Zacks_Analysts' Blog : Earnings Preview: F5 Networks - Analyst Blog

F5 Networks Inc. (FFIV) is scheduled to announce its third quarter fiscal 2011 results on July 20, 2011, and we observe limited movements in analyst estimates.

Second Quarter Overview

F5 Networks delivered decent second quarter results, beating the Zacks Consensus Estimate on the bottom line. The quarter’s earnings came in at 69 cents, up 64.3% from the year-ago quarter. However, revenue was in line with the Zacks Consensus Estimate.

F5 Networks reported second quarter revenues of $277.6 million, up 34.7% from the year-ago period, driven by increases in both product and service revenues. Strength from the Americas and Asia-Pacific regions contributed to the improvement.

A stable pricing environment and better product mix aided the 180 basis points (bps) gross margin expansion from the year-ago quarter. Operating margin surged 580 bps from the year-earlier period.

Third Quarter Guidance

F5 Networks expects revenues of $287.0–$292.0 million. On a GAAP basis, earnings per share are expected in the range of 69–71 cents, which is roughly in line with the Zacks Consensus Estimate. Excluding stock-based compensation expense, management expects non-GAAP earnings per share to range between 89 cents and 91 cents.

Agreement of Analysts

Out of the 21 analysts providing estimates for the third quarter, none revised their estimates in the last 30 days. Out of the 21 analysts providing estimates for fiscal 2011, only 1 analyst made a downward revision in the last 30 days. No movement was noticed in the past 7 days for either the third quarter or fiscal 2011.

The analysts are positive about F5’s dominant position in the Application Delivery market. Moreover, upcoming infrastructure virtualization and data center consolidation projects are pointing toward the need for achieving data center efficiencies in the enterprise vertical. This is actually boosting the demand for F5’s networking products. Hence, the analysts are looking out for strong revenue growth in the third quarter, leading to healthy earnings per share.

But some analysts expect F5 Networks to face stiff competition from Citrix Inc. (CTXS) and some other key players, which could limit its market share.

Magnitude of Estimate Revisions

The movement of the Zacks Consensus Estimates for the third quarter and fiscal 2011, however, indicates some positive sentiments of analysts. For the past ninety days, Zacks Consensus Estimates for the quarter and full year increased a penny and three cents, respectively, to 71 cents and $2.85.

Recommendation

Better execution and focus on enterprise and service providers has placed F5 Networks well in the application delivery controller (ADC) market and helped it take share from Cisco Systems Inc. (CSCO). F5 Networks is also keen on expanding its cloud exposure. The analysts see demand acceleration for F5’s ADCs in telcos in the back half of 2011 and beyond as soon as Victoria and TMOS 11 come into production in the second half.

Stiff competition in the networking market and lackluster contribution from Japan are concerns.

Currently, F5 Networks has a Zacks #4 Rank, implying a short-term Sell recommendation.