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F5 Networks, Inc. (NASDAQ: FFIV) sells computer software and hardware that run servers, data storage devices, and network-based computer programs faster and more securely.^[1] F5's products are typically bought by Fortune 1000-sized companies in the telecommunications, financial services, technology, manufacturing and transportation industries, as well as the government. As these institutions grow more and more dependent on computer networks for sharing information, they have a greater demand for network-related software.^[2] While the need for network-related software is increasing, though, the fact that F5 attends to the IT needs of companies in a limited number of industries makes it susceptible to the market trends that affects these industries; the write-downs occurring in the financial industry, for example, tend to make big banks cut back on spending; if a bank already has a version of F5's software installed, then it does not upgrade to the newer version. In addition to companies based in the United States, F5 sells its software to large corporations around the world. International sales accounted for 41.6% of F5's total revenues in 2007. As more and more foreign companies become Fortune 1000-sized, the international markets represent a direction of growth once the application delivery networking market matures in the United States.

Contents 1 Business and Financials 2 Trends and Forces 2.1 The momentum towards centralized servers and the use of network-based applications, such as Web Services and Voice over IP, increases the demand for F5’s products 2.2 IT software vendors such as F5 are especially vulnerable to the market volatility that affects their group of customers 2.3 The increasing demand of international companies for networking-related software represents a potential direction of growth and risk 3 Competitors 4 Market Share 5 References

[edit] Business and Financials

Products

F5's products distribute internet traffic across multiple servers while making them appear to be a single server, speeding up web applications over a network, and protecting critical web applications from attacks.^[3] The BIG-IP application delivery controller (the company's core product) accounted for 91% of total product revenues in 2007. In addition to the BIG-IP system, F5 sells complementary products that provide secure remote access to corporate networks and speed up the access to corporate applications over the internet. These products accounted for only 9% of total product revenues in 2007.^[4]

Sales and Revenues

The primary customers for F5's products are large enterprises. F5 sells to these enterprises via distributors, value-added resellers (VARs) and systems integrators. Ingram Micro and Avnet Technologies are F5's major distributors, accounting for 11.6% and 13.2% of the company's revenues, respectively.^[5] VARs sell F5's products to their end-users as well, but also provide network design, installation and testing services to the customers. System integrators are usually enterprise software vendors such as Microsoft, Oracle and SAP that integrate F5's products into their own software. In addition to these distribution channels, F5 employs a sales team that directly sells its products to their end-users.^[6]

F5's revenues have almost doubled in the last three years. The rapid revenue growth is the result of increasing corporate demand for the company's BIG-IP application delivery controller.^[7] Accordingly, F5's services revenues have grown as F5 installs more and more product bases.

Revenues Breakdown (in thousands)^[8]

Year	2007	2006	2005
Net revenues (total)	$525,667	$394,049	$281,410
Net revenues (from products)	$392,921	$304,878	$219,603
Net income	$77,000	$66,005	$46,902

International revenues represented 41.6%, 42.6% and 40.5% of net revenues in fiscal years 2007, 2006 and 2005, respectively. EMEA stands for Europe, the Middle East, and Africa.

Revenues by Region^[9]

Year	2007	2006	2005
Americas	$307,087	$226,242	$167,322
EMEA	$92,674	$70,716	$47,198
Japan	$64,346	$51,560	$38,435
Asia Pacific	$61,560	$45,531	$28,455

Sales and marketing account for a full third of F5's total expenses. This reflects the company's efforts to compete with more visible rivals such as Cisco. F5 also trains a sales and customer support team.

Expenses Breakdown (percent of total revenue)^[10]

Year	2007	2006	2005
Sales and marketing	33.4%	32.4%	31.9%
Research and development	13.1%	12.5%	11.2%
General and administrative	9.4%	9.9%	9.1%

In September, 2007, the company employed 1582 staff members: 450 (28%) in product development, 669 (42%) in sales/marketing, 279 (18%) in technical support and 184 (12%) in finance, administration and operations.^[11]

[edit] Trends and Forces

[edit] The momentum towards centralized servers and the use of network-based applications, such as Web Services and Voice over IP, increases the demand for F5’s products

By the end of 2007, on average, network-based applications had taken up 40% of all application usage time.^[12] For companies and other large institutions, common network-based applications include e-mail and security software, word processing, spreadsheet and database applications, virtual desktop tools, and customer relations management software. An employee's work done on these applications is very important to the functioning of a company, so the company needs ways to make network traffic as efficient as possible. F5’s core product addresses this need by directing network traffic so that a company's servers can perform more important tasks, such as relaying information from a database or processing a customer's request. Therefore, as more and more corporate operations, from data storage to communication to customer relations management, are done electronically, the demand for F5’s BIG-IP controller and its complementary software suite will grow.^[13] In the past 4 years, the average year over year growth of the application delivery controller market has been around 20%.^[14][15][16]

[edit] IT software vendors such as F5 are especially vulnerable to the market volatility that affects their group of customers

The application delivery controller market has grown rapidly in the past few years because large institutions are beginning to realize the advantages of the network traffic load balancing and other functions that the controllers perform. As a result, even in a time of recession, F5's quarterly revenues have increased sequentially in the first half of fiscal year 2008 by 8%.^[17][18] However, it is likely that once the application delivery controller market matures (i.e. when most corporations have integrated these controllers into their IT systems), companies would no longer see the need to purchase additional application delivery controllers. This is especially true during times of recession, since IT is an easy place for companies to save money. For example, after a series of major write-downs, an investment bank that already has an application delivery controller installed would probably choose not to buy a newer version of the controller, whereas it would have if the write-downs had not occurred. If many banks suffer the same problem, then F5's revenue stream would be harmed.

[edit] The increasing demand of international companies for networking-related software represents a potential direction of growth and risk

Telecommunications, financial services, technology, manufacturing and transportation companies in emerging markets are growing rapidly. From April 2007 to April 2008, industrial production grew by 15.7% in China, 9.2% in Russia, 3.0% in India, 10.5% in South Korea, 10.1% in Thailand, 12.2% in Venezuela, and 8.6% in Argentina.^[19] As foreign companies grow bigger, their demand for application delivery controllers also increases. In the period between 2005 to 2007, F5's international revenues have grown by $244M as the company expands its customer base internationally to match the well-established customer base of Cisco. Increasing operations in the international markets brings a series of risks, including fluctuating currency exchange rates (a rising dollar decreases reported earnings) and political instability in countries such as Thailand and Venezuela. Furthermore, F5 potentially faces IT-specific problems that Cisco has faced in the past years, such as being accused of providing the Chinese government with Internet website filtering technology.^[20]

[edit] Competitors

F5's core product competes in the application delivery controller market (the Layer 4-7 market, referring to the “layer” of network services its products provide), with Cisco Systems (CSCO), Inc., Citrix Systems (CTXS), Inc., Nortel Networks (NT) Corporation, Juniper Networks (JNPR), Inc., Foundry Networks (FDRY) , Inc., and Radware (RDWR) . In this market, F5 has become the leader in recent years based on revenues, outcompeting Cisco. Because it has expanded into the markets of complementary products, however, the company also competes in the WAN optimization (with Riverbed Technology (RVBD) , Juniper, and Packeteer (PKTR) ), the SSL Virtual Private Network remote access (with Juniper, Citrix, Nokia (NOK), Nortel Networks (NT) and Symantec (SYMC) ), application firewalls (with Citrix) and file virtualization (EMC (EMC) , Network Appliance (NTAP) , Brocade and Cisco) markets. Compared to many of its competitors, F5 has a shorter company history (which translates into less time to develop better technology), and less financial, technical and marketing resources, as well as a smaller customer base. As a result, larger competitors can respond faster to emerging technologies, and sell their products for lower prices. However, F5 holds a significant advantage in the flexibility of its TMOS technology and the integration of its product suites.^[21]

Cisco Systems (CSCO) : Cisco is F5’s biggest competitor, especially in the load balancing market segment. Cisco holds a significant advantage in the size of its distribution channels and its customer base. F5 has built partnerships with well-established enterprise software vendors to compete with Cisco’s size. The flexibility in F5’s products has enabled the company to outcompete Cisco.^[22]

Juniper Networks (JNPR) : Juniper, with its partnership with Symantec, is an important competitor in the secure remote access market segment. The company also sells products in the WAN optimization and load balancing, but is not as large a competitor in these markets as Riverbed and Cisco, respectively, are.^[23]

Citrix Systems (CTXS): Citrix is a competitor in both the load balancing and WAN delivery market segments through its acquisitions of NetScaler and Orbital Data, respectively. The company’s revenues growth has slowed, but Citrix benefits from its strong enterprise customer base, and like F5, offers a strong portfolio of application networking software.^[24]

Riverbed Technology (RVBD): Riverbed is the market leader by revenue in the WAN application delivery market. The strength in the technology offered by Riverbed is a primary factor that has enabled it to capture market share.^[25]

[edit] Market Share

The application delivery controllers market is growing rapidly, and the competitive landscape is also changing. In the last few years, F5 has overtaken Cisco as the leader in this market.^[26][27][28]

[edit] References

1. ↑ FFIV 10-K 2007, Item 1
2. ↑ FFIV 10-K 2007, Item 1
3. ↑ FFIV 10-K 2007, Item 1
4. ↑ FFIV 10-K 2007, Item 1
5. ↑ FFIV 10-K 2007, Item 6
6. ↑ FFIV 10-K 2007, Item 1
7. ↑ FFIV 10-K 2007, Item 6
8. ↑ FFIV 10-K 2007, Item 6
9. ↑ FFIV 10-K 2007, Item 6
10. ↑ FFIV 10-K 2007, Item 6
11. ↑ FFIV 10-K 2007, Item 1
12. ↑ “Growth of web applications in the US: Rapid adoption, but only when there’s a real benefit” Rubicon Consulting White Paper, September 25th 2007
13. ↑ “F5 & Acopia vs. Cisco & NeoPath” Byte and Switch, August 6th 2007
14. ↑ "Application delivery market up 23% in Q4 2004" ZDNet, August 18th, 2005
15. ↑ FFIV Press Release, April 23rd 2008
16. ↑ FFIV Press Release, April 23rd 2008
17. ↑ FFIV Press Release, April 23rd 2008
18. ↑ FFIV Press Release, April 23rd 2008
19. ↑ The Economist, Economic and financial indicators, June 7th 2008
20. ↑ Suite101.com, Cisco International Sales, January 25th 2007
21. ↑ FFIV 10-K 2007, Item 1
22. ↑ F5 Commands Worldwide Market Share Lead for Application Delivery Controllers, WebServices.org, May 1st 2007
23. ↑ FFIV 10-K 2007, Item 1
24. ↑ FFIV 10-K 2007, Item 1
25. ↑ Riverbed Technology Leads The WAN Optimization Appliance Market, Forrester, July 20th 2007
26. ↑ RDWR Press Release, May 2nd 2007
27. ↑ “F5 & Acopia vs. Cisco & NeoPath” Byte and Switch, August 6th 2007
28. ↑ CTXS Q1 2007 Financial Information