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F5 (FFIV) Q2 Earnings Beat Estimates, Revenues Lag, Up Y/Y

Zacks Equity Research

F5 Networks Inc. FFIV 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 ARW 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.

F5 Networks, Inc. Price, Consensus and EPS Surprise

F5 Networks, Inc. Price, Consensus and EPS Surprise | F5 Networks, Inc. Quote

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.


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.

Zacks Rank & Stocks to Consider

F5 Networks currently carries a Zacks Rank #4 (Sell).

A couple of better-ranked stock in the broader Computer and Technology sector are Paycom Software PAYC and MeetMe MEET, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Paycom and MeetMe is forecast at 25% and 20%, respectively.

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