Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of F5 Networks (FFIV) fell an incredible 19% in Friday's trading session. The provider of application delivery networking technology reported a disappointing set of preliminary second-quarter results on April 4, after the market close.

Second-Quarter Results

F5 Networks generated preliminary second-quarter revenue of $350.2 million, up 3.1% on the year before. Yet investors were extremely disappointed after the company earlier guided for second-quarter revenue of $370-$380 million. Analysts expected the company to guide for revenue of $375.8 million.

Non-GAAP earnings per share are expected to come in between $1.06 and $1.07, compared to an earlier guidance of between $1.21 and $1.24 per share. Diluted earnings per share are expected to come in between $0.79 and $0.80 per share, compared to $0.86 in the second quarter last year.

F5 is scheduled to report its official results on April 24.

CEO John McAdam commented on the disappointing preliminary results, "From a market perspective, Telco bookings were down sharply on both a sequential and year-over-year basis. U.S. Federal sales were also down significantly from the second quarter a year ago. The slowdown in orders was pronounced in North America and to a lesser extent EMEA while Asia-Pacific and Japan came in roughly as planned."

Valuation

F5 Networks ended its first quarter of its fiscal 2013 with $517.7 million in cash, equivalents and short-term investments. The company operates without the assumption of debt, for a significant net cash position.

The company generated annual revenue of $1.38 billion for the year of 2012, on which the company net earned $275.2 million. The first signs of a slowdown were already apparent last year. As revenue rose more than 19% compared to 2011, net income rose by merely 14%.

After the recent sell-off, the market values F5 Networks around $5.7 billion, which values operating assets of the firm around $5.2 billion. This values the firm's operating assets at 3.7 times 2012's annual revenues and 18-19 times annual earnings.

F5 Networks does not pay a dividend at the moment.

Some Historical Perspective

Long-term shareholders of F5 have seen very decent returns over the past decade. Shares have traded in a $20-$40 trading range between 2005 and 2009. From that point in time, shares quickly rose to peaks of almost $150 at the end of 2010.

Shares fell back to $75 in 2011, before recovering to $135 at the start of 2012. From that point of time, shares have given up roughly half their value again, currently exchanging hands at $72 per share.

Between 2009 and 2012, the company more than doubled its annual revenues toward $1.38 billion. Net earnings tripled to $275.2 million, or $3.45 per diluted share.

Investment Thesis

The poor guidance is clearly disappointing, but should not come as a complete surprise to investors. Over the past four quarters, consecutive revenue growth has slowed down from 5.3% in the second quarter of 2012, to 3.8% in the third quarter, and 2.8% in the fourth quarter of the year.

First-quarter sequential revenue growth slowed down to a mere 0.8%, while the preliminary results indicate that second-quarter revenues are expected to fall by 4.2% compared with the first quarter.

The company blames external factors, namely the U.S. federal budget cuts, and weak and lump spending by the telecom companies including AT&T (T) and Verizon Communications (VZ). Yet it is obvious to investors and analysts that 5F Networks is at least partially to blame as well.

The weaker spending of Telecom majors is surprising to some extent and is impacting other competitors like Radware (RDWR) as well. Recently, analysts at Piper Jaffray noted that F5 is losing market share in the application delivery controller market to firms like Citrix Systems (CTXS). Worse, the ADS market grew at double-digit rates, and growth is expected to come to an almost standstill in the first quarter.

At these levels I don't have a strong opinion on the valuation of the shares. While revenue and earnings will most likely be stagnant for the full year of 2013, the valuation at 18-19 times annual earnings is not that appealing. Yet at these levels shares are not an obvious short as a re-acceleration of earnings growth could also boost the earnings valuation multiple.

At these levels I remain on the sidelines awaiting further events or another share price move before re-considering my stance.

Source: F5 Networks - Revenue Slowdown Accelerates Triggering A Renewed Correction