F5 Networks Inc. (FFIV) reported first-quarter fiscal 2015 adjusted earnings per share (excluding amortization and other one-time items but including stock-based compensation) on a proportionate tax basis of $1.24, which beat the Zacks Consensus Estimate of $1.22 and increased 39.3% on a year-over-year basis.
However, shares of this network equipment maker plunged 15.4% in after-hour trading as revenues missed the Consensus mark due to fewer deals worth $1 million or more. Lower-than-expected revenue and earnings forecasts for the second quarter dampened investors’ sentiments.
Revenues
Although F5 Networks’ revenues grew 13.9% year over year to $462.8 million, it remained toward the lower end of its guidance range of $460 to $470 million. Moreover, it fell short of the Zacks Consensus Estimate of $466 million. The company witnessed seasonal softness as reflected from the decline in the number of deals worth more than $1 million.
Revenues were boosted by a 10.2% increase in Product revenues, primarily driven by higher Enterprise revenues in the Americas, Europe, the Middle East and Africa (EMEA), Asia Pacific and Japan regions. Also, an 18.1% increase in service revenues on a year-over-year basis aided quarterly revenues.
Notably, F5 Networks’ “Good, Better, Best” (GBB) pricing strategies and higher competencies of BIG-IQ platform also helped to streamline its product portfolio and drive year-over-year revenue growth.
Geographically, on a year-over-year basis, revenues from the Americas increased 14% and contributed 56% of total revenue. EMEA increased 20% and accounted for 25% of total revenue. The Asia-Pacific was up 9% on a year-over-year basis, representing 14% of total revenue while Japan revenues increased 3% and represented 5% of revenues.
By verticals, Enterprise, Service providers and Government (including 5% from the U.S. federal) accounted for 63%, 23% and 13% of total revenue, respectively.
The company’s distributors Ingram Micro (IM), Avnet (AVT), Westcon and Aero accounted for 16.7%, 13.9%, 17.5% and 11.4%, respectively of the total revenue.
Operating Results
F5 Networks’ adjusted gross margin (excluding amortization and other one-time items but including stock-based compensation) improved 90 basis points (bps) on a year-over-year basis to 83.4%, primarily due to lower cost of services as a percentage of revenue.
The company’s adjusted operating margin (excluding amortization and other one-time items but including stock-based compensation) increased 210 bps from the year-ago quarter to 29.5%, primarily due to higher gross margin and lower adjusted operating expenses as a percentage of revenues. Adjusted operating expenses, as a percentage of revenues, decreased 120 bps on a year-over-year basis.
The company’s adjusted net income (excluding amortization and other one-time items but including stock-based compensation) came in at $91.4 million or $1.24 per share, which improved from $69.6 million or 89 cents reported in the year-ago quarter. On a GAAP basis, net income came in at $89.1 million or $1.21 per share compared with $68 million or 87 cents reported in the year-ago period.
Balance Sheet & Cash Flow
F5 Networks exited the quarter with cash, cash equivalents and short-term investments of approximately $654.1 million. Receivables were $255.9 million at the end of quarter.
F5 Networks’ balance sheet does not have any long-term debt. The company reported cash flow from operations of $186.4 million.
Share Repurchases
During the quarter, F5 Networks repurchased approximately 1.2 million shares for $150 million. The company still has $180.7 million under the share buyback program authorized in 2010.
Concurrent with the earnings release, the company announced an additional share buyback program of $750 million taking the total share repurchase authorization to $930.7 million.
Guidance
For the second quarter of fiscal 2015, F5 Networks expects revenues in the range of $465 to $475 million (mid-point $470 million). The Zacks Consensus Estimate is pegged at $478 million. Non-GAAP gross margin is expected to be between 83.5% and 84%. The company expects non-GAAP earnings for the second quarter of fiscal 2015 in the range of $1.48 to $1.51. The Zacks Consensus Estimate is pegged at $1.25 per share. Non-GAAP effective tax rate is expected to be 38.5%.
Amid macro concerns and a tight federal budget, management remains positive on the company’s upcoming product launches and growing demand for its security solutions.
F5 Networks also mentioned that it will continue investing in technology and headcount to keep pace with changing market trends.
Also, management stated that the partnership with Software Defined Networks (SDN) and other cloud providers should drive long-term growth.
Our Take
F5 Networks reported mixed first-quarter fiscal 2015 results and provided tepid second-quarter revenue guidance. Though the year-over-year comparisons were favorable, we remain concerned about the decline in the number of deals worth more than $1 million.
However, the company’s GBB pricing strategy and its BIG-IQ platform remain the tailwinds. Revenue growth seems to be steady and was positively impacted by strength across all its business segments and higher Enterprise revenues.
We believe that the company’s product refreshes will boost revenues, going forward. Moreover, these initiatives are expected to expand the company’s total addressable market and result in client wins.
Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller market. The company is also keen on expanding its cloud exposure. Nevertheless, the volatile spending atmosphere and competition from Juniper Networks Inc. (JNPR) remain the concerns.
Currently, F5 Networks has a Zacks Rank #2 (Buy).
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