F5 Networks Inc. (FFIV) posted decent fourth quarter adjusted earnings per share (EPS) of 61 cents, beating the Zacks Consensus Estimate of 55 cents. The adjusted EPS excludes the legal settlement charges, but includes stock-based compensation charges.
The increase in earnings may be attributed to increasing demand for the company’s products from the growing need for server virtualization and cloud computing within organizations.
F5 Networks reported revenues of $254.3 million in the fourth quarter, up 45.2% from $175.1 million in the year-ago period. The quarter’s revenue surpassed the company’s guided range of $242.0-$247.0 million and the Zacks Consensus Estimate of $248.0 million. According to industry sources, the growth in revenue could be attributed to strong demand for the company’s products and market share win over Cisco Systems Inc. (CSCO).
Continuous enhancement of product suites during the quarter led to a year-over-year increase of 51.5% from the Product segment. Revenues from the Services segment also climbed 34.7% year over year, reflecting a growth in new and renewed service maintenance contracts booked during the quarter.
Operating Results
Gross margin in the fourth quarter rose to 81.6% from 79.2% in the year-ago quarter. The improvement was supported by a stable pricing environment for the company’s products and an improved product mix.
Despite the substantial year-over-year increase of 33.1% in operating expenses, operating income came in at $76.3 million, up from $41.4 million in the year-ago quarter. Operating margin in the quarter was 30.0%, up from 23.6% reported in the year-ago quarter. The margin improvement could be attributed to higher revenues.
Reported net income was $48.2 million or 59 cents per share, up from $28.4 million or 36 cents per share in the comparable quarter last year. Excluding the impact of one-time legal settlement and stock-based compensation charges, non-GAAP net income was $63.9 million or 79 cents, compared to $40.0 million or 50 cents in the year-ago quarter. However, including stock-based compensation charges, the adjusted net income was 61 cents, up from 36 cents in the year-earlier quarter.
Balance Sheet, Cash Flow & Share Repurchase
Cash, cash equivalents and short-term investments totaled approximately $428.5 million at the end of the September quarter, up $30.2 million from the prior quarter. Cash flow from operations was $86.0 million, up from $75.3 million in the prior quarter.
F5 Networks repurchased $75.0 million worth of its outstanding shares.The company also received approval from its board of directors for a new program to repurchase up to $200 million of its outstanding common stock.
Guidance
For the first quarter of fiscal 2011, F5 Networks expects revenues of $265.0 million to $275.0 million. On a GAAP basis, earnings per share are expected to be in the range of 62–64 cents. Excluding stock-based compensation expense, the company expects non-GAAP earnings per share to range between 80 cents and 82 cents.
Our Take
F5 Networks delivered solid fourth quarter results, beating Zacks Consensus Estimates on both the top and bottom lines. The company also provided an encouraging first quarter outlook based on the current business momentum and strong product pipeline. Moreover, we believe that F5’s aggressive share repurchase program will attract investors.
However, the cyclical nature of IT spending, high exposure to the extremely volatile financial services sector and competitive pressure in the enterprise market remain concerns.
Currently, F5 Networks has a Zacks #3 Rank implying a short-term Hold rating.
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