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F5 Networks Inc. (FFIV - Snapshot Report) reported fourth-quarter 2013 adjusted earnings per share (excluding amortization, loss on lease property and other one-time items but including stock-based compensation) of $1.01, which beat the Zacks Consensus Estimate of 98 cents. On a year-over-year basis, earnings improved 16.2%.


F5 Networks reported revenues of $395.3 million which not only increased 9% from the year-ago quarter but also came ahead of the Zacks Consensus Estimate of $385 million. Improvement in revenues was mainly due to broad-based strength in end markets and geographical regions.

Moreover, revenues were impacted positively by a 19.8% hike in services revenues on a year-over-year basis and a modest increase (up 1.2% year over year) in Product revenues.

Geographically, on a year-over-year basis, revenues from the Americas increased 15% and represented 59% of revenues. Europe, the Middle East and Africa (EMEA) grew 7% and accounted for 22.0% of total revenue. The Asia-Pacific declined 1.0%, representing 13% of total revenue, while Japan was down 11% and represented 5% of revenues.

By vertical, Financial was the strongest, accounting for 22.0% of total revenue. Telco accounted for 18% of revenues, followed by Technology, which represented about 15%. Government accounted for 14% of total revenue (including 7.0% from the U.S. federal).

The company also reported that 16.3% of the total revenue came from distributor Ingram Micro (IM - Analyst Report), with 15.8% from Avnet (AVT - Analyst Report) and 11.6% from Westcon.

Operating Results

The company’s adjusted gross margins (excluding amortization, loss on lease property and other one-time items but including stock-based compensation) expanded 20 basis points (bps) on a year-over-year basis to 83.3% primarily due to higher revenue base.

F5 Networks’ adjusted operating margins (excluding amortization, loss on lease property and other one-time items but including stock-based compensation) expanded 124 bps from the year-ago quarter to 32.5% primarily due to lower operating expenses as a percentage of revenues. Operating expenses, as a percentage of revenues, declined 104 bps on a year-over-year basis.

The company’s adjusted net income (excluding amortization, loss on lease property and other one-time items but including stock-based compensation) came in at $79.3 million or $1 per share which improved from $68.9 million or 87 cents reported in the year-ago quarter.

Balance Sheet & Cash Flow

F5 Networks exited the fourth quarter with cash, cash equivalents and short-term investments of approximately $542.1 million, down from $551.3 million in the prior quarter. Receivables were $204.2 million versus $205.1 million in the prior quarter.

F5 Networks’ balance sheet does not comprise any long-term debt. The company reported cash flow from operations of $499 million for the year ended Sep 30, 2013. F5 Networks repurchased 569k shares for $50.0 million during the quarter.


For the first quarter of fiscal 2014, F5 Networks expects revenues in the range of $390.0 million to $400.0 million, flat sequentially at the mid-point. The GAAP gross margin is expected to be roughly 83.0%. The company expects its non-GAAP earnings for the first quarter in the range of $1.17 to $1.20, well above the Zacks Consensus Estimate of 96 cents.

Amid macro concerns and tight federal budget, management remains positive on the company’s upcoming product launches and growing demand for its security solutions.

F5 also mentioned that it will continue investing in technology and headcount to keep pace with the changing market trends.

Our Take

We are encouraged by F5 Networks’ fourth-quarter results, which surpassed the Zacks Consensus Estimate on both counts. Revenue growth seems to be steady but the modest growth in Product revenues will remain an overhang, indicative of its revenue guidance. However, the company is positive about its product launches and growing demand for its products, particularly the security products.

Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller market. The company is also keen on expanding its cloud exposure. Nevertheless, the volatile spending atmosphere and stiff competition from Juniper Networks Inc. (JNPR - Analyst Report) and Brocade remain concerns.

Currently, F5 Networks has a Zacks Rank #5 (Strong Sell).

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