F5 Networks, Inc.
) delivered second quarter 2013 adjusted earnings per share (EPS)
of 81 cents, which missed the Zacks Consensus Estimate by a
penny. The miss could well be attributed to higher expenses and
tax rate. The quarter's results were lower than 88 cents reported
in the year-ago quarter.
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The miss was not surprising as F5 negatively preannounced its
second quarter in early April and lowered its forecasts for the
F5 Networks reported revenues of $350.2 million in the reported
quarter, up 3.1% from $339.6 million in the year-ago period but
down 4.2% sequentially. Revenues were in line with the company's
revised guidance provided in its mid-quarter update. Previously,
the company expected revenues to be in the 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.
Product revenues dropped 9.8% year over year to $185.1 million,
while Services revenues climbed 22.8% year over year to $165.1
Geographically, on a year-over-year basis, Americas declined 4.0%
and represented 54.0% of revenues. Europe, the Middle East and
Africa (EMEA) grew 13.0%, accounting for 23.0% of total revenue.
Asia-Pacific grew 21.0%, representing 16.0% of total revenue,
while Japan declined 5.0% and represented 6.0% of revenues.
By vertical, Financial was the strongest, accounting for 23.0% of
total revenue. Technology accounted for 18.0% of revenues,
followed by Telco, which represented about 17.0%. Government
accounted for 13.0% of total revenue (including 5.0% from U.S.
The company noticed increasing demand for its security products
(Application Security Module, Advanced Firewall Manager and
BIG-IP 4200 platform). Considering the popularity of BIG-IP
solutions, F5 plans to launch BIG-IP 5000 and BIG-IP 7000 series
during the second half of 2013.
Gross profit in the reported quarter inched up 2.8% from the
year-ago quarter to $289.9 million. Gross margin dropped 20 basis
points (bps) year over year to 82.8%.
F5 Networks' operating expenses increased 11.3% year over year,
mainly due to a 20.6% rise in research and development expenses
and 13.6% rise in general and administrative expenses. Expenses
increased due to continuous hiring. Operating income came in at
$92.5 million, down 11.7% from $104.7 million reported in the
year-ago quarter. Operating margin in the quarter was 26.4%, down
from 30.8% in the year-ago quarter.
Reported net income was $63.4 million or 80 cents per share
compared with $68.6 million or 86 cents a year ago. GAAP earnings
per share were at the higher end of revised guidance. Excluding
amortization of intangibles and acquisition-related expenses but
including stock-based compensation and related tax adjustments,
non-GAAP EPS was 81 cents compared with 88 cents in the year-ago
Balance Sheet & Cash Flow
Cash, cash equivalents and short-term investments totaled
approximately $522.8 million in the second quarter, up from
$517.8 million in the prior quarter. Receivables were $192.8
million versus $209.1 million in the prior quarter. Inventories
were $18.0 million, down from $18.7 million in the prior quarter.
F5 Networks' balance sheet does not comprise any long-term debt.
Cash flow from operations was $80.7 million, down from $144.8
million in the prior quarter. Capital expenditure was $7.0
million versus $7.8 million in the prior quarter.
F5 Networks repurchased 508,000 million outstanding shares for
$50.0 million during the second quarter. Currently, there are
$81.3 million worth shares outstanding under the existing
Concurrent with the earnings release, F5' board also declared an
additional share buyback authorization of $200.0 million.
For the third quarter of fiscal 2013, F5 Networks expects
revenues of $355.0 million to $365.0 million, up 2.8%
sequentially at the mid-point. On a GAAP basis, earnings per
share are expected in the range of 80-83 cents. Excluding
stock-based compensation expense, amortization of purchased
intangible assets and related tax effects, the company estimates
non-GAAP earnings per share between $1.06 and $1.09.
Amid macro concerns and tight federal budget, management remains
positive on the company's upcoming product launches and growing
demand for its security solutions. But the company remains
somewhat concerned about bill slippage and longer sales cycles,
particularly in the telco vertical, as well as U.S. federal
F5 also mentioned that it will continue investing in technology
to keep pace with changing market trends.
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.
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.
F5 Networks missed the Zacks Consensus Estimate by a penny in the
second 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. F5 Networks is also keen on expanding
its cloud exposure. But the volatile spending atmosphere and
stiff competition from
Cisco Systems Inc.
Juniper Networks Inc
) remain concerns.
Currently, F5 Networks has a Zacks Rank #4 (Sell).