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F5 Annual Shareholders Meeting 3/22/07

CAVEAT I am human and an amateur investor. Mistakes will be made by me, but the company and the SEC hold THE TRUTH. When in doubt, ask. If we are lucky, some other investor was there who can add their insights.

Congratulations to f5 for the frugality award. Once again they held the meeting in their building. Over the years (this is something like my fifth time there) the room has morphed from break room to conference room. I suspect that the foosball table was rolled back in shortly after we left the meeting.

There were seats for about 50-100 and only about 3 dozen people in the room. At least a dozen of them were officers and directors. A few more were employees helping out. That left a very small crowd of individual investors and institutional representatives. That is very small considering that it was the 10 year anniversary of a company that has a market cap around $3B. (Let's see - divide $3B by 35 and my share comes out to . . . Pity it doesn't work that way.)

This year was the first that they had demos. In proper frugal fashion, they had a blade server and their new product MONTREAL on typical plastic lab carts. The gentleman explaining them was very informative, low-key, and pleasant to talk with.

After I sat down, one of the officers even came over and introduced himself. They've noticed which shareholders come back each year and wanted to make sure we had a chance to talk to someone and to know that we were appreciated. It is a gesture that costs nothing and is a fine example of what Investor Relations can really mean.

As a consequence of these informal discussions I was pleased to learn of the simple things that mean a lot. The employees like their work and the company, and that the company growth is showing up in the fact that they are getting new buildings.

F5 usually holds the record for the shortest formal meeting, but a few items had come up. The chance for drama was averted as a shareholder proxy was dealt with agreeably prior to the meeting; so, some time was spent to acknowledge the concern and the resolution. They even gave the proxy initiator the mike for a while. It was nicely handled. For those interested in the details, it had to do with executive compensation. (Due to a recent move I didn't get the proxy materials at my new address, so I am sketchy on the details.)

Of about 39,000,000 shares, 95% were represented in the room. All remaining initiatives passed, though not by unanimous vote (80% for the board, 65% for the equity plan, and 95% for the auditors).

The CEO started the presentation with a video. It did a fair job of being informative about the company's products without being condescending. That is a tough balancing act. I don't know how the company uses the video, but then I don't understand marketing in general.

The CEO got back up and ran through the general presentation of the business and where it is going, with some ten-year insights thrown in.

Here's a quick run-down of the stats that I caught. (There were more, but I don't try to write down everything.)
employees 1155
year-to-year revenue growth 40%
year-to-year income growth 28%
gross margin 78%
cash and short-term investments ~ $500,000,000
market share Application Delivery Controller 33%
market share Advanced Platforms 60%
Dev Central members (social web site for developers ) - 13,000
resellers 700

Their products live in the space between the network and the applications. Because those two are usually designed and operated separately, f5 is able to sit there and optimize the liaison (my word) between the two levels of the Internet. This is a growing market and they feel that the addressable market is $3B (though I can't remember the timeframe).

Their goal has been to be the undisputed leader and their market share numbers suggest that they are the leader, though maybe not the undisputed one - yet.

I get the impression that the reason f5's products do so well is because they are designed more as a coherent suite, rather than a collection of boxes. While some of the recent acquisitions were hardware firms, some of that functionality is morphing into software. That way, f5 can sell a solution in one box instead of several. (In side conversations I learned that the early year sales were to the IT staff, but now the decision ladder is more aware of f5 and is embracing the products too. Maybe this reflects a product that works well for the IT staff technically and also pleases the finance folks.)

The DevCentral web site is helping in other ways. I got the impression that because of solutions generated by the users and based on f5 products, it is now possible to use f5 products to fight phishing (the illegal capture of identity information).

The big product for 2007 is Montreal, which has performance metrics something like five times the current equipment. I didn't capture the numbers because I don't truly understand them. Go check the specs yourself. (And then explain them to the rest of us.)

The CFO took over. Said many of the same things, but spent more time with the numbers. I won't repeat what I listed above, but I will add the comparisons he made between FY2003 and FY2006.

Revenue FY03 $115M , FY06 $384M (consistently 12% government, 23% service)
Income FY03 $2.3M , FY06 $66M
Cash et al FY03 $79M , FY06 $492M
Employees FY03 507 , FY06 1068

They are proud and pleased with such growth; especially, because it also happens with an operating margin of 23%.

QUESTIONS & ANSWERS (paraphrased)
? employee growth is continuing. They added 255 in FY06 (though 50 were from an acquisition) and already added 85 in 1Q07 and expect to add over 100 in 2Q07.
? Montreal will probably be an add-on, not a replacement product.
? Supplying server farms is a large percentage of f5's business.
? They will hang onto their cash rather than give a dividend or a buyback. The cash helps them in negotiating with large companies and makes acquisitions much easier.
? Cisco/Netscaler & Citrix are their competitors and they do not underestimate them.
? While China and Asia are known for reverse engineering and then competing, f5 is fortunate that software is very important and difficult to mimic. Despite that they are aware of the possibility.

While staying under the public's radar, f5 has managed to become a business that continues to operate with finances that recall the heady days of the early Internet. What is equally amazing is that they are using real numbers based on sales, not projections based on eyeballs.

Individuals, such as ourselves, may not invest in the company because very few people ever see the products. The analysts and institutional investors have found it though, and they are enough to pull the price along.

I always have to find a caution somewhere, because otherwise the story is too good to be true. So here it is. The graphic for the addressable market did climb to $3B but then it flattened. I have a rough time believing that f5's market is suddenly going to stop growing, but then I am an amateur.

In short, it would be wonderful if my other investments looked so good.

DISCLAIMER LTBH but I have grudgingly been selling. Those poorer performers haven't been doing well enough to help me make a downpayment on a house, and the kitchen should really be remodelled, and the fence just blew down, and . . .
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