F5 (FFIV) Up 1.8% Since Last Earnings Report: Can This Continue?

It’s been a month since F5 Networks (FFIV) last reported earnings. Shares rose about 1.8% in that time, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is F5 due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the key drivers.

F5 Q2 earnings exceed estimates, revenues decline y/y

F5 reported mixed results for the second quarter of fiscal 2024. The Seattle, Washington-based company’s non-GAAP earnings of $2.91 per share topped the Zacks Consensus Estimate of $2.88 and rose 13.8% from $2.53 in the same quarter last year.

Financial results were at the high end of management’s guidance range of $2.79 to $2.91 per share. The solid financial performance reflects the combined impact of improved gross margin and disciplined management of operating expenses.

F5’s fiscal second quarter revenue of $681 million missed the consensus estimate of $686.9 million and declined 3.1% year-over-year. However, revenues were within the company’s forecast range of $675 million to $695 million.

Top line in detail

Product revenue (44% of total revenue), which includes the Software and Systems subdivisions, declined 12% year-over-year to $300.2 million. The decrease in Product revenues was primarily due to lower sales of Systems, partially offset by increased sales of Software. The company’s reported non-GAAP product revenue was lower than our estimate of $317.8 million.

Systems revenue declined 32% year-over-year to $142 million, representing approximately 47% of total Product revenue. The company revealed that the decline reflects lower levels of backlog deliveries compared to previous quarters, while demand is showing some signs of stabilization. Our revenue estimate for Systems was $157.2 million.

The negative impact of lower System sales was partially offset by improved Software results. Software revenue increased 20% year-over-year to $159 million in the fiscal second quarter, driven primarily by a 28% increase in subscription software revenue. Software revenues increased mainly due to renewals. Our estimate was $160.6 million.

Global services revenue (56% of total revenue) increased 5% to $381 million. The strong growth was primarily driven by price increases introduced in fiscal 2022. Our global services revenue estimate was $367.8 million.

F5 reported lower sales in EMEA and APAC, recording a year-on-year decline of 6% and 9%, respectively. However, revenue in the Americas region increased by 1% year-over-year. The share of revenue from the Americas, EMEA and APAC regions was 57%, 26% and 17%, respectively.

In terms of customers, enterprises, service providers and governments represented 69%, 13% and 19% of product bookings respectively.

Margins

Year-over-year, GAAP and non-GAAP gross margins increased 140 basis points (bps) and 170 bps to 79.3% and 82.1%, respectively. Price realization and easing of supply chain constraints, as well as a reduction in additional supply chain costs, contributed to the improvement.

The company’s fiscal second-quarter GAAP operating expenses decreased 9.3% to $400.3 million, while non-GAAP operating expenses decreased 6.8% to $348.8 million. GAAP operating expenses as a percentage of revenue decreased to 58.8% in the second quarter of fiscal 2024 from 62.8% reported in the prior-year quarter. Meanwhile, non-GAAP operating expenses as a percentage of revenue dropped to 51% from 53% in the year-ago quarter.

F5 GAAP operating profit increased 32.1% to $140 million, while margin increased 540 basis points to 20.5%. Moreover, non-GAAP operating profit increased 9.94% year-over-year to $210 million, while margin increased 370 basis points to 30.9%. The increase in non-GAAP operating margin was primarily due to improved gross margin and a decrease in operating expenses as a percentage of revenue.

Balance sheet and cash flow

F5 ended the March-ended quarter with cash and short-term investments of $903.4 million, compared to $826 million in the previous quarter. In the first half of fiscal year 2024, the company generated operating cash flow of $386.95 million.

During the fiscal second quarter, FFIV repurchased $100 million worth of stock. As of April 29, 2024, there was $672 million remaining under F5’s current authorized share repurchase program. The company undertakes to use at least 50% of free cash flow for share repurchase.

Conductivity

F5 forecasts non-GAAP earnings per share in the range of $675-$695 million (mid-range $685 million) and non-GAAP earnings per share in the range of $2.89-$3.01 (mid-range $2.95) for the third quarter fiscal year 2024. Non-GAAP gross margin is projected to be between 82% and 83%.

The company expects non-GAAP operating expenses to be between $340 million and $352 million in the fiscal third quarter. Stock-based compensation costs are expected to be between $55 million and $57 million.

For fiscal 2024, F5 maintains its revenue growth forecast of flat with low single-digit percentage decline. Non-GAAP gross and operating margins continue to be projected in the ranges of 82-83% and 33-34%, respectively.

However, the company raised its non-GAAP EPS growth forecast to 7-9% from the previously forecast 6-8%. F5 now forecasts the effective tax rate for fiscal year 2024 to be 20-22% from a previously forecast 21-22%.

Furthermore, FFIV still intends to return at least 50% of fiscal 2024 free cash flow to shareholders through share repurchases.

How have estimates changed since then?

Investors have witnessed a downward trend in estimate revisions over the last month.

VGM results

At this point, F5 has a solid Growth Score of B, although it lags slightly behind its Momentum Score with a C. Following the exact same trajectory, the stock is rated a C on the value side, placing it in the mid-20s for this investment strategy .

Overall, the stock has a Total VGM Score of C. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, F5 carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

Industry player performance

F5 belongs to the Zacks Internet – Software industry. Another stock in the same industry, Snap (SNAP), has gained 1.8% over the past month. More than a month has passed since the company announced its results for the quarter ended March 2024.

In its most recently reported quarter, Snap reported revenue of $1.19 billion, representing a year-over-year change of +20.9%. EPS of $0.03 for the same period compared to $0.01 a year ago.

Snap is expected to report earnings per share of $0.02 for the current quarter, representing a year-over-year change of +200%. The Zacks Consensus Estimate has remained unchanged over the past 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #2 (Buy) for Snap. The stock also has a VGM Rating of C.

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