Friday, January 22, 2010

Bookkeeping: Establishing Small Stake in F5 Networks (FFIV)

I am not interested in increasing long exposure much until the market calms down, but we have an opportunity to get into F5 Networks (FFIV) which posted a great quarter yesterday (and is hiring people, a rarity) for just about the same price as it was before the earnings release.  That does not mean it cannot drop 20% from here if the market falls apart.  So we'll get started with a starter position of 0.6% exposure and by doing so it will have much more visibility - off our watch lists and onto our "watch like a hawk" area.  The other benefit is we don't have to worry about knee jerk reactions around earnings for 3 months from now since it is out of the way.

Purchase price will be about $53.10; since this first purchase is small, I'd make a larger second purchase on either a bounce or a fall to mid $50.00s, right at the 50 day moving average.  And then if it broke that level we'd either scale back dramatically or leave completely.

F5 is yet another way to play data, mobile, and cloud computing - some of the few true secular growth areas in America.  (outside of lobbyists of course)


Investors Business Daily highlighted the company yesterday with an interview with the CEO.

F5 Networks is the market leader in so-called application delivery controllers. ADCs are a type of hardware appliance that helps companies manage network traffic.  ADCs help control data access and security, while also improving the performance of software applications.  F5 competes against Cisco Systems (CSCO), Citrix Systems, Radware (RDWR) and others.

IBD: How does F5 help customers improve the performance of their corporate networks?

McAdam: The main piece of our business is the application delivery controller product. It's an appliance (combining hardware and software) that sits in the data center between the network and the applications that run on the servers.

It can see all the traffic coming in and out, and it knows what applications are running, so it can do optimization for Microsoft (NasdaqGS:MSFT - News) or Oracle (NasdaqGS:ORCL - News) applications.

Optimization can include reducing the amount of bandwidth a customer needs, or reducing the number of servers needed to run the application. So it's a very intelligent gateway in the data center.

IBD: What are your thoughts on the economy and your outlook for 2010?

McAdam: It's mainly positive news now. Looking back at 2009, we saw a pause in spending in the first half. Then around April we saw spending accelerate, and in July we saw it get even better. It continued getting better in October, and we think it's still getting better now.

During the downturn, we didn't see our business crumble. It was the opposite. We clearly have been in the sweet spot in terms of market drivers, because frankly, our products are pretty strategic.

With application delivery controllers, companies can consolidate 20 data centers down to two or three. Also, the growth of mobile data and mobile applications is creating demand for us to optimize (network) infrastructure for (telco) service providers.

IBD: How do you separate all the industry hype about cloud computing from the reality?

McAdam: On the smart phone and mobile side, we help carriers reduce the traffic that crosses their networks in response to user interactions.

So for example, if a user gets 100 units of traffic, they will deploy us to reduce that load down to 80 units of traffic by using compression, or by reducing the number of round trips needed to answer a customer's query. The end user sees a faster response for applications, and the carrier reduces its (capital expenses) for traffic.

IBD: How has the growth of smart phones and mobile computing affected your business?

McAdam: Six months ago, we said it would be about two or three years out (for clouds to mature), but now it's moving much faster.

One thing that stands out about the cloud is it's cheaper. It actually costs less. If I was a small company with just 10 people, I'd go straight to the cloud (to run my business operations).

So I think it will happen quickly with small and medium businesses. The enterprise (larger companies and organizations) will go slower, with hybrid data centers and with their own internal clouds.

But this cloud trend is not going to go away because the financial benefits are so significant, and now we have the technology to do it well.

Long F5 Networks in fund; no personal position

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