Here's a layman's notes of what I saw.
f5 Annual Stockholder's meeting April 20,2001
INTRODUCTIONS
The meeting was held in downtown Seattle in a hotel that is trying to be high tech, high end and different. That seemed appropriate for a company like f5. They had one of the regular meeting rooms. It looked like it could hold about 100 folks but there were only about 50 or 60 people there. The audience was younger than at some of the other meetings I attend (MSFT, SBUX, etc.) but there were still a few suits hanging around. They were probably the few institutional holders.
OFFICIAL MEETING portion
The CEO ran the show and did well. When he ran the official part it was with his head down reading from the script. That was one of the fastest official stockholder's meetings that I have seen. It was definitely less than 10 minutes and maybe more like three. The main items I noticed was that there was a real age mix of officers though that is no surprise. They also authorized 2,000,000 more shares
The most interesting portion is when he went through the presentation. He was straightforward enough to start right off with what has happened to the stock. The main message he started with was how f5 had started with big corporations (enterprise solutions) and how last year there had been a lot of growth through the dotcoms. He emphasized that they quickly returned to focussing on the enterprise companies once they realized what was happening to the dotcoms.
PRESENTATION
When he displayed the 2001 revenues they still seemed to show Q1 to Q1 and Q2 to Q2 growth. The graphic also showed that the percentage of dotcom business may be down but the enterprise portion is way up. It sounds like the large customers held back somewhat during Q1 and Q2 but are coming back.
Besides focussing more on the enterprise customers they also cut expenses by 25% through layoffs and other actions. They are now holding weekly business control meetings where they review costs and such. Overall morale is supposedly still good despite the layoffs.
They apparently have reduced Day Sales Outstanding (DSO) from 104 days to 84 days and gross profit margin is up 6 points. They still have $30M in cash. They expect to break even at least this year. The Dell BigIP deal was worth over $1M in Q1 and they expect that to grow and help a lot.
He did a good job of describing the products as being very good because they are usually first to market and are fully integrated. Evidently Cisco's acquisitions strategy has produced products which encompass the same space but are dissimilar and don't always work well together. f5's use of XML and common interfaces helps the products work well together. He described Cisco's product line as "Islands of Dysfunctionality". He spent so much time not slamming the competition that he might have been dealt this slide and had to go with it. Cisco is the main competitor but he tried to treat them with respect while still demonstrating how good f5's products are.
He was quite proud of iControl; their Internet Control Architecture. I think it is this system that allows customer's applications to become aware of the real time condition of the Internet. Evidently this capability is very handy for Microsoft and their .Net strategy.
The last item of the presentation was the expected Q3 numbers. Revenues are expected to be $28M-$30M. Earnings are expected to be somewhere around a $.05 loss or breakeven. Gross margins are expected to be about 62%. DSO will hopefully be below 80 days, and inventory should be flat to down. I hope I got those numbers right.
Q&A (I have paraphrased quite a bit. Hopefully the story still comes through.)
> They expect to increase shareholder value through: increased enterprise momentum, product leadership, business controls, and more road shows.
> The sales cycle is about 90-120 days. They hope iControl will act as a pull on the sales.
> f5's work on the new Internet protocol (IPV6?) sounds to be small.
> The Microsoft .Net implications are that iControl will be a key enabler of .Net. Mostly that is because the product is developed from the software side (not like CSCO which develops from the hardware side). Therefore it works well with other XML based approaches like .Net.
> He was asked for the 5 top performance enhancements but all I got was that coopertition, i.e. keep it open, is key.
> Juniper's influence on CSCO only affects f5 tactically. That probably means more to someone else.
> The refocusing on enterprise companies happened so quickly because the sales force is from enterprise companies and because it was only just recently that the dotcoms stepped in and out.
> They are still hiring into the sales force of 70-75 people world-wide in metro centers. About half of those folks are in North America.
> Attrition after the layoffs was low enough that he knew all of their names.
> They plan on talking to more institutions. They would like to have more institutional investors.
> f5 is a great company and recently a poor stock that is because f5 is just part of a trend. He pointed out that while the highest market cap of f5 may have been hard to justify by standard metrics of large caps, the current market cap is also so low that it is hard to justify based on conventional metrics. That sounded like it was true of the other companies in the sector as well.
> Exodus had been 25% of sales but with the drop in dotcoms it is more like less than 10%. It is still one of the three biggest customers. Dell may son be #1.
> He wouldn't comment on 2002 profitability because their "profitability model" is highly dependent on the economy and the economy is hard to evaluate right now.
> The greatest hazard in the short term is the economy though they think they are in a great strategic spot.
> The majority of sale will still be through channel partners, not OEMs. I am not sure what difference this makes.
> The products are made in Washington state by some of f5's partners.
Those are my recollections based on scribbled notes. I came away impressed with the fact that they are providing an integrated package and that the customers are well respected companies. I might buy more given the right opportunity (re: cash). If anyone knows of their market share I would appreciate hearing about it. At this low of a market cap I wonder if they aren't a takeover target by one of their alliance partners (MSFT, DELL, etc.) or by their competitor (CSCO). Any insights would be appreciated and I'll try to answer what questions I can.
Disclaimer: LTB&H though I didn't start buying until about a year ago. |
