F5 Networks Inc. (FFIV - Snapshot Report) reported second-quarter fiscal 2015 adjusted earnings per share (excluding amortization and other one-time items but including stock-based compensation) on a proportionate tax basis of $1.21, which came in line with the Zacks Consensus Estimate. Earnings however increased from 93 cents reported in the year-ago quarter.

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The year-over-year surge was driven by higher operating margin, favorable impact of foreign currency and a more encouraging tax rate during the quarter.

However, shares of this network equipment maker plunged 2.8% in after-hour trading due to lower-than-expected revenue forecasts for the third quarter.

Revenues

F5 Networks’ revenues grew 12.4% year over year to $472.1 million and remained toward the higher end of its guidance range of $465 to $475 million. Moreover, it came ahead of the Zacks Consensus Estimate of $471 million. The company’s revenues increased on a year over year basis, primarily due to better-than-expected sales to U.S. service providers and enterprise customers. Also, increase in the number of deals worth more than $1 million aided quarterly revenues.

Revenues were also boosted by an 8.4% increase in Product revenues and a 17% increase in service revenues on a year-over-year basis.

Notably, F5 Networks’ “Good, Better, Best” (GBB) pricing strategies and higher competencies of BIG-IQ platform also helped to streamline its product portfolio and drive year-over-year revenue growth.

Geographically, on a year-over-year basis, revenues from the Americas increased 14% and contributed 57% of total revenue. EMEA also increased 14% and accounted for 24% of total revenue. Asia-Pacific was up 11% on a year over year basis, representing 14% of total revenue while Japan revenues decreased 3% and represented 5% of total revenue.

By verticals, Enterprise, Service providers and Government (including 5% from the U.S. federal) accounted for 65%, 24% and 12% of total revenue, respectively.

The company’s distributors Ingram Micro (IM - Analyst Report), Avnet (AVT -Analyst Report), Westcon and Aero accounted for 15.5%, 13.5%, 16.6% and 10.5%, respectively of total revenue.

Operating Results

F5 Networks’ adjusted gross margin (excluding amortization and other one-time items but including stock-based compensation) improved 67 basis points (bps) on a year over year basis to 83.1%, primarily due to higher revenue base.

The company’s adjusted operating margin (excluding amortization and other one-time items but including stock-based compensation) increased 195 bps from the year-ago quarter to 28.8%, primarily due to higher gross margin and lower adjusted operating expenses as a percentage of revenues. Adjusted operating expenses, as a percentage of revenues, decreased 128 bps on a year over year basis.

The company’s adjusted net income (excluding amortization and other one-time items but including stock-based compensation) came in at $88.2 million or $1.21 per share, which improved from $71.1 million or 93 cents reported in the year-ago quarter. On a GAAP basis, net income came in at $85.7 million or $1.81 per share compared with $69.6 million or 92 cents reported in the year-ago period.

Balance Sheet & Cash Flow

F5 Networks exited the quarter with cash, cash equivalents and short-term investments of approximately $666.5 million. Receivables were $262.6 million at the end of the quarter.

F5 Networks’ balance sheet does not have any long-term debt. The company reported cash flow from operations of $142.3 million. During the quarter, F5 Networks repurchased approximately 1.4 million shares for $156.9 million. The company still has $774 million authorized under the share buyback program.

Guidance

For the third quarter of fiscal 2015, F5 Networks expects revenues in the range of $475 million to $485 million (mid-point $480 million). The Zacks Consensus Estimate is pegged at $489 million. Non-GAAP gross margin is expected to be between 83.5% and 84%. The company expects non-GAAP earnings for the third quarter of fiscal 2015 in the range of $1.57 to $1.60. The Zacks Consensus Estimate is pegged at $1.31 per share. Non-GAAP effective tax rate is expected to be 35%.

Amid macro concerns and a tight federal budget, management remains positive on the company’s upcoming product launches and growing demand for its security solutions.

F5 Networks also mentioned that it will continue investing in technology and headcount to keep pace with changing market trends.

Also, management stated that the partnership with Software Defined Networks (SDN) and other cloud providers should drive long-term growth.

Our Take

F5 Networks reported better-than-expected second-quarter fiscal 2015 results. Also, the year-over-year comparisons on both counts were favorable primarily due to better-than-expected sales to U.S. service providers and enterprise customers. Also, an increase in the number of deals worth more than $1 million aided the quarter’s revenues. However, the company provided a tepid third-quarter revenue guidance.

Nonetheless, the company’s GBB pricing strategy and its BIG-IQ platform remain tailwinds. Revenue growth seems to be steady and was positively impacted by strength across all its business segments and higher Enterprise revenues.

We believe that the company’s product refreshes will boost revenues, going forward. Moreover, these initiatives are expected to expand the company’s total addressable market and result in client wins.

Better execution and focus on enterprise and service providers have placed F5 Networks well in the application delivery controller market. Nevertheless, the volatile spending atmosphere and competition from Juniper Networks Inc. (JNPR- Analyst Report) remain concerns.

Currently, F5 Networks has a Zacks Rank #4 (Sell).