It has been about a month since the last earnings report for F5 Networks (FFIV Quick QuoteFFIV - Free Report) . Shares have lost about 1.8% in that time frame, outperforming 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's Q3 Earnings Beat, Revenues Miss Estimates

F5 reported mixed third-quarter fiscal 2023 results, wherein the top line missed but the bottom line surpassed the Zacks Consensus Estimates.

This Seattle, WA-based company’s non-GAAP earnings of $3.21 per share beat the Zacks Consensus Estimate of $2.86. The bottom line increased 24.9% from the year-ago quarter’s $2.57 per share and was way higher than management’s guided range of $2.78-$2.90 per share. The robust bottom-line performance was mainly driven by higher revenues, the benefits of price realization and easing supply-chain constraints and related costs.

F5 revenues of $702.6 million for the third quarter fell short of the consensus mark of $703.2 million. However, on a year-over-year basis, revenues increased 4.2% and came well above the midpoint of management’s guidance range of $690-$710 million despite persistent macroeconomic uncertainties and tight budgets of customers.

F5 stated that better sales execution mainly boosted the top-line performance. The company also noted that it is witnessing early signs of stabilization in demand as third-quarter demand remained above what it had expected at the beginning of the quarter. Moreover, though third-quarter demand was way lower than the year-ago quarter level, it remained higher than the first and second quarters of the current fiscal.

Top Line in Detail

Product revenues (47% of total revenues), which comprise the Software and Systems sub-divisions, increased 1% year over year to $328.2 million. The rise in Product revenues was mainly driven by increased sales of Systems, partially offset by a decline in Software sales. The company’s reported non-GAAP Product revenues were slightly lower than our estimates of $333.8 million.

Systems revenues grew 5% year over year to $155 million, accounting for approximately 47% of the total Product revenues. Though the demand for Systems products remained constrained, the segment benefited from supply-chain normalization and better execution in reducing the backlog. Our estimates for Systems revenues were pegged at $190.1 million.

Industry-wide supply-chain constraints for components in 2022 had severely hurt F5’s Systems segment’s overall performance. However, a continuously improving supply chain for the past couple of quarters has been helping the company clear its backlog, thereby boosting its Systems top line.

However, the benefits of higher Systems sales were partially offset by weak performance in Software. Software revenues declined 3% year over year to $174 million in the third quarter, mainly due to tough comparisons. Nonetheless, Software sales improved 32% sequentially, reflecting strong growth in renewals. Our estimates for Software’s third-quarter revenues were pegged at $143.7 million.

Global Service revenues (53% of the total revenues) grew 8% to $374 million. The robust growth was mainly driven by price increases introduced last year and the benefits of high-maintenance renewals. Our estimates for Global Services revenues were pegged at $362.4 million.

F5 Networks registered sales growth across the Americas and EMEA regions, witnessing a year-over-year increase of 3% and 16%, respectively. However, revenues from the APAC region plunged 6% on a year-over-year basis. Revenue contributions from the Americas, EMEA and APAC regions were 57%, 26% and 18%, respectively.

Customer-wise, Enterprises, Service providers and Government represented 66%, 13% and 21% of product bookings, respectively.

Margins

On a year-over-year basis, GAAP and non-GAAP gross margins contracted 80 basis points (bps) and 70 bps to 79.8% and 82.5%, respectively. However, sequentially, GAAP and non-GAAP gross margins expanded 190 bps and 210 bps, respectively. The company noted that the sequential improvement was primarily driven by price realization and ease in supply-chain constraints, as well as reductions in ancillary supply-chain costs.

While GAAP operating expenses went up 4.8% to $457.4 million, non-GAAP operating expenses declined 5.7% to $346 million. GAAP operating expenses as a percentage of revenues increased to 65.1% in the third quarter of fiscal 2023 from 64.7% in the year-ago quarter. Meanwhile, non-GAAP operating expenses as a percentage of revenues declined to 49.2% from 54.4% in the year-ago quarter.

F5 Networks’ GAAP operating profit declined 2.8% to $104 million, while the margin contracted 120 bps to 14.7% However, the non-GAAP operating profit jumped 20% year over year to $233 million, while the margin improved 440 bps to 33.2%. An increase in the non-GAAP operating margin was primarily driven by higher revenues and lower operating expenses as a percentage of revenues, partially offset by a contraction in the gross margin.

Balance Sheet & Cash Flow

F5 Networks exited the June-ended quarter with cash and short-term investments of $690.6 million compared with the previous quarter’s $755.3 million.

The company generated operating cash flow of $165 million in the third quarter and $463.6 million in the first nine months of fiscal 2023.

During the quarter, FFIV repurchased shares worth $250 million. In the first nine months of fiscal 2023, it bought back common stocks worth $290 million. As of Jul 24, 2023, F5 had $982 million remaining under its current authorized share repurchase program. So far in fiscal 2023, the company has utilized about 68% of its free cash flow toward share buybacks compared with its commitment of using at least 50% of free cash flow for share buybacks announced at the beginning of fiscal 2023.

Guidance

F5 Networks projects non-GAAP revenues in the $690-$710 million band (midpoint of $700 million) and non-GAAP earnings per share in the $3.15-$3.27 band (midpoint of $3.21) for the fourth quarter of fiscal 2023. The non-GAAP gross margin is forecast to be around 83%.

Considering the full-quarter benefits of cost-reduction initiatives announced in April 2023, the company expects fourth-quarter non-GAAP operating expenses between $338 million and $350 million. Share-based compensation expenses are anticipated in the range of $55-$57 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

Currently, F5 has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, 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 upward for the stock, and the magnitude of these revisions looks promising. Notably, F5 has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.