From IBD:
Internet Infrastructure Company Seeds The 'Cloud,' Makes Rain
Marilyn Alva
Investor's Business Daily
On 6:12 pm EST, Friday November 13, 2009
The next-generation data center has its head in the "cloud."
That's a techie term for somewhere out there on the Internet where computer services and applications are hosted and accessed.
Fuzzy as it seems, cloud computing is the new big thing in information technology.
It enables on-demand network access to a shared pool of networks, servers, storage and other computing resources. In other words, it can save companies a lot of money.
At the same time, data centers are consolidating into fewer but more-massive server farms.
All this change makes managing internal network traffic more important. Enter Seattle-based F5 Networks (NasdaqGS:FFIV - News).
"F5 is at the center of a lot of these trends," said analyst Jason Ader of William Blair & Co.
By directing and balancing Web traffic, F5's software and hardware products help applications run faster and smoother even as data centers move further away from end users.
F5 Networks considers itself in the "sweet spot" of new data center architecture, in and out of the cloud.
"Virtualization of servers is important, and our solution makes this new architecture work," said Chief Executive John McAdam.
F5's application delivery controllers are pizza-size boxes that include chips, networking gear and software. They typically sit in front of racks of servers at data centers.
F5 is the top player in application delivery controls, or ADCs. It has a 38% share of the still relatively nascent market, estimated at less than $1.5 billion worldwide.
That's up from a 16% share in 2004 and ahead of former leader Cisco Systems (NasdaqGS:CSCO - News). Research firm Gartner estimates that Cisco's share has fallen to 22.5%. Citrix Systems (NasdaqGS:CTXS - News) is a distant third.
Besides big enterprises and banks, F5's customers include government agencies and wireless service providers, which use its products to speed up mobile applications.
Facebook uses F5's products in its infrastructure.
"Businesses are buying (F5's) products, but consumers are benefiting from them just as much as business users," Ader said. "One of the most important things you can do for technology is make the applications fast, or we're not going to want to use them."
Unlike rivals who target a number of different tech areas, F5 is laser-focused on the ADC market. It also provides security.
"They have the benefit of focus. They have a huge installed base and they have a large sales force," Ader said. "They are a great way for investors to play data-center transformation."
F5 might appeal to bigger outfits looking to boost their presence in ADCs, some observers say. McAdam wouldn't comment on recent rumors that F5 could be an acquisition candidate, a company policy when such rumors surface.
Ader said it makes sense that F5 "would be an attractive asset for a larger company trying to build a data-center infrastructure portfolio." Among potential buyers, he cited Hewlett-Packard (NYSE:HPQ - News), Sun Microsystems (NasdaqGS:JAVA - News), IBM (NYSE:IBM - News), Dell (NasdaqGS:DELL - News) and Cisco.
F5 has upgraded its core traffic management operating system -- TMOS for short -- so it can address a myriad of new applications, including texting for mobile operators and video-on-demand for cable carriers.
After almost a year in which customers put nonessential spending on hold, orders have started to come in again. Revenue of $175.1 million in the firm's fourth fiscal quarter ending Sept. 30 was up 11% from the previous quarter, though up just 2% from the year-earlier period.
Management expects revenue of $182 million to $187 million in the current quarter.
Product revenue in the last quarter increased 14% sequentially, analyst Jeff Kvall wrote in a client note for Barclays Capital, "a meaningful improvement following several quarters of sequentially flat growth to declines."
Full-year revenue moved up only slightly to $653 million from $650 million.
F5 recently announced its largest single order ever, valued at $35 million for both products and services. It wouldn't disclose the client's name, but Ader says he's pretty sure it's Bank of America (NYSE:BAC - News).
"There was a lot of pent-up demand for their products during the downtime," Ader said. "Now that companies are feeling a little better about their business and understand data center transformation is going to dramatically reduce their IT costs, they know they have to get moving."
F5's bookings were up across all geographic regions, especially in North America, the company reported on Oct. 21.
CEO McAdam said in a phone interview that year-over-year growth in China was excellent. Chinese customers include Internet and mobile companies, banks and other public-sector enterprises.
Profit in the quarter jumped 108% from the earlier year to 50 cents a share. For the full year ending Sept. 30, earnings rose 89% to $1.68 per share -- a sharp contrast to last year, when profit fell 1% to 89 cents a share. Analysts polled by Thomson Reuters estimate per-share earnings for the current fiscal year of $1.99, an 18% year-over-year rise.
Thanks to its software-rich products, F5's gross margin is typically strong, around 80% in the last quarter.
"It's really software that's the secret sauce," Ader said, "or else the company wouldn't be able to charge so much."
Products range in price from $15,000 to $200,000. Because they are "mission critical," customers often buy duplicates, says Dan Matte, senior vice president for marketing.
F5 has long-standing ties with software companies like Microsoft (NasdaqGS:MSFT - News), SAP (NYSE:SAP - News) and Oracle (NasdaqGS:ORCL - News), Ader says, noting that they often refer customers to F5.
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