F5’s Q4 Revenue Surges; Company Closer to Resolving Stock-Option Overhang

F5 Networks rewarded its investors last night by blowing past revenue expectations for the fourth quarter and announcing that it is close to resolving its stock-option backdating issues.

The Seattle-based vendor of application-traffic delivery and security gear saw its fourth-quarter revenue grow to $111.7 million, up 12 percent sequentially and an increase of 39 percent from the corresponding quarter a ago. Analysts surveyed by Thomson Financial were expecting revenue of $105.5 million.

For the first quarter ending Dec. 31, the company expects revenue of $116 million to $118 million, against Thomson’s consensus estimate of $110 million.

Meanwhile, as reported by Reuters, the company said an internal review of its stock-options practices found that the recorded dates for some options granted between 1999 and 2004 may be unreliable. As a result, F5 might need to record additional non-cash stock-based compensation expenses of up to $30 million. It said it may also need to restate six years of results and amend its financial statements from the first half of fiscal 2006. Nonetheless, the company does not anticipate that these charges will materially affect its cash or revenue position.

The company’s core BIG-IP application-traffic delivery product carried the quarter. Revenue from its security products, the Firepass SSL VPN and the TrafficShield Web-security offering, was up 21 percent sequentially, but flat on a year-to-year basis. Firepass revenue climbed 26 percent sequentially, while TrafficShield revenue expanded 5 percent.

On the whole, revenue from F5’s security products continues to be uneven, not showing the sort of consistency the company would prefer. The company continues to bolster its security-oriented channel partners to deliver more consistent results.

From a product standpoint, however, the big disappointment was the WANJet, the company’s WAN-optimization product, whose revenue dropped 69 percent sequentially. F5 will now focus on porting WANJet’s WAN-optimization functionality to BIG-IP’s TMOS operating system, effectively integrating WAN optimization into its flagship product. That integration will delay delivery of F5’s chassis-based traffic-management and -optimization offering, codenamed Montreal.

Naturally, there are concerns that F5’s integration of WAN optimization into BIG-IP will be too late to staunch competitive incursions from other WAN-optimization players, including Citrix, Riverbed, Packeteer, Juniper, and Cisco Systems. That’s a risk that F5 apparently is willing to take.

On balance, though, F5’s business is exceptionally robust. The company continues to deliver consistent quarterly results, and its franchise product, BIG-IP, is as popular as it’s ever been.

F5 says it continues to cooperate with investigations into its stock-option practices by the Department of Justice and the Securities and Exchange Commission. There is still a danger that those investigations might result in charges against executive officers of the company.


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