F5 Networks (FFIV) Chris Vandergrift Technology Industry Group

Background -- Based in Seattle, WA -- 8.8 bn market cap, 882 mm in annual sales -- Forward PE 25 -- Revenues growing 12% qoq and 38% yoy -- Competitors: CSCO, JNPR

Putting it in Context Over the next 5 years, the world will add 1 bn internet users – up from 2 bn now And add 15 bn new network connections, including smart TVs, PCs, smartphones, and tablets In 2010, 249 billion gigabytes crossed the internet– This is expected to quadruple over the next 15 years The world will need bandwidth, server capability, switching, routing to handle the load – FFIV will be at the center of this trend

International Growth In the mid-1990s, price of PC was equal to 175 weeks income for average Chinese worker. Today that metric is down to seven weeks. There are 1.4 bn people in China and 1 bn people in India – these people will want access to the internet as affluence spreads through their countries These markets will drive Southeast Asia, Brazil, and eventually Africa

What does F5 do? Application Delivery for mobile devices (iPhone, Blackberry, Android, 3G iPad) and traditional PCs Its servers allows uninterrupted streaming of Apps– Pandora, MLB At-Bat, Netflix, youtube– as well as programs for work such as Virtualized Desktops

How? Demands on Carriers networks are complex– must acknowledge user, put in queue, validate credentials, route bits in milliseconds F5’s servers act like an intelligent traffic cop– once a request is made, finds open spot in the “cloud” with fastest path to source Efficiency routing allows the networks to work faster and consume less energy

Who are its customers? Carriers (VZ, T), World’s largest ten banks (GS, JPM), Higher Education, Government, Healthcare, Manufacturing, Retail Provides -- Smart routing of traffic -- Retains high availability + security -- Highest grade solution / low price -- Access control, smoother operation

Comparison Indicator Cisco Systems CSCO Juniper Networks JNPR F5 Networks FFIV Market Cap. 124.68B 15.74B 8.8B Forward P/E 11.8 24.0 25.0 Earning Growth (y/y) 8.0% 60.6% 90.1%

Recent News Stock fell 21% as F5 beat earnings 88 cents (vs. 83 cents estimate) but missed revenue estimates by a fraction Product revenue grew 44% year over year, and service revenue was up 36% year over year Sales to technology companies rose 146% y/y, Gross Margins remain outstanding at 82%

Can F5 sustain this growth? Execs confident growth would pick up in Q1 2011 because of bigger business pipeline and larger salesforce; Headcount grew by 120 people to 2,130 in Q4; Management hiring aggressively and add 125+ employees during Q2. Sales to new customer grew 20% in 2010 and noted a lot of “competitive displacement deals”

Income Statement

Balance Sheet/Cash flow Highlights 485 mm in cash or $6 per share No debt, current ratio of 2.09 High quality cash flow- 342 mm in 2010 vs. 288 mm in earnings

Valuation Forward P/E of 25 but is a very fast grower Assuming annual revenue growth of 30% over the next five years, earnings should grow to $13.50. P/E compresses to 15 and we’re looking at a $200 stock or 81% over 5 years (12.5% annually) Gross Margins remain outstanding at 82%; having been increasing in recent quarters

Conclusion Fast growing niche in the mobile internet boom Must ride out short-term turbulence for long- term hold Buy now and hold for $185 target; re-evaluate when hits