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F5 Networks Inc. FFIV reported second-quarter fiscal 2020 non-GAAP earnings per share of $2.23, beating the Zacks Consensus Estimate of $1.99. Moreover, the company’s quarterly earnings came in significantly higher than its guidance of $2.14-$2.16 per share. Nonetheless, non-GAAP earnings fell 13.2% from the year-ago quarter as elevated operating expenses more than offset the benefit of higher revenues.
Revenues increased 7% year over year to $583.4 million, surpassing the Zacks Consensus Estimate of $566 million on solid software growth. Also, revenues came in at the mid-point of the company’s $580-$590 million guided range.
During the earnings conference call, the company stated that the coronavirus outbreak had a neutral impact on its business. F5 Networks witnessed minimal business disruptions during the first two-and-a half months outside of Asia.
Notably, during the last 15 days of the quarter, the firm witnessed increased purchases from some customers in a bid to strengthen their application infrastructure. However, some clients push-out their technological upgradation projects, which neutralize the aforementioned tailwinds.
F5 Networks, Inc. Price, Consensus and EPS Surprise
F5 Networks, Inc. price-consensus-eps-surprise-chart | F5 Networks, Inc. Quote
Product revenues (45% of total revenues) during the quarter totaled $262 million, up 10% year over year. Software sales soared 96% year over year and represented 35% of product revenues. This upside can be attributed to the growing adoption of the Enterprise License Agreement (ELA) and annual subscriptions among customers.
System revenues of $171 million, representing 65% of product revenues, declined 11% on a year-over-year basis due to continued transition of customers to software-based solutions.
Service revenues (55% of total revenues) increased 5% to $324 million. Improvements to the tools and processes that the company’s team uses to identify and secure renewals are among the key catalysts. Further, healthy services attached in renewal rates to software sold as perpetual or as subscriptions, including NGINX-related sales, are tailwinds. Moreover, increase in consulting-services demand associated with the rising software sales is an upside.
Region wise, revenues from the Americas grew 7%, year on year, reflecting 56% of the total count. APAC revenues were up 9%, representing 19% of the total top line. EMEA climbed 8%, accounting for 25% of total revenues.
Going by the verticals, Enterprise, Service providers and Government (including 7% from the U.S. Federal) displayed 69%, 15% and 16% of the total product bookings, respectively.
Non-GAAP gross margin of 85% remained flat year over year and came in at the lower end of the guided range of 85-85.5%.
Non-GAAP operating expenses flared up 19.8% year on year to $327 million and came in within the company’s prior estimate of $325–$337 million. However, as a result of higher operating expenses, the company’s non-GAAP operating margin shrunk 580 basis points to 29.1%.
Balance Sheet & Cash Flow
F5 Networks exited the reported quarter with cash and investments of approximately $1 billion compared with the prior quarter’s $1.5 billion.
During the first six months of fiscal 2020, the company generated $325.8 million of operating cash flow. Moreover, during the first half of fiscal 2020, it bought back $50 million worth of its common stocks.
Citing business uncertainties due to the pandemic, the company withdrew its fiscal 2020 outlook. However, it has issued a guidance for the fiscal third quarter.
For the fiscal third quarter, F5 Networks expects non-GAAP revenues in the range of $555-$585 million. The Zacks Consensus Estimate for revenues is pegged at $559.9 million.
The company anticipates non-GAAP earnings per share in the $1.91-$2.13 band. The Zacks Consensus Estimate is pinned at $1.88.
The company expects to incur operating expenses of $320-$332 million, including the Shape acquisition-related expenses.
Management remains optimistic that surging demand for multi-cloud application services will be a key driver. Furthermore, strong demand for software solutions is a tailwind. Rising traction from subscription and ELA offerings is another driving factor.
Additionally, F5 Networks and NGINX’s first combined solution, Controller 3.0, is expected to increase the total addressable market and deal sizes by spending more use cases across DevOps and Super-NetOps customer profiles.
Zacks Rank and Key Picks
Currently, F5 carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader technology sector include Zoom Video Communications, Inc. ZM, Avid Technology, Inc. AVID and InterDigital, Inc. IDCC, each flaunting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The long-term earnings growth rate for Zoom, Avid and InterDigital is currently pegged at 26.6%, 20%, and 15%, respectively.
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