Network application delivery and security specialist F5 (NASDAQ:FFIV) reported strong growth in the Q3 FY2021 earnings announcement, with revenue up 11.7% year on year to $651.5 million. F5 Networks made a GAAP profit of $89.6 million, improving on its profit of $69.8 million, in the same quarter last year.
F5 Networks (FFIV) Q3 FY2021 Highlights:
- Revenue: $651.5 million vs analyst estimates of $637.8 million (2.13% beat)
- EPS (non-GAAP): $2.76 vs analyst estimates of $2.46 (12.2% beat)
- Revenue guidance for Q4 2021 is $670 million at the midpoint, above analyst estimates of $663.9 million
- Free cash flow of $172.8 million, up 45.1% from previous quarter
- Gross Margin (GAAP): 81.4%, up from 80% previous quarter
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.
Large organizations are often running multiple online applications with complex connections across geographical locations, on-premise servers and cloud environments. Even though these companies theoretically do have enough computing power, their servers still can get overwhelmed when there is a lot of concentrated demand in one location, resulting in internal apps being slow and employees not being able to work, or customers not being able to shop online, use the apps or consume the content they want.
F5 provides technology that filters and distributes internet traffic across a company’s servers to improve page load speed, website availability, and also prevent cyber-attacks. To ensure users have an uninterrupted experience when visiting web applications, F5 uses load balancing technology to spread the demand across multiple servers and send traffic to the best-performing web server. Instead of using a content delivery network such as Cloudflare or Akamai to store temporary copies of web pages, F5 allows companies to use servers under their own control, whether in the cloud or on-premises, which can be important for compliance, privacy or other reasons.
Using AI- based technology, F5 is also able to inspect web traffic to detect suspicious activities and malicious users who try to steal sensitive information or overwhelm a web server with fake traffic. It also provides the features to automate the management of applications so that engineers can focus on more important tasks.
Communication, work, shopping and consuming content are all increasingly done online these days, and it is critical for companies to ensure that their services are always available to their users and customers. That drives demand for software and services that help companies handle massive traffic surges and ensure stability, availability and security of their web applications.
F5 faces competition from providers of application management and web security solutions such as Citrix (NASDAQ:CTXS) , Cisco (NASDAQ:CSCO), and Akamai (NASDAQ:AKAM) as well as cloud vendors such as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Google Cloud.
As you can see below, F5 Networks's revenue growth has been slow over the last year, growing from quarterly revenue of $583.2 million, to $651.5 million.
This quarter, F5 Networks's quarterly revenue was up 11.7% 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 $6.22 million in Q3, compared to $20.6 million in Q2 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 6.43% over the next twelve months.
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, licences, technical support and other necessary running expenses was at 81.4% in Q3.
That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, 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.
Key Takeaways from F5 Networks's Q3 Results
With a market capitalization of $11.8 billion, more than $767.9 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.
It was nice that F5 Networks improved their gross margin, even if just slightly. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, revenue growth is overall a bit slower these days. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company currently trades at $196.73 per share.
Is Now The Time?
When considering F5 Networks, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of F5 Networks we will be cheering from the sidelines. Its revenue growth has been very weak.
F5 Networks's price to sales ratio based on the next twelve months is 4.5, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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