F5 Networks Inc. (FFIV) posted decent second quarter fiscal 2011 earnings per share (EPS) of 68 cents, beating the Zacks Consensus Estimate of 66 cents. The outperformance was attributable to solid revenues fueled by the growing demand for the company’s products, as well as market share gains.
Revenues
F5 Networks reported revenues of $ 277.6 million in the second quarter, up 34.7% from $ 206.1 million in the year-ago period. The quarter’s revenue was at the lower end of the company’s guided range of $ 275.0–$ 280.0 million and roughly in line with the Zacks Consensus Estimate of $ 278.0 million. Revenue growth was driven by increases in both product and services revenues. Moreover, strength from the Americas and Asia-Pacific regions contributed to the improvement.
Continuous enhancement of product suites during the quarter led to a year-over-year 34.0% growth in the Product segment. Revenues from the Services segment climbed 35.8% year over year, fueled by growth in new and renewed service maintenance contracts booked during the quarter.
Geographically, on a year-over-year basis, revenue from the Americas grew 38%, APAC grew 68%, while EMEA grew 22%. The improvement in these regions offset the weakness in Japan, where revenue contribution was flat year over year and down 6% sequentially.
Operating Results
Gross profit in the second quarter surged 37.8% from the year-ago quarter to $ 226.9 million. Gross margin was up 180 basis points year over year to 81.7%. The increase was supported by a stable pricing environment for the company’s products and an improved product mix.
F5 Networks’ operating expenses increased 25.2% over the prior year, led by a 28.3% increase in sales and marketing expenses due to increased hiring. Despite the substantial increase in opex, operating income came in at $ 83.2 million, up 66.7% from $ 49.9 million in the year-ago quarter. Operating margin in the quarter was 30.0%, up from 24.2% reported in the year-ago quarter. The margin improvement could be attributed to higher revenues.
Net income was $ 55.6 million or 69 cents per share, up from $ 33.1 million or 42 cents in the comparable quarter last year. The company’s earnings exceeded its own guided range of 65–67 cents for the quarter.
All the figures in the quarter include the effect of stock-based compensation expense. There were no other one-time items in the quarter.
Balance Sheet, Cash Flow & Share Repurchase
Cash, cash equivalents and short-term investments totaled approximately $ 475.2 million at the end of the March quarter, down from $ 485.5 million in the prior quarter. Receivables grew $ 0.9 million quarter over quarter to $ 142.9 million. Inventories remained roughly unchanged at $ 18.2 million.
Total deferred revenue was $ 313.4 million, compared to $ 287.8 million in the previous quarter. F5 Networks is free of any long-term debt. Cash flow from operations was $ 91.3 million, down from $ 103.1 million in the prior quarter. Capital expenditure was $ 6.2 million, up from $ 5.5 million in the prior quarter. F5 Networks repurchased 404,933 outstanding shares worth $ 46.5 million.
Guidance
For the third quarter of fiscal 2011, F5 Networks expects revenues of $ 287.0 million to $ 292.0 million. On a GAAP basis, earnings per share are expected in the range of 69–71 cents. The Zacks Consensus Estimate for the third quarter is 70 cents. Excluding stock-based compensation expense, the company estimates non-GAAP earnings per share of between 89 cents and 91 cents.
Our Take
F5 Networks delivered decent second quarter results, beating the Zacks Consensus Estimate on the bottom line. The shares jumped 12.53% in after-hours trading on an upbeat third quarter guidance.
In our opinion, solid execution and focus on enterprise and service providers have positioned F5 Networks well in the application delivery controller market and helped it take share from Cisco Systems Inc. (CSCO). F5 Networks is also keen on expanding its cloud exposure. The analysts see demand acceleration for F5’s ADCs in telcos in the back half of 2011 and beyond as soon as Victoria and TMOS 11 come into production in the second half. But lower contribution from Japan will remain a concern for the near term.
Currently, F5 Networks has a Zacks #3 Rank, implying a short-term Hold recommendation.
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