Fiscal 2014 was a good year for F5 Networks (NASDAQ:FFIV), as the company reported 17.2% and 12.2% growth in its revenue and net income, respectively. Growth in the year was driven by F5's strength in the enterprise business, growing demand for its security products, the success of the Good, Better, Best bundles in driving million dollar-plus deals and broader adoption of its solutions. Though the company experienced a larger-than-expected drop in million dollar-plus deals in Q1 2015, in both large enterprise and Federal opportunities in the U.S., it firmly believes that this is more of a seasonal issue, and claims to have a strong pipeline of such deals for the current quarter.
F5 anticipates another year of solid growth and profitability in fiscal 2015, and is confident that the growth drivers of its business remain robust. The company claims that its business pipeline creates rate was very strong in Q1 2015, up significantly over the previous year, and the pipeline of business in Q2 2015 looks very strong. Assuming no material impact to the industry from broader macro issues, F5 believes that growth will continue in the current fiscal year, driven by: 1) an expanding product portfolio; 2) growing customer awareness and adoption of the Synthesis architecture; and 3) partnerships with key players in the emerging SDN market. It believes growth will be stronger in the second half of the year compared to the first half.
Our price estimate of $127 for F5 Networks is marginally above the current market price. In this article, we list the factors that are expected to drive F5's future growth.
Security Business Remains The Largest Growth Driver
F5 continues to see strong growth in its security business, with strong sales across the security solutions portfolio, including ASM (Application Security Manager), APM (Application Performance Manager) and AFM (Application Firewall Manager). The company claims to have gained some strategic sales wins in the service provider market. Both its consolidation strategy and its focus on security NFC, Gi 1 services and LTE applications are resonating well with service providers. F5 is starting to see some real momentum globally with its Gi firewall solutions, and the company believes this can be a strong growth driver in fiscal 2015 and beyond.
F5 got a very positive reaction to the launch of its Silverline hybrid application services strategy from its sales force, partners and customers. The initial launch included F5's subscription-based DDoS service and anti-malware and phishing protection service. It has already seen some excellent orders for both solutions, and is planning to increase the portfolio of cloud-based subscription services, starting with the vast AFM solution in the new few months.
Additionally, F5 added significant functionality to its orchestration and management product (BIG-IQ), which was key to getting the strategic security wins. This is also another component of the hybrid applications services strategy. The company has a host of new functionality and new products in its pipeline. It recently released a new high-end 2U platform - BIG-IP 12000 - and plans to enhance its management and orchestration capabilities with BIG-IQ release 4.5 in the near future. The release will include significant enhancements to F5's datacenter security product (AFM and ASM), as well as comprehensive support for the SDN ecosystem.
With increasing network complexity, reducing security risk is an important criterion for enterprises. Over the years, data theft technology has become more sophisticated, and the global cyber crime market is currently sized at more than $100 billion. Since its entry into the Internet firewall market in February 2012, F5 has expanded its security solution portfolio with the addition of new products. Because requirements continue to increase for customers to protect their applications in both on-premise data centers and in private and public clouds, the company sees continuing demand for its products in the future.
F5 Remains The Market Leader In ADCs
According to network equipment research firm Dell'Oro Group, F5's share in the Application Delivery Controller (ADC) market increased to 52% in the third quarter of calendar year 2014. F5 derives a significant portion of its revenue from the ADC market, and has been the leader in ADCs for many years. The core function of its products is load-balancing data that distributes Internet traffic evenly across multiple servers in a data center (either physical servers or virtual machines).
Despite the slowing growth, the ADC market continues to have immense long-term growth potential. According to the research firm TechNavio, the global ADC market will grow at a CAGR of 8.13% between 2013 and 2018. One of the key factors contributing to this market growth is the increasing workload distribution using ADCs. The global ADC market also has been witnessing the emergence of cloud-optimized ADC equipment.
Cisco ACE Replacement Opportunity To Continue in 2015
In 2012, rival firm Cisco (CSCO) announced its decision to exit the ADC market, after losing more than 50% of its market share to F5 and Citrix (CTXS). F5 has scored big product wins by replacing some of Cisco's ACE products in large customer accounts since then. The company expects the opportunity to continue throughout 2015 and beyond. The ACE installed base is over $1 billion of potential business, but F5's target market is much larger. In addition to replacing Cisco's existing solutions, F5 has the added opportunity of providing customers additional functionality, including security, access control and application acceleration.
F5 has created a sales service web portal for ACE Migration, which complements a significant experience and consulting expertise. It also intends to step up its market initiatives on the ACE opportunities starting this quarter to take advantage of its current growth momentum and experience in transitioning ACE customers to F5 ADC solutions.
"Good, Better, Best" Offerings Drive Software Sales
F5 introduced the "Good, Better, Best" pricing model in November 2013 to help customers maximize their value of enterprise application delivery. The program helps customers select a platform that best fits the organization's needs, offering advanced traffic management, optimization and security services. The company claims that the model makes it easier to package its solutions together for the customer, giving them some incentive to add more modules.
F5 continues to experience strong momentum in the "Good, Better, Best" bundles, with an increasing number of the customers opting for the "Best" solutions. Sales of these bundles now account for a significant percentage of its overall sales.
Disclosure: No positions.
