F5 Networks Inc. (FFIV) posted third quarter fiscal 2011 earnings per share (EPS) of 77 cents, beating the Zacks Consensus Estimate of 71 cents.
The outperformance was attributable to solid revenues aided by the growing demand for the company’s products, as well as market share gains.
However, shares slid 6.99% in after market trade, probably due to F5 Networks’ broad European exposure.
Revenues
F5 Networks reported revenues of $290.7 million in the third quarter, up 26.1% from $230.5 million in the year-ago period.
The quarter’s revenue was at the higher end of the company’s guided range of $287.0–$292.0 million. Revenue growth was driven by increases in both product and services revenues. Moreover, strength from Asia-Pacific and Japan contributed to the improvement.
Continuous enhancement of product suites during the quarter led to a year-over-year 21.6% growth in the Product segment. Revenues from the Services segment climbed 34.1% year over year, fueled by growth in new and renewed service maintenance contracts booked during the quarter.
Geographically, on a year-over-year basis, revenues grew 22% in the Americas, 58% in APAC, 42% in Japan and 15% in EMEA. The Americas’ contribution was a bit constrained by some project spending delays in the U.S. federal market, particularly in the financial vertical. Revenue growth in EMEA was adversely impacted by the ongoing debt crisis in that region. However, we are impressed with the strong performance in Japan, as management itself was conservative due to the natural disaster, which disrupted production in that country.
Operating Results
Gross profit in the third quarter surged 28.2% from the year-ago quarter to $238.3 million. Gross margin was up 130 basis points year over year to 82.0%. The increase was supported by a stable pricing environment for the company’s products and an improved product mix.
F5 Networks’ operating expenses increased 19.2% over the prior year, mainly due to a 21.3% increase in sales and marketing expenses resulting from increased hiring. Despite the substantial increase in expenses, operating income came in at $88.3 million, up 46.9% from $60.1 million reported in the year-ago quarter. Operating margin in the quarter was 30.4%, up from 26.1% in the year-ago quarter. The margin improvement could be attributed to higher revenues.
Net income was $62.5 million or 77 cents per share, up from $40.5 million or 50 cents in the comparable quarter last year. The company’s earnings exceeded its own guided range of 69–71 cents.
All the figures in the quarter include the effect of stock-based compensation expense. There was no other one-time item in the quarter.
Balance Sheet, Cash Flow & Share Repurchase
Cash, cash equivalents and short-term investments totaled approximately $585.3 million at the end of the June quarter, up from $475.2 million in the prior quarter. Receivables grew $11.8 million sequentially to $154.7 million. Inventories were $0.3 million, down from $17.9 million in the prior quarter.
Total deferred revenue was $321.8 million, compared to $313.4 million in the previous quarter. F5 Networks is free of any long-term debt. Cash flow from operations was $101.0 million, up from $91.3 million in the prior quarter. Capital expenditure was $8.8 million, up from $6.2 million in the prior quarter. F5 Networks repurchased 471,633 outstanding shares worth $50.0 million.
Guidance
For the fourth quarter of fiscal 2011, F5 Networks expects revenues of $307.0 million to $312.0 million. On a GAAP basis, earnings per share are expected in the range of 75–77 cents. The Zacks Consensus Estimate for the fourth quarter is 77 cents. Excluding stock-based compensation expense, the company estimates non-GAAP earnings per share between 97 cents and 99 cents.
Our Take
F5 Networks delivered impressive third quarter results, beating the Zacks Consensus Estimate on the bottom line. Better execution and focus on enterprise and service providers has placed F5 Networks well in the application delivery controller (ADC) market and helped it grab share from Cisco Systems Inc. (CSCO). F5 Networks is also keen on expanding its cloud exposure. Analysts see demand acceleration for F5’s ADCs in telcos during fiscal 2011 and beyond as soon as Victoria and TMOS 11 come into production.
But, management’s commentary regarding adverse effects of the ongoing financial uncertainty in Europe keeps up cautious. On the other hand, F5 appears positive about its North American business and seasonal strength of the U.S. federal business.
Currently, F5 Networks has a Zacks #4 Rank, implying a short-term Sell recommendation.
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