F5 Networks Inc. (NASDAQ:FFIV) reported second-quarter fiscal 2017 adjusted earnings per share (excluding amortization of intangible assets and other one-time items but including stock-based compensation) on a proportionate tax basis of $1.46, missing the Zacks Consensus Estimate of $1.52 per share. However, earnings increased from $1.24 per share reported in the year-ago quarter.
Revenues
Although, F5 Networks’ revenues grew 5.4% year over year to $518.2 million, it came toward the lower end of the guided range of $518–$528 million. Reported revenues also missed the Zacks Consensus Estimate of $523 million.
Revenues were boosted by an 8.5% increase in service revenues and 2% increase in Product revenues on a year-over-year basis.
Notably, F5 Networks’ “Good, Better, Best” (GBB) pricing strategies and higher competencies of BIG-IQ platform also helped in streamlining its product portfolio and driving year-over-year revenue growth.
Geographically, on a year-over-year basis, revenues from the Americas were up 7% and contributed 56% to total revenue. EMEA increased 4% and accounted for 24% of total revenue. Asia-Pacific was up 16% on a year-over-year basis, representing 15% of total revenue while Japan revenues decreased slightly and represented 5% of total revenue.
By verticals, Enterprise, Service providers and Government (including 4% from the U.S. federal) accounted for 65%, 22% and 13% of total revenue, respectively.
The company’s distributors Ingram Micro, Tech Data (NASDAQ:TECD) (formerly Avnet), Arrow (NYSE:ARW) and Westcon accounted for 16.3%, 12.6%, 10.5% and 17.9%, respectively, of total revenue.
Operating Results
F5 Networks’ adjusted gross margin (excluding amortization of intangible assets and other one-time items but including stock-based compensation) was almost flat on a year-over-year basis and came in at 83.5%.
The company’s adjusted operating margin (excluding amortization of intangible assets and other one-time items but including stock-based compensation) increased 100 basis points (bps) from the year-ago quarter to 27.3%, primarily due to lower adjusted operating expenses as a percentage of revenues. Adjusted operating expenses, as a percentage of revenues, decreased 102 bps on a year-over-year basis.
The company’s adjusted net income (excluding amortization of intangible assets and other one-time items but including stock-based compensation) came in at approximately $93 million compared with $84.8 million reported in the year-ago quarter. On a GAAP basis, net income came in at $93.1 million compared with $75.4 million reported in the year-ago period.
Balance Sheet & Cash Flow
F5 Networks exited the quarter with cash, cash equivalents and short-term investments of approximately $1.015 billion. Receivables were $293.9 million at the end of the quarter.
F5 Networks’ balance sheet does not have any long-term debt. The company reported cash flow from operations of $175.3 million during the quarter. During the quarter, F5 Networks repurchased approximately 1.1 million shares for $150 million.
Guidance
For the third quarter of fiscal 2017, F5 Networks expects revenues in the range of $520–$530 million. The Zacks Consensus Estimate is pegged at $537 million. Non-GAAP gross margin is expected to be roughly 84.5%. The company expects non-GAAP earnings for the third quarter of fiscal 2017 in the range of $2.01–$2.04 per share. The Zacks Consensus Estimate is pegged at $1.64 per share. Non-GAAP effective tax rate is expected to be 32%.
Share Price
In the last one year, the company’s stock surged roughly 31.7% and outperformed the Zacks categorized Internet Software industry, which gained only 11.4%.
Our Take
F5 Networks reported dismal second-quarter fiscal 2017 results, as both the bottom and top line missed the Zacks Consensus Estimate. However, year-over-year comparisons on both counts were favorable. Nonetheless, the company provided a tepid third-quarter revenue guidance.
It is worth mentioning that the company’s GBB pricing strategy and its BIG-IQ platform remain tailwinds. Revenue growth seems to be steady and was positively impacted by strength across all its business segments and higher software revenues.
We believe that the company’s product refreshes will boost revenues, going forward. Moreover, these initiatives are expected to expand the company’s total addressable market and result in client wins.
Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller market. Nevertheless, a volatile spending atmosphere and competition from Juniper Networks Inc. (NYSE:JNPR) remain concerns.
Currently, F5 Networks has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
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