Why This Tech Company Has Good Upside in 2013

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While most investors were focusing on the carnage at Apple, some of us were looking at a stock that is benefiting from many of the drivers created by the iPhone. In fact, F5 Networks (NASDAQ: FFIV) benefits from any kind of smartphone, tablet device or anything else that increases the necessity for corporations to move bandwidth rich applications around the Internet. F5 reported a good set of results and there are plenty of profit drivers for 2013. I like the stock and continue to hold; here is why.

F5 Networks Reports In-Line

The numbers were in line with the internal guidance given in the last quarter.

  • Q1 Revenues of $365.5 million vs. guidance of $363-370 million
  • Q1 Non-GAAP EPS of $1.14 vs. guidance of $1.14-1.16
  • Q2 Revenue Guidance of $370-380 million vs. analyst consensus of $378 million
  • Q2 Non-GAAP EPS Guidance of $1.21-1.24 vs. analyst consensus of $1.20

In summary, the results were at the lower end of previous guidance, but going forward the internal forecast was stronger than the market had anticipated. I confess I thought that F5 would give a decent set of numbers when I bought some more of the stock at the last results. As outlined in a previous article there were a few upside catalysts for F5 and it seemed to execute well with them in this quarter. The good news is that they can contribute even more in 2013.

F5 Networks' Upside Potential

On the conference call management reiterated the forecast that the second half of fiscal 2013 would see better relative results than the first and, with the good guidance for Q2, the market took heart that F5 was headed for a strong year. Growth remains in double digit territory despite a challenging tech environment.

<img src="/media/images/user_12882/f5networks2_large.png" />

 Things look good for F5 due to the following points.

  • New hardware and software (which started shipping at the end of the quarter) will create a product refresh cycle.
  • Cisco Systems (NASDAQ: CSCO) pulled out of the application delivery controller (ADC) market and F5 has plenty of potential to replace Cisco.
  • Telco is a key vertical and carrier spending appears to be making a comeback.
  • US Government and Japan were weaker than expected in the quarter, and there is potential for resumption of growth in 2013.

Starting with the industry verticals, Telco was stronger this quarter and snapped a declining streak while Government was declared to be behind internal forecast even if this is traditionally a weak quarter for Federal revenues.

<img src="/media/images/user_12882/f5networks1_large.png" />

 

Telco was impressive this quarter, and F5 referenced a lot of interest in its products coming from mobile. This makes sense because if the carriers do ramp up spending it will surely be more on the wireless side. Federal spending is likely to come back a bit after the fiscal cliff issues are resolved.

With the Technology segment, management stated that the weakness was due to a couple major customers who were building IT architecture that required F5 to invest in producing solutions that integrated its functionality within their applications. The hope is that these revenues can come back in a few quarters. Lastly the Financial vertical remains strong, and if you have seen how some floors of investment banks are becoming data centers thanks to the amount of quant based trading going on, then you would understand too.

Cisco pulling out of investing in the ADC market was fortuitous timing for F5, especially as it has a major product refresh this year. In addition F5 has a small but growing data center security solution, which is competing with Cisco and Juniper Networks (NYSE: JNPR). Juniper recently reported declining revenues in its security solutions and even though F5 doesn’t compete across the whole security product range, it will offer Cisco and Juniper strong competition in areas like mobile or the data center. It already sells into these customers with ADCs.

Finally on the issue of the product refresh, F5 took a positive approach even though these things can sometimes work against technology companies. History is littered with companies that had a quarter or two of weakness based on its sales force or channel partners not getting up to speed on the new products or managing sales leads accordingly. Moreover customers may just decide to buy the cheaper options and take a ‘wait and see’ approach. It's something to look out for.

Where Next for F5 Networks?

In conclusion I think the stock remains attractively priced and has potential for upside from the factors listed above as well as some cyclical help. The company generates a lot of cash flow which belies its lofty PE ratio, and the median analyst target of $110 should be well within reach provided it hits consensus estimates. There is some uncertainty with the product refresh but the new products are already being shipped. The management should have some early data on how the cycle will work for them, and the noises are positive.

This is a stock well worth looking at for the cyclical end of your portfolio, and I am happy to hold for now.


SaintGermain has a position in F5 Networks. The Motley Fool recommends Cisco Systems and F5 Networks. The Motley Fool owns shares of F5 Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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