F5 To Retain Its Growth Momentum In Q4’14

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F5 Networks (NASDAQ:FFIV), a leading provider of technology that optimizes the delivery of network-based applications, will report its Q4 2014 earnings on October 29th. (Fiscal years end with the month of September.) The company reported strong sales for the first three quarters of fiscal 2014, driven by rising customer adoption of its new product portfolio, the ‘Good, Better, Best’ pricing model, and the growing sales momentum of F5′s security and service provider business. F5 claims to have experienced a very strong increase in its business pipeline in Q3 2014 which it believed would translate into growth in Q4 2014 as well as fiscal 2015.

As drivers of  F5′s future growth, we see:  1) continued strength in sales of F5′s security solutions; 2) the ‘Good, Better, Best’ bundling options; 3) rising momentum from the replacement of Cisco’s ACE installed base; and, 3) a general trend toward broader adoption of its full solution portfolio by large enterprises, service providers and government customers. F5 intends to continue introducing significant enhancements and world leading technology in its key focus areas, which include security, the service provider and mobility markets, as well as the cloud and software defined data center architectures. The company plans to make infrastructure investments in additional data centers and security operation centers to ensure growth in its cloud-based opportunities, including Defense.Net, Versafe and general F5-as-a-service solutions.

Our price estimate of $118 for F5 Networks is slightly above the current market price. We will update our valuation after the Q4 2014 earnings release.

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See our complete analysis for F5 Networks here

Security Business Remains A Key Growth Driver

With increasing network complexity, reducing security risk is an important criterium for enterprises. Over the years, data theft technology has become more sophisticated and the global cyber-crime market is currently sized at $104 billion. [1] IDC estimates that companies around the world will spend $491 billion in 2014 for fixes and recovery from data breaches and malware, $127 billion in dealing with security issues and $364 billion dealing with data breaches. [2]

Since its entry in the Internet firewall market in February 2012, F5 has expanded its security solution portfolio with the addition of new products. It acquired Israel-based Versafe Ltd., a provider of web anti-fraud, anti-phishing and anti-malware solutions,  in September 2013, enhancing F5′s security, access and mobile solutions. Earlier this year, F5 closed its acquisition of Defense.Net, which is a provider of cloud-based security services for protecting data centers and Internet applications from Distributed Denial-of-Service (DDoS) attacks.  DDoS attacks  bombard servers with access requests, making them unavailable to thier intended users. The combined portfolio of the F5 and Defence.Net will provide customers with the most comprehensive hybrid DDoS solution. With the growth of the Internet and rapid increase in the volume of traffic accessing applications, the DDoS attacks are becoming very common as cyber criminals find new ways to amplify their attacks.

F5 will deliver another major revision of TMOS (Alpine release) in the near future. The TMOS Alpine release includes approximately 124 new features with over 50 new features for security. Examples of new security functionality includes good integration of the Versafe module on BIG-IP for native deployment of WebSafe anti-fraud and detection services, centralized management support for ASM and BIG-IQ, more GI firewall support for AFM, including significant new centralized management capabilities and BIG-IQ. [3]

With growing awareness of its security solutions in the market, F5 believes that this segment offers huge growth opportunity and expects the strong sale momentum to continue in the next few quarters.

Cisco ACE Replacements Provides Added Growth Opportunity

In 2012, 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 has scored big product wins by replacing some of Cisco ACE products in large customer accounts since then. The company claims that the competitive win rates continue to be extremely high, at over 90%. 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.

F5 recorded 900 ACE replacement project wins in fiscal 2013 and believes that the Cisco ACE install base continues to be a significant replacement opportunity for it, at least for 2 years. The Cisco ACE replacement opportunities was a strong growth driver for F5 in Q3 2014. F5 claims that customers continue to take the opportunity to add additional functionality, such as its ASM and/or the AFM security modules when they implement the new F5 solutions.

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The web application firewall market is expected to grow rapidly at a CAGR of 17.92% until 2018
Notes:
  1. HP, F5 Networks Expand Web, Mobile Security Offerings, eWeek, September 17, 2013 []
  2. The Link between Pirated Software and Cybersecurity Breaches, March 2014 []
  3. F5 Networks’ (FFIV) CEO John McAdam on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, July 23, 2014 []