F5 Networks (NASDAQ:FFIV), one of the leading technology providers that optimizes the delivery of network-based applications, witnessed the sharpest fall in its stock value in the last two years. The company lowered its revenue target for Q2 2013 to $350.2 million compared to its earlier estimate of $370-$380 million, which led to a 20% (approx.) decline in stock price last week. While F5’s target gross margins remain in-line with its earlier estimate of 83%, the company now expects GAAP EPS in the range of $0.79 – $0.80 per share compared to its initial guidance of $0.93 to $0.96 per share.
Believing that its competitiveness in the market remains intact, F5 claims that a slowdown in orders from North America and to a lesser extent from EMEA is responsible for the decline in sales in Q2 2013. America and EMEA account for 53% and 21% of F5’s total revenue, respectively. Sales of F5 products in Japan and Asia-Pacific, though slow, were in line with what the company expected.
A sharp decline in revenue from telecommunication (telco) customers and the US federal government were the primary reasons for the weak Q2 2013 sales. While it had a strong pipeline of deals at the start of the quarter, F5 experienced difficulty in closing certain deals as customers hesitated to release purchase orders. It blames the slow macro environment for the budget constraint and the consequent delay in orders by its customers.
F5 closed its fiscal 2012 with $1.38 billion in revenues, marking a 20% increase over 2011. Despite the economic slowdown, F5 marked its 15th consecutive quarter of revenue growth in Q1 2013. The company has had consistent operating margins, a solid balance sheet with strong cash generation and no debt. While we agree that the slowdown in Q2 2013 orders is a cause of concern, we feel that the rich pipeline of new products and an expanding salesforce can help F5 re-accelerate growth in product revenue in the future as the economic situation stabilizes.
New Product Development Will Increase Competitiveness
F5 Networks claims to be working on the most significant product line refresh in several years. It had a handful of new products and software solutions planned for launch in 2013 which will help boost demand and create new revenue growth opportunities for the future.
F5′s upcoming new release of TMOS, code-named Solar, offers approximately 76 new areas of functionality for TMOS which will help expand its addressable market in the future. In addition, the company has a number of new ADC platforms and VIPRION products which should help re-accelerate growth in demand.
The company witnessed a 6% increase in the proportion of revenue from new business last quarter, and we expect the contribution to increase in the coming quarters. 
Gaining Momentum In Security & Service Provider Solutions
F5 claims that sales of its security solutions were up substantially in Q2 2013. It registered significant sales wins for its application delivery firewall solution especially in the financial vertical. 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.
In addition to improving products, the company is coming out with innovative programs to boost its security solutions sales. F5’s TMOS refresh includes a range of new security as well as service provider offerings and products to enable cloud architecture. F5′s application delivery firewall solution is the industry’s first solution that combines network firewall, application security, access management, and DNS security with traffic management while confirming to industry leading performance and scalability. ((F5 Networks’ CEO Discusses F1Q13 Results – Earnings Call Transcript, Seeking Alpha, January 23))
Expanding Sales Force
F5 expanded its employee base by 22% in 2012 and added another 95 employees in Q1 2013. Foreseeing a higher demand for its product in the future, F5 had planned to add another 100 employees in Q2 2013. In addition to expanding its product base, the company is also focusing on product training to ensure that its sales force is able to maximize the advantage of its new products portfolio. 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.
F5 Networks will provides additional details pertaining to the reasons for the drastic decline in sales when it releases its Q2 2013 result on April 24. We will update our price estimate of $130 for F5 Networks after the earning release.Notes:
- F5 Networks’ CEO Discusses F1Q13 Results – Earnings Call Transcript, Seeking Alpha, January 23 [↩]