It has been about a month since the last earnings report for F5 Networks (FFIV Quick QuoteFFIV - Free Report) . Shares have lost about 0.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is F5 due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

F5 Networks Q2 Earnings Top Estimates, Outlook Disappoints

F5 Networks reported better-than-expected second-quarter fiscal 2021 results. The company posted fiscal second-quarter non-GAAP earnings per share of $2.50, beating the Zacks Consensus Estimate of $2.39.

Moreover, the quarterly earnings came in higher than management’s guidance of $2.32-$2.44 per share. Also, non-GAAP earnings increased 12% from the year-ago quarter, mainly on solid revenues and efficient cost management.

Non-GAAP revenues climbed 11% year on year to $645.3 million, surpassing the Zacks Consensus Estimate of $634.8 million on robust software growth. The top-line figure also comes in higher than the company’s guided range of $625-$645 million.

Despite reporting upbeat second-quarter results, shares of F5 Networks depreciated 4.6% during yesterday’s extended trading session as the fiscal third-quarter revenue and earnings guidance fell short of consensus estimates.

Revenue Details

Product revenues (48% of total revenues), which comprise Software and Systems sub-divisions, went up 18% year on year to $309 million. Software sales jumped 20% year over year to $108 million, accounting for approximately 35% of the total Product revenues.

Systems revenues climbed 17% to $201 million. During the earnings conference call, F5 Networks’ executive vice president and chief financial officer, Frank Pelzer, stated, “Systems demand was higher than anticipated in the quarter, largely from a broad-based increase in application usage and the corresponding increase in application traffic continued growth of systems-based security use cases as well as the emergence of 5G-driven service provider demand.”

Global Service revenues (52% of total revenues) increased 4% to $336 million.

Additionally, the company noted that it is moving ahead with its strategy of transitioning the business into a subscription-based model. During the fiscal second quarter, subscriptions represented 79% of Software revenues, up from the year-ago quarter’s 73%.

Furthermore, F5 Networks registered sales growth across all regions, with the Americas, EMEA and APAC witnessing year-over-year increase of 6%, 16% and 15%, respectively. Revenue contributions from the Americas, EMEA and APAC regions were 54%, 27% and 20%, respectively.

Customer wise, Enterprises, Service providers and Government represented 68%, 16% and 16%, respectively, of product bookings.

Margins

GAAP gross margin contracted 290 basis points (bps) to 80.1%. Non-GAAP gross margin shrunk 160 bps to 83.4%.

GAAP operating expenses flared up 16% year on year to $463 million, while non-GAAP operating expenses rose 4.6% to $342 million. The company’s GAAP operating margin shrunk 600 bps to 8.3%, while non-GAAP operating margin improved 120 bps to 30.3%.

Balance Sheet & Cash Flow

F5 Networks exited the January-March quarter with cash and investments of $662 million compared with the prior-year quarter’s $1.37 billion. This decline was mainly due to the cash used for the Volterra acquisition and initiation of the $500-million share-repurchase program.

During the fiscal second quarter, the company generated $128.5 million of operating cash flow. During the reported quarter, it repurchased shares worth $400 million through Accelerated Share Repurchase transaction.

During the first-half of fiscal 2021, the company generated operating cash flow of $265.8 million and bought back $500 million worth of its common stock.

Outlook

For the fiscal third quarter, F5 Networks projects non-GAAP revenues of $620-$650 million (mid-point $635 million). The company anticipates non-GAAP earnings per share in the $2.36-$2.54 band (mid-point $2.45).

We believe surging demand for multi-cloud application services will be a key growth driver during the fiscal third quarter. Furthermore, solid demand for software solutions is a tailwind. Rising traction from subscription and Enterprise License Agreement (ELA) offerings is another driving factor.

Additionally, F5 Networks and NGINX’s first combined solution — Controller 3.0 — will likely boost the total addressable market and deal sizes by spending more use cases across DevOps and Super-NetOps customer profiles.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, F5 has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, F5 has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.