F5 Busts Out Big Q2

F5 Networks Inc. (Nasdaq: FFIV) turned in better than expected second-quarter earnings yesterday, but the celebration was doused in part by weak sales to the U.S. government and the Far East.

For its second quarter, which ended March 31, F5 posted revenues of $67.7 million. This figure was up 67 percent on the same period last year and topped analyst estimates of $64.83 million (see F5 Announces Q2 Results).

Despite the results, F5 stock took a hammering today, dropping $3.44 (7.29%) in the early going (see F5 Busts Out Big Q2 and F5 Announces Q2 Results).

Second-quarter earnings per share were 31 cents -- beating the consensus analyst forecast of 29 cents -- on net income of $12.1 million. For the second quarter of 2004, F5 reported net income of $6.0 million, or 16 cents per diluted share.

Execs on last night's conference call said that sales of the companys FirePass SSL VPN products helped drive the results. F5’s security revenues were $6.5 million, up 28 percent on the prior quarter.The Seattle-based vendor acquired the FirePass technology when it bought remote-access specialist URoam in 2003, and has since filled out its product portfolio, notably with the launch of the high-end 4100 device (see F5 Buys uRoam, Reports Strong Q3 and F5 Fuses Firewall & VPN).

But it wasn’t all smooth sailing in the second quarter. Like other vendors, the security specialist has noticed a slowdown in its U.S. government business. These worries may have contributed to the stock selloff. Last week Foundry Networks Inc. (Nasdaq: FDRY) cut its guidance, prompted in part by belt tightening on Capitol Hill (see Foundry Faces Tough Times).

F5 CEO John McAdam attributes the slowdown to delayed project implementations, a situation that Foundry's management is only too familiar with (see War Fogs Foundry's Numbers).

Japan was another problem area. The Japanese market contributed 18 percent of F5’s revenues for the quarter, down from 22 percent in the same quarter of 2004. “Clearly the spending there seems to be reasonably tight,” McAdam said.

Here, again, F5 is not the only vendor feeling the pinch. Last week IBM Corp. (NYSE: IBM) partly attributed its financial woes to softness in certain geographies -- it has only managed to increase its Asian revenues by 1 percent (see IBM Reports Q1 Results).Nonetheless, the consensus among analysts remains positive about the F5’s long-term prospects. Oppenheimer & Co. reiterated its Buy rating on F5 stock. “The business continues to be driven by the webification of applications and the attendant need [of users] to improve their performance and provide secure communication paths,” the company said in a guidance note.

Analyst Alex Henderson of Citigroup does not see any cause for concern in the stock’s performance today. “While FFIV has opened up down, we think the quarter and outlook are exceptional and we do not see any issues in the quarter that justify the decline in the shares at the open.”

Turning to F5's product roadmap, McAdam said the company is working to combine its core security products by offering them as software modules.

He explained its first priority is to have the TrafficShield Application Firewall running on its Traffic Management Operating System as an optional software module. “You should expect to see more modules announced in the near future,” he said. This could be a shrewd move, particularly at a time when vendors are scrambling to roll as many features as possible into all-singing, all-dancing data center devices.

Earlier this week, for example, execs at Check Point Software Technologies Ltd. (Nasdaq: CHKP) attributed the firm's improved first-quarter performance to the decision to offer software-based SSL VPN products on its hardware products (see Check Point Gets by Q1).McAdam gave little away on product specifics and launch dates, although he did confirm that a high-end version of F5's Big-IP SSL Accelerator is in the pipeline.

But will there be any demand for the new TrafficShield software module? The Scottish CEO confirmed that sales of the hardware-based TrafficShield device had been below the company’s initial projections. “The application firewall market is still in an early adoption stage,” he explains. “Customers want to evaluate the product before running a full implementation.”

For the third quarter of 2005, ending June 30, F5 has set a revenue target of $70 million to $72 million and an earnings target of between 33 cents and 34 cents.

A spokeswoman for F5 downplayed the stock's performance today. "We’re in a healthy growth market and are very focused on driving the business and aren’t dictated by the stock market," she said.

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

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