TECHNOLOGY

F5 CEO: Our Software Firepower Better Than Rivals

F5 pummeled Cisco in a fast-growing part of the market for data center gear. Now, F5 Networks finds itself the hunted.Not many companies eat Cisco Systems' (CSCO) lunch, but F5 Networks (FFIV) is one of them.

Seattle-based F5 holds 47% of the market for application delivery controllers.

ADCs manage Internet traffic in data centers, routing workloads among servers.

Citrix Systems (CTXS) holds 18% of the market and Cisco, the No. 1 maker of networking gear overall, is No. 3 at 12%.

Research firm Gartner forecasts ADC sales will rise to $2.94 billion in 2015 from $1.45 billion last year.

Competition is heating up on two fronts.

More companies are jumping into the fray, such as Riverbed Technology (RVBD) and privately held A10 Networks.

And many rivals aim to dethrone F5 by selling software versions of ADCs. Unlike the hardware boxes that plug into computer networks, software-only ADCs run directly on servers.

F5, however, has its own software firepower. Last quarter, F5 Networks told analysts its revenue from software-only ADC products jumped 149% from the year-earlier tally, though it didn't give sales numbers.

In a recent interview, F5 Chief Executive John McAdam discussed the ADC market with IBD.

IBD: F5's software ADC growth rate is impressive, but what is the size of the revenue base?

McAdam: It's a relatively small base. It's still very much in its infancy. It's a small percentage of our business. However, over time that will increase.

IBD: Do software-only ADCs target mainly cloud-computing environments, in which server infrastructure is shared?

McAdam: Probably the (best-suited) environment is definitely the cloud environment, where you can spin off software versions really quickly as you get more users.

We have (customers) that move from the software version to a hardware solution.

Sometimes a customer will start off with a software version and then realize, as the workload increases with more applications, they need to go with a hardware solution for more data throughput.

IBD: What's the cost of a software ADC vs. a hardware ADC?

McAdam: The software version is a lower-end solution. It's got all the functionality but it doesn't have the performance of an integrated hardware solution. You're talking about single-digit gigabits-per-second vs. hundreds of gigabits-per-second.

If you really need a lot of throughput, customers will go for the hardware product.

IBD: Are profit margins higher on software ADCs?

McAdam: It's all software, so almost by definition the (gross profit margin) is going to be in the 90s.

IBD: F5's profit margins improved last quarter. Is that because the sales mix included more software-based ADCs?

McAdam: It is related, but it's not the biggest factor.

The biggest factor are software modules, such as an application security firewall or WAN optimization, added to our hardware solutions.

IBD: What percentage of sales will software-only ADCs be in a few years?

McAdam: It's going to be small. The reason is that Viprion (hardware) sales tripled over the last year, because of high data throughput.

We see (software ADCs) almost as an extra market for us. It's incremental rather than a cannibalization-type situation.

IBD: Didn't Riverbed acquire Zeus to get a software-only product?

McAdam: That's correct. If you look at the competitive landscape, companies like Citrix and Cisco, the great majority of (competition) is still with (hardware) systems.

There are constraints on software-only versions if you're looking for decent throughput.

IBD: Some analysts claim software-only ADCs could take over in the long run.

McAdam: We don't agree. We're sitting with a significant market share, we're the leader.

All the trends we're seeing are customers consolidating data centers — data getting more complex, and data increasing.

The need for more performance isn't abating. I'm not being defensive here. If you look at our portfolio of software-only solutions, we're second to none.

But we see no signs whatsoever of the hardware systems business being overtaken by software, definitely not over the next three to five years.

IBD: You mentioned cannibalization. Some analysts say F5 had software technology ready but let others get to market with it first, almost by choice.

McAdam: We obviously take the view of optimizing revenue in the business, but also react to customer requirements. Citrix had a software version before us, but since we've released ours, we've actually increased our number of modules available. We now have the biggest portfolio out there. If you look at the (number of) downloads of our software, we absolutely outstrip any other competitor.

IBD: Most data centers use VMware (VMW)-type virtualization technology to run multiple programs on one server. Is virtualization a trend that works in favor of F5 or do you just coexist with it?

McAdam: It works massively in favor. The reason is that when a customer has a group of, say, 15 virtual servers, our products sit in front of those servers and do all the workload optimization.

We basically control the network traffic. We're at a strategic point of control that sees how well applications are running. You need more sophisticated management, more provisioning capability, more security in that environment. We see VMware as a key partner, along with companies like Oracle (ORCL) and Microsoft (MSFT).

IBD: Enterprise sales were a bright spot last quarter. Despite the outsourcing and cloud services trends, doesn't that indicate strong corporate spending on internal data centers?

McAdam: No question. If you talk to Fortune 500 companies, most are building an architecture that consolidates the number of data centers, uses virtualization and has their own private cloud technology. But you see both (private clouds and public clouds). We work with (cloud service provider) Rackspace Hosting (RAX). They're a big partner.

IBD: Do you expect to see more M&A among data equipment vendors or within the ADC market?

McAdam: Not really. From our perspective, if there's a technology that we have on our roadmap that maybe we can go to market with faster, then we take a look at M&A.

IBD: What technology might F5 be interested in acquiring?

McAdam: Security and telco (products) in general are two areas that we're always looking at what's available.

By REINHARDT KRAUSE, INVESTOR'S BUSINESS DAILY
Posted 02/01/2012 05:56 PM ET