F5 Sends Mixed Messages

Application traffic management market leader F5 Networks reported last night that it had concluded its internal probe into the company’s past stock-option granting practices.

As a result of investigations, the company said a total of $22.9 million in additional stock-based compensation expense must be recorded for fiscal years 1999 through 2006. F5’s inquiry found the grant dates for some stock options granted in fiscal years 1999 through 2004 should not be relied upon for accounting purposes.

F5 said it expects to complete the restatements in time to file its 2006 annual report by the required deadline.

The company also announced that general counsel Joann Reiter has resigned. F5 hired an interim general counsel to replace Reiter, who will remain with the Seattle-based company until November 22.

Despite the loss of Reiter, F5 could have suffered a worse fate — and it remains the subject of investigations by the Department of Justice and SEC into its past stock-option granting practices. There had been rumors that the tenure of John McAdam, the company’s president and CEO, might be threatened by the stock-option scandal, but he has cleared the first major hurdle, represented by the company’s internal probe.

Meanwhile, F5 continues to post impressive financial results. The company’s fourth-quarter performance, announced last night, surpassed analysts’ expectations.

For the fourth quarter ended Sept. 30, the company recorded a profit of $17.8 million, or 43 cents per share. Excluding stock-based compensation costs, the company earned 58 cents per share, while the mean analyst estimate was 55 cents per share, according to a Thomson Financial poll. Revenue grew 39 percent to $111.7 million from $80.6 million in the 2005 fourth quarter, exceeding the analyst target of $107.4 million.

If there is a fly in the financial ointment, it’s in the guidance the company offered for the current quarter. F5 projected revenue of $116 million to $118 million for the first quarter of fiscal 2007, with an earnings forecast of 43 cents to 45 cents a share. That guidance is at the low end of analysts’ expectations, which are for earnings of 45 cents per share on revenue of $117.6 million.

2 responses to “F5 Sends Mixed Messages

  1. You are giving out bad information. The new fiscal Q1 consensus numbers that you quote are based on F5’s own guidance from October 25. The previous ’07 revenue consensus estimate was $110.7 million, well below the new consensus estimate. F5 simply reiterated its Oct. 25 guidance last night. There is no fly in the ointment.

  2. Rob,

    While you are correct about the guidance numbers being derived from F5’s update on October 25 — and F5 simply reiterated that guidance last night — the analyst estimates appear to have been updated in the interim.

    Check out http://finance.yahoo.com/q/ae?s=FFIV for the latest analyst estimates.

    The expectation bar has been raised.

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