Network application delivery and security specialist F5 (NASDAQ:FFIV) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 1.93% year on year to $700.3 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 $72.4 million, down on its profit of $93.5 million, in the same quarter last year.
F5 Networks (FFIV) Q1 FY2023 Highlights:
- Revenue: $700.3 million vs analyst estimates of $700.6 million (small miss)
- EPS (non-GAAP): $2.47 vs analyst estimates of $2.33 (6.01% beat)
- Revenue guidance for Q2 2023 is $700 million at the midpoint, below analyst estimates of $703.3 million
- Free cash flow of $144.5 million, roughly flat from previous quarter
- Gross Margin (GAAP): 77.8%, down from 80.3% 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.
As you can see below, F5 Networks's revenue growth has been unimpressive over the last two years, growing from quarterly revenue of $624.6 million in Q1 FY2021, to $700.3 million.
F5 Networks's quarterly revenue was only up 1.93% year on year, which might disappoint some shareholders. But the growth did slow down compared to last quarter, as the revenue increased by just $345 thousand in Q1, compared to $25.5 million in Q4 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 10.3% year on year to $700 million, improving on the 1.71% year-over-year decline 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 11.4% 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, licenses, technical support and other necessary running expenses was at 77.8% in Q1.
That means that for every $1 in revenue the company had $0.77 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 $144.5 million in Q1, up 81.1% year on year.
F5 Networks has generated $473.7 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 Q1 Results
With a market capitalization of $8.92 billion F5 Networks is among smaller companies, but its more than $659.7 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. On the other hand, revenue growth was quite weak and the revenue guidance for the next quarter slightly missed analysts' expectations. Overall, this quarter's results were not the best we've seen from F5 Networks. The company is up 1.46% on the results and currently trades at $148.6 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. However, its revenue growth has been very weak, and analysts believe that rate will remain roughly steady. 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 2.9x, 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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