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F5 Networks (NASDAQ:FFIV) Beats Q1 Sales Targets But Stock Drops 14.1%


Jabin Bastian /
2022/01/25 4:16 pm EST
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Network application delivery and security specialist F5 (NASDAQ:FFIV) reported Q1 FY2022 results beating Wall St's expectations, with revenue up 10% year on year to $687.1 million. However, management provided guidance for the next quarter with revenues at $630 million at the midpoint, or 9.24% below analyst estimates. F5 Networks made a GAAP profit of $93.5 million, improving on its profit of $87.6 million, in the same quarter last year.

Is now the time to buy F5 Networks? Access our full analysis of the earnings results here, it's free.

F5 Networks (FFIV) Q1 FY2022 Highlights:

  • Revenue: $687.1 million vs analyst estimates of $678 million (1.33% beat)
  • EPS (non-GAAP): $2.89 vs analyst estimates of $2.78 (3.84% beat)
  • Revenue guidance for Q2 2022 is $630 million at the midpoint, below analyst estimates of $694.1 million
  • Free cash flow of $79.8 million, down 57.9% from previous quarter
  • Gross Margin (GAAP): 80.3%, down from 81.5% same quarter last year

“Our customers’ need to grow and evolve the applications that support and drive their businesses led to strong demand for F5’s application security and delivery solutions, fueling 10% revenue growth in our first quarter,” said François Locoh-Donou, F5’s President and CEO.

While the company initially started in the late 90s by selling hardware appliances, these days F5 (NASDAQ:FFIV) is making software that helps large enterprises ensure their web applications are always available, by distributing network traffic and protecting them from cyber attacks.

The amount of content on the internet is exploding, whether it is music, movies and or e-commerce stores. Consumer demand for this content creates network congestion, much like a digital traffic jam which drives demand for specialized content delivery networks (CDN) services that alleviate potential network bottlenecks.

Sales Growth

As you can see below, F5 Networks's revenue growth has been slower over the last year, growing from quarterly revenue of $624.6 million, to $687.1 million.

F5 Networks Total Revenue

This quarter, F5 Networks's quarterly revenue was up 10% year on year, which is above average for the company. But the growth did slow down compared to last quarter, as the revenue increased by just $5.1 million in Q1, compared to $30.4 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 7.85% over the next twelve months, although estimates are likely to change post earnings.

There are others doing even better than F5 Networks. Founded by ex-Google engineers, a small company making software for banks has been growing revenue 90% year on year and is already up more than 400% since the IPO last December. You can find it on our platform for free.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. F5 Networks's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 80.3% in Q1.

F5 Networks Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like F5 Networks to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that F5 Networks is doing a good job controlling costs and is not under pressure from competition to lower prices.

Key Takeaways from F5 Networks's Q1 Results

Sporting a market capitalization of $13.8 billion, more than $858.9 million in cash and with positive free cash flow over the last twelve months, we're confident that F5 Networks has the resources it needs to pursue a high growth business strategy.

F5 Networks topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue growth was quite slow. Overall, this quarter's results were not the best we've seen from F5 Networks. The company is down 14.1% on the results and currently trades at $190 per share.

F5 Networks may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.