F5 Posts Weak 4Q, View Disappoints
F5 Networks Inc. (FFIV) delivered fourth quarter 2012 adjusted earnings per share (EPS) of 87 cents, which missed the Zacks Consensus Estimate of 94 cents but was 20.5% above the year-ago level. The miss could well be attributed to slowing Product revenue growth, higher expenses and tax rate.
However, shares slumped 10.6% in after hours reflecting low investor confidence. F5 Networks delivered a cautious outlook citing a tough spending environment, which did not meet the Street’s expectation.
Revenues
F5 Networks reported revenues of $362.6 million in the reported quarter, up 15.2% from $314.6 million in the year-ago period. Revenue was at the lower end of the company’s guidance of $360.0–$370.0 million and below the Zacks Consensus Estimate of $367.0 million. Higher Services revenue was partially offset by slowing Product revenue. Also, strong growth in Europe, the Middle East and Africa (:EMEA) and Asia-Pacific regions was somewhat muted by weak contribution from Americas.
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 6.2% in the Product segment. But this was partially offset by smaller deal sizes, particularly among large U.S. enterprise and telecommunications customers. Revenues from the Services segment climbed 30.4% 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 8.0% and represented 56.0% of revenues. EMEA grew 29.0%, accounting for 22.0% of revenues. Asia-Pacific and Japan grew a respective 31.0% and 13.0%, representing 15.0% and 7.0% of revenue.
By vertical, Financial was the strongest, accounting for 20.0% of the total revenue. Telco accounted for 19.0% of revenues, followed by Technology, which represented about 17%. Government accounted for 17% (including 10% from U.S. federal).
Operating Results
Gross profit in the reported quarter surged 15.9% from the year-ago quarter to $299.9 million. Gross margin escalated 50 basis points year over year to 82.7%.
F5 Networks’ operating expenses increased 18.0% year over year, mainly due to a 30.6% rise in research and development expenses and 15.2% rise in sales and marketing expenses. Expenses hiked due to continuous hiring. Operating income came in at $111.8 million, up 12.6% from $99.3 million reported in the year-ago quarter. Operating margin in the quarter was 30.8%, down from 31.6% in the year-ago quarter.
Reported net income was $67.7 million or 85 cents per share compared with $67.6 million or 84 cents a year ago. The company’s earnings missed its own guided range of 90–93 cents.
Excluding the effect of stock-based compensation, amortization of intangibles and acquisition-related expenses, non-GAAP EPS was $1.12 versus $1.06 in the prior-year quarter. But including stock-based compensation and related tax adjustments, EPS was 87 cents, compared with 84 cents in the year-ago quarter.
Balance Sheet & Cash Flow
Cash, cash equivalents and short-term investments totaled approximately $532.2 million in the fourth quarter, up from $519.7 million in the prior quarter. Receivables declined $8.5 million sequentially to $185.2 million. Inventories remained sequentially unchanged at $17.4 million.
Total deferred revenue was $447.3 million, compared with $433.9 million in the previous quarter. F5 Networks’ balance sheet does not comprise any long-term debt. Cash flow from operations was $148.6 million, up from $113.4 million in the prior quarter. Capital expenditure was $11.3 million versus $5.7 million in the prior quarter. F5 Networks repurchased 514,000 million outstanding shares for $50.0 million during the quarter.
Guidance
Management stated that F5 will be introducing a range of products, which will drive solid revenue growth, going forward. But, at the same time, management expressed its concern about the macro uncertainties that could affect the near-term fundamentals. Management also remained concerned about an expected budget cut from the telecom customers.
For the first quarter of fiscal 2013, F5 Networks expects revenues of $363.0 million to $370.0 million representing flat sequential comparison. On a GAAP basis, earnings per share are expected in the range of 86–88 cents. Excluding stock-based compensation expense, amortization of purchased intangible assets and related tax effects, the company estimates non-GAAP earnings per share between $1.14 and $1.16. The Zacks Consensus Estimates for the first quarter and fiscal 2013 are pegged at 87 cents and $4.22, respectively.
Our Take
F5 Networks delivered unimpressive fourth quarter results, missing the Zacks Consensus Estimates both on the bottom and top lines. The company provided bleak first quarter guidance citing macro uncertainties. We have been noticing that over the past few quarters, despite consistent product launches, revenue generation is gradually slowing down. This could prove hazardous to the company’s fundamentals if the new product lineups in 2013 fail to ramp up demand.
Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller (ADC) market and helped it to grab market share from Cisco Systems Inc. (CSCO) and Juniper Networks Inc. (JNPR). F5 Networks is also keen on expanding its cloud exposure.
However, we remain concerned on F5 due to a tight spending environment and stiff competitive atmosphere.
Currently, F5 Networks has a Zacks #4 Rank, implying a short-term “Sell” rating.
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