F5 Comes Back from the Dead

03/05/2012 9:00 am EST


Rob DeFrancesco

Founder, Tech-Stock Prospector

Whether you call it vulture investing, zombie investing, or something equally colorful, the fact is that when promising stocks revive and the economy is helping them, there's a lot of opportunity, writes Rob DeFrancesco of Tech Stock Prospector.

There was a lot of cautiousness heading into the fiscal first-quarter (December) earnings report from F5 Networks (FFIV).

But the company delivered on both the top and bottom lines. Per-share earnings of $1.03 beat the consensus estimate by two cents, and revenue rose 19.9% to $322.4 million, above the consensus estimate of $319.1 million and the high end of the guidance range of $315 million to $320 million.

While other networking companies experienced slack demand from service providers (particularly North American carriers) going into the end of 2011, F5 CEO John McAdam said the company’s enterprise and service provider businesses were quite strong in the December quarter. Sometimes companies are just on the right side of the demand curve, offering needed technology at the right time.

On the conference call, McAdam singled out robust sales of the fairly new midrange VIPRION 2400 product line, which saw steady demand across all regions and verticals. The 2400 features Virtual Clustered Multiprocessing (vCMP) technology, which combines virtualization and multi-tenancy capabilities that allow customers to run multiple instances of BIG-IP software on one device, an important requirement for large enterprises and cloud providers who need on-demand scalability and the ability to isolate network traffic into different customer segments.

Overall product revenue (61% of total revenue) was up 15% to $196.6 million, while services revenue advanced 29% to $125.9 million. Virtualized versions of F5’s ADC products saw big revenue growth of 149% year over year off of a small base.

The Americas accounted for 59% of total revenue and turned in solid growth of 20%. Growth in the EMEA region (21% of revenue) came in at 14%, while APAC (14% of revenue) saw 28% growth, and Japan (6% of revenue) delivered 22% growth. Deal sizes were up across the board, with a standout performance in Japan.

Once again, the telecom and financial services verticals led the charge, representing 23% and 21% of revenue, respectively. Technology accounted for 17% of revenue, and government made up 9%, including 4% from the US federal sector.

There was some weakness in the US federal business in the December quarter, but the enterprise verticals picked up the slack. A higher software component (the 2400 offers more opportunities for customers to attach software) helped GAAP gross margin come in at 82.8%, while operating margin was solid at 37.8%. Cash flow from operations totaled $131.9 million.

The company spent $34 million to repurchase 320,000 shares at an average price of $107.65 a share. Roughly $332 million remains available under the repurchase authorization. F5 has $1.1 billion in cash & investments on the balance sheet. Deferred revenue rose 11% sequentially to $380 million.

F5 is seeing increased attach rates for its software offerings, including Application Security Manager (ASM) and Access Policy Manager (ASM). The ASM application firewall had a record quarter and APM is seeing a pickup in demand because the solution protects public-facing (highly vulnerable) applications by providing policy-based, context-aware access to users while consolidating access infrastructure.

At the F5 analyst day last year, management emphasized that it would focus more on the security sector in 2012. Customers are asking for more security offerings, and the sales force is becoming more security-savvy.

With the TMOS v11.1 release this quarter, F5 will offer even more security features, and add more features directed at service providers. In addition, the platform update will include a trial version of F5’s new deep-packet inspection functionality.

For the fiscal second quarter, management took a cautious view on contract close rates, but McAdam called the pipeline of new business “extremely strong,” even in the EMEA region. As for visibility, he said it looks fairly clear through the next two quarters. Product revenue growth is still expected to accelerate in the current quarter.

Guidance for the March quarter came in better than expected: EPS of $1.05 to $1.07 (the consensus was $1.05) on revenue of $332 million to $337 million (the consensus was $330.5 million). The company sees gross margin holding steady sequentially in the 82% to 83% range.

Looking ahead, the Centaur blade for the VIPRION 4400 (popular in the service-provider market) will be released later this year, and F5 will refresh the low end of its product line. On schedule for the end of calendar 2012, the Topaz project will include a network firewall.

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