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Author: tktrimbath Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1870  
Subject: FFIV annual stockholder meeting notes - long Date: 3/11/2008 10:23 PM
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CAVEAT I am human and an amateur investor. Mistakes will be made by me, but the company and the SEC hold THE TRUTH. When in doubt, ask. If we are lucky, some other investor was there who can add their insights.

Pre-Meeting
Another year and in the same place. For the last several years f5 has held the stockholders meeting in their breakroom that has morphed into a conference room. Nice transition and a good use of the company money. That was especially true considering that there were less than a hundred chairs and probably less than forty people there. Most of the people were suits, officers, directors and such. Looking back into my previous years' notes might be entertaining if there were changes as the company grew and as the stock has recently stumbled.

OFFICIAL MEETING
Everything passed as per management's direction. Not a surprise. 93% of the votes were represented in the room. That's about $1.6B amongst the 40 people. My share was much smaller than the average.

BUSINESS PRESENTATION
John McAdam, CEO, gave the presentation. In general, they've had 20 sequential quarters of revenue growth and they expect that to continue. The chief asterisk throughout the presentation was the impact of the recent acquisition of Acopia.

Fiscal year 2007 closed with 33% revenue growth, 17% income growth, 48% employee growth and almost a half billion in assets (cash?). The company was voted "Best Large Company" by the Seattle Times, and was #8 of Fortune's 100 fastest growing tech companies. An industry metric called the Magic Quandrant showed f5 as the best of those studied for vision and execution.

F5's products have always been positioned to save the customer money by letting them optimize their servers to the extent that they don't have to buy or maintain as many servers. The Acopia acquisition allows f5 to do the same for storage devices. (I think the idea is to get the customers to see f5 as an optimizer and a cost reducer whether it is for web servers or storage devices, two things that dominate the large data centers behind online companies.) As an example, one of f5 devices is 1/3 the price, uses about half the electricity, and takes up much less space than the competition. This creates a high barrier to competitors (ideally).

I get the impression that the company feels that the Acopia acquisition was good but misinterpreted as separate from f5's core competencies. The acquisition should add about $25,000,000 to $30,000,000 to the company revenues from a market that is expected to grow at 124% CAGR.

FINANCIAL PRESENTATION
The CFO reviewed the data already presented with a few details thrown in. Headcount drives about 70% of costs, so they watch that, but they needed the extra people for the acquisition and for the introduction of the new products. Products generate 71% of revenues. North America generates 57% of revenues. All geographic areas continue to grow, though not in lockstep. There was a drop in federal work, but that is already a single digit market. Besides the misinterpretation of the Acopia acquisition, there was an earnings shortfall to account stock compensation expenses. About 28% of employees are involved in product development and 19% in services. Gross margins are held at 77%. The stock buyback ($200,000,000) has been active through 2Q08.

QUESTIONS & ANSWERS (paraphrased)
? A representative of the Worker Owner Council wants the company to use majority voting to elect directors. A recent change in Washington Law is somehow affecting this.
? Market share (in general) held at 33% and is a 6 month old number.
? Last quarter was solid. Federal and Japan markets were disappointments. The trouble in the financial companies affects f5 because almost everything they do relies on computers. (I don't know if that is good news and bad news.)
? Acopia generated $7,700,000 last quarter and is expected to hit the high side of guidance.

MY CONCLUSIONS & SUMMARY
F5 continues to grow and expand in a reasonable fashion. The double whammy of a misunderstood acquisition and the expensing of stock compensation seriously depressed the stock price (right when I was planning to sell to pay some bills.) Both of those events are singular. If the acquisition is successful and if that market grows as expected, f5 will continue to do as well as ever.

The company has grown from something that would have been very easy to buyout. It could still be bought out based on price, but it gets more expensive every year.

I like the acquisition because it plays to f5's understanding of the customer's needs in terms of cost reduction via sophisticated integrated hardware and software.

I am more concerned with the inability of the stock buyback to raise the price and the flattened market share. They may be signs of questions that I didn't even know to ask.

In other words, it looks good to me. But something may be up. I suspect the depressed stock price is temporary and the result of a spooked institution and a worried economy.

DISCLAIMER LTBH since 2000 and I keep forgetting that they only went public in 1999. Pity I might have to sell the shares, unless of course DNDN, MVIS or another part of my portfolio makes me a better offer. Investing happens to make money to pay bills and such. Gotta sell sometime. Still it would be nice to hang in there for 10 years first.
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