A Rebound In Million Dollar Deals Drive F5’s Growth In Q2’15
F5 Networks (NASDAQ:FFIV) reported a strong Q2 2015 with both revenue and earnings per share (EPS) beating Wall Street’s consensus estimates. (Fiscal years end with September.) At $471.2 million, revenue grew 2% sequentially and 12% year to year. And it was above the mid-point of F5’s guided range. Both GAAP and non- GAAP EPS of $1.18 and $1.59, respectively, came in ahead of company guidance as well. The strength in EPS was driven by a stronger than anticipated operating margin during the quarter, the result of lower than expected operating expenses. Below the operating line, currency effects boosted other income and the tax rate was more favorable than expected.
In Q1 2015, F5 experienced a larger than expected drop in million dollar plus deals in both large enterprise and Federal sectors in the U.S., which led to a slight sequential decline in the company’s revenue. The company claims to have seen a rebound in such large deals in Q2 2015, which was an important factor driving growth in the quarter.
In keeping with recent historical patterns, ongoing strength of its major drivers, and a robust pipeline, F5 anticipates continued sales momentum with sequential and year-over-year growth expected in the second half of fiscal 2015. The company’s Q3 2015 outlook (mentioned below) was slightly lower than consensus estimates, which is what probably led to a marginal decline in its stock price in after hours trading yesterday.
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F5 plans to drive growth in its business by investing in infrastructure and headcount (adding 100-125 employees in the current quarter), while delivering world-class operating margins. F5 believes that its existing product portfolio, its hybrid applications services strategy, and its future product roadmap are not only in-line with customer and market trends, but also key to enabling those trends.
Our price estimate of $127 for F5 Networks is marginally above the current market price. We are in the process of updating our model for the Q2 2015 earnings release.
See our complete analysis for F5 Networks here
Strong Sales In North America Drove Growth; International Sales Impacted By The Strengthening Dollar
F5 saw solid sales in North America with double-digit year-over-year sales bookings growth , driven by a rebound in sales from large deals compared to Q1 2015 and record sales levels in the service provider vertical. The strength in North America was somewhat offset by some late quarter softness in sales in EMEA, APAC and Latin America, likely impacted by the strengthening US dollar. Though the EMEA region continued to deliver year-over-year sales booking growth, the growth was not as strong as seen in previous quarters and was below F5’s internal forecasts. Sales in the APAC region were also below F5’s initial forecast while sales in Japan were slightly above the forecast.
In Q2 2015, revenue from the Americas accounted for 57% of F5 total revenues, while EMEA, APAC and Japan accounted for 24%, 14% and 5% of the sales, respectively. On a year-over-year basis, Americas and EMEA revenue grew 14%, APAC 11% and Japan revenue was down 3%.
Security Business Remains The Largest Growth Driver
A combination of the ‘Good, Better, Best’ pricing model, virtual ADC sales, and a solid attach rate of software modules continued to result in solid software sales for F5 in Q2 2015. In the last few years, the company has evolved beyond the traditional data center routes to include a robust hybrid products and services portfolio including scale-out virtual editions, born-in-the-cloud products and as-a-service solutions, all complementing its market-leading ADC technology. With a 52% market share, F5 continues to be a market leader in ADCs, with an ability to provide solutions as virtual software offerings across all the major hypervisors (i.e., virtualization engines) and a unique orchestration functionality in its BIG IQ that enables customers to move to software-defined data centers and NFV (network function virtualization) architectures.
F5 continues to believe that its security business will be the largest growth driver, and expects to see strong demand for its expanding portfolio of security solutions as customers look to adopt hybrid architectures, deploying applications both in premise and in the cloud. The company had a number of large project wins with its security solutions in Q2 2015. In Q1 2015, F5 won a large scale AFM Gi firewall project in a Tier 1 service provider in North America, which is now in production. It claims to have received more orders last quarter as the customer rolls out more of the Gi firewall solution throughout their network, and expects to see continuing business from this project this fiscal and in fiscal 2016.
F5 extended its Silverline hybrid application strategy (launched in Nov’14) a few weeks back with its industry leading WAP capabilities built on the industry-leading ASM solution. The company now offers its customers leading WAP services in both on-premise and subscription-based cloud offerings. This new cloud offering provides both ease and speed of deployment and allows organizations to confidently incorporate cloud resources, while protecting apps and data from increasingly sophisticated security attacks, risks and vulnerabilities.
Sales in the service provider market were also very solid in Q1 2015 with sales bookings at a record high. The America regions, in particular, had a very solid quarter with several wins with the Tier 1 service providers as well as a number of competitive wins in the cable companies. F5 won several competitive replacements last quarter, and had some solid wins with its traffic to LTE solution, including license upgrades as LTE traffic increased in the installed base. Gi consolidation traffic steering optimization continues to be a good drivers for the company in the service provider market.
F5 continues to aggressively increase its portfolio of application products and cloud services, significantly expanding its addressable market and the types of revenue streams available to its sales force and partner channel.
Q3 2015 Outlook
– Revenue in the range of $475 million to $485 million.
– GAAP and non-GAAP gross margin in the range of 82% – 82.5% and 83.5% – 84%, respectively.
– GAAP operating expenses in the range of $257 million to $266 million.
– GAAP effective tax rate of 37% and non-GAAP effective tax rate of 35%.
– GAAP and non-GAAP EPS target of $1.16 to $1.19 and $1.57 to $1.60, respectively.
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