F5 Networks Will Manage To Retain Its Leadership In ADCs

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A recent report published by research firm Gartner places F5 Networks (NASDAQ:FFIV) at the top of the Leaders Quadrant for Application Delivery Controllers (ADC) for the ninth consecutive year, positioning F5 as the highest in execution and furthest in vision within the quadrant. F5 derives a significant portion of its revenue from the ADC market, and has been the leader in ADCs for many years. However, the company was recently downgraded by Guggenheim, with the firm stating that F5’s core ADC business is slowing and it has become a net ADC share donor.

F5 accounts for over 50% of the ADC market, and its closest competitors are way behind it in terms of market share. The company did a comprehensive refresh of its product portfolio in 2013 which significantly expanded its addressable market. As the gains of the refresh dry up, F5 might not be able to increase its market share at the historical rate, but we still believe that the company has the expertise, resources and capital to defend its leadership in the ADC market for years to come.

Our price estimate of $129 for F5 Networks is approximately 10% above the current market price.

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See our complete analysis for F5 Networks here

Sizing Up The ADC Market  

The ADC is a key system within enterprise and cloud data centers that  improves the  availability, security and performance of applications across networks. Essentially, an ADC distributes workloads throughout a computer network, simplifying both the management of data centers and the delivery of resources across diverse networks. They also enable applications to perform faster.

While the ADC market witnessed double-digit growth in 2012, the growth rate slowed down to low single digits in 2013 and 2014. Nevertheless, the ADC market continues to have immense long-term growth potential. Market Research International believes that the global ADC market will grow at a CAGR of 8.13% between 2013 and 2018. One of the key factors contributing to this market growth is the increasing workload distribution using ADCs. The market has also been witnessing the emergence of cloud-optimized ADC equipment. Additionally, the expansion of security features in the ADC platform has and will continue to drive demand in the future.

Research form IDC foresees steady growth of the worldwide ADC market for the next few years, estimating the market to reach more than $2.2 billion in 2018.

Expanding Security Business, ‘Good, Better, Best’ Pricing Model’ & Cisco ACE Replacement Opportunity To Drive F5’s Growth

F5 managed to increase its revenue market share in ADCs to approximately 52% in 2014, as the company benefited from a full year of its new software bundling offerings and its clients increasingly deployed the company’s security functionality within ADC implementations. Over the past year, F5 introduced its Silverline cloud-based offerings and is leveraging its LineRate acquisition to help combat erosion from lower-cost or open-source offerings. However, Gartner’s most recent market share data shows that F5 lost 130 basis points of revenue share from Q1’15 to Q215, and 60 basis points from Q214 to Q215. [1]

We believe that an expanding security solutions portfolio, increasing acceptance of its “Best” product offering (approximately 70% of the customers opt for this bundled offering), and the Cisco ACE replacement opportunity will help F5 retain its leadership in ADCs.

Since its entry in the Internet firewall market in February 2012, F5 has significantly expanded its security solutions portfolio with the addition of new products. In Q3 2015, F5 signed its largest service provider security deal to date, a multi-million dollar agreement with a domestic tier 1 carrier. The company expects to see strong demand for its expanding portfolio of security solutions as customers look to adopt hybrid architectures, deploying applications both on-premise and in the cloud.

F5 has scored big product wins by replacing some of Cisco ACE products in large customer accounts since the latter announced its decision to exit the ADC market in 2012. 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.

What Are The Challenges; Who are F5’s Key Competitors?

According to Gartner‘s clients and survey results, F5 is the highest-priced provider in the ADC market. According to the research firm, the F5 platform is not well-aligned with mid-market organizations’ ADC requirements from a feature and price perspective.

On the other hand, Citrix (one of F5’s key competitor) provides a comprehensive set of hardware and software options for ADC deployments that span midsize to large enterprises, service providers and cloud providers. Additionally, Citrix’s partnership with Cisco in various areas of data center and virtual desktop infrastructure poses as a threat to F5. Citrix is also a leading player in virtualization offerings, which is a fast growing sub-segment of ADC.

Radware has a strong portfolio of ADC solutions, and the company accounts for approximately 9% to 10% of overall ADC revenue. Radware grew more than double the market rate in 2014. The company offers cost-effective solutions and also has a deep set of security capabilities that can be integrated with its ADCs.

In addition to Citrix and Radware, F5 also competes against start-up firm A10 Networks and other smaller players such as Riverbed Technology, and Brocade.

The intense competition in the market might restrict F5’s capability to gain additional share in the application delivery network market. But the company retains its predominant market share and highly robust and broad offering.

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Notes:
  1. F5: Guggenheim Cuts to Hold; Surrendering Share in Apps Controller Market, Barron’s, September 22, 2015 []