F5’s Software Strength Outpaces Supply Chain Challenges Hurting Systems Revenue

We maintain our $210 fair value estimate for narrow-moat F5 after its third-quarter results exceeded expectations for adjusted earnings as well as revenue. While F5 continues to combat supply chain challenges and an uncertain macroenvironment, its continued efforts to shift organizations to software subscriptions is paying off. After releasing results, investors in after-hours trading reacted positively, with shares gaining as much as 15% before coming back down to around a 6% gain. We view shares as undervalued, and management reiterated that it anticipates the first quarter of fiscal 2023 will be the low point in systems revenue. We think that the recurring revenue F5 continues to expand upon (72% of total revenue from 66% in the year-ago period), coupled with margin expansion when systems revenue returns to normal levels, will have the company in a strong position to capitalize on the essential nature of F5’s product offerings for organizations.