Volatile F5 Networks Delivers

Shares of F5 Networks Inc. (Nasdaq: FFIV) tend to be quite volatile, and the stock can always be counted on to provide some thrills around earnings season. After the close yesterday, the company -- a provider of application delivery controllers (ADCs) that optimize and secure network data traffic -- reported above-consensus results for its fiscal second quarter, ended March, but offered only in-line guidance for the June quarter.

In after-hours trading, the stock initially dropped more than 10 points, then reversed and proceeded to rebound nearly 20 points as traders listened in on the upbeat earnings conference call. That level of volatility is par for the course. Last year, F5 shares traded down to $69.01 in August from a peak of $145.76 in January and then rallied to finish December at $106.12.

For the March quarter, per-share earnings of $1.09 beat the consensus estimate by two cents and revenue rose 22.3% year-over-year to $339.6 million, above the consensus of $335.3 million. Product revenue came in at $205.2 million, with year-over-year growth accelerating to 18.1% from 15% in the December quarter. Non-GAAP gross margin rose 70 basis points sequentially to 84.2%, and non-GAAP operating margin advanced 50 basis points sequentially to 38.3%.

On the conference call, F5 CEO John McAdam pointed out that the company saw accelerated growth in each of its key geographies. Revenue from the important Americas region, which accounted for 59% of total revenue, rose 21%, up from 20% growth in the December quarter. Strong execution by the sales force in Europe (even in economically challenged parts of southern Europe) helped revenue growth in the Europe, Middle East, and Africa (EMEA) region accelerate to 19% from 14% in the fiscal first quarter.

Demand from service providers was particularly strong, with the telecom vertical accounting for 27% of total revenue, up from 23% in the fiscal first quarter. Technology companies remained big buyers of F5 gear, accounting for 19% of total revenue, while the financial services vertical represented 16% of revenue. Management said the US federal business showed some sequential improvement.

Bookings for F5’s core Viprion product line surged 200% year-over-year, driven by strong demand for the mid-range 2400 and the introduction of the 4480 (offering double the performance of the 4400), which is aimed at large enterprises and service providers. Later this year, the company plans to introduce an even more robust version of the 4400, refresh the low end of the product line, and add deep packet inspection (DPI) functionality. (For more on DPI technology, see Bracing for Earnings Season.)

F5 continues to see solid attach rates for its security software (particularly its access control and Web application protection solutions), which is one reason margins are on the rise. Launched in January, the company’s datacenter firewall, which defends a customer’s core infrastructure from outside attacks, has quickly become a meaningful contributor to revenue, according to McAdam. He said F5 is winning $1-million+ deals in this space against major competitors, including Juniper Networks Inc. (NYSE: JNPR).

On the wireless front, F5 in the March quarter saw some “reasonably large sales” linked to future LTE deployments, said CEO McAdam. The company should continue to see a pickup in wireless-related revenue thanks in part to its acquisition in February of Traffix Systems, a provider of signaling products used by carriers to build and monetize 4G/LTE networks.

Another growth driver: F5’s ADCs are increasingly being used in conjunction with desktop virtualization software from partner VMware Inc. (NYSE: VMW). F5 and VMware have a common foe in Citrix Systems Inc. (Nasdaq: CTXS), which offers its own desktop virtualization solution and NetScaler ADC.

For the quarter ending in June, F5 sees EPS of $1.12 to $1.14 (the consensus is $1.14) on revenue of $350 million to $355 million, vs. the consensus of $353.1 million. The company maintains its fiscal 2012 (ending September) revenue growth guidance of at least 20%; given F5’s current momentum, this growth outlook could prove to be conservative.

F5 shares recently traded at 27.6 times the fiscal 2012 consensus EPS estimate of $4.49, above the expected growth rate of 18.8%. This is one stock where it pays to take advantage of the volatility and buy on weakness.