F5 Networks Inc. (FFIV) posted decent first quarter fiscal 2011 earnings per share (EPS) of 68 cents, beating the Zacks Consensus Estimate of 65 cents. The increase in earnings was attributable to solid revenues fueled by the growing demand for the company’s products.
Revenues
F5 Networks reported revenues of $268.9 million in the first quarter, up 40.6% from $191.2 million in the year-ago period and 5.7% from $254.3 million in the prior quarter. The quarter’s revenue was on the lower end of the company’s guided range of $265.0-$275.0 million and in line with the Zacks Consensus Estimate. Revenue growth was driven by increases in both product and services revenues.
Continuous enhancement of product suites during the quarter led to a year-over-year 43.9% growth in the Product segment. Revenues from the Services segment climbed 35.5% year over year, fueled by growth in new and renewed service maintenance contracts booked during the quarter.
Operating Results
Gross profit in the first quarter surged 44.7% from the year-ago quarter to $220.0 million. Gross margin was up 226 basis points year over year to 81.8%. The increase was supported by a stable pricing environment for the company’s products and an improved product mix.
F5 Networks’ operating expenses rose 29.4% over the prior year, led by a 32.3% increase in sales and marketing expenses due to an increase in hiring. Despite the substantial opex increase, operating income came in at $79.9 million, up 82.8% from $43.7 million in the year-ago quarter. Operating margin in the quarter was 29.7%, up from 22.9% reported in the year-ago quarter. The margin improvement could be attributed to higher revenues.
Including stock-based compensation expense, reported net income was $55.7 million or 68 cents per share, up from $29.3 million or 36 cents per share in the comparable quarter last year. The quarter’s earnings surpassed the company’s guided range of 62–64 cents. There were no one-time items in the quarter.
Balance Sheet, Cash Flow & Share Repurchase
Cash, cash equivalents and short-term investments totaled approximately $485.5 million at the end of the December quarter, up $57.0 million from the prior quarter. Receivables grew $29.9 million quarter over quarter to $142.0 million. Inventories were roughly unchanged at $18.2 million.
Total deferred revenue was $287.8 million, compared to $259.4 million in the previous quarter. Cash flow from operations was $103.1 million, up from $74.0 million in the prior-year quarter. Capital expenditure increased $1.84 million from the prior-year quarter to $5.5 million. F5 Networks repurchased $25.0 million worth of its outstanding shares.
Guidance
For the second quarter of fiscal 2011, F5 Networks expects revenues of $275.0 million to $280.0 million. On a GAAP basis, earnings per share are expected to be in the range of 65–67 cents. Excluding stock-based compensation expense, the company expects non-GAAP earnings per share to range between 84 cents and 86 cents.
Our Take
F5 Networks delivered decent first quarter results, beating the Zacks Consensus Estimate for the bottom line. However, the shares plunged 22.1% in after-hours trading on disappointing second quarter guidance, which was much lower than the Street’s expectations.
However, we find that better execution and focus on enterprise and service providers has placed F5 Networks well in the application delivery controller market and helped it take away share from Cisco Systems Inc. (CSCO). F5 Networks is also keen on expanding its cloud exposure. The company’s total available market has already touched $4.0 billion in 2010 and it is expected to reach $9.0 billion by 2014.
Currently, F5 Networks has a Zacks #2 Rank implying a short-term Buy recommendation.
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