F5 Earnings: Frosty Demand Conditions Show Signs of Thawing as F5 Scores a Strong Result

We are maintaining our $170 fair value estimate for narrow-moat F5 FFIV after the firm reported third-quarter financial results largely in line with our expectations. While the firm has navigated a tough macro environment over the last few quarters, management highlighted early signs of demand stabilization, a positive indicator for upcoming quarters. Results, coupled with the easing macro pressures, appeared to impress investors, as shares jumped more than 10% afterhours. Following the afterhours pop, F5′s shares are now trading in 3-star territory and we view them as fairly valued.

F5′s sales for the third quarter clocked in at $703 million, up 4% year over year and slightly below our estimate. Services revenue remained robust for the quarter, growing 8% year over year, as customers continued to sweat existing assets. While third-quarter software revenue declined 3% from last year, we expect software growth to rebound in the coming quarters as the firm laps tough comparisons from fiscal 2023 and as demand conditions improve.

F5 reported adjusted EPS of $3.21, well above management’s guidance. Adjusted operating margin also remained strong, expanding 450 basis points year over year to 33.2% as the firm, rightly so in our opinion, continues to prioritize operational discipline.

Fourth-quarter revenue guidance includes revenue at a midpoint of $700 million, representing negligible year-over-year growth while adjusted earnings guidance is in a range of $3.15 to $3.27. We expect management to hit these targets and provide more upbeat guidance in upcoming quarters as the macro stabilization continues. In addition, management has maintained their commitment to using at least 50% of annual free cash flow for share repurchases, which will help drive investor confidence for the long term and solidify their base.