F5 Networks on Punishment

Written by on January 21, 2011 in Investing with 1 Comment

Beaten with an ugly stick is an understatement for the shellacking F5 just endured: 2 billion in market cap; 21% in stock value gone. I listened intently to the earnings call to figure out WTF happened.  At the end of the call, I still didn’t quite get it.  However, the CEO made it clearer, at least to me, on his CNBC appearance on Thursday.

The CEO said that October, the first month of their new fiscal year, was slower than had been anticipated.  I used to work in sales, so I know exactly how the game is played.  Sales guys pull-in any and every deal possible into the 4th quarter.  From a compensation perspective, a deal in Q4 is much more valuable than a deal in Q1 and I am not talking about a few bucks.  It could be a high 5 figure difference.

I recall in 2000, a customer called me up inquiring about a product.  It just so happened that it was the last day of our fiscal year.  By the end of the day, I had closed a several hundred thousand dollar deal.  In good times that can happen.  So, when the CEO is talking about seasonality that’s what he is talking about.  I believe the improving economy allowed the sales guys to pull in more business from Q1 than they have in the past.

F5 earnings beat expectations and their revenue was in-line.  However, their revenue guidance spooked Wall Street as it was below consensus.  The CEO knew that the guidance would disappoint the street, but he had to guide conservatively.  One missed quarter could be forgiven in time, but two would be a killer.

In the interview, the CNBC reporters desperately try to find a chink in F5′s armor. However, the CEO said that he is not going to apologize for growing revenue 41% and earnings 69%.  Bottom line is that F5 is in the sweet spot.  It’s gear is essential for today’s multimedia heavy networks.  That being said, they were caught violating Wall Street’s “thou shall not disappoint” rule.  So, F5 is on punishment.  No TV or talking to friends for 3 months.  In my opinion, the stock is going to be dead money for a month or so and then it may start running in anticipation of a good Q2 report.

Disclosure:

F5 is one of five stocks I have built my mobile strategy around aka QOFAR.  I am currently long F5 in my long term account and constantly trade around that position in my short term account.

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