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Networking solutions provider F5 Networks Inc. (FFIV - Snapshot Report) negatively preannounced its forthcoming second quarter 2013 results, scheduled to release on Apr 24. Post announcement, F5’ shares plunged $14.3 or 15.8% in the after-hours, reflecting shattered investor sentiment.

F5 now expects revenues to be $350.2 million, significantly down from previously expected range of $370.0–$380.0 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.

Though there were some negative factors noticed during the first quarter 2013 results, such a massive downward revision is surprising. In the last quarter, though total revenue grew 13.4% year over year, Product revenues decreased. The deceleration in Product revenues is being noticed since the past few quarters. Also, bookings came below 1.

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.

But F5’s view for fiscal 2013 seemed pretty good. For fiscal 2013, F5 aims to reaccelerate product revenue growth through Big-IP appliance refresh and the introduction of new products such as Application Delivery Firewall (layer 3-7), DPI, and the next version of TMOS. Management expects to see sequential revenue growth throughout the year.

F5 also expects Traffix (acquired on February 2012) to start contributing materially toward revenues in 2014 as it sees good traction from customers for its diameter routing technology.

The company is also making its existence felt in the software-defined networking (SDN) market, through the acquisition of a privately-held networking services provider, LineRate Systems, last February.

Software-defined networking 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 Inc. (CSCO - Analyst Report), Juniper Networks Inc. (JNPR - Analyst Report), Brocade (BRCD - Snapshot Report) and many more. With LineRate, F5 is now positioned to compete in the SDN space.

Despite attractive long-term growth prospects, near term concerns keep us on the sidelines. Currently, F5 Networks has a Zacks Rank #3 (Hold).

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