F5 Networks miss Q2 2017 estimates, issues poor Q3 2017 outlook

The stock of F5 Networks Inc. (Nasdaq: FFIV), an internet traffic and content management solutions provider, plunged about 7% last week to close at $129.13.

Analysts attribute lower than expected fiscal 2017 second quarter results for the decline in the share price. However, a look at the earnings report reveal that the stock would decline further due to reasons mentioned below.

The Seattle-based company reported fiscal 2017 second quarter net income of $93.14 million, or $1.43 per share, on revenues of $518.25 million. This compares with net income of $75.42 million, or $1.11 per share, on revenues of $483.68 million.

Excluding stock-based compensation and amortization of intangible assets, among others, the Q2 non-GAAP income increased to $127.01 million, or $1.95 per share, from $114.01 million, or $1.68 per share, in the similar period of 2016. On average, analysts polled by Thomson Reuters anticipated earnings of $1.97 on revenues of $522.88 million.

F5 Networks, Inc.

Geographically, revenues from the Americas increased 7% y-o-y and accounted for 56% of the total revenue. EMEA revenues grew 4% y-o-y, while Asia-Pacific revenues increased 16% y-o-y. EMEA and Asia-Pacific contributed 24% and 15% to total revenue, respectively. However, revenues from Japan declined marginally and accounted for 5% of total revenue.

The company reported adjusted gross margin of 83.5%, almost flat on a y-o-y basis. However, F5 Networks’ adjusted operating margin increased 100 basis points to 27.3%. Lower operating expenses resulted in an increase in the adjusted operating margin.

At the end of the second quarter, cash, cash equivalents and short-term investments were $1.015 billion. In the same period last year, cash, cash equivalents and short-term investments were $882.40 million.

However, the company issued a gloomy third-quarter outlook. F5 Networks anticipates third-quarter revenues in the range of $520 million to $530 million. Furthermore, the company expects Q3 2017 net income of between $94.8 million and $96.8 million. On a per share basis, earnings are expected in the range of $1.47 to $1.50. The company also aims to report non-GAAP earnings in the range of $2.01 to $2.04 per share.

Analysts anticipate earnings of $2.09 per share on revenues of $537 million. Thus, poor third-quarter outlook would keep the stock of F5 Networks bearish in the short-term. The stock has broken below its 50-day moving average. The stochastic oscillator is in the bearish zone. So, the stock is expected to reach the next major support level of 120.

To gain from the analysis, a binary trader can purchase a put option contract having a day around May 10th as the expiry date. The contract should be bought when the stock of F5 trades near $130 in the cash market.

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