F5 Networks Pre-earning Article: What We’re Watching

F5 Networks (NASDAQ:FFIV), a global leader in application delivery network, is set to announce its Q2 2012 results on Wednesday, April 18. It competes with heavyweights such as Cisco Systems (NASDAQ:CSCO) and Juniper Networks (NYSE: JNPR), as well as smaller players like China’s Huawei and Brocade Communications. F5’s last quarter revenue and earnings beat estimates and the company posted an increase in gross margin. Better execution and focus on enterprise and service providers have helped F5 Networks emerge as the leader in application delivery controller (ADC) market. Here are some factors that will determine the company’s performance in the current quarter.

See our complete analysis for F5 Networks here

Application Delivery Network Sales

Application delivery network (ADN) solutions is a fast-growing segment in the enterprise networking market. The shift to cloud-based applications and storage is also driving demand for application delivery products. With a contribution of 62% to the Trefis price estimate, the growth of ADM market plays a major role in determining the company’s performance. We believe the ADM market will grow at a rate of 19.3% in the coming year, and an average rate of 15.7% till the end of our forecast period.

Research firm Gartner forecasts ADC sales to double to $2.94 billion in 2015 from $1.45 billion in 2011. F5 currently holds roughly half the market, having long overtaken Cisco as the number one ADC supplier.

Acquisition of Traffix Systems and Entry into Internet Firewall Market

F5 Networks acquired Traffix Systems, a provider of 4G Diameter signaling products for telecommunications service providers, in February 2012. While F5 is the industry leader in providing load balancing solutions for IP-based traffic, Traffix has the industry leadership in Diameter and signaling for the 4G/LTE networks. The acquisition will further increase F5’s exposure in the network market providing it unique depth and breadth of technology that will enable carriers to transition from 3G to 4G and IMS in a simpler, cost-effective and non-disruptive way.

F5 also entered the Internet firewall market in February 2012, with its Big-IP 11.1 software passing the ISCA Labs test for network firewalls. By pushing into the firework market which aims to protect data centers, F5 will take on networking major Juniper Networks.

Data Center Consolidation

With the slowing global economy, an increasing number of companies are reducing their IT spending and cutting overheads. F5 can leverage the current situation by optimizing existing data centers of customers, thereby reducing their cost and energy needs. As data use rises and complexities increase, there will be a greater need to mass size and monetize that data. We expect in 2012 the push toward datacenter consolidation and virtualization will continue to bring enterprise business for F5 networks, which was recently placed by Gartner in the leaders’ quadrant of the SSL VPN Magic Quadrant.

Data center consolidation using virtualization technologies, widespread adoption of cloud-based services and computing, and continued explosive growth of mobile applications are some of the industry trends that will be key growth drivers for F5. The company currently holds a 24.8% share in the ADM market.

F5 also benefits from the release of new consumer electronic products such as smartphones and an increase in web traffic. However, lower government spending and the tightening of budget in the financial services industry could have a significant impact in the coming quarters, as these segments account for a considerable share of F5 Networks’ total value. Nevertheless, we estimate the F5 ADN market share to grow at an average rate of 1.9% over our forecast period.

We maintain our price estimate of $129 for F5 Networks, around 4% above the current market price.

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