Monday, October 25, 2010

F5 Earnings Preview

By David Gross

F5 reports Tuesday after the close, following a quarter when its stock soared more than 50% to $103 a share, while settling back recently to just over $98 a share.   Many of its peers in the layer 4-7 networking market also saw their share prices rise dramatically between July and September, and have followed it up by posting better-than-expected top line growth.   Riverbed, for example, was up 65% in the third quarter, and then reported revenue 8% ahead of expectations, and lifted guidance for the December quarter 5%.   That stock is now up 100% from where it was July 1st.   Citrix saw its value increase 61% in the third quarter, and then reported that its data center revenue grew 47% year-over-year.   Moreover, in the slides accompanying its earnings call, Citrix explicitly mentioned that its NetScaler MPX was leading the way in its data center growth, and that product line that competes directly against F5's BIG-IP and VIPRION platforms.

F5 traded up 6% Friday off of Riverbed's better-than-expected earnings report.   Additionally, Citrix is its leading competitor, putting additional pressure on the company to outperform.   During its last call, F5 gave a top line guidance range of $242 million -  $247 million for this quarter, ahead of estimates that were around $230 million.   Whisper numbers are pushing $260 million now, and it would likely be a huge disappointment if the company did not lift guidance for next year.

Another factor to look out for is the expectations multiple.   Wall Street has largely been overreacting to good and bad news in the heavily watched data center services and networking industries.   On its July call, Mellanox announced sequential revenue would decline 7%, and its stock fell more than 30% the next day.  On its infamous October 5 warning call, Equinix announced revenue would fall 2% short of guidance, and its stock fell more than 30% the next day.   Then last week, Riverbed beat revenue estimates by 8%, and its stock was up more than 18%.   The sell-side analysts then started firing out downgrades and upgrades after all these numbers were posted.

It Wall Street-speak, you could say F5 is currently "priced to perfection", especially with the stock getting a 6% bounce of its own off of the Riverbed report.   And for years, some have predicted that F5's custom ASICs would eventually lose their lead over the Intel Xeons and merchant silicon used by Netscaler.   However, that is not a trend that is going to shift because one quarter's revenue is $5 million higher or lower than expected.

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