F5 Annual Stockholders Meeting 2/24/2005
Here’s some of what I got out of the annual meeting.
CAVEAT
I am human. I make mistakes. When in doubt, watch the webcast.
PRE-MEETING
Every $2B market cap company should have its meeting in the company’s headquarters. Last year it was in the breakroom. This year they upgraded by opening up a wall and let the speakers talk from the slightly elevated stage of the neighboring conference room. I think the room also does duty as a training facility. These folks watch costs.
There were chairs for about fifty people. Most of the seats were taken and there were about a dozen or two suits standing in the back. I suspect they were the money people, directors, and such. A few of them held loud conversations that provided fie examples of how separated some people are from normal suburban lifestyles. Whenever I hear such attitudes from the suits I want to vote against executive compensation packages.
FORMAL MEETING
The CEO performed as well as ever. He ran through the official meeting correctly and legally without wasting time. Some companies spend a lot of time on the official portion even though everything would pass no matter what happened at the meeting. The votes were there. The issues passed. He got on with the real meat, which was the management view of the business.
BUSINESS PRESENTATION
The CEO took about 15-20 minutes describing the business’s products, services, finances, markets and strategy. He had to spend a fair amount of time describing very basic topics because the company’s products are not very familiar to the general public. I’m only now catching on because I’ve attended these meetings for about five years.
Their over-arching strategy, though he didn’t use that term, was to, “Save their customers money”. Sell them something that helps them and you get a good business. I know, the details through great complexity into my simplification.
They must be doing something right. The FY04 numbers looked very nice: 42% year-to-year revenue growth, operating margins improved from the low teens to 24%, $222,000,000 in cash and no debt, and a 60% increase in shareholder value. It looks like things are continuing to improve.
In at least one market they have become #2 and I somehow managed to not write down the percentage. The growth is two-fold. While technology is doing poorly, their corner of the tech world is growing. In addition, they are gaining market share from Cisco and Nortel. So they are in a good place and doing well against the competition.
I would do a disservice if I tried to describe all of their products and services, but here is a quick rundown of what I caught. Firepass, which lets things like PDAs and PCs remotely access applications and was the result of an acquisition, managed to exceed its sales targets. Buffalo Jump, which is another name for BIG/IP version 9, will be launched this year and is expected to be important, and no, I don’t remember any sales projections that were going to back that up. Traffic Shield, which looks at how applications are being accessed, is being well received as a defense against “Day Zero” attacks. I think that is the jargon for those hacker assaults that are brand new. Traffic Shield looks for changes in the normal patterns and hopes to stop attacks without having to access virus libraries or such potentially out-of-date resources. The competitors for application switches are described on the company’s web site. Evidently they have graphics there that demonstrate f5’s ten-fold advantage over the competitors when it comes to encryption security. (I never feel confident listing their products so don’t be too surprised if you’ve spotted an error. Please pass along corrections.)
Services are important, but there is less to say about them.
Their long-term strategy is to maintain a revenue growth number that I must have gotten wrong (>40% year-to-year?), and about 20% operating margins. They will focus on traffic management, application management, and security, oh yeah, and have fun.
FINANCIALS
The CFO gave a quick review of the numbers. Some of it was a repeat of what the CEO said.
Gross margins are at 77% and look to stay there. Day-Sales-Outstanding has improved from 55 down to 41 and will probably stabilize there. Cash has improved from $79M to $222M, primarily from an offering made back in November. Revenues were 74% from hardware. All markets grew but the largest was Domestic at 61%. Sales and Marketing accounts for 40% of the employees.
Income statement trends look textbook-good and are expected to continue. I’ve already quoted the numbers up above. He took the time to graphically show eight quarters of data. The good numbers don’t look like flukes. They are working from 32 inventory turns. Does that mean they are turning over inventory 32 times? If so I have to check my understanding of DSO. Inventories are going to climb to support the revenue growth.
They are growing profits faster than revenues. Total expenses are up but are flat or down as a percentage of revenue. Sales and marketing costs have decreased from 42% to 33%.
He provided guidance but I merely glanced at it to note that it was marginally higher. As is typical for f5, the guidance was positive but restrained and not projected forward more than a quarter.
QUESTIONS AND ANSWERS (paraphrased)
? The fiscal year is September to September.
? Microsoft and f5 are not competing in the security market. F5 is t the server level. Microsoft is at the PC.
? Some resellers sell F5 and Cisco products.
? Customers tend to buy a box and then sign up for product support.
? Management’s wish list for their cash hoard is to maintain a strong balance sheet. That foundation aids sales to companies that fell better working with stable firms.
? Mergers and Acquisitions are always possible but never really mentioned until after the fact. They officially have no plans to purchase anyone or sell themselves. Having said that, the URoam purchase worked very well.
? No news in the need for changes to facilities. (That was mine and I was merely curious about when such a growth company would outgrow their building. I got the impression that it is not an issue.)
? The company has facilities in Seattle, San Jose, Spokane and Tel Aviv.
? Splits, dividends and buybacks are always possible but they wouldn’t discuss such plans.
? The Level 4/7 market is growing faster than the rest of technology.
? ASP is stable. It is not a price-driven decision. (I wrote it down and have no idea what it means.)
? Microsoft’s Longhorn project is designed to improve PC security. F5 works on server security.
SUMMARY
As always, a well-run meeting that describes a well-run company. The meeting was over quickly enough that I was driving out of the parking garage less than an hour after they’d started. They are small and growing. Their story is a David and Goliath tale. I’d pass along any drama there was to report, but the progress has been so consistent and involves products that few folks understand; that it is easy to simply sit there, hear good sales stories, see good financials and trends and walk away with a good feeling.
CONCLUSION
I’ll continue to HOLD and regret that I sold some after I mis-interpreted some of last year’s market picture. The company has good products, services, management and finances. The stock looks pricy given the current revenues, but their trends are impressive enough to legitimize the price. That is not the same thing as saying the stock is cheap. It ain’t. It does however mean that I will continue with my existing investment.
DISCLAIMER
LTBH since 2000. The original shares are gone but investments are ultimately there to be spent. I think next time I’ll spend something else. |
