F5 Shares Get Hammered

Traffic management specialist F5 Networks Inc. (Nasdaq: FFIV) last night announced third-quarter results, posting revenues of $73.1 million, up 65 percent on revenues of $44.2 million for the same period last year. This topped analyst estimates of $71.76 million (see F5 Announces Q3 Results).

Apparently there were some deep-pocketed investment types that weren't impressed with the results. Today F5's stock was hammered on the news, dropping 8.83 (17.75%) to 40.92.

Expectations must have been set sky-high, because F5 appeared to meet or beat analyst estimates. Earnings per share were 35 cents on net income of $14 million, up from 20 cents on net income of $7.4 million in the third quarter of 2004. This was above analyst estimates of 34 cents.

The stock may have been down on some less-than-bullish news about activity in the U.S. government and Japan, where revenue was softer than expected.

F5s revenues increased 78 percent year-over-year in North America and 69 percent in Europe, which helped offset a sluggish Japanese market. “It was a pretty slow quarter,” admits CEO John McAdam of the situation in Japan. “We expect it to go up as we approach [the Japanese fiscal] half year.”Speaking on a conference call earlier today, McAdam said North American and European sales were boosted by sales of F5's Buffalo Jump traffic management hardware to enterprises and service providers.

Japan was not the only place where F5 had a rough time -- the company's U.S. government business has still not picked up after a tough second quarter. “U.S. federal government business was weak in the quarter as we continued to see budget constraints,” says McAdam. Last quarter, F5 was one of a number of vendors that felt the effects of belt-tightening on Capitol Hill (see F5 Busts Out Big Q2 and Foundry Faces Tough Times).

Executives say new products are in the pipeline. One exec on the call confirmed that the company is working on a new platform. This, he says, would be available toward the end of 2006. McAdam adds that the company is currently beta testing a software-based version of its TrafficShield firewall device running on the company’s core TM/OS operating system.

F5 ended the quarter with $329 million in cash and investments, although McAdam was coy when questioned about potential acquisitions. If F5 did enter the M&A arena, he says, it would look for a small technology company that could be integrated into its TM/OS architecture. “We’re always looking at the XML space, for example, and there’s more that we can do with WAN optimization."

The Layers 4-7 switching, or traffic management market, where F5 is a major player, is similar to WAN optimization in that it focuses on the efficient use of bandwidth consumed by applications. There has already been some M&A activity in this space with Citrix Systems Inc. (Nasdaq: CTXS) snapping up NetScaler Inc. for $300 million earlier this year (see Citrix to Buy NetScaler for $300M).For the fourth quarter of 2005, F5 has set a revenue target of between $76 million and $78 million, and earnings of 29 or 30 cents per share, which includes the charge for a new stock-based compensation scheme.

— James Rogers, Site Editor, Next-Gen Data Center Forum