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F5 Networks (FFIV) Q4 Earnings Surpass Estimates, Up Y/Y

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F5 Networks (FFIV) Q4 Earnings Surpass Estimates, Up Y/Y

F5 Networks (FFIV) fourth-quarter fiscal 2018 results benefit from increasing demand for cloud and security offerings.

F5 Networks Inc. FFIV reported third-quarter fiscal 2018 GAAP earnings per share (excluding amortization of intangible assets, stock-based compensation and other one-time items) of $2.90, surpassing the Zacks Consensus Estimate of $2.63. Furthermore, earnings increased 18.9% year over year.

Management noted that revenue strength, expense discipline and lower-than-expected effective tax rates boosted earnings.

F5 Networks’ revenues grew 4.6% year over year to $562.7 million and came ahead of the Zacks Consensus Estimate of $560.7 million.  Software growth, particularly in public cloud, and increasing demand for security offerings were the key growth drivers.

Shares of F5 Networks have returned 23.1% year to date, significantly outperforming the industry’s 5% rally.

Quarter Details

Products revenues (46% of total revenues) during the quarter came in at $256 million, up 3% from the year-ago quarter, led by software.

Software grew 19% year over year and contributed 17% to product revenues. The upside can be attributed to deployments in public (fastest growing part) and private cloud driven by the surge in demand for security in the multi-cloud environment. Partnership with major public cloud providers like Amazon Web Services and Microsoft MSFT Azure is a tailwind.

F5 benefited from acceleration in Enterprise License Agreement (ELA) and Virtual Edition (VE) subscription software deals.

Systems revenues, which represent 83% of product revenues, grew 18 basis points (bps) on a year-over-year basis.

Services revenues (54%) increased 6% year over year to $306 million. Deferred revenues of $1 billion increased 5.3% year over year, driven by continued high-maintenance renewal rates.

Geographically, on a year-over-year basis, revenues from the Americas were up 1% and contributed 54% to total revenues. Softness in Tier 1 service providers in North America is a headwind.

EMEA increased 8% and accounted for 25% of total revenues. Asia Pacific was up 11% on a year-over-year basis, representing 15% of total revenues. Japan revenues grew 15% and represented 5% of total revenues.

By verticals, Enterprise, Service providers and Government (including 7% from the U.S. federal) accounted for 66%, 18% and 16% of total revenues, respectively.

The company’s distributor, Ingram Micro accounted for 18% of revenues. Arrow ARW and Westcon contributed 10% each to total revenues, while Tech Data TECD contributed 11%.

Margins

F5 Networks’ non-GAAP gross margin increased 20 bps during the quarter and came in at 84.7%, driven by strength in services margin.

The company’s non-GAAP operating margin decreased 40 bps to 38% in the quarter.

Balance Sheet & Cash Flow

F5 Networks exited the quarter with cash, cash equivalents and short-term investments of approximately $1.04 billion compared with $1.08 billion in the prior quarter.

Long-term liabilities were $365.6 million. It reported cash flow from operations of $204 million in the quarter.

During the quarter, F5 Networks repurchased shares worth approximately $150 million.

Outlook

For first-quarter fiscal 2019, F5 Networks expects revenues in the range of $542-$552 million. The company expects non-GAAP earnings per share in the range of $2.51-$2.54.

For fiscal 2019, the company anticipates sequential revenue growth throughout the year.

The company projects software growth to be in the 30% to 35% range in 2019 and 2020. Strong momentum in ELA, Cloud Edition and new products F5-as-a-Service and Cloud-Native App Services, which are scheduled to be launched in the first half of 2019, are expected to be key growth drivers for software.

Moving to security, the company expects Advanced Web Application Firewall and SSL orchestration capabilities to be the two meaningful growth drivers in standalone security next year.

The company expects operating margin to be in the mid-30s range in the fiscal. In the second and third quarters, it is projected to be slightly down and finally end fiscal fourth quarter in upper 30s.

F5 currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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