Network application delivery and security specialist F5 (NASDAQ:FFIV) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue down 1.71% year on year to $634.2 million. However, guidance for the next quarter was even less impressive, coming in at $670 million at the midpoint, being 3.36% below analyst estimates. F5 Networks made a GAAP profit of $56.2 million, improving on its profit of $43.2 million, in the same quarter last year.
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F5 Networks (FFIV) Q2 FY2022 Highlights:
- Revenue: $634.2 million vs analyst estimates of $634.2 million (small beat)
- EPS (non-GAAP): $2.13 vs analyst estimates of $2.01 (5.73% beat)
- Revenue guidance for Q3 2022 is $670 million at the midpoint, below analyst estimates of $693.3 million
- Free cash flow of $121.2 million, up 51.9% from previous quarter
- Gross Margin (GAAP): 80%, in line with same quarter last year
“Our strong 40% software growth enabled us to deliver above the midpoint of our revenue guidance and at the top end of our non-GAAP earnings per share guidance for the 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 unimpressive over the last year, declining from quarterly revenue of $645.2 million, to $634.2 million.
Guidance for the next quarter indicates F5 Networks is expecting revenue to grow 2.83% year on year to $670 million, slowing down from the 11.7% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 9.61% over the next twelve months.
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 150% 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% in Q2.
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 Q2 Results
With a market capitalization of $11.2 billion, more than $887.1 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We struggled to find many strong positives in these results. On the other hand, it was less good to see that the revenue growth was quite weak and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is down 1.4% on the results and currently trades at $190.93 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.