F5 Networks Plans For Virtual Future

6/8/2015


  Recent Price
$126
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
21
  Shares (millions)
73
  Long-Term Debt As % Of Capital
0%
  52-Week Price Range
$136.11 - $106.57

F5 Networks ($126; FFIV) is the country's largest seller of a product you've probably never heard of — application delivery controllers, or ADCs.

These devices manage traffic on computer servers, allowing websites and communications networks to operate quickly and efficiently — a fitting product for a company soon to be run by Manny Rivelo, a 19-year veteran of networking giant Cisco Systems ($29; CSCO).

While the hardware-upgrade cycle continues for now, F5 plans for a softer future. The company sells software-based ADCs that run on the servers they manage and in November launched Silverline, a cloud-based service that sells security software and will in the future make ADC software available via the internet.

F5's subscription-software business is tiny, but Rivelo expects it to "become material in a couple of years" and provide a long, steady revenue stream. F5 is a Focus List Buy and a Long-Term Buy.

Growth story

Over the last 12 months, F5's mix of products and services generated growth of 16% in sales, 29% in per-share profits, and 24% in operating cash flow.

No stock is perfect, and the chief criticism of F5 Networks involves the deceleration of product revenue as more corporations opt for cloud-based rentals rather than the purchase of their own equipment. Of course, deceleration is not the same as a stall. In the six months ended March, product revenue rose 9% and accounted for 52% of total revenue while services revenue jumped 18%.

That trend helps explain F5's focus on software and services. Analysts project sales growth of 11% and per-share-profit growth of 19% this year, followed by respective gains of 11% and 13% in 2016. F5 has topped profit estimates in four straight quarters.

While product-revenue deceleration may continue in coming quarters, help is on the way. In addition to growth from services and software, F5 stands to benefit from:

• Accelerating demand for enterprise applications, and the network infrastructure they require.

• Increasing use of mobile apps, a fast-growing market where F5 already has a solution available.

• Market-share gains in cybersecurity, as new product offerings Versafe and Defense.net help transform the unit into a key growth driver for F5.

• Continued share gains in the wake of Cisco's exit from the ADC market.

Conclusion

At 21 times trailing earnings, F5 trades 13% above the median for communications-equipment stocks in the S&P 1500 Index but 25% below the median for internet software & services. Such a valuation makes sense for a company that straddles the line between industries.

F5 pays no dividend, but last year the company spent a net $569 million on stock buybacks, reducing its share count by 5%. Given its strong cash flow, F5 seems likely to continue the buybacks — without sacrificing research & development, which has accounted for 12% to 16% of sales in each of the last nine fiscal years.

You can obtain an annual report for F5 Networks Inc. at 401 Elliott Ave. W., Seattle, WA 98119, (206) 272-5555, www.f5.com.

F5 NETWORKS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '15
1.59
vs.
1.27
12%
128.08
-
111.07
22 - 19
Dec '14
1.55
vs.
1.22
14%
136.11
-
108.60
25 - 20
Sep '14
1.57
vs.
1.26
18%
130.86
-
106.82
25 - 21
Jun '14
1.39
vs.
1.12
19%
124.80
-
106.57
26 - 22
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
1.73
5.43
0.00
128.30
-
78.14
24 - 14
2013
1.48
4.59
0.00
108.37
-
67.53
24 - 15
2012
1.38
4.37
0.00
139.46
-
69.60
32 - 16
2011
1.15
3.78
0.00
145.76
-
69.01
39 - 18
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
84
60
97
94
81
59

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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