SHfn Special Report
from Stockhouse.com
Contributed by: Hilary Chiba
F5 Networks (NASDAQ: FFIV)
F5 Networks - A Net Infrastructure Play With A Profit
F5 addresses Internet traffic management needs. Its family of products employs intelligent load balancing technology to expedite data transfer and minimize network outages for its clients. Its content management products monitor and proactively allocate resources on a multi-server architecture to prevent outages.
Shares of this uniquely profitable Internet infrastructure company have retreated from a remarkable rally, which took the stock from its $10 IPO price last summer to a high of $160. In an exclusive interview with StockHouse, CEO Jeffrey Hussey discusses F5's strategy for growth both at home and abroad.
Keeping the .coms up and running is no small feat, and F5 Networks (NASDAQ: FFIV) has been well rewarded for doing so by Wall Street since going public on the Nasdaq just seven months ago. The share ascension of companies that rescue countless businesses from being devoured by their own Internet infrastructure has been fast and furious. F5 followed this trend higher. The $10 IPO hit $160 in November before falling back into the $90 range.
StockHouse spoke with CEO Jeffrey Hussey who endorsed F5 products as superior to the comparable offerings of competitors Alteon WebSystems (NASDAQ: ATON) and Cisco (NASDAQ: CSCO). Hussey emphasized the company's commitment to distribution and service. Channel partners and resellers accelerate distribution; the company expanded one such alliance with Internet hosting firm Exodus Communications (NASDAQ: EXDS) just this past Monday.
Recently F5 passed the 1000 customer milestone, and Hussey told StockHouse that the UK subsidiary had planted roots with local alliances and that its international branches into Asia-Pacific and Europe were generating substantial business.
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StockHouse: Can tell us a bit about how F5 is valuable for mission critical Internet applications?
"End-user expectations, now days, are that sites are always on, and that they can always deliver high performance, regardless of whether or not it is a commerce site, Intranet application, or some business-to-business extranet-type application. Our products are designed to reduce the total cost of ownership of the infrastructure to support those online applications."
Hussey: F5 is a leading provider of Internet traffic and content management appliances and applications. It is our goal to help our customers make sure that their infrastructures are capable of maintaining their brand identity and meeting their end-user expectations. End-user expectations, now days, are that sites are always on, and that they can always deliver high performance, regardless of whether or not it is a commerce site, Intranet application, or some business-to-business extranet-type application. Our products are designed to reduce the total cost of ownership of the infrastructure to support those online applications.
StockHouse: You currently have about 4 or 5 different products?
Hussey: Yes, 4 products. Our first flagship product, called BIG/ip, is a local area traffic management appliance that delivers high availability, in server load balancing, in a data center application. Our second product is called 3DNS, which is a wide area of traffic management, high availability, and load balancing solution. It directs traffic to the data center in a multi-data center scenario that can provide the end-user the best, and most reliable, performance. Our third product is called global/SITE. It is a file replication and content synchronization appliance, which makes sure that the data, on the server in a distributed model, is always the same. So, customers are not seeing different prices or content when their request is directed to one data center versus the other. Our fourth product is called see/IT, which is comprised of three different modules. The first is our unified configuration module. The second is a Real Time, network-monitoring application that displays traffic and outages on the network, as it occurs in real time. The third is a module that performs resource allocation and forecasting. It leverages the position of our other products in our network to help network administrators and managers anticipate the need to add additional servers or transport resources before the fact.
StockHouse: Do most of your clients use see/IT, or do most of them start with the BIG/ip and then work up from there, adding, as they need?
Hussey: A lot of our customers, in the past, have started with BIG/ip and added 3DNS, and then added see/IT and are now adding global/SITE. Now that F5 has a family of products, more and more of our customers are buying BIG/ip, 3DNS, see/IT, and in many instances global/SITE at the same time, and deploying the family of products. They are designed to work together very well, and drastically reduce overall network outages, as well as the amount of day-to-day administration that is required to maintain distributed server infrastructure.
StockHouse: How much, approximately, does it reduce outages? Do you have any test statistics?
Hussey: No, there really aren't any statistics. It is really difficult to come up with a meaningful figure, but I think that the proof is in the pudding. About 25-30% of our business is repeat business from our installed base, which suggests that our products are meeting their expectations and helping them keep their sites up all of the time.
StockHouse: Is your revenue model a licensing structure for all four products?
Hussey: We sell an appliance, which really means that all of our value-ad is in the software, but we deliver that software preinstalled on, basically, an Intel server. The see/IT application is just that. It is an NT-based application suite. So, three of the four products are appliances that are software delivered on a device that is installed into the network, and one is an application that is installed, typically, on a network administrator's workstation.
StockHouse: Ok, so you would recognize recurring revenues then I assume?
Hussey: Our business model is that we get a sale for each of the products. We sell all of our products bundled, turnkey, including maintenance, installation and upgrades. So, to the extent, our customers are interested in getting our support and maintenance after the first year, which is included in the initial sale. There is a recurring component as well.
StockHouse: Currently, as far as revenue breakdown goes, BIG/ip is still the majority of your business? About 70% of total revenues last quarter?
Hussey: Right.
StockHouse: How do you see that changing, going forward?
Hussey: Actually, over time, what we expect is that as our revenues grow and as our follow on products mature, we'll get increasingly additional contribution, or a bigger percentage contribution from our other products. So, our revenues, by product mix, will be more balanced.
StockHouse: You currently have a presence in major markets, including portals, e-commerce, financial, government. What other markets are you looking at now?
Hussey: That has covered a lot of them. Now, we have over 1,000 customers, and those customers are in nearly every type of market. We have customers who have deployed our products in e-commerce applications, in intranet application, in business-to-business applications, and in ASP and ISP infrastructures. From there, also in many different vertical markets, whether it's financial, health care, manufacturing, services, or retail. So, that really underscores the horizontal applicability of our product family across a wide variety of markets and businesses. From a different perspective, historically the vast majority of our revenues have come domestically, in North America. As we have continued to invest in building our sales and distribution strength, we are now seeing quite a bit of business out of our international market, like Asia-Pacific, Europe, the Federal government, and OEM partnerships.
"We've forged a number of alliances with channel partners and resellers in the UK like Planet Online, for instance."
StockHouse: And you also have a subsidiary in the UK. What is the focus of the UK business and what type of partnerships for distribution have you forged there?
Hussey: Our subsidiary in the UK is primarily geared towards sales and marketing in Europe. We've forged a number of alliances with channel partners and resellers in the UK like Planet Online, for instance.
StockHouse: How is the penetration of the UK market going so far?
Hussey: Well, the UK market, and all international markets, are 1-1.5 years behind the domestic market. Right now, we are seeing a tremendous surge of interest in business in the international markets as they really start to deploy infrastructure to support mission critical, typically business-to-business, and e-commerce initiatives, outside North America.
StockHouse: What is the key to success in this market?
Hussey: I think that the key to success, first and foremost, is great product quality and then good distribution that is followed up with great service and support. F5 has a reputation, and we work really hard to preserve it, for having great product quality as well as the best service and support that you can find. That has been one of our primary keys to success, along with all of the other typical, tactical measures, such as being the first mover in lots of different markets, and having a family of products instead of being a one-product company.
StockHouse: There are also other players that address the need for speed at different levels, such as caching, managing traffic over the routers, Internet backbone, switches, etc. Where might you see a logical fit for future partnerships?
Hussey: Well, the basic attributes of any of our products fall under one of three categories. It is either a performance attribute, a management attribute or a security attribute. Within each of those categories, there are things like local and wide-area load balancing, caching, connection management, etc. Under administration there might be log analysis, billing and reporting, network monitoring, and so on and so forth. In the security system, it might be intrusion detection or auditing or something like that. I mean to the extent that we build out our product portfolio, we are either going to build those kinds of features ourselves, partner and/or license, or acquire those technologies to the extent that we can do them within our plans and our timelines. Our real strategic product direction is to continue to enhance and build our product portfolio along those lines.
StockHouse: Well, your stock price has had quite a nice appreciation since you went public. Are you very pleased with the Wall Street's reaction to your stock?
Hussey: Yes, we are pleased with the Wall Street's reaction to our stock.
StockHouse: So, you think that, generally, the Street understands your product and the potential that is there?
Hussey: Yes. Prior to our public offering, I don't think that the visibility and the importance of Internet traffic management, as a category, were very well understood. I think that through our offering, and that of many others, that this category and its strategic importance are better understood now than it has been in the past.
StockHouse: Looking forward, it is hard to quantify the growth that is expected in many aspects of business as a result of the Internet. Do you have any statistics or projections on what the magnitude of the explosive growth and expansion of the Internet will mean for your market?
"...our market is not widely covered by industry analysts. There have been a couple of attempts to size our market, and those attempts characterize this market as being worth somewhere between $1-3 billion by the year 2002 or 2003. We think those are, if anything, possibly conservative."
Hussey: Well, our market is not widely covered by industry analysts. There have been a couple of attempts to size our market, and those attempts characterize this market as being worth somewhere between $1-3 billion by the year 2002 or 2003. We think those are, if anything, possibly conservative. There is no estimate that really contemplates both the Internet traffic and the content management space and kind of just rolls it all into one, and we are really the only company that is addressing both.
StockHouse: You have an alliance with 3Com (NASDAQ: COMS) that was just recently announced, and that is expected to expand opportunities for their switches in the ISP and ASP web-hosting market.
Hussey: Yes, we have announced an alliance with 3Com. 3Com is both reselling our products and intends to incorporate our software into their switching platforms, specifically their Core Builder 9000.
StockHouse: Do you expect that to significantly ramp up your revenues for this quarter?
Hussey: No, that product will not be available until later this year. It will have no impact on this quarter.
StockHouse: The consensus earnings estimate of the four analysts covering your stock is for $1 a share.
Hussey: We are comfortable with their estimates.
StockHouse: What else would you like your investors to know that they can look forward to in the upcoming year?
Hussey: Well, a year is a long time in this business. We are going to continue to execute our plan and both add to our product portfolio, as well as focus a lot of attention on building our distribution channels and partnerships with other larger resellers. We really think one of the keys to success here is to rapidly build the installed base, leverage follow-on product sales and service revenue to build a sustainable long-term business. We think that we can do that, and we can do that profitably, which in this day and age, is fairly unique.
StockHouse: Yes, you blew your analysts out of the water last time you reported. I know that you are going to have to spend a lot of money for R&D and building up your distribution, but you do expect to maintain your profitability going forward?
Hussey: We do expect to be profitable going forward.
StockHouse: Great. Well, I thank you very much for your time, Mr. Hussey.
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