The Key Trends From F5 Networks’ Q1

F5 Networks (NYSE:FFIV) announced its fiscal Q1 earnings on January 24, reporting a 2% annual increase in revenues to $523 million. Similar to previous quarters, most of the company’s revenue growth (6%) came from the Services segment, while Product revenues were down by around 5% on a y-o-y basis. In terms of geographies, Americas and EMEA (Europe, Middle East and Africa) revenues were up by 2% and 7%, respectively, while Asia-Pacific revenues fell 5% on a y-o-y basis.

We have summarized F5 Networks’ Q1 FY’18 earnings and also detailed the major takeaways from the announcement in our interactive dashboard for the company, the key parts of which are captured in the charts below.

See our complete analysis for F5 Networks

December Quarter Highlights

F5 has been increasingly facing competition from new entrants in the application delivery controller (ADC) market as well as from native cloud-based service providers in the ADN market. The growth rate in F5’s combined product sales slowed down to low single digits in 2015 before showing a negative trend in 2016. This trend was evident in through fiscal 2017 ended September, as well as the December quarter. Product revenues fell by 5% y-o-y to $227 million this quarter, as shown below. The company is also facing some uncertainty in demand for its core ADC solutions over the cloud, as some of its customers are reevaluating their application architectures and deployment options. As the adoption rate remains relatively low, it can continue to put pricing pressure on hardware products.

F5’s services business reported 7% annual growth in revenues to $296 million. Moreover, the company’s Services gross margin (GAAP) improved by nearly 70 basis points over the prior year period to 85.1% for the December ended quarter. Over the years, F5’s Services revenues have become more meaningful due to the significant customer base additions.

Negative revenue growth was complemented by low margins for the Products segment, which offset the increase in Services gross margin. However, a limited increase in operating expenses led to 4% growth in GAAP operating income to $144 million. In addition, F5 repurchased roughly 3 million shares in the previous twelve months, due to which net income per share remained flat on a y-o-y basis despite a 5% decline in net income.

Guidance For March Quarter

F5’s management expects a modest 2% annual increase in revenues to $530 million in the March quarter. The company-wide gross margin (GAAP) will likely remain flat over previous year levels at around 83% for the second fiscal quarter 2018. F5 expects its GAAP diluted EPS for the March quarter to be around $1.68, which would be over 15% higher on a y-o-y basis.

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