F5’s Weak Q1 Software Performance Offset by Services Resiliency; Maintaining $199 FVE

We maintain our $199 fair value estimate for narrow-moat F5 after its first-quarter results for revenue met consensus estimates and adjusted earnings per share exceeded estimates. Macroeconomic factors have created budget and project scrutiny, which, in turn, have weighed on F5’s product revenue, particularly hindering new software sales growth. However, we are pleased with management’s proactive steps taken to navigate this period of heightened uncertainty. F5 has re-engineered several of its products to reduce its dependence on an increasingly expensive broker market and avoid margin-dilutive expedite fees. After results were reported, shares traded down over 4%, which we believe is in reaction to disappointing results in its software products during the quarter. Although the 3% growth in software is a significant disappointment, management’s outlook of 15%-20% in fiscal year 2023 for software growth was maintained. As such, we still view shares as undervalued and believe the immediate market reaction is overly punitive.