Investors in cloud computing app provider F5 Networks (NASDAQ:FFIV) suffered a big blow Wednesday, as the stock crashed 10% through 2:45 p.m EDT. The move comes despite the company beating analyst targets for sales and earnings in the fiscal second quarter of 2021.
Heading into earnings, analysts had forecast F5 would earn $2.39 per share on sales of $636 million. Tuesday night, F5 reported earnings of $2.50 per share on sales of $645 million. But the stock is down despite the beat. Why?
I see a couple of reasons why investors might have been unimpressed with F5's beat.
First and foremost, while F5 grew its sales a respectable 11% year over year in Q2, with product revenue growing 18% and services revenue up 4%, the company's earnings performance according to generally accepted accounting principles (GAAP) was underwhelming. Although pro forma earnings did exceed expectations, at $0.70 per share, the company's GAAP earnings declined 30% from the $1 per share earned a year ago.
Guidance is the second reason investors may be displeased with last night's news. Although it's true F5 beat earnings in Q2, investors are often more concerned with predictions of future performance than with a company's actual historical achievements. And in that regard, investors may have been upset to learn that after beating in Q2, F5's predictions for the third quarter show the company earning only $2.36 to $2.54 per share ($2.45 at the midpoint) this quarter, rather than the $2.50 per share (pro forma) that Wall Street wants to see F5 to earn in Q3.
Additionally, F5 said its sales for Q3 will range from $620 million to $650 million in Q3. While at the midpoint, that prediction would basically match Wall Street estimates, it leaves open the possibility that F5 will miss on sales this quarter, as well as on earnings.