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October 24, 2011
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F5 Networks Inc. (FFIV) is scheduled to announce its fourth quarter fiscal 2011 results on October 25, 2011, and we notice no material movement in analyst estimates.
Third Quarter Overview
F5 Networks delivered decent third quarter results, beating the Zacks Consensus Estimate on the bottom line. The quarter’s earnings came in at 77 cents, up 54.0% from the year-ago quarter. The outperformance was attributable to solid revenues aided by growing demand for the company’s products, as well as market share gains.
The company reported third quarter revenues of $290.7 million, up 26.1% from the year-ago period, driven by increases in both product and service revenues. Strength in the Americas and Asia-Pacific regions was notable.
A stable pricing environment and better product mix aided the 130 basis points (bps) of gross margin expansion from the year-ago quarter. Operating margin surged 430 bps from the year-earlier period.
Fourth Quarter Guidance
Management believes that large projects, data center consolidation, and virtualization will continue to drive business. Management also stated that strong product offerings and operational efficiency will support F5’s sequential growth through the remainder of fiscal year 2011.
However, the company is somewhat cautious about the impact of the ongoing financial uncertainty in Europe on its EMEA business. Management expects strength in its North American and U.S. Federal businesses. Considering the above facts, F5 Networks expects revenues of $307.0 million to $312.0 million in the fourth quarter of 2011.
On a GAAP basis, earnings per share are expected in the range of 75–77 cents, which are roughly in line with the Zacks Consensus Estimate. Excluding stock-based compensation expense, management expects non-GAAP earnings per share to range between 97 cents and 99 cents.
Agreement of Analysts
The analysts are positive about F5’s dominant position in the Application Delivery market. Moreover, upcoming infrastructure virtualization and data center consolidation projects are increasing the need for data center efficiencies in the enterprise vertical.
This is boosting demand for F5’s networking products. Hence, the analysts are expecting strong revenue growth in the fourth quarter, and consequently, to healthy earnings per share.
The analysts are optimistic about F5’s sales expansion strategy that should benefit from new products and the TMOS 11 (flagship product) refresh. But the current macro outlook and lackluster spending patterns are forcing a cautious view on the stock.
Out of the 19 and 18 analysts providing estimates for the fourth quarter and fiscal 2011, respectively, none revised their estimates in the last 30 days. But among the 19 analysts providing estimates for fiscal 2012, 4 reduced their estimates in the past 30 days.
The estimate reduction for fiscal 2012 was mainly due to the ongoing uncertainty in the spending environment.
Magnitude of Estimate Revisions
The movement of the Zacks Consensus Estimates for the fourth quarter and fiscal 2011, however, indicates slightly negative sentiments of analysts. For the past ninety days, Zacks Consensus Estimates for the quarter and full year slipped a penny to 77 cents and $2.90, respectively.
Recommendation
Better execution and focus on enterprise and service providers have 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 the production of Victoria and TMOS 11 come on stream in the third half.
Stiff competition in the networking market and concerns relating to margin sustainability will be overhangs.
Currently, F5 Networks has a Zacks #4 Rank, implying a short-term Sell recommendation.
Read the full analyst report on "FFIV"
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