A month has gone by since the last earnings report for F5 Networks (FFIV Quick QuoteFFIV - Free Report) . Shares have lost about 0.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is F5 due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

F5 Q3 Earnings and Revenues Surpass Expectations

F5 reported better-than-expected third-quarter fiscal 2024 results. This Seattle, WA-based company’s non-GAAP earnings of $3.36 per share beat the Zacks Consensus Estimate of $2.97 and increased 4.7% from the year-ago quarter’s $3.21.

The bottom line also surpassed management’s guidance range of $2.89-$3.01 per share. The robust bottom-line performance reflected the combined impact of gross margin improvement and disciplined operating expense management.

F5’s revenues of $695 million for the fiscal third quarter surpassed the consensus mark of $686.6 million but declined 1.1% on a year-over-year basis. Revenues came at the higher end of the company’s guidance range of $675-$695 million.

Top Line in Detail

Product revenues (44.4% of total revenues), which comprise the Software and Systems sub-divisions, decreased 6% year over year to $308.5 million. The decline in Product revenues was mainly due to lower Systems sales, partially offset by increased Software sales. The company’s reported non-GAAP Product revenues were higher than our estimate of $304.5 million.

Systems revenues plunged 16% year over year to $130 million, accounting for approximately 42% of the total Product revenues. The company revealed that the decline reflected a lower level of backlog-related shipments compared with prior quarters, while the demand showed some signs of stabilization. Our estimate for Systems revenues was pegged at $137 million.

The negative impacts of lower Systems sales were partially offset by the improved performance of Software. Software revenues increased 3% year over year to $179 million in the fiscal third quarter. Software revenues grew on the back of renewals. Our estimate was pegged at $167.5 million.

Global Service revenues (55.6% of the total revenues) grew 3.4% to $387 million. The robust growth was mainly driven by price increases introduced in fiscal 2022. Our estimate for Global Services revenues was pegged at $381.2 million.

F5 registered lower sales across the Americas and APAC regions, witnessing a year-over-year decrease of 4% and 1%, respectively. However, revenues from the EMEA region grew 5% on a year-over-year basis. Revenue contributions from the Americas, EMEA and APAC regions were 55%, 27% and 18%, respectively.

Customer-wise, Enterprises, Service providers and Government represented 67%, 12% and 21% of product bookings, respectively.

Margins

On a year-over-year basis, GAAP and non-GAAP gross margins expanded 60 basis points each to 80.4% and 83.1%, respectively. The improvement was driven by price realization and ease in supply-chain constraints, as well as reductions in ancillary supply-chain costs.

The company’s fiscal third-quarter GAAP operating expenses declined 13.4% to $396 million, while non-GAAP operating expenses marginally declined from $346 million registered in the year-ago quarter to $345.5 million in the third quarter of fiscal 2024.

F5’s GAAP operating profit jumped 56.7% to $163 million, while the margin expanded 870 bps to 23.4%. However, the non-GAAP operating profit remained flat year over year at $233 million, while the margin improved 20 bps to 33.4%. An increase in the non-GAAP operating margin was primarily driven by an improvement in the gross margin and lower operating expenses as a percentage of revenues.

Balance Sheet & Cash Flow

F5 exited the June-ended quarter with cash and short-term investments of $935.6 million compared with the previous quarter’s $903.4 million. The company generated an operating cash flow of $546 million in the fiscal third quarter.

During the fiscal third quarter, FFIV repurchased shares worth $150 million. The company is committed to using at least 50% of free cash flow for share repurchases.

Guidance

F5 projects non-GAAP revenues in the $720-$740 million band (midpoint of $730 million) and non-GAAP earnings per share (EPS) in the range of $3.38-$3.50 (midpoint of $3.44) for the fourth quarter of fiscal 2024. The non-GAAP gross margin is forecasted to be 83%.

The company expects non-GAAP operating expenses between $350 million and $362 million for the fiscal fourth quarter. Share-based compensation expenses are anticipated in the range of $54-$56 million.

For fiscal 2024, F5 now expects its revenue growth to be mid to high single-digit percentage.

The company reiterated the non-GAAP EPS growth in the range of 7-9%. F5 now projects the effective tax rate for fiscal 2024 to be 19.5-20% from the 20-22% projected previously.

Moreover, FFIV still intends to return at least 50% of its fiscal 2024 free cash flow to shareholders through share buybacks.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

The consensus estimate has shifted 6.12% due to these changes.

VGM Scores

At this time, F5 has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, F5 has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.