F5’s Stock Price Declines On Q1’17 Results, But Recent Product Launches To Boost Sales Going Forward

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F5 Networks (NYSE:FFIV) reported its Q1 2017 earnings on January 25th. (Fiscal years end with September) The company saw modest growth in its revenues in the quarter, which was primarily driven by 8.5% growth in service revenues. In addition, F5 saw 15% growth in its non-GAAP earnings per share as its weighted average share count decreased by 6% and non-GAAP Net Income increased by 5%. Though the company’s results in the quarter were close to its previously guided range, some of the metrics were slightly below the consensus estimate. This led to a 8% decline in the company’s stock price post earnings announcement.

It is worth noting that F5’s services revenues growth, which averaged around 14% in the last ten quarters was down to single digits in the quarter. The slow growth of service revenues is primarily because F5’s product sales declined by 5% in FY 2016. However, it should be noted that the company’s product sales, which have consecutively declined in the last four quarters of 2016, increased by 2% in Q1. F5 expects’s its service revenues to normalize in the second half or FY’17, as its product sales improve with the growing adoption of its new iSeries products.

We are in the process of updating our model for F5 Networks

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See our complete analysis for F5 Networks

In the table below we can note the key metrics as reported by F5 networks in Q1’17:

Screen Shot 2017-01-27 at 1.30.28 PM

Source: Sec filings

F5’s New Security Portfolio Can Boost Its Sales In FY 2017

During the earnings call, F5 announced the addition of several new offerings to its security portfolio. Following is a highlight of some of these products:

A) Herculon SSL Orchestraor to tap the growing market opportunity because of a surge in SSL encrypted traffic. It is worth noting that the SSL protocol is typically used when a web browser needs to securely connect to a web server over the internet. However, the decryption/encryption processing of SSL traffic is burdensome for servers. An ADC can remove the need for servers to be burdened with the intensive task of processing.

B) Herculon DDoS defender to provide a multilayered defense against volumetric and pervasive DDoS attacks.

C) Silverline WAF Express service to cater to the security concerns arising from the growing deployment of applications on the cloud. Typically an on-premise Web Application Firewall (WAF) is used to secure these applications when hosted on private infrastructure. F5 claims that its Silverline WAF Express Service enables anyone to quickly deploy the service of Web Application Firewall(WAF) without requiring the training and security knowledge.

D) Services for threat monitoring, remediation, and analysis of the security threats.

We believe that F5’s new security offering, along with the growing adoption of its recently launched iSeries products, can help the company deliver strong product revenue growth in FY’17 and beyond. This, in turn, should drive the company’s service revenues over the next couple of years.

However, The Company’s Growth Correlation With Public And Private Cloud Growth Remains Unclear

Though F5 sees the shift of application workloads to private and public cloud architectures as a new opportunity, it remains to be seen if this shift is good for F5. This is because the company will have to compete with the offerings of cloud vendors going ahead.

Traditionally, ADC vendors have focussed on helping customers manage applications in their own data centers. However, as more and more applications are now being deployed in the cloud, and as data center companies are offering their own load balancing support for applications on the cloud, ADC vendors are increasingly focused on evolving their support for applications on the cloud. Consequently, traditional load balancing companies have to compete with the offerings of cloud vendors. It is worth noting that Amazon provides its own elastic load balancing (ELB) support to distribute the incoming application traffic across multiple Amazon EC2 instances in the cloud, for applications using Amazon web services. Nevertheless, F5 claims that, as its customers are shifting their applications to the public cloud, almost 100% of the time they continue to use F5’s products. This is a big positive for the company.

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