F5 Earnings: Demand Stabilizes, Margins Improve as Cost Discipline Is Fruitful; Raise FVE 6% to $180

We are raising our fair value estimate to $180 per share from $170 for narrow-moat F5 after the firm closed its fiscal year on a mostly positive note. While the demand environment has yet to normalize, management called out signs of demand stabilization as some enterprise customers, that had previously been extending the use of assets beyond typical durations, resumed hardware purchases. While its top line would continue to be muted in the near term, F5 has successfully demonstrated operating leverage in terms of gross margin improvements from selling more software, operating discipline, as well as previous cost-cutting measures. Despite revenue headwinds, we are pleased with F5’s ability to produce profitability under difficult conditions. Our fair value increase is a result of our model roll for the fiscal year end and our positive consideration of F5’s operating flexibility. While we view shares as undervalued, we’d ask investors to tread with caution as F5’s customers continue to scrutinize spending in times of macroeconomic uncertainty.