F5 Networks (FFIV) Stock Up on Q4 Earnings Beat, Solid Outlook
Shares of F5 Networks FFIV gained 4.3% in the extended trading session after the IT security solution provider reported better-than-expected fourth-quarter fiscal 2020 results. Management also issued a strong outlook for the current quarter.
The company reported fourth-quarter fiscal 2020 non-GAAP earnings per share of $2.43, beating the Zacks Consensus Estimate of $2.38. Moreover, the quarterly earnings came in higher than management’s guidance of $2.30-$2.42 per share. Nonetheless, non-GAAP earnings fell 6.2% from the year-ago quarter as elevated operating expenses offset the benefit of higher revenues to a large extent.
Non-GAAP revenues increased 4% year over year to $615 million, surpassing the Zacks Consensus Estimate of $607 million on solid software growth. Also, revenues came in line with the company’s high-end guided range of $595-$615 million.
Product revenues (45% of total revenues) during the fiscal fourth quarter totaled $280 million, up 6% year over year. Software sales jumped 36% year over year to $113 million, accounting for approximately 40% of the total Product revenues.
F5 Networks, Inc. Price, Consensus and EPS Surprise
The upside in Software sales can be attributed to the revenue contribution from the recently-acquired Shape Security business as well as the growing adoption of the Enterprise License Agreement (ELA) and annual subscriptions among customers. Shape contributed nearly $23 million to the company’s Software business revenues during the reported quarter.
Service revenues (55% of total revenues) increased 3% to $336 million. Improvements to the tools and processes that the company’s team uses to identify and secure renewals are among the key catalysts. Further, healthy services attached in renewal rates to software sold as perpetual or as subscriptions, including NGINX-related sales, were tailwinds. Moreover, increase in consulting-services demand associated with the rising software sales is an upside.
GAAP gross margin contracted 280 basis points (bps) to 81.8%. Non-GAAP gross margin shrunk 190 bps to 84.4%.
Operating expenses flared up 5.7% year on year to $335 million. As a result of lower gross margin and higher operating expenses, the company’s non-GAAP operating margin shrunk 250 bps to 30.1%.
Balance Sheet & Cash Flow
F5 Networks exited the July-September quarter with cash and investments of $1.3 billion compared with the prior-year quarter’s $1.1 billion.
During fiscal 2020, the company generated $661 million of operating cash flow. Moreover, during the same time frame, it bought back $100 million worth of its common stocks.
The company issued an encouraging business outlook for the first quarter of fiscal 2021.
For the fiscal first quarter, F5 Networks expects non-GAAP revenues of $595-$615 million. The Zacks Consensus Estimate for revenues is pegged at $590.4 million.
The company anticipates non-GAAP earnings per share in the $2.26-$2.38 band. The Zacks Consensus Estimate is pinned at $2.23.
We believe surging demand for multi-cloud application services will be a key growth driver. Furthermore, solid demand for software solutions is a tailwind. Rising traction from subscription and ELA offerings is another driving factor.
Additionally, F5 Networks and NGINX’s first combined solution, Controller 3.0, is expected to increase the total addressable market and deal sizes by spending more use cases across DevOps and Super-NetOps customer profiles.
Zacks Rank and Stocks to Consider
F5 Networks currently carries a Zacks Rank #4 (Sell).
Better-ranked stocks in the broader technology sector include Zoom Video Communications ZM, Salesforce CRM and Intuit Inc. INTU, all sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The long-term earnings growth rate for Zoom, Salesforce and Intuit is currently pegged at 25%, 15.7%, and 14.5%, respectively.
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