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F5 (FFIV) Down 15.4% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for F5 Networks (FFIV). Shares have lost about 15.4% 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 its most recent earnings report in order to get a better handle on the important catalysts.

F5 Networks Reports Mixed Q2 Results

F5 Networks delivered second-quarter fiscal 2019 GAAP earnings per share (excluding amortization of intangible assets, stock-based compensation and other one-time items) of $2.57, surpassing the Zacks Consensus Estimate of $2.55. Furthermore, the bottom line improved 11.3% year over year.

F5 Networks revenues inched up 2.2% year over year to $544.9 million but missed the Zacks Consensus Estimate of $547 million. However, the top-line figure is within the company’s guided range of $543-$553 million.

Software growth, particularly in public cloud, and surging demand for security offerings were key drivers.

Quarterly Details

Products revenues (44% of total revenues) during the reported quarter totaled $237.9 million, up 0.1% from the year-ago quarter, driven by software.

Software rose 30% year over year and contributed 19% to product revenues. This upside can be attributed to demand for the company’s flagship software and offerings, both on-prem and in the public cloud.

Software growth continues to be driven by security use cases and account for a higher share of the company’s overall product business. Management mentioned that the company’s anti-bot and machine-generated traffic monitoring and blocking capabilities are gaining customer adoption. Emergence of the new security use cases including privileged user access, credential stuffing and zero trust is also benefiting the company.

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’ steady shift to multi-cloud deployments.

Systems revenues, representing 81% of product revenues, declined 5% on a year-over-year basis. Customers’ adherence to a cloud-first mentality is an overhang on hardware investment and use cases as this inclination is prolonging deal timings.

Nonetheless, systems growth opportunities in high-performance security use case and the emerging markets are an upside.

Services revenues (56%) increased 3.8% year over year to $307 million.

Geographically, on a year-over-year basis, revenues from the Americas, reflecting 56% of the total revenues grew 4%. Asia Pacific and Japan revenues inched up 1% and contributed to 19% of the total revenues.

EMEA was flat and accounted for 25% of the total revenues. Execution challenges in Europe as a result of the macro economic uncertainty in the region (particularly UK and Germany), have been a concern.

Going by the verticals, Enterprise, Service providers and Government (including 6% from the U.S. federal) contributed to 65%, 20% and 16% of the total revenues, respectively. The U.S. federal government shutdown adversely impacted the government business in the quarter under discussion.

The company’s distributor, Ingram Micro, translated to 20% of the company’s revenues. Arrow and Tech Data contributed 10% each to the total revenue base.

F5 Networks’ non-GAAP gross margin came in at 85% and its non-GAAP operating margin was 34.9% in the quarter under review.

Balance Sheet & Cash Flow

F5 Networks exited the reported quarter with cash, cash equivalents and short-term investments of approximately $1.31 billion compared with $1.13 billion in the prior quarter.

Long-term liabilities were $448 million compared with $365.6 million in the previous quarter.

The company reported cash flow $194 million from operations of in the quarter under consideration.

During the reported quarter, F5 Networks repurchased 616,000 shares worth $100 million.

 

Outlook

Management remains optimistic that demand for its solutions will be encouraged by a strengthening trend toward the multi-cloud environment. Rising traction of subscription and ELA offerings is a tailwind.

For third-quarter fiscal 2019, F5 Networks expects revenues in the range of $550-$560 million. The company anticipates non-GAAP earnings per share in the band of $2.54-$2.57.

The acquisition of Nginx, which is likely to close in the second calendar quarter, will not have any impact on the revenue stream.

Moreover, a strong momentum in new products, such as F5-as-a-Service, and the launch of high-grade ELA consumption model are expected to be key catalysts for software.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, F5 has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

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

Outlook

F5 has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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