F5 Networks, Inc. (NASDAQ:FFIV) is seeing significant traction for its application delivery platforms, which are playing an increasingly relevant role in handling core datacenter infrastructure functions.
More specifically, F5's "full-proxy" architecture are implementing several core IT infrastructure functions in Fortune 500 enterprises and in Web 2.0 and Cloud datacenters that go beyond server load balancing.
F5 Networks is a provider of technology that optimizes the delivery of network-based applications, security, the availability of servers, storage devices, etc. F5 is a strategic point of control within a network. F5 solutions are used by enterprises, service providers, and Web portals.
F5's BIG-IP platform insertion into mainstream IT functions such as "seamless user access to multiple applications"; "handling a new range of threat scenarios"; "scaling the datacenter sub-linearly to traffic growth", etc makes the App Delivery purchase less discretionary.
"The upside of F5's solutions being viewed as a series of core IT functions is that F5's HW and SW modules, and related services, become line items in the core IT budget versus being relegated to the load balancer item within an application upgrade budget," Deutsche Bank analyst Brian Modoff wrote in a note to clients.
F5 said more than 30 percent of their application data centers (ADCs) are seeing software modules attach rates. F5's hardware and software modules incorporate features that were historically purchased as point products. This suggests F5's solutions being increasingly viewed as part of the core IT infrastructure purchase versus as a load balancer purchase.
F5's solution rollouts as a single sign-on proxy, across enterprise and Web/Cloud/SaaS applications, is a tailwind for sales of Next-Gen Firewalls as IT views authentication proxies as a security function. The company sees total available market for application delivery worth $7 billion -$8 billion.
"Our IT conversations give us convicti! on that F5's Application Delivery solutions are transitioning into "architectural plays" and are likely to widen the moat between F5 and its sub-scale peers - smoothing out the volatility in inter-quarter purchases of F5's solutions – and grow the company's share of IT wallet in FY14+," Modoff said.
The Traffic Management feature can leverage single sign-on modules across F5's platforms in the event of congestion or failure in any individual module.
Meanwhile, the company's strategy to build up a consulting practice is a longer term positive as Cisco, IBM and VMware had success in creating architectural lock-ins for their portfolio, which are stickier and create a longer-term product sales and refresh pipeline versus a modest book and ship business.
"We note that management's strategy to build a consulting services practice in FY14 (albeit with a 50-100bps services margin hit) is pertinent for the core IT functions role that F5's solutions are starting to play into," Modoff said.
Further, the bear case around potential near-term downside to F5's product gross margins is overstated, given that the total spend on F5's HW + SW solutions are likely to grow as a percentage of the IT budget – given F5's platforms integrating several core IT functions.
These functions previously were stand-alone systems such as authentication servers, application + network firewalls, policy servers, etc.
"In sum, we see potential for upside to the high-single digit product rev consensus view for FY14 (we are modeling 7.4% Y/Y product rev growth in FY14; maintaining an upward bias)," Modoff said.
The FFIV stock, which trades 14.4 times its 2014 consensus earnings estimate, is down 17 percent year-to-date.
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