F5 Networks meets Q3 EPS view, issues weak Q4 outlook

The stock of internet traffic managing software provider F5 Networks, Inc (NASDAQ: FFIV) has lost more than 10% in the past two weeks to trade at about $119.

Analysts attribute the decline to the lower than anticipated fiscal 2017 third-quarter revenues. Additionally, the poor fourth-quarter guidance issued by the company also resulted in a steep decline in the share price.

However, considering the current valuation, decent quarterly earnings, and upcoming products, we anticipate a recovery in the share price.

The Seattle-based company reported fiscal 2017 third-quarter revenues of $517.84 million, up 4.3% from $496.52 million in the corresponding quarter of 2016. During the June’17 quarter, net income of $97.662 million, or $1.52 per share, was higher than $91.789 million, or $1.37 per share, in the same period of 2016.

F5 Networks, Inc.

Excluding amortization of intangible assets, litigation expenses, and stock based compensation, among others, the Q3 2017 net income increased to $130.78 million, or $2.03 per share, from $121.70 million, or $1.81 per share, in Q3 2016. On average, the Street had expected earnings of $2.03 per share on revenues of $525.6 million. At the end of the recent quarter, receivables stood at $295.1 million. The company also ended the quarter with cash, cash equivalents and other marketable securities worth $1.014 billion.

Segment wise, Products revenue increased 1.6% y-o-y to $235.11 million. Services revenue was $282.73 million, up about $17 million from last year. Services business is growing at a faster rate as companies around the globe are shifting their operations to the cloud. During the second-quarter, F5 Networks has released several new systems that enable customers to use its products in all the major cloud services.

Looking ahead, the company anticipates Q4 2017 earnings of between $2.20 and $2.23 per share on revenues of $530 million to $540 million. Currently, FactSet’s Consensus is earnings of $2.23 per share on revenues of $551.5 million. Non-GAAP gross margin and effective tax rate are expected to be about 84.5% and 31%, respectively.

The company missed the midpoint of its own Q3 2017 revenue guidance range of $520 million to $530 million. That was one of the main reasons for the stock to get battered. However, third-quarter revenue and earning growth, and reasonable Q4 EPS and revenue outlook indicates that the stock is poised for a short-term bullish reversal.

Technically, the MACD indicator has formed a positive divergence with the price. Furthermore, the stochastic RSI indicator is in the oversold region. Thus, we can expect the stock to undergo a bullish reversal in the near future.

To benefit from the upswing, we believe that an investment in a call option would be the most suited one. Before proceeding with the investment, we would like to make sure that the option remains valid for a week and a strike price of about $120 is available.