F5 Networks: Earnings Preview

NEW YORK ( TheStreet) -- The big question for F5 Networks ( FFIV) ahead of the company's fiscal fourth-quarter results this afternoon is: Did business continue to weaken across the pond?

While the broad market's continued consternation about Europe would seem to be cause for concern that the trend F5 reported last quarter is still in place, bullish sell-side analysts don't seem all that worried.

"Our checks on F5 were better than expected, with most resellers seeing good demand, a solid pipeline, and an enterprise tech spending environment that is holding up well," said BMO Capital in a research note previewing the report early Tuesday. "Some customers are seeing deals being more closely scrutinized, but that is to be expected, and deals are nonetheless getting done."

The firm continued: "Although EMEA Europe, Middle East, and Africa and public sector spending could remain weak, we believe the spending environment hasn't materially changed from when FFIV most recently reported results and expect F4Q to be in line with expectations."

The average estimate of analysts polled by Thomson Reuters is for F5 to report earnings of 98 cents a share in the September-ended period on revenue of $308.5 million. Back in late July, the company forecast a non-GAAP profit of 97 to 99 cents a share for the fourth quarter on revenue of between $307 million to $312 million.

BMO, which reiterated an outperform rating on the stock and has a $127 target price, expects the company's performance to meet the consensus view but said the shares may not see a big benefit in the wake of the report.

"We expect FFIV results to be in line, similar to recent quarters, but heightened expectations as a result of the recent run up in the shares will likely limit upside and could even provide some risk," the firm said. "While our checks on FFIV were the strongest in the group, we are concerned that the telco vertical (20%-25% of revenue) will offset strength in other verticals."

BMO is expecting earnings of 99 cents a share for the quarter on revenue of $310 million. It's anticipating gross margins of 82.6% and operating margins of 38.3%, and is currently forecasting earnings of $1.03 a share on revenue of $325 million for F5's fiscal first quarter ending in December.

Noble Financial, which has a buy rating and $130 price target on F5, was also pretty calm, anticipating that federal dollars will pick up some slack.

"As we have pointed to before (and is already playing out this quarter), government buying patterns should be strong, and we expect the company to see a similar rebound; government accounted for approximately 10% of total revenue last quarter," the firm said on Monday. "We expect the weakness in EMEA to continue, but we do not see it being nearly as severe as last quarter, where revenue from EMEA was down 2% sequentially."

Both Noble and BMO believe the long-term prospects for F5 are very promising.

"F5 is in the sweet spot of business and industry trends," Noble said. "Its Application Delivery Controllers (ADC) are attractive technology components for trends such as data center consolidation, virtualization and cloud services. It has been gaining share against Cisco ( CSCO) and small competitors in this market. The company has been growing the top and bottom lines by 30% to 50%. Operating margins have continued to expand, topping 37% in the last fiscal year. We expect these trends to continue."

BMO summed its view up by saying: "We believe FFIV remains the networking company that is best positioned to benefit from the virtualization, cloud, bandwidth and applications growth in the enterprise and service provider markets."

F5 shares were recently trading down nearly 5% at $88.90 just ahead of the closing bell. Year-to-date, the shares are off nearly 30% and have ranged as high as $145.76 in mid-January and as low as $69.01 in late August in the past year.

Wall Street has maintained a mildly bullish stance on F5 with 22 of the 36 analysts covering the stock at either strong buy (8) or buy (14) and the median 12-month price target sitting at $95.

-- Written by Michael Baron in New York.

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