F5 Networks CEO John McAdam was smiling Thursday as he addressed a small group of stock brokers and media at The Met’s 31st Annual “Guess the Dow” competition. And with good reason.
F5, which reported first quarter results Wednesday that beat Wall Street expectations, saw its stock soar more than five percent in trading today. That made the brokers in the room — including three of the 10 who picked it as one of their top Pacific Northwest stocks of 2014 — pretty happy.
But McAdam, an affable Scotsman who joined F5 as CEO 14 years ago, isn’t so much about watching the stock symbol flash on Nasdaq as he is about executing on a business that’s growing fast with no debt and operating margins around 35 percent.
So far, he’s liking some of the big tech trends that are playing right into the hands of F5, including the transformation to cloud-based services as well as growing cyber security threats. (A growing part of F5’s business includes software to detect and extinguish phishing scams).
F5 certainly has come a long way since McAdam’s arrival. Shortly after his appointment, the dot-com bust hit, nearly wiping out F5. “We were in survival mode,” said McAdam, recalling that the cash position had dwindled to about $30 million.
But F5 prevailed, growing from about $100 million in sales a decade ago to more than a billion last year. McAdam said it is certainly possible for the company to top $2 billion in annual revenue.
One of the ways F5 has grown is through acquisitions, buying up eight companies in recent years. Just one of those deals failed to work out, with McAdam stressing that the conservative approach they’ve taken when acquiring other companies has proved successful.
“We like to build our own product, but if we see something out there that we can take to market quicker, and it is synergistic with what we do, we will take a look at it,” said McAdam. In most cases, he said the acquisitions have mainly been about the technology, not gobbling up new customers. “They have been small, so we don’t mess them up,” he said. “It is very easy to mess up an acquisition.”
Asked later by one of the brokers about whether F5 would ever consider buying a public company like FireEye, McAdam stopped dead in his tracks and stated: “The risk is too high.” (The price tag is probably too big as well, since FireEye’s market value of $8.8 billion tops F5’s of $7.8 billion).
“Our strategy is very, very straightforward and quite public on this. We like small,” said McAdam, adding that the best deals are those which can be easily integrated into the overall F5 platform.
McAdam also shared some interesting insights into how F5 made headway against Cisco, the biggest competitor in the market when he arrived as CEO. At the time, Cisco held about 55 percent of the market, compared to just nine percent for F5. Over time, however, F5’s focus allowed it compete more aggressively against Cisco, to the point that its one-time rival last year made the decision to exit the business.
That’s been a boon for F5, which has turned Cisco into one of its most important partners. F5 now commands about 46 percent of the market, ahead of Citrix.
“We have been replacing Cisco systems over the last year very successfully… And we’ve typically been upselling as we have been doing that,” said McAdam.
“Our main competitor used to be Cisco, and now they are (one of our) best partners,” he said. Cisco didn’t focus on the market like F5 did, opening up the opportunity.
F5 also has successfully diversified its business, expanding for example into security software. That’s a business that McAdam thinks will continue to grow over time, with the exec noting that “it’s astounding the number of attacks” occurring on a daily basis.
“It is a battle that is going to keep going, and sometimes it is mafia-type organizations…. It’s a constant battle, and the stakes are big,” he said. To help in that arena, F5 last year purchased Tel Aviv-based Versafe.
And, for all of those who were wondering about the “Guess the Dow” predictions, nine of the 10 stock brokers forecast an uptick in the stock market for 2014. The most bullish prediction came from Eric Brewe of RBC Wealth Management who predicted a Dow close of 19,275. “I am a bull on America,” said Brewe, adding that there’s “way too much cash on the sidelines.” His top Northwest stock picks for the year, included Paccar, Tableau Software and RealNetworks.