F5 Networks (FFIV) Q2 Earnings & Revenues Miss Estimates

F5 Networks Inc. FFIV reported second quarter fiscal 2016 adjusted earnings per share (excluding amortization of intangible assets but including stock-based compensation) on a proportionate tax basis of $1.24, which missed the Zacks Consensus Estimate of $1.27 per share. However, earnings increased from $1.21 per share reported in the year-ago quarter.

Revenues

F5 Networks' revenues grew 2.4% year over year to $483.7 million and were within the guided range of $480 million to $490 million. Reported revenues however lagged the Zacks Consensus Estimate of $485.4 million.

Revenues were boosted by a 13.3% increase in service revenues, which more than offset a 7.7% decline in Product revenues on a year-over-year basis.

Notably, F5 Networks' "Good, Better, Best" GBB pricing strategies and higher competencies of BIG-IQ platform also helped to streamline its product portfolio and drive year-over-year revenue growth.

Geographically, on a year-over-year basis, revenues from the Americas increased 1% and contributed 56% of total revenue. EMEA also increased 8% and accounted for 25% of total revenue. Asia-Pacific was up 1% on a year-over-year basis, representing 13% of total revenue while Japan revenues decreased 1% and represented 5% of total revenue.

By verticals, Enterprise, Service providers and Government (including 7% from the U.S. federal) accounted for 64%, 21% and 16% of total revenue, respectively.

The company's distributors Ingram Micro IM, Avnet AVT and Westcon accounted for 15%, 13.3% and 18.2%, respectively of total revenue.

Operating Results

F5 Networks' adjusted gross margin (excluding amortization of intangible assets but including stock-based compensation) expanded 48 basis points (bps) on a year-over-year basis to 83.6%, primarily due to a higher revenue base.

The company's adjusted operating margin (excluding amortization of intangible assets but including stock-based compensation) decreased 250 bps from the year-ago quarter to 26.3%, primarily due to higher adjusted operating expenses as a percentage of revenues. Adjusted operating expenses, as a percentage of revenues, increased 483 bps on a year-over-year basis.

The company's adjusted net income (excluding amortization of intangible assets but including stock-based compensation) came in at $84.3 million or $1.24 per share compared with $88.2 million or $1.21 per share reported in the year-ago quarter. On a GAAP basis, net income came in at $75.4 million compared with $85.7 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 $775 million. Receivables were $266.2 million at the end of the quarter.

F5 Networks' balance sheet does not have any long-term debt. The company reported cash flow from operations of $133.1 million. During the quarter, F5 Networks repurchased approximately 2.1 million shares for $200 million.

Guidance

For the third quarter of fiscal 2016, F5 Networks expects revenues in the range of $490 million to $500 million (mid-point $495 million). The Zacks Consensus Estimate is pegged at $502 million. Non-GAAP gross margin is expected to be roughly 84%. The company expects non-GAAP earnings for the third quarter of fiscal 2016 in the range of $1.77 per share to $1.80 per share. The Zacks Consensus Estimate is pegged at $1.41 per share. Non-GAAP effective tax rate is expected to be 33%.

Our Take

F5 Networks reported lower-than-expected second quarter fiscal 2016 results. However, year-over-year comparisons on both counts were favorable. Also, the company provided encouraging third-quarter guidance.

It is worth mentioning that the company's GBB pricing strategy and its BIG-IQ platform remain tailwinds. Revenue growth seems to be steady and was positively impacted by strength across all its business segments and higher software revenues.

We believe that the company's product refreshes will boost revenues, going forward. Moreover, these initiatives are expected to expand the company's total addressable market and result in client wins.

Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller market. Nevertheless, a volatile spending atmosphere and competition from Juniper Networks Inc. remain concerns.

Currently, F5 Networks has a Zacks Rank #2 (Buy). Besides F5 Networks, investors may consider Lexmark International Inc. LXK, a Zacks Rank #1 (Strong Buy) stock in the technology sector.

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