F5, Inc. (FFIV) Q1 2026 Earnings Call Transcript
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Overview
The earnings call summary and Q&A reveal strong financial metrics, including increased revenue and EPS guidance, robust hardware demand driven by AI and regulation, and effective risk management. Despite some uncertainties, such as potential supply constraints and unclear details on AI revenue, the overall sentiment is positive. The company's adaptability in hybrid multicloud deployments and strategic responses to challenges further reinforce this outlook. The positive guidance and shareholder return plans suggest a likely stock price increase, aligning with a 'Positive' sentiment rating.
Key Financial Performance
Revenue $822 million, a 7% increase year-over-year, driven by hybrid multicloud adoption, AI demand, and regulations requiring resilience and data sovereignty.
Product Revenue $410 million, an 11% increase year-over-year, supported by hybrid multicloud adoption and AI demand.
Services Revenue $412 million, a 4% increase year-over-year.
Systems Revenue $218 million, a 37% increase year-over-year, driven by tech refresh and capacity expansion related to hybrid multicloud and AI demand.
Software Revenue $192 million, an 8% decrease year-over-year, attributed to exceptionally strong results in Q1 FY '25.
Subscription-based Software Revenue $164 million, a 1% increase year-over-year.
Perpetual License Software Revenue $27 million, a decrease year-over-year due to strong results in Q1 FY '25.
Recurring Revenue 69% of total revenue, consisting of subscription-based revenue and maintenance services.
Revenue by Region - Americas 2% growth year-over-year, representing 53% of total revenue.
Revenue by Region - EMEA 24% growth year-over-year, representing 31% of total revenue.
Revenue by Region - APAC 1% decline year-over-year, representing 16% of total revenue.
GAAP Gross Margin 81.5%.
Non-GAAP Gross Margin 83.8%.
GAAP Operating Expenses $456 million.
Non-GAAP Operating Expenses $375 million.
GAAP Operating Margin 26.0%.
Non-GAAP Operating Margin 38.2%, an improvement of 80 basis points year-over-year.
GAAP Net Income $180 million or $3.10 per share.
Non-GAAP Net Income $259 million or $4.45 per share, reflecting 16% EPS growth year-over-year.
Cash Flow from Operations $159 million.
CapEx $10 million.
Deferred Revenue $2.1 billion, a 6% increase year-over-year.
Employees Approximately 6,400 employees.
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Operating Highlights
BIG-IP Version 21.0: Launched in November, it scales for demanding AI workloads, enhances control plane performance, and introduces support for Model Context Protocol (MCP) and S3 for AI architectures.
Advanced API Security: Enabled API discovery engines to run locally in customer environments, providing consistent API security capabilities on-premises and in the cloud.
Hybrid Multicloud Adoption: F5 is leading in hybrid multicloud solutions, driven by regulations like GDPR and DORA, and customer needs for flexibility, cost efficiency, and vendor lock-in prevention.
AI Infrastructure: AI-related investments are scaling, driving demand for F5's application delivery and security solutions, including AI data delivery, runtime security, and factory load balancing.
Customer Support Post-Security Incident: Managed over 9,000 additional support cases with minimal demand disruption, earning positive customer feedback.
Revenue Growth: Achieved 7% revenue growth in Q1 FY26, with 11% product revenue growth and 37% systems revenue growth.
Converged Networking and Security Platforms: F5's ADSP unites traffic management with application and API security, enabling customers to consolidate point solutions and simplify operations.
AI Security Enhancements: Acquired CalypsoAI to enhance runtime security offerings, including real-time threat defense and robust guardrails for AI applications.
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Risk or Challenges
Security Incident Impact: The company experienced a security incident at the start of the quarter, which created uncertainty. Although the impact on demand was minimal, it required significant mobilization of global sales and support teams to manage over 9,000 additional support cases.
Regulatory Compliance: Regulations such as MIS 2, GDPR, and Dora are accelerating hybrid multicloud adoption, but they also impose greater resilience and digital sovereignty requirements, especially outside the U.S., which could increase operational complexity and costs.
AI Infrastructure Challenges: The shift to AI-centric data centers and the need for higher levels of data movement and compute are putting pressure on networking, storage, and application delivery layers, creating potential bottlenecks.
Cloud Concentration Risks: Customers are modernizing infrastructures to reduce risks tied to cloud concentration and vendor lock-in, which could impact F5's ability to retain customers if not addressed effectively.
Rising Memory Costs: Anticipated rising memory costs in the second half of FY '26 are expected to impact product costs, potentially affecting gross margins.
Software Revenue Decline: Software revenue declined by 8% year-over-year, with subscription-based software revenue growing only 1%, indicating potential challenges in sustaining software growth.
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Guidance & Outlook
FY 2026 Revenue Growth: F5 has raised its FY 2026 revenue growth outlook to 5%-6%, up from the prior range of 0%-4%.
Software Revenue Growth: Mid-single-digit growth is expected for FY 2026.
Systems Revenue Growth: Double-digit growth is anticipated for FY 2026.
Services Revenue Growth: Low single-digit growth is projected for FY 2026.
Gross Margin: FY 2026 gross margin is estimated to be in the range of 82.5%-83.5%, reflecting a modest reduction due to anticipated rising memory costs in the second half.
Non-GAAP Operating Margin: FY 2026 non-GAAP operating margin is expected to be in the range of 34%-35%, up from the prior range of 33.5%-34.5%.
Non-GAAP EPS: FY 2026 non-GAAP EPS is projected to be in the range of $15.65-$16.05, up from the prior range of $14.50-$15.50.
Share Repurchase: F5 plans to repurchase at least 50% of its free cash flow in FY 2026, with $300 million already repurchased in Q1.
Q2 FY 2026 Revenue: Revenue is expected to be in the range of $770 million to $790 million, reflecting approximately 7% growth at the midpoint.
Q2 Non-GAAP Gross Margin: Expected to be in the range of 82.5%-83%.
Q2 Non-GAAP Operating Expenses: Estimated to be between $396 million and $408 million.
Q2 Non-GAAP EPS: Projected to be in the range of $3.34-$3.46 per share.
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Shareholder Return Plan
Share Repurchase Program: In Q1, F5 repurchased $300 million worth of shares at an average price of $249 per share. For FY '26, the company expects its full-year share repurchase to be at least 50% of its free cash flow. Given the $300 million repurchased in Q1, repurchase activity is anticipated to be lower in the remaining quarters of FY '26.
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Key Q&A
Q:Can you discuss the trend of AI adoption among non-AI native enterprise customers and its durability?
A:Francois Locoh-Donou explained that AI adoption is still in its early stages. Enterprises are shifting from training AI models to moving AI applications into production, requiring hardened data pipelines, low latency, high scale, and high performance. F5 is well-positioned to meet these needs. The trend is durable as more enterprises adopt AI and scale production. He highlighted a multimillion-dollar deal with a global technology OEM as an example of this trend.
Q:What caused the sequential decline in software performance, and how do you plan to achieve mid-single-digit growth?
A:Cooper Werner attributed the decline to a strong comparison from the previous year, including a large 8-figure renewal and strong perpetual software business. However, Q1 FY26 performance was slightly ahead of expectations. He expressed confidence in achieving mid-single-digit growth due to a strong renewal cohort, healthy utilization rates, and no demand disruption.
Q:What is driving the strong performance in hardware, and how does it relate to market share and growth?
A:Francois Locoh-Donou noted that hybrid multicloud architectures are now the norm, driven by flexibility, cost optimization, and control. New catalysts like regulation and AI adoption are accelerating demand for hardware. F5 is uniquely positioned with its flexibility in hardware, software, and SaaS offerings. Regulation and AI adoption are contributing to strong hardware demand.
Q:How is the hardware upgrade cycle progressing, and what role does AI play in it?
A:Francois Locoh-Donou stated that the hardware refresh cycle is stronger than past cycles due to expansion and readiness for AI deployments. Cooper Werner added that capacity expansion and regulation are also driving demand. AI is a substantial driver of the refresh cycle.
Q:How is F5 managing increased memory costs and potential supply constraints?
A:Francois Locoh-Donou explained that F5 took early actions, such as raising forecasts, qualifying additional suppliers, and executing broker buys. These measures have ensured confidence in near-term supply despite substantial price increases. However, there is some risk of supply constraints in the future.
Q:What has been the impact of the security breach on customers and F5's operations?
A:Francois Locoh-Donou stated that no evidence of customer breaches has been reported. F5 mobilized quickly to provide patches and support, resulting in minimal disruption. Over 50% of customers are now on the latest software release. Cooper Werner added that there was no noticeable financial impact or demand disruption.
Q:What percentage of revenue is coming from AI projects, and what is the future outlook?
A:Francois Locoh-Donou mentioned that AI-related revenue was in the single-digit millions per quarter last year and has now grown to double-digit millions. He expects this to grow as AI use cases expand, particularly in data delivery and security.
Q:How much of the systems revenue growth is attributed to price hikes?
A:Cooper Werner stated that the January 2025 price increase contributed to systems revenue growth, particularly in net new sales. The impact on software is more muted due to multiyear agreements, but there is healthy pickup from pricing on the software side as well.
Q:What is the revenue outlook for systems and EPS for the full year?
A:Cooper Werner explained that the guidance implies mid-teens systems revenue growth for the full year, with a measured approach to the second half due to early-year uncertainties. EPS guidance reflects gross margin adjustments and targeted investments in sales capacity and roadmap features.
Q:What is driving the strength in EMEA, particularly in the public sector?
A:Francois Locoh-Donou attributed EMEA strength to regulation-driven hybrid multicloud deployments and digital sovereignty. Cooper Werner added that public sector strength in EMEA was driven by data sovereignty concerns, complementing strong performance in the U.S. federal sector.
Q:How is F5 addressing hybrid multicloud deployments, and what trends are emerging?
A:Francois Locoh-Donou highlighted F5's unique flexibility in hardware, software, and SaaS offerings, which is ideal for hybrid multicloud architectures. Customers are consolidating spend on F5 due to its ability to provide consistent security and delivery across environments. Innovations like API discovery capabilities are further driving adoption.
Q:What is the capacity expansion trend in hardware, and how is it linked to AI?
A:Cooper Werner noted that customers are refreshing higher up in the portfolio, driven by security and AI performance needs. This includes higher ASPs and additional units, reflecting readiness for AI workloads and higher security requirements.
Q:Review of Unclear Management Responses
A:Management avoided providing specific revenue percentages for AI projects, citing the early stage of adoption. They also did not detail the exact financial impact of the security breach, only stating there was no noticeable impact. Additionally, they did not provide a precise breakdown of systems revenue growth attributed to price hikes versus other factors.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI application
AI delivery
AI demand
AI factory
AI investment
AI runtime
Cloud Services
NGINX Cloud
adoption AI
agency
banking
case customer
customer infrastructure
defense
demand driver
development
experience application
infrastructure AI
infrastructure security
mitigation
multicloud adoption
multicloud environment
multicloud model
need flexibility
networking security
platform multicloud
product platform
resilience sovereignty
runtime security
scale ingestion
security compliance
security multicloud
storage application
throughput
trend multicloud
vendor lock
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The earnings call summary and Q&A reveal strong financial metrics, including increased revenue and EPS guidance, robust hardware demand driven by AI and regulation, and effective risk management. Despite some uncertainties, such as potential supply constraints and unclear details on AI revenue, the overall sentiment is positive. The company's adaptability in hybrid multicloud deployments and strategic responses to challenges further reinforce this outlook. The positive guidance and shareholder return plans suggest a likely stock price increase, aligning with a 'Positive' sentiment rating.
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