Can Software & Services Boost F5 Networks (FFIV) Q1 Earnings?

F5 Networks Inc. (NASDAQ:FFIV) is set to report first-quarter fiscal 2019 results on Jan 23.

The company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average positive earnings surprise being 6.45%.

In the last reported quarter, the company’s non-GAAP earnings per share of $2.90 increased 18.9% year over year and surpassed the Zacks Consensus Estimate of $2.63. Moreover, F5 Networks’ revenues grew 4.6% to $562.7 million and topped the consensus estimate of $560.7 million.

For first-quarter fiscal 2019, F5 Networks expects revenues in the range of $542-$552 million. The Zacks Consensus Estimate stands at $546.65 million. The company expects non-GAAP earnings per share in the range of $2.51-$2.54. The consensus estimate is pegged at $2.54.

Let’s see how things are shaping up for the upcoming announcement.

Factors at Play

F5 Networks’ growth in services and software solutions segment is a key driver. The company’s traction in public cloud deployments, given the surge in demand for security in the multi-cloud environment, is a tailwind.

Additionally, the company is also upping its public cloud expertise. The joining of former General Manager of Global Business Development and sale operations for Amazon's (NASDAQ:AMZN) AWS Marketplace, Barry Russell, as the head of its cloud sales team, in fourth-quarter fiscal 2018 is expected to boost F5 Networks’ expansion into multi-cloud opportunities globally.

The BIG-IP Cloud Edition had started gaining traction among customers immediately after its launch last year. This trend is expected to continue in the fiscal first quarter and drive revenues.

On the last earnings call, the company hinted that a key managed care provider has chosen F5 Networks’ solutions, including the BIG-IP Cloud Edition, to aid its transition to the public cloud. This is expected to give impetus to the momentum further.

Moreover, the company stated that it is witnessing strong momentum in Enterprise License Agreements and Virtual Edition subscription software deals. The size of deals is increasing, allowing F5 Networks to expand its use cases and implement a new consumption model, which is expected to drive software growth. The software segment grew 19% year over year in the last quarter of fiscal 2018, and contributed 17% to product revenues. The Zacks Consensus Estimate for product revenues in the fiscal first quarter is pegged at $237 million, indicating year-over-year growth of 4.4%.

Further, the company’s growth opportunities in the security market are driven by its advanced Web Application Firewall (WAF). It is witnessing an expansion in its addressable market and revenue growth prospects on the back of its WAF offerings. The strong adoption of advanced WAF in existing as well as new customers is expected to continue in the to-be-reported quarter.

The company, however, expects quarterly fluctuations in hardware sales despite demand for new hardware in emerging markets like China and Latin America.

A volatile spending environment and increasing competition remain headwinds for F5 Networks’ revenue growth. Soft spending by tier 1 service providers in North America is a concern.

Additionally, increasing competition remain headwinds for F5 Networks’ revenue growth. Notably, Cisco Systems (NASDAQ:CSCO) poses the most significant competitive threat to F5 Networks, given the dominance of the former in the overall networking market.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Zacks Rank #4 (Sell) or #5 (Strong Sell) stocks are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

F5 Networks has an Earnings ESP of 0.00% and carries a Zacks Rank #3.

Some Stocks With Favorable Combination

Here are few stocks, which per our model have the right combination of elements to post an earnings beat this quarter:

Twitter, Inc. (NYSE:TWTR) has an Earnings ESP of +26.55% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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