F5 Builds Its Growth Momentum With An Upgraded Product Portfolio

Despite a cautious spending environment F5 Networks (NASDAQ:FFIV) reported $395 million in revenue in Q4 2013, a 7% q-o-q and 9% y-o-y growth. Characterized by a difficult macro environment, the company witnessed negative growth in the first half of fiscal 2013. However, with the completion of its product refresh in Q3 2013, it saw its growth re-accelerate in the latter part of the year. For fiscal 2013, F5’s revenue base increased by 8% compared to fiscal 2012. In addition to strong demand for its new product, the rising strength in new and emerging markets helped improve F5’s gross margins to 83.1% in Q4 2013 compared to 82.7% in Q4 2012.

F5’s book-to-bill ratio (ratio of orders received to units shipped and billed) in Q4 2013 was greater than one, and the company claims to be seeing an uptick in million-dollar-plus deals, which had been shrinking since the last few quarters. We think that the upgraded product portfolio, increasing Cisco ACE replacement and a strong sales force will help accelerate F5’s product demand in the future. The company has consistent margins, a solid balance sheet with strong cash generation and no debt.

We are in the process of updating our price estimate of $112 for F5 Networks, which is at significant premium to the current market price of $86.

See our complete analysis for F5 Networks here

Rising Customer Demand For The New Product Platform

In Q3 2013, F5 completed the launch of what it claims to be the most significant product refresh in several years. It developed a range of new products and software solutions with an aim to boost demand and create new revenue growth opportunities. New platforms include a high-end VIPRION 8-slot chassis and a new range of appliances, the BIG-IP 2000, 4000, 5000, 7000 and 10000 Series. F5 also introduces the largest portfolio of software virtualization products and a new centralized management platform, BIG-IQ.

The upgraded product portfolio has significantly expanded F5’s addressable market and the company claims to be witnessing record competitive win rates. Additionally, F5 completed its acquisition of LineRate Systems in February this year which it believes will broaden its application-focused ADC solutions and advance its leadership in ADCs.

Strong Sales Momentum In Security Solutions

Continuing its growth momentum in AFM, APM and ASM modules in Q4 2013, F5 reported another strong quarter in security sales. The company witnessed higher sales across its major verticals, both in enterprise as well as the service provider markets.

With the explosion of data and processing required online, rising number of remote workers, and growing mobile customers, security has become a major concern for most enterprises. Some 92% of Forbes Global 2,000 companies reported data breaches last year. ^[1] Thus, this is one segment bound to witness tremendous growth in the coming years. The traditional firewall market is currently valued at $2 billion. ^[2]

F5 entered the Internet firewall market in February 2012 and since then has expanded its security solution portfolio with the addition of new products. Last month, it 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 modules now account for approximately 30% of F5’s total product revenue. With the growing awareness of its security solutions in the market, the company expects the strong sale momentum to continue in fiscal 2014 as well.

F5 Gains By Replacing Cisco’s ACE Products

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 has scored big product wins by replacing some of Cisco ACE products in large customer accounts in the last few quarters.

In its earnings call, F5 announced that its has recorded over 900 ACE replacement project wins in fiscal 2013. In Q4 2013, new business accounted for 47% and existing business for 53% of F5’s sales as compared to 40% and 60% a year ago, respectively. The ACE opportunity accounts for a majority of the new business.

The ACE installed base is over $1 billion but F5’s target market is much larger.  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. ^[2] Though Citrix remains a big threat for F5, we believe the latter will continue to retain its dominance in the ADC market.

Q1 2014 Outlook

– Revenue in the range of $390 million to $400 million.

– GAAP gross margin of 82% – 83%.

– GAAP operating expense between $219 – $226 million

– Stock based compensation to increase to $36 million.

– Effective tax rate of 38%.

– GAAP EPS in the range of $1.17 – $1.20.

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

1. HP, F5 Networks Expand Web, Mobile Security Offerings, eWeek, September 17, 2013 [↩]
2. F5 Networks Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, October 23, 2013 [↩] [↩]