F5 Networks: Why the Sell-Off After a Small Earnings Miss?

| About: F5 Networks, (FFIV)
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F5 Networks (NASDAQ:FFIV), a Seattle data storage and network provider, fell in after-hours trading after reporting a small miss in revenue and earnings. As I write this Wednesday evening during after market trading I am looking at a spreadsheet made by EDGAR Online. I am able to look at the numbers reported and the previous numbers to take a look at where FFIV is headed and if I should stay away, short, or buy this stock.

At the lows of the apparent panic selloff, FFIV found itself worth 25% less than the close of the the day before. For a company that reported revenue of $269 Million (up over 5% from the last quarter) verses a Street consensus of $270.3 million, one would not expect such a throwing away of the stock.

The selloff became increasingly puzzling when looking at the actual earnings per share. FFIV actually beat the consensus. FFIV had adjusted earnings of 88 cents per share compared to the Street consensus of 85 cents per share. This compares to adjusted earnings of 52 cents for same period last year. Even without an adjustment, the profit per share is reported at .69 per share up from .37 per share for the same period last year. Not what I would call an AAPL blow out quarter, but also not one that would call for a full run to the exits either.

One could point towards the guidance being less than stellar. In my view even this area of the earnings report was not “bad” and I feel guidance points towards continued growth and profitability. Indeed, according to the conference call, FFIV plans on increasing the overall headcount by more than 125 employees during the current quarter (currently FFIV has a little over 2000 employees). In my experience, companies do not increase payroll when they are facing revenue and earnings problems. In the earnings press release yesterday, CEO John McAdam stated

Product revenue was up nearly 44 percent from the first quarter of fiscal 2010, and service revenue grew more than 35 percent during the same period. On a regional basis, all geographies delivered sequential and year-over-year gains, led by Asia Pacific where revenue was up 11 percent from the prior quarter and 62 percent from the first quarter a year ago...

In short, Mr. McAdam is saying that FFIV is firing on all cylinders and the future looks bright. Based on past performance, both in terms of growth and earnings, I would agree.

FFIV expects the next earnings report to contain a profit of 84 to 86 cents per share with the Street estimate of about 85 cents. Forward revenue is the one area that did not shine in the report and the greatest sin the company committed that I found. Forward revenue is estimated to be $275 to 280 million compared to the street number of $281 million. Not what I would call a miss that should put the company on sale for a massive 25% off bargain. With a reported short float of about 5% of the shares I would not expect the short interest to have a big impact one way or another. With reporting of short interest always as stale as last month's bread, it is difficult to gather much of an opinion though unless the short interest is extreme and goes on for a relatively long time (like BKS has currently).

I thought the conference call generally went well and I did not see any bumps in the road with the statements or the Q & A. FFIV 60 day moving average is 130.48 and the 200 day moving average is 96.03. Using the 200 day moving average as the golden average, FFIV remains in the bullish trend and it seems reasonable that FFIV will move back towards the 90 day moving average of 120.13 to test that level. If that level can breach the 90 day moving average I will be looking for a test of the 60 day moving average (which changes each day).

According to the conference call much of the sales appear to be seasonal and fall in line with what was experienced in the same period last year. With what appears to be the first real leg up in cloud computing and wider acceptance it is hard to imagine FFIV not continuing its path higher in sales and earnings. Intel (NASDAQ:INTC) reported an over 70% increase in capex recently and this should spill over to many companies with a ripple effect in the technology space. It would seem reasonable that the forward season looks bright, based on increases in the largest companies, ie. increasingly more online products/services. The pipeline continues to be full according to the conference call, confirming my thoughts that FFIV products remain strong. With new products like the “Victoria platform” (currently in beta ) and improvements in the offerings that include a targeted approach to the mobile space, FFIV will continue to differentiate itself and add value as stated in the conference call.

CNBC announced that CEO McAdam will be interviewed today which generally results in a pop in the price of the stock of a company during and, often, after the interview. This seems to be especially true after a beating by the Street. Of course, if Mr. McAdam drops the ball and does a poor job it could put pressure on the stock as I have also seen before (the MCP CEO interview comes to mind, although he did redeem himself in further interviews).

Based on the overall weakness in the market yesterday, along with the huge discount sellers of FFIV are providing I started a long position looking for a bounce as investors digest the numbers and see the value provided by the selloff. I will be looking for FFIV to trade this week above $110 again and a retest of the 90 day moving average within the next 30 days. I waited to I saw the price stabilize from the initial selloff and, like CREE's trading yesterday, I do not expect the stock to trade today at the lows of after-market trading yesterday.

Disclosure: I am long FFIV. I have no positions in any other company discussed in the article.