F5 Networks To Report Strong Fiscal Q3 Results On The Back Of Cloud Business

F5 Networks (NYSE:FFIV) is scheduled to report its fiscal Q3 results on July 24. In Q2, the company beat consensus expectations on EPS, despite falling short on revenue expectations. Going into Q3, we will be keen to understand if the strength in enterprise license agreement (ELA) adoption seen in Q2 can continue in the current macro environment. Also, we will be listening in on commentary around traction in the cloud software business.

Trefis estimates F5 Networks’ valuation to be $170 per share, which is roughly 15% ahead of the current market price. We capture trends in F5 Networks’ Earnings over recent quarters in an interactive dashboard along with our forecast for full-year 2019. You can modify any of the key drivers to visualize the impact of changes on the company’s share price estimate. Additionally, you can see more Trefis technology company data here.

A Quick Look At F5 Networks’ Revenues

F5 Networks makes money through the sale of networking and security offerings. The company’s revenue ($2.16 billion in 2018) is reported in two segments:

• Product ($0.96 billion in 2018 revenue, 44% to total revenues): Segment revenues are derived from the sale of networking and security offerings.
• Services ($1.2 billion in 2018 revenue, 56% to total revenues): Segment revenues are derived from the sale of associated professional services, including maintenance contracts.

Operating Trends

• Product revenue increased marginally from $0.94 billion in F2016 to $0.96 billion in F2018. We expect F2019 revenues to inch ahead to $0.97 billion (1% y-o-y).
• Services revenues reached $1.2 billion in F2018 from $1.05 billion in F2016. The change of $0.15 billion between F2016-F2018 implied an annualized rate of 6.9%. Q2 2019 revenue came in at $0.31 billion (3.8% y-o-y). We expect F2019 revenue to reach $1.3 billion (8% y-o-y).
• Total revenues have increased to $2.16 billion in F2018 from $2 billion in F2016 primarily due to growth in Services revenues. The change of $0.17 billion between F2016-F2018 implied an annualized rate of 4.1%. We expect revenues to reach $2.27 billion (5% y-o-y) for the year.
• Total operating expenses have increased almost in step with total revenues from $1.1 billion in 2016 to $1.2 billion in 2018. This has resulted in F5 Networks’ operating income largely remaining constant around $600 million over recent years
• A reduction in tax rates helped net income reach $467 million in F2018 from $366 million in F2016. We expect 2019 earnings to reach $492 million – representing a net income margin figure of 21.7%

Per Trefis estimates, the EPS for the full-year 2019 is likely to be $8.22. Taken together with a P/E of 21x, this works out to a fair value of $170 for F5 Networks’ stock (shows cash and valuation analysis), which is roughly 15% ahead of the current market price