Network application delivery and security specialist F5 (NASDAQ:FFIV) reported results in line with analyst expectations in Q2 FY2023 quarter, with revenue up 10.9% year on year to $703.2 million. However, guidance for the next quarter was less impressive, coming in at $700 million at the midpoint, being 6.4% below analyst estimates. F5 Networks made a GAAP profit of $81.4 million, improving on its profit of $56.2 million, in the same quarter last year.
F5 Networks (FFIV) Q2 FY2023 Highlights:
- Revenue: $703.2 million vs analyst estimates of $698.9 million (small beat)
- EPS (non-GAAP): $2.53 vs analyst estimates of $2.42 (4.34% beat)
- Revenue guidance for Q3 2023 is $700 million at the midpoint, below analyst estimates of $747.8 million
- Free cash flow of $130.2 million, roughly flat from previous quarter
- Gross Margin (GAAP): 77.9%, down from 80.1% 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 two years, growing from quarterly revenue of $645.3 million in Q2 FY2021, to $703.2 million.
This quarter, F5 Networks's quarterly revenue was up 10.9% year on year, which is above the trend for the company. We can see that the company increased revenue by $2.8 million quarter on quarter. That's a solid improvement on the $345 thousand increase in Q1 2023, so shareholders should appreciate the acceleration of growth.
Guidance for the next quarter indicates F5 Networks is expecting revenue to grow 3.78% year on year to $700 million, in line with the 3.53% 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 9.84% 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 77.9% in Q2.
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.
Cash Is King
If you have followed 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 $130.2 million in Q2, up 7.38% year on year.
F5 Networks has generated $482.7 million in free cash flow over the last twelve months, a solid 17.4% of revenues. This strong FCF margin is a result of F5 Networks asset lite business model and provides it plenty of cash to invest in the business.
Key Takeaways from F5 Networks's Q2 Results
With a market capitalization of $8.59 billion F5 Networks is among smaller companies, but its more than $755.3 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
We struggled to find many strong positives in these results other than the EPS beat. It was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and revenue growth is slower these days. Free cash flow in the quarter also missed. Overall, this quarter's results could have been better. The company is up 0.52% on the results and currently trades at $138 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. Although F5 Networks is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been very weak, and analysts believe that rate will remain roughly steady.
F5 Networks's price to sales ratio based on the next twelve months is 2.7x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that F5 Networks doesn't trade at a completely unreasonable price point.
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