F5’s Strong Performance to Continue Into Q4’14 and 2015, Driven by Enterprise Business, Security Solutions, New Pricing Model & Cisco ACE Replacements

F5 Networks (NASDAQ:FFIV) closed its fiscal 2014 with a strong Q4 2014 (reported on October 29), where earnings surpassed the wall street expectations and came in ahead of the company guidance. Growth in the quarter was driven by F5’s strength in the enterprise business, growing demand for its security products, the success of the Good, Better, Best bundles in driving million-dollar-plus deals, and broader adoption of its solutions. At $465.3 million, the company’s Q4 2014 revenue was above its guided range of  $453 million to $463 million, up 6% sequentially and 18% year to year. Both GAAP ($1. 26) and non-GAAP earnings per share ($1.57)  also beat company expectation by a significant margin. The company saw year-on-year growth across all major regions, with especially strong results in EMEA and North America and good improvement in Asia Pacific and Japan. For fiscal year 2014 (ended  September 30th), F5 witnessed a 16.9% increase  in its top line and   12.2% growth in its net income.

During the Q4 2014 earnings call, F5 announced the retirement of its current CEO, John McAdam, at the end of fiscal 2015. A smooth and effective plan for a successor is one of the top priorities for F5 in fiscal 2015. The company anticipates another year of solid growth and profitability in fiscal 2015. Assuming no material impact to the industry from broader macro issues, F5 believes that growth will continue in the current fiscal year, driven by:  1) an expanding product portfolio; 2) growing customer awareness and adoption of the Synthesis architecture; and, 3) partnerships with key players in the emerging SDN market.  It believes growth will be stronger in the second half of the year compared to the first half.

Our price estimate of $118 for F5 Networks is in line with the current market price. We are in the process of updating our model for the Q4 2014 earnings release.

See our complete analysis for F5 Networks here

Security Solutions Drove A Significant Number Of Large Design Wins In 2014

During its Q4 2014 earnings call, F5 announced that its security solutions drove a significant number of sales wins, including many multimillion-dollar transactions, in fiscal 2014. Approximately 36% of F5’s total product sales in the year  included one or more security products, which represents 41% growth over fiscal 2013.

Since its entry in the Internet firewall market in February 2012, F5 has expanded its security solution portfolio with the addition of new products. In fiscal 2014, it added  significant functionality to its web application firewall and access solutions, ASM and APM. F5 believes it is gaining market share in the web applications firewall market. F5’s traditional firewall solution, ASM, grew significantly in fiscal 2014, and it won  several large transactions where it replaced the incumbent competitive solutions. Project wins included both data center firewall solutions and Gi firewall solutions with Tier 1 service providers. As the requirement for customers to protect their applications in on-premise data centers and in private and public clouds continues to increase, the company sees continuing demand for its products in the future.

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]

F5 also significantly expanded its portfolio of subscription security solutions in fiscal 2014. It added a Secure Web Gateway product, Versafe anti-malware and anti-phishing subscription service via its Security Operations Centers.  And it completed the acquisition of Defense.Net, gaining a high-capacity, cloud-based service for protecting data centers from DDoS attacks. The company claims to now have the most comprehensive, hybrid DDoS solution in the market, engineered to absorb the full threat spectrum of DDoS attacks.

F5 plans to formally roll out Versafe and Defense.Net as subscription services to its sales force during the current quarter.  These new security offerings will further expand its addressable market. Though it has yet to formally release these solutions to its global sales force and partner channel, it has already received customer orders for both the new cloud-based DDoS service and the anti- malware and phishing solutions.

Good, Better, Best Offerings Drives Software Sales

F5 introduced the ‘Good, Better, Best’ pricing model in November 2013 to help customers maximize their value of enterprise application delivery. The program helps customers select a platform that best fits the organizations’ needs, offering advanced traffic management, optimization and security services. The company claims that the model makes it easier to package its solutions together for the customer, giving them some incentive to add more modules.

F5 continued to experience strong momentum in the ‘Good, Better, Best’ bundles in Q4 2014, with increasing number of the customers opting for the ‘Best’ solutions. Sales of these bundles now account for a significant percentage of its overall quarterly sales.

Cisco ACE Replacement Opportunity To Continue in 2015

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. F5 recorded 900 ACE replacement project wins in fiscal 2013, and fiscal 2014 marked another solid year of revenue from new customer ACE replacements.  Contributing as well was solid growth from existing replacements for sales in of additional products in areas like security. F5 expects  the opportunity to continue throughout 2015 and beyond.

The ACE installed base is over $1 billion of potential business, 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 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.

Q1 2015 Outlook

– Revenue in the range of $460 million to $470 million.

– GAAP and non-GAAP gross margin of 82% and 83.5%.

– GAAP operating expense of $245 million to $253 million.

– GAAP and non-GAAP effective tax rate of 38.5% and 35.5%, respectively.

– GAAP and non-GAAP EPS target of $1.10 to $1.13 and $1.46 and $1.49, respectively.

– Capex to range from $6 million to $12 million per quarter for ongoing infrastructure investments. Capex to increase to $15 million to $20 million in the second half of the year to support the expansions of facilities in San Jose and Tel Aviv, expected to come online in the summer of 2015.

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More Trefis Research

1. HP, F5 Networks Expand Web, Mobile Security Offerings, eWeek, September 17, 2013 [↩]
2. The Link between Pirated Software and Cybersecurity Breaches, March 2014 [↩]