Ahead in the Cloud

The outlook for the expected recovery of the Puget Sound region’s technology sector looks mostly cloudy-and that’s just the way Seattle’s F5 Networks Inc. wants it.

Cloud computing, the delivery of hosted services over the internet, is one of the hottest trends in the IT world. According to a March 2009 report from Gartner Inc., worldwide revenues for cloud services are expected to top $56 billion this year-a 21.3 percent increase from 2008-and should reach $150 billion by 2013.

By supplying a service called application delivery control (ADC), which manages traffic between servers, F5 Networks is reaping the rewards of the trend that is transforming expensive data centers into private or public clouds that provide just-in-time IT service. F5’s virtual ADC service furnishes the infrastructure that allows for rapid cloud-to-cloud and cloud-to-user communication, whether a provider offers software as a service (SaaS) or infrastructure as a service (IaaS).

“We make sure the access is always on, fast and secure,” says Erik Giesa, vice president of product management and marketing at F5. “Clients only use the IT services they need at the time that they need them.”

At a time when many tech firms are praying for just flat returns, F5 is showing profits again. For the fourth fiscal quarter of this year, F5 reported a profit of $28.4 million, representing a 44 percent surge over the same quarter last year. The company now has more than 1,600 employees, up nearly 50 percent in the past two years. Earlier this year, F5 was ranked as No. 12 in Forbes magazine’s list of the top 25 technology stocks.

One customer is wireless carrier AT&T, which has faced heavy loads on its system because of the popularity of the iPhone, for example. AT&T uses F5 software to make more efficient use of its network. Other F5 software helps companies more efficiently allocate data storage so that less frequently used data are put on cheap storage devices while frequently accessed data are stored on more expensive, easily accessed devices.

F5’s success has come largely under the radar because its products are meant to be largely invisible. As one customer aptly describes the firm’s services, F5 provides the “non-sexy plumbing” of the cloud infrastructure. The company has grown in tough times because efficiencies offered by cloud computing can help reduce IT costs by a third or more, and time-to-market by one-half to two-thirds. Microsoft’s SharePoint software operates eight times more efficiently when used with F5 software, says F5 CEO John McAdam, a veteran of IBM. He says 80 percent of Fortune 100 companies use F5 software.

One client, IaaS provider BlueLock, in Indianapolis, says F5’s core product, the Big-IP local traffic manager (LTM), helps balance the server load during high demand periods and also takes on the burden of encrypting data that are sent, thus freeing up BlueLock’s virtual servers to perform other tasks. As a result, BlueLock has been able to increase its monthly recurring revenue 15 percent.

Another benefit is F5’s ability to efficiently store huge volumes of data. Transplace, a Texas freight logistics company which has put 95 percent of its data center operation into a Microsoft-based SaaS system, says that F5’s WebAccelerator module has made page loads three times faster. Transplace adds it has not experienced a single outage of its transportation management platform since the Big-IP LTM system was adopted in 2006.

The recent success enjoyed by 13-year-old F5 is a return to form, of sorts. After introducing its core Big-IP product in 1997, F5 went public in 1999 and was soon trading at $160 per share, serving more than 1,600 customers during the dot-com boom. Once the tech bubble burst and most of its clients went bust, F5’s stock value plummeted to below its original IPO price of $10 by the end of 2000.

That same year, however, McAdam took over as CEO and began reinventing the company. Rather than focus on startups, McAdam turned to the larger, more established firms, which were increasingly relying on huge data centers to run their businesses. After returning F5 to profitability in 2003, McAdam began a string of acquisitions, including secure web access provider uRoam (2003), firewall provider MagniFire Websystems (2004), network optimization company Swan Labs (2005) and file virtualization firm Acopia (2007).

The results from McAdam’s transformation are impressive. Since 2000, annual revenue for F5 has grown from $108.6 million to more than $650 million in 2008. For 23 consecutive quarters, F5 showed revenue growth until the economic crisis sank all boats at the end of 2008.

The company’s strong performance this year, however, has lifted share prices from $32 to more than $40 and earned praise from analysts. “We think the opportunity exists for F5 to regain its momentum as a slate of new products penetrates the market,” says Wedbush Morgan analyst Rohit Chopra.

Today, although a fifth of its customers are in the still-shaky financial sector, F5 appears to be in a position of strength. After going head-to-head with network systems giant Cisco Systems, F5 has established a clear lead during the last two quarters in the ADC market, with 38 percent of the market, compared to Cisco’s 22.5 percent share. That’s a sharp turnaround from 2000, when Cisco had 50 percent of the market to F5’s 10 percent. F5’s growing strength has led to persistent rumors that it may be acquired by a larger company like Dell or HP.

For 2010 and beyond, F5 sees plenty more room for growth in the cloud market. In a nationwide study commissioned by F5, Applied Research found that 80 percent of IT managers from 250 large companies surveyed said that they were at least in the trial stages of deploying cloud-computing systems, and half had already deployed a public cloud.

The potential to increase F5’s reach into the virtual ADC niche may even be great overseas. International business, Erik Giesa says, accounts for 40 to 45 percent of F5’s revenue, a figure that is expected to rise, especially in Asia, where wireless carriers are building 4G networks much faster than their counterparts in the United States. India, he notes, is another expanding market that will soon eclipse China in terms of mobile subscriber growth.

The Indian subcontinent, Giesa says, will need a company like F5 to manage the safe and efficient transmission of the rising tide of cloud data. “The benefits of our products aren’t just about cost savings,” he adds. “It’s also the assurance of security. Enterprises must have access and control of their data, and we give them that control.”