F5 Networks (FFIV) Q3 Earnings & Revenues Miss Estimates

F5 Networks Inc. FFIV reported third-quarter fiscal 2017 adjusted earnings per share (excluding amortization of intangible assets and other one-time items but including stock-based compensation) on a proportionate tax basis of $1.55, missing the Zacks Consensus Estimate of $1.59 per share. However, earnings improved from $1.41 per share reported in the year-ago quarter.

On a non-GAAP basis, the company reported earnings of $2.03 per share compared with $1.81 per share reported in the year-ago quarter.

In the last one year, the company’s stock gained roughly 4.2%, underperforming the industry‘s gain of 14.9%.

Revenues

Although F5 Networks’ revenues grew 4.3% year over year to $517.8 million, it lagged the management guided range of $520–$530 million. Reported revenues also missed the Zacks Consensus Estimate of $525 million.

Revenues were boosted by 6.6% increase in service revenues and 1.6% increase in Product revenues on a year-over-year basis.

Notably, F5 Networks’ “Good, Better, Best” (GBB) pricing strategies and higher competencies of BIG-IQ platform also helped in streamlining product portfolio and driving year-over-year revenue growth.

Geographically, on a year-over-year basis, revenues from the Americas were up 6% and contributed 57% to total revenue. EMEA increased 4% and accounted for 23% of total revenue. Asia-Pacific was up 3% on a year-over-year basis, representing 15% of total revenue while Japan revenues decreased 8% and represented 4% of total revenue.

By verticals, Enterprise, Service providers and Government (including 6% from the U.S. federal) accounted for 65%, 20% and 14% of total revenue, respectively.

The company’s distributors Ingram Micro, Tech Data TECD and Westcon accounted for 16.8%, 12.2% and 19.1%, of total revenue, respectively.

Operating Results

F5 Networks’ non-GAAP gross profit (excluding amortization of intangible assets, other one-time items and stock-based compensation) was up 3.8% on a year-over-year basis and came in at $435.5 million. Non-GAAP gross margin decreased slightly during the quarter and came in at 84.1%, primarily due to higher cost of sales.

The company’s non-GAAP operating margin (excluding amortization of intangible assets, other one-time items and stock-based compensation) decreased 55 basis points (bps) from the year-ago quarter to 35.8%, primarily due to higher non-GAAP operating expenses as a percentage of revenues. Operating expenses, as a percentage of revenues, increased 17 bps on a year-over-year basis.

The company’s non-GAAP net income (excluding amortization of intangible assets, other one-time items and stock-based compensation) came in at approximately $130.8 million compared with $121.7 million reported in the year-ago quarter. On a GAAP basis, net income came in at $97.7 million compared with $91.8 million reported in the year-ago period.

Balance Sheet & Cash Flow

F5 Networks exited the quarter with cash, cash equivalents and short-term investments of approximately $1.014 billion. Receivables were $295.1 million at the end of the quarter.

The company’s balance sheet does not have any long-term debt. It reported cash flow from operations of $163 million during the quarter. During the quarter, F5 Networks repurchased approximately 1.2 million shares for $150 million.

Guidance

For fourth-quarter fiscal 2017, F5 Networks expects revenues in the range of $530–$540 million. The Zacks Consensus Estimate is pegged at $550 million. Non-GAAP gross margin is anticipated to be roughly 84.5%. The company expects non-GAAP earnings for fourth-quarter fiscal 2017 in the range of $2.20–$2.23 per share. The Zacks Consensus Estimate is pegged at $1.76 per share. Non-GAAP effective tax rate is expected to be 31%.

Our Take

F5 Networks reported dismal third-quarter fiscal 2017 results, as both the bottom line and top line missed the Zacks Consensus Estimate. However, year-over-year comparisons on both counts were favorable. Nonetheless, the company provided tepid fourth-quarter revenue guidance.

It is worth mentioning that the company’s GBB pricing strategy and its BIG-IQ platform remain tailwinds. Revenue growth seems to be steady and was positively impacted by strength across all business segments along with higher software revenues.

We believe that the company’s product refreshes will boost revenues, going forward. Moreover, these initiatives are expected to expand its total addressable market and result in client wins.

Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller market. Nevertheless, a volatile spending atmosphere and competition from Juniper Networks Inc. JNPR remain concerns.

Currently, F5 Networks carries a Zacks Rank #3 (Hold).

A better-ranked stock in the broader technology sector worth considering is Applied Optoelectronics, Inc. AAOI, sporting a a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Optoelectronics has a long-term EPS growth rate of 18.75%.

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