F5 Reports A Solid Q3’15, Suggesting Fiscal 2015 Will Be Another Year Of Strong Growth

Leading application delivery network (ADN) solutions provider F5 Networks (NASDAQ:FFIV) continued its growth momentum with a solid showing for fiscal Q3 2015 (fiscal years end with September), underlining the growing demand for the company’s expanding array of products and services. The company’s recent performance has been strong, supported by: 1) strength in the enterprise business; 2)  rising demand for its security products; 3) success of the ‘Good, Better, Best’ bundles in driving the return of million-dollar-plus deals;  and, 4) the broader adoption of its solutions.  With these factors, the company reported 17.2% and 12.2% growth in revenue and net income, respectively, in fiscal 2014. Given the company’s strong performance in fiscal 2015 so far, looks like 2015 will be another year of solid growth for F5 Networks.

F5 claims to be seeing a continuous momentum in sales of its software offerings, both as modules on its purpose-built hardware and the standalone virtual editions, as a rising number of large organizations deploy hybrid architectures. During Q3 2015, the company also saw the beginning of what it believes will be a steady ramp in sales of its recently launched subscription-based Silverline services.

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 $128 for F5 Networks is in line with the current market price. We are in the process of updating our model for the Q3 2015 earnings release.

See our complete analysis for F5 Networks here

A Quick Snapshot of Q3 2015 Earnings

At $483.6 million, F5’s Q3 2015 revenue was at the high end of the company guided range, increasing 2% quarter on quarter and 10% year on year. Accounting for 51% of total revenue, product revenue was up 2% sequentially and 5% year on year. Service revenue accounted for the remaining 49% of F5’s total revenue, increasing 3% quarter on quarter and 15% year on year. On a year on year basis, while Americas and EMEA revenue grew 13% and 14%, respectively, revenue from APAC and Japan declined 6% and 2%, respectively. GAAP and non-GAAP EPS of $1.29 and $1.67, respectively, also exceeded company guidance.

Given the strong Q3 2015 earnings, F5’s stock is up almost 10% since the company reported its earnings on July 22nd.

‘Good, Better, Best’ Pricing Model Drive Software Revenue; Security Remains The Most Important Growth Driver 

F5 claims that among the notable signs of its progress in Q3 2015 was the significant growth in software revenue, driven by the uptake of its ‘Good, Better, Best’ packaging driving million-dollar plus deals. The ‘Good, Better, Best’ pricing model was introduced 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. F5 claims that the model makes it easier to package its solutions together for the customer, giving them some incentive to add more modules. Sales of these bundles now account for a significant percentage of F5’s total sales.

Over the past 3 years, F5’s quarterly revenue from the sales of software modules and virtual editions has more than doubled, accounting for more than a third of its product revenue last quarter. As per a recent industry analyst report, F5 grew 2.5 times faster than the general virtual ADC market. ^[1] F5 believes that the trend will continue in subsequent quarters as well.

Its security modules remain the most important growth driver for F5. In its Q3 2015 earnings call, the company mentioned that, given the highly visible cyber security attacks last quarter, more customers from an increasing diverse pool are approaching F5 to tap its ability to secure applications, manage user policy and access, and mitigate application attacks across traditional data centers and public and private clouds. As a result, the company had a number of notable wins in Q3 2015, including a branch of the U.S. government, a prestigious medical research group, both of whom needed to secure their organization’s remote access capabilities. Additionally, a multi-national defense contract to purchase its Access Policy Manager for single sign-on federation and three national carriers came to F5 for a variety of security solutions. In Q3 2015, F5 signed its largest largest service provider security deal to-date, a multi-million dollar agreement with a domestic Tier 1 carrier.

F5 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. In the current quarter, it will launch the next version of BIG-IP, version 12.0, which will help  customers navigate their application centric environment without compromising security or operational efficiency.

Q4 2015 Outlook

– Revenue in the range of $500 million to $510 million.

– GAAP gross margin in the 82.0% to 82.5% range, including approximately $4 million of stock-based compensation expense and $2.7 million in amortization of purchased intangible assets.

– Non-GAAP gross margin in the 83.5% to 84.0% range.

– GAAP operating expenses in the range of $267 million to $276 million, including approximately $38.5 million in stock-based compensation expense and $0.7 million in amortization of purchased intangible assets.

– GAAP and non-GAAP effective tax rate of 37% and 35%, respectively.

– GAAP and non-GAAP EPS target of $1.26 to $1.29 per share and $1.72 to $1.75 per share, respectively.

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1. F5 Network’s Q3 2015 Earnings Call Transcript, Seeking Alpha, July 22, 2015 [↩]