F5 Rolling With The Cloud

F5 Networks (FFIV) CEO John McAdam is feeling good about his company's place in the market, based on the rise of cloud computing.

"We believe our competitive position is the strongest it has ever been," McAdam said on an earnings call with analysts late Wednesday.

The company reported per-share profit minus items of 52 cents for its fiscal first quarter ended Dec. 31. That's up 30% from the year-earlier quarter and 3 cents more than expected by analysts polled by Thomson Reuters. Its outlook for this quarter also beat views.

At least one analyst, Broadpoint AmTech's Brian Marshall, on Thursday raised his rating on the stock to buy from neutral.

The company's stock rose as much as 6% Thursday on the news, before ending the day up 3% at 53.01, a nearly 10-year high.

With cloud computing, users access software applications, data and other resources over the Web from remote data centers "in the cloud." Benefits include lower costs to manage networks, more flexibility in running workloads and access to data from anywhere.

F5 Networks (FFIV) is the market leader in so-called application delivery controllers. ADCs are a type of hardware appliance that helps companies manage network traffic.

ADCs help control data access and security, while also improving the performance of software applications. F5 competes against Cisco Systems (CSCO), Citrix Systems (CTSX) Radware (RDWR) and others.

McAdam took the reins of F5 after working at IBM (IBM) and Sequent Computer Systems, which IBM bought in 1999.

McAdam spoke with IBD from company headquarters in Seattle after Wednesday's earnings call.

IBD: How does F5 help customers improve the performance of their corporate networks?

McAdam: The main piece of our business is the application delivery controller product. It's an appliance (combining hardware and software) that sits in the data center between the network and the applications that run on the servers.

It can see all the traffic coming in and out, and it knows what applications are running, so it can do optimization for Microsoft (MSFT) or Oracle (ORCL) applications. Optimization can include reducing the amount of bandwidth a customer needs, or reducing the number of servers needed to run the application. So it's a very intelligent gateway in the data center.

IBD: What are your thoughts on the economy and your outlook for 2010?

McAdam: It's mainly positive news now. Looking back at 2009, we saw a pause in spending in the first half. Then around April we saw spending accelerate, and in July we saw it get even better. It continued getting better in October, and we think it's still getting better now.

During the downturn, we didn't see our business crumble. It was the opposite. We clearly have been in the sweet spot in terms of market drivers, because frankly, our products are pretty strategic.

With application delivery controllers, companies can consolidate 20 data centers down to two or three. Also, the growth of mobile data and mobile applications is creating demand for us to optimize (network) infrastructure for (telco) service providers.

IBD: How do you separate all the industry hype about cloud computing from the reality?

McAdam: On the smart phone and mobile side, we help carriers reduce the traffic that crosses their networks in response to user interactions.

So for example, if a user gets 100 units of traffic, they will deploy us to reduce that load down to 80 units of traffic by using compression, or by reducing the number of round trips needed to answer a customer's query. The end user sees a faster response for applications, and the carrier reduces its (capital expenses) for traffic.

IBD: How has the growth of smart phones and mobile computing affected your business?

McAdam: Six months ago, we said it would be about two or three years out (for clouds to mature), but now it's moving much faster.

One thing that stands out about the cloud is it's cheaper. It actually costs less. If I was a small company with just 10 people, I'd go straight to the cloud (to run my business operations).

So I think it will happen quickly with small and medium businesses. The enterprise (larger companies and organizations) will go slower, with hybrid data centers and with their own internal clouds.

But this cloud trend is not going to go away because the financial benefits are so significant, and now we have the technology to do it well.

As for challenges, security remains an issue, and there are ongoing question marks about privacy.