F5 Networks (NASDAQ:FFIV), the Seattle-based global leader in application development network, posted its Q2 2012 result on Wednesday. With $340 million in revenues, the company saw a sequential increase of 5% and a y-o-y increase of 22%. Product revenue at $205 million saw an 18% y-o-y growth rate, whereas service revenue at $134.5 million grew 29% y-o-y. We analyze some trends that impacted the company’s quarter results along with factors that would contribute to its future outlook. It competes with heavyweights such as Cisco Systems (NASDAQ:CSCO), Citrix Systems (NASDAQ:CTXS) and Juniper Networks (NYSE: JNPR).
Growing Demand for VIPRION Platforms, BIG-IP Software Modules and Virtual Technology
The company believes that strong demand for the VIPRION platform, its industry leading Virtual Clustered Multiprocessing technology (“vCMP”), and the full range of BIG-IP software modules contributed to the solid product revenue gains. Continuing the Q1 momentum, sales of VIPRION chassis based products were up almost 200% over last year. In early April, the company introduced the new VIPRION 4480 that effectively doubles the performance of VIPRION 4400, the high-end of their ADC product family. The company also witnessed strong sequential and y-o-y sales growth in the virtual editions solution.
Overall, the application development networking business saw a q-o-q increase of 4% and a y-o-y increase of 22%, which is more or less in line with our estimated growth in ADN revenue.
Strong Demand for Security Products
F5 saw an increase in demand for all of its security products including ASN, APM, EDGE Gateway appliance and DNS security modules. It also witnessed a growing demand for TMOS-based data center firewall solution, which with the grant of an ICSA Certification marked the entry of F5 in the Internet firewall market, in February 2012. As the number and complexity of security threats continue to grow, F5 anticipates the integrated security solutions to be an increasingly important component of the revenue stream. It feels that the firewall solutions are coming on strongly and expects it to be an growing opportunity. In the later part of 2012, F5 plans another release of TMOS plan which will include DPI functionality, a host of new security features and major enhancements for private and public cloud environments.
Acquisition of Traffix Systems
F5 Networks acquired Traffix Systems in February 2012. The acquisition was further expected to increase F5’s exposure in the network market. However, as the company expected, the Q2 revenue from Traffix was not material to its results. It does not anticipate it contributing much in the next quarter as well. F5 is of the view that significant benefits will only start accruing in fiscal 2013.
The company targets revenue in the range of $350-$355 million for the coming quarter. It feels that it has strong fundamentals and would be able to generate sequential growth throughout 2012. It expects the contribution from the financial sector to go up in the current quarter, as it does not see any systematic trend in the slight decline that it saw in Q2. Contribution from telcos, on the other hand, was very high in Q2 and the company expects that to come down this quarter. It targets an overall annual growth rate of at least 20%.
F5 is confident that its technology leadership is as strong as it has ever been. With a robust pipeline of future sale opportunities, the company is well-positioned to take advantage of growth opportunities in the ADC markets as well as exploiting new avenues by expanding in the cloud-based architecture, the security market and the service provider market.
We maintain our price estimate of $129 for F5 Networks, around 4% above the current market price.