1. F5 Networks (FFIV)
Chris Vandergrift Technology Industry Group

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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%

10. 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%

11. Can F5 sustain this growth?
Execs confident growth would pick up in Q 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”

12. Income Statement

13. 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 mm in earnings

14. 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

16. 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