F5 (FFIV) Down 12.4% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for F5 Networks (FFIV). Shares have lost about 12.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is F5 due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

F5 Networks Reports Mixed Q3 Results

F5 Networks reported third-quarter fiscal 2019 GAAP earnings per share of $2.52, missing the Zacks Consensus Estimate of $2.57 but inching up 3.3% year over year. Excluding the impact of the NGINX buyout, non-GAAP earnings would have been in line with estimates.

F5 Networks revenues rose 4% year over year to $563.4 million and also surpassed the Zacks Consensus Estimate of $555 million. The acquisition of NGINX contributed $5.1 million to revenues in the quarter under review.

Quarterly Details

Products revenues (44.2% of total revenues) during the reported quarter totaled $248.9 million, up 4.2% from the year-ago period, driven by software. NGINX contributed to $4 million of subscription software revenues.

Software soared 91% year over year and represented 27% of product revenues. This upside can be attributed to the growing adoption of the Enterprise License Agreement (ELA) and annual subscriptions among customers.

Excluding NGINX, software revenues surged 79% year over year and accounted for 26% of the product revenues.

Software growth is consistently aided by security use cases, which include web application firewall, bot-defense and mitigation. A few multimillion-dollar ELA deals were also a tailwind in the quarter under consideration.

Systems revenues, denoting 73% of product revenues, declined 11% on a year-over-year basis.

Services revenues (55.8%) increased 3.7% year over year to $314.5 million with $1.1 million contributed by NGINX.

Geographically, on a year-over-year basis, revenues from the Americas — reflecting 53% of the total count — dipped 1%. Asia Pacific and Japan revenues rose 22% and generated 23% of the total top line. EMEA was nudged up 2% and accounted for 24% of the total revenue tally.

Going by the verticals, Enterprise, Service providers and Government (including 8% from the U.S. Federal) depicted 60%, 20% and 19% of the total revenue stream, respectively.

The company’s distributor Ingram Micro translated to 18% of the company’s revenues. Tech Data and Westcon contributed 11% and 10%, respectively, to the total revenue base.

Margins

Non-GAAP gross margin expanded 90 basis points (bps) to 85.4% during the quarter.

Non-GAAP operating margin contracted 290 bps to 33.1%. Excluding NGINX, non-GAAP operating margin was 34.2% in the quarter under discussion.

Balance Sheet & Cash Flow

F5 Networks exited the reported quarter with cash, cash equivalents and short-term investments of approximately $986.5 million compared with $1.31 billion in the sequential quarter.

Long-term liabilities were $481 million compared with $448 million in the previous reported quarter.

The company reported cash flow of $150 million from operations in the quarter under consideration.

Outlook

Management remains optimistic that increasing demand for the multi-cloud application services will be a stable key driver. Rising traction of subscription and ELA offerings is a tailwind.

For fourth-quarter fiscal 2019, F5 Networks expects revenues in the range of $577-$587 million (mid-point $582 million). Of the same, NGINX is anticipated to contribute less than $8 million.

The company anticipates non-GAAP earnings per share in the band of $2.53-$2.56.

The company will incur capital expenditure of $25-$35 million for the development of its new corporate headquarters in the fiscal fourth quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -12.46% due to these changes.

VGM Scores

At this time, F5 has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise F5 has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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