F5 Networks Inc. (FFIV) reported third-quarter 2010 earnings per share of 50 cents (including stock-based compensation expense), exceeding the Zacks Consensus Estimate by 7 cents and the company’s guidance range of 42–44 cents.
The analysts’ sentiment on the stock remains positive, since F5 Networks has been reporting earnings surprises on a regular basis. The recent upward revisions in their estimates are indicative of the trend.
F5 Networks reported revenues of $230.5 million in the third quarter, up 45.7% from $158.2 million in the year-ago period and 11.8% from $206.1 million in the prior quarter. The quarter’s revenue surpassed the guided range of $214–$219 million. The growth in revenue could be attributable to strong demand for BIG-IP product suites across all geographical regions. BIG-IP product sales witnessed 57% year-over-year growth.
Continuous enhancements of product suites during the quarter led to a year-over-year increase of 54.2% from the Product segment. However, revenues from the Services segment also climbed 32.7% year over year, reflecting growth of new and renewed service maintenance contracts booked during the quarter.
Gross margin in the third quarter rose to 80.6% from 78.8% in the year-ago quarter. The improvement was supported by a stable pricing environment for the company’s products and improved product mix.
Despite substantial increase in operating expenses year over year, operating income came in at $60.1 million, up from $31.3 million reported in the year-ago quarter. Operating margin in the quarter was 26.1%, up from 19.8% reported in the year-ago quarter. The improvement could be attributed to higher revenues.
Reported net income was $40.5 million or 50 cents per share, up from $22.8 million or 29 cents per share in the comparable quarter last year. Excluding the impact of restructuring and one-time legal settlement charges, but including stock based compensation charges, the adjusted net income was 50 cents per share, up from 29 cents in the year-earlier quarter.
Balance Sheet, Cash Flow & Share Repurchase
Cash, cash equivalents and short-term investments totaled approximately $398.3 million at the end of the June quarter, up $13.1 million from the prior quarter. Cash flow from operations was $75.3 million, exceeding the company’s guidance of $70 million, but was down from $77.9 million in the prior quarter. Capital expenditure was $3.3 million in the third quarter, slightly down from $3.4 million in the prior quarter. F5 Networks repurchased 291,027 of its outstanding shares.
For the fourth quarter of fiscal 2010, F5 Networks expects revenue of $242 million to $247 million. GAAP earnings per share are expected to be in the range of 53–55 cents. Excluding stock-based compensation expense, the company expects non-GAAP earnings per share to range between 69 cents and 71 cents.
We consider the guidance to be conservative given F5 Networks’ increased exposure to the application networks market, strong demand from wireless operators and increased spending on data center projects. Moreover, we remain encouraged by new product launches and software upgrades, which will lead to additional market share gains.
Considering the above factors, we are comfortable with Zacks #2 Rank, implying a short-term Buy rating for F5 Networks’ shares.