F5 Networks Earnings Preview: New Products To Drive Top Line Growth

Application delivery networking provider F5 Networks (NYSE:FFIV) is scheduled to report its Q2 FY 2017 earnings on April 26. The company expects net revenues to be around $523 million at the midpoint for the first quarter, which implies 8% year-over-year revenue growth. Strong revenue growth is expected due to the launch of its new appliances, including the Shuttle series as well as the first full quarter for F5’s BIG-IP iSeries hardware products. As F5 started shipping these new products towards the end of the previous quarter, we expect the impact on sales should be visible starting in the March quarter. ^[1]

On the other hand, it still remains to be seen how these products fare in the evolving landscape of the Application Delivery Controller (ADC) market. The company is increasingly facing competition from new entrants in the ADC market as well as from native cloud-based service providers. Traditionally, ADC vendors have focused on helping customers manage applications in their own data centers. However, as more and more applications are now being deployed on cloud, ADC vendors are increasingly focused on evolving their support for applications on the cloud. Consequently, these companies have to compete with the offerings of cloud vendors. As a result, F5 is gradually losing share to cloud vendors in the ADC market, despite being a market leader. According to Gartner, F5’s market share fell from 49% in 2014 to 47% in 2015. Nevertheless, the company sees the shift of application workloads to private and public cloud architectures as a new opportunity. Moreover, F5’s new product lines are ready to be integrated with on-premise private clouds. ^[2]

Q1 FY’17 Highlights

In the most recent quarter, F5 reported 6% annual growth in revenues to $516 million. As shown in the table below, growth was largely driven by services revenues, which were up 8% y-o-y to $276 million. The shift of application workloads to private and public cloud architectures serves as an opportunity for F5 expand its software and services offerings, as evidenced by the strong growth in its services revenues. Comparatively, product revenues were only around 2% higher on a y-o-y basis to $239 million as customers are shifting preference from purchasing standalone hardware.

In addition to revenue growth, F5 successfully improved its gross margin by a percentage point to 83.5% during the December quarter. However, operating expenses rose 8% y-o-y to $294 to offset the positive impact of higher revenue and gross margins. As a result, net income was up 4% to $94 million for the quarter. The company repurchased shares worth $150 million through the quarter (at an average of $142 per share) to boost its earnings per share, as shown below.

We have a $147 price estimate for F5’s stock, which is slightly higher than the current market price.

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

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1. F5 Q1’17 Earnings Call Transcript, Seeking Alpha, January 2017 [↩]
2. F5 BIG-IP System Hardware Factsheet, F5 Product Listing, April 2017 [↩]