F5 Networks Misses on Q1 Earnings

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F5 Networks Inc. (FFIV) reported first-quarter fiscal 2014 adjusted earnings per share (excluding amortization and other one-time items but including stock-based compensation) on a proportionate tax basis of 89 cents, which not only missed the Zacks Consensus Estimate of 91 cents but also lagged management’s guidance of $1.17 to $1.20 per share. On a year-over-year basis, earnings improved a marginal 0.8%.

Revenues

F5 Networks reported revenues of $406.4 million, which not only increased 11.2% from the year-ago quarter but also came ahead of the Zacks Consensus Estimate of $396 million. Improvement in revenues was due to broad-based strength across end markets and geographical regions.

Moreover, revenues were impacted positively by a 16.9% hike in services revenues on a year-over-year basis and a modest increase (up 4.2% year over year) in Product revenues.

Geographically, on a year-over-year basis, revenues from the Americas increased 6.0% and represented 56.0% of total revenue. Europe, the Middle East and Africa (:EMEA) grew 17.0% and accounted for 24.0% of total revenue. The Asia-Pacific increased 19.0%, representing 15.0% of total revenue while Japan grew 17.0% and represented 5% of revenues.

By vertical, Enterprise was the strongest, accounting for 61.0% of total revenue. Service providers represented 24.0% of revenues while Government accounted for 14.0% of total revenue (including 7.0% from the U.S. federal).

The company also reported that 17.9% of total revenue came from distributor Ingram Micro (IM), 14.3% from Avnet (AVT) and 13.5% from Westcon.

Operating Results

The company’s adjusted gross margin (excluding amortization and other one-time items but including stock-based compensation) decreased 111 basis points (bps) on a year-over-year basis to 82.5% primarily due to higher cost of services.

F5 Networks’ adjusted operating margin (excluding amortization and other one-time items but including stock-based compensation) declined 277 bps from the year-ago quarter to 27.4% primarily due to higher operating expenses (especially R&D) as a percentage of revenues. Operating expenses, as a percentage of revenues, increased 166 bps on a year-over-year basis.

The company’s adjusted net income (excluding amortization and other one-time items but including stock-based compensation) came in at $69.6 million or 89 cents, which improved from $70.3 million or 88 cents reported in the year-ago quarter. On a GAAP basis net income came in at $68.0 million or 87 cents as compared to $69.5 million or 88 cents reported in the year-ago quarter.

Balance Sheet & Cash Flow

F5 Networks exited the first quarter with cash, cash equivalents and short-term investments of approximately $578.2 million, up from $542.1 million in the prior quarter. Receivables were $220.8 million versus $204.2 million in the prior quarter.

F5 Networks’ balance sheet does not comprise any long-term debt. The company reported cash flow from operations of $158.9 million for the year ended Dec 31, 2013. F5 Networks repurchased 2.4 million shares for $82.35 million during the quarter.

Guidance

For the second quarter of fiscal 2014, F5 Networks expects revenues in the range of $408.0 million to $418.0 million. Non-GAAP gross margin is expected to be roughly 83.5%. The company expects non-GAAP earnings for the second quarter of fiscal 2014 to be in the range of $1.23 to $1.26, well above the Zacks Consensus Estimate of 94 cents. Non-GAAP effective tax rate is expected to be 35.0%.

Amid macro concerns and tight federal budget, management remains positive on the company’s upcoming product launches and growing demand for its security solutions.

F5 also mentioned that it will continue investing in technology and headcount to keep pace with changing market trends.

Our Take

F5 Networks reported mixed first-quarter results and provided an encouraging second-quarter guidance. The company’s top line increased year over year and beat the Zacks Consensus Estimate whereas the bottom line fell short of the consensus. Revenue growth seems to be steady but the modest growth in Product revenues will remain an overhang. However, the company is positive about its product launches and growing demand for its products, particularly the security products.

Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller market. The company is also keen on expanding its cloud exposure. Nevertheless, the volatile spending atmosphere and competition from Juniper Networks Inc. (JNPR) and Brocade remain concerns.

Currently, F5 Networks has a Zacks Rank #2 (Buy).

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