F5 Networks Earning Preview: Outlook Solid Despite Weak Macro Trends

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F5 Networks (NASDAQ:FFIV), a leading provider of technology used in optimizing security and performance of servers, data storage devices and other network resources, is set to announce its Q3 2012 results on July 18. While the company posted solid results last quarter, registering a 22% y-o-y increase and is expected to continue the momentum in Q3 as well, the market seems to think otherwise as the stock has lost around 10% of its value since the start of this month. We believe that the recent fall in the stock price is more on account of near-term macro concerns, and we remain positive on the company’s long-term prospects based on its strong fundamentals. Here we list down certain factors that contribute to our belief.

See our complete analysis for F5 Networks here

Acquisition of Traffix Systems and Entry into Internet Firewall Market

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F5 Networks acquired Traffix Systems, a provider of 4G Diameter signaling products for telecommunications service providers, in February 2012. While F5 is the industry leader in load balancing solutions for IP-based traffic, Traffix is dominant in diameter and signaling for the 4G/LTE networks. With a 27% contribution to total sales, telecommunication is one of the important customer bases for F5 Networks.

We believe the 4G LTE network will benefit the company with a potential increase in its subscriber base. Additionally, by providing F5 with unique depth and breadth of technology, the acquisition will further increase the company’s exposure in the network market.

F5 also entered the Internet firewall market in February 2012, with its Big-IP 11.1 software passing the ISCA Labs test for network firewalls. Apart from improving products, the company is coming out with innovative programs to boost its security solutions sales. By pushing into the firework market that aims to protect data centers, F5 will take on networking major Juniper Networks.

However, we do not expect to see a material contribution from Traffix this quarter, but anticipate significant benefits to start accruing in fiscal 2013.

Growing Focus on Mobile Application Delivery

As the number of remote workers and mobile customers increase, enterprise demand for mobile application delivery is on the rise. Chrome, Amazon Silk and Mozilla Firefox are standards that are becoming increasingly important for remote users who need a more efficient traffic flow that consumes less bandwidth on their mobile devices. Keeping this in mind, Google (NASDAQ:GOOG) has designed its SPDY application-layer protocol which provides minimal latency when transporting content over the Web via the typical HTTP protocol.

In May this year, F5 announced updates to application delivery optimization that makes BIG-IP the first ADC on the market to support Google’s SPDY protocol. F5’s application delivery optimization offering provides a better mobile user experience, optimizing image delivery and rendering of web pages in a much quicker environment.

Keeping it well in line with changing trends and developments, F5’s focus on mobile application delivery can further push up its share in the application delivery network market.

Shift To Cloud Based Services and Storage Will Benefit F5

As organizations transform their own data centers, they are increasingly turning to external, third-party cloud providers for services and storage to lower their capital and operating costs. To accommodate the dynamic needs of their clients, cloud providers are building large virtualized data centers to host a constantly changing mix of on-demand resources.

Dev Central, F5 Network’s online community, recently collaborated with industry leader Bluelock to migrate the community to a cloud environment. Additionally, F5 recently announced a new global cloud licensing program developed for Infrastructure-as-a-service (Iaas) cloud providers that offers benefits not only for the providers but customers and channel partners as well. (Read: F5 Networks Migrates Its Online Community To A Cloud Environment)

Research firm Forrester projects the global market for cloud computing to increase from $41 billion in 2011 to $241 billion by 2020. [1] With a current application delivery network market share of 25%, F5 Networks could significantly leverage on this growth.

Increase In Demand For Data Center Networking

Though the demand for data center networking was up 17% y-o-y, it registered a sequential decline of 6% last quarter. [2] However, going forward, this segment is estimated to register an increasing growth rate.

F5 faces intense competition from Hewlett-Packard (NYSE:HPQ) for the second slot behind Cisco (NASDAQ:CSCO) in the data center network equipment market. However, the company has been stepping up efforts to enhance its security portfolio with new product launches such as IP Intelligence and Enhanced DNS Services.

With the increasing shift to cloud-based applications, security has become a major threat among enterprises. We feel that the company is doing well to address the security and performance risks associated with migrating to the cloud.

We maintain our price estimate of $129 for F5 Networks, almost 4o% above the current market price.

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F5 Networks Reaches $128 With Shift To Cloud

by Trefis Team

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F5 Networks (NASDAQ:FFIV), the application delivery heavyweight, helps companies simplify the management of their data center operations and delivery of services across diverse data center resources. It has pioneered the load-balancing technology that distributes internet traffic evenly across multiple servers, making them look like a single device. Optimizing growth in the application delivery network market, F5 has almost doubled its revenues and profits in the last 5 years.

The stock has lost around 20% of its market value in the last month. However, with a robust pipeline of future sale opportunities, we believe the company’s leadership to be as strong as its ever been. Here, we analyze certain prominent trends that shape the future prospects and in turn support our valuation of $128 for the company, which stands at a premium of 20% to the current market price.

See our complete analysis for F5 Networks here

Shift To Cloud Based Services and Storage

Notes:
  1. More Predictions on the Huge Growth of Cloud Computing, Wall Street Journal, April 21, 2011 []
  2. Cisco (Once Again) Tops in Data Center Networking; UCS Rising, CertCities, June 28, 2012 []