Why Is F5 (FFIV) Down 1.2% Since Last Earnings Report?

A month has gone by since the last earnings report for F5 Networks (FFIV). Shares have lost about 1.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is F5 due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

F5 Networks Q2 Earnings & Revenues Beat Estimates

F5 Networks reported second-quarter fiscal 2020 non-GAAP earnings per share of $2.23, beating the Zacks Consensus Estimate of $1.99. Moreover, the company’s quarterly earnings came in significantly higher than its guidance of $2.14-$2.16 per share. Nonetheless, non-GAAP earnings fell 13.2% from the year-ago quarter as elevated operating expenses more than offset the benefit of higher revenues.

Revenues increased 7% year over year to $583.4 million, surpassing the Zacks Consensus Estimate of $566 million on solid software growth. Also, revenues came in at the mid-point of the company’s $580-$590 million guided range.

During the earnings conference call, the company stated that the coronavirus outbreak had a neutral impact on its business. F5 Networks witnessed minimal business disruptions during the first two-and-a half months outside of Asia.

Notably, during the last 15 days of the quarter, the firm witnessed increased purchases from some customers in a bid to strengthen their application infrastructure. However, some clients push-out their technological upgradation projects, which neutralize the aforementioned tailwinds.

Revenue Details

Product revenues (45% of total revenues) during the quarter totaled $262 million, up 10% year over year. Software sales soared 96% year over year and represented 35% of product revenues. This upside can be attributed to the growing adoption of the Enterprise License Agreement (ELA) and annual subscriptions among customers.

System revenues of $171 million, representing 65% of product revenues, declined 11% on a year-over-year basis due to continued transition of customers to software-based solutions.

Service revenues (55% of total revenues) increased 5% to $324 million. Improvements to the tools and processes that the company’s team uses to identify and secure renewals are among the key catalysts. Further, healthy services attached in renewal rates to software sold as perpetual or as subscriptions, including NGINX-related sales, are tailwinds. Moreover, increase in consulting-services demand associated with the rising software sales is an upside.

Region wise, revenues from the Americas grew 7%, year on year, reflecting 56% of the total count. APAC revenues were up 9%, representing 19% of the total top line. EMEA climbed 8%, accounting for 25% of total revenues.

Going by the verticals, Enterprise, Service providers and Government (including 7% from the U.S. Federal) displayed 69%, 15% and 16% of the total product bookings, respectively.

Margins

Non-GAAP gross margin of 85% remained flat year over year and came in at the lower end of the guided range of 85-85.5%.

Non-GAAP operating expenses flared up 19.8% year on year to $327 million and came in within the company’s prior estimate of $325–$337 million. However, as a result of higher operating expenses, the company’s non-GAAP operating margin shrunk 580 basis points to 29.1%.

Balance Sheet & Cash Flow

F5 Networks exited the reported quarter with cash and investments of approximately $1 billion compared with the prior quarter’s $1.5 billion.

During the first six months of fiscal 2020, the company generated $325.8 million of operating cash flow. Moreover, during the first half of fiscal 2020, it bought back $50 million worth of its common stocks.

Outlook

Citing business uncertainties due to the pandemic, the company withdrew its fiscal 2020 outlook. However, it has issued a guidance for the fiscal third quarter.

For the fiscal third quarter, F5 Networks expects non-GAAP revenues in the range of $555-$585 million. The company anticipates non-GAAP earnings per share in the $1.91-$2.13 band.

The company expects to incur operating expenses of $320-$332 million, including the Shape acquisition-related expenses.

Management remains optimistic that surging demand for multi-cloud application services will be a key driver. Furthermore, strong demand for software solutions is a tailwind. Rising traction from subscription and ELA offerings is another driving factor.

Additionally, F5 Networks and NGINX’s first combined solution, Controller 3.0, is expected to increase the total addressable market and deal sizes by spending more use cases across DevOps and Super-NetOps customer profiles.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 7.71% due to these changes.

VGM Scores

At this time, F5 has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, F5 has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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