What Happened:

Shares of network application delivery and security specialist F5 (NASDAQ:FFIV) jumped 7.25% in the afternoon session after the company reported third-quarter results that narrowly beat analysts' revenue expectations. On a brighter note, earnings per share beat by an impressive 12%. Free cash flow also improved significantly compared to the previous quarter. Management added some bullish comments, stating that demand is stabilizing and that F5 Networks should be able to grow non-GAAP EPS by a double-digit percentage, which is higher than expectations. That really stood out as a positive in these results. On the other hand, its underwhelming revenue guidance for next quarter was disappointing (although next quarter's EPS guidance was in-line). Overall, this was a mixed quarter for F5 Networks, but the double-digit percentage non-GAAP EPS growth for the full year is being received well. After the initial pop the shares cooled down to $159, up 0.02% from previous close.

What is the market telling us:

F5 Networks's shares are not very volatile than the market average and over the last year have had only 4 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. The previous big move was three months ago, when the stock dropped 6.85% on the news that the company reported underwhelming earnings, which narrowly beat analysts' revenue estimates. However, revenue guidance for the next quarter was below consensus estimates. Following the results, Barclays analyst downgraded the stock's rating from Overweight (Buy) to Equal-Weight (Hold).

F5 Networks is up 9.77% since the beginning of the year, and at $159 per share it is trading close to its 52-week high of $173.70 from August 2022. Investors who bought $1,000 worth of F5 Networks' shares 5 years ago would now be looking at an investment worth $907.53.

Is now the time to buy F5 Networks? Access our full analysis of the earnings results here, it's free.

On this page, you can find detailed information about the financial performance of F5 Networks, including the latest F5 Networks earnings report and upcoming earnings date. The page provides an overview of the company's financial health, with key data points such as the current stock price, earnings per share, and revenue compared against the forecast.

Network application delivery and security specialist F5 (NASDAQ:FFIV) reported results in line with analysts' expectations in Q3 FY2023, with revenue up 4.17% year on year to $702.6 million. However, next quarter's revenue guidance of $700 million was less impressive, coming in 1.01% below analysts' estimates. F5 Networks made a GAAP profit of $89 million, improving from its profit of $83 million in the same quarter last year.

Is now the time to buy F5 Networks? Find out by accessing our full research report free of charge.

“Over the last several years, through the combination of organic innovation, acquisitions and technology integration, we have created a converged portfolio uniquely capable of simplifying the complexities our customers face operating today’s hybrid, multi-cloud IT environments,” continued Locoh-Donou (company CEO). “We are delivering the gross margin improvement and operating leverage we committed to, and we are confident in our ability to achieve our target of double-digit non-GAAP earnings growth for fiscal year 2023,”

While the company initially started in the late 90s by selling hardware appliances, these days F5 (NASDAQ:FFIV) is making software that helps large enterprises ensure their web applications are always available, by distributing network traffic and protecting them from cyber attacks.

The amount of content on the internet is exploding, whether it is music, movies and or e-commerce stores. Consumer demand for this content creates network congestion, much like a digital traffic jam which drives demand for specialized content delivery networks (CDN) services that alleviate potential network bottlenecks.

Sales Growth

As you can see below, F5 Networks's revenue growth has been over the last two years, growing from $651.5 million in Q3 FY2021 to $702.6 million this quarter.

F5 Networks's quarterly revenue was only up 4.17% year on year, which isn't particularly great. On top of that, the company's revenue actually decreased by $533 thousand in Q3 compared to the $2.8 million increase in Q2 2023. Shareholders might want to pay closer attention to this situation as management is guiding for another decline in sales next quarter.

Next quarter, F5 Networks is guiding for a 0% year-on-year revenue decline to $700 million, a further deceleration from the 2.64% year-on-year decrease it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 0.26% over the next 12 months.

In volatile times like these, we look for robust businesses with strong pricing power. Overlooked by most investors, this company is one of the highest-quality software companies in the world, and its software products have been the gold standard in critical industries for decades. The result is an impressive business that's up an incredible 18,000%+ since its IPO. You can find it on our platform for free.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. F5 Networks's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 79.8% in Q3.

That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, F5 Networks's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Key Takeaways from F5 Networks's Q3 Results

Sporting a market capitalization of $9 billion, F5 Networks is among smaller companies, but its more than $690.6 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

It was good to see F5 Networks beat on revenue, albeit by a small magnitude, and Strengthen its gross margin this quarter. What is driving the stock up seems to be management comments that demand is stabilizing and that F5 Networks should be able to grow non-GAAP EPS by a double digit percentage, which is higher than expectations. That really stood out as a positive in these results. On the other hand, its underwhelming revenue guidance for next quarter was disappointing (although next quarter's EPS guidance was in line). Overall, this was a mixed quarter for F5 Networks, but the double-digit percentage non-GAAP EPS growth for the full year is being received well. The stock is up 9.17% after reporting and currently trades at $164 per share.

F5 Networks may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, and what's happened in the latest quarter. We cover this and more in our full company report, and it's free.

Looking for more investment opportunities? One way to find them is to watch for paradigm shifts, just like how every company in the world is slowly becoming a technology company and facing increasing cybersecurity risks. This company is leading the charge in cyber defense with its cloud-native cybersecurity solutions while generating best-in-class revenue growth and SaaS performance metrics. It should definitely be on your radar.

The author has no position in any of the stocks mentioned in this report.

F5, Inc. FFIV shares gained 10.6% during Monday’s extended trading session after the application security solution provider reported better-than-expected third-quarter fiscal 2023 earnings and provided impressive guidance for the fourth quarter.

This Seattle, WA-based company’s non-GAAP earnings of $3.21 per share beat the Zacks Consensus Estimate of $2.86. The bottom line increased 24.9% from the year-ago quarter’s $2.57 per share and was way higher than management’s guided range of $2.78-$2.90 per share. The robust bottom-line performance was mainly driven by higher revenues, the benefits of price realization and easing supply-chain constraints and related costs.

F5 revenues of $702.6 million for the third quarter fell short of the consensus mark of $703.2 million. However, on a year-over-year basis, revenues increased 4.2% and came well above the midpoint of management’s guidance range of $690-$710 million despite persistent macroeconomic uncertainties and tight budgets of customers.

F5 stated that better sales execution mainly boosted the top-line performance. The company also noted that it is witnessing early signs of stabilization in demand as third-quarter demand remained above what it had expected at the beginning of the quarter. Moreover, though third-quarter demand was way lower than the year-ago quarter level, it remained higher than the first and second quarters of the current fiscal.

F5, Inc. Price, Consensus and EPS Surprise

F5, Inc. price-consensus-eps-surprise-chart | F5, Inc. Quote

Top Line in Detail

Product revenues (47% of total revenues), which comprise the Software and Systems sub-divisions, increased 1% year over year to $328.2 million. The rise in Product revenues was mainly driven by increased sales of Systems, partially offset by a decline in Software sales. The company’s reported non-GAAP Product revenues were slightly lower than our estimates of $333.8 million.

Systems revenues grew 5% year over year to $155 million, accounting for approximately 47% of the total Product revenues. Though the demand for Systems products remained constrained, the segment benefited from supply-chain normalization and better execution in reducing the backlog. Our estimates for Systems revenues were pegged at $190.1 million.

Story continues

Industry-wide supply-chain constraints for components in 2022 had severely hurt F5’s Systems segment’s overall performance. However, a continuously improving supply chain for the past couple of quarters has been helping the company clear its backlog, thereby boosting its Systems top line.

However, the benefits of higher Systems sales were partially offset by weak performance in Software. Software revenues declined 3% year over year to $174 million in the third quarter, mainly due to tough comparisons. Nonetheless, Software sales improved 32% sequentially, reflecting strong growth in renewals. Our estimates for Software’s third-quarter revenues were pegged at $143.7 million.

Global Service revenues (53% of the total revenues) grew 8% to $374 million. The robust growth was mainly driven by price increases introduced last year and the benefits of high-maintenance renewals. Our estimates for Global Services revenues were pegged at $362.4 million.

F5 Networks registered sales growth across the Americas and EMEA regions, witnessing a year-over-year increase of 3% and 16%, respectively. However, revenues from the APAC region plunged 6% on a year-over-year basis. Revenue contributions from the Americas, EMEA and APAC regions were 57%, 26% and 18%, respectively.

Customer-wise, Enterprises, Service providers and Government represented 66%, 13% and 21% of product bookings, respectively.

Margins

On a year-over-year basis, GAAP and non-GAAP gross margins contracted 80 basis points (bps) and 70 bps to 79.8% and 82.5%, respectively. However, sequentially, GAAP and non-GAAP gross margins expanded 190 bps and 210 bps, respectively. The company noted that the sequential improvement was primarily driven by price realization and ease in supply-chain constraints, as well as reductions in ancillary supply-chain costs.

While GAAP operating expenses went up 4.8% to $457.4 million, non-GAAP operating expenses declined 5.7% to $346 million. GAAP operating expenses as a percentage of revenues increased to 65.1% in the third quarter of fiscal 2023 from 64.7% in the year-ago quarter. Meanwhile, non-GAAP operating expenses as a percentage of revenues declined to 49.2% from 54.4% in the year-ago quarter.

F5 Networks’ GAAP operating profit declined 2.8% to $104 million, while the margin contracted 120 bps to 14.7% However, the non-GAAP operating profit jumped 20% year over year to $233 million, while the margin improved 440 bps to 33.2%. An increase in the non-GAAP operating margin was primarily driven by higher revenues and lower operating expenses as a percentage of revenues, partially offset by a contraction in the gross margin.

Balance Sheet & Cash Flow

F5 Networks exited the June-ended quarter with cash and short-term investments of $690.6 million compared with the previous quarter’s $755.3 million.

The company generated operating cash flow of $165 million in the third quarter and $463.6 million in the first nine months of fiscal 2023.

During the quarter, FFIV repurchased shares worth $250 million. In the first nine months of fiscal 2023, it bought back common stocks worth $290 million. As of Jul 24, 2023, F5 had $982 million remaining under its current authorized share repurchase program. So far in fiscal 2023, the company has utilized about 68% of its free cash flow toward share buybacks compared with its commitment of using at least 50% of free cash flow for share buybacks announced at the beginning of fiscal 2023.

Guidance

F5 Networks projects non-GAAP revenues in the $690-$710 million band (midpoint of $700 million) and non-GAAP earnings per share in the $3.15-$3.27 band (midpoint of $3.21) for the fourth quarter of fiscal 2023. The non-GAAP gross margin is forecast to be around 83%.

Considering the full-quarter benefits of cost-reduction initiatives announced in April 2023, the company expects fourth-quarter non-GAAP operating expenses between $338 million and $350 million. Share-based compensation expenses are anticipated in the range of $55-$57 million.

Zacks Rank & Stocks to Consider

F5 currently carries a Zacks Rank #4 (Sell). Shares of FFIV have risen 4.7% year to date (YTD).

Some better-ranked stocks from the broader technology sector are Salesforce CRM, Fortinet FTNT and Meta Platforms META. Salesforce and Fortinet each sport a Zacks Rank #1 (Strong Buy), while Meta carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Salesforce's second-quarter fiscal 2024 earnings has been revised upward by 21 cents to $1.90 per share for the past 60 days. For fiscal 2024, earnings estimates have moved upward by 33 cents to $7.44 per share in the past 60 days.

Salesforce's earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 15.5%. Shares of CRM have surged 70.2% YTD.

The Zacks Consensus Estimate for Fortinet’s second-quarter 2023 earnings has remained unchanged at 34 cents per share in the past 60 days. For 2023, earnings estimates have remained unchanged at $1.46 per share in the past 60 days.

Fortinet’s earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 16.4%. Shares of FTNT have rallied 58.1% YTD.

The Zacks Consensus Estimate for Meta's second-quarter 2023 earnings has been revised northward by a couple of cents to $2.87 per share in the past seven days. For 2023, earnings estimates have increased by 2 cents to $12.03 per share in the past seven days.

Meta’s earnings beat the Zacks Consensus Estimate twice in the preceding four quarters while missing the same on two occasions, the average surprise being 15.5%. Shares of META have surged 142.5% YTD.

Want the latest recommendations from Zacks Investment Research? Today, you can obtain 7 Best Stocks for the Next 30 Days. Click to get this free report

Salesforce Inc. (CRM) : Free Stock Analysis Report

F5, Inc. (FFIV) : Free Stock Analysis Report

Fortinet, Inc. (FTNT) : Free Stock Analysis Report

Meta Platforms, Inc. (META) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research