301b basics - BIG-IP Local Traffic Manager (LTM) Specialist : Maintain & Troubleshoot Updated: 2023

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Shares of F5 Networks (NASDAQ:FFIV) are lower today after the company reported earnings. Total revenue climbed 11% year-over-year to reach $703 million, but software revenue dropped 13%. In response to the mixed results, the company announced it would be cutting roughly 9% of its workforce or around 620 employees.

Nevertheless, KeyBanc Capital Markets analyst Thomas Blakey pointed out some positives, like the growth in new deals and expanding pipelines. F5’s CEO, François Locoh-Donou, mentioned that due to ongoing macro uncertainties and their impact on customer spending, the company expects low-to-mid single-digit revenue growth in Fiscal Year 2023.

The firm’s Non-GAAP EPS of $2.53 exceeded expectations, and F5 reaffirmed its commitment to giving back to shareholders through share repurchases. With $1.23 billion still available under its authorized common stock repurchase program, the company plans to buy back at least $250 million worth of shares in the next quarter. However, F5 anticipates revenue to land between $690 million and $710 million, with non-GAAP diluted earnings per share ranging from $2.78 to $2.90. As a result, the midpoints are slightly below the consensus estimates of $702 million and $2.86 per share.

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Overall, Wall Street analysts have a consensus price target of $156.92 on FFIV stock, implying almost 19% upside potential, as indicated by the graphic above.

Disclosure

Song Pang is the senior vice president of customer engineering at NetBrain, a market leader for NetOps automation.

For far too long, many CIOs have focused on identifying, acquiring and rolling out the latest in technology hardware and software. This is a very tangible set of steps and has largely overshadowed and obscured the need to rethink day-to-day operational processes.

In most cases, the current operational plan is simply considered a given set of proven processes that have been in place for decades—which is the root of the CIO’s problem. If the specific set of technologies across IT has changed so dramatically over the years, yet the operational process to support the infrastructure is still largely as it was defined decades ago, there surely is a missed opportunity for a more effective approach.

The Uptime Institute will tell you that network outages and service degradations are occurring more frequently and are of longer duration. So why is this happening despite all this new technology? There are three main reasons: increasing network complexity, fewer skilled engineers and outdated and ad hoc processes. Here’s a breakdown of each of these factors and what CIOs can do to overcome them.

Increasing Network Complexity

As M&A activity along with aggressive cloud-migration strategies continues to power the growth of most multinational enterprises, the networks themselves are getting more complex. Public and private clouds, virtualized components, microservices, software-defined capacity and more have all made NetOps’ tasks much more complicated.

The SolarWinds IT Trends Report 2022 found that hybrid IT is increasing network complexity. Forty-nine percent of tech pro respondents said that the acceleration of hybrid IT has increased the complexity of their organization’s IT management, and 36% admitted they were only somewhat confident in their ability to manage that complexity.

F5 Network’s 2022 State of Application Strategy Report found that 70% of organizations manage five different application architectures, and the average organization uses 21 application security and delivery technologies. Seventy-seven percent of respondents run applications in multiple clouds, and 93% use some type of cloud-based “as-a-service” offering.

Most CIOs admit they are already in a deficit when it comes to keeping their IT infrastructure running today, the cloud in particular. The SolarWinds report also found that “while more than half (54%) of tech pro respondents state they leverage monitoring strategies to manage [network] complexity, 49% revealed they lack visibility into the majority of their organization’s apps and infrastructure.” In short, those respondents lack the proper tools and processes today to manage the complex needs of the business, largely because managing device health is no longer a valid proxy to assure digital business success.

Limited Skilled Resources

The second issue is simply a lack of qualified engineers to address the largely bespoke and reactive processes in place. For the past several years, many of the industry’s top IT analyst firms have been citing a dwindling pool of experienced resources after the start of Covid. The Uptime report found that “problems with attracting and retaining staff appear to be worsening … over half (53%) of operators surveyed report difficulty finding qualified candidates for open jobs—up from 47% in 2021, and 38% in 2018.”

Employee retention is yet another issue with almost half (42%) of respondents reporting their staff was hired away. Shrinking budgets will further limit IT departments’ ability to employ experienced engineers and will make hiring even harder and more costly. Organizations that rely on this type of traditional infrastructure are already struggling to find qualified people to manage it, no matter how much they offer.

Fewer highly skilled resources means network service tickets take longer to resolve and require more escalations. If only one engineer on a team has the knowledge to fix a particular problem or update a particular piece of hardware, what happens when they’re out sick or on vacation or they live 1,000 miles from where the issue is reported? IT departments without a good way of sharing knowledge can often devolve into many little silos that slow down troubleshooting and a series of missed expectations. A no-code approach can better capture the knowledge of a wide range of subject matter experts and make it sharable and transportable.

How Ad Hoc IT Processes Can Hinder Business Growth

The biggest issue, which has been overlooked in IT departments for years, is that network operations processes are often outdated, focused on manually maintaining device health rather than maintaining IT business services, and are almost entirely reactive. What this means is operational leaders still focus on fixing problems when they occur rather than preventing problems from occurring in the first place. This is ironic since it costs much less to prevent a disruption early on than it does to restore operations after a problem manifests into production and affects the business.

The Answer To NetOps Challenges

The good news is that today’s most aggressive CIOs are looking for the means to manage their network-connected businesses focused on delivered service outcomes. Here are several steps that IT leaders can take to Improve their management infrastructure.

• Examine the desired business outcomes that the network supports. For example: keeping VoIP calls clear, maintaining security policy compliance or keeping the application responsiveness needed in e-commerce. Build a list of these key outcomes.

• Assess if their current IT tools allow them to monitor and verify that these outcomes are being met. Plan new ways to monitor and verify these intents if necessary.

• Look for ways to save time on regular network management tasks. For example, if engineers typically run the same three diagnostic tests for most or all trouble tickets, can those tests be automated to run every time a ticket is created?

• Analyze how the IT and NetOps teams share knowledge among themselves. Do teams have access to the information they need? For example, can the security team find the location of an IP address on their own, or do they need to talk to NetOps?

• Identify any bottlenecks in NetOps (tasks that only a few engineers have the skill set to do) and work to train, hire or provide tools to enable other engineers to do them as well.

While increasing network complexity and decreasing talent both make NetOps more difficult, the central issue is outdated processes. Modernizing those processes with a focus on business outcomes is key for CIOs to regain control of NetOps.

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It has been about a month since the last earnings report for F5 Networks (FFIV). Shares have added about 5.8% in that time frame, outperforming the S&P 500.

Will the exact positive trend continue leading up to its next earnings release, or is F5 due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most exact earnings report in order to get a better handle on the important catalysts.

F5 Networks' Q2 Earnings and Sales Top Estimates

F5 reported second-quarter fiscal 2023 results, wherein the top and the bottom lines surpassed the Zacks Consensus Estimate.

This Seattle-based company’s non-GAAP earnings of $2.53 per share beat the Zacks Consensus Estimate of $2.42. The bottom line increased 18.8% from the year-ago quarter’s $2.13 per share and was way higher than management’s guided range of $2.36-$2.48 per share.

During the reported quarter, F5 Networks witnessed a 11% increase in its revenues amid a global chip shortage scenario in the semiconductor industry. The company’s non-GAAP revenues were $703.2 million, which beat the Zacks Consensus Estimate of $700.7 million. The top line was above the mid-point of the guided range of $690-$710 million.

Top Line in Detail

Product revenues (48.4% of total revenues), which comprise Software and Systems sub-divisions, increased 14% year over year to $340.6 million. System sales jumped 43% year over year to $209 million, accounting for approximately 61.3% of the total Product revenues. However, Software revenues slumped 13% to $132 million, making up the remaining 38.7% of the total Product revenues.

Global Service revenues (51.6% of total revenues) grew 8% to $362.6 million.

F5 Networks registered sales growth across the Americas, EMEA and APAC regions, witnessing a year-over-year increase of 7%, 22% and 9%, respectively. Revenue contributions from the Americas, EMEA and APAC regions were 54%, 27% and 18%, respectively.

Story continues

Customer-wise, Enterprises, Service providers and Government represented 67%, 13% and 20% of product bookings, respectively.

Margins

GAAP and non-GAAP gross margins contracted 220 basis points (bps) and 250 bps to 77.9% and 80.4%, respectively.

GAAP and non-GAAP operating expenses went up 1.9% and 4.6%, respectively, to $441.5 million and $374.1 million. F5 Networks’ GAAP and non-GAAP operating margins expanded 330 bps and 70 bps to 15.1% and 27.2%, respectively.

Balance Sheet & Cash Flow

F5 Networks exited the March-ended quarter with cash and short-term investments of $755.3 million compared with the previous quarter’s $660 million.

During the fiscal second quarter, the company generated $141 million of operating cash flow compared with the $158 million reported in the previous quarter. The operating cash flow remained under pressure due to strong multi-year subscription sales, which impacted the cash collection process.

Guidance

F5 Networks projects non-GAAP revenues in the $690-$710 million (mid-point of $700 million) and non-GAAP earnings per share in the $2.78-$2.90 band (mid-point of $2.84) for third-quarter fiscal 2023. Non-GAAP gross margin is forecast to be around 82%.

For fiscal 2023, F5 Networks expects low-to-mid-single digit revenue growth.
The company anticipates non-GAAP earnings to grow in 7-11% band. Non

GAAP operating margin is forecasted to be roughly 30%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, F5 has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, F5 has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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