F5 Misses: Still Lacks Growth Catalyst

Apr. 4.13 | About: F5 Networks, (FFIV)

F5 (NASDAQ:FFIV) pre-announced that it would miss revenue and EPS guidance for the second fiscal quarter ending March 31, 2013.

As I wrote in my prior post on March 27th, I felt F5 was at risk of missing revenue estimates given weakening book to bill trends in the past few quarters, decelerating product revenue growth, slowing technology vertical sales and a likely lull in telecom orders. As it turned out, F5 attributed the miss in the March quarter to weak telecom spending in the US and also weak spending in the US Federal market.

I continue to believe that weakness in US telecom was to be somewhat expected given the company benefited already from strong initial spending for LTE build-outs in the US and a need for F5 to more broadly participate in LTE build-outs outside the US market. In addition, the industry commentary at the recent OFC optical conference suggested spending in general in the broader US telecom market has been slower than expected in the March quarter. F5, while not an optical equipment supplier, might have also been impacted by this slow spending start to the year by US telecom operators. The weak federal spending is probably not a major surprise given the budgetary issues in the US.

Now that F5 has missed, the question is whether it is time to buy the stock? My sense is that F5 has now entered a more mature stage as a company in its core Application Delivery Controller (ADC) business and that the next major catalysts for the stock will be how successful F5 is in its new markets of application security firewall and diameter routing. F5 did mention that its security business was up strongly in the quarter, which is a good sign, but the business is probably still too small relative to overall revenues to make an impact in overall sales growth. Diameter routing, while an exciting new market, is also too small at this point to impact overall sales. F5 could become interesting as a stock if it were to trade down below $70 in my view.

Until then, I am likely not a buyer of the stock, as I don't think the stock will regain its premium valuation until new growth catalysts like security and diameter become more visible components of growth for the company.

Disclosure: I am short FFIV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: NT Advisors LLC is a consulting firm for the technology, private equity and venture capital industries. I am currently short FFIV, but may seek to cover my short in the next couple of days.