F 5 Networks ( FFIV ), a maker of application delivery controllers (ADCs), has continued its winning ways under new CEO Manuel Rivelo, boosting revenue and profit by capitalizing on high demand for new software and security services to guard against digital data breaches.
The Seattle-based company, whose client base ranges from the U.S. government toFacebook ( FB ), is the No. 1 seller of ADCs. The electronic devices direct traffic to corporate computer servers and data centers, helping to make websites and communication networks faster and more efficient.
F5 has in recent years expanded its ties with customers by also selling them security products and services, and continues to do so under Rivelo. Demand in this arena is mounting amid a torrent of headlines about major organizations suffering cyberattacks that resulted in costly data breaches. In recent months alone, cybercriminals have infiltrated systems at Harvard University, health insurerAnthem (WLP), and the U.S. government’s Office of Personnel Management.
F5 competes withCitrix Systems ( CTXS ),Brocade Communications Systems ( BRCD ) andA10 Networks ( ATEN ). The company is part of IBD’s Internet-Network Solutions group, which also includesRackspace Hosting (RAX),Akamai Technologies (AKAM) andEquinix (EQIX).
“It’s just going to keep growing and growing,” U.S. Global Investors trader Mike Matousek told IBD, referring to demand for data security.
He said investors are increasingly interested in companies such as F5 because they are continuously hearing that organizations fear the worst when it comes to cybersecurity and view as vital their ongoing investments in the latest technology to thwart breaches.
Investors See Opportunity
“So there’s more opportunity here,” Matousek said. “There’s a lot of potential ahead.”
F5’s stock is up about 14% over the past year. The company in July posted fiscal third-quarter revenue of $483.6 million, up 10% from a year earlier, and GAAP net income of $93.2 million, up 8.7%. On a per-share non-GAAP basis, earnings rose 5% to $1.67.
The sales trajectory is expected to continue. For the quarter ending Sept. 30, F5 set a revenue goal of $500 million to $510 million.
A company executive told IBD that F5 does not break out the percentage of its product revenue generated by its security business. But during the company’s earnings call in July, F5 executives said software sales, which are often linked with security services, have more than doubled over the past three years and now make up about a third of revenue. Customers, the company said, are moving more of their systems into the cloud, via software, and need accompanying security protections.
Rivelo, a former Cisco Systems executive, officially took the helm at F5 on July 1. But he began leading the company after his promotion, from executive vice president of strategic solutions to CEO, was announced last spring. He replaced John McAdam, who had been F5 Networks’ chief executive for about 15 years.
Rivelo was not available to comment for this article, but during the earnings call he said F5’s security business will remain “a major growth driver” for the company.
Given the spate of highly publicized cyberattacks, he added, “more customers from an increasing diverse pool are approaching F5 for our ability to secure applications, manage user policy and access, and mitigate application attacks across traditional data centers, and public and private clouds.”
Rivelo said in F5’s third quarter alone it established major new business relationships on the security front with a branch of the U.S. government and “a prestigious medical research group,” among others.
New Global Sales Chief
CFO Andy Reinland told investors recently that security “continues to be key for us. And we’re going to continue to incentivize the sales force to really push that.” This week F5 named John DiLullo to lead global sales, reporting to Rivelo.
James Paulsen, chief investment strategist at Wells Capital Management and an observer of companies affected by cyberattacks including banks, said in an interview that “it is hard to see where the threat ends.”
He said regulators of various industries and leaders of major governments around the world are increasingly paying attention to cybersecurity and likely will over time join forces to create stronger global security standards. This, he said, should make it easier for companies and governments to work together to combat cybercriminals.
Should all of that materialize in coming years, Paulsen said, it could help more companies get beyond playing catch-up on the security front and instead make investments to continuously stay ahead of criminals. This, he said, could ultimately minimize the number of high-profile breaches. But it would not diminish the need for high-level security services.
Looking For Acquisitions
“It’s never going to go away,” he said of the threat of attacks. “They aren’t going to just shut this down, but the good guys are going to get better and better at this.”
Toward that end, F5 said it is on the lookout for acquisitions that can fortify its suite of products and help drive more growth.
“We look for a nice technology tuck-in that we can bring in, integrate the code into the platform, and then offer it as part of a platform solution,” Rivelo said at an August conference. “We do aggressively look at companies … We look at them every week.”
He said sellers’ pricing expectations are currently a bit lofty. “In general, right now it’s a little heated,” Rivelo said of the M&A market. But if F5 finds an appealing and affordable target, “we’ll bring it on board to accelerate our roadmap and our vision.”