F5 Networks Earnings Preview: Improved Margins To Offset Slowdown In Product Sales

F5 Networks (NYSE:FFIV) is scheduled to report its fiscal Q2’18 earnings on April 25. In recent years, the application delivery networking (ADN) provider has reported steady growth in revenues driven by robust demand for its offerings, with the company’s services segment outpacing growth in its core ADN product sales. In the most recent quarter, F5’s product revenues fell by 5% y-o-y to $227 million. Moreover, 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. On the other hand, services business reported 7% annual growth in revenues to $296 million. Over the years, F5’s Services revenues have become more meaningful due to the significant customer base additions. We expect product revenues to be flat over the comparable prior year period while services revenues are expected to increase in the mid single-digits.

Similarly, the company’s services gross margin has consistently improved in recent years, while product gross margins have compressed. This trend is also expected to continue through the March quarter. We have summarized our expectations and forecasts for Q2’18 results on our interactive dashboard for F5 Networks. 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 to better monetize its services offerings. If you think differently, you can change expected segment revenue and margin figures for F5 Networks to gauge how it will impact expected EPS for the March quarter.

See our complete analysis for F5 Networks

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