Jan 26, 2000
F5 Networks: Simply An Outstanding Performer
It's earnings season right now and many tech companies are delivering positive earnings surprises, so it's not easy for a young company to rise above the din. F5 Networks (Nasdaq:FFIV - news) just beat the consensus by a whopping 50% -- that's one way to get noticed. In its short life as a public company F5 has made a habit of standing out, even in a crowd of exceptional performers. It's in the business of Internet traffic and content management products, a market opportunity that is blossoming in a big way.
We just profiled F5 a month ago in a Company Spotlight entitled "Network Traffic Management Is Huge." The latest quarterly results from this company help validate that statement. F5 reported a 611% increase in revenues from $2.7 million to $19.2 million. Earnings came in at 18 cents per share, beating the First Call consensus of 12 cents and reversing a 36 cent loss in the year ago quarter. In the past three months its customer base went from 750 to 1,175.
F5 Networks was one of the hottest new issues in a very strong IPO class of 1999. The company went public last June at $10 and it closed Tuesday at $133.50, giving it a market cap of $2.8 billion. For that to happen to a company with just $44 million in sales, there's obviously something very big about F5's prospects and the market it addresses.
F5 makes Internet traffic and content management products that improve the performance and reliability of web-based businesses and applications. This company is parked in front of a huge opportunity that is difficult to quantify yet hard to understate its potential importance in the Internet economy going forward.
The broad imperative addressed by F5 is driven by two key issues: the soaring amount of data traffic on the Internet and corporate networks; and the fact that the Internet has matured beyond an entertaining novelty to become the medium for mission critical business functions and applications. This naturally includes the online media and e-commerce "dot-com" companies who want their sites accessible and responsive, but it also involves industries that now use intranets as well as the web for various enterprise applications like HR, supply chain management or collaboration on product design and manufacturing.
Traffic management solutions monitor and balance the load on servers and other devices by determining which server can best respond to a user request and direct it accordingly, ensuring optimum response time for users. These products also improve fault tolerance (if one server crashes, traffic is routed to the next best server) and allow geographically dispersed server architecture for better performance.
F5's also offers a product that helps network managers monitor and analyze their network traffic. Another F5 product controls file-based content and application management for publishing across dispersed server networks.
As dot-com companies "scale" to fulfill their promise and as traditional businesses increasingly rely on the Internet for mission-critical applications, the need for F5's products is clear. Customers include Exodus Communications (Nasdaq:EXDS - news) , MCI WorldCom (Nasdaq:WCOM - news) , InfoSpace (Nasdaq:INSP - news) and Intuit (Nasdaq:INTU - news) . Two weeks ago the Exodus alliance was expanded allowing F5 to place staff in Exodus' Internet Data Centers to support the deployment of Internet traffic management. Exodus is a major wheel in Internet hosted services, so this relationship carries considerable value.
Obviously such a huge market opportunity is going to attract competition. F5's competes with several companies in different ways, including Radware (Nasdaq:RDWR - news) , Foundry Networks (Nasdaq:FDRY - news) , and Alteon WebSystems (Nasdaq:ATON - news) . Heavyweights like Cisco Systems (Nasdaq:CSCO - news) and Cabletron Systems (NYSE:CS - news) are also involved in this market. Unlike the others whose traffic management solutions reside inside network switches, F5 and Radware are in a separate appliances, making the purchase decision for customers independent of other hardware issues and in the case of F5, centralizing the administration of network management.
Estimates on market size are hard to produce because many companies incorporate traffic management into network switches, so it's not clear how to break it out. Nonetheless, the market is potentially so huge that many investors have taken to focusing on company growth rates and valuation based on multiples to expected revenues. F5 Networks grew revenues from less than $5 million in FY98 to $27.8 million in FY99. Analysts were looking for that figure to head for around $80 million in FY2000, but after the just-reported first quarter revenues of $19.2 million, estimates for this year will likely gravitate toward $100 million. That is astonishing growth.
- James Hale
The Online Investor
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