Why Is F5 Networks (FFIV) Up 11.1% Since Its Last Earnings Report?

It has been about a month since the last earnings report for F5 Networks, Inc. (NASDAQ:FFIV) . Shares have added about 11.1% in that time frame.

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

F5 Networks Surpasses Q2 Earnings & Revenue Estimates

F5 Networks reported second-quarter fiscal 2018 non-GAAP earnings per share (excluding amortization of intangible assets, stock-based compensation and other one-time items) of $2.31, surpassing the Zacks Consensus Estimate of $2.26 as well as the guidance of $2.24-$2.27. Furthermore, earnings increased 18.5% from the year-ago bottom-line figure.

Revenues

F5 Networks’ revenues grew 2.9% year over year to $533.3 million and came ahead of the Zacks Consensus Estimate of $530 million. Notably, revenues were also above the mid-point of the guided range of $525-$535 million.

Revenues were boosted by around 6.7% increase in service revenues, which accounted for 55% of total revenues. However, product revenues witnessed a decrease of 1.5% on a year-over-year basis.

Geographically, on a year-over-year basis, revenues from the Americas were up 1% and contributed 55% to total revenues. EMEA increased 8% and accounted for 26% of total revenues. Asia Pacific was up 2% on a year-over-year basis, representing 14% of total revenues. Japan revenues decreased 6% and represented 4% of total revenues.

By verticals, Enterprise, Service providers and Government (including 5% from the U.S. federal) accounted for 66%, 21% and 13% of total revenues, respectively.

The company’s distributors Ingram Micro and Tech Data accounted for 17% and 12% of revenues, respectively. Arrow, Westcon and Cynics contributed 11% each to total revenues.

Operating Results

F5 Networks’ non-GAAP gross profit (excluding amortization of intangible assets, other one-time items and stock-based compensation) was up 2.9% on a year-over-year basis and came in at $451.2 million. Non-GAAP gross margin decreased 30 basis points (bps) during the quarter and came in at 84.7%, primarily due to higher cost of sales.

The company’s non-GAAP operating profit (excluding amortization of intangible assets, other one-time items and stock-based compensation) totaled $187.5 million, up 1% from the year-ago quarter. Non-GAAP operating margin was almost flat on a year-over-year basis.

The company’s non-GAAP net income (excluding amortization of intangible assets, other one-time items and stock-based compensation) came in at approximately $143.3 million compared with $127 million reported in the year-ago quarter. On a GAAP basis, net income came in at $109.6 million compared with $93.1 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 $1.02 billion compared with $1 billion in the prior quarter.

Long-term liabilities were $328.4 million. It reported cash flow from operations of $374.7 million. During the quarter, F5 Networks repurchased shares worth approximately $300 million.

Guidance

For third-quarter fiscal 2018, F5 Networks expects revenues in the range of $535-$545 million. The company expects non-GAAP earnings per share in the range of $2.36-$2.39.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to two lower.

F5 Networks, Inc. Price and Consensus

VGM Scores

At this time, FFIV has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value and growth investors than momentum investors.

Outlook

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