F5 Networks (FFIV, Financial) has had a solid run during the last one year, gaining over 27%. The company develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. However, year-to-date, the company has lost around 5% on the Street, almost 7% below its 52-week high.
Let’s see if the recent pullback creates a buying opportunity.
Looking back
F5 posted second-quarter fiscal 2015 results last month. The quarter was marked by a rebound in sales from large deals and record sales levels in the service provider vertical. This was partly offset by lower-than-expected performance in the APAC, Latin America and EMEA region, on the back of negative impact of strengthening US dollar.
Second quarter revenue grew both sequentially and year-over-year. Revenue surged 12.4% year-over-year to clock $472.1, being closer to the higher end of the guided range of $465 to $475 million. The revenue growth was on the back of better-than-expected sales to sales to U.S. service providers and enterprise customers and 8.4% year-over-year growth in product revenues and 17% in services revenue.
Four greater than 10% distributors alone -- Westcon at16.6%, Ingram Micro (IN, Financial) at 15.5%, Avnet (AVNT, Financial) at 13.5% and Aero at 10.5% - gave a push to the top-line. As a result, F5 Networks beat consensus estimate of $471 million. I had recently covered Ingram Micro and Avnet here and here.
F5 Network’s gross margin expanded by 67 basis points year-over-year to clock 83.1%, primarily due to higher revenue base, as a result of strong top-line performance. Adjusted operating margin expanded 195 bps and came in at 28.8%, as a result of higher gross margin and 128 bps contractions in operating expenses as a percentage of revenues.
On the back of strong top-line growth earnings came in line with consensus estimates and closed $1.21 per share versus $0.93 per share in the year-ago-quarter.
Looking ahead
During the quarter, F5 Network repurchased 1.4 million shares for $156.9 million. The company still has $774 million authorized under the share buyback program. This will be a growth driver for bottom-line as and when shares are repurchased to reduce the outstanding shares count.
Also, partnership with Software Defined Networks and other cloud providers will be a long-term growth driver. In addition, the BIG-IQ platform and the company’s “Good, Better, Best” pricing strategies are going to be long-term tailwinds. The BIG IQ platform enables customers to move to software-defined data centers and NFV architectures.
F5 Network’s Gi firewall solution is also expected to drive sales during the rest of the current fiscal and also fiscal 2016.
The company recently upgraded its Silverline services platform a couple of weeks ago with its industry leading WAP capabilities, built on its industry-leading ASM solution. This is now being offered in both on-premise and subscription-based cloud offerings. This should be a long-term growth driver.
For the third-quarter fiscal 2015, F5 Network expects revenues to be in the range of $475 million to $485 million versus consensus estimate of $489 million. EPS is expected to be in the range of $1.57 to $1.60 versus consensus estimate of $1.31.
Final words
F5 Network’s balance sheet does not have a long-term debt. The company has made progress in the strategic initiatives in the service provider market last quarter. The company’s commitment to invest in technology and people will allow it to keep refreshing its product portfolio to meet the network security challenges, going forward. F5 Network’s forward P/E of 17.36 versus trailing P/E of 26.90 signifies growth in earnings, going forward. Analysts expect the next five year growth to be at a CAGR of 15.65%. Hence, I would recommend this share for long-term gains.
