What Lies Ahead For F5 Networks After Modest Q3 Results?

by Trefis Team
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F5 Networks (NYSE:FFIV) announced its fiscal Q3’18 earnings on July 25, reporting a modest 5% increase in net revenues to $542 million. Product revenue was up 1% y-o-y to under $239 million while services revenue rose 7% to $303 million. The company has reported a similar trend through the first three quarters of the current fiscal year. F5’s product revenues have stagnated as the company is facing some uncertainty in demand for its core ADC solutions over the cloud since some of its customers are reevaluating their application architectures and deployment options. Comparatively, the services business has sustained revenue growth and has continued to outpace growth in its core ADN product sales in recent quarters. Going forward we expect this trend to continue through the end of the current year.

Outlook For FY’18 And Beyond

In the first half of the current fiscal year, F5 Networks reported a slight decline in revenues. While the third quarter was better with a modest (1%) revenue growth in product sales, the larger trend remains the same. The combined ADN market has grown at double digits in 2016 and 2017, up from mid single-digit growth in previous years. In the same period, F5’s market share has declined consistently due to the increasing presence of competing players in the market the market including Citrix Systems, Array Networks, Aryaka Networks. In addition, other large networking players such as Cisco (NASDAQ:CSCO), HP Enterprise (NYSE:HPE) and Juniper (NYSE:JNPR) also have a presence in this market. As a result, we forecast product sales for F5 Networks to remain subdued through the end of the current year and in the next couple of years.

On the other hand, customer preferences have transitioned from purchasing standalone hardware and “on-premise” deployment of solutions to cloud-based and software-as-a-services (SaaS) offerings. This has given a strong boost to F5’s services segment. As a result, F5’s services segment has continued to grow at a rapid pace (in mid teens consistently from F%’13 through FY’16) in recent years. Although growth slowed down to around 7% in FY’17, it was still the only key area of growth for the company. This trend has continued in FY’18 thus far, with a 7% growth in revenues to $895 million for the first three quarters of the year. We expect the company to sustain the high single digit revenue growth from services through the end of the decade. 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 current year. We have summarized our expectations and forecasts for FY’18 results on our interactive results forecast dashboard for F5 Networks. If you think differently, you can change expected segment revenue and margin figures for F5 Networks to gauge how it will impact the company’s results for fiscal year 2018.

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