is a leading provider of multi-cloud application security and delivery solutions which enable our customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. Our 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 our high-performance appliances. We market and sell our products primarily through multiple indirect sales channels in the Americas; Europe, the Middle East, and Africa (EMEA); 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. Our revenue is derived from the sales of both global services and products. Our global services revenue includes annual maintenance contracts, training and consulting services. The majority of our product revenues are derived from sales of our application security and delivery solutions including our BIG-IP software and systems, F5 NGINX software, and our F5 Silverline offerings. Our BIG-IP software solutions are sold both on a perpetual license and a subscription basis. We sell F5 NGINX on a subscription basis. Our Silverline solution is a managed services offering, also sold on a subscription basis. F5 Distributed Cloud Services provides security, multi-cloud networking, and edge-based computing solutions, encompassing software solutions from what were previously branded as our Shape, Volterra, and Silverline product offerings. F5 Distributed Cloud Services are offered on a subscription basis, under a unified software-as-a-service ("SaaS") platform.
We monitor the sales mix of our revenues within each reporting period. We believe customer acceptance rates of our new products, feature enhancements and consumption models are indicators of future trends. We also consider overall revenue concentration by geographic region as an additional indicator of current and future trends. Toward the end of fiscal 2022, and continuing through the first half of fiscal 2023, we saw changes in customer buying patterns due to the uncertain macroeconomic environment. In our second quarter of fiscal 2023, the impact of these buying patterns have led to softer demand in customer orders for both our software and systems products and services. We believe the current demand environment is temporary based on several factors, notably our products and services unique market position relative to our peers, the softer demand being a matter of customer budget constraints rather than competitive pressures or architectural shifts, and our stronger than normal maintenance renewals, which signal delays in purchases rather than decisions, which are typical indicators we have witnessed in times of macroeconomic uncertainty. We will continue to closely monitor the macroeconomic environment and its impacts on our business.
•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, software-as-a-service infrastructure costs, amortization of developed technology and personnel and overhead expenses. In addition, factors such as sales price, product and services mix, inventory obsolescence, returns, component price increases, warranty costs, global supply chain constraints, and the remaining uncertainty surrounding the COVID-19 pandemic could significantly impact our gross margins from quarter to quarter.
•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
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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. The decrease in cash and investments for the first six months of fiscal year 2023 was primarily due to cash used for the voluntary prepayment of the Term Loan Facility, including the outstanding principal balance of $350.0 million, and all accrued, but unpaid interest outstanding of $3.0 million. In addition, $40.0 million of cash was used for the repurchase of outstanding common stock in the first quarter of fiscal 2023. The decrease was partially offset by cash provided by operating activities of $298.6 million. Going forward, we believe the primary driver of cash flows will be net income from operations. 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. Additionally, on January 31, 2020, we 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"). We have the option to increase commitments under the Revolving Credit Facility from time to time, subject to certain conditions, by up to $150.0 million. As of March 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility, and we had available borrowing capacity of $350.0 million.
•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 the second quarter of fiscal year 2023 due to the growth of our subscriptions business. Our days sales outstanding for the second quarter of fiscal year 2023 was 62. Days sales outstanding is calculated by dividing ending accounts receivable by revenue per day for a given quarter.
Summary of Critical Accounting Policies and Estimates
The preparation of our financial condition and results of operations requires us to make judgments and estimates that may have a significant impact upon our financial results. We believe that, of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management, which can materially impact reported results: revenue recognition, accounting for business combinations and accounting for leases. Actual results may differ from these estimates under different assumptions or conditions.
There were no material changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K for the fiscal year ended September 30, 2022. Refer to the "Recently Adopted Accounting Standards" section of Note 1 in this Quarterly Report on Form 10-Q for a summary of the new accounting policies.
Impact of Current Macroeconomic Conditions
Our overall performance depends in part on worldwide economic and geopolitical conditions and their impacts on customer behavior. Worsening economic conditions, including inflation, higher interest rates, slower growth, fluctuations in foreign exchange rates, and developments related to the COVID-19 pandemic, and other changes in economic conditions, may adversely affect our results of operations and financial performance. For further discussion of the potential impacts of recent macroeconomic events on our business, financial condition, and operating results, see Part 1, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q.
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Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements, related notes and risk factors included elsewhere in this Quarterly Report on Form 10-Q.

|  | Three months ended March 31, |  | Six months ended March 31,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
|  | (in thousands, except percentages)
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 |
Percentage of net revenues |  |  |  |  |  |  |  |
Products |  | 48.4 | % |  | 46.9 | % |  | 48.5 | % |  | 48.5 | %
Services |  | 51.6 |  |  | 53.1 |  |  | 51.5 |  |  | 51.5 |
Total |  | 100.0 | % |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %

Net Revenues. Total net revenues increased 10.9% and 6.2% for the three and six months ended March 31, 2023, respectively, from the comparable periods in the prior year. The increase in total net revenues for the three months ended March 31, 2023 was primarily due to an increase in product revenue from stronger systems sales through greater availability of product compared to supply constraints in the previous year. In addition, service revenue increased largely based on continued growth in maintenance contract renewals. Overall revenue growth for the six months ended March 31, 2023 was primarily due to increases in both product and service revenue. International revenues represented 48.8% and 47.6% of total net revenues for the three and six months ended March 31, 2023, respectively, compared to 46.5% and 45.5% for the same periods in the prior year, respectively.
Net Product Revenues. Net product revenues increased 14.5% and 6.3% for the three and six months ended March 31, 2023, respectively, from the comparable periods in the prior year. The increase in net product revenues for the three months ended March 31, 2023 was primarily due to an increase in systems revenue, partially offset by a decrease in software revenue from a decline in sales of new term-based subscriptions. The increase in net product revenues for the six months ended March 31, 2023 was due to an increase in systems revenue compared to the same period in the prior year.
The following presents net product revenues by systems and software:

|  | Three months ended March 31, |  | Six months ended March 31,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
|  | (in thousands, except percentages)
Net product revenues |  |  |  |  |  |  |  |
Systems revenue |  | $ | 208,689 |  |  | $ | 145,975 |  |  | $ | 381,721 |  |  | $ | 326,132 |
Software revenue |  | 131,892 |  |  | 151,543 |  |  | 299,418 |  |  | 314,535 |
Total net product revenue |  | $ | 340,581 |  |  | $ | 297,518 |  |  | $ | 681,139 |  |  | $ | 640,667 |
Percentage of net product revenues |  |  |  |  |  |  |  |
Systems revenue |  | 61.3 | % |  | 49.1 | % |  | 56.0 | % |  | 50.9 | %
Software revenue |  | 38.7 |  |  | 50.9 |  |  | 44.0 |  |  | 49.1 |
Total net product revenue |  | 100.0 | % |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %

Net Service Revenues. Net service revenues increased 7.7% and 6.1% for the three and six months ended March 31, 2023, respectively, from the comparable periods in the prior year. The increase in net service revenues for the three and six months ended March 31, 2023 was the result of increased purchases or renewals of maintenance contracts driven by delayed purchase decisions in new product purchases by our install base and additions to our installed base of products. In addition, we are starting to see the benefits of price increases put in place in fiscal 2022.
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The following distributors of our products accounted for more than 10% of total net revenue:

| Three months ended March 31, |  | Six months ended March 31,
| 2023 |  | 2022 |  | 2023 |  | 2022
Ingram Micro, Inc. | 16.5 | % |  | 20.3 | % |  | 17.1 | % |  | 19.5 | %
Synnex Corporation | 14.7 | % |  | 14.3 | % |  | 14.2 | % |  | 13.2 | %

The following distributors of our products accounted for more than 10% of total receivables:

| March 31, 2023 |  | September 30, 2022
Ingram Micro, Inc. | — |  |  | 12.9 | %
Synnex Corporation | 13.9 | % |  | 12.6 | %
Carahsoft Technology | — |  |  | 16.2 | %

No other distributors accounted for more than 10% of total net revenue or receivables.

|  | Three months ended March 31, |  | Six months ended March 31,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
|  | (in thousands, except percentages)
Cost of net revenues and gross profit |  |  |  |  |  |  |
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 |
Percentage of net revenues and gross margin (as a percentage of related net revenue)
Products |  | 29.3 | % |  | 23.9 | % |  | 29.2 | % |  | 23.9 | %
Services |  | 15.4 |  |  | 16.4 |  |  | 15.5 |  |  | 15.9 |
Total |  | 22.1 |  |  | 19.9 |  |  | 22.1 |  |  | 19.8 |
Gross margin |  | 77.9 | % |  | 80.1 | % |  | 77.9 | % |  | 80.2 | %

Cost of Net Product Revenues. Cost of net product revenues consists of finished products purchased from our contract manufacturers, manufacturing overhead, freight, warranty, provisions for excess and obsolete inventory, software-as-a-service infrastructure costs and amortization expenses in connection with developed technology from acquisitions. Cost of net product revenues increased $28.6 million, or 40.1% for the three months ended March 31, 2023 and increased $45.8 million, or 29.9% for the six months ended March 31, 2023 from the comparable periods in the prior year. The increase in cost of net product revenues was primarily due to systems product revenue growth for the three and six months ended March 31, 2023 from the comparable periods in the prior year. In addition, cost of product revenues increased due to component cost increases, expedite fees, and other sourcing-related costs in the first half of fiscal 2023, from the comparable period in the prior year.
Cost of Net Service Revenues. Cost of net service revenues consists of the salaries and related benefits of our professional services staff, travel, facilities and depreciation expenses. For the three and six months ended March 31, 2023, cost of net service revenues as a percentage of net service revenues was 15.4% and 15.5%, respectively, compared to 16.4% and 15.9% for the comparable periods in the prior year, respectively. Professional services headcount at the end of March 2023 increased to 1,072 from 1,059 at the end of March 2022.
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|  | Three months ended March 31, |  | Six months ended March 31,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
|  | (in thousands, except percentages)
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 |
Operating expenses (as a percentage of net revenue) |  |  |  |  |  |  |  |
Sales and marketing |  | 33.2 | % |  | 36.1 | % |  | 33.2 | % |  | 35.0 | %
Research and development |  | 20.1 |  |  | 21.4 |  |  | 20.2 |  |  | 20.1 |
General and administrative |  | 9.5 |  |  | 10.8 |  |  | 9.8 |  |  | 10.2 |
Restructuring charges |  | — |  |  | — |  |  | 0.6 |  |  | 0.6 |
Total |  | 62.8 | % |  | 68.3 | % |  | 63.8 | % |  | 65.9 | %

Sales and Marketing. Sales and marketing expenses consist of 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 expenses increased $4.3 million, or 1.9% for the three months ended March 31, 2023 and increased $3.3 million, or 0.7% for the six months ended March 31, 2023 from the comparable periods in the prior year. The increase in sales and marketing expense for the three months ended March 31, 2023 was primarily due to an increase of $6.7 million in commissions from the comparable period in the prior year. The increase in sales and marketing expense for the six months ended March 31, 2023 was primarily due to an increase of $8.0 million in employee travel and customer outreach as well as an increase in commissions of $6.6 million from the comparable period in the prior year. The increase in sales and marketing expense for the six months ended March 31, 2023 was partially offset by a decrease in marketing spend of $4.0 million as part of cost reductions implemented by management. In addition, sales and marketing expenses for the first quarter of fiscal 2022 included an impairment charge of $6.2 million related to the write-off of the Shape trade name intangible asset which offset the year-over-year increase. Sales and marketing headcount at the end of March 2023 increased to 2,480 from 2,437 at the end of March 2022. Sales and marketing expenses included stock-based compensation expense of $26.9 million and $52.6 million for the three and six months ended March 31, 2023, respectively, compared to $27.6 million and $54.4 million for the same periods in the prior year, 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 expenses increased $5.5 million, or 4.1% for the three months ended March 31, 2023 and increased $17.6 million, or 6.6% for the six months ended March 31, 2023 from the comparable periods in the prior year. The increase in research and development expense for the three months ended March 31, 2023 was primarily due to an increase of $5.3 million in personnel costs from the comparable period in the prior year. The increase in research and development expense for the six months ended March 31, 2023 was primarily related to an increase of $17.1 million in personnel costs from the comparable period in the prior year. Research and development headcount at the end of March 2023 increased to 2,212 from 2,019 at the end of March 2022. Research and development expenses included stock-based compensation expense of $18.7 million and $37.2 million for the three and six months ended March 31, 2023, respectively, compared to $18.2 million and $36.8 million for the same periods in the prior year, respectively.
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, facilities and depreciation expenses. General and administrative expenses decreased $1.5 million, or 2.2% for the three months ended March 31, 2023 and increased $2.8 million, or 2.1% for the six months ended March 31, 2023 from the comparable periods in the prior year. General and administrative headcount at the end of March 2023 increased to 972 from 905 at the end of March 2022. General and administrative expenses included stock-based compensation expense of $10.9 million and $21.9 million for the three and six months ended March 31, 2023, respectively, compared to $10.9 million and $21.8 million for the same periods in the prior year, respectively.
Restructuring Charges. In the first fiscal quarters of 2023 and 2022, we completed restructuring plans to align strategic and financial objectives and optimize resources for long term growth. As a result of these initiatives, we recorded restructuring
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charges of $8.7 million and $7.9 million related to a reduction in workforce that is reflected in our results for the six months ended March 31, 2023 and 2022, respectively.

|  | Three months ended March 31, |  | Six months ended March 31,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
|  | (in thousands, except percentages)
Other income and income taxes |  |  |  |  |  |  |  |
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 |
Other income and income taxes (as percentage of net revenue)
Income from operations |  | 15.1 | % |  | 11.8 | % |  | 14.1 | % |  | 14.3 | %
Other expense, net |  | 0.4 |  |  | (0.3) |  |  | 0.5 |  |  | (0.3) |
Income before income taxes |  | 15.5 |  |  | 11.5 |  |  | 14.6 |  |  | 14.0 |
Provision for income taxes |  | 3.9 |  |  | 2.6 |  |  | 3.6 |  |  | 2.7 |
Net income |  | 11.6 | % |  | 8.9 | % |  | 11.0 | % |  | 11.3 | %

Other Income (Expense), Net. Other income (expense), net consists primarily of interest income and expense and foreign currency transaction gains and losses. The increase in other income (expense), net for the three months ended March 31, 2023 was primarily due to an increase in interest income of $2.7 million from our investments and a decrease in interest expense of $1.3 million compared to the same period in the prior year. The increase in other income (expense), net for the six months ended March 31, 2023 was primarily due to an increase in foreign currency gains of $6.6 million and an increase in interest income of $5.7 million from our investments compared to the same period in the prior year.
Provision for Income Taxes. 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.
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. Our net deferred tax assets at March 31, 2023 and September 30, 2022 were $231.7 million and $180.6 million, respectively. The net deferred tax assets include valuation allowances of $46.7 million and $46.1 million as of March 31, 2023 and September 30, 2022, respectively, which are primarily related to certain state and foreign net operating losses and tax credit carryforwards.
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, the impact of stock-based compensation, 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 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
Cash and cash equivalents, short-term investments and long-term investments totaled $760.0 million as of March 31, 2023, compared to $894.1 million as of September 30, 2022, representing a decrease of $134.1 million. The decrease was primarily due to cash used for the voluntary prepayment of the Term Loan Facility, including the outstanding principal balance of $350.0 million, and all accrued, but unpaid interest outstanding of $3.0 million. In addition, $40.0 million of cash was used for the repurchase of outstanding common stock in the first quarter of fiscal 2023. The decrease was partially offset by cash provided by operating activities of $298.6 million for the six months ended March 31, 2023.
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Cash provided by operating activities for the first six months of fiscal year 2023 resulted from net income of $153.8 million combined with changes in operating assets and liabilities, as adjusted for various non-cash items including stock-based compensation, deferred revenue, depreciation, impairment and amortization charges. Cash provided by operating activities for the first six months of fiscal year 2023 increased from the comparable period in the prior year primarily due to an increase in cash received from customers, which partially offset strong billings and an increase in the balance of accounts receivable.
Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the risks detailed in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q. However, we anticipate our current cash, cash equivalents and investment balances, anticipated cash flows generated from operations, and available borrowing capacity on the Revolver Credit Facility will be sufficient to meet our liquidity needs.
Cash provided by investing activities was $52.4 million for the six months ended March 31, 2023, compared to cash provided by investing activities of $37.9 million for the same period in the prior year. Investing activities include purchases, sales and maturities of available-for-sale securities, business acquisitions and capital expenditures. The amount of cash provided by investing activities for the six months ended March 31, 2023 was primarily the result of $95.8 million in maturities of investments and $16.1 million in sales of investments, partially offset by $35.0 million in cash paid for acquisitions and $23.8 million in capital expenditures related to maintaining our operations worldwide.
Cash used in financing activities was $377.4 million for the six months ended March 31, 2023, compared to cash used in financing activities of $248.2 million for the same period in the prior year. Our financing activities for the six months ended March 31, 2023 primarily consisted of $350.0 million of cash used for the voluntary prepayment of the Term Loan Facility, as well as $40.0 million of cash used to repurchase shares. In addition, $9.8 million in cash was used for taxes related to net share settlement of equity awards. Cash used in financing activities was partially offset by cash received from the exercise of employee stock options and stock purchases under our employee stock purchase plan of $22.5 million.
On January 31, 2020, we 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"). We have the option to increase commitments under the Revolving Credit Facility from time to time, subject to certain conditions, by up to $150.0 million. As of March 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility, and we had available borrowing capacity of $350.0 million.
Obligations and Commitments
As of March 31, 2023, our principal commitments consisted of obligations outstanding under operating leases and purchase obligations with one of our component suppliers.
We lease our facilities under operating leases that expire at various dates through 2033. There have been no material changes in our principal lease commitments compared to those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
In October 2022, we entered into an unconditional purchase commitment with one of our suppliers for the delivery of systems components. Under the terms of the agreement, we are 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, we have $1.2 million of remaining purchases under the first year of our commitment. Our total non-cancelable long-term purchase commitments outstanding as of March 31, 2023 was $31.2 million.
We have a contractual obligation to purchase inventory components procured by our primary contract manufacturer in accordance with our annual build forecast. The contractual terms of the obligation contain cancellation provisions, which reduce our liability to purchase inventory components for periods greater than one year. In order to support our build forecast, we will, from time-to-time prepay our primary contract manufacturer for inventory purchases.
Recent Accounting Pronouncements
The anticipated impact of recent accounting pronouncements is discussed in Note 1 to the accompanying Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. We maintain an investment portfolio of various holdings, types, and maturities. Our primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. At any time, a sharp rise in market interest rates could have a material adverse impact on the fair value of our fixed income investment portfolio. Conversely, declines in interest rates, including the impact from lower credit spreads, could have a material adverse impact on interest income for our investment portfolio. Our fixed income investments are held for purposes other than trading. Our fixed income investments were not leveraged as of March 31, 2023. We monitor our interest rate and credit risks, including our credit exposures to specific rating categories and to individual issuers. As of March 31, 2023, 3% of our fixed income securities balance consisted of U.S. government and U.S. government agency securities. We believe the overall credit quality of our portfolio is strong.
Inflation Risk. We are actively monitoring the current inflationary environment, but we do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. If the current inflationary environment constrains our customers’ ability to procure goods and services from us, we may see customers reprioritize these investment decisions. These macroeconomic conditions could harm our business, financial condition and results of operations.
Foreign Currency Risk. The majority of our sales, cost of net revenues, and operating 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 conduct transactions in foreign currencies 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.
Management believes there have been no material changes to our quantitative and qualitative disclosures about market risk during the six month period ended March 31, 2023, compared to those discussed in our Annual Report on Form 10-K for the year ended September 30, 2022.
Item 4.Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) which are designed to ensure that required information is recorded, processed, summarized and reported within the required timeframe, as specified in the rules set forth by the Securities Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023 and, based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1.Legal Proceedings
See Note 8 - Commitments and Contingencies of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding legal proceedings in which we are involved.
Item 1A.Risk Factors
The following information updates, and should be read in conjunction with, the information discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. The risks discussed below and in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. These are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be insignificant also may materially and adversely affect our business, financial condition or operating results in the future.
Continued macroeconomic downturns or uncertainties may harm our industry, business, and results of operations.
We operate globally and as a result, our business, revenues, and profitability may be impacted global macroeconomic conditions. The continuing adverse global macroeconomic conditions and related market uncertainties have, among other things, softened customer demand and customer purchase decisions, which may in turn, limit our ability to forecast future business activities involving our products and services. Prolonged adverse macroeconomic conditions both in the U.S. and abroad, including, but not limited to, rising interest rates to combat inflationary pressures of goods and services, challenges in the financial and credit markets, labor shortages, supply chain disruptions, trade uncertainty, adverse changes in global taxation and tariffs, sanctions, outbreaks of pandemic diseases such as COVID-19, political unrest and social strife, armed conflicts, such as the Russian invasion of Ukraine, or other impacts from the macroeconomic environment have led to a slowing of global economic growth. Continued worsening of macroeconomic conditions could adversely affect our business, financial condition, results of operations and cash flows through, among others, softer demand of our products and services as well as unfavorable increases to our operating costs, which could negatively impact our profitability.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
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. As of March 31, 2023, the Company had $1.2 billion remaining authorized to purchase shares under its share repurchase program.
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Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
None.
Item 6.Exhibits

Exhibit Number |  |  | Exhibit Description
10.1 | — |  | F5, Inc. Incentive Plan, as amended and restated (1) §
10.2 | — |  | F5, Inc. Employee Stock Purchase Plan, as amended and restated (2) §
10.3 | — |  | Severance Agreement by Haiyan Song and F5, Inc. (3) §
10.4 | — |  | F5, Inc. Assumed Lilac Cloud 2018 Equity Incentive Plan (4) §
10.5 | — |  | F5, Inc. Lilac Acquisition Equity Incentive Plan (5) §
31.1* | — |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* | — |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* | — |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* | — |  | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH* | — |  | Inline XBRL Taxonomy Extension Schema Document
101.CAL* | — |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* | — |  | Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* | — |  | Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* | — |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document
104* | — |  | Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed herewith.
§ Indicates a management contract or compensatory plan or arrangement.
(1) Incorporated by reference to Exhibit 10.1 on Current Report on Form 8-K filed with the SEC on March 10, 2023.
(2) Incorporated by reference to Exhibit 10.2 on Current Report on Form 8-K filed with the SEC on March 10, 2023.
(3) Incorporated by reference to Exhibit 10.1 on Current Report on Form 8-K filed with the SEC on January 9, 2023.
(4) Incorporated by reference to Exhibit 99.1 on Form S-8 filed with the SEC on February 2, 2023.
(5) Incorporated by reference to Exhibit 99.2 on Form S-8 filed with the SEC on February 2, 2023.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 5th day of May, 2023.

| F5, INC.
| By: |  | /s/ FRANCIS J. PELZER
|  |  | Francis J. Pelzer
|  |  | Executive Vice President,
|  |  | Chief Financial Officer
|  |  | (principal financial officer and principal accounting officer)

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