Posting $406 million in revenue, F5 Networks (
) exceeded its own guidance for Q1 2014. (Fiscal Years end with
September.) Driven by increasing demand for its new hardware and
software products, the company witnessed a 2.8% sequential and
11.2% annual growth in its top line. Strong demand for its upgraded
product portfolio, positive customer response to the recently
introduced Synthesis architectural vision, and F5′s 'Good,
Better, Best' pricing model (introduced in November 2013) led to
strong sales across all geographic regions. However, the higher
proportion of service revenue lowered F5′s gross profit a bit
from 82.2% in Q1 2013 to 82.1% in Q1 2014.
Based on the rising demand of its new products, the growing
strength in its security offerings, and the building growth
momentum with its Traffix Diameter solutions, F5 feels
confident of witnessing a continuous growth in its top line for the
rest of 2014. It plans to continue introducing significant
enhancements and world-leading technology in its key areas of
focus, mainly security, service providers and mobility, the
cloud and software-defined application services.
While we agree that the weak macro environment can restrict its
short term growth, we believe in F5′s long term growth potential.
Our price estimate of $112 for F5 Networks
is at a 15% premium to the current market price. We are in the
process of updating our valuation.
See our complete analysis for F5 Networks
Rising Demand For New Products & Software Accelerates
The product refresh last year has significantly increased F5′s
sales momentum. In Q3 2013, F5 completed the launch
of what it claims to be the most significant product
refresh in several years. It developed a range
of new products and software solutions with an aim to boost
demand and create new revenue growth opportunities. New platforms
include a high-end VIPRION 8-slot chassis and a new range of
appliances, the BIG-IP 2,000, 4,000, 5,000, 7,000 and 10,000
Series. F5 also introduced the largest portfolio of software
virtualization products and a new centralized management
F5 claims that it has improved product revenue growth in fiscal
Q1 2014. The new product line has equipped F5′s sales force and
partner channel with the most functional and competitive ADC
(Application Delivery Controller) solutions in the market and
already accounts for the majority of the company's ADC
sales. The ADC market is estimated to grow at a CAGR of 7.07%
through 2015. F5 is a leader in a ADCs with a market share in
excess of 50%.
F5 introduced its Synthesis architecture for
software-defined application services in Q1 2014, and it claims
that the architectural vision has been very well-received by
its customers and channel partners. Synthesis helps customers
improve service velocity and accelerates time-to-market through
automated provisioning and intelligent orchestration of application
services, which reduces the cost and complexity of deploying
software-defined application services across all types of systems
and environments. F5 also highlighted a number of partnerships
with the leading developers of software-defined networking
technology, which it believes will expand the market opportunities
for its products.
Strong Sales Momentum In Security Solutions
F5 witnessed another quarter of strong sales of its security
solutions, including ASM, APM and AFM modules, in Q1 2014.
With the explosion of online data storage and processing and the
rising number of remote and mobile users, security has become
a major concern for most enterprises. Some 92% of Forbes Global
2,000 companies reported data breaches in 2012. Thus, this is one
segment bound to witness tremendous growth in the coming
years. The traditional firewall market is currently valued at $2
F5 entered the Internet firewall market in February 2012 and
since then has expanded its security solution portfolio with the
addition of new products. Its security portfolio solution has
increased dramatically in the last few quarters. It acquired Israel
based Versafe Ltd., a provider of web anti-fraud,
anti-phishing, and anti-malware solutions in September
2013. Offering advanced web and mobile protection solutions,
Versafe provides a comprehensive real-time detection and
protection for every user, device and browser.
The acquisition will help make the company's security,
access, and mobile solutions (including its Application Delivery
Firewall solution) stronger. F5 is building out two world-class
security operations centers in Seattle and Tel Aviv to support the
new online security service from its Versafe acquisition.
With the growing awareness of its security solutions in the
market, F5 believes that this segment offers huge growth
opportunity and expects the strong sale momentum to continue in
High Win Rates In
Replacing Cisco's ACE Products
In 2012, rival firm Cisco announced its decision to exit
the ADC market after losing more than 50% of its market share to F5
and Citrix. F5 has scored big product wins by replacing
some of Cisco ACE products in large customer accounts in the last
few quarters. It claims that competitive win rates continue to be
extremely high. F5 recorded 900 ACE replacement project wins
in fiscal 2013 and the company believes that the Cisco ACE
install base continues to be a significant replacement opportunity
for it, at least for 2 years.
The ACE installed base is over $1 billion, but F5′s target
market is much larger. In addition to replacing Cisco's
existing solutions, F5 has the added opportunity of
providing customers additional functionality
including security, access control and application
acceleration. Though Citrix remains a big threat for F5, we
believe the latter will continue to retain its dominance in
the ADC market.
Q2 2014 Outlook
- Revenue target of $408 million to $418 million.
- GAAP and non-GAAP gross margins to be flat sequentially.
- GAAP operating expenses in the range of $226 million to
- Effective tax rate of 38%.
- GAAP EPS target of $0.87 to $0.90 and non-GAAP EPS in the
range of $1.23 to $1.26.
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