One of the leading technology providers that optimizes the delivery of network-based applications, F5 Networks (NASDAQ:FFIV), will announce its Q1 2013 earnings Wednesday, January 23. Despite a sluggish macro environment, the company closed its fiscal 2012 with $1.38 billion in revenues, marking a 20% increase over 2011.
However, F5 admitted that it had limited short term visibility for Q1 2013 as its customers reduced spending in the second half of 2012, on account of macro weakness. Slow growth in product revenue, particularly from large enterprises and telco customers, have reduced large million dollar plus type opportunities. Thus, we do not expect the company to start 2013 on a spectacular note.
F5 maintains a flat outlook for Q1 2013, on account of seasonal factors, but we estimate the growth to resume in subsequent quarters. 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)
Here we list certain factors that we feel can help steer demand in 2013 and should show up in the upcoming earnings report.
Shift To Cloud Based Services and Storage
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 are building large virtualized data centers to host a constantly changing mix of on-demand resources. Research firm Forrester, projects the global market for cloud computing to increase from $41 billion in 2011 to $241 billion by 2020. 
How can F5 Networks benefit from the trend?
F5 can benefit from growth in cloud computing in two ways – first, as cloud providers deploy its products within their data centers, and secondly, as customers deploy F5′s products to switch traffic quickly and easily between their own internal resources and the cloud.
Last year, Dev Central, F5 Network’s online community, collaborated with industry leader Bluelock to migrate the community to a cloud environment. Additionally, F5 announced a new global cloud licensing program developed for Infrastructure-as-a-service (Iaas) cloud providers that offers benefits to providers, customers and channel partners alike. Last month, F5 further extended its cloud capabilities by introducing solutions for Amazon’s web services. (Read: F5 Extends Its Cloud Capabilities By Introducing Solutions For Amazon Web Services)
As F5 looks to provide the next generation of cloud capabilities to expand its user base and meet the increasing need of enterprises, we estimate its market share to increase to 36% by the end of our forecast period.
Increasing Presence In Key Markets – Security and Mobile Application Delivery
With the explosion of data and processing required online, security has become a major concern for most enterprises, and thus, this is one segment bound to witness tremendous growth in coming years. With its BIG-IP 11.1 software passing the ISCA Labs test for network firewalls, F5 entered the Internet firewall market in February 2012. In addition to improving products, the company is coming out with innovative programs to boost its security solutions sales.
Within the next quarter, 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.
With an increase in the number of remote workers and mobile customers, enterprise demand for mobile application delivery is on the rise. Chrome, Amazon Silk and Mozilla Firefox are the standards that are becoming increasingly important for remote users who need a more efficient traffic flow that consumes less bandwidth on their mobile devices.
Last year, F5 announced updates to application delivery optimization that made BIG-IP the first ADC on the market to support Google’s 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.
Keeping it well in line with changing trends and developments, we expect F5’s focus on security applications and mobile application delivery to contribute to an increase in its share in the application delivery network market.
Expanding Sales Force
F5 expanded its employee base by 22% in 2012, and intended to add another 100 employees in Q1 2013, which is reminiscent of the fact that it foresees a higher growth rate in the coming years. We believe the increase in sales force will help F5 leverage the rapidly expanding product portfolio and steer demand for its products in the future.
We will update our price estimate of $130 for F5 Networks post the Q1 2013 earnings release.Notes:
- More Predictions on the Huge Growth of Cloud Computing, Wall Street Journal, April 21, 2011 [↩]