F5 Beats as Rev Grows

Zacks

F5 Networks Inc. (FFIV) delivered second quarter 2012 adjusted earnings per share (EPS) of 88 cents, beating the Zacks Consensus Estimate of 86 cents. Shares surged 6.27% in after hours.

The outperformance was attributable to solid revenues arising from the growing demand for the company’s products, as well as market share gains. The company also witnessed strong demand from its enterprise customers.

Revenues

F5 Networks reported revenues of $339.6 million in the reported quarter, up 22.4% from $277.6 million in the year-ago period. The book-to-bill ratio was greater than one.

Revenue during the quarter surpassed the company’s guidance of $332.0–$337.0 million and Zacks Consensus Estimate of $335.0 million. Revenue growth was driven by strong product demand across all geographic regions and strength in Service Provider biz.

Continuous enhancement of product suites and strong demand for its VIPRION, BIG-IP suites during the quarter led to a year-over-year growth of 18.1% in the Product segment. Revenues from the Services segment climbed 29.5% year over year, fueled by growth in new and renewed service maintenance contracts booked during the quarter.

Geographically, on a year-over-year basis, Americas grew 21.0% year over year and represented 58.0% of revenues. EMEA grew 19.0% year over year, accounting for 21% of revenues. Asia-Pacific and Japan grew a respective 24.0% and 47.0%, representing 14.0% and 7.0% of revenue.

By vertical, telco was the strongest, accounting for 27% of the total revenue. Technology came second with 19% of revenues followed by Financial, which represented 16%, while Government accounted for 12% (including 6% from U.S. federal).

Operating Results

Gross profit in the reported quarter surged 24.3% from the year-ago quarter to $282.0 million. Gross margin escalated 130 basis points year over year to 83.0%. The increase was supported by a stable pricing environment for the company’s products and an improved product mix.

F5 Networks’ operating expenses increased 23.4% year over year, mainly due to a 26.3% rise in research and development expenses and 24.2% rise in sales and marketing expenses. Higher sales and marketing expenses rose due to employee addition from the recently acquired Traffix Systems. Despite the substantial rise in expenses, operating income came in at $104.7 million, up 25.8% from $83.2 million reported in the year-ago quarter. Operating margin in the quarter was 30.8%, up from 30.0% in the year-ago quarter. The margin improvement could be attributed to higher revenues.

Reported net income was $68.6 million or 86 cents per share compared with $55.6 million or 68 cents a year ago. The company’s earnings matched its own guided range of 84–86 cents.

Excluding the effect of stock-based compensation, amortization of intangibles and acquisition-related expenses, non-GAAP EPS was $1.09 versus 88 cents in the prior year quarter. But including the stock-based compensation and related tax adjustments, EPS was 88 cents, compared to 68 cents in the year ago quarter.

Balance Sheet, Cash Flow & Share Repurchase

Cash, cash equivalents and short-term investments totaled approximately $489.6 million in the second quarter, down from $556.5 million in the prior quarter. Cash consideration for acquiring Traffix Systems in February and the share buyback program aided in cash balance diminution. Receivables grew $3.9 million sequentially to $184.0 million. Inventories reduced to $17.0 million from $17.5 million in the prior quarter.

Total deferred revenue was $412.8 million, compared to $380.0 million in the previous quarter. F5 Networks’ balance sheet does not comprise any long-term debt. Cash flow from operations was $101.6 million, down from $131.9 million in the prior quarter. Capital expenditure was $6.9 million versus $5.9 million in the prior quarter. F5 Networks repurchased 404,106 outstanding shares for $84.8 million during the quarter.

Guidance

For the third quarter of fiscal 2012, F5 Networks expects revenues of $350.0 million to $355.0 million representing a sequential growth excluding any material contribution from the Traffix acquisition. On a GAAP basis, earnings per share are expected in the range of 88–90 cents. The Zacks Consensus Estimate for the third quarter is pegged at 84 cents. Excluding stock-based compensation expense, amortization of purchased intangible assets and related tax effects, the company estimates non-GAAP earnings per share between $1.12 and $1.14. The Zacks Consensus Estimate for the third quarter is pegged at 93 cents.

The company reaffirms year-over-year total revenue growth of at least 20% for fiscal 2012. The expectations are based on a strong product pipeline and competitive wins in all major markets.

Our Take

F5 Networks delivered impressive second quarter results, beating the Zacks Consensus Estimate on the top and bottom lines. Better execution and focus on enterprise and service providers has placed F5 Networks well in the application delivery controller (ADC) market and helped it grab share from Cisco Systems Inc. (CSCO). F5 Networks is also keen on expanding its cloud exposure.

With the rollout of TMOS ver.11, F5 Networks is witnessing strong demand for its VIPRION products. On the other hand, the company remains optimistic regarding a rebound in its Financial and Enterprise verticals. This could help the company in trouncing its own estimates, in our belief.

However, stiff competition in the networking market, concerns relating to margin sustainability, and the Europe-U.S. federal spending could put a lid over the company’s fundamentals.

Currently, F5 Networks has a Zacks #2 Rank, implying a short-term Buy rating.

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