F5 Inc Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Tim Long - Barclays - Analyst : Thank you. Just two, if I could. Francois, could you talk a little bit about the AI business. I don't know if you can scale for us how big it is currently. But more importantly, if you can just touch on kind of the breadth of who you're selling into an AI and what type of customers these large data centers, enterprises, government combination? Anything there would be helpful. And then second, if you can just touch on kind of sustainability of the hardware systems business. It sounds like there might have been a little bit of pulling into the into the December quarter, but still a pretty solid number. So where do you think we are with inventory or ability to keep those numbers going? It sounds like there are some share gains helping. Thank you.

Question: Meta Marshall - Morgan Stanley - Analyst : Great. Maybe just on -- if you could kind of help us size kind of the distributed cloud business at this point, just kind of given the growth that we've seen kind of in the API security cases that you were talking about? And then maybe second for Cooper, just you kind of had noted a more back-half-loaded year or Frank had maybe noted a back-half-loaded year last quarter. Just how are you kind of thinking about any seasonality to the year, particularly with just such a strong start to the beginning of the year? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 28, 2025 / 9:30PM, FFIV.OQ - Q1 2025 F5 Inc Earnings Call

Question: Samik Chatterjee - JPMorgan - Analyst : Congrats on the results here. I guess, Francois, just sort of going off your earlier commentary and two questions as a clarification. One, you mentioned the refreshes that you're seeing largely on account of customers having sweat assets earlier I mean, is that more as part of a broader refresh of customers doing broader refreshes of their data center? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 28, 2025 / 9:30PM, FFIV.OQ - Q1 2025 F5 Inc Earnings Call Or is there something more specific rate to their readiness for AI that's driving that? Can you just flesh that out a bit in terms of trigger. We all know that customers if they want to consort assets as long as they want or at least to some extent. So is there a necessarily sort of a trigger that's driving them to now refresh? And then, secondarily, you talked about AI and over the last couple of days, we've seen a lot of more concerns around sort of the compute intensity going into pretraining or training of AI models rate to probably more favorable sentiment now on how AI inferencing sort of ships out. Can you just talk about sort of where do you see your leverage to in that sort of overall AI process and some rep exposure to training versus inferencing, how would you sort of quantify that for us?

Question: Michael Ng - Goldman Sachs - Analyst : I just have two as well. First, I wanted to ask about the perpetual revenue in the quarter. This is the third consecutive year where you had a very strong seasonal fiscal 1Q. I was wondering if you could just provide a little bit more color there? Is it related to the financial expansion that you talked about? Is it indeed seasonality? Or should we think about this as a run rate? And then second, I could appreciate US federal is a small part of the business. I think you mentioned 4%. Could you just comment directionally, was that strong? Was it weak? Any directional color would be helpful there.

Question: Tal Liani - BofA Global Research - Analyst : Can you hear me?

Question: Tal Liani - BofA Global Research - Analyst : Good. I have two questions. Some of them were asked, but I want to ask it in a different way. So you're increasing the guidance for the by about $40 million, $50 million and you meet the numbers for this quarter, $50 million beat, the second quarter has a $10 million beat. So the growth in the annual guidance is in line, slightly below the Q1, Q2. And the question is, is there something special in Q1, Q2? Is it brings things forward that -- or is it just conservatism that they're not willing now to make a call on the second half? The second question -- sorry. Should I continue? Or should I --

Question: Tal Liani - BofA Global Research - Analyst : Second question is on software. And I'm trying to separate new software from renewals because when you renew contract, you recognize 62% upfront. So -- and the way that accounting works is between in a three-year contract between three years -- year three and year four, which means renewal, there's a very big jump in revenues because only the leftovers are left for third year and then there is upfront recognition in the fourth year. So the question is, can you separate of the software growth that we're seeing, phenomenal software growth? Can you separate how much of it is because of accounting and renewals? And how much of it is because of real growth, growth with customer kind of use cases for products, et cetera. I just want to -- because we're talking about renewals, I just wanted to have the understanding of kind of old revenues versus new growth opportunities.

Question: Tal Liani - BofA Global Research - Analyst : Got it.

Question: Tal Liani - BofA Global Research - Analyst : Great. And about the second-half question.

Question: Amit Daryanani - Evercore ISI - Analyst : I guess maybe just talk on the system side, -- you folks had really good 18% growth year over year on the system side. How much of that do you think was driven by pull-ins ahead of the price increases that you're implementing? And if you can just quantify what sort of price increases went into -- got to implement on Jan 1, that would be helpful?

Question: Amit Daryanani - Evercore ISI - Analyst : Got it. And then if I just go back to the software discussion you're having a minute ago, the way you folks are guiding at this point, it looks like 22% growth in Q1 and then you see some fairly notable deceleration as the year progresses to hit that at least 10%. Is that kind of deceleration just conservativeness because you don't know what the expansion metrics could look like on new projects could look like? Or is there something more nuanced that's happening in the next few quarters that we should be aware about?

Question: Matt Hedberg - RBC Capital Markets - Analyst : I have two as well. Maybe the first one, just a point of clarification on some of the improving IT spending trends that you mentioned. I guess, Francois, I guess, specifically, did you see any change in enterprise buying behavior in the US post the Presidential election, I guess, is the first question?

Question: Matt Hedberg - RBC Capital Markets - Analyst : I got it. Okay. That's helpful. And then maybe just an AI question for me. You talked a lot about it in your prepared remarks. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 28, 2025 / 9:30PM, FFIV.OQ - Q1 2025 F5 Inc Earnings Call And I guess digging into a little bit more, the other big topic, and it didn't come up in this call, it really does feel like a genetic AI is kind of changing the way we think about G&A and how organizations think about workflow and automation. You guys obviously have a focus on app delivery and API security, et cetera. Do you think an genic AI tailwind could start to emerge as that technology proliferates amongst customers?

Question: James Fish - Piper Sandler Companies - Analyst : Cooper, I don't want to dwell on this, but I think what we're all trying to get at here is these were impressive results. The largest beat we've seen out of F5, I think ever. Can you help us understand the differences in terms of what's driving the sustainability here? How do we think about -- you talked about the mid-single digits on pricing across systems and software, how to think about also the Citrix share gains, the budget flush, the pull in the large deal and refresh. Just help us level set what the sustainable kind of longer-term vision here is for growth.

Question: James Fish - Piper Sandler Companies - Analyst : Got it. And then you guys used to talk about F5 as having roughly 200,000 systems, and we think about refreshes every five, seven years on average. Obviously, the supply chain stuff changed a lot of things. Are we starting to see that, call it, 50,000, 60,000 cohort or even more create a bigger bulge and that's what's giving you guys the confidence around double-digit hardware refresh this year -- I'm sorry, double-digit hardware growth this year?

Question: Victor Chiu - Raymond James - Analyst : This is Victor Chiu and up for Simon Leopold. I just wanted to follow up on the earlier question that someone asked around the specific triggers around the system refreshes. It makes sense that these large customers have been sweating assets for quite a while. But I guess it's just surprising the timing around how they're kind of aligning together. So I guess, was there some specific dynamic that caused that triggered upgrades to kind of align around the same time? And kind of what was the delta, I guess, versus your expectations previously, I guess? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 28, 2025 / 9:30PM, FFIV.OQ - Q1 2025 F5 Inc Earnings Call

Question: Victor Chiu - Raymond James - Analyst : Okay. So given that dynamic, I mean, does your expectation around systems growth over the long term change, given these dynamics? Or do you still expect over time that systems continue to decline? Is that's your expectation?

Question: Matt Dezort - Needham & Company. - Analyst : Great. Congrats on the results, guys. I guess, Francois, on that AI opportunity you were just talking about, I guess, what visibility do you guys have to those initial opportunities? Where are we at in the rollout of those? Can you talk a little bit about your go-to-market for these AI opportunities, whether that's requiring any incremental investment? And how are you winning these opportunities? And who are you seeing? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 28, 2025 / 9:30PM, FFIV.OQ - Q1 2025 F5 Inc Earnings Call

Question: Matt Dezort - Needham & Company. - Analyst : Yes. And then I guess on the competitive environment, it sounds like things are really opening up for you guys. Anything you can give us on the pipeline of opportunities there. how are win rates trending for hardware as well as in cloud with NGINX and DCS, do you anticipate any changes to the competitive opportunity as you take up prices here in January?

Question: Sebastien Naji - William Blair & Company - Analyst : I think a lot of my questions have been sort of asked and answered. So maybe just one for me and somewhat of a point question. Could you perhaps update us on your CDN product that came out of the Lilac acquisition? And maybe talk a little bit about how much success you're having here? That seems to be a space that is growing very fast right now. And I'm just wondering if this is a part of that DCS business that could be inflecting or growing more rapidly here in the near future.