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F5 Networks (NASDAQ:FFIV) Q4 Sales Beat Estimates But Gross Margin Drops


Full Report / October 25, 2022
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Network application delivery and security specialist F5 (NASDAQ:FFIV) announced better-than-expected results in the Q4 FY2022 quarter, with revenue up 2.64% year on year to $700 million. The company expects that next quarter's revenue would be around $700 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. F5 Networks made a GAAP profit of $89.3 million, down on its profit of $110.7 million, in the same quarter last year.

F5 Networks (FFIV) Q4 FY2022 Highlights:

  • Revenue: $700 million vs analyst estimates of $691.8 million (1.17% beat)
  • EPS (non-GAAP): $2.62 vs analyst estimates of $2.52 (3.92% beat)
  • Revenue guidance for Q1 2023 is $700 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $145.8 million, up 134% from previous quarter
  • Gross Margin (GAAP): 78.9%, down from 81.1% 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 $614.8 million in Q4 FY2020, to $700 million.

F5 Networks Total Revenue

F5 Networks's quarterly revenue was only up 2.64% year on year, which might disappoint some shareholders. But the growth did slow down compared to last quarter, as the revenue increased by just $25.5 million in Q4, compared to $40.2 million in Q3 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates F5 Networks is expecting revenue to grow 1.87% year on year to $700 million, slowing down from the 10% year-over-year increase in revenue the company had recorded in the same quarter last year.

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 78.9% in Q4.

F5 Networks Gross Margin (GAAP)

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 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 $145.8 million in Q4, down 23.2% year on year.

F5 Networks Free Cash Flow

F5 Networks has generated $409 million in free cash flow over the last twelve months, a solid 15.1% 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 Q4 Results

With a market capitalization of $8.84 billion F5 Networks is among smaller companies, but its more than $884.5 million in cash and positive free cash flow over the last twelve months give us confidence that F5 Networks has the resources it needs to pursue a high growth business strategy.

F5 Networks topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was less good to see that the revenue growth was quite weak and gross margin deteriorated a little. Overall, it seems to us that this was a complicated quarter for F5 Networks. The company is down 1.13% on the results and currently trades at $151.74 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 F5 Networks is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been very weak.

F5 Networks's price to sales ratio based on the next twelve months is 3.2x, suggesting that the market has lower expectations of the business, relative to the high growth 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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