Despite the challenging macroeconomic environment, F5 Networks (NASDAQ:FFIV) was able to post yet another quarter of solid earnings with a 16% y-o-y increase in net income. Led by strong single digit sequential growth in service revenues and a marginal increase in product revenues, F5 registered a y-o-y increase of 21% and a sequential increase of 4% in revenues. While security offerings remain a key driver, strong VIPRION sales and increased adoption of TMOS version 11.0 contributed to continued growth this quarter.
The company remains optimistic of its performance for the rest of the year despite continued economic headwinds and a cautious spending environment. It, however, maintains a conservative target of $360 million in revenues for Q4 2012. We believe new product developments will further expand F5’s market, keeping it well-equipped to take advantage of the favorable market trends.
Here are certain trends that we think could have a positive impact on the company, going forward.
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Virtualized Data Centers
As organizations transform their own data centers, they are increasingly turning to external, third-party cloud providers for services and storage to lower their capital and operating costs. To accommodate the dynamic needs of their clients, cloud providers in turn are building large virtualized data centers to host a constantly changing mix of on-demand resources. F5 benefits from this trend in two ways:
1) Cloud providers deploy F5 products within their data centers, and
2) Customers deploy F5′s products to switch traffic quickly and easily between their own internal resources and the cloud.
Research firm Forrester projects the global market for cloud computing to increase from $41 billion in 2011 to $241 billion by 2020.  We believe that F5 Networks, with a 25% application delivery network market share could significantly leverage the growth. We estimate its market share to rise to 38% by the end of our forecast period.
Growing Security Concerns
With the explosion of data and processing required online, security has become a major concern for most enterprises and, thus, this is one segment which is bound to witness tremendous growth in coming years. With its Big-IP 11.1 software passing the ISCA tests for network firewalls, F5 shook up the firewall market with its entry in February 2012.
Apart from improving products and major enhancements for private and public cloud environments, the company has also come out with innovative programs to boost its security solutions sales. F5 expects to launch its TMOS upgrade code-named “Solar” which targets corporate customers and telecom service providers and also focuses on protecting web applications from Internet attacks, which will set it apart from network-focused security providers.
Mobile Traffic Growth Will Lead To Increase In Mobile Application Delivery
The use of mobile devices is slated to witness exponential growth in coming years. As the number of remote workers and mobile customers increase, there is a growing enterprise need to support all its end-users from a device standpoint. Thus, mobile application delivery support is the next logical step for most application delivery controller vendors.
In May, F5 announced updates to application delivery optimization that makes BIG-IP the first ADC on the market to support Google’s (NASDAQ:GOOG) SPDY protocol. F5’s application delivery optimization offering provides a better mobile user experience, optimizing image delivery and rendering of web pages in a much quicker environment.
We believe that a robust product pipeline will help the company expand in new markets and maintain its positive, long-term outlook.
We are in the process of updating our price estimate of $129 for F5 Networks.Notes:
- More Predictions on the Huge Growth of Cloud Computing, Wall Street Journal, April 21, 2011 [↩]