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Morningstar | F5 Networks Announces Intent to Acquire Software Competitor Nginx; Maintaining FVE of $181. See Updated Analyst Note from 12 Mar 2019

Narrow-moat F5 Networks announced its intent to acquire privately held Nginx, a provider of open-source software for application delivery controllers (ADCs) and microservices, for $670 million of cash by acquiring all issued and outstanding shares of Nginx. Nginx and F5 were competitors in the ADCs marketplace, with Nginx focused on software-based solutions to disrupt F5's traditional hardware dominance. We view this acquisition in line with F5's strategic efforts to focus on software with cloud-based and virtualized products. Management provided guidance for fiscal 2019 and fiscal 2020 to now have increased revenue growth with lower non-GAAP operating margin and non-GAAP EPS growth. After updating our model, we are maintaining our fair value estimate of $181 per share.

Nginx is a leader in the web application server, microservices, and API management side of development operations, whereas F5 excels at routing and managing the applications for the end users. F5 will now be able to offer a more complete solution for application and traffic management, from the developer side to the networking side. Per Nginx and Netcraft, over 374 million websites (around 25% of total) used Nginx software in February 2019 and 67% of the top 10,000 sites ran on Nginx (per W3Tech data). This massive installation base should provide potential incremental opportunities for F5 to manage the flow of applications after application development for multi-cloud deployments, in our view. Additionally, we posit that F5 benefits from purchasing a company that's garnered success with a cloud and virtualized model since F5 aims to make inroads in those markets.

F5 increased its revenue growth target for fiscal 2019 and fiscal 2020 to now be mid-single-digit growth from low- to mid-single-digit growth but for non-GAAP operating margin to decline to around 33%-35% from 35%-37%. Nginx had $26 million in revenue in 2018, which was a 65% annual growth rate per F5 management.

Per Pitchbook data, Nginx raised $84 million in capital cumulatively, with its latest round of funding in June 2018. F5 has committed to maintaining the Nginx brand and Nginx's CEO and founders will join the F5 team and lead the Nginx operations. The deal is expected in the second calendar quarter of 2019.