F5, Inc. (FFIV) Q4 2025 Earnings Call Transcript
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Overview
The earnings call summary indicates strong financial metrics with increased guidance for revenue, EPS growth, and share repurchases. Despite a security breach, recurring revenues remain stable, and the company is investing in cybersecurity. The Q&A session reveals potential growth in the systems business and software driven by AI and SaaS adoption. While there are uncertainties, the overall sentiment is positive, with strong financial performance and optimistic guidance outweighing the risks.
Key Financial Performance
Total Revenue Exceeded $3 billion, representing a 10% year-over-year growth. Growth was driven by data center reinvestment, hybrid cloud adoption, and enterprise AI infrastructure demand.
Operating Profit Exceeded $1 billion for the first time, with an 18% year-over-year growth in earnings per share. Growth attributed to product refresh cycle, competitive takeouts, and maturation of software model.
Gross Margins 83.6%, up 80 basis points year-over-year. Improvement due to strong profitability and financial execution.
Operating Margin 35.2%, up 160 basis points year-over-year. Reflects strong financial discipline and operational efficiency.
Free Cash Flow $906 million, up 19% year-over-year. Highlighted as a result of strong business fundamentals and execution.
Q4 Revenue $810 million, an 8% year-over-year growth. Product revenue grew 16%, while global services revenue grew 2%.
Systems Revenue $186 million, up 42% year-over-year. Growth driven by tech refresh, data center modernization, and AI use cases.
Software Revenue $229 million, slightly up year-over-year. Perpetual license software grew 25%, while subscription-based software declined 3%.
Recurring Revenue 72% of Q4 revenue, reflecting strong subscription-based and maintenance revenue.
Regional Revenue Growth Americas grew 7%, EMEA grew 7%, and APAC grew 19% year-over-year.
Non-GAAP Gross Margin 84.3%, up 138 basis points year-over-year. Reflects strong financial discipline.
Non-GAAP Operating Margin 37.0%, up 255 basis points year-over-year. Indicates improved operational efficiency.
Non-GAAP Net Income $257 million, or $4.39 per share, reflecting 20% year-over-year EPS growth.
Deferred Revenue $2.0 billion, up 11% year-over-year. Indicates strong future revenue potential.
Annual Software Revenue $803 million, up 9% year-over-year. Term-based subscriptions grew 18%, while SaaS and Managed Services declined 9%.
Security Revenue $1.2 billion, up 6% year-over-year. Stand-alone security revenue totaled $463 million, representing 31% of product revenue.
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Operating Highlights
AI-related demand: Contributed to growth with over 30 customers leveraging F5 for AI workflows. Key use cases include AI data delivery, runtime security, and factory load balancing.
F5 AI Guardrails and AI Red Team: Launched two new offerings leveraging CalypsoAI technology for securing AI inference. Secured wins with a top-tier investment bank and a global AI compute platform leader.
Hybrid multi-cloud adoption: Driving demand for advanced application delivery and security solutions. 26% of top 1,000 customers now use F5 Distributed Cloud Services, up from 17% in 2024.
Regional revenue growth: Americas grew 7%, EMEA grew 7%, and APAC grew 19% year-over-year.
Revenue and profitability: Achieved $3 billion in revenue and $1 billion in operating profit for FY '25. Gross margins at 83.6% and operating margin at 35.2%.
Free cash flow: Generated $906 million in FY '25, up 19% from FY '24.
Incident response: Addressed security vulnerabilities in BIG-IP code, enabling customers to update environments with minimal disruption.
Security investments: Increased investment in security, including hiring Michael Montoya as Chief Technology Operations Officer to enhance security across processes and products.
AI capabilities: Acquired CalypsoAI to strengthen AI runtime security and launched new offerings to address AI inference security needs.
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Risk or Challenges
Incident Response and Security Vulnerabilities: The company faced a significant security incident on August 9, requiring immediate containment of a threat actor and urgent action to address vulnerabilities in BIG-IP code. This incident has led to increased investment in security and the hiring of a Chief Technology Operations Officer. However, the company acknowledges potential near-term business impacts as customers assess and remediate their environments.
Customer Sales Cycles Disruption: The security incident may cause near-term disruption to sales cycles as customers focus on assessing and remediating their environments. This could impact revenue growth, particularly in the first half of FY '26.
Transition of Legacy SaaS and Managed Services: The transition of legacy SaaS and managed service offerings has led to a decline in subscription-based software revenue by 3% year-over-year. This reflects customer preferences for hardware-based solutions in certain use cases and may impact recurring revenue streams.
Economic and Competitive Pressures: The company faces competitive pressures in the market, particularly in the transition to hybrid multi-cloud architectures and AI-driven infrastructure. Additionally, economic uncertainties could impact customer spending and adoption of new solutions.
Regulatory and Compliance Risks: The company must navigate strict regulatory requirements, particularly in sectors like banking and government. Failure to meet these requirements could result in compliance risks and operational disruptions.
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Guidance & Outlook
FY '26 Revenue Growth: Guidance for FY '26 revenue growth is in the range of 0% to 4%, with mid-single-digit growth supported by hybrid multi-cloud adoption, systems refresh opportunities, and AI readiness use cases. However, near-term disruption to sales cycles is anticipated, with impacts more pronounced in the first half of the year before normalizing in the second half.
FY '26 Gross Margin: Estimated gross margin for FY '26 is in the range of 83% to 83.5%.
FY '26 Non-GAAP Operating Margin: Expected to be in the range of 33.5% to 34.5%, with the lowest margins in fiscal Q2 due to payroll tax resets and costs associated with a large customer event.
FY '26 Non-GAAP Effective Tax Rate: Projected to be in the range of 21% to 22%.
FY '26 EPS: Expected to be in the range of $14.50 to $15.50.
FY '26 Free Cash Flow Usage: At least 50% of free cash flow will be used for share repurchases.
Q1 FY '26 Revenue: Guidance for Q1 revenue is in the range of $730 million to $780 million, reflecting potential near-term disruption to sales cycles.
Q1 FY '26 Non-GAAP Gross Margin: Expected to be in the range of 82.5% to 83.5%.
Q1 FY '26 Non-GAAP Operating Expenses: Estimated to be between $360 million and $376 million.
Q1 FY '26 Non-GAAP EPS: Anticipated to be in the range of $3.35 to $3.85 per share.
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Shareholder Return Plan
Share Repurchase: In Q4, we repurchased $125 million worth of F5 shares at an average price of $297 per share. For the year, we repurchased shares equivalent to 55% of our annual free cash flow. Finally, we intend to continue to use at least 50% of our free cash flow towards share repurchases in FY '26.
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Key Q&A
Q:What form of conservatism has been put into the estimates? Are customers being accommodated through discounting, pushing off purchasing decisions, or other incentives?
A:The company has considered three categories of near-term disruptions: (1) Allocation of resources to address customer upgrades and remediation, which takes time away from normal sales cycles; (2) Potential delays in deal approvals due to the visibility of the security incident; (3) Some customers may decide not to move forward with certain projects. However, over 70% of revenues are recurring, and no significant impacts have been observed yet.
Q:How much of fiscal '25 growth was due to the product upgrade cycle?
A:Approximately two-thirds of the systems business growth in FY '25 was due to tech refresh, with the remaining one-third coming from data center capacity expansion and data sovereignty use cases, driven by AI.
Q:How was the potential impact of the security breach sized, and how many customers were affected?
A:The company profiled its revenue streams to assess potential impacts, focusing on recurring revenue streams that are resilient and identifying areas like new software projects that could face near-term impacts. They also reviewed historical data from peers and engaged with sales teams for feedback. The breach primarily affected BIG-IP customers, with two categories of impact: (1) Mobilization of resources for upgrades, and (2) Data exfiltration affecting a small percentage of customers. Most customers reported that the exfiltrated data was not sensitive.
Q:Are there additional costs due to the data breach, and what percentage of revenue comes from BIG-IP?
A:The company has been investing in cybersecurity and incorporated additional investments into its planning. Costs related to the breach, including free Falcon EDR subscriptions, will be covered by cyber insurance or accounted for as one-time expenses. BIG-IP is the highest revenue product, but the company does not break out its revenue contribution.
Q:Can the systems business grow further from the current level, and what drives software growth?
A:The systems business is still early in the refresh cycle and has potential for growth, driven by data center capacity expansion tied to AI readiness. Software growth is driven by multiyear agreements, SaaS adoption, and customers consuming multiple product families. However, FY '26 growth is impacted by the timing of subscription renewals, with stronger growth expected in FY '27.
Q:What are the economics of transitioning to Distributed Cloud Services (DCS), and why are enterprise and service provider verticals performing differently?
A:DCS operates on a land-and-expand model, with significant ARR expansion among customers. Enterprise verticals are embracing hybrid multi-cloud, driving growth, while the service provider segment remains tepid due to the lack of growth drivers like 5G adoption.
Q:What is the impact of the U.S. federal government shutdown on the December quarter, and what is the mix of software versus hardware growth in the full-year guidance?
A:The company has assumed some disruption in the federal segment for Q1 due to the shutdown. They are not providing specific guidance on the mix of software versus hardware growth for the full year, given the recent security incident.
Q:Does the security breach affect both software and hardware equally?
A:Yes, the breach affects both software and hardware equally.
Q:How will the market share dynamics change due to the potential impact in the first half, and why has stand-alone security revenue not grown significantly?
A:The company expects to continue gaining market share over time due to its investments in security and its comprehensive application delivery and security platform. Stand-alone security revenue growth has been limited as customers prefer to consume security through the platform, and there has been some impact from the SaaS transition.
Q:Why is there no leverage in operating margins in the back half of the year, and how is the company addressing zero-day threats from the breach?
A:Operating margins are expected to show leverage in the back half of the year after a low point in Q2 due to seasonal factors. To address zero-day threats, the company is enhancing its security measures, including scanning code, setting up a trust center, leveraging AI, and implementing EDR capabilities on BIG-IP.
Q:What is the status of the migration of end-of-life products, and are there any delays due to the breach?
A:The company is still early in the refresh cycle, with over 50% of the installed base on legacy platforms. There have been no changes to the end-of-life timelines due to the breach.
Q:Are there any new activities in the telecom domain related to 5G?
A:The transition from 4G to 5G continues, with some geographies ahead of others. However, the expected revenue growth from 5G has not materialized, leading to pressure on telecom operators' CapEx spend.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the revenue contribution of BIG-IP, the mix of software versus hardware growth in the full-year guidance, and the exact operating expense increase in Q2. Additionally, they used general terms like 'early days' and 'potential impact' without quantifying certain aspects of the security breach and its effects.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI readiness
ARR core
ARR offering
Chief Technology
Cloud Services
FY ARR
FY cash
FY demand
FY driver
FY expectation
FY result
Francois hello
SaaS service
Services transition
action
disruption sale
flow FY
incident response
investigation
legacy SaaS
license software
non share
offering FY
point FY
priority
road map
sale cycle
service offering
software license
step
subscription FY
system demand
term disruption
threat actor
transition legacy
update
FFIV Transcript
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