Witnessing a 6% sequential and 5% annual rise in its Q3 2013 revenue ($370.3 million), it looks like F5 Networks (NASDAQ:FFIV) has regained its growth momentum. The company posted its 15th consecutive quarter of revenue growth in Q1 2013. However, a difficult macro environment led to a sharp decline in earnings from telecommunication customers and the U.S. federal government, which in turn lowered its revenue by 4% q-o-q in Q2 2013.
Bouncing back from the weakness in Q2 2013, F5 saw strong growth from the U.S. which accounted for 58% of its revenues, as its customers adopted its new product portfolio. Though Japan continues to remain weak, F5 registered improving demand from EMEA and the APAC region. Its product revenue increased 6% sequentially, but declined 5% y-o-y. Marking a 5% sequential and a 19% annual growth, F5’s services business remains strong. Gross margins were fairly stable at 82.5%.
Though F5 does not anticipate a material change in the macro environment in the near term, it expects its product portfolio upgrade in the last two quarters to help it grow despite continuing softness in the global economy. The company believes that the product refresh will enable it to expand its addressable market for its solution portfolio, especially in the security and service provider markets.
F5 has consistent operating margins, a solid balance sheet with strong cash generation and no debt. We think that the upgraded product portfolio aided by a strong salesforce can help accelerate its product demand in the future.
Strong Sales Of New Products Help Build Growth Momentum
In the last few quarters, F5 has launched what it claims to be the most significant product refresh in several years. It developed a range of new products and software solutions with which it aims to boost demand and create new revenue growth opportunities for the future. The product upgrade was concluded in Q3 2013.
While F5 had a strong pipeline of deals at the start of Q1 2013, it experienced difficulty in closing certain deals as customers hesitated to release purchase orders. In addition to macro uncertainty which led to budget constraints, F5 believes that its customers delayed their project timeline and prolonged decision making in order to transition to its new range of products. However, the company claims that it saw sales momentum build for its new products in Q3 2013.
It saw strong demand for its new entry-level BIG-IP 2000 Series platforms, which was launched in Q2 2013, as well as strong traction for the BIG-IP 4000 Series. F5 released its newest platforms, the midrange BIG-IP 5000 and 7000 series, and the new TMOS release, code named Corona, in Q3 2013. It expects both products to drive revenue growth in the future.
F5’s updated product portfolio offer significant price performance advantages which we believe will increase the company’s growth opportunities in key markets including security, service providers, cloud-based architectures and new-generation data centers. With the industry-leading portfolio of virtualization products and hardware-based solutions, F5 has the broadest and most fully-featured array of ADC solutions in the market.
F5′s entry in the Internet firewall market is another factor which we believe will increase its competitiveness in the market. 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 the coming years. F5 recorded strong sales in all its major security solutions, including advanced firewall manager, access policy manager and the application security manager.
Expanding Sales Force To Help Steer Demand For F5′s Products
F5 expanded its employee base by 22% in 2012. Continuing the momentum, it added 95 employees in Q1 2013 and 30 employees in Q2 2013, taking its total headcount to approximately 3,155 employees. It plans to increase its headcount by over 150 in the current quarter.
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 Gains From Cisco’s Exit From The ADC Market
Last year, rival firm Cisco announced its decision to exit the ADC market after losing more than 50% of its market share to F5 and Citrix. F5 is the market leader in ADC and the segment accounts for close to 60% of its total product revenues. F5 declared in its earnings call that it scored big product wins by replacing some of Cisco ACE products in large customer accounts in Q2 2013 as well as Q3 2013, and has a strong pipeline of similar opportunities.
In addition to replacing Cisco’s existing solutions, F5 has the added opportunity of providing customers additional functionality including security, access control and application acceleration. Though Citrix remains a big threat for F5, we believe the latter will continue to retain its dominance in the ADC market. (For a detailed discussion read our article: F5 Gains As Cisco Exits The ADC Market)
Q4 2013 Outlook
– Revenue in the range of $378 – $388 million.
– GAAP gross margin of 83%, including $2.5 million of stock-based compensation & $1 million in amortization of purchased intangible assets.
– GAAP operating expenses between $199 – $206 million.
– GAAP effective tax rate of 37%.
– GAAP EPS target of $0.93 to $0.96 per diluted share.
We have updated our price estimate for F5 Networks to $112.