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For 2Q2013, F5 now expects revenues to be $350.2 million, significantly down from previously expected range of $370-$380 million. Management blamed slowing sales in North America and Europe, Middle East and Africa for the dismal performance. From end market viewpoint, soft Telco and U.S. Federal bookings hampered revenue growth.
Lower revenues have also pulled down earnings per share expectations. F5 now expects GAAP earnings per share in the range of 79-80 cents, down from previously expected range of 93-96 cents. Non-GAAP earnings are expected to be within $1.06 and $1.07 per share, down from prior expectation range of $1.21-$1.24.
In its earnings call, F5 expressed its concern about the macro uncertainties that could affect near-term fundamentals. Management also remained concerned about an expected budget cut from telecom customers.
Slashing the Estimates
Wall Street analysts who cover the company wasted no time in the past few days "adjusting" their revenue and EPS projections. The lowering of estimates was sufficiently deep and widespread to kick FFIV down to a Zacks #4 Rank (Sell) last week and then to a #5 (Strong Sell) this week.
Since a good picture can tell even a bad story quickly, below is the Zacks proprietary Price & Consensus chart which plots annual earnings estimates against stock price.
You can see the immediate hit that the already-flat-lined 2013 and 2014 estimates took on the company's news. The kinks downward in those lines represent full-year EPS cuts of at least 11% for each.
The Distant, Cloudy Future
F5 hardware and systems are designed to improve the availability and performance of mission-critical Internet-based servers and applications. The company's products monitor and manage local and geographically dispersed servers and intelligently direct traffic to the server best able to handle a user's request. Their primary goal is to help prevent system failure and provide timely responses to user requests and data flow.
One area of expansion is in the field of "software-defined networking" (SDN) is an approach to networking in which control moves from hardware to a software application called a controller. A network administrator uses these controllers to direct and regulate network traffic from a centralized hub.
This minimizes the use of different and expensive switches for controlling web-trafficking and helps in uninterrupted traffic flow. Another important factor for choosing SDN technology is that it is applicable for both private and public cloud infrastructures.
The SDN approach to networking is gaining popularity among key networking players such as Cisco Systems (CSCO - Analyst Report), Juniper Networks (JNPR - Analyst Report), and Brocade (BRCD - Snapshot Report).
Bottom line: While F5 is a key player in the technologies of Internet traffic flow, their revenue and earnings outlooks have hit a major traffic jam. Until the congestion clears and analysts start raising estimates again, its probably best to find another route.
Kevin Cook is a Senior Stock Strategist with Zacks.com