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Earnings Preview: F5 Networks

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F5 Networks Inc. (NasdaqGS:FFIV - News) is scheduled to announce its first quarter fiscal 2012 results on January 18, 2012, and we notice no material movement in analyst estimates.

Fourth Quarter Overview

F5 Networks delivered impressive fourth quarter results, beating the Zacks Consensus Estimate by 7 cents on the bottom line. The quarter’s earnings came in at 84 cents, up 42.4% from the year-ago quarter. The outperformance was attributable to solid revenues aided by growing demand for the company’s products, as well as market share gains.

The company reported revenues of $314.6 million, up 23.7% from the year-ago period, driven by increases in both product and service revenues. Strength in the Americas and Asia-Pacific-Japan regions was notable.

A stable pricing environment and better product mix aided the 60-basis point (bps) gross margin expansion from the year-ago quarter. Operating margin surged 160 bps from the year-ago period.


Management believes that large projects, data center consolidation and virtualization will continue to drive business. Management also stated that superior product offerings and operational efficiency will support F5’s sequential growth through the remainder of fiscal year 2012.

Management expects to see healthy growth from its core ADC market solutions, as well as incremental opportunities on continued expansion in the service provider and security markets. However, the company is somewhat cautious about the impact of ongoing financial uncertainty in Europe on its EMEA business. Management expects strength in its North American and the U.S. Federal businesses.

F5 Networks expects first quarter revenue of $315.0 million to $320.0 million. On a GAAP basis, earnings per share are expected in the range of 79–81 cents. The Zacks Consensus Estimate for the first quarter is pegged at 81 cents, at the high end of the guided range. Excluding stock-based compensation expense, the company estimates non-GAAP earnings per share of between 99 cents and $1.01.

Agreement of Analysts

The analysts are positive about F5’s dominant position in the Application Delivery market. Moreover, the upcoming infrastructure virtualization and data center consolidation projects are increasing the need for data center efficiencies in the enterprise vertical.

This is boosting the demand for F5’s networking products. Hence, the analysts are expecting strong revenue growth in the first quarter, and consequently, healthy earnings per share.

The analysts are optimistic about F5’s sales expansion strategy that should benefit from new products and the TMOS 11 (flagship product) refresh. But the current macro outlook and lackluster spending patterns are forcing a cautious view on the stock. Moreover, the analysts expect F5’s operating margin story to see less leverage ahead given slowing revenue growth and a continued increase in hiring.

Out of the 19 analysts providing estimates for both the first quarter and fiscal 2012, only one revised the estimate in the last 30 days for fiscal 2012. Also, among the 13 analysts providing estimates for fiscal 2013, only one reduced the estimate in the past 30 days.

The lack of estimate revisions for fiscal 2012 and 2013 is likely on account of the ongoing uncertainty in the spending environment and weak guidance.

Magnitude of Estimate Revisions

There was practically no movement in the Zacks Consensus Estimates for the first quarter and fiscal 2012 in the past 30 days. The Zacks Consensus Estimate for the first quarter and fiscal 2012 remained unchanged at 81 cents and $3.57, respectively.

But the fiscal 2012 figure witnessed a significant increase of 9 cents in the past 90 days. Again, for the past 90 days, Zacks Consensus Estimates for fiscal 2013 surged from $4.09 to $4.30.


Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller (NYSE:ADC - News) market and helped it capture share from Cisco Systems Inc. (NasdaqGS:CSCO - News). F5 Networks is also keen on expanding its cloud exposure.

However, we can see that the positives are not evident from the company’s guidance and we think that this could be due to the stiff competition in the networking market, concerns relating to margin sustainability, Europe-U.S. federal spending and a tightening of budgets in financial services.

Currently, F5 Networks has a Zacks #4 Rank, implying a short-term Sell recommendation.

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