RBC Downgrades F5 Networks, Says Neither Dividends Nor Catalysts Are Coming

• F5 Networks, Inc. FFIV has seen an 8.57 percent decline in its share price year-to-date, from a high of $132.71 on December 30, 2014.
• RBC Capital’s Mark Sue has downgraded the rating on the company from Outperform to Sector Perform, while lowering the price target from $130 to $125.
• While there do not appear to be any dividend or stock catalysts in the near term, Sue believes that the company’s end markets are maturing with workloads migrating to the cloud.

Analyst Mark Sue believes that given that F5 Networks is the market share leader, “the impact of the ADC market slow-down may be more pronounced” for the company, although security, product refreshes and application data analysis add-ons could “help regrow the top-line.”

The company revised its F1Q16 revenue guidance down to below the recently lowered estimates, as well as the consensus forecasts. Product revenues are expected to be flat year-on-year in the near term, with the cloud transitions affecting F5 Networks’ business. The EPS guidance has also been lowered below the estimate.

According to the RBC Capital report, “F5’s in investment mode and desires to add another 100 employees after adding +135 in F4Q implying peakish margins nearterm.”

F5 Networks attributed its lowered guidance to the macro backdrop, while expecting quarter-on-quarter growth, albeit back-end loaded, throughout FY16.

The company reported over 8 percent year-on-year growth in revenues for the quarter, with software growing as a percentage of product mix. Government sales were robust, with U.S. Fed leading the growth at 39 percent year-on-year growth, followed by overall government at 38 percent.

EMEA and Asia grew in the mid-teens, with North America growing at 6 percent year-on-year. “In order to consider a more constructive stance on the stock again, we’d like to see product revenue growth accelerate >10 percent annually,” Sue stated.