New Products To Help F5 Retain Its Growth Momentum In Q4

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F5

Quick Take

  • F5 will report its Q4 2013 earnings on October 23 and it anticipates a marginal increase in revenues supported by an upgraded product portfolio.
  • After witnessing 15 consecutive quarters of revenue growth, F5 saw a 4% sequential decline in its Q2 2013 revenues on account of a sharp decline in earnings from telecommunication customers and the U.S. federal government.
  • For the last few quarters, F5 has been focusing on what it believes is the most significant product refresh in several years which can help re-accelerate its product demand in the future.
  • In addition, F5′s increasing focus on security applications will help drive demand for its products in the future.
  • It recently acquired Israel based Versafe Ltd., a provider of web anti-fraud, anti-phishing, and anti-malware solutions, which can make its security, access, and mobile solutions stronger.
  • F5 has enjoyed high margins for many years, but the increasing competition can restrict margin growth in the future.

After posting its 15th consecutive quarter of revenue growth in Q1 2013, F5 Networks (NASDAQ:FFIV) witnessed negative growth in Q1 2013 as a difficult macro environment led to a sharp decline in its earnings from telecommunication customers and the U.S. federal government. However, the company bounced back in Q2 2013 with a 6% q-o-q and 5% y-o-y growth in revenues as its customers adopted its new product portfolio. Though Japan continues to remain weak, F5 registered strong growth from the U.S. and saw improving demand from the EMEA and APAC region.

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F5 will report its Q4 2013 earnings on October 23 and it anticipates a marginal increase in revenues. The company expects the product portfolio upgrade in the last two quarters to help it grow despite continuing softness in the global economy. 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 sales force can help accelerate its product demand in the future.

Our price estimate of $112 for F5 Networks is at a significant premium to the current market price of $89. We will update our valuation after the company’s Q4 2013 earnings release.

See our complete analysis for F5 Networks here

An Updated Product Portfolio Will 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 which it thinks will boost demand and create new revenue growth opportunities. 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. We believe the momentum will continue in Q4 2013 as well.

F5’s updated product portfolio offers 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.

An enhanced security portfolio is another factor which we believe will increase its competitiveness in the market. With explosion of data and processing required online, security has become a major concern for most enterprises, and thus is one segment bound to witness tremendous growth in the coming years.

Last month, F5 acquired Israel based Versafe Ltd., a provider of web anti-fraud, anti-phishing, and anti-malware solutions for an undisclosed amount. Offering advanced web and mobile protection solutions, Versafe provides a comprehensive real-time detection and protection for every user, device and browser. Though F5 claims that the acquisition will not have any material impact on its operating results, it will help make the company’s security, access, and mobile solutions (including its Application Delivery Firewall solution) stronger.

Security and mobile application delivery are important growth markets for F5, and thus we believe that an enhanced product portfolio increases its competitiveness in the market. (Read: F5 Enhances Its Security Portfolio By Acquiring Versafe)

Rising Competition Could Restrict Margin Growth

F5 enjoys very high gross margins which increased from 76.7% in 2009 to 83.6% in 2012. Gross margins remained more or less consistent so far this year, but the same could come under pressure as competition intensifies. F5 faces increasing competition in the application delivery networking market. In addition to some larger players like Cisco, Juniper and Citrix, it also competes against new entrants such as Palo Alto Networks, Fortinet and Sourcefire.

F5 is facing competitive pressure from potentially lower cost software based solutions from Citrix. Though it continues to dominate the ADC market, F5′s market share in the segment declined from 58.1% in 2011 to 55.6% in 2012, while Citrix’s increased from 17.3% to 19% during the same period. [1]

Falling ADC prices over the years have attracted small and medium sized businesses as well as large enterprises and service providers, driving market growth. In order to face Citrix’s growing threat and retain its leadership in ADCs, F5 might have to lower its prices to spur demand, which can put pressure on its margins.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Is F5 Networks’ Fumble a Buying opportunity?, The Motley Fool, April 10, 2013 []