President, Chief Executive Officer and Director at F5
Thank you, Suzanne, and hello everyone. Thank you for joining us. In my remarks today, I will speak to our Q1 highlights as well as our expectations for Q2. Frank will then review the details of our Q1 results and provide some additional color about our outlook.
Q1 was our third consecutive quarter of stability, with the quarter and individual deals playing out largely as expected. We are not yet hearing that customers' budgets are increasing, but the more predictable spending patterns are encouraging. Our team delivered another solid quarter with consistent performance across our geographic theaters. We had a strong performance from our service provider vertical, which correlates to unusually strong perpetual license software revenue in the quarter. This is likely less indicative of service provider trends overall and more of a reflection of F5's position in some key projects.
We delivered Q1 revenue above the high-end of our guidance range. In addition, our continued operating discipline enabled us to deliver non-GAAP operating margins of 35.5%. This is up more than 900 basis points from the year-ago period. As a result of these factors and the modest tax benefit, we also delivered non-GAAP earnings per share growth of 39% with EPS of $3.43 per share, well above the high-end of our guidance range.
Our customers are still watching their budgets closely. As we look ahead, we are encouraged by several factors including better predictability from customers, improving systems demand, and the fact that some customers are making decisions that investments need to happen now. We are cautiously optimistic that these factors signal an easing of the extreme customer spending caution that characterized last year. And in fact, we are seeing stronger underlying demand. Because of the backlog headwind we face in FY '24, despite improving demand signals, we expect our Q2 revenue will be down low-single-digits from Q2 of last year. Francois will discuss our outlook in greater detail in a few minutes.
As little as five years ago, nearly every large enterprise organization expected that they would move their application environments from on-premises to the public cloud or SaaS. They also expected that doing so would dramatically simplify their operations and reduce costs. Instead, today, customers are grappling with a more intricate and costly set of challenges than ever before. In our most recent State of Application Strategy research, 88% of our customers report they are currently operating applications across on-premises and cloud environments. The same research found that 38% of organizations are hosting their applications in six different types of environments.
The expanding number of applications across distributed environments demands specific expertise and tools for each environment, which adds cost and operational complexity. At the same time, this expanded landscape provides cybercriminals with more potential targets, amplifying security concerns. This complexity is further intensified by the rapid growth in the number of applications, a growth trajectory that is poised to accelerate significantly with the widespread adoption and proliferation of AI. We firmly believe that F5 is strategically positioned to support our customers as they navigate these escalating challenges across a rapidly evolving landscape. Our innovation and product portfolio evolution over the last several years has been aimed at addressing exactly these challenges.
Before I pass the call to Frank, I will speak to some customer highlights from the quarter. Our F5 BIG-IP family serves traditional applications either on-premises, co-located, or in cloud environments. BIG-IP's data plane performance, automation capabilities, and seamless integration into public cloud environments continues to differentiate it from competitors. Our commitment to innovation and to providing customer flexibility through a range of consumption models also has enabled us to continue to gain share in the traditional ADC space. BIG-IP's capabilities drove a significant win in Q1 with a North American service provider. The customer is now deploying F5 cloud-native software at scale in its 5G architecture.
Over the last five years, we have invested to modernize BIG-IP and to deliver industry-leading container-native functions to scale and secure 5G cloud infrastructures. These investments made this win possible. Modern F5 BIG-IP software is now powering the growth from this provider's consumer 5G handset demand and securing its overall fixed wireless access offerings, the fastest growing 5G service in North America.
Turning to F5 NGINX, which serves modern container-native and microservices-based applications and APIs. We continue to see large enterprises adopt NGINX for our cloud and Kubernetes-based applications. As those applications scale, we are seeing our NGINX opportunities scale as well. In addition, customers are also leveraging NGINX for app layer security for containers. In Q1, an APAC-based auto manufacturer selected NGINX Plus with App Protect to power and protect its next-generation connected car data and service offering.
Beyond the standard car-related maintenance information, the customer is empowering a range of vehicle-related services from traffic management and statistics to fleet management and automated insurance claims. The customer envisions providing rich, data-enabled services including traffic data to government agencies for road maintenance and enabling automated insurance claim filing using telemetry and location data. The customer selected NGINX for this ambitious project because of its unique ability to implement WAF [Phonetic] for containers on AWS, as well as its ability to support specific requirements that could not be met by native cloud services.
F5 Distributed Cloud Services is a portfolio of SaaS and managed services, which we have built from a combination of organic and inorganic efforts. The platform will have its second birthday shortly and continues to gain traction with customers as a result of its flexibility and strong capabilities. We are intercepting two exciting growth categories with Distributed Cloud, Web App and API Protection, or WAAP, and the emerging opportunity in Secure Multi-Cloud Networking. In fact, we have seen explosive growth in the number of attacks blocked by Distributed Cloud's WAAP capabilities with the number of blocked attacks growing more than 100% in Q1 from Q4.
In one WAAP win from the quarter, a large U.S.-based financial institution selected F5 Distributed Cloud Services to solve its challenge of application security in hybrid cloud. The customer leveraged our Flexible Consumption Program, adding API Discovery and Protection to manage the many fintech aggregator applications that access their financial data through APIs. F5 Distributed Cloud Services is also gaining traction in API security. In just the last 12 months, we have observed a substantial increase in the volume of API attacks. 95% of customers surveyed for our State of Application Strategy report say they have deployed an API gateway.
This is a significant increase from 2019 when only 35% had deployed one. In fact, 92% of the total attacks mitigated by Distributed Cloud in Q1 were targeted toward APIs. That is up from 73% in Q4. As an example of an API security win in Q1, following multiple service impacting outages, a service provider in our APAC region selected Distributed Cloud to replace their prior API security vendor. Distributed Cloud's multi-cloud networking capabilities are making it possible for the customer to switch between public clouds when necessary while providing visibility and reporting via a single pane of glass.
F5 Distributed Cloud Services is also gaining traction in Secure Multi-Cloud Networking use cases. In another example from Q1, a global provider of traditional and digital learning resources deployed Distributed Cloud Services. The customer was looking for consistent application-level security, multi-cloud scalability, and networking. Distributed Cloud enabled them to simplify their infrastructure, strengthen management of their multi-cloud architecture, and improve application security. They also deployed multiple F5 Customer Edge software instances in their cloud infrastructure and in their on-premises data center, enabling them to meet an aggressive cloud migration schedule. I will spend just a few minutes talking about the opportunity we see emerging with AI applications.
AI will accelerate the growth in the number of applications and APIs. We are seeing the start of this already in the form of AI models and new AI-driven services becoming available from startups and established tech companies alike. We expect that as enterprises ramp adoption of AI over the next one to two years, that adoption will bring with it a flood of new enterprise applications that leverage those AI models and the APIs of the new AI-driven services.
These AI-powered applications differ from typical applications in several important ways. First, they are API-driven, both in terms of leveraging the APIs of third-party AI models and services, and also in terms of exposing their own capabilities as APIs for downstream use. Thus, API security for these AI-powered apps is critical. Customers tell us that API security is the top security service in use or planned for use to protect the integrity of AI and machine learning models. Customers also tell us that AI is driving demand for a comprehensive API security solution, inclusive of DDoS protection, bot detection, and data masking and leak protection.
Second, AI-powered applications tend to be comprised of many different components and data sources, which are distributed across hybrid and multi-cloud environments. F5 is an AI enabler. Effectively optimizing, managing, and securing AI applications and the APIs that connect them demands a blend of specialized expertise and capabilities that align seamlessly with our solutions portfolio. We are the application and API expert with a deep understanding of the needs of demanding applications built over decades. This expertise and the capabilities of F5 Distributed Cloud Services is a powerful combination, particularly as customers begin to deploy real life AI use cases.
During Q1, we secured a win that highlights the synergies of our product families and showcases how F5 supports and enables AI-driven use cases. An EMEA-based service provider selected the combination of F5 Distributed Cloud Services and BIG-IP to secure and deliver a first-of-its-kind AI-as-a-service offering for their B2B customers. After comparing F5's capabilities to alternatives, the customer determined only F5 can meet the security and scalability requirements needed to deliver their offering in a cost-efficient way. These real-life use cases offer a view to how we are enabling customers to secure, deliver, and optimize their applications and APIs, and how we simplify the challenges of operating in a complex hybrid multi-cloud world.
Now, I will turn the call to Frank. Frank?