F5 Networks Earnings Preview: New Products, Services To Help Drive Growth

F5 Networks (NYSE:FFIV) is scheduled to report its fiscal Q3 earnings on Wednesday, July 26. In recent years, the application delivery networking (ADN) provider has reported steady growth in revenues driven by robust demand for its offerings. A key trend to note is that F5’s services segment has outpaced growth in its core ADN product sales.

In the coming quarters, F5 Networks expects strong revenue growth from the product segment due to the launch of its new appliances and strong demand for BIG-IP iSeries hardware products. In addition, the ADN market is expected to grow at double digits through 2021 to become $8.3 billion market, up from $4.5 billion in 2016, according to a report by Global Info Research. ^[1]

We have a $141 price estimate for F5’s stock, which is slightly higher than the current market price.

See our complete analysis for F5 Networks

Guidance For June Quarter

For the June quarter, F5’s management expects a 6% annual growth in revenues to $525 million. Its gross margin will likely remain around current levels of 83% going forward. Disciplined operating expense management should help F5 report sustained growth in its net income and earnings per share. The company expects its non-GAAP diluted EPS for the June quarter to be around $2.03, which implies 12% year-over-year growth and is in line with the Reuters’ consensus estimate. ^[2]

Recapping the March Quarter & Recent Trends

Over the years, F5 has 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 the cloud, ADC vendors are increasingly focused on evolving their support for cloud applications. Consequently, these companies have to compete with the offerings of cloud vendors. This has resulted in strong revenue growth for software product sales and services revenues, as compared to hardware revenue streams.

In addition, F5 faces increasing competition from new entrants in the application delivery network (ADN) market. While the market has grown at a steady pace over the years, F5’s resulting ADN market share has fallen from over 25% to under 21% in the last five years. Despite this, F5’s combined product sales in the most recent quarter were up 7% to $241 million as shown below. This was attributable to strong demand for BIG-IP iSeries hardware products, which F5 started shipping towards the end of the December quarter. ^[3]

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. F5’s services revenues have grown at double digits over the last few years. However, this  slowed down to a 7% annual increase in services revenues to $277 million in the March quarter.

F5’s consolidated gross margin (GAAP) was flat over the comparable prior year period at 83%. Operating expenses rose only 2% y-o-y to $292 to help drive net earnings. As a result, net income was up almost 20% to $93 million for the quarter and earnings per share rose 16% to $1.95.

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More Trefis Research

1. Global Application Delivery Networks ADN Market, Markets Report Center, January 2017 [↩]
2. Reuters Analysis For F5 Networks, Reuters Stock Analysis For F5, Reuters April 2017 [↩]
3. F5 Q1’17 Earnings Call Transcript, Seeking Alpha, January 2017 [↩]