F5 Networks' 4th-Quarter Results Aren't Worth Cheering

F5 Networks (NASDAQ: FFIV  ) is one of those businesses that looks essential. Who doesn't need software and gear for managing the traffic in digital networks that seem to grow geometrically busier with each passing year?

If your answer is "everyone," then you understand why I rated this stock to outperform in my Motley Fool CAPS portfolio. Today, that pick is underperforming the broader market by about 59 percentage points. Ugh.

But the story is getting better, right? F5 reported good Q4 results last night. Revenue rose 9% to $395.3 million, resulting in $1.26 in earnings per share after excluding stock-based compensation and other non-core costs. Analysts were expecting $384.9 million and $1.19, respectively, according to FactSet data published by the Associated Press.

Looking ahead, management expects $1.17 to $1.20 a share in adjusted earnings from $390 to $400 million in revenue. Wall Street was hoping for $1.20 and $389.9 million, about even with guidance.

An initial burst of enthusiasm sent the stock up more than 3% after hours, but trading activity has since moderated. F5 shares are up less than a half a percent as I write this morning. I think I know why.

"We anticipate overall gross margins may decline 50 to 100 basis points over the course of the year, driven by increased investment in our consulting services, which carry lower margins. It is our view that in addition to increasing services revenue, these investments drive future product growth, deal sizes, customer penetration and overall customer satisfaction," Chief Financial Officer Andy Reinland said in prepared remarks in last night's conference call with analysts.

To me, he's putting a positive spin on a troubling trend: Product revenue is tougher to come by, so F5 is investing in services to squeeze more from current customers and increase billings from every new engagement.

F5 needs the juice. Q4 product revenue inched up just 1.2%, which means consulting accounted for virtually all of F5's top line growth. For the full fiscal year, product revenue fell 2.4%.

Cisco's team-up with Citrix Systems to deliver more F5-style application delivery functionality to their customers appears to have taken a huge toll. Enhanced consulting services and more security products are the company's way of fighting back.

The battle is a long way from over, and unfortunately for F5 investors, a win is anything but assured.

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