F5 Networks Inc. (FFIV) reported third-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 $1.07 per share, which not only beat the Zacks Consensus Estimate of $1.05 per share but also increased 23.1% on a year-over-year basis.
Revenues
F5 Networks reported revenues of $440.3 million, which not only increased 18.9% from the year-ago quarter but also came ahead of the Zacks Consensus Estimate of $434.0 million. Improvement in revenues was primarily due to broad-based strength across its business segments (particularly in security products) and better-than-expected demand for systems and application services.
Moreover, revenues were impacted positively by a 20.4% increase in Product revenues, primarily driven by better-than-expected demand in security solutions and a 17.2% increase in service revenues on a year-over-year basis. Notably, F5 Networks’ “Good, Better, Best” (GBB) pricing strategies (up 49.0% sequentially) also helped to streamline the company's product portfolio and drive year-over-year revenue growth.
Geographically, on a year-over-year basis, revenues from the Americas increased 17.0% and represented 57.0% of total revenue. Europe, the Middle East and Africa (EMEA) grew 33.0% and accounted for 23.0% of total revenue. The Asia-Pacific grew 17.0% on a year-over year basis, representing 15.0% of total revenue while Japan revenues were down 3.0% and represented 5% of revenues.
By vertical, Enterprise accounted for 68.0% of total revenue. Service providers represented 20.0% of revenues while Government accounted for 12.0% of total revenue (including 3.0% from the U.S. federal).
The company also reported that 18.3% of total revenue came from distributor Ingram Micro (IM), 13.2% from Avnet (AVT) and 14.8% from Westcon.
Operating Results
The company’s adjusted gross margin (excluding amortization and other one-time items but including stock-based compensation) decreased 37 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 75 bps from the year-ago quarter to 26.1% 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 111 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 $81.1 million or $1.07 per share, which improved from $68.9 million or 87 cents reported in the year-ago quarter. On a GAAP basis net income came in at $79.5 million or $1.05 per share cents compared with $68.2 million or 86 cents reported in the year-ago quarter.
Balance Sheet & Cash Flow
F5 Networks exited the third quarter with cash, cash equivalents and short-term investments of approximately $611.4 million compared with $623.8 million in the prior quarter. Receivables were $243.1 million versus $223.5 million in the prior quarter.
F5 Networks’ balance sheet does not comprise any long-term debt. The company reported cash flow from operations of $130.3 million for the nine months ended Jun 30, 2014. F5 Networks repurchased approximately 1.4 million shares for $150.5 million during the quarter.
Guidance
For the fourth quarter of fiscal 2014, F5 Networks expects revenues in the range of $453.0 million to $463.0 million (mid-point $458.0 million). The Zacks Consensus Estimate is pegged at $454.0 million. Non-GAAP gross margin is expected to be roughly 83.5%. The company expects non-GAAP earnings for the fourth quarter of fiscal 2014 to be in the range of $1.46 to $1.49, well above the Zacks Consensus Estimate of $1.14 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 better-than-expected third-quarter fiscal 2014 results and provided an encouraging fourth-quarter guidance. Moreover, the company’s “Good, Better, Best” (GBB) pricing strategy remains a tailwind.
Revenue growth seems to be steady and was positively impacted by strength across all its business segments, (particularly in security products) and better-than-expected demand for systems and application services.
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, the volatile spending atmosphere and competition from Juniper Networks Inc. (JNPR) remain concerns.
Currently, F5 Networks has a Zacks Rank #2 (Buy).
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