As anticipated by the company, F5 Networks (NASDAQ:FFIV) started its fiscal 2013 on a flat note with a 1% increase in Q1 2013 revenue, although earnings were 13% higher compared to Q1 2012. While product revenue declined marginally (-2%), services revenue was up 5% compared to the previous quarter. Though F5 saw growth in most geographies, uncertainty caused by the fiscal uncertainty led to a decline in business from the US federal government and Japan. However, F5 claims to have a strong sales pipeline for its federal business and believes that its upcoming product refresh in 2013 will increase future demand from Japan.
Despite the economic slowdown, F5 marked its 15th consecutive quarter of revenue growth in Q1 2013. The company has had consistent operating margins, a solid balance sheet with strong cash generation and no debt. We feel that the rich pipeline of new products and an expanding sales force can help F5 re-accelerate growth in product revenue this year onward.
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New Product Development To Increase Competitiveness
F5 Networks claims to be working on the most significant product line refresh in several years. It had a gamut of new products and software solutions planned for launch in 2013 which it aims will help boost demand and create new revenue growth opportunities for the future.
F5’s upcoming new release of TMOS, code-named Solar, offers approximately 76 new areas of functionality for TMOS which will help expand its addressable market in the future. In addition, the company has a number of new ADC platforms and VIPRION products which should help re-accelerate growth in demand.
The company witnessed a 6% increase in the proportion of revenue from new business and we expect the contribution to increase in the coming quarters. 
Increased Momentum In Security & Service Provider Solutions
With the explosion of data and processing required online, security has become a major concern for most enterprises, and thus, this is one segment bound to witness tremendous growth in coming years. With its BIG-IP 11.1 software passing the ISCA Labs test for network firewalls, F5 entered the Internet firewall market in February 2012. F5 saw strong sales in its security module in Q1 2013.
In addition to improving products, the company is coming out with innovative programs to boost its security solutions sales. The upcoming TMOS refresh will include a range of new security as well as service provider offerings and products to enable cloud architecture. F5’s application delivery firewall solution is the industry’s first solution that combines network firewall, application security, access management, and DNS security with traffic management while confirming to industry leading performance and scalability. ((F5 Networks’ CEO Discusses F1Q13 Results – Earnings Call Transcript, Seeking Alpha, January 23))
Keeping it well in line with changing trends and developments, we expect F5’s increasing security applications to contribute to an increase in its share in the application delivery network market.
Increasing Headcount To Drive Sales
F5 expanded its employee base by 22% in 2012 and added another 95 employees in Q1 2013. Foreseeing a higher demand for its product in the future, F5 intends to add another 100 employees in the current quarter. In addition to expanding its product base, the company is also focusing on product training to ensure that its sales force is able to maximize the advantage of its new products portfolio.
We believe the increase in sales force will help F5 leverage the rapidly expanding product portfolio and steer demand for its products in the future.
Outlook for Q2 2013
– Revenue target: $370 to $380 million
– GAAP gross margins: 83%
– GAAP Operating expenses: $198 million to $205 million
– Effective tax rate of 32.5%
– EPS of $0.93 to $0.96 per diluted share
– Inventory levels of $18 million to $20 million
– Cash flow from operations: >95 million
We will update our price estimate of $130 for F5 Networks post the Q1 2013 earnings release.Notes:
- F5 Networks’ CEO Discusses F1Q13 Results – Earnings Call Transcript, Seeking Alpha, January 23 [↩]