F5 Q1 2025 Earnings Report

F5 EPS Results

• Actual EPS: N/A
• Consensus EPS: $3.36
• Beat/Miss: N/A
• One Year Ago EPS: $3.43

F5 Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $716.48 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

F5 Announcement Details

• Quarter: Q1 2025
• Date: 1/28/2025
• Time: After Market Closes
• Conference Call Date: Tuesday, January 28, 2025
• Conference Call Time: 4:30PM ET

F5 (NASDAQ:FFIV) provides multi-cloud application security and delivery solutions in the United States, Europe, the Middle East, Africa, and the Asia Pacific region. The company's distributed cloud services enable its customers to deploy, secure, and operate applications in any architecture, from on-premises to the public cloud. It offers unified, security, networking, and application management solutions, such as web app and API protection; multi-cloud networking; application delivery and deployment; domain name system; content delivery network; and application deployment and orchestration. The company also provides application security and delivery products, including NGINX Plus; NGINX Management Suite; NGINX Ingress Controller; NGINX App Protect; BIG-IP Packaged Software; and BIG-IP Systems. In addition, it provides a range of professional services, including maintenance, consulting, training, and other technical support services. F5, Inc. sells its products to large enterprise businesses, public sector institutions, governments, and service providers through distributors, value-added resellers, managed service providers, systems integrators, and other indirect channel partners. It has partnerships with public cloud providers, such as Amazon Web Services, Microsoft Azure, and Google Cloud Platform. The company was formerly known as F5 Networks, Inc. and changed its name to F5, Inc. in November 2021. F5, Inc. was incorporated in 1996 and is headquartered in Seattle, Washington.

F5 Q1 2025 Earnings Call Transcript

Key Takeaways

• F5 reported 11% total revenue growth in Q1, including 20% product revenue growth (22% software, 18% systems), and delivered non-GAAP EPS of $3.84, beating guidance by $0.43.
• The company raised its fiscal 2025 revenue guidance to 6–7% growth (up from 4–5%) and its non-GAAP EPS growth outlook to 6.5–8.5%, citing strong Q1 results and a healthy pipeline.
• Robust software subscription expansion drove upside, as customers consolidated multiple security point products onto F5’s platform and accelerated modernization and technology refresh projects.
• F5 emphasized its unique hybrid multi-cloud portfolio for application security and delivery, achieving record competitive displacements across hardware, software, and SaaS deployment models.
• Emerging AI opportunities include high-performance data delivery for model training and inference, secure AI inferencing via API security, and AI factory load balancing, with several large enterprise wins in Q1.

Presentation

[Operator]

Good afternoon and welcome to the F5 Inc. First Quarter Fiscal 2025 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Also, today's conference is being recorded.

[Operator]

If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne Doolong. Ma'am, you may begin.

[Suzanne DuLong, Vice President, Investor Relations at F5]

Hello and welcome. I'm Suzanne Doolong, F5's Vice President of Investor Relations. We're here with you today to discuss our Q1 fiscal year 2025 financial results. Francois Loco Donau, F5's President and CEO and Cooper Warner, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the F5 executive team are also here to answer questions during the Q and A session.

[Suzanne DuLong, Vice President, Investor Relations at F5]

A copy of today's press release is available on our website at f5.com, or an archived version of today's audio will be available through April 28, 2025. We'll post the slide deck accompanying today's webcast to our IR site at the conclusion of our call. To access the replay of today's webcast by phone, dial 877-660-6853 or 201-612-7415 and use meeting ID 1374 9373. The telephonic replay will be available through midnight Pacific Time, January 29, 2025. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com.

[Suzanne DuLong, Vice President, Investor Relations at F5]

Our discussion today will contain forward looking statements, which include words such as believe, anticipate, expect, and target. These forward looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non GAAP metrics during today's discussion. Please see our full GAAP to non GAAP reconciliation in today's press release and in the appendix of our earnings slide deck.

[Suzanne DuLong, Vice President, Investor Relations at F5]

Please note that F5 has no duty to update any information presented in this call. During today's call, Francois will speak to our Q1 highlights and our strategy and growth opportunities. Cooper will then review the details of our Q1 results and our outlook. I'll now turn the call over to Francois.

[François Locoh-Donou, President and CEO at F5]

Thank you, Suzanne, and hello, everyone. We are really pleased to share our robust Q1 results with you today. F5's alignment with significant secular trends, a more stable IT spending environment and our strong execution contributed to another record quarter. We delivered 11% total revenue growth, including 20% product revenue growth. Software revenue grew 22% and systems revenue grew 18% with strength from all geographies.

[François Locoh-Donou, President and CEO at F5]

Our revenue outperformance also drove Q1 non GAAP EPS of $3.84 a beat of $0.43 above the top end of our guidance range. The quarter's strength is multifaceted and reflects a continuation of the trends we observed in the second half of last year. First, we are benefiting from consistently strong expansion of our software subscription, many of which have exceeded our expansion forecast. 2nd, with a more stable IT spending environment, new software demand continues to grow as customers resume transformative and modernization projects. And 3rd, technology refresh activity is increasing, driving demand for both software and systems.

[François Locoh-Donou, President and CEO at F5]

Our pipeline shows these drivers will persist into Q2 contributing to our expectations for Q2 revenue in a range of $705,000,000 to $725,000,000 implying roughly 5% growth at the midpoint. In addition, reflecting our Q1 outperformance and our better than expected Q2 forecast, we are raising our FY 2020 5 revenue expectations to 6% to 7% growth, up from our initial guidance of 4% to 5% growth. Cooper will speak to our outlook in greater detail in just a few minutes. Before he does, I will spend a few minutes discussing F5's differentiation and highlighting some customer wins from Q1. Over the last several years, we have substantially reshaped F5 for the hybrid and multi cloud architectures of the AI era.

[François Locoh-Donou, President and CEO at F5]

With all its advantages, hybrid multi cloud also brings with it new challenges. IT teams are being overwhelmed by high cost, crushing complexity and escalating cyber risk, a set of challenges we call the ball of fire. As AI becomes ubiquitous, it will add fuel to the ball of fire requiring more capacity to handle massive amounts of data, more sophisticated traffic management to deal with complex traffic patterns and enhanced security capabilities to stay ahead of new security threats. Unlike competitors who invested solely in cloud or SaaS or significantly reduced investment limiting their applicability in a multi cloud world, over the last several years, F5 innovated across hybrid SaaS and next generation software and hardware. As a result, we stand alone with the only complete hybrid multi cloud portfolio for application security and delivery.

[François Locoh-Donou, President and CEO at F5]

We are the only player that can partner with a CIO or CISO to secure and deliver all of their applications and APIs across hybrid multi cloud environment. We are differentiated across 3 primary vectors. First, F5 has the most effective and comprehensive application and API security platform in the industry. We enable our customers to consolidate point products targeting specific threats onto a single integrated platform with a suite of best in class capabilities. A notable example of the power of our ability to consolidate multiple security point products comes in the form of a significant Q1 renewal and expansion with a major financial services customer.

[François Locoh-Donou, President and CEO at F5]

Along with the anticipated renewal and expansion of its sizable BIG IP and NGINX term subscription, the customer converged multiple security point solutions onto F5 adding SSLO and DDoS use cases. The result was a larger than expected expansion on what was already an 8 figure renewal. 2nd, F5's hybrid multi cloud strategy enables consolidation on a single vendor for app security and delivery. Only F5 delivers solutions that extend from customers on premise environment across public clouds to the edge. F5 simplifies connecting disparate infrastructure environments and the applications deployed in and across them.

[François Locoh-Donou, President and CEO at F5]

In Q1, a regional utility company in North America modernized its big IP application hosting, security and remote access infrastructure. The customer also deployed F5 Distributed Cloud Services to support its modern applications, displacing 2 F5 competitors and consolidating their traditional and modern applications and investment on F5. 3rd, F5 solutions streamline customers' operations with consistent policies, comprehensive automation and rich analytics. We enable customers to simplify their operational management across all environments. 1 of the largest private sector banks in APAC offers a great example of this dynamic.

[François Locoh-Donou, President and CEO at F5]

The customer has deployed F5's unified security policy displacing 2 point security competitors and consolidating on F5 for multiple use cases across their on premises, public clouds and Kubernetes environments, leveraging F5 in SaaS, software and hardware deployment models. F5 is vastly simplifying hybrid multi cloud complexity for customers. By converging multiple point solutions to address high performance traffic management, full web app and API security, multi cloud networking and AI gateway capabilities, we are empowering customers with simplicity and choice. F5 enables them to tame the ball of fire with the right mix of hardware, software and SaaS that best fits their operating model, deploying securely and consistently on premises, in the cloud or at the edge. F5's differentiated approach to hybrid multi cloud is also driving competitive displacement momentum across our full range of hardware, software and SaaS deployment models.

[François Locoh-Donou, President and CEO at F5]

In fact, in Q1, we achieved a record number of competitive displacement. These included a notable win with a home improvement retailer. Following a series of escalating challenges with its incumbent ADC provider, the customer is replacing them with F5 BIG IP, leveraging BIG IP's automation capabilities to support their application delivery infrastructure and to streamline operations. In another example of a competitive takeout in Q1, a leading American insurance provider and long time BIG IP customer chose F5's distributed cloud services to eliminate its growing security tools for all and reduce associated administrative burdens and costs. The customer is replacing their prior API protection provider with F5's distributed cloud services, web application and API protection or WAP solution.

[François Locoh-Donou, President and CEO at F5]

In doing so, they are enhancing their application and API security while consolidating tooling. Before I pass the call to Cooper, as I have in prior quarters, I will discuss the latest developments we see emerging with AI. In the last year, organizations across the globe have embraced AI as a strategic imperative. We expect that within 3 years, 80% of applications and processes will be infused with AI. There is evidence of this ramp in our own business with more than 50% of our F5 distributed cloud customers already leveraging our AI agent, which provides configuration assistance and insights.

[François Locoh-Donou, President and CEO at F5]

While AI promises to bring massive productivity benefits, it is also creating new compliance, infrastructure, networking and security challenges for customers. AI is already exacerbating the ball of fire and accelerating the pressure to simplify hybrid multi cloud deployments. Our early AI opportunities are concentrated on 3 areas of high performance data delivery and security. The dominant AI opportunity for F5 thus far is delivering and securing data for both AI model training and inference. AI model training requires high performance traffic management to ensure the efficiency, speed and reliability of lengthy and expensive training processes.

[François Locoh-Donou, President and CEO at F5]

Customers are using F5 BIG IP to move incredible amounts of data at high speed to and from their data stores, providing greater efficiency for the training process. AI inference is having a profound effect on infrastructure as well. When customers perform retrieval augmented generation or RAG as a part of inference, they see a sharp increase in the number of queries going to their data stores. As a result, these data stores experience congestion and latency slowing overall infrastructure performance. By deploying BIG IP in front of their data stores, customers are able to scale to handle the vast and increasing amounts of queries related to RAG.

[François Locoh-Donou, President and CEO at F5]

The result is improved availability and resiliency for their AI workloads. The second AI opportunity we see today leverages our market leading WAP solution for secure AI inferencing. APIs connect the AI ecosystem and AI APIs are subject to the same security challenges and vulnerabilities as traditional APIs. F5's WAP solutions protect hybrid and multi cloud applications with functionality that spans from API discovery to API security, which is essential for AI workloads. Customers are leveraging F5's complete security portfolio to protect their AI workloads, including BIG IP, NGINX and F5 distributed cloud services.

[François Locoh-Donou, President and CEO at F5]

We expect secure AI inferencing will become a bigger opportunity for F5 as organizations move from experimenting to leveraging AI inferencing at scale. The 3rd AI opportunity we are focused on is AI factory load balancing. Here, F5 is optimizing the performance and scalability of AI factories with advanced traffic management. We are doing this across AI factories and are working with partners toward deploying our solutions within AI factories. Across AI factories, customers are deploying BIG IP to improve the efficiency and performance of data going to and from massive GPU clusters.

[François Locoh-Donou, President and CEO at F5]

Within AI factories, and as we described last quarter, we have partnered with NVIDIA to ensure BIG IP NEXT for Kubernetes works seamlessly with NVIDIA's BlueField 3 DPUs. The combination of S5 BIG IP and NVIDIA's DPUs provides customers with improved performance, multi tenancy and observability. While it is early, we are seeing growing momentum with AI opportunities. I will share just a couple of wins from Q1. The first is with a net new customer, a large mobility platform in APAC who is using BIG IP for high performance data delivery.

[François Locoh-Donou, President and CEO at F5]

They selected F5 BIG IP to support their robust AI computing stack, addressing high velocity load balancing for AI data ingestion and replacing costly public cloud infrastructure. F5's SSL performance and compatibility with AI protocols with orchestration was a major factor in winning this customer. The 2nd Q1 AI win I will highlight is with a leading multinational bank headquartered in our EMEA region. The customer selected FI's BIG IP to secure, optimize and scale their AI applications. They are leveraging BIG IP for traffic management and WAF, ensuring efficient distribution and security of their critical AI and data infrastructure with seamless integration with their existing infrastructure.

[François Locoh-Donou, President and CEO at F5]

Now, I will turn the call to Cooper to elaborate on our results and outlook. Cooper?

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Thank you, Francois, and hello, everyone. I'll review our Q1 results before I elaborate on our Q2 and fiscal year 2025 outlook. As Francois noted, we delivered an exceptional Q1, growing revenue 11% to 766,000,000 dollars reflecting a mix of 52% global services and 48 percent product revenue. Global services revenue of $398,000,000 grew 3%. Product revenue totaled $368,000,000 dollars up 20% year over year due to a combination of strong software and systems growth.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Our software revenue grew 22% year over year to $209,000,000 reflecting exceptional expansion in several large multiyear subscription renewals as well as healthy growth in new software projects. Subscription based software revenue totaled $162,000,000 up 30% year over year, representing 78% of our total software revenue. Perpetual licensed software totaled $46,000,000 in Q1, up 2% year over year. Systems revenue totaled $160,000,000 up 18% year over year. Our systems revenue is benefiting from a number of factors.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

First, technology refresh momentum is building as customers refresh aging hardware estates. The refresh activity is now widespread. In fact, some of the quarter's most significant demand came from customers outside of our top 1,000 customers. A second factor that has begun to accelerate the pace of refresh for many customers relates to upcoming end of software support dates for our Viprion and I Series families. Having gained clarity on the need for a balance of both hardware and software solutions in hybrid multi cloud environments, customers are moving forward with plans to standardize on our next generation hardware offerings.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Lastly, our commitment to continuous innovation in both software and hardware is driving increased competitive displacement momentum and resulting in new customer wins. As we've discussed previously, we implemented a price increase on January 1st and we believe we did see a modest amount of systems orders pulled into Q1. Revenue from recurring sources contributed 72% of our Q1 revenue, reflecting 10% year over year growth. Our recurring revenue comes from a combination of our subscription based revenue and the maintenance portion of our global services revenue. Shifting to revenue distribution by region.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

As Francois noted, our teams drove growth across all theatres. Revenue from the Americas grew a strong 15% year over year, representing 56% of total revenue. EMEA grew 6%, representing 27% of revenue and APAC grew 6%, representing 17% of revenue. Looking at our major verticals, enterprise customers delivered another very strong quarter, representing 71% of Q1's product bookings. Government customers represented 16% of product bookings, including 4% from U.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

S. Federal. Finally, service providers represented 13% of Q1 product bookings. We also delivered strong Q1 operating results, driven by our robust revenue growth. GAAP gross margin was 81.7%.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Non GAAP gross margin was 83.9%. Our GAAP operating expenses were $421,000,000 Our non GAAP operating expenses were $356,000,000 Our GAAP operating margin was 26.8%. Our non GAAP operating margin was 37.4%, up 189 basis points from the year ago period. Our GAAP effective tax rate for the quarter was 20.4%. Our non GAAP effective tax rate was 21.8%.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Our GAAP net income for the quarter was $166,000,000 or $2.82 per share. Our non GAAP net income was $227,000,000 or $3.84 per share, reflecting 12% EPS growth from the year ago period. I will now turn to cash flow and balance sheet metrics, all of which remain very strong. We generated $203,000,000 in cash flow from operations in Q1. CapEx was $8,000,000 DSO for the quarter was 57 days.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Cash and investments totaled approximately $1,160,000,000 at quarter end. Deferred revenue was $1,950,000,000 up 6% from the year ago period, driven by our subscription software strength and very healthy maintenance renewals. In Q1, we repurchased $125,000,000 worth of VEPI shares at an average price of $2.55 per share. As of the end of Q1, we had $1,300,000,000 remaining on our authorized stock repurchase program. Our Q1 share repurchases represented 64% of free cash flow.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Finally, we ended the quarter with approximately 6,440 employees. I will now speak to our outlook for Q2. With the exception of revenue, my guidance comments reference non GAAP metrics. We expect Q2 revenue in the range of $705,000,000 to 725,000,000 dollars implying 5% year over year growth at the midpoint. As a reminder, and as we noted on our October call, U.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

S. Payroll tax resets and our large customer event in February significantly impact our Q2 expenses. This results in it being our seasonal low quarter for both gross and operating margins. We expect non GAAP gross margin of approximately 82.5% to 83%. We estimate Q2 non GAAP operating expenses of $362,000,000 to $374,000,000 We expect Q2 share based compensation expense of approximately $58,000,000 to $60,000,000 We anticipate Q2 non GAAP EPS in a range of $3.02 to $3.14 per share.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

In light of our strong Q1 results and our Q2 guidance, I will also provide an update to our fiscal year 2025 full year outlook. We are raising our FY 2025 revenue growth forecast to a range of 6% to 7%. This is up from our initial guidance for 4% to 5% revenue growth and reflects our outperformance in Q1 and our healthy pipeline heading into Q2. Given our strong Q1 performance and continued strong expansion trends, we now expect our software revenue to grow at least 10% in fiscal year 2025. This is up from the upper single digit range we spoke to last quarter.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

We continue to expect FY 2025 non GAAP gross margin in a range of 83% to 84% and non GAAP operating margin of approximately 35%. Our FY 2025 non GAAP effective tax rate estimate remains at a range of 21% to 23%. We are also raising our EPS outlook and now expect to deliver 6.5% to 8.5% non GAAP earnings growth in FY 2025, up from our prior guidance of 5% to 7% growth. Finally, we intend to continue to use at least 50% of our annual free cash flow towards share repurchases in FY 2025. With that, I'll pass the call back to Francois.

[François Locoh-Donou, President and CEO at F5]

Thank you, Cooper. To conclude, we are benefiting from our alignment with powerful secular trends. Most significant among these is our unique ability to address the crushing complexity of hybrid multi cloud. Unlike competitors who invested solely in cloud or SaaS or significantly reduced investment, we innovated across hybrid SaaS and next generation software and hardware. We are reducing complexity for customers by converging multiple point solutions to address high performance traffic management, full web app and API security, multi cloud networking and AI gateway capabilities.

[François Locoh-Donou, President and CEO at F5]

We are empowering customers with simplicity and choice, enabling them to choose hardware, software or SaaS and to deploy securely and consistently on premises in the cloud or at the edge. And we believe we are increasing our opportunity as a result. It's early still, but we also see building momentum with AI opportunities. Our industry leading ability to rapidly and securely move the large amounts of enterprise data necessary for AI model training and inferencing positions F5 as indispensable as businesses start to implement AI at scale. Operator, please open the call to questions.

[Operator]

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Tim Long with Barclays. Please proceed with your question.

[Tim long, Managing Director at Barclays]

Thank you. Just 2 if I could. First of all, could you talk a little bit about the AI business? I don't know if you can scale for us how big it is currently. But more importantly, if you can just touch on kind of the breadth of who you're selling into an AI and what type of customers are those large data centers, enterprises, government combination?

[Tim long, Managing Director at Barclays]

Anything there would be helpful. And then second, if you can just touch on kind of sustainability of the hardware systems business. It sounds like there might have been a little bit of pulling into the December quarter, but still pretty solid numbers. So where do you think we are with inventory or ability to keep those numbers going? It sounds like there are some share gains helping. Thank you.

[François Locoh-Donou, President and CEO at F5]

Thank you, Tim. Let me start with hardware actually, your second question on the sustainability. Look, we think we're going to have a pretty strong year on hardware, and we're seeing that because we have a strong pipeline on refresh activity. That's largely driven by the fact that a number of customers were sweating assets for a period of time. Their applications have been growing in capacity.

[François Locoh-Donou, President and CEO at F5]

They continue to deploy in hybrid multi cloud environments, and it's creating the need for more hardware. So we think hardware this year is likely to be in the double digit growth rate for the year. And in addition to that, we are in addition to growth within our existing customers in hybrid multi cloud environment, we're also continuing significant competitive displacements. I mentioned earlier on the call, one of the big home retailers was one of the competitive takeouts we had in the quarter. And we continue to see more opportunities of that because of the investments we've made in next generation hardware where competitors have not.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Yes. And Tim, one thing I'd also add on the supply front, we feel really good about our ability to fulfill this demand in the near term. No real constraints that we're seeing right now. We're largely onto newer generation platforms and we did a lot of work during the supply chain crisis in terms of developing a more resilient supply chain and base of partners. So we should be in really good shape from that perspective.

[François Locoh-Donou, President and CEO at F5]

Great. And then Tim, on the first part of your question on AI. So let me just frame, the opportunity that we're seeing for S5 in AI, there are really 3 categories of opportunity we're seeing. The first one is really moving data securely and at speed to and from data stores, both when model are being trained and need to access data from data stores or in inferencing where customers are inferencing with retrieval augmented generation. And the I would say the majority of the deals that we have done to date are really in this first category of opportunity.

[François Locoh-Donou, President and CEO at F5]

The types of deals that we have won are typically large enterprises that are either building AI factories or are deploying AI applications and typically have data on premise or have repatriated data from the cloud to their own on premises to be able to use it in these with these AI models. And they are across the board. It's really across Europe, Asia and North America. So we've had deals across all three geographies. The other 2 categories of opportunities, category 2 is really security, and it's really security in inferencing, and it's with our API security and API discovery solutions.

[François Locoh-Donou, President and CEO at F5]

We're starting to see opportunities there, but it's early days. And then the 3rd category is for load balancing traffic for AI factories, both inter cluster and intra cluster. Inter cluster is really load balancing the traffic in and out of AI factories. We would typically do that with our traditional ADC technology. And then as you know, we've announced the partnership with NVIDIA for traffic management intra cluster, though this is early days and we think that opportunity will develop longer term.

[Tim long, Managing Director at Barclays]

Okay. Thank you. And congrats Cooper on the new role.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Great. Thank you, Tim.

[Operator]

Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

[Meta Marshall, Analyst at Morgan Stanley]

Great. Thanks. Maybe just on if you could kind of help us size kind of the distributed cloud business at this point, just kind of given the growth that we've seen kind of in the API security cases that you were talking about? And then maybe second for Cooper, just you kind of had noted a more back half loaded year or Frank had maybe noted a back half loaded year last quarter. Just how are you kind of thinking about any seasonality to the year, particularly with just such a strong start to the beginning of the year? Thanks.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Sure. So I'll take the latter question. We saw obviously a pretty strong Q1. The tech refresh really picked up speed and we're seeing that broadly hybrid multi cloud is just driving an overall inflection in demand. Having said that, the large renewal base that we discussed for the second half of the year, that base is still the same base.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

So really when we're trying to look at the rest of the year, we're looking at how does Tech Refresh continue to play out and then how do expansion rates play out within that software base. Q1 was a very strong quarter for an exceptionally strong quarter for expansion and we referenced as an example a large 8 figure deal where we saw even better expansion than we had already anticipated. And that was really more to do with that customer choosing to converge multiple security solutions onto our platform. That's a trend we've been seeing across a number of our larger software customers. But having said that, that expansion that growth in the expansion rate that we saw in Q1 was fairly tied to a number of large customers.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

And it's early in the year, so we wouldn't necessarily further increase our expansion rate that we're assuming in the second half. We'll continue to engage closely with the larger customers that are in that second half base, but we already took the expansion rate up that we were assuming coming out of a strong finish to FY 'twenty four. And so it's something that we'll continue to track, but not necessarily making an assumption that that expansion rate should continue to go up in the second half.

[François Locoh-Donou, President and CEO at F5]

Thanks, Cooper. And Meta, to the first part of your question around distributed cloud, as you know, we distributed cloud is part of our SaaS and managed services portfolio. We shared that the total ARR for SaaS and managed services was roughly around $180,000,000 at the end of our fiscal year 2024. We haven't broken out Distributed Cloud within that, but it is in there and growing fairly rapidly. In fact, we passed an important milestone this quarter.

[François Locoh-Donou, President and CEO at F5]

We passed over 1,000 customers on Distributed Cloud. The vast majority, if not all of these customers are large enterprises. 2 thirds of them are roughly existing F5 customers that also adopted distributed cloud and about a third of them are net new customers. The trend I mentioned earlier about customers embracing hybrid multi cloud is also visible in the growth we're seeing in distributed cloud because a number of our existing customers who are using F5 for hardware or software on prem are also using us for software as a service because they get consistency of their security solutions, they get consistency of their app delivery solutions. And that's a strength for us, having invested in software and hardware and in SaaS, being able to consolidate spend on F5.

[François Locoh-Donou, President and CEO at F5]

In fact, this quarter, we passed the milestone where more than 20% of our top 1,000 customers are now using Distributed Cloud. So our largest customers around the world are also choosing F5 for SaaS, and that gives us a lot of comfort around the potential growth of the platform.

[Meta Marshall, Analyst at Morgan Stanley]

Great. Thanks. Congrats.

[François Locoh-Donou, President and CEO at F5]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

[Samik Chatterjee, Executive Director at JP Morgan]

Hi. Thanks for taking my questions and congrats on the results here. I guess, Francois, just sort of going off your earlier commentary and two questions as clarification. 1, you mentioned the refreshes that you're seeing largely on account of customers having sweat assets earlier. I mean, is that more as part of a broader refresh of customers doing broader refreshes of their data center?

[Samik Chatterjee, Executive Director at JP Morgan]

Or is there more something more specific related to their readiness for AI that's driving that? Can you just flesh that out a bit in terms of what's the trigger? We all know that customers, if they want to construct assets as long as they want or to at least to some extent. So is there necessarily sort of a trigger that's driving them to now refresh? And then secondarily, you talked about AI and over the last couple of days, you've seen a lot of more concerns around sort of the compute intensity going into pre training or training of AI models relative to probably more favorable sentiment now on how AI inferencing sort of shapes out.

[Samik Chatterjee, Executive Director at JP Morgan]

Can you just talk about sort of where do you see your leverage to in that sort of overall AI process and some rate of exposure to training versus inferencing? How would you sort of quantify that for us? Thank you.

[François Locoh-Donou, President and CEO at F5]

Thank you, Samik. Let me start with the first part around the refresh activity we're seeing. I think there are a couple of factors there, Samik. The first one is more of a general factor that is not F5 specific. I think there is a revitalization of data center capacity, data center builds that is in part driven by large enterprises preparing for having the right infrastructure for AI and in part driven by large enterprises also embracing hybrid multi cloud as not just the transient state, but the destination of where they're going to operate for the next decade and beyond.

[François Locoh-Donou, President and CEO at F5]

And I think that is driving strength in data center spend or data center infrastructure. And clearly, we are benefiting from some of that, but that's not F5 specific. There are factors around refresh that are specific to F5 that have to do with the fact that our customers over the last couple of years were very frugal in their refresh activity, very cautious, tried to sweat their assets as much as possible. And because of application growth and capacity growth, they kind of have to proceed with these refresh. And there are also some end of support dates that are coming in the portfolio in the 2026 time frame that also customers have to get ahead of and make sure that they do refresh.

[François Locoh-Donou, President and CEO at F5]

So those are, I would say, 2 factors driving the refresh pipeline and activity we're seeing. To your second question on AI, when you look at our opportunity, what we see the 3 categories of opportunity I described earlier for AI. The first one, which is really high performance data delivery to and from data stores. The vast majority of that opportunity is in retrieval augmented generation, which is inferencing for large enterprise. And so this one is unaffected by the discussion about how large will be the GPU cluster build outs in AI factories.

[François Locoh-Donou, President and CEO at F5]

And today, our immediate opportunity really, and I would say the majority of the deals that we have won are in that category. As it relates to the news from yesterday and the discussion from yesterday around the size and scale of AI factory build outs in the future, That's tied to our opportunity to go into load balance in front of clusters or even go inside of clusters and provide traffic management intra clusters. We are not yet you're very early days in that opportunity. We haven't yet started to actually drive revenue from that opportunity. We think it's a very sizable opportunity down the road, but it's very early days and frankly, too early for us to quantify it.

[François Locoh-Donou, President and CEO at F5]

In general though, I would say that the stance of F5 is the if in fact we can have more open source models that allow more enterprises to adopt AI faster and build their applications and it creates a faster proliferation of AI applications. That is really good news for F5 because it means that we will have more opportunity to do high performance data delivery for data stores and more opportunity to secure AI workloads. And if in fact, it is cheaper to build and train these models than we thought it would be, that is also good news because it will accelerate adoption of AI. So we're at this point, it's early days. I think we don't want to get too ahead of ourselves in terms of these opportunities because it's not yet meaningful or material to our revenues, but we are excited about the opportunities we're seeing and the engagements we're having with customers.

[Samik Chatterjee, Executive Director at JP Morgan]

Great. Thank you. Thanks for all that color. Thank you.

[Operator]

Thank you. Our next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

[Michael Ng, Analyst at Goldman Sachs]

Hey, good afternoon. Thank you very much for the question. I just have 2 as well. First, I wanted to ask about the perpetual revenue in the quarter. This is the, I think, 3rd consecutive year where you had a very strong seasonal fiscal 1Q.

[Michael Ng, Analyst at Goldman Sachs]

I was wondering if you could just provide a little bit more color there as it related to the financials expansion that you talked about. Is it indeed seasonality or should we think about this as a run rate? And then second, I can appreciate U. S. Federal is a small part of the business.

[Michael Ng, Analyst at Goldman Sachs]

I think you mentioned 4%. Could you just comment directionally? Was that strong? Was it weak? Any directional color would be helpful there. Thank you.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Sure. Yes. Thanks, Michael. I'll start on the perpetual question, speaking to our perpetual software results. And you're right, we have seen stronger results in our Q1.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Typically, customers that prefer a CapEx model have gravitated to our perpetual commercial model and we see that more pronounced in the service provider vertical, where we tend to see some of that investment coming in kind of near the end of the calendar year as part of their business model planning. So I don't know yet that we're ready to say this is kind of the new seasonality, but that we tend to see our largest strength in our fiscal Q1. And I think this really does point to the flexibility that we give customers in terms of the commercial models that best fit their business model. It's something that has really helped continue to drive differentiation in our software opportunity.

[François Locoh-Donou, President and CEO at F5]

And I can take your question on the federal business. Look, 4%, it's an important, of course, part of our business, but a relatively small component overall. We our business in Q1 in the Fed was pretty solid. Our pipeline looks very healthy. And so there of course, there for everybody that's doing business with the federal government, there's some level of uncertainty at this point in time with the change in administration.

[François Locoh-Donou, President and CEO at F5]

But generally, we had a pretty good Q1 and the pipeline looks healthy.

[Michael Ng, Analyst at Goldman Sachs]

Excellent. Thank you, Cooper. Thank you, Francois.

[François Locoh-Donou, President and CEO at F5]

Thank you.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Tal Liani with Bank of America. Please proceed with your question.

[Tal Liani, Analyst at Bank of America]

Hello, can you hear me?

[François Locoh-Donou, President and CEO at F5]

Yes.

[Tal Liani, Analyst at Bank of America]

Good. I have two questions. Some of them were not, but I want to ask it in a different way. So you're increasing the guidance for the year by about $40,000,000 $50,000,000 dollars and you beat the numbers for this quarter, dollars 50,000,000 beat and the 2nd quarter has a $10,000,000 beat. So the growth in the annual guidance is in line slightly below the Q1, Q2.

[Tal Liani, Analyst at Bank of America]

And the question is, is there something special in Q1, Q2 as it brings things forward and that or is it just conservatism that they're not willing now to make a call on second half? The second question Sorry, should I continue or should

[Cooper Werner, Chief Financial Officer at F5 Inc.]

I Sure, go ahead.

[Tal Liani, Analyst at Bank of America]

Second question is on software. And I want to I'm trying to separate new software from renewals because when you renew contracts, you recognize 62% upfront. So and the way that accounting works is between in a 3 year contract, between 3 year year 3 year 4, which means the renewal, there's a very big jump in revenues because only the leftovers are left for 3rd year and then there is upfront recognition in the 4th year. So the question is, can you separate off the software growth that we're seeing, phenomenal software growth, can you separate how much of it is because of accounting and renewals and how much of it is because of real growth, growth with customers, new kind of use cases for products, etcetera. I just want to because we're talking about renewals, I just wanted to have the understanding of kind of old revenues versus new growth opportunities.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Sure. I guess I'll probably take both of them and Francois, you can jump in. Let's start with the software question. So you're right, the number one vehicle that we sell software in is what we call our flexible consumption program. These are the large multi year subscriptions that we sell both as a for license based offering or deployable based offerings as well as SaaS based offerings.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

But the deployable offering is the larger opportunity and that is where you get that upfront revenue recognition of 63% typically if it's a 3 year deal and then the remainder is recognized as service revenue over time. And so that is you are speaking to the dynamic of why our software revenue is not a smooth growth trajectory. And so we get a lot of questions around that is that speak to the predictability and the visibility we have in software. And the reality is we do have pretty good visibility in the software opportunity. But because of the how the revenue is recognized with ASC 606, you do get some lumpiness in the growth rates.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

And so we've had quarters where the growth rate on the headline revenue number was a bit lower than the underlying strength of the business. And then there are quarters where you've got large opportunities at renewal where you do have an upfront revenue recognition. And so that's something when we talk to the longer term software growth opportunities, that's something that eventually kind of smooths out. But in any given quarter, you're going to see some degree of lumpiness. Now having said that, looking at what's behind the strength that we saw in this quarter, clearly we saw upside to the reported revenue from software compared to how we had guided for the quarter.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

And that was really driven by the very strong expansion we're seeing at that time of renewal across those large subscription offerings. And this is really customers that are converging multiple solutions onto our platform. So we're winning at a higher rate in the marketplace and we're seeing customers do a lot more with that 5 across our portfolio and that's really what's behind that strength and it's what has allowed us to take our guide up for the full year for software.

[Tal Liani, Analyst at Bank of America]

Got it.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

And then I would also note that we did also see growth from new software projects, where we had said going into the year that we were assuming revenue from new projects would be roughly flat year over year and when we saw healthy growth in Q1. And so that's something we'll continue to monitor over the course of the year.

[Tal Liani, Analyst at Bank of America]

Great. And about the second half question?

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Yes. So the guide for the full year, and we had said that it would be low single digit growth in the first half and mid single digit second half. And so we saw strength in Q1 that was both on hardware and software. We did note that there was likely some pull in of demand into Q1 related to the pricing increases. We don't think that was the headline on the software, the hardware growth, but that was some of it.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

So as we look ahead to the back half of the year, we are factoring that in a little bit. But on the software side, as I said on a prior question, the base against which we assess that growth opportunity in the second half year, it's the same base. And so that's something that if we continue to see exceptional expansion rates on that base, we could see a better outcome from a revenue perspective. But given that it's early in the year and that a lot of that strength was really kind of more pronounced across some of our largest deals in Q1, we think it would be a little bit premature to just assume that same level of expansion in second half of the year, but we'll continue to engage closely with those customers and we certainly see the opportunity.

[Tal Liani, Analyst at Bank of America]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Amit Daryanani with Evercore ISI. Please proceed with your question.

[Amit Daryanani, Senior Managing Director - Equity Research at Evercore]

Yes. Thanks a lot. I have 2 as well. I guess maybe just started on the systems side. You folks had really good 18% growth year over year on the systems side.

[Amit Daryanani, Senior Managing Director - Equity Research at Evercore]

How much of that do you think was driven by pull ins ahead of the price increases that you're implementing? And if you just quantify what sort of price increases went into got implemented on Jan Post, that would be helpful.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Sure. Yes. So it was a modest I mean, it's kind of hard to fully break that out. But as we worked our sales teams, our view is that it was a modest amount of pull in. It wasn't super material to the results, but we did want to acknowledge that there likely was some demand pulled in.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

These price increases are kind of mid single digits across hardware and software. So they're not at the same magnitude that of previous price increases we saw in the systems business where we saw a more pronounced pull in of demand.

[Amit Daryanani, Senior Managing Director - Equity Research at Evercore]

Got it. And then if

[Amit Daryanani, Senior Managing Director - Equity Research at Evercore]

I just go back to that software discussion you're having a minute ago, the way you folks are guiding at this point, it looks like 22% growth in Q1 and then you see some fairly notable deceleration as the year progresses to hit that at least 10%. Is that kind of deceleration just conservativeness because you don't know what the expansion metrics could look like, the new projects could look like? Or is there something more new on that's happening in the next few quarters that we should be aware about?

[Cooper Werner, Chief Financial Officer at F5 Inc.]

No. I mean, I think you could say that maybe we're being prudent. The last couple of quarters, the expansion rate has been well ahead of our historical norms. Again, because it's so early in the year and it tends to be centered around our larger deals, I think that we're just being a little bit, wanting a little bit more time to really assess do those expansion rates continue to go up through the year. But as I said, it's the same base of opportunity that we see in the second half of the year as when we originally put together our guidance. So what you're really seeing is just the strength that we saw in Q1 against what we had previously said would be kind of more flattish to low growth on the software side.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

And given the strong expansion rates we saw on those largest customers, that's where the strength is coming through in Q1.

[Amit Daryanani, Senior Managing Director - Equity Research at Evercore]

Got it. Thank you.

[Operator]

Thank you. Our next question comes from the line of Matt Hedberg with RBC. Please proceed with your question.

[Matt Hedberg, Managing Director & Software Research Analyst at RBC Capital Markets]

All right. Thanks for the question. I have 2 as well. Maybe the first one, just a point of clarification on some of the improving IT spending trends that you mentioned. I guess, Francois, I guess specifically, did you see any change in enterprise buying behavior in the U.

[Matt Hedberg, Managing Director & Software Research Analyst at RBC Capital Markets]

S. Post the presidential election, I guess, is the first question?

[François Locoh-Donou, President and CEO at F5]

I want to say no. However, I mean, our quarter, as you know, started on October 1 and ended on December 31. So the presidential election was in the middle. Our quarter is typically back end loaded. So naturally, we would have expected significant amounts of our bookings to come after the presidential election.

[François Locoh-Donou, President and CEO at F5]

But we cannot point to that being a factor because the pipeline going into the quarter was pretty strong. And it was more of a continuation and a bit of acceleration of trends that we actually had seen in the last quarter of fiscal 2024, really around customers embracing hybrid multi cloud and wanting to invest in data center capacity to support application growth.

[Matt Hedberg, Managing Director & Software Research Analyst at RBC Capital Markets]

I got it. Okay. That's helpful. And then maybe just an AI question for me. You talked a lot about on your prepared remarks.

[Matt Hedberg, Managing Director & Software Research Analyst at RBC Capital Markets]

And I guess digging into a little bit more, the other big topic and I don't it didn't come up in this call, it really does feel like AgenTek AI is kind of changing the way. We think about Gen AI and how organizations think about workflow and automation. You guys obviously have a focus on app delivery and API security, etcetera. Do you think an AgenTek AI tailwind could start to emerge as that technology proliferates amongst customers?

[François Locoh-Donou, President and CEO at F5]

Well, the in terms of F5, yes, because the more AI applications and agents are part of that exist, that means the more data needs to move between data stores and these agents or these models. And it also means that it's way more APIs to secure and way more AI modules that require security. So for us, an AgenTic world where also drives more complexity, so I should step back a little bit. When we talk about hybrid multi cloud, we framed that before as this ball of fire, meaning customers have more and more applications or components of applications that are distributed across multiple cloud environments and or multiple infrastructure environments. And they have to connect all these application or app components together.

[François Locoh-Donou, President and CEO at F5]

They have to secure them. And it is complex to do that across multiple infrastructure environments. And that's what we call the ball of fire, and that's what's driving customers enterprise customers to sometimes consolidate spend on a player like F5 that can provide security and delivery across all of these environments and simplify the process of securing and delivering across hybrid multi cloud. Now if you think about an Agensix world, this is one where AI applications are going to calling agents that are, of course, in a different infrastructure environment. Sometimes folks don't even know where that agentic application resides.

[François Locoh-Donou, President and CEO at F5]

And so it creates even more complexity around hybrid and multi cloud environment, and it creates even more need to secure those applications across all these environments. And so that exponential growth in complexity that could come from an AgenTic world is actually tailwind to a company that solves the ball of fire and solve that complexity. So we feel that, that could be significant tailwind, but it's very early days for us in AI. And as you know, and as we have found out over the last several days, we continue to learn something new every week about AI. So we have to remain both excited but also humble about the opportunity.

[Matt Hedberg, Managing Director & Software Research Analyst at RBC Capital Markets]

Great, great perspective. Congrats on the result, guys. Thanks.

[François Locoh-Donou, President and CEO at F5]

Thank you.

[Operator]

Thank you. Our next question comes from the line of James Fish with Piper Sandler. Please proceed with your question.

[James Fish, Director & Equity Research Analyst at Piper Sandler Companies]

Hey guys. Cooper, I don't want to dwell on this, but I think what we're all trying to get at here is these were impressive results, the largest peak we've seen out of F5, I think ever. Can you help us understand the differences in terms of what's driving the sustainability here? How do we think about you talked about the mid single digits on pricing across systems and software, how to think about also the Citrix share gains, the budget flush, the pull in, the large yield and refresh. Just help us level set what the sustainable kind of longer term vision here is for growth?

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Sure. I mean, I'll start with kind of what the underlying driver is that's really kind of lifting all facets of our revenue base and that's the complexity that we resolve for customers with hybrid multi cloud environments. And so we're seeing that show up in the software business and the hardware business and the services business. On the software side, what it's really manifesting in expansion. And so and that is something that we do think is durable.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

It's accelerating that rate of expansion across portfolio. That is something that we think is very sustainable and that we think long term is really going to benefit our software opportunity. Now as we've noted, when you see strong expansion across large customers with multiyear software agreements, you see a large upfront recognition of that software opportunity. And so that's where it can get a little bit spiky when you start to see an acceleration in that rate of expansion. But we're also seeing it across the hardware business where as Francois noted, customers recognizing that hybrid multi cloud is their destination.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

That's the environment they're going to be working within over time, has led them to recognize the need to continue to invest in both systems and software solutions. And we are the only player that is invested across all form factors and continued in particular to invest in the systems in what with what we brought to market in our new generation of appliances. And so that's really what's sustainable about the opportunity. Now, of course, there's going to be some spikiness and whether that's some price pull in that we may have seen in the current quarter, which we don't think was super material, but there is a little bit of that in terms of the timing of the rev rec on the software expansions. But broadly, the underlying theme is something that we think will continue to help drive the revenue opportunity for us over time.

[James Fish, Director & Equity Research Analyst at Piper Sandler Companies]

Got it. And then you guys used to talk about F5 is having roughly 200,000 systems, and we think about refreshes every 5, 7 years on average. Obviously, the supply chain stuff changed a lot of things. Are we starting to see that, call it, 50000, 60000 cohorts or even more create a bigger bulge and that's what's giving you guys the confidence around double digit hardware refresh this year? I'm sorry, double digit hardware growth this year?

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Yes, that's certainly part of it. It's not so much that the bulge is bigger, it's just that the bulge is a lot closer to us now. And that's where we referenced the end of software support dates that are pending in FY 'twenty six and 'twenty seven and that those really are associated with 2 product families that are more than half of our installed base today. And so customers really look to start planning in advance of those dates and every customer is different. Some will look to drive those refreshes much earlier like well ahead of those dates.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Other customers may run right up to those dates, but that's where we're seeing kind of more near term visibility on the size and shape of what that tech opportunity could look like and we think it extends well beyond the current year at least through FY 'twenty six.

[James Fish, Director & Equity Research Analyst at Piper Sandler Companies]

Thanks.

[Operator]

Thank you. Our next question comes from the line of Simon Leopold with Raymond James. Please proceed with your question.

[Victor Chiu, Equity Research Associate - Telecom & Technology at Raymond James Financial]

Hi, guys. This is Victor Chiu for Simon Leopold. I just wanted to follow-up on the earlier question that someone asked around the specific triggers around the system refreshes. It makes sense that these large customers have been sweating assets for quite a while. But I guess it's just surprising the timing around how they're kind of aligning together.

[Victor Chiu, Equity Research Associate - Telecom & Technology at Raymond James Financial]

So I guess was there some specific dynamic that caused the that triggered these upgrades to kind of align around the same time and kind of what was the delta, I guess, versus your expectations previously, I guess?

[François Locoh-Donou, President and CEO at F5]

Well, I would say, first of all, we had said already at the start of the year, and in fact, I think we said it during the summer of 2024 that we expected 2025 to be a stronger year for hardware after 1.5 years where customers were sweating assets. So we have said we expected growth in hardware this year. And so we now expect growth in hardware to be actually stronger than we thought at the beginning of the year. And that is because the refresh activity and the expansion activity and the takeout rates of competitors is stronger than we anticipated. If you go back to the root cause of that, we think it's really driven by customers embracing their hybrid multi cloud architectures, realizing they need more capacity in their data centers and therefore we're getting expansion both refresh and expansion on that.

[François Locoh-Donou, President and CEO at F5]

We're also getting a number of customers consolidating use cases on F5. So we have a number of customers this quarter that chose F5 to consolidate multiple security use cases and displaced other point security vendors and go on to F5. That's driven by the investments we've made in security and the next generation software and hardware over the last several years. All of that's coming to align on the opportunity for us to on both on our systems business and on our software business.

[Victor Chiu, Equity Research Associate - Telecom & Technology at Raymond James Financial]

Okay. So given that dynamic, I mean, does your expectation around systems growth over the long term change given these dynamics? Or do you still expect over time that systems continue to decline? Is that your expectation?

[François Locoh-Donou, President and CEO at F5]

Look, what we have said we're not here to give long term guidance. But what we have said is that over time, we expected that more and more customers would move towards adopting more software in their environment. That said, I'd say a lot of these customers, the majority of customers are actually deploying software and hardware in their environment. That's why we talk about hybrid multi cloud. They want the flexibility to deploy the software in different places, but they continue to deploy hardware.

[François Locoh-Donou, President and CEO at F5]

So over time, the trajectory of the hardware business is our views on that haven't changed. Of course, AI and the AI use cases I mentioned earlier are a bit of a wildcard on that. It's too early to know what impact they have on the trajectory of the hardware business. But we are starting to see some opportunities for hardware related to AI and that could have some impact down the road on the long term trajectory of the business.

[Victor Chiu, Equity Research Associate - Telecom & Technology at Raymond James Financial]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from the line of Matt Dusser with Needham and Company. Please proceed with your question.

[Matt Dezort, Principal at Needham & Company]

Great. Thanks for taking the question and congrats on the results guys. I guess, Francois, on that AI opportunity you were just talking about, I guess, what visibility do you guys have to those initial opportunities? Where are we at in the rollout of those? Can you talk a little bit about your go to market for these AI opportunities, whether that's requiring any incremental investment?

[Matt Dezort, Principal at Needham & Company]

And how are you winning these opportunities? And who are you seeing? Thanks.

[François Locoh-Donou, President and CEO at F5]

Thank you. So there's a bundle of questions there. I'll try and hit all of them. The let me start by saying, I am very cautious when I speak to our opportunity in AI because I feel things are developing very quickly and there's always new learnings. And frankly, there is the body of data that's available to us to make pattern recognition and long term projections is those samples are very small today.

[François Locoh-Donou, President and CEO at F5]

That said, we are the kinds of deals that we are winning right now are generally large enterprises. And as you know, F5 is a company that is focused on large enterprises. So this is where our account teams are already working and having relationship with customers. We are typically winning these opportunities either because our traditional customers are deploying the infrastructure for AI or because the folks deploying AI infrastructure get to know about F5 from their internal stakeholders who deploy F5. We haven't had to make very significant departures from our existing products to date because our existing products are ideal for securing and moving significant amounts of data at speed in this environment.

[François Locoh-Donou, President and CEO at F5]

And so it's a fairly straightforward go to market motion for our existing account teams both to find these opportunities and to prosecute these opportunities with our existing solutions. Now going forward, as we learn more about these environments, we may make some targeted customizations, development, etcetera, for these opportunities, but that will come down the road. In terms of the competitive landscape, again, we stand alone in having made the investment in both software and hardware for hybrid multi cloud environment. These AI architectures are inherently hybrid and multi cloud because you have data that can reside on prem or in the cloud. You have AI models that are largely in public clouds today, but some enterprises are starting to deploy AI applications on prem.

[François Locoh-Donou, President and CEO at F5]

And so you do need the ability to connect these environments together and solutions that operate across them. We're very uniquely positioned to serve those needs. And that is why we have a good win rate on the opportunities that we have engaged to date. Have I addressed all of the elements of the question?

[Matt Dezort, Principal at Needham & Company]

Yes. Thanks, Francois. And then I guess on the competitive environment, it sounds like things are really opening up for you guys. Anything you can give us on the pipeline of opportunities there? How are win rates trending for hardware as well as in cloud with NGINX and DCS?

[Matt Dezort, Principal at Needham & Company]

Do you anticipate any changes to the competitive opportunity as you take up prices here in January?

[François Locoh-Donou, President and CEO at F5]

We don't anticipate changes to our competitive opportunity as it relates to prices. As well as to your first part of your question, I would say in the software and hardware ADC market, we feel very, very good about our competitive position, which is the result of several years of investment in next generation software and hardware going against competitors that chose not to do that. And so large customers, as you know, ADCs are extraordinarily sticky as a technology. And despite that, we are able to take out some estates that are pretty significant in large Fortune 500 Companies. So we continue to feel very good about that, and we think that opportunity, a lot of it is still in front of us and will continue.

[François Locoh-Donou, President and CEO at F5]

In distributed cloud services, we are early. We are an attacker. We are very happy that we just passed 1,000 customers there. We went from 0 to 1,000 customers in roughly 30 months. All enterprise customers, all paying customers, of course.

[François Locoh-Donou, President and CEO at F5]

And our the maturity of our platform is growing every quarter and we expect to become more and more competitive over time and increase our win rate over time.

[Matt Dezort, Principal at Needham & Company]

Fantastic. Thanks guys. Congrats again.

[François Locoh-Donou, President and CEO at F5]

Thank you.

[Cooper Werner, Chief Financial Officer at F5 Inc.]

Thank you.

[Suzanne DuLong, Vice President, Investor Relations at F5]

Thanks Matt.

[Operator]

Thank you. And as our last question, we'll have Sebastien Najee from William Blair. Please proceed with your question.

[Sebastien Naji, Equity Research Associate at William Blair]

Okay. Well, I guess, thanks for squeezing me in. I think a lot of my questions have been sort of asked and answered. So maybe just one for me and somewhat of a pointed question. Could you perhaps update us on your CDN product that came out of the Lilac cloud acquisition?

[Sebastien Naji, Equity Research Associate at William Blair]

And maybe talk a little bit about how much success you're having here? That seems to be a space that is growing very fast right now. And I'm just wondering if this is a part of that DCS business that could be inflecting or growing more rapidly here in the near future?

[François Locoh-Donou, President and CEO at F5]

Well, thank you, Sebastien. We are yes, we let me bring a clarification here. We did bring lilac and now CDN capability into our overall distributed cloud services platform. You're absolutely right about that. And we did that not because we want to go and compete in the CDN market as a principal in the CDN market.

[François Locoh-Donou, President and CEO at F5]

We feel that is well served with strong players in the market like Akamai. But we did that rather because we have a number of customers that want the security capabilities from a size like web app firewall, API security, DDoS protection, things like web app scanning, etcetera. And at times, want that bundle with some caching capability. And so we felt it was important that we'd be able to offer the entire bundle to them. And I mentioned we have passed 1,000 customers earlier.

[François Locoh-Donou, President and CEO at F5]

A number of these customers actually took a full bundle that includes our CDN capability into the solution that they're purchasing from F5. But generally, customers don't come for a F5 looking for a CDN. They come for a F5 looking for a bundle of capabilities, security, of course, that includes a CDN. And on that, we're doing well with the solution that we got from lilac.

[Sebastien Naji, Equity Research Associate at William Blair]

Got it. Makes a lot of sense. Congrats on the quarter again. Thanks.

[François Locoh-Donou, President and CEO at F5]

Thank you so much.

[Operator]

Thank you. And there are no further questions at this time. I would like to turn the floor back to CEO, Francois Lecaudanou for closing remarks.

[François Locoh-Donou, President and CEO at F5]

Well, thank you for joining us. We look forward to seeing many of you during the quarter and to discussing our hybrid multi cloud and AI opportunities. Thank you.

[Operator]

Thank you. And this concludes today's conference and you may disconnect your line at this time. Thank you for your participation.

Participants

Executives

• Suzanne DuLong, Vice President, Investor Relations
• François Locoh-Donou, President and CEO
• Cooper Werner, Chief Financial Officer

Analysts

• Tim long, Managing Director at Barclays
• Meta Marshall, Analyst at Morgan Stanley
• Samik Chatterjee, Executive Director at JP Morgan
• Michael Ng, Analyst at Goldman Sachs
• Tal Liani, Analyst at Bank of America
• Amit Daryanani, Senior Managing Director - Equity Research at Evercore
• Matt Hedberg, Managing Director & Software Research Analyst at RBC Capital Markets
• James Fish, Director & Equity Research Analyst at Piper Sandler Companies
• Victor Chiu, Equity Research Associate - Telecom & Technology at Raymond James Financial
• Matt Dezort, Principal at Needham & Company
• Sebastien Naji, Equity Research Associate at William Blair