F5 Misses by a Penny in 1Q

F5 Networks, Inc. (FFIV - Snapshot Report) delivered first quarter 2013 adjusted earnings per share (EPS) of 88 cents, which missed the Zacks Consensus Estimate by a penny. The miss could well be attributed to higher expenses and tax rate.

Revenues

F5 Networks reported revenues of $365.5 million in the reported quarter, up 13.4% from $322.4 million in the year-ago period. Revenue was at the lower end of the company’s guidance of $363.0–$370.0 million. Higher Services revenue was partially offset by lower Product revenue.

Geographically, on a year-over-year basis, Americas grew 12.0% and represented 58.0% of revenues. Europe, the Middle East and Africa (EMEA) grew 22.0%, accounting for 23.0% of total revenue. Asia-Pacific grew 16.0%, representing 14.0% of total revenue, while Japan declined 11.0% and represented 5.0% of revenues.

By vertical, Telco was the strongest, accounting for 23.0% of total revenue. Financial accounted for 20.0% of revenues, followed by Technology, which represented about 13%. Government accounted for 11% of total revenue (including 5% from U.S. federal).

Operating Results

Gross profit in the reported quarter surged 14.2% from the year-ago quarter to $304.6 million. Gross margin escalated 50 basis points (bps) year over year to 83.3%.

F5 Networks’ operating expenses increased 4.0% year over year, mainly due to a 30.6% rise in research and development expenses and 33.5% rise in sales and marketing expenses. Expenses increased due to continuous hiring. Operating income came in at $109.1 million, up 9.3% from $99.8 million reported in the year-ago quarter. Operating margin in the quarter was 29.8%, down from 31.0% in the year-ago quarter.

Reported net income was $69.5 million or 88 cents per share compared with $66.5 million or 83 cents a year ago. Excluding amortization of intangibles and acquisition-related expenses, but including stock-based compensation and related tax adjustments, non-GAAP EPS was 88 cents, compared with 82 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Cash, cash equivalents and short-term investments totaled approximately $517.8 million in the first quarter, up from $532.2 million in the prior quarter. Receivables were $209.1 million versus $185.2 million in the prior quarter. Inventories were $18.7 million, up from $17.4 million in the prior quarter.

F5 Networks’ balance sheet does not comprise any long-term debt. Cash flow from operations was $144.8 million, down from $148.6 million in the prior quarter. Capital expenditure was $7.8 million versus $11.3 million in the prior quarter. F5 Networks repurchased 555,000 million outstanding shares for $50.0 million during the quarter.

Guidance

For the second quarter of fiscal 2013, F5 Networks expects revenues of $370.0 million to $380.0 million, up 2.3% sequentially. On a GAAP basis, earnings per share are expected in the range of 93–96 cents. Excluding stock-based compensation expense, amortization of purchased intangible assets and related tax effects, the company estimates non-GAAP earnings per share between $1.21 and $1.24.

Our Take

F5 Networks missed the Zacks Consensus Estimate by a penny in the first quarter of fiscal 2013. We have been noticing that over the past few quarters, despite consistent product launches, revenue generation is gradually slowing down. This could prove hazardous to the company’s fundamentals if the new product lineups fail to ramp up demand in 2013.

Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller (ADC) market and helped it to grab market share from Cisco Systems Inc (CSCO - Analyst Report) and Juniper Networks Inc (JNPR - Analyst Report). F5 Networks is also keen on expanding its cloud exposure.

Currently, F5 Networks has a Zacks #2 Rank (Buy).

Investors should look out for some more stocks that are slated to report this earnings season with positive Zacks Rank and Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method).

Yahoo Inc. (YHOO - Analyst Report) has a Zacks Rank #1 (Strong Buy) with an ESP of +14.82%.