F5 Networks projects single-digit revenue growth for the next several years amid software transition, sending its stock down 5 percent

F5 Networks CEO Francois Locoh-Donou (F5 Photo)

A revamped F5 Networks executive team made its pitch to Wall Street investors in New York Thursday, hoping to convince them the company is managing the tricky transition to the world of cloud computing. Based on their initial reaction, CEO Francois Locoh-Donou has some work still to do.

F5 Networks is scrambling to improve sales of software-based security and application delivery products as sales of its application delivery hardware decline over the next few years amid the shift to cloud computing. The Seattle-based company rose to prominence thanks to its expertise in networking and application-delivery products designed for on-premises data centers, but fewer and fewer companies are building data centers these days and the ones still operating data centers are shifting important workloads to cloud providers like Amazon Web Services and Microsoft Azure.

As a result, growth has stalled at F5 as it attempts to shift its product mix toward cloud-native software, where it has shown some promise but faces tough challenges from established vendors and the big cloud providers themselves. The idea is to provide application-delivery services for customers running public cloud and hybrid cloud strategies, while also ramping up its application security software to help protect those applications when they are deployed across multiple operating environments.

F5 Networks has a plan to shift its business from hardware to software, but revenue growth will be slow for several years while that is underway. (F5 Slide)

This transition is going to take some time. Locoh-Donou told investors Thursday that F5 expects “steady but defensible revenue growth” over the next several years, ranging from low single-digit growth to high single-digit growth as the transition unfolds. Slow growth is not the kind of thing that gets Wall Street investors particularly excited about a tech stock, and they reacted accordingly, sending shares of F5 down around five percent on a day when the broader Nasdaq index was up a fraction as of this writing.

Still, Locoh-Donou thinks F5 can win business in these markets because it isn’t tied to a single cloud strategy.

“Large enterprises are all going to multicloud,” he said during the company’s presentation to financial analysts, the first time Locoh-Donou has made this pitch to Wall Street since taking over as F5 CEO almost one year ago. “The public cloud portion of our software business is the fastest growing portion of our business, and it will represent a bigger portion of our software business than it does today.”

F5 is also at least gaining share in the declining ADC systems market, said Kara Sprague, senior vice president and general manager of the ADC group, and one of several new executive team hires announced by F5 back in January. It hopes to defend that position as the data center market slowly declines over time, but will make a big push in 2018 around virtual application-delivery controllers, which load-balance applications as they move across a network and accelerate the delivery of certain applications as needed.