F5 To Remain A Leader In The ADC Market, Which Continues To Grow Though At A Slower Rate

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F5 Networks (NASDAQ:FFIV) is one of the leading technology providers that optimizes the delivery of network-based applications. The company grew at a CAGR of more than 20% between fiscal years (ended September) of 2009 to 2012. Though the growth rate slowed to 8% in fiscal 2013, it re-accelerated in the first half of 2014 as the company saw increasing adoption of its upgraded product portfolio.

F5 derives a significant portion of its revenue from the Application Delivery Controller (ADC) market. The core function of its products is load-balancing data that distributes Internet traffic evenly across multiple servers in a data center (either physical servers or virtual machines). With a market share in access of 50%, F5 has been the leader in the ADC market for many years.

Although the ADC market is expected to continue  grow in the future as well, the rate of growth is estimated to slow down to single digits. Since F5 is already the market leader in ADC’s, investors ask can F5 outpace the industry growth rate to achieve double digit growth in revenue? Also, will the company be able to maintain its dominant position in the ADC market with intense competition from Citrix, A10 networks and Radware?

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We believe that an upgraded product portfolio, a strong balance sheet and a focus on expanding its footprint in key growth segments will enable F5 to retain its leadership in the market. We expect the company to witness low double digit growth for the next few years and have reflected this in our model.

Our price estimate of $118 for F5 Networks is slightly below the current market price.

See our complete analysis for F5 Networks here

The ADC Market Continues To Grow, Though At A Slower Rate

An ADC distributes workloads throughout a computer network, simplifying both the management of data centers and the delivery of resources across diverse networks. They also enable applications to perform faster.

While the ADC market witnessed a double-digit growth in 2012, the growth rate declined to 4% in 2013. [1] Despite the slowing growth, the ADC market continues to have immense long term growth potential. According to the research firm TechNavio, the global ADC market will grow at a CAGR of 8.13% between 2013 and 2018. One of the key factors contributing to this market growth is the increasing workload distribution using ADCs. The global ADC market has also been witnessing the emergence of cloud-optimized ADC equipment. [2]

Additionally, even as the ADC market is slowing, the software ADC market is growing rapidly, due to the introduction of Software Defined Networking (SDN). A software ADC is an ADC without dedicated physical hardware, which makes it easier for network administrators to manage large and complex networks. The combination of more data, increasing internet access, and mobile users is causing problems for network administrators. Transparency Market Research estimates the SDN market to cross $3.5 billion by 2018. [3] The general adoption of the technology is still relatively low but is expected to takeoff in the next few years.

Upgraded Product Portfolio & New Solutions To Help F5 Defend Its ADC Market Share

The ADC market is highly concentrated with only a few companies having a significant market share. With a more than 50% market share, F5 is the market leader in the segment. Citrix occupies the second position with an approximate share of 20%, while A10 Networks recently surpassed Radware  as the No. 3 player in the ADC market. [4] The search for growth has forced the companies to add additional features. Many, vendors have added a web application firewall or a distributed denial of service defense solution (DDoS) . F5 recently acquired Defence.net, a cloud-based DDoS vendor, to enhance its on-premise DDoS solution. Additionally, F5 now has a web application firewall solution which compliments its ADC solution.

Last year, F5 completed the launch of what it describes as the most significant product refresh in several years. The company developed a range of new products and software solutions with features intended to boost demand and create new revenue growth. The upgraded product portfolio has significantly expanded F5′s addressable market and the company reports that it is witnessing record competitive win rates.  F5 also completed its acquisition of LineRate Systems in February 2013, which it believes will broaden its application-focused ADC solutions and advance its leadership in ADCs.

At its analyst meeting last year, F5 mentioned that its installed base of users has a relatively older suite of ADCs in place, ranging from three to six years of service, and even longer, in some cases. That means a refresh cycle has just begun gaining traction. A second wave of new software and hardware solutions, which offer new features across all product categories, will be released in the second half of 2014. Enriched product capabilities should continue to drive growth and strengthen its market position.

F5 has been working towards positioning itself as a leader in the rapidly growing software ADC market, which is in high demand due to the ever increasing complexity and workloads of networks. It is spending heavily in the segment and has partnered with VMware and Cisco, the top 2 SDN vendors, to leverage their ADC expertise in the software ADC market. F5 has also expanded its ADC offerings to include a web application firewall (WAF). The WAF market is expected to grow rapidly at a CAGR of 17.92% until 2018. [3]

We believe that F5 Networks has the expertise, resources and capital to defend its leadership in the ADC market for years to come.

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The web application firewall market is expected to grow rapidly at a CAGR of 17.92% until 2018
Notes:
  1. A Fable of Three Networking Insects, The Motley Fool, May 17, 2013 []
  2. Global Application Delivery Controller Market 2014-18, PR Newswire, March 5, 2014 []
  3. F5 Networks Is Positioning For The Digital ADC Market, Seeking Alpha, September 1, 2014 [] []
  4. A10 Networks Is Going After The Market Leaders, Seeking Alpha, September 9, 2014 []