F5, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Q3 Highlights: Delivered 12% total revenue growth, 26% product revenue growth, 39% systems revenue growth, 16% software revenue growth, and 24% EPS growth.
• F5 ADSP Traction: Early positive customer response with wins like a North American health insurer consolidating security and delivery vendors, and an EMEA airline modernizing application delivery and security using F5's hybrid multi-cloud approach.
• AI Innovations: Introduced advancements to the F5 AI Assistant (integrating Fletch acquisition for threat insights), expanded F5 AI Gateway capabilities, and partnerships with NVIDIA and MinIO to support AI infrastructure.
• AI Use Cases: AI data delivery, runtime security, and factory load balancing, with wins in regions like EMEA (government institution accelerating AI data ingestion) and APAC (e-commerce provider optimizing GPU-as-a-Service platform).

Segment Performance

• Revenue: Total revenue grew 12% to $780 million in Q3. Product revenue grew 26% to $389 million, with systems revenue up 39% to $181 million and software revenue up 16% to $208 million. Global Services revenue was $392 million, up 1%.
• Revenue Contribution: Product revenue and Global Services each made up 50% of total revenue. Recurring revenue contributed 73% of Q3 revenue.
• Regional Breakdown: Americas (55% of total revenue, +13% Y/Y), EMEA (26% of total revenue, +6% Y/Y), APAC (19% of total revenue, +21% Y/Y).
• Vertical Breakdown: Enterprise customers represented 70% of Q3 product bookings, government customers 15% (5% U.S. Federal), and service providers 15%.

Guidance

• Q4 Revenue: Expected to be in the range of $780 million to $800 million, implying ~9% revenue growth for FY '25.
• Non-GAAP Metrics: Q4 non-GAAP gross margin projected at 84% to 84.5%, non-GAAP operating expenses estimated at $376 million to $388 million, and non-GAAP EPS at $3.87 to $3.99.
• FY '25 Outlook: Revenue growth ~9%, non-GAAP gross margin 83% to 84%, non-GAAP operating margin ~35%, EPS growth 14% to 15%, and share repurchases at or above 50% of free cash flow.

Risks

• Market and Competitive: Potential impact of tariffs, competitive displacements, and market dynamics affecting hardware and software sales.
• Execution: Uncertainties in AI adoption timelines and fully realizing AI-related opportunities, including the pace of AI security market development.

Question and Answer

• **Q: On hardware strength, tariffs, and sustainability; A: Discussed tech refresh, hybrid cloud, and AI trends driving hardware growth, noting no impact from tariffs yet.
• **Q: On software pipeline and renewals; A: Strong renewals with expansion, new projects mixed but confident in Q4 performance.
• **Q: On gross margins; A: High-performance use cases and hardware strength impacted margins, but Q4 expected to improve.
• **Q: On hardware refresh and software growth; A: Early in hardware refresh cycle for iSeries and VIPRION, software growth mid-single digits next year with renewals and new use cases.
• **Q: On new products like NVIDIA DPU and AI Gateway; A: NVIDIA DPU solution is GA with early positive feedback, AI Gateway in early stages with proof of concepts.
• **Q: On Fed business and free cash flow; A: Fed business on plan, no major impact from R&D credits on free cash flow.
• **Q: On hardware non-refresh piece and AI magnitude; A: ~1/3 of hardware growth non-tech refresh, AI use cases small but growing with indirect impacts.
• **Q: On tech refresh inning and AI adoption; A: Early in hardware refresh, AI adoption timeline uncertain but both data delivery and security important.
• Q: On tech refresh and price increases; A: Tech refresh for F5 products, price increases phasing in with reasonable customer reception.