F5 Networks (NASDAQ:FFIV), a leading provider of technology optimizing the delivery of network-based applications, reported its Q4 2012 earnings on Wednesday, October 24. Despite a sluggish macro environment, the company closed its fiscal 2012 with $1.38 billion in revenues, marking a 20% increase over 2011. With a stable balance sheet, expanding product offering, consistent operating margins and no debt, we feel that F5 has strong fundamentals to support a higher valuation. (Read Related Article: F5 Can Hit $135 By Riding Application Delivery Network Growth)
While we agree that the short term outlook could be impacted on account of weak demand, the fact that the company expanded its employee base by 22% in 2012 and plans to add another 100 employees this quarter is reminiscent of the fact that F5 foresees a higher growth rate in the coming years. With an expanding product portfolio and increase in its addressable markets, we believe that the company has potential to maintain its growth rate next year as well.
Potential Slowdown In Growth This Quarter
Posting $363 million in revenues, F5 ended the year with a strong Q4, registering a 3% q-o-q and a 15% y-o-y growth rate. At $67.7 million, F5’s net income increased for the third consecutive quarter. Telecommunication, technology, government and the financial sectors remain the most important verticals for the company. While America continues to contribute more than 50% to F5’s revenue, the company registered significant growth in the EMEA (29%) and APAC (31%) regions.
With a 107% y-o-y growth rate, strong adoption of the VIPRION chassis-based product was a significant driver for growth in Q4. Additionally, leveraging its acquisition of Traffix, F5 saw an increase in customer engagement for its diameter signaling products. It believes the same to be of strategic importance for the service provider business.
While the Q4 2012 results are extremely encouraging, F5 admits of having limited short term visibility as its customers reduced spending in the second half of 2012 on account of the macro headwinds. Slow growth in product revenue, particularly from large enterprises and telco customers, have resulted in reduced larger million dollar plus type opportunities.
F5 maintains a flat outlook for the current quarter, but we believe that the same is on account of seasonal factors as well as the weak macro conditions and maintain our outlook for a double digit growth for 2013.
Factors That Can Steer Demand in 2013
While the demand might remain weak in the current quarter, we feel the steady buildup of a robust pipeline will stimulate demand in the subsequent quarters. F5 has a gamut of new products and portfolio that it intends to launch in 2013.
Within the next two quarters, F5 will be introducing its largest appliance refresh in four years. The upcoming release of the TMOS application will include a range of new security as well as service provider offerings and products to enable cloud architecture. Additionally, the company plans to launch a new version of VIPRION that will have double the unmatched performance of VIPRION 4480. The introduction of the BIG-IP 4200v, earlier this month, can further extend F5’s leadership in the application delivery network (ADN) market.
To further leverage the rapidly expanding product portfolio and to steer demand for its products, F5 has increased its sales force by almost 20% this year. With a comprehensive product offering, the company expects to see higher demand for new security and service provider software modules. Apart from the robust product lineup, Cisco’s recent announcement to stop development of its ACE product line opens up additional market share opportunity for F5.
The company has made good progress so far expanding in key markets including security, service provider and cloud-based architectures and is witnessing an increase in software attach rates. We feel that the technology roadmap provide new opportunities for growth and estimate F5 to register an increase in its market share over the review period.
We are in the process of updating our price estimate of $135 for F5 Networks for the Q4 2012 earnings release.