Despite the Market Swoon, F5 Networks Is Thriving

Jun. 7.11 | About: F5 Networks, (FFIV)
The summer swoon is here. And with it comes an opportunity to find thriving stocks selling products in fast growing industries. One such company is F5 Networks (NASDAQ:FFIV), a maker of equipment helping organizations securely speed information across virtual and cloud based networks.
While the stock market took a rest in May, chief information officers have been hard at work executing strategies to reduce server footprints, and with it the costs associated for managing them.
Over the next four years, the number of CIOs having the majority of their IT running on cloud networks is expected to rise to 43% from 3%, according to Gartner. Forrester estimates nearly 70% of companies have virtualized at least some of their servers, with another 24% planning to implement virtualization this year. Across industries, the common theme is reducing costs amid the ever-rising deluge of digital information.
As a result, companies including application delivery network player F5 are enjoying significant sales growth. Last quarter (FYQ2) sales were up 34.7% year over year to $173.7 million; a 3.2% quarter-over-quarter increase. Revenue from the Americas rose 38% from last year to $163.8 million while Asia Pacific sales ticked in at $38.3 million, up 68%. And, F5 gained 8% market share in its core application delivery network products last year as competitors like Cisco (NASDAQ:CSCO) struggled.
But strength doesn't simply end with F5's product sales. A larger proportion of revenue is coming from service contracts as its client base grows. Such revenue increased 35% to $103.8 million last quarter. This brought the services share of total revenue to 37.4% from 36.8% last year.
Good companies can leverage higher sales for profit growth, but only if costs remain in check. At F5, cost of net revenue fell to 18.2% from 20.1% in the quarter. And, sales and marketing, research and development and general administrative percentages of revenue all fell year-over-year in the quarter and for the trailing six months.
F5 gets a good chunk of sales from two global distributors, Avnet (NYSE:AVT) and Tech Data (NASDAQ:TECD). Together they represent 25% of the company's sales. Across the industry, companies worked down excess inventory amid cautious IT spending, and they are now enjoying a resurgence of demand. Last quarter, year-over-year revenue at Avnet and Tech Data increased 40% and 13%, respectively.
An eye on costs and strong sales have allowed F5 to beat street estimates in each of the past four quarters, sparking analysts to forecast $4.40 per share in 2012 earnings, up 21% from 2011. At the same time, F5's cash balance has risen to $475 million, or $5.86 per share. The company is also sitting on another $522 million in long-term investments. And, with operating cash flow of $356 million and no debt, there is plenty of money to fuel growth and buybacks. Just last quarter, F5 repurchased nearly 405k shares. And, as of May, the company had $166 million remaining on its buyback authorization.
Investors searching for stocks which previously sold off and are already recovering should note F5 is 25% below its 52 week high and challenging resistance at its 200 day moving average. While the S&P 500 index has fallen 5% since April, F5 has increased more than 10%.
Given the current stock price, rapid global growth tied to IT spending, a strong balance sheet and products selling into a growing industry, F 5 is well positioned to make investors money in the coming months.
Disclosure: I am long FFIV, CSCO.