Here's Why F5 Networks Inc. Should Continue Outperforming

Driven by strength in security products and a strong roadmap, F5 can scale new highs.

Jun 23, 2014 at 1:00PM

Networking equipment company F5 Networks (NASDAQ:FFIV) has gone from strong to stronger in 2014. The company's stock is already up more than 25% so far this year, outpacing rivals Cisco (NASDAQ:CSCO) and Juniper Networks (NYSE:JNPR).

Driven by strong sales of its security solutions and a tiered product strategy, F5's growth has accelerated remarkably. The company's revenue was up almost 20% year-over-year in the previous quarter, while non-GAAP earnings grew almost 10%. Looking ahead, there are enough indications that F5 will continue its outstanding run and scale new highs. Let's see why.

Impressive growth
F5 is seeing strong demand for its software-defined application services, which resulted in a 22% year-over-year product revenue growth in the second quarter. Strong sales of software modules, especially its security modules, were driven by the company's tiering strategy as a growing percentage of customers purchased its "Better" and "Best" offerings.

The tiered product strategy is working well for the company. F5 Networks segregated its product and pricing into "Good," "Better," and "Best," or GBB, categories last quarter. This move was received well by customers, with products in the Best category seeing solid growth. In fact, GBB sales increased 83% quarter-on-quarter, with over 78% of its customers buying the Best category products. 

Sales of F5's TMOS-based products were also strong and as per the company's internal expectations. In addition, its Traffix Diameter Signaling and Routing products also gained traction with key contract wins at a number of large service providers.

Looking ahead, F5 Networks believes that it will be able to sustain the strong momentum going forward. The company forecasted third-quarter results above analysts' estimates, propelled by increasing demand from telecom customers, indicating the strength of its business.

Security going strong
Security is the cornerstone of F5's growth. The company saw robust sales of its security solutions, including application security manager, access policy manager, and advanced firewall manager. It recorded a couple of multi-million dollar contracts, replacing existing solutions from rivals. 

In the service-provider vertical, a Tier 1 service-provider purchased F5's AFM firewalls to replace its existing traditional data center firewalls. F5 now operates two security operations in Seattle and Tel Aviv to support a new online security service from its Versafe acquisition. F5's Versafe services are now seeing strong traction for Internet anti-fraud, anti-phishing and anti-malware solutions.

Strong product development
F5 also announced its secure Web Gateway solution last quarter. It is now building a strong pipeline for this subscription-based service. In addition, F5 and VMware introduced a high-performance secure access solution for Virtual Desktop and Desktop-as-a-Service in February. F5 and VMware's technologies aim to provide a secure experience to the mobile workforce. The two companies are giving customers the ability to readily and securely access applications at a low cost.

F5 also launched VIPRION 2200, which is the industry's first application delivery controller in a 2U appliance footprint. This controller uses F5's innovative ScaleN technology to provide resource elasticity, expanding the capacity of its physical and virtual solutions to seamlessly scale and consolidate application services on demand.

Competitive climate
F5's solid product roadmap and strong adoption of its security solutions will fuel the growth of its business. In fact, its security segment is in better shape than rival Juniper Networks. In the first quarter, Juniper's security product revenue was down 2% from the year-ago quarter. However, the company is trying to improve sales of its security products aggressively.

The 2% decline in the previous quarter was better than the 16% and 31% drops seen in the preceding two quarters. In addition, Juniper's security solutions recently received a couple of big endorsements at the Interop Tokyo 2014 conference. Juniper's SRX5400 Series Services Gateway received the top award in the security category, suggesting that the company is moving in the correct direction.

On the other hand, F5 will also benefit from Cisco's woes. Cisco has faced a lot of trouble this year due to security flaws. Earlier this year, the networking company's equipments were exposed to the Heartbleed bug, a flaw that allowed hackers to access web, email, and VPN communications. Earlier this month, security analysts discovered another bug in the web encryption software that might let attackers spy on communications.

This mistake could be an advantage for F5 as its customers "have been protected from the Heartbleed bug since it was introduced in OpenSSL," according to management.

All in all, F5 looks well-positioned to grow its business further. The company's focus on innovative products and a smart product-tiering strategy are working well and resulting in strong growth. In addition, as competitors are on a weak footing, F5 can benefit. Finally, with F5 Networks trading at a P/E of just 31, way below the industry average of 54, it could prove to be a good pick. 

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple and F5 Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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