Is F5 Pooling Its Resources Into R&D Effectively?

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FFIV
F5

F5‘s (NYSE:FFIV) investments in research and development (R&D) are aimed at developing new products and upgrading the current line of products to trigger future growth and help stay on par with or better than the competition. Considering this, the efficiency of F5’s R&D can be gauged by gross profit dollars (since it incorporates cost of sales) generated per dollar spent on R&D.

F5 Gross Profit Per Dollar R&D Expense

The chart above indicates that the company’s R&D efficiency has declined over the past few years. This is despite the fact that F5’s gross profits increased during the same period. The company’s R&D efficiency has been experiencing pressure, as it has been investing its resources to launch new products to prevent losing market share to its competitors.

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Though F5 has been the leader in ADC (Application Delivery Controller) market for many years, its market share has been threatened of late, as more and more applications are being deployed in the public cloud, where there is less need for a traditional load-balancer. Further, F5 is facing competitive threat from its rival, Citrix. With a software based solution, Citrix is a leading player in virtualization, which is a fast growing sub-segment of ADC market.

In order to prevent any market share declines, F5 has been investing its resources to upgrade its products frequently. The company last underwent a significant product refresh in 2014, when it launched its BIG-IP platform. Further, the hardware upgrade of F5’s current line up of products is expected soon. The company claims that its new appliances, named the Shuttle series, have significant performance improvements over its previous line of products. We can expect some positive impact of these investments on F5’s revenues and gross profits in the near term.

However, we believe that the company’s R&D expenses as a percentage of gross profit is likely to remain consistent in the foreseeable future, as it needs to keep investing a significant portion of its gross profits into R&D to launch new products to stay ahead in the market.

For information, please refer to our complete analysis for F5 Networks

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