With its BIG-IP 11.1 software passing the International Computer Security Association (ICSA) Labs test for network firewalls, F5 Networks (NASDAQ:FFIV) entered the Internet firewall market in February 2012 and since then has expanded its security solution portfolio with the addition of new products. Security solutions continue to be a major growth driver for the company. The growing sales momentum of F5′s security and service provider business was an important growth driver behind its strong performance in Q2 2014.
The application delivery network market has evolved from the load balancing systems that were initially developed to ensure the availability and scalability of websites. Today, enterprises use ADCs (Application Delivery Controllers) to optimize application availability, end-user performance, data center resources and security across a growing variety of enterprise applications. With the increasing shift to cloud-based applications, security has become a major threat among enterprises, and thus this is one segment that is bound to see growth in coming years. With increased focus on selling security applications, we believe F5 will benefit from the proliferation of data in the market.
Our price estimate of $109 for F5 Networks is almost in line with its current market price.
Why Security Is An Important Market For F5
There is growing demand for applications and content as subscribers now interact with a number of different types of networks (3G, 4G LTE) and protocols. Additionally, newer, feature-rich mobile devices require more connections and bandwidth per subscriber. With increasing network complexity, reducing security risk is an important criteria for enterprises. Over the years, data theft technology has become more sophisticated and the global cyber-crime market is currently sized at $104 billion.  IDC estimates that companies around the world will spend $491 billion in 2014 for fixes and recovery from data breaches and malware, $127 billion in dealing with security issues and $364 billion dealing with data breaches. 
The security market is highly competitive with players such as Cisco, McAfee and Palo Alto Networks, etc. Despite intense competition F5 claims to be making significant progress in the market. Last quarter, F5 saw strong sales across its securities solutions portfolio including Application Security Manager (ASM), Access Policy Manager (APM) and Advanced Firewall Manager (AFM). It had two multi-million dollar sales win in the quarter as F5 solutions replaced existing competitors' solutions. Also, a Tier 1 service provider purchased F5′s AFM firewalls to replace existing traditional data center firewalls.
With growing awareness of its security solutions in the market, F5 believes that this segment offers huge growth opportunity and expects the strong sale momentum to continue in fiscal 2014.
Partnership With VMware To Enhance F5′s Network And Security Program
In August 2013, F5 integrated its BIG-IP products with VMware, a provider of virtualization and cloud infrastructure, to offer a combined solution for networking and security programs for its customers. It uses the new VMware Ready program to automate key application delivery services. The new VMware software enables customers of all sizes to continue utilizing their existing investments in networking and security products, while benefiting from efficiency and agility of the VMware cloud infrastructure through validated joint solutions.
By helping to quickly locate certified solutions, the program allows customers to lower their operating costs and management complexity, and meet their compliance requirements. The partnership enables professionals to efficiently deploy and optimize application delivery services across virtualized and cloud environments. VMware is a key player in cloud management, automation, and virtualization. Its bookings in cloud management and automation were up 40% in Q4 2014. 
Versafe Acquisition Enhances F5′s Security Portfolio
F5 acquired Israel based Versafe Ltd., a provider of web anti-fraud, anti-phishing, and anti-malware solutions in September 2013. Offering advanced web and mobile protection solutions, Versafe provides a comprehensive real-time detection and protection for every user, device and browser. The acquisition will help make F5's security, access and mobile solutions (including its Application Delivery Firewall solution) stronger. Its world-class security operations centers in Seattle and Tel Aviv are now live and operational, and will help support the new online security service from the Versafe acquisition. F5 claims that is has started to see sales wins of Versafe services.
Disclosure: No positions.