Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

F5 Networks, Inc. (FFIV): Why Did This Tech Company Crash?

F5 Networks, Inc. (NASDAQ:FFIV) pre-announced results and delivered the kind of eye watering earnings miss that only small-cap technology investors can fully appreciate. In truth it was a pretty nasty miss on the top and bottom lines. As ever, the market will react with a savage markdown and then start guessing at the causes. Is this an F5 issue or is it an issue of broader based technology weakness?

F5 Networks, Inc. (NASDAQ:FFIV) Misses Estimates

In order to fully appreciate how bad this miss was it is worthwhile looking at what F5 Networks, Inc. (NASDAQ:FFIV) said last time around. I’m going to highlight a few takeaways from the recent pre-announcement:

1). Q2 revenues expected to be $350.2 million vs. internal forecast of $370-380 million

2). Non-GAAP EPS expected to be $1.06-1.07 vs. internal forecast of $1.21-1.24

3). Telco sales down sharply and below company guidance.There was broad based telco weakness, in North America in particular. F5 said the pipeline was there, but deals failed to close at the rate it had expected.

4). US Federal sales down significantly.

5). Enterprise sales were described as being ‘okay.’

6). Japan and Asia Pacific were ‘in line.’

7). F5 Networks, Inc. (NASDAQ:FFIV) is undergoing a product refresh.

A graphical depiction of the effect on revenue growth:

To make matters worse a rival Application Delivery Controller (ADC) provider Radware Ltd. (NASDAQ:RDWR) followed up by announcing that it would miss its own revenue guidance for the quarter by 8% and earnings by over 20%. So is that game over for the ADC market? Furthermore, with industry forecasters putting F5 Networks, Inc. (NASDAQ:FFIV)’s market share at 50-60%, if the market is saturated then how does this speak to F5’s prospects?

F5’s Prospects

To answer this we have to delve into the detail of what happened, and unfortunately it is not clear. Indeed, Radware Ltd. (NASDAQ:RDWR) stated that EMEA and China were weaker than expected but described US sales as being ‘strong.’ Note that this is almost a mirror image of what F5 said about its regions. I appreciate that F5’s sales are nearly 8x that of Radware’s (always view F5’s as more accurate), but this variance in regional performance does raise questions.

Furthermore, as F5 has such a dominant market position it is somewhat susceptible to encroaching competition from Citrix Systems, Inc. (NASDAQ:CTXS) and others. There has been some significant activity on that front. Late last year Cisco Systems, Inc. (NASDAQ:CSCO) announced it wouldn’t be making new investments in its Application Control Engine (ACE) products and instead would be recommending Citrix Systems, Inc. (NASDAQ:CTXS)’s ADC NetScaler to its customers while integrating it into its network technology. It’s an expansion of its overall strategic partnership with Citrix.

Of course, it also gives F5 opportunities, and the company claimed that its rate of closure on the ACE contracts was better than the rest. This implies that this isn’t really a problem of the new customers and contracts that came up.

As for the ‘market saturation’ argument–and no doubt you will be hearing a lot more about this in the next few weeks–I’m not convinced. There may well be a short term affect as customers try to hold back on investment in technology that they feel they are well covered in (this is normal with all industry cycles), but the truth is that the jump in bandwidth rich applications and the need to move them around the net seamlessly and without degradation are still rising significantly. Hardly a day goes by without a corporation announcing significantly more investment in its e-commerce or social media strategy. Indeed, F5 did say that the pipelines were there but they just couldn’t close them in the quarter.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.