F5, INC. Q2 FY2025 earnings call

Key Points:

• Francois highlighted F5's continuous innovation and technology leadership as drivers of strong Q2 results, with 7% total revenue growth and 18% year-over-year growth in non-GAAP EPS.
• Introduced the F5 Application Delivery and Security Platform, which converges load balancing, traffic management, and app/API security.
• Discussed AI-related innovations including the AI gateway, support for the Model Context Protocol (MCP), and wins in AI use cases across data delivery, access to AI models, and AI factory load balancing.
• Mentioned customer wins in various regions leveraging F5's solutions for data center modernization, security, and AI-powered applications.
• Cooper reviewed Q2 results, noting global services revenue grew 3%, product revenue up 12%, strong cash flow, and balance sheet metrics, including record cash flow from operations, low CapEx, and strong deferred revenue.

F5 delivered 7% total revenue growth, with 12% product revenue growth. Systems revenue grew 27%, while software revenue was flat year-over-year. Recurring revenue contributed 72% of Q2 revenue. Product revenue accounted for 46% of total revenue, with systems revenue making up a significant portion and software revenue flat. The company's global services revenue grew 3%, and product revenue was up 12% year-over-year.

Forward-Looking Statements:

• Q3 revenue is expected to be in the range of $740 million to $760 million, implying ~8% growth.
• FY '25 revenue growth guidance is raised to 6.5% to 7.5% from the prior 6% to 7%.
• Anticipates non-GAAP gross margin of approximately 83% to 83.5% in Q3 and FY '25 non-GAAP gross margin in the range of 83% to 84%.
• Adjusted EPS guidance is raised to 8% to 10% growth, up from prior 6.5% to 8.5% growth.
• Intends to use at least 50% of annual free cash flow for share repurchases in FY '25.

Risks Discussed:

• Macro uncertainty could impact demand.
• Potential tariff impacts on systems business, though low exposure and expected to be offset by efficiency gains.
• Supply chain risks, but no material impacts expected.

Q: Tim Long from Barclays asked about software performance and hardware replacement ramp.

A: Cooper discussed software growth weighted to the second half due to strong renewals, and Francois talked about hardware growth driven by refresh, data center modernization, competitive displacement, and AI.

Q: Ryan Koontz from Needham & Company asked about competitive displacement.

A: Francois explained early innings in displacing competitors in new accounts and accelerating consolidation with the new platform.

Q: Amit Daryanani from Evercore asked about AI use cases.

A: Francois stated data delivery for AI models is the largest current opportunity, with security and AI factory load balancing as early opportunities.

Q: Samik Chatterjee from JPMorgan Chase asked about hardware demand and software perpetual revenue.

A: Francois and Cooper discussed no pull-in of hardware demand in Q2 and software perpetual revenue aligning with expectations.

Q: Michael Ng from Goldman Sachs asked about systems installed base and software renewal implications.

A: Cooper talked about the large installed base of iSeries and VIPRION, and software renewal cycles with 3-year contracts.

Q: Meta Marshall from Morgan Stanley asked about Q3 linearity and international currency impact.

A: Cooper noted healthy linearity in Q3 and weakening dollar providing minor benefit to international business.

Q: Tal Liani from Bank of America asked about software growth drivers and AI timing.

A: Cooper and Francois discussed software growth from renewals and AI as an early but growing driver.

Q: James Fish from Piper Sandler asked about hardware drivers and software growth confidence.

A: Francois ranked hardware drivers as tech refresh, data center modernization, competitive displacement, and AI. Cooper discussed software growth from strong renewal visibility.