Network application delivery and security specialist F5 Networks (NASDAQ:FFIV) reported results in line with analysts' expectations in Q4 FY2023, with revenue flat year on year at $707 million. However, next quarter's revenue guidance of $685 million was less impressive, coming in 1.69% below analysts' estimates. Turning to EPS, F5 Networks made a non-GAAP profit of $3.50 per share, improving from its profit of $2.62 per share in the same quarter last year.
F5 Networks (FFIV) Q4 FY2023 Highlights:
- Revenue: $707 million vs analyst estimates of $702.3 million (small beat)
- EPS (non-GAAP): $3.50 vs analyst estimates of $3.21 (9.08% beat)
- Revenue Guidance for Q1 2024 is $685 million at the midpoint, below analyst estimates of $696.8 million
- Free Cash Flow of $174.4 million, up 16.2% from the previous quarter
- Gross Margin (GAAP): 80.1%, up from 78.9% in the same quarter last year
Initially started as a hardware appliances company in the late 1990s, F5 Networks (NASDAQ:FFIV) makes software that helps large enterprises ensure their web applications are always available by distributing network traffic and protecting them from cyberattacks.
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 (hindering employee productivity) and customers not being able to shop online or consume the content they want.
F5 Networks 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 Networks 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 Networks 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, the company 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.
Content Delivery
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 Networks 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 $682 million in Q4 FY2021 to $707 million this quarter.
F5 Networks's quarterly revenue was only up 0.99% year on year, which might disappoint some shareholders. However, its revenue increased $4.33 million quarter on quarter, a strong improvement from the $533 thousand decrease in Q3 2023. This is a sign of acceleration of growth and very nice to see indeed.
Next quarter, F5 Networks is guiding for a 2.2% year-on-year revenue decline to $685 million, a further deceleration from the 1.93% year-on-year decrease it 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 80.1% in Q4.
That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, sales and marketing, and general administrative overhead. F5 Networks's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that F5 Networks is controlling its costs and not under pressure from its competitors to lower prices.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. F5 Networks's free cash flow came in at $174.4 million in Q4, up 19.6% year on year.
F5 Networks has generated $599.2 million in free cash flow over the last 12 months, an impressive 21.3% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from F5 Networks's Q4 Results
Sporting a market capitalization of $8.68 billion, F5 Networks is among smaller companies, but its more than $803.3 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
We struggled to find many strong positives in these results. Its revenue guidance for next quarter underwhelmed, driven by some customer caution given the uncertain macroeconomic environment. Furthermore, the company has a $180 million headwind from strong backlog fulfillment in fiscal year 2023 that tempers its 2024 revenue growth expectations. Overall, this was a mediocre quarter for F5 Networks. The company is down 2.21% on the results and currently trades at $145 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.
We cheer for everyone who's making the lives of others easier through technology, but in case of F5 Networks, we'll be cheering from the sidelines. Its revenue growth has been very weak over the last two years, and analysts expect growth to deteriorate from here.
F5 Networks's price to sales ratio based on the next 12 months is 3.1x, 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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