In the first quarter with popular web server company NGINX under its umbrella, F5 Networks reported stronger revenue growth but came up short of Wall Street expectations on profits.
Revenue: Driven by a 91 percent spike in software revenue, F5 posted $563.4 million in revenue in the third quarter of its fiscal year, up 4 percent over a year ago. That’s well ahead of analyst expectations of $554.96 million, or roughly 2.4 percent annual growth.
Profits: F5’s net profits of $151.5 million, or $2.52 per share, fell short of expectations of $2.56 per share in earnings.
Looking ahead: For the fourth quarter, ending Sept. 30, F5 projects earnings of $2.53 to $2.56 per share on revenue of $577 million to $587 million. Revenue is right in line with analyst projections for the next quarter, but profits are lower than the earnings of $2.71 per share expected by Yahoo Finance.
F5 stock is down close to 3 percent in after-hours trading. Shares in the Seattle-based provider of cloud and security application services are down about 10 percent since the beginning of the year.
The biggest on-going storyline for the company is the integration NGINX, the web server it agreed to acquire earlier this year for $670 million. As F5 was deep in acquisition talks, GeekWire reported it was simultaneously working on its own product that competed with a new NGINX offering.
The acquisition closed in May, and F5 is only factoring in NGINX’s contributions since then. NGINX contributed $5.1 million for the quarter, but also dragged the company’s profitability down. Without NGINX, F5 would have beat analysts’ profit expectations with $2.57 per share.
In an interview with GeekWire, F5 CEO François Locoh-Donou said the company has been upfront about the potential for its profits to continue to drop as it integrates NGINX.
“I do expect we will take a hit on profitability because we are making deliberate investments in NGINX to grow this platform,” Locoh-Donou said. “This was an offensive move by us not a defensive acquisition.”
NGINX’s popular web and application server technology will be a huge part of F5’s broader, next-generation product strategy as the company makes the transition from serving customers running data centers to serving customers running on public cloud infrastructure. F5 expects NGINX to juice revenue growth in 2019 and 2020 into the mid-single digits and bump up software revenue as a percentage of the company’s total balance sheet.
Lagging revenue growth has been hanging over the company the last several years, but today’s numbers are an encouraging sign that NGINX can accelerate revenue growth out of the roughly 2 percent year-over-year bump F5 has seen the last couple quarters.
It’s an interesting time at F5 under Locoh-Donou, as the company is not only moving to a software-based model, it is also embracing subscriptions as the main method to deliver its products. All while integrating NGINX.
“We are making a double transition in that we have been a majority hardware company, and we are transitioning to majority software,” Locoh-Donou said. “And within that we are also transitioning to subscription, so we’re making a big jump here.”
F5 made some key executive hires in the quarter, bringing in new CTO Geng Lin and executive vice president and chief marketing & customer experience officer Mika Yamamoto.
Lin was chief development officer and head of engineering at J.P. Morgan Chase, where he worked on cloud-based banking products. He also wrote two books on cloud computing and held senior technology roles at Google, Dell and Cisco’s IBM Alliance.
Yamamoto previously served as global president of Marketo, a marketing software company owned by Adobe. She was also chief digital marketing officer for SAP and worked at Amazon, Microsoft, Gartner and Accenture prior to that.
