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F5 (FFIV) Down 0.8% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for F5 Networks (FFIV). Shares have lost about 0.8% in that time frame, underperforming the S&P 500.

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

F5 Q1 Earnings and Revenues Beat Estimates

F5 reported better-than-expected first-quarter fiscal 2024 results. This Seattle, WA-based company’s non-GAAP earnings of $3.43 per share beat the Zacks Consensus Estimate of $3.03 and increased 39% from the year-ago quarter’s $2.47 per share.

The bottom line was also way higher than management’s guided range of $2.97-$3.09 per share. The robust bottom-line performance reflects the combined impact of gross margin improvement and disciplined operating expense management.

F5’s revenues of $693 million for the first quarter surpassed the consensus mark of $687.1 million and came toward the high end of management’s guidance range of $675-$695 million. However, on a year-over-year basis, revenues decreased 1%, primarily due to continued weakness in Systems sales.

Top Line in Detail

Product revenues (44% of total revenues), which comprise the Software and Systems sub-divisions, decreased 10% year over year to $306 million. The decline in Product revenues was mainly due to lower Systems sales, partially offset by increased Software sales. The company’s reported non-GAAP Product revenues were slightly higher than our estimates of $319.4 million.

Systems revenues plunged 22% year over year to $135 million, accounting for approximately 44% of the total Product revenues. The company revealed that the decline reflects a lower level of backlog-related shipments compared to prior quarters, while the demand shows some signs of stabilization. Our estimates for Systems revenues were pegged at $149.3 million.

The negative impacts of lower Systems sales were partially offset by the improved performance of Software. Software revenues increased 2% year over year to $170 million in the first quarter. Our estimates for Software’s first-quarter revenues were pegged at $170.1 million.

Global Service revenues (56% of the total revenues) grew 7% to $387 million. The robust growth was mainly driven by price increases introduced in fiscal 2022 and the benefits of high-maintenance renewals. Our estimates for Global Services revenues were pegged at $366.1 million.

F5 registered sales growth across the EMEA and APAC regions, witnessing a year-over-year increase of 5% and 8%, respectively. However, revenues from the Americas region fell 6% on a year-over-year basis. Revenue contributions from the Americas, EMEA and APAC regions were 54%, 28% and 18%, respectively.

Customer-wise, Enterprises, Service providers and Government represented 64%, 17% and 19% of product bookings, respectively.

Margins

On a year-over-year basis, GAAP and non-GAAP gross margins expanded 240 basis points (bps) and 270 bps to 80.3% and 83.1%, respectively. We believe that the improvement could be primarily driven by price realization and ease in supply-chain constraints, as well as reductions in ancillary supply-chain costs.

The company’s first-quarter GAAP operating expenses went down 13.8% to $391.7 million, while non-GAAP operating expenses declined 12.7% to $330 million. GAAP operating expenses as a percentage of revenues decreased to 56.5% in the first quarter of fiscal 2024 from 64.8% in the year-ago quarter.

Meanwhile, non-GAAP operating expenses as a percentage of revenues declined to 47.6% from 54% in the year-ago quarter.

F5’s GAAP operating profit jumped 81.3% to $165 million, while the margin expanded 1080 bps to 23.8%. Moreover, the non-GAAP operating profit jumped 33% year over year to $246 million, while the margin improved 900 bps to 35.5%. An increase in the non-GAAP operating margin was primarily driven by an improvement in the gross margin and lower operating expenses as a percentage of revenues.

Balance Sheet & Cash Flow

F5 exited the December-ended quarter with cash and short-term investments of $826 million compared with the previous quarter’s $808 million. The company generated operating cash flow of $165.3 million in the first quarter.

During the quarter, FFIV repurchased shares worth $150 million. As of Jan 29, 2024, F5 had $772 million remaining under its current authorized share repurchase program. The company is committed to using at least 50% of free cash flow for share repurchases.

Guidance

F5 projects non-GAAP revenues in the $675-$695 million band (midpoint of $685 million) and non-GAAP earnings per share in the $2.79-$2.91 band (midpoint of $2.85) for the second quarter of fiscal 2024. The non-GAAP gross margin is forecasted between 82% and 83%.

The company expects second-quarter non-GAAP operating expenses between $347 million and $359 million. Share-based compensation expenses are anticipated in the range of $56-$58 million.

For fiscal 2024, F5 reaffirms revenue growth forecast of flat to a low-single-digit-percentage decline. Non-GAAP gross and operating margins are still anticipated in the ranges of 82-83% and 33-34%, respectively.

However, the company raised the non-GAAP EPS growth guidance range to 6-8% from 5-7% projected earlier on the updated annual tax rate outlook. F5 now projects the effective tax rate for fiscal 2024 to be 21-22% instead of the 21-23% projected previously.

Moreover, FFIV still intends to return at least 50% of its fiscal 2024 free cash flow to shareholders through share buybacks.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, F5 has a great Growth Score of A, though it is lagging a lot 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 B. 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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