The modern era has been defined in large part by a few key technologies. One of them is undoubtedly the cloud. And with the rise of cloud computing, the demand for various services related to it has also grown. A business you can designate as a Example of an expert when it comes to this space is F5 (NASDAQ: FFIV). As a multi-cloud application delivery and security company, with enterprise-grade solutions and a variety of other offerings, F5 has carved out a rather interesting niche for itself in the market. When it comes to financial performance, the recent past has been quite interesting. The company’s revenues continue to climb, but they have encountered problems with declining margins. Even with that, however, the company’s shares look cheap both on an absolute basis and relative to similar companies. So because of that, and my overall view of this space, I feel optimistic about the future.
F5’s mixed fourth quarter results, but stocks look attractive
Keeping abreast of a company’s performance from a fundamental perspective is extremely important for any investor. And what better time to watch updated numbers than when they’re first reported. On October 25, after the market closed, F5’s management team announced financial results covering the company’s fourth quarter of fiscal 2022. During this quarter, sales reached $700 million. Along with representing a 2.6% increase from the $682 million reported in the same period last year, revenue generated by the company also exceeded expectations by $8.13 million.
Although the company’s systems revenue fell 5%, largely due to continued shortages of semiconductors, the rest of the business saw attractive growth. Most notably, we saw a 13% increase in software revenue that the business experienced. Admittedly, growth in enterprise software has been weaker than management had hoped. But today, software makes up 51% of the company’s total product line. Just five years earlier, it totaled less than 15%. It’s also worth noting that around 76% of the company’s total software revenue comes in the form of subscription-based services, including SaaS (software as a service) offerings and utility-based revenue. The rest of that revenue came from perpetual license sales. Seeing a business generate a significant portion of its revenue from subscriptions is always a bright spot in my book. This is due to the ongoing nature of the supplier-customer relationship, and the stability of revenue and cash flow this should provide.
Although the company performed well on the revenue front, the net income figures could have been better. For starters, net profit for the last quarter of the year was $89.3 million. This is down from the $110.7 million generated in the same period last year. On a per share basis, the company reported earnings of $1.49. While this amount was higher than the $1.42 that analysts thought the company would report, it was lower than the $1.80 per share recorded in the last quarter of 2021. The fact that the systems revenue mix in the last quarter was particularly painful for the company was higher than the company thought it would be and the higher costs associated with sourcing and shipping critical components weighed on the company’s bottom line. In fact, the company’s gross profit margin was just 78.9%. This compares to the 82% to 83% range makers thought they were seeing. Naturally, this had a negative impact on the company’s other bottom lines. Last quarter operating cash flow was $134.3 million. That stacked up unfavorably compared to the $197.1 million reported in the same period last year. If we adjust for changes in working capital, the picture would have been slightly better, with the metric dropping from $212.4 million to $175.1 million. Meanwhile, the company’s EBITDA fell from $217.3 million to $194.2 million.
Thanks to last quarter’s reporting, we now know what the company’s results looked like for all of 2022. During that time, sales reached $2.70 billion. That’s up 3.6% from the $2.60 billion reported in 2021. The main growth driver for the full year, software, was far more impressive than last quarter. . In 2022, software revenue growth was an impressive 33%. But that was offset by a 13% decline in systems revenue, once again largely due to the continued shortage of semiconductors plaguing the world. For the full year, the same factors therefore affected the company’s net income. Rising costs caused net income to fall from $331.2 million last year to $322.2 million this year. Cash flow from operations fell even further, from $645.2 million to $422.6 million. But if we adjust for changes in working capital, we would actually see an improvement here year over year, with the metric going from $692.8 million to $692.9 million. Meanwhile, the company’s EBITDA also fell from $793.4 million to $782.7 million.
Looking to the future, management has provided some advice. They currently forecast revenue growth of between 9% and 13% for all of 2023. At the midpoint, that would translate to revenue of $2.97 billion. They also forecast non-GAAP earnings per share growth in the low-to-mid teenage rate. Applying that same logic to total earnings per share, that would imply a net profit of $356.5 million. No indication was given regarding the other profitability parameters. But if we assume they would grow at the same rate as net income, then we should expect adjusted operating cash flow of $766.7 million and EBITDA of $866 million.
Using these numbers, we can calculate that the company is trading at a forward price multiple of earnings of 24.7, a forward price multiple of adjusted operating cash flow of 11.5, and an EV multiple of EBITDA of 9.5. Using the 2022 data instead, we end up with multiples of 27.3, 12.7, and 10.5, respectively. As part of my analysis, I also compared the company to five similar companies. On a price-earnings basis, these companies ranged from a low of 22.8 to a high of 297.3. In this scenario, two of the five companies were cheaper than our prospect. Using the price/operating cash flow approach, the range was 11.9 to 129.1, while the EV/EBITDA approach would give a range between 8.8 and 56.3. In both of these cases, only one of the companies was cheaper than F5.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Juniper Networks (JNPR)||24.5||53.9||13.2|
|Ciena Corp. (CIEN)||35.6||68.6||15.0|
|Lumentum Holdings (LITE)||27.7||11.9||8.8|
|Viavi Solutions (VIAV)||297.3||20.2||20.9|
All things considered, I understand why investors might be a little hesitant about F5 right now. It’s not great to see a company posting deteriorating results year over year. That said, stocks still look cheap and management expects a nice improvement in fiscal year 2023. Taking all of these elements together, I think stocks are cheap enough to warrant a solid buy rating. right now.