Data Speed And Security Build Business At F5 Networks
BY KEVIN DOBBS, IBD Jan 7, 2015
[note: this was a pre-earnings article.]
F5 Networks soared in 2014 and looks poised for another strong run this year. Demand is mounting for its security products as clients do more business via digital means and require heightened protection from hackers.
Though not solely a security provider, Seattle-based F5 (FFIV) says that it is well-positioned to meet increasing needs on that front, needs amplified in 2014 by a range of breaches, from a cyberattack on banking giant JPMorgan Chase (JPM) to the infamous attack on Sony (SNE) and release of its executives' internal emails.
Cooper Werner, F5's senior vice president of finance, told investors recently that the percentage of the company's product revenue tied to its security business reached 36% in the fiscal year ended Sept. 30. It marked a 41% year-over-year jump.
F5 Networks' fast-throughput gear for data centers includes a chassis and performance "blades" that plug in to scale up processing as needed.
"Obviously, this is probably the biggest driver to our overall growth," Werner said while speaking at an investor conference hosted by Barclays in December.
In its latest completed fiscal year, F5's revenue climbed 17% to $1.73 billion. Analysts polled by Thomson Reuters project top-line growth of 13% for the current fiscal year.
Upselling Safety
F5, whose clients include big online operators such as Facebook (FB) and Pandora Media (P), is the leading seller of application delivery controllers. ADCs are electronic devices that, in a nutshell, efficiently direct traffic to corporate computer servers and data centers, enhancing the work processed in these areas and boosting website and communication network speeds.
Werner said that F5 has worked to deepen business relationships with its ADC clients by also offering them data-center security products and services.
In short, F5 views security "as a natural extension of its ADC offerings, to help applications perform efficiently" and make them "more secure," as UBS analyst Amitabh Passi summed it up in a research note to clients.
With demand now surging for data center protections, F5 finds itself at the center of what many observers expect will prove a long-running trend.
"All it takes is a read of the headlines to see why demand for data security is on the rise and will continue to rise," BMO Private Bank Chief Investment Officer Jack Ablin told IBD.
"I think that is the next frontier," Ablin said. He added that companies staking their ground now stand to be well-positioned to capitalize on the secular trend.
F5's stock surged nearly 44% in 2014. It finished the final trading day of the year at $130 per share. It currently trades near 128.
F5 is the No. 3 company by market cap after Equinix (EQIX) and Akamai Technologies (AKAM) in the Internet-Network Solutions industry group, which ranks No. 38 out of 197 groups that IBD tracks. The next largest players in the category are Rackspace Hosting (RAX) and SolarWinds (SWI). With an IBD Composite Rating of 98, F5 is one of the highest-rated companies in the Internet-Network Solutions group, topped only by Rackspace and SolarWinds, each of which gets a 99.
A global survey by PricewaterhouseCoopers found that information security breaches skyrocketed in 2014, leaping 48% from 2013 to 42.8 million detected incidents. Total financial losses attributed to security compromises jumped 34% over 2013, the PWC survey said.
"The rise in security incidents would account for some of this increase in financial losses, of course. But another explanation might be that today's more sophisticated compromises often extend beyond IT to other areas of the business, and financial losses may now include remediation of more customer impacts and not just operational disruptions," PricewaterhouseCoopers said in a report. Companies and organizations "must remain vigilant and agile in the face of a continually evolving threat landscape."
GBT Capital Management Chairman Gary Townsend told IBD that cyberattack concerns are deepening and spreading across sectors, making security a top priority for companies of all sizes. "One needs to be concerned about it everywhere," he said. "No one is immune from attack."
Demand Outlook
Deutsche Bank analysts said in a December note that their recent checks on F5 suggested "no incremental slowdown in demand" for the company's services, indicating that results for the quarter that ended Dec. 31 are likely to be strong. The analysts cited "an expanding order pipeline" for application and cloud-based security products from Fortune 500 companies.
Depending on the traffic level and the number of servers needed to manage it, F5 charges between $50,000 and $300,000 for its ADCs. Competitors include Citrix Systems (CTXS) and A10 Networks (ATEN). F5 also sells virtual ADCs that run in clients' data centers as opposed to on F5's own hardware.
Analysts on average anticipate that F5 will report earnings per share of $1.49 for the quarter that ended Dec. 31, which would be up 22% year over year, on sales of $467 million, which would be up 15%.
The Deutsche Bank analysts anticipate that the momentum will continue. "We see 2015 as a positive year," they wrote. The analysts have a buy rating on F5, with a $150 price target.
Brent Bracelin, an analyst at Pacific Crest Securities, recently raised his price target on F5 to $162 from $153 and kept an outperform rating. In a December research note, Bracelin cited F5's "increasingly strategic positioning in security headed into the new year."
Acquisitions have augmented F5's growth. In 2014, the company bought Defense.Net, a provider of cloud-based security services. And in 2013, it acquired Versafe, whose software guards Web applications from malware and fraud. Analysts anticipate more deals to come, providing an additional reason to expect growth.
Speaking at the Barclays conference in December, Edward Eames, F5's executive vice president of business operations, said that the company could continue on the M&A path, with a focus on small, add-on deals.
"I think we're very happy with the small technology purchase — and then fold that into the company and add it into our product line," Eames said.
"And that's definitely the strategy we have going forward. So I don't think we'd be looking for larger M&A," he said. "But yes, security, cloud — perhaps services and subscription around the two, as well — would all be focus areas, and we are continuing to look." |
