F5 Networks Q3’15 Earnings Preview: Company To Remain On A Growth Trajectory

F5 Networks (NASDAQ:FFIV), which specializes in Application Delivery Networking technology, is set to report its Q3 2015 earnings on July 22nd. (Fiscal year ends with September.) Fiscal 2014 was a good year for the company as it reported 17.2% and 12.2% growth in revenue and net income, respectively. Growth in the year was driven by F5’s strength in the enterprise business, growing demand for its security products, success of the Good, Better, Best bundles in driving million-dollar-plus deals, and the broader adoption of its solutions.

F5 reported a strong Q2 2015 with both revenue and earnings per share (EPS) beating Wall Street’s consensus estimates. 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.

Based on the strength of its current pipeline, including the return in the number of large deal opportunities and continued momentum from key drivers, F5 anticipates Q3 2015 revenue to be in the range of $475 million to $485 millin, and GAAP and non-GAAP EPS between $1.16 to $1.19 and $1.57 to $1.60, respectively.

F5 anticipates another year of solid growth and profitability in fiscal 2015. Assuming no material impact to the industry from broader macro issues, the company 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.

Our price estimate of $127 for F5 Networks is at an approximate 10% premium to the current market price. We will update our valuation after the Q2 2015 earnings release.

See our complete analysis for F5 Networks here

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 the 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 with 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.

Sales in the service provider market were also very solid in Q2 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 driver 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.

 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 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 stepped up its market initiatives on the Cisco ACE opportunities starting Q2 2015 to take advantage of its current growth momentum and experience in transitioning ACE customers to F5 ADC solutions. The company has also created a sales service web portal for ACE Migration which complements a significant experience and consulting expertise. F5 continued to see strong sales of Cisco ACE replacements in Q2 2015, as customers continue to take the opportunity to add additional functionality such as the AFM and AFM security modules. It expects the trend to continue in Q3 2015 as well.

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