In line with its revised earnings target announced earlier this month, F5 Networks (NASDAQ:FFIV) reported $350 million in its Q2 2013 earnings, a 4% sequential decline. A difficult macro environment led to a sharp decline in revenue from telecommunication customers and the U.S. federal government.
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While F5 had a strong pipeline of deals at the start of Q2 2013, it experienced difficulty in closing certain deals, as customers hesitated to release purchase orders. The constrained customer budgets resulted in longer sales cycle, which impacted F5’s Q2 2013 revenues. Additionally, the $1 million+ deals continued to decline for the fourth consecutive quarter. Nevertheless, the company managed to maintain its gross margins at 83%.
F5 believes that the slowdown in orders was due to a combination of factors – budget constraints, delayed project timeline and prolonged decision making, as its customers transitioned to its new range of products. Believing that its competitiveness in the market remains intact, the company remains committed to re-accelerating its product revenue growth in the future. F5’s ongoing product refresh offers significant price performance advantages which we believe will increase its growth opportunities in key markets including security, service providers, cloud-based architectures and new-generation data centers.
We think that the rich pipeline of new products and an expanding salesforce can help F5 re-accelerate growth in product revenue in the future, as the economic situation stabilizes.
F5 To Complete Its Product Refresh This Quarter
Since the last few quarters, F5 has been working on the most significant product refresh in several years. It had a range of new products and software solutions planned for launch in 2013, with which it aims to boost demand and create new revenue growth opportunities for the future. F5 claims that the new products launched so far are gaining traction in the market. It will start shipping the BIG-IP 5000 and 7000 Series platforms in the coming quarter, which will complete its comprehensive product refresh started this year. F5 has another release of its TMOS platform planned for this quarter.
In Q2 2013, F5 added two new Fortune 500 customers and witnessed growth in its enterprise business, especially the financial vertical which accounted for 23% of its total sales bookings. The new platforms offer significant price performance improvements over its existing solutions and can re-accelerate growth in demand in the future.
F5’s entry in the Internet firewall market is another factor which we believe will increase its competitiveness in the market. 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 the coming years. The company recorded strong sales of its application security module (ASM) and advanced firewall manager (AFM) in Q2 2013. It started shipping AFM in mid-February and its solutions were purchased by over 50 customers.  AFN is the world’s fastest and most scalable application delivery firewall solution.
An updated product portfolio and a growing focus on security applications will help drive demand for F5’s products in the future.
Expanding Sales Force To Help Steer Demand For F5’s Products
F5 expanded its employee base by 22% in 2012, and added another 95 employees in Q1 2013. Continuing the momentum, it added 30 employees in Q2 2012, taking its total headcount to approximately 3,155 employees. It targets to hire an additional 50 to 100 employees by the end of 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.
Q3 2013 Outlook
– Revenue in the range of $355 to $365 million
– GAAP gross margin of 83%
– GAAP operating expense to be between $197-$204 million
– Effective tax rate of 36%
– GAAP EPS between $0.80 to $0.83 per diluted share
We will update our price estimate of $130 for F5 Networks after the earning release.Notes:
- F5 Networks Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, April 24, 2013 [↩]