A Clear Winner in Cloud Computing is F5 Networks

The market for Application Delivery Controllers (ADC) is benefitting from several secular trends that are likely to only accelerate in the future. Application Delivery Contollers, formerly known as load balancers act as gateways to datacenters for Internet traffic.

F5 Networks (NASDAQ:FFIV) has been a beneficiary of being the only player focused on the ADC market, which has enabled it to maintain a product-based competitive advantage over its two larger competitors. Our checks suggest that Cisco appears to have almost ceded the market to FFIV in the high-end Enterprise and at Service Providers
If you have watched the proliferation of content consumption devices and the growth of new media such as video has accelerated and looks likely to continue on its trajectory in the near future.

These factors have expanded the need for more data centers to deliver the content and the need for higher bandwidth to carry the higher content load at service providers and the enterprise. The ADC market has benefitted consequently as more ADC’s are required to control traffic emanating out of the new servers and previously installed products have to be upgraded to deal with the higher bandwidth and greater sophistication necessary to service the requirements of new media.

Many expect these trends to continue driving growth of Internet traffic and in turn drive the rapid growth of the ADC market. Within the enterprise, the advent of multi-core processors and virtualization has accelerated the transition towards consolidated data centers. Data center consolidation has resulted in larger virtualized server farms which have in turn increased the need for Application Delivery Controllers to manage, accelerate and optimize traffic between users and the larger pool of servers within data centers. We expect data center consolidation to further accelerate as enterprises begin to see tangible ROI from these projects.

The transition of workloads to Public Clouds such as Hosting providers, which we believe is ramping today, is also likely to be a strong factor driving demand for ADC’s in the future. As Hosting providers increase the sophistication of service levels offered to customers, we believe ADC’s are likely to be more widely adopted at these customers, further expanding the market.

FFIV, the leader in the ADC market with close to 60% share, according to our estimates, continues to benefit from a relatively benign competitive environment, which has allowed the company to maintain a significant product lead over competition, in our opinion. FFIV, according to our estimates, has about 60% share of the ADC market and Cisco and Citrix are the company’s two key competitors.

Citrix also appears to have lost ground to FFIV in its historically strong Internet vertical and appears to be focusing increasingly on selling ADC’s in the context of Desktop virtualization implementations. Our checks suggest that within the Enterprise segment, FFIV’s ability to optimize application traffic using its iRules engine, its server-offload functions, such as security, identity and access management, which relieve servers of significant processing cycles, its integrated security and Web-acceleration features are key product differentiators.

Within the Service Provider segment, we believe the higher bandwidth traffic control possible with FFIV’s high-end VIPRION platform and the ability to provide different service levels to different customers (using iRules) are key differentiators for FFIV, which have enabled it to increase its share of the market over the past few years.
FFIV’s Dev Central community of F5 users, we understand, is also a key driver of iRules adoption across the company’s installed base and we believe a source of viral marketing for the company.