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Weak October gives F5 a Cisco moment

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Application security programs and practises

Wall Street has been driving up the stock in networking equipment provider F5 Networks in recent months, but after the company reported its financial results for the first quarter of fiscal 2011 on Wednesday, investors let some of the air out of its stock on Thursday because the company missed Wall Street's – but not its own – targets.

In the quarter ended December 31, F5 had revenues of $268.9m, up 40.7 per cent from the year-ago period. Net income was $55.7m, up 90.1 per cent and working out to 68 cents per share.

The company's guidance for the quarter was for sales to fall between $265m and $270m, with earnings per share in the range of 62 to 64 cents. But, because Wall Street expectations were for sales to be $2m higher and because of weakness that F5 had in the final two weeks of October, investors bled down a full 22.5 per cent of its value to $107.60 per share.

Networking giant Cisco Systems, you will recall, gave Wall Street heart palpitations back in February when it reported its first quarter of fiscal 2011 results ended October 30. Sales hit $10.75bn for Cisco in that quarter, but were short of Wall Street's expectations by more than $500m, and Cisco got a similar market capitalization haircut.

This spanking demonstrates more than ever that despite all the talk of server, storage, and network convergence, these three families of IT products remain on their own sales cycles and remain distinct – and sometimes cranky and unpredictable – markets.

F5 sells the popular BIG-IP family of application delivery appliances, which do network load balancing, crunch SSL encryption and decryption, accelerate application and Web performance, and control access to applications.

In the first quarter, F5 had product revenues of $171.5m, up 43.8 per cent, and services revenues of $97.4m, up 35.5 per cent. In a conference call with analysts, F5 said that its core application networking products, including BIG-IP and the FirePass virtual private networking appliances, accounted for the lion's share of first-quarter revenues, at $261.7m.

The ARX series of file-virtualization appliances brought in $7.2m in revenues, which was flat compared to the prior quarter but up 27 per cent compared to a year ago. According to F5 president and chief executive officer John McAdam, however, the company's ARX sales were lower than F5 had expected.

McAdam said that F5 was cooking up a software-only version of the ARX appliance, called the ARX-VE, that would run atop standard server iron and inside a guest slice on a server hypervisor. McAdam also said that new ARX-1500 and ARX-2500 appliances were in the works and would be launching soon, and that a project called Victoria was taking the technology in its high-end Viprion application-delivery controller and pushing it down into midrange products. The Victoria products are in beta-testing now; McAdam did not say when they will launch.

In the first quarter, McAdam said that F5's sales were up over 60 per cent in the Asia/Pacific region, grew by just under 35 per cent in Japan, and were up over 40 per cent in the Americas. Revenue growth in EMEA was a more muted 29 per cent increase, but that was against a tougher compare. The Americas region contributed 59 per cent of overall revenues, with EMEA comprising 22 percent, Asia/Pacific 13 per cent, and Japan 6 per cent.

By industry, financial services firms accounted for 19 per cent of sales, telecommunications firms and service providers 21 per cent, technology companies another 21 per cent, and government customers 12 percent. F5 had one customer in the quarter that contributed more than 10 per cent of its revenues; that was master reseller Avnet, which accounted for 18.8 per cent of F5's revenues. (Avnet has thousands of downstream resellers worldwide who push its products.)

F5 told Wall Street to calm down, and that it would have growth sequentially in each of the quarters for fiscal 2011. The company said that it expected sales of between $275m and $280m in the fiscal second quarter ending March 31, and that it was on track to bring 65 to 67 cents per share to the bottom line. ®

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