Network application delivery and security specialist F5 (NASDAQ:FFIV) reported results in line with analysts' expectations in Q3 FY2023, with revenue up 4.17% year on year to $702.6 million. However, next quarter's revenue guidance of $700 million was less impressive, coming in 1.01% below analysts' estimates. F5 Networks made a GAAP profit of $89 million, improving from its profit of $83 million in the same quarter last year.
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F5 Networks (FFIV) Q3 FY2023 Highlights:
- Revenue: $702.6 million vs analyst estimates of $699.8 million (small beat)
- EPS (non-GAAP): $3.21 vs analyst estimates of $2.86 (12.3% beat)
- Revenue guidance for Q4 2023 is $700 million at the midpoint, below analyst estimates of $707.2 million
- Free cash flow of $150 million, up 15.2% from the previous quarter
- Gross Margin (GAAP): 79.8%, in line with the same quarter last year
“Over the last several years, through the combination of organic innovation, acquisitions and technology integration, we have created a converged portfolio uniquely capable of simplifying the complexities our customers face operating today’s hybrid, multi-cloud IT environments,” continued Locoh-Donou (company CEO). “We are delivering the gross margin improvement and operating leverage we committed to, and we are confident in our ability to achieve our target of double-digit non-GAAP earnings growth for fiscal year 2023,”
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.
As you can see below, F5 Networks's revenue growth has been over the last two years, growing from $651.5 million in Q3 FY2021 to $702.6 million this quarter.
F5 Networks's quarterly revenue was only up 4.17% year on year, which isn't particularly great. On top of that, the company's revenue actually decreased by $533 thousand in Q3 compared to the $2.8 million increase in Q2 2023. Shareholders might want to pay closer attention to this situation as management is guiding for another decline in sales next quarter.
Next quarter, F5 Networks is guiding for a 0% year-on-year revenue decline to $700 million, a further deceleration from the 2.64% year-on-year decrease it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 0.26% over the next 12 months.
In volatile times like these, we look for robust businesses with strong pricing power. Overlooked by most investors, this company is one of the highest-quality software companies in the world, and its software products have been the gold standard in critical industries for decades. The result is an impressive business that's up an incredible 18,000%+ since its IPO. You can find it on our platform for free.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 79.8% in Q3.
That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, F5 Networks's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Key Takeaways from F5 Networks's Q3 Results
Sporting a market capitalization of $9 billion, F5 Networks is among smaller companies, but its more than $690.6 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was good to see F5 Networks beat on revenue, albeit by a small magnitude, and improve its gross margin this quarter. What is driving the stock up seems to be management comments that demand is stabilizing and that F5 Networks should be able to grow non-GAAP EPS by a double digit percentage, which is higher than expectations. That really stood out as a positive in these results. On the other hand, its underwhelming revenue guidance for next quarter was disappointing (although next quarter's EPS guidance was in line). Overall, this was a mixed quarter for F5 Networks, but the double-digit percentage non-GAAP EPS growth for the full year is being received well. The stock is up 9.17% after reporting and currently trades at $164 per share.
F5 Networks may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, and what's happened in the latest quarter. We cover this and more in our full company report, and it's free.
Looking for more investment opportunities? One way to find them is to watch for paradigm shifts, just like how every company in the world is slowly becoming a technology company and facing increasing cybersecurity risks. This company is leading the charge in cyber defense with its cloud-native cybersecurity solutions while generating best-in-class revenue growth and SaaS performance metrics. It should definitely be on your radar.
The author has no position in any of the stocks mentioned in this report.