The Motley Fool's readers have spoken, and I have heeded your cries. After months of pointing out CEO gaffes and faux pas, I've decided to make it a weekly tradition to also point out corporate leaders who are putting the interests of shareholders and the public first and are generally deserving of praise from investors. For reference, here is last week's selection.
This week, we'll take a closer look at F5 Networks (FFIV -0.96%) CEO John McAdam, and explain how he's creating a rapidly growing, and fun to work for, company.
Kudos to you, Mr. McAdam
The past few months have been an absolute roller-coaster ride for information technology companies such as F5, which provides application delivery solutions to businesses. Primarily, businesses cut back on their spending because of the uncertainty associated with the fiscal cliff. With that now resolved, you might think spending would have picked up, but with the U.S. debt ceiling debates still clogging up Congress, don't be so certain that spending has returned.
We have seen rare instances of big telecom spending, such as the $14 billion multiyear infrastructure upgrade announced by AT&T in November or the $8 billion investment in Sprint Nextel by SoftBank, which is certain to go into building its 4G LTE network, but the immediate results have been tepid at best. Network delivery solutions provider Acme Packet (APKT), for instance, recorded a sequential quarter and year-over-year decline in revenue in its most recent quarter while tightening its non-GAAP annual loss estimates.
So if the sector is in such "dire straits," why would you bother investing in F5 Networks? There are a lot of reasons to be optimistic about this recent selection by Fool Co-founder David Gardner.
To begin with, as my colleague and Foolish premier tech analyst Eric Bleeker has noted, F5 has been almost unparalled in its efforts to dominate the load-balancing market despite Cisco Systems' best efforts to penetrate the market . Cisco announced it was ending production of its Application Control Engine load-balancer products in September. With this rapidly expanding market all to itself, F5 is able to exhibit remarkable growth in the telecom and cloud-computing space even with relative tepid spending.
Second, and as I just touched on, you're getting an unbelievable growth rate with F5 for a relatively cheap price. In the same quarter that Acme Packet whiffed, F5 recorded a 15% improvement in revenue. For the full-year, F5 reported 16% sales growth within the U.S. and 24% internationally, signaling to investors that it's pushing into high-growth emerging markets with ease.
Another important and extremely overlooked point that Eric makes for tech solution providers involves the way that F5 records its revenue. The contracts it secures are amortized over time, meaning that although earnings growth might appear to be slowing, its free cash flow could actually be stable or even accelerating depending on how many new contracts it's brought in .
And then there are some amazing intangible factors.
A step above his peers
Aside from making its competitors eat its dust in the application delivery control space, F5 offers unique benefits to its employees, while taking good care of the community and shareholders.
Within the U.S., employees are entitled to some very nice perks, including 18 paid days off after just the first year, free juice and soda, twice-a-week massages, a $100 monthly stipend to be used on mass transportation, as well as the usual medical, dental, and 401(k) packages that you'd expect at most reputable companies. As an added bonus, F5 has taken the "Beer 30" concept to heart with its "Beer Fridays," featuring microbrews, wine, Ping-Pong, foosball, and other interactive games every week.
Although shareholders haven't received a dividend from F5 yet -- and who can blame F5, which wants to further expand its stranglehold in the ADC space -- they have witnessed F5 announcing a $200 million share repurchase program in 2010 . However, with $532 million in cash, no debt , and $465 million in free cash flow generated last year , I see no reason why a dividend won't be coming at some point down the road.
Finally, from a community standpoint, members of F5 participated in raising money for cancer, diabetes, and HIV/AIDS, through the Yoga for Hope campaign in my city, Seattle . In addition, F5 has been recognized by Seattle Mayor Mike McGinn for its involvement in the "Good Company" business recognition program.
Two thumbs up
I hope you're thinking what I'm thinking. If F5 is growing at roughly 15% to 20% now, when tech spending is constrained, just imagine how quickly it'll expand once telecom spending ramps up and cloud-computing data centers start seeing dramatic increases in usage and storage. F5 is set up in the sweet spot of growth, and I can see why David Gardner considers it to be a disruptive force in the tech sector. F5 has a pristine balance sheet, plenty of free cash flow, is expanding rapidly outside the U.S., and has what appears to be a very happy workforce. For those reasons, I'm anointing John McAdam with two well-deserved thumbs up!
