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F5 Networks (NASDAQ:FFIV) Q4: Beats On Revenue But Gross Margin Drops


Radek Strnad /
2022/10/25 4:13 pm EDT
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Network application delivery and security specialist F5 (NASDAQ:FFIV) reported Q4 FY2022 results beating Wall St's expectations, with revenue up 2.64% year on year to $700 million. The company expects that next quarter's revenue would be around $700 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. F5 Networks made a GAAP profit of $89.3 million, down on its profit of $110.7 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) Q4 FY2022 Highlights:

  • Revenue: $700 million vs analyst estimates of $691.8 million (1.17% beat)
  • EPS (non-GAAP): $2.62 vs analyst estimates of $2.52 (3.92% beat)
  • Revenue guidance for Q1 2023 is $700 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $145.8 million, up 134% from previous quarter
  • Gross Margin (GAAP): 78.9%, down from 81.1% same quarter last year

“Organizations across the globe have embraced and accelerated digital transformation to improve efficiency and to deliver the extraordinary digital experiences that are significant drivers of their businesses. In a challenging macro environment, these efforts take on new importance,” 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 unimpressive over the last two years, growing from quarterly revenue of $614.8 million in Q4 FY2020, to $700 million.

F5 Networks Total Revenue

F5 Networks's quarterly revenue was only up 2.64% year on year, which might disappoint some shareholders. But the growth did slow down compared to last quarter, as the revenue increased by just $25.5 million in Q4, compared to $40.2 million in Q3 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates F5 Networks is expecting revenue to grow 1.87% year on year to $700 million, slowing down from the 10% year-over-year increase in revenue the company had recorded in the same quarter last year.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. 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 78.9% in Q4.

F5 Networks Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still a good 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.

Key Takeaways from F5 Networks's Q4 Results

With a market capitalization of $8.84 billion F5 Networks is among smaller companies, but its more than $884.5 million in cash and positive free cash flow over the last twelve months give us confidence 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 less good to see that the revenue growth was quite weak and gross margin deteriorated a little. Overall, this quarter's results were not the best we've seen from F5 Networks. The company is down 1.13% on the results and currently trades at $151.74 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.