A Look Back At F5 Networks’ 2017 Performance

Application delivery networking provider F5 Networks (NYSE:FFIV) has reported positive results this year so far, driven by robust demand for its offerings. The ADN market has grown in 2016 and 207 thus far, up from mid single-digit growth in previous years. As a result, market leader F5 has sustained growth in its core ADN offerings. However, with many competing players entering the market including Citrix Systems, Array Networks, Aryaka Networks and other large players such as Cisco (NASDAQ:CSCO), HP Enterprise (NYSE:HPE) and Juniper (NYSE:JNPR), F5 has lost share in the ADN market. This trend is expected to continue through the end of the decade, despite steady growth in revenues for F5 Networks.

Through the first three quarters of the year, F5 reported a 5% increase in net revenues to nearly $1.6 billion. Gross profit (GAAP) increased 4% over the comparable prior year period, due to which its gross margin compressed by around 30 basis points, as shown below. Similarly, operating income (GAAP) was up 3% on a y-o-y basis to $427 million, while the operating profit margin was down 50 basis points to 27.1%. On a non-GAAP basis, net income was up 10% to $413 million while diluted earnings per share jumped 15% to $6.40 for the three quarters combined.

Services Drive Growth

Product revenue was up 2% on a y-o-y basis to $725 million – a trend observed in recent years. Offsetting the slowdown in product sales, F5’s services segment has grown in double digits in the last few years. As the delivery of IT solutions increasingly transitions from on-premise deployment to a cloud-based model, software companies derive more of their revenues from services. This trend continued this year, with services revenue growing at 7% y-o-y to $849 million.

We forecast services to continue to drive growth, albeit at a slower pace than historic levels. It is important to note that while the services business would have limited demand without the presence of core ADN product sales, the transition of customer preferences from license agreements to SaaS solutions provides an opportunity for F5 monetize its services offerings.

In terms of the product segment, F5’s market share has fallen from over 25% in 2013 to 23% in 2016. This is attributable to growing competition from new entrants in the market as well as from native cloud-based service providers. According to Global Info Research, the ADN market is expected to grow in double digits through 2021 to become an $8 billion market, up from $4.5 billion in 2016. Given the increasing competition in this domain, we forecast F5 Networks to continue to lose share in the ADN market. Its market share could further decline by around 4 percentage points to 17% by the end of the decade. Despite losing share in the market, we expect F5’s ADN business to continue to grow at low single digits in the coming years.

Guidance For December Quarter

F5’s management expects a modest 1% annual increase in revenues to $520 million in the December quarter. Keeping up the trend from recent quarters, its GAAP gross margin will likely remain lower than previous year levels at around 83% for the first fiscal quarter 2018. F5 expects its non-GAAP diluted EPS for the December quarter to be around $2.04, which is 3% higher on a y-o-y basis.

Despite mild guidance for the December quarter, we maintain our $135 price estimate for F5 Networks, which in line with the current market price. You can modify the interactive charts in this article to gauge how changes in individual drivers for F5 Networks can have on our price estimates for the company.

See our complete analysis for F5 Networks

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