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F5 (FFIV) Up 8.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for F5 Networks (FFIV). Shares have added about 8.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is F5 due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

F5 Networks Reports Q1 Results

F5 Networks delivered first-quarter fiscal 2019 GAAP earnings per share (excluding amortization of intangible assets, stock-based compensation and other one-time items) of $2.70, surpassing the Zacks Consensus Estimate of $2.54. Furthermore, earnings increased 19.5% year over year.

F5 Networks’ revenues grew 4% year over year to $544 million but missed the Zacks Consensus Estimate of $547 million. However, the figure is within the company’s guided range of $542-$552 million. Software growth, particularly in public cloud, and surging demand for security offerings were key growth drivers.

Quarterly Details

Products revenues (43% of total revenues) during the reported quarter totaled $233.9 million, up 3% from the year-ago quarter, driven by software.

Software rose 21% year over year and contributed 19% to product revenues. This upside can be attributed to deployments in public (fastest growing part) cloud. Growing demand for security solutions, particularly Advanced Web Application Firewalls, is also a tailwind.

Moreover, acceleration in Enterprise License Agreement (ELA) and Virtual Edition (VE) subscription software deals is a positive. ELA pipeline consistently grows on the back customers’ continuous shift to multi-cloud deployments.

Systems revenues, representing 81% of product revenues, slipped less than 1% on a year-over-year basis.

Services revenues (57%) increased 4.7% year over year to $309.9 million.

Geographically, on a year-over-year basis, revenues from the Americas, which reflected 54% of total revenues, remained flat. EMEA rose 7% and accounted for 27% of total revenues. Asia Pacific and Japan revenues grew 11% and represented 19% of total revenues.

By verticals, Enterprise, Service providers and Government (including 10% from the U.S. federal) contributed to 65%, 14% and 21% of total revenues, respectively.

The company’s distributor, Ingram Micro translated into 17% of revenues. Arrow and Westcon contributed 11% each to total revenues.

F5 Networks’ non-GAAP gross margin came in at 85.2%, aided by improving product margins on the back of an increasing mix of software sales and a steady uptrend in services margins.

The company’s non-GAAP operating margin was 37% in the quarter under review, boosted by gross margin strength and operating expense efficiency.

Balance Sheet & Cash Flow

F5 Networks exited the reported quarter with cash, cash equivalents and short-term investments of approximately $1.13 billion compared with $1.04 billion in the prior quarter.

Long-term liabilities were $435 million compared with $365.6 million in the previous quarter.

The company reported cash flow from operations of $197.9 million in the quarter under consideration.

During the reported quarter, F5 Networks repurchased 569,000 shares worth a total of $101 million.

Outlook

Management remains optimistic that demand for its solutions will be encouraged by a strengthening trend toward multi-cloud environment.

Robust sales to enterprise customers are expected to remain a tailwind. Higher application traffic with 5G architectures is also likely to be a key driver. However, softness within service providers vertical as some of its larger customers are planning their next-generation application architectures, remains a concern.

Although the company has not considered the impact of the U.S. federal government shutdown within its initiated guidance, the same if persists throughout the quarter, might then impact results, notes management.

For second-quarter fiscal 2019, F5 Networks expects revenues in the range of $543-$553 million. The company anticipates non-GAAP earnings per share in the band of $2.53-$2.56.

The company projects software growth in the 30-35% range during the 2019-2020 period. Continued traction in Cloud Edition is projected to be a meaningful contributor to software growth. In 2019, management envisions meaningful contributions from the new modes of consumption, particularly, ELA and the subscription models, which are also gaining wide acceptance from customers.

Moreover, a strong momentum in new products, such as F5-as-a-Service and Cloud-Native App Services, which are scheduled to be launched during the first half of 2019, are expected to be key growth drivers for software, mainly in 2020.

In the fiscal second and third quarters, operating margin is predicted to be slightly down and might finally end the fourth quarter in upper 30s.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, F5 has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, F5 has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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