F5 Networks Inc. (FFIV) reported second-quarter fiscal 2014 adjusted earnings per share (excluding amortization and other one-time items but including stock-based compensation) on a proportionate tax basis of 93 cents, which not only missed the Zacks Consensus Estimate of 95 cents but also lagged management’s guidance of $1.23 to $1.26 per share. However, on a year-over-year basis, earnings improved 15.0%.
Revenues
F5 Networks reported revenues of $420.0 million increased 19.9% from the year-ago quarter and also came ahead of the Zacks Consensus Estimate of $414 million. Improvement in revenues was due to broad-based strength across end markets and geographical regions.
Moreover, revenues were positively impacted by an 18.0% hike in Services revenues and a 21.6% increase in Product revenues on a year-over-year basis.
Geographically, on a year-over-year basis, revenues from the Americas increased 25.0% and represented 56.0% of total revenue. Europe, the Middle East and Africa (EMEA) grew 23.0% and accounted for 24.0% of total revenue. The Asia-Pacific remained flat on a year-over year basis, representing 14.0% of total revenue while Japan grew 17.0% and represented 6% of revenues.
By vertical, Enterprise was the strongest, accounting for 65.0% of total revenue. Service providers represented 23.0% of revenues while Government accounted for 13.0% of total revenue (including 5.0% from the U.S. federal).
The company also reported that 16.9% of total revenue came from distributor Ingram Micro (IM), 14.4% from Avnet (AVT) and 12.5% from Westcon.
Operating Results
The company’s adjusted gross margin (excluding amortization and other one-time items but including stock-based compensation) decreased 66 basis points (bps) on a year-over-year basis to 82.4% primarily due to higher cost of services.
F5 Networks’ adjusted operating margin (excluding amortization and other one-time items but including stock-based compensation) increased 19 bps from the year-ago quarter to 26.9% primarily due to lower operating expenses (especially Sales and marketing and General and administrative ) as a percentage of revenues. Operating expenses, as a percentage of revenues, decreased 85 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 $71.1 million or 93 cents, which improved from $64.2 million or 81 cents reported in the year-ago quarter. On a GAAP basis net income came in at $69.6 million or 91 cents compared with $63.4 million or 80 cents reported in the year-ago quarter.
Balance Sheet & Cash Flow
F5 Networks exited the second quarter with cash, cash equivalents and short-term investments of approximately $623.8 million, up from $578.2 million in the prior quarter. Receivables were $223.5 million versus $220.8 million in the prior quarter.
F5 Networks’ balance sheet does not comprise any long-term debt. The company reported cash flow from operations of $240.9 million for the six months ended Mar 31, 2014. F5 Networks repurchased 1.4 million shares for $150.0 million during the quarter.
Guidance
For the third quarter of fiscal 2014, F5 Networks expects revenues in the range of $428.0 million to $438.0 million. The Zacks Consensus Estimate is pegged at $427.0 million. Non-GAAP gross margin is expected to be roughly 83.5%. The company expects non-GAAP earnings for the third quarter of fiscal 2014 to be in the range of $1.33 to $1.36, well above the Zacks Consensus Estimate of $1.05 per share. Non-GAAP effective tax rate is expected to be 35.5%.
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.
Our Take
F5 Networks reported mixed second-quarter fiscal 2014 results and provided encouraging third-quarter guidance. The company’s top line increased year over year and beat the Zacks Consensus Estimate whereas the bottom line fell short of the consensus.
Revenue growth seems to be steady and was positively impacted by strength across all its business segments, end markets and geographical regions. Moreover, the company is positive about its product launches and growing demand for its products, particularly the security products.
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 (TAM) 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, a volatile spending atmosphere and competition from Juniper Networks Inc. (JNPR) and Brocade remain concerns.
Currently, F5 Networks has a Zacks Rank #2 (Buy).
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