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F5 CEO Looks for Turnaround as New Products Hit Market

11/15/2012 | 10:55am US/Eastern

--New products expected to boost revenue growth

--Networking company has blamed weak economy for underwhelming sales

--CEO plans to continue small-scale acquisitions

 
   By Drew FitzGerald 
 

F5 Networks Inc. (>> F5 Networks, Inc.) shares have suffered a steeper decline than many of its peers in the information-technology sector this year, making the company's upcoming line of products especially vital to its recovery.

The networking-technology company on Thursday began revealing many of those improvements to analysts, pledging to deliver faster hardware appliances and new software at a better value for customers. F5 has dominated the market for application-delivery controllers, which help programs run more smoothly by managing data loads, while expanding into related markets like Internet security.

Chief Executive John McAdam said the company's rollout of new products comes with "an urgency" because of how quickly the market for such tools is expanding. At the same time, F5's recent revenue growth has slowed, climbing 15% in its fiscal fourth quarter after almost regularly topping 20% in previous periods.

F5 has cited business leaders' lack of confidence in the broader economy for constraining its sales, especially from big customers who previously signed contracts topping $1 million.

"Caution is the new norm since 2009," Mr. McAdam said in an interview Wednesday. "We're making sure we've got our own growth drivers here, and are not just dependent on economic change."

F5 plans to respond by making its products more flexible for use on cloud-computing systems, partly by deepening partnerships with other companies, such as software provider VMware Inc. (>> VMware, Inc.).

Mr. McAdam said the company also will look for acquisition targets in other areas of the IT sector, though the company would avoid taking over a large company "if we thought it would have a material negative impact on our operating margin."

F5's shares have declined 18% this year as analysts worry about the growth prospects of its core application-delivery market. The stock, which recently traded at $87.28, reached as high as $145 in 2011.

With new virtual versions of its network hardware, F5 is attempting to meet surging demands placed on companies' data centers. Customers of Amazon.com Inc.'s (>> Amazon.com, Inc.) Web Services business, for instance, will be able to expand use of F5's application delivery suite on the cloud should a flood of users suddenly put new stress on a website.

The company also is rolling out an advanced firewall that monitors traffic on several layers of a network.

The product transition earned a vote of confidence Tuesday after Goldman Sachs analyst Kent Schofield upgraded its stock to buy from neutral, noting the potential the new products have to grow its already large market share.

"F5 has been losing share in fixed [application-delivery] products fairly consistently," Mr. Schofield wrote in a note to clients, citing market research firm Dell'Oro. "We believe this is due in part to the aging of F5's product line-up," which will be replaced by its "newer and more competitive BIG-IP product set."

Networking giant Cisco Systems Inc. (>> Cisco Systems, Inc.) also offered F5 an opportunity to expand after it discontinued a line of competing application-delivery products. Instead, Cisco plans to partner with software provide Citrix Systems Inc. (>> Citrix Systems, Inc.) to sell an array of niche networking products.

"It's not that surprising that a stock underperforms going into a major product launch," said Alex Henderson, analyst at Needham & Co. "There's a lot of product coming. That's the good news. The bad news is there's a six-month sales cycle, so you probably haven't hit the nadir."

Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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