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.
Is now the time to buy F5 Networks? Access our full analysis of the earnings results here, it's free.
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
“We delivered 11% revenue growth in our second quarter as a result of stronger than expected systems shipments and strong global services performance,” said François Locoh-Donou, F5’s President and CEO.
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.
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.
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.
In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.
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.
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 give us confidence that F5 Networks has the resources it needs to pursue a high growth business strategy.
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.
F5 Networks may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.
One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.
The author has no position in any of the stocks mentioned.