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F5 Networks (NASDAQ:FFIV) Reports Q2 In Line With Expectations But Quarterly Guidance Underwhelms


Full Report / June 23, 2022
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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.

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

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.

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.

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.

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.

F5 Networks Total Revenue

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.

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.

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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. F5 Networks's free cash flow came in at $121.2 million in Q2, roughly the same as last year.

F5 Networks Free Cash Flow

F5 Networks has generated $563.8 million in free cash flow over the last twelve months, an impressive 21.2% of revenues. This extremely high FCF margin is a result of F5 Networks asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

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 currently trades at $152.4 per share.

Is Now The Time?

F5 Networks may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that F5 Networks is not a bad business. Its revenue growth has been very weak, but at least that growth rate is expected to increase in the short term. But on a positive note, its impressive gross margins are indicative of excellent business economics.

F5 Networks's price to sales ratio based on the next twelve months is 4.1x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While F5 Networks wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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