F5 (FFIV) Q4 2025 Earnings Call Transcript

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DATE

Monday, Oct. 27, 2025, at 4:30 p.m. ET

CALL PARTICIPANTS

• President & CEO — Francois Locoh-Donou
• Executive Vice President & CFO — Cooper Werner
• Senior Vice President, Strategic Communications — Suzanne DuLong

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RISKS

• Management explicitly cited near-term business disruption stemming from a recent security incident, noting, "We acknowledge that we may see some near-term impact on our business, but we are fully focused on mitigating that impact."
• Fiscal 2026 revenue growth is expected in the range of 0%-4% (non-GAAP), with management noting that demand impacts from the security incident are "expected to be more pronounced in the first half before normalizing in the second half," according to Cooper Werner.
• The company noted the potential for a modest near-term operating margin impact linked to slower demand. "We recognize the revenue guide may lead to a modest impact on our operating margin near term," according to Cooper Werner, referencing fiscal 2026 non-GAAP operating margin.
• Government business faces additional uncertainty, with management reporting, "guidance assumed some level of disruption in that segment of our business, especially in Q1 fiscal 2026 with the government shutdown," according to Francois Locoh-Donou.

TAKEAWAYS

• Full-year revenue -- Revenue exceeded $3 billion for fiscal year ended Sept. 30, 2025, marking 10% growth driven by data center reinvestment, hybrid cloud adoption, and enterprise AI infrastructure demand.
• Full-year operating profit -- Operating profit reached $1 billion for the first time in fiscal year ended Sept. 30, 2025, reflecting an operating margin of 35.2%, up 160 basis points from the prior year.
• Full-year gross margin -- Gross margin for fiscal year ended Sept. 30, 2025, was 83.6%, up 80 basis points over fiscal year ended Sept. 30, 2024, indicating improved profitability.
• Full-year free cash flow -- Free cash flow was $906 million, up 19%, yielding a 29% margin and highlighting financial strength for fiscal year ended Sept. 30, 2025.
• Q4 revenue -- Revenue was $810 million, up 8%, with product revenue at $414 million (up 16%) and global services at $396 million (up 2%).
• Q4 systems revenue -- Systems revenue was $186 million, up 42%, propelled by tech refresh, data center modernization, and AI-linked demand.
• Q4 software revenue -- Software revenue was $229 million, slightly above the prior year, as perpetual software licenses rose 25% to $30 million, while subscription software declined 3% to $198 million.
• Q4 recurring revenue -- Recurring revenue accounted for 72% of total revenue, reflecting a highly recurring business model.
• Regional performance -- Americas grew 7% (57% of total), EMEA rose 7% (26%), and APAC increased 19% (17%).
• Product bookings by vertical -- Enterprise customers represented 73%, government 19% (including 6% U.S. Federal), and service providers 8% of product bookings.
• Q4 GAAP and non-GAAP gross margin -- Gross margins were 82.2% and 84.3% (non-GAAP), respectively, with non-GAAP up 138 basis points from the year-ago quarter.
• Q4 non-GAAP EPS -- Non-GAAP EPS was $4.39, reflecting 20% growth from the year-ago period.
• Fiscal 2025 software revenue -- Software revenue was $803 million, up 9% year over year, led by term-based subscription growth of 18% to $508 million; SaaS and managed services declined 9% to $170 million.
• Total security revenue -- Total security revenue was $1.2 billion, up 6%, representing 39% of total revenue, with standalone security at $403 million (31% of product revenue).
• Annualized recurring revenue (ARR) for SaaS and managed services -- Annualized recurring revenue (ARR) for SaaS and managed services was $185 million, up slightly from fiscal year ended Sept. 30, 2024; core SaaS and MEMS services ARR rose 21%.
• Balance sheet and cash metrics -- Cash and investments at quarter-end were $1.3 billion; deferred revenue was $2 billion, up 11%.
• Share repurchases -- Share repurchases totaled $125 million at an average price of $297 per share; full-year repurchases were equivalent to 55% of annual free cash flow.
• Fiscal 2026 guidance -- Revenue growth is forecast at 0%-4%; non-GAAP gross margin is expected in the 83%-83.5% range; non-GAAP operating margin at 33.5%-34.5%; non-GAAP effective tax rate at 21%-22%; and EPS in the range of $14.50-$15.50 for fiscal year ended Sept. 30, 2026.
• Q1 2026 outlook -- Revenue is expected between $730 million and $780 million; non-GAAP EPS is projected in the range of $3.35-$3.85; software revenue is expected to decline year over year due to a challenging prior-year comparison.
• Security incident response and investments -- The company completed all undisclosed high vulnerability patches for BIG-IP, and hired Michael Montoya as Chief Technology Operations Officer to further bolster cybersecurity initiatives.
• AI-related revenue -- There were over 30 new AI use case customer wins in fiscal year ended Sept. 30, 2025, and the acquisition of Calypso AI in Q4, with integration into the ADSP platform and the introduction of new AI security products.
• Business mix dynamics -- Approximately two-thirds of systems business in fiscal year ended Sept. 30, 2025, arose from tech refresh, with one-third from capacity expansion and data sovereignty use cases.
• Platform adoption metrics -- Nearly 900 customers now use F5 XOps as of Q4, a substantial increase from 20 in fiscal year ended Sept. 30, 2024; 26% of the top 1,000 customers use F5 distributed cloud services as of Q4, up from 17% in fiscal year ended Sept. 30, 2024.
• Customer engagement -- Management highlighted rapid customer response to security updates and positive feedback about transparency and support during the incident.
• No change to end-of-support dates -- The company has not extended any hardware or software refresh migration timelines in response to the security incident.

SUMMARY

The F5 (NASDAQ:FFIV) call featured explicit guidance for materially slower growth in fiscal year ended Sept. 30, 2026, directly attributed to short-term demand disruption from a recently disclosed security incident and related customer remediation activity. Free cash flow, cash balances, and recurring revenue composition signaled ongoing financial resilience despite muted top-line outlook. Management affirmed continued investment in cybersecurity—including the appointment of Michael Montoya—and named the completion of mission-critical BIG-IP patches and rapid customer adoption of security updates as near-term execution priorities. The quarter delivered proof points of AI-driven customer wins, cross-platform adoption, and increased term-based software subscriptions, signaling growth vectors against a still-muted SaaS/managed services performance.

• Non-GAAP operating margin is projected to bottom in Q2 fiscal year ended Sept. 30, 2026, "due to payroll tax resets in January and costs associated with our large customer event in March," according to management, before improving in the back half.
• The installed base refresh remains in its early stages, management said, with "more than half of our installed base on legacy systems nearing end of software support" as of fiscal year ended Sept. 30, 2025, pointing to a multi-year hardware and software replacement opportunity.
• Incident remediation and additional cybersecurity spending, along with associated insurance offsets, are accounted for as one-time expenses, not in ongoing OpEx guidance.
• Management stated that application delivery and security customers are consolidating onto F5's integrated platform, with a declining share of standalone security revenue and rising attached/module-based adoption.
• The government segment is expected to face disruption, explicitly referenced due to the U.S. federal shutdown, with normalization anticipated after the near term.
• Hardware growth in fiscal year ended Sept. 30, 2025, was described as driven by both the refresh cycle and emerging capacity expansion use cases, which are "still relatively early, but represent a newer growth trend," according to management.
• Management set expectations for a "reacceleration of software growth rate" in fiscal year ended Sept. 30, 2027, according to Cooper Werner, as renewal cycles and SaaS transitions normalize beyond temporary fiscal year ended Sept. 30, 2026 headwinds.
• The board appointed Francois Locoh-Donou as incoming chair following Al Higginson's retirement in March 2026, marking a leadership succession milestone.

INDUSTRY GLOSSARY

• ADSP (Application Delivery and Security Platform): F5's integrated platform that unifies application performance, security, and management functions for hybrid and multi-cloud environments.
• XOps: Capabilities within F5's platform for operational policy management, analytics, and automation across application environments.
• DSO (Days Sales Outstanding): A metric indicating how quickly F5 collects payment after a sale, cited as 46 days for the quarter.
• SaaS (Software-as-a-Service): Subscription-based software solutions delivered via the cloud, as distinct from perpetual and term license models.
• MEMS: In context, refers to F5's Managed Edge and Managed Security services, contributing to ARR growth.
• BIG-IP: F5's hardware/software platform for application delivery, security, and traffic management, central to its product and customer deployments.
• Calypso AI: Acquired in Q4, a provider of AI security software solutions now integrated into F5's product suite.
• AWAF: Advanced Web Application Firewall from F5, delivering application security features.
• SSLO: Secure Sockets Layer Orchestrator, F5's product for inspecting and managing encrypted traffic.
• APM: Access Policy Manager, F5's solution for controlling and securing user access to applications.
• LTM: Local Traffic Manager, an F5 core module for traffic distribution and application availability.

Full Conference Call Transcript

Francois Locoh-Donou: Thank you, Suzanne, and hello, everyone. We delivered exceptional fiscal year 2025 results, exceeding $3 billion in revenue and $1 billion in operating profit for the first time. Revenue grew 10%, while earnings per share grew 18%. Our growth was driven by data center reinvestment, hybrid cloud adoption, and enterprise AI infrastructure demand. Our product refresh cycle, competitive takeouts, and the maturation of our software model and go-to-market motions also contributed to growth. In FY 2025, we maintained our strong profitability, delivering gross margins of 83.6%, up 80 basis points over FY 2024, and an operating margin of 35.2%, up 160 basis points over FY '24.

This performance resulted in record free cash flow of $906 million, up 19% compared to FY '24, underscoring the strength of our financial model and execution. Our FY 2025 results demonstrate the power of our platform and our strategic role in the marketplace. They also strengthen our confidence in our vision and roadmap for the future. Our immediate focus, however, has been on our incident response, and I will speak to our priorities and offer an update on where we are now. Upon identifying the threat on August 9, our team immediately activated our incident response process. Our priorities were clear.

First, contain the threat actor, initiate a thorough investigation, and take immediate and urgent action to strengthen F5's security posture. While the investigation will continue and the work of bolstering our security will expand, our initial steps have been successful. Second, we prioritized delivering reliable software releases to address all undisclosed high vulnerabilities in BIG-IP code as quickly as possible. Through the exceptional efforts of our engineering and support teams, we achieved this, enabling thousands of customers to promptly deploy critical updates upon disclosure. Our customers are moving quickly to update their BIG-IP environment, and a significant number of our largest customers have completed their updates with minimal disruption.

As an example, a North American technology provider completed updates to 814 devices in a six-hour window in the first weekend. Customers have expressed appreciation for our transparency, the thoroughness of the information we provided, and the clarity in the steps they need to take to improve the security of their environment. Our third priority is raising the bar on security across all aspects of our business. We are acutely aware of the increasing sophistication of attackers and the fact that the threat surface is expanding rapidly. Each year, over the last several years, we have aggressively increased our investment in security, and we are making further significant investments this year and beyond.

To further this work, Michael Montoya, a recognized cybersecurity expert and former member of our board, has joined F5 as Chief Technology Operations Officer. Michael brings deep operational expertise and will drive the execution of a robust roadmap to further enhance security across our internal processes, environments, and products. Our goal across all these actions is to better protect our customers, and we believe F5 will be a stronger partner to customers because of it. We know customers will judge us by how we respond to this incident. Throughout this process, we have been committed to transparent customer communication at every step, reflecting lessons learned from how others have navigated similar challenges.

We acknowledge that we may see some near-term impact on our business, but we are fully focused on mitigating that impact while doubling down on the value we deliver to our customers. Stepping back, it is evident that advanced nation-state threat actors are targeting technology companies and, most recently, perimeter security companies. We are committed to learning from this incident, sharing our insights with customers and peers, and driving collaborative innovation to collectively strengthen the protection of critical infrastructure across the industry. Now I will turn the call over to Cooper, who will walk you through our Q4 results and our outlook. Following his remarks, I will return to discuss the broader business trends and some key customer highlights.

Cooper Werner: Thank you, Francois, and hello, everyone. I will review our Q4 results and some selected full fiscal 2025 results before I elaborate on our outlook for FY '26 and Q1. We delivered a strong Q4, growing revenue 8% to $810 million, with a mix of 49% global services revenue and 51% product revenue. Global services revenue of $396 million grew 2% year over year, while product revenue totaled $414 million, increasing 16% year over year. Systems revenue totaled $186 million, up 42% over Q4 of FY '24, driven by tech refresh and data center modernization, direct and indirect AI use cases, as well as competitive takeouts.

Our software revenue of $229 million was up slightly against an exceptionally strong Q4 of FY 2024. Perpetual license software totaled $30 million, up 25% year over year. Subscription-based software declined 3% year over year to $198 million, reflecting the transition of our legacy SaaS and managed service revenue offerings and, to a lesser extent, customers' preference for hardware-based solutions for certain use cases, a trend which emerged over the course of FY '25. Revenue from recurring sources contributed 72% of our Q4 revenue. Our recurring revenue consists of our subscription-based revenue and the maintenance portion of our global services revenue. Shifting to revenue distribution by region, our teams drove growth across all theaters.

Revenue from The Americas grew 7% year over year, representing 57% of total revenue. EMEA delivered 7% growth, representing 26% of revenue. And APAC grew 19%, representing 17% of revenue. Looking at our major verticals, enterprise customers represented 73% of Q4's product bookings. Government customers represented 19% of product bookings, including 6% from US Federal. Finally, service providers represented 8% of Q4 product bookings. Our continued financial discipline contributed to our strong Q4 operating results. GAAP gross margin was 82.2%. Non-GAAP gross margin was 84.3%, an increase of 138 basis points from Q4 FY 2024. Our GAAP operating expenses were $461 million. Our non-GAAP operating expenses were $384 million. Our GAAP operating margin was 25.4%.

Our non-GAAP operating margin was 37%, an improvement of 255 basis points year over year. Our GAAP effective tax rate for the quarter was 11.4%. Our non-GAAP effective tax rate was 16.9%. Our GAAP net income for the quarter was $190 million or $3.26 per share. Our non-GAAP net income was $257 million or $4.39 per share, reflecting 20% EPS growth from the year-ago period. I will now turn to cash flow and balance sheet metrics, all of which were very strong. We generated $208 million in cash from operations in Q4. CapEx was $16 million. DSO for the quarter was 46 days. Cash and investments totaled approximately $1.3 billion at quarter-end.

Deferred revenue was $2 billion, up 11% from the year-ago period. We generated $906 million in free cash flow for all of FY 2025, up 19% from FY '24, resulting in a free cash flow margin of 29%, highlighting the strength of our business fundamentals. 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. We ended the quarter with approximately 6,580 employees. Francois recapped our high-level FY '25 results at the start of the call. I will elaborate on our annual software and security revenue results.

Software grew 9% year over year, totaling $803 million, with software subscriptions representing 85% of FY 2025 software revenue. Our software revenue is comprised of perpetual software licenses, term-based subscriptions, and SaaS and managed services. Perpetual software licenses contributed $120 million in software revenue, up 7% year over year. Term-based subscriptions contributed $508 million to software revenue, up 18% year over year, driven by continued strong renewals and expansions. SaaS and managed services contributed $170 million in revenue, down 9% year over year, reflecting growth from F5 distributed cloud services, offset by the transition of our legacy offerings.

Total annualized recurring revenue for our SaaS and managed services offerings ended the year at $185 million, up slightly from FY '24, including 21% growth in ARR for our core SaaS and MEMS services solutions. ARR from legacy offerings declined to $15 million as we wound down legacy SaaS and managed service offerings and transitioned customers to F5 distributed cloud services. We expect to complete any remaining transitions in '26. Several years ago, we began breaking out our security-related revenue. This year, our total security revenue, which includes standalone security, attached security, and maintenance revenue related to security, grew 6% to approximately $1.2 billion or 39% of total revenue. Standalone security revenue totaled $403 million, representing 31% of product revenue.

Let me now address our outlook, beginning with FY '26. Unless otherwise noted, our guidance references non-GAAP metrics. We delivered an exceptional FY 2025, exceeding expectations with stronger-than-expected systems demand and continued healthy expansion in our software subscription business. As we enter FY 2026, we see several persistent demand drivers, including hybrid multi-cloud adoption driving expansion across our platform, the continuing strong systems refresh opportunity with more than half of our installed base on legacy systems nearing end of software support, growing systems demand beyond tech refresh for data sovereignty and AI readiness use cases, and a return to growth in revenue from our SaaS and managed services with the transition of legacy offerings largely completed in FY 2025.

These drivers and our current pipeline support mid-single-digit revenue growth in FY 2026 against our exceptional 10% growth in FY 2025. However, we also anticipate some near-term disruption to sales cycles as customers focus on assessing and remediating their environment. Taking this into account, we are guiding FY '26 revenue growth in the range of 0% to 4%, with any demand impacts expected to be more pronounced in the first half before normalizing in the second half. Moving to our operating model, we recognize the revenue guide may lead to a modest impact on our operating margin near term.

We are committed to driving continued operating margin leverage and believe any demand impact is likely to be short-term, and therefore, any effect on our operating model would also be temporary. With that context, we estimate FY '26 gross margin in a range of 83% to 83.5%. We estimate FY '26 non-GAAP operating margin to be in a range of 33.5% to 34.5%, with operating margins lowest in our fiscal Q2 due to payroll tax resets in January and costs associated with our large customer event in March. We expect our FY 2026 non-GAAP effective tax rate will be in a range of 21% to 22%. And we expect FY '26 EPS in a range of $14.50 to $15.50.

Finally, we intend to continue to use at least 50% of our free cash flow towards share repurchases in FY '26. Turning to our Q1 outlook, we expect Q1 revenue in a range of $730 million to $780 million. This is a wider range than we would typically guide, reflecting the potential for some near-term disruption to sales cycles. While we are not guiding revenue mix, we expect Q1 software to be down year over year given the strong growth in the year-ago period. We expect non-GAAP gross margin in the range of 82.5% to 83.5%. We estimate Q1 non-GAAP operating expenses of $360 million to $376 million.

We expect Q1 share-based compensation expense of approximately $61 million to $63 million. We anticipate Q1 non-GAAP EPS in a range of $3.35 to $3.85 per share. I will now pass the call back to Francois.

Francois Locoh-Donou: Thank you, Cooper. Our immediate priority remains supporting customers as they evaluate and safeguard their environment. As we help our customers navigate this period, market dynamics are moving in a direction where F5 solutions are more essential than ever. The accelerated adoption of hybrid multi-cloud architectures and AI-driven infrastructure is driving demand for advanced application delivery and security solutions, areas where F5 is uniquely positioned to address our customers' most complex challenges. The industry has platforms for endpoints, network access, and for cloud workloads, but the F5 application delivery and security platform is the first to unify high-performance traffic management with advanced application and API security across hybrid and multi-cloud environments at scale.

Unlike fragmented point solutions, the ADSP is purpose-built to simplify hybrid multi-cloud complexity. It integrates security, scalability, and operational efficiency while enabling valuable XOps capabilities like policy management, analytics, and automation. By the end of Q4, nearly 900 customers were leveraging F5 XOps capabilities, up from just 20 in 2024. Innovations like our AI assistant and application study tool have been instrumental in driving this growth, which underscores the power and potential of the ADSP. Over the last several years, we have also been evolving our go-to-market strategy, focusing on landing, adoption, expansion, and renewals within our solutions portfolio. This approach has delivered results.

26% of our top 1,000 customers are now using F5 distributed cloud services, up from 17% in 2024. By delivering integrated solutions and accelerating customer outcomes, F5 is uniquely positioned to lead in a rapidly growing and dynamic market. I will speak to a few customer highlights from Q4 that demonstrate the power and the benefit of our holistic platform approach. An APAC-based bank is driving secure and scalable digital transformation with F5's comprehensive application delivery and security solutions. Leveraging F5 BIG-IP, NGINX, and distributed cloud services, the bank is modernizing its critical infrastructure to enable 24/7 Internet banking and mobile application access while meeting strict regulatory requirements for service resilience and disaster recovery.

F5 ensures business continuity and robust security, protecting against DDoS attacks and API vulnerabilities. By enabling seamless migration to containerized applications, F5 is positioning the bank for hybrid multi-cloud success. The leading North American investor manager partnered with F5 to modernize its infrastructure, enhance resilience, and ensure uninterrupted operations. By migrating from legacy I Series platforms to BIG-IP R Series ahead of end-of-software support dates, the customer avoided compliance risks and ensured seamless operational continuity. The customer also deployed F5 for secondary DNS services to reduce reliance on a single provider and deliver critical redundancy to prevent outages. F5's lightweight platforms and cloud solutions help the customer optimize performance within existing budgets.

Finally, a major energy and gas company partnered with F5 to modernize its critical infrastructure and drive its cloud migration while ensuring seamless security across hybrid and multi-cloud environments. F5's BIG-IP and distributed cloud services extend application delivery, security, and identity management into hybrid multi-cloud environments, ensuring seamless operations and operational continuity. The customer is also leveraging F5's advanced WAF to strengthen the protection of revenue-generating B2B applications and business-critical platforms. With F5, the customer simplified operations, achieved cost savings, and accelerated the modernization effort. These examples highlight the strong impact F5's ADSP approach is having for our customers.

While we continue to work toward realizing the platform's full potential, we are confident that our commitment to innovation will drive even more value and outcomes for our customers. Before closing, I will highlight the traction we are building in AI use cases. We are seeing clear evidence that AI-related demand is contributing to our growth. AI is prompting a wave of data center refreshes as enterprises prepare for increased network capacity and services to support AI workloads, AgenTeq AI, and inferencing demands. Beyond benefiting from broader AI-driven trends, F5 is directly powering key AI use cases.

In FY 2025, we secured AI use case wins with more than 30 customers who are leveraging F5 to enable seamless, scalable, and secure AI workflows. These wins represent net new insertion points and growth opportunities built on decades of expertise. Today, we are actively supporting three critical AI use cases. Number one, AI data delivery. F5 secures and accelerates high-throughput data ingestion for AI training and inferencing, enforcing policies and protecting sensitive data while eliminating bottlenecks. Number two, AI runtime security. F5 safeguards AI applications, APIs, and models from abuse, data leakage, and attacks like prompt injection, ensuring visibility and control. And number three, AI factory load balancing.

F5 optimizes traffic and GPU utilization in AI factories to increase token throughput, reduce time to first token, and lower cost per token. In Q4, we secured several new AI wins across these use cases. In an AI data delivery use case, an asset manager in EMEA partnered with F5 to overcome challenges in managing their AI workloads and ensuring reliable data performance. Their existing server could not handle high levels of demand, causing outages that disrupted operations. F5 provided a customized solution with advanced technology to improve systems reliability, efficiently manage data traffic, and seamlessly work with their existing infrastructure.

The government ministry in EMEA chose F5 to secure and scale AI security runtime operations for its AI-driven weather prediction platform. Expanding on a prior AI data delivery project, the ministry required a comprehensive solution to ensure real-time access to AI-driven data, with robust security for sensitive operations. F5 delivered a comprehensive solution suite, including AWAF for application security, SSLO for traffic inspection, APM for access control, and LTM for reliable data delivery. With F5, the ministry transitioned from manual, inefficient forecasting to a secure, real-time AI-powered platform, improving performance, accuracy, and operational efficiency.

In an AI factory load balancing use case, a North American service provider specializing in providing high-performance computing solutions for AI and machine learning workloads needed a high-performance solution to manage and scale AI workloads. They required enhanced scalability, reliability, and accessibility for GPU-driven workloads, as well as a proxy for container functions to optimize AI data pipeline performance. F5 provided an integrated solution featuring container ingress services with BIG-IP Virtual Editions, delivering a critical control layer for performance, scalability, and reliability across AI data pipelines. F5's ease of installation and ability to address the customer's specific needs set it apart from competing open-source alternatives. In Q4, we strengthened our AI runtime security capabilities with the acquisition of Calypso AI.

Their cutting-edge technology enhances our offerings with real-time threat defense and red teaming at scale, addressing critical needs for enterprises deploying generative and agentic AI. We are integrating these capabilities into our ADSP, creating the most comprehensive solution for securing AI inference. In fact, we launched two new offerings in Q4 leveraging Calypso's technology. F5 AI Guardrails establishes and monitors how AI models and agents interact with users and data while defending against attackers. An F5 AI red team identifies threats and informs exactly where and how urgently guardrails should be implemented. Wasting no time, our team secured wins for these offerings with a top-tier investment bank and a global AI compute platform leader.

Collectively, our Q4 successes underscore F5's growing leadership in the hybrid multi-cloud landscape and the real value our platform approach delivers to customers, empowering them to simplify operations, enhance security, and accelerate innovation across their environment. I want to express my deepest gratitude to our customers and partners. Your urgency, collaboration, and trust through every step of our incident response have been invaluable. We are truly honored to work alongside you and remain steadfast in our commitment to earn your confidence every single day. I also want to extend my heartfelt thanks to all Fivers who came together with incredible focus and dedication to drive a strong and effective response.

Looking ahead, we are resolute in our commitment to emerge stronger from this experience and to working across the security community to build a better and safer digital world. In closing, I am deeply honored by the board's appointment as chair effective with Al Higginson's retirement in March 2026. As a director for nearly thirty years, and chair for twenty, Al's leadership has been essential to F5's growth and transformation. He has provided outstanding stewardship and tone at the top that has shaped the F5 we are today. I am humbled by the board's trust and confidence in me to help lead F5 through its next chapter.

I look forward to working alongside this talented management team and the board to continue F5's trajectory of creating long-term value for shareholders. Operator, please open the call to questions.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Meta Marshall: Our first question comes from the line of Meta Marshall with Morgan Stanley. Please proceed.

Meta Marshall: Great. Thanks, and I appreciate the question. Can you hear me?

Francois Locoh-Donou: We can.

Meta Marshall: Okay. Alright. Sorry. There was music for a second. So just in case, just a question in terms of, you know, what form of kind of conservatism have you put in the estimates? I guess I'm just trying to get a sense of, you know, are you accommodating customers through discounting? Is this your pushing off kind of purchase, you know, maybe people are pushing off purchasing decisions while they're handling kind of servicing or upgrading incidents, or are you having to give other incentives to kind of upgrade boxes? Just trying to get a sense of kind of what form that kind of customer conservatism is taking. And then maybe just a second question.

Just as you think about kind of the underlying growth of the systems business, like, way to contextualize how much of the '25 growth was kind of due to the product upgrade cycle that was happening. Thanks.

Francois Locoh-Donou: Let me start with the first part of your question. I think Cooper will take the second question. Let me just say fiscal 2025 and the momentum in the business has been very, very strong. That we've talked about, specifically hybrid multi-cloud and AI. Six. With trends kind of normalizing in the second half of the year. So double click on this near-term impact categories of things that could create near-term disruption. We have, you know, our own resources in the right place. And that takes time away from considering the next project. So that is a short-term net cost reduction around five.

There's a second potential disruption that we have, you know, considered in our guidance, which is that it would be natural that in some of our customers, at an executive level, we may see a complex organization. Make sure that they want to be reassured that projects should move forward and they have no is potentially for some of our customers to not to do that. And we have considered that as a third potential impact. Now, I haven't seen any of the impacts that I'm talking about, but we are very prudent about this because we are, you know, very, very early after the disclosure and the interaction with customers.

Systems business, we're seeing strength in both the product rate for our and capacity expansion. The growth has been pretty balanced actually across both. Roughly two-thirds of our systems business in FY '25 was tech refresh with about a third coming from what we call data center increasing capacity data sovereignty use cases. A lot of this is really driven by AI that can be both direct. So it's just been a trend that we've continued to see over the course of the year where we're seeing growth from both the refresh motion as well as some of these newer use cases.

And then on the refresh motion, I would also note that I think we're still relatively early days on that refresh cycle with more than half of our installed base currently still on the legacy product families. We're going into software support in the future.

Meta Marshall: Thank you so much.

Operator: Our next question comes from the line of George Notter with Wolfe Research. Please proceed.

George Notter: Hi. Thanks a lot, guys. Hey. Just continuing on that line of discussion. I guess I'm curious about how you actually size the potential impact from the security breach. You know, I would imagine it's probably a complex exercise, but I'm just curious if you could just kind of walk through the logic here and then maybe related to that, can you give us a sense for how many customers were affected where, you know, there was configuration information taken or are there specific, you know, customer issues that you can point to?

Cooper Werner: Yeah. So, George, this is Cooper. I'll take the first part, and then Francois can address the second question. So Francois kind of touched on it a little bit at a high level. I mean, he's going to reference the percentage of our business that is recurring in nature, but as we went through this process, we really took a fairly granular approach at kind of profiling our revenue base across all the different revenue streams and kind of taking a look at, you know, which of these revenue streams could be more impacted and which ones would, you know, be more resilient in the near term.

So if you think about our revenue base, a lot of the revenue we recognize comes straight off the balance sheet. So our service revenue, that maintenance revenue is mostly coming off of deferred revenue. We've got our SaaS revenue is coming out of beginning ARR. And then we've got a lot of our software business coming through in the form of and we wouldn't expect to have much of a near-term impact. And then if you look at kind of newer use cases, whether that's, you know, competitive takeout or new software project, that's where you're potentially could be more of a, you know, a near-term impact.

And so we kind of looked at these different cohorts of our revenue base and just kind of made a judgment as to what the impact could be in the near term as customers are kind of going through some of their operational activities around the incidents. And then we also have just looking at other, you know, peers historically that have gone through similar incidents and what teams. Just kind of assessing at the outset what their view and, you know, I think we're very encouraged by some of the early feedback we've gotten from those conversations. It that they've been very healthy discussions. Customers are helping them.

Francois Locoh-Donou: Question, George, on customer impact. And very aware in our customers who have had to work long hours to secure their environment. In ensuring that they are in the place they want to be. With that said, the customers who are infected customers. They were really two categories of impact. All of our BIG-IP customers, we recommended strongly to all of them that they upgrade their BIG-IP through the latest releases that we work very hard to make available. And we were very impressed, frankly, with the speed with which our customers have mobilized resources to be able to make these upgrades and put them in production fairly rapidly.

So the impact really on them was having to mobilize resources to do that work shortly after our disclosure. We will continue. That impacted a small percentage of data customers. For and the sort of e-discovery process around what specific data was customer. But from the, you know, the first body of work that we have done on that, the customers that were impacted. And we have sent them their information, their data package for the data that might have been exfiltrated. And the most common feedback from customers so far has been that data is not sensitive, and they're not concerned about it.

George Notter: Thank you.

Operator: Our next question comes from the line of Michael Ng with Goldman Sachs. Please proceed.

Michael Ng: Hey. Good afternoon. Thanks for the questions. I just have two. First, just on OpEx. It seems like the implied OpEx growth for fiscal 26 is about 4% at the midpoint. I'm just wondering if you're seeing any additional cost as a result of the data breach, you know, investments in systems internally or, you know, costs related to offering the offering free software EDRs to affected customers. And then second, you know, certainly, encouraging to hear that it was just, you know, BIG-IP that was impacted, not NGINX or DCS. Could you just tell us what percentage of the revenue comes from BIG-IP? Thank you very much.

Cooper Werner: So, yeah, so I'll start with the latter. We don't break out our product by revenue line. We're a single segment company, but it's, you know, BIG-IP is, you know, the highest revenue product course. But we don't actually break out what the contribution is. And then in terms of investment in the security and the OpEx, so, yeah, we actually have been investing aggressively in cybersecurity over the last several years. It's more than doubled our investment in cybersecurity in the last three years alone. And we had already accounted for continued investment in our planning for this year even before we learned of the coursework. You know, we've learned a lot in the last several weeks.

That was among the highest priority areas of investment in our plan. Going into the year.

Michael Ng: And any cost related to the Falcon EER subscription?

Cooper Werner: Yeah. So there are a number of costs related to the incident remediation and offering that you're referencing that is part of that. Those are either going to be accounted for in our with our cyber insurance or they would be remediation costs that are accounted for separately as a one-time expense.

Michael Ng: Thank you very much, Cooper.

Cooper Werner: You're welcome. Thank you.

Operator: Our next question comes from the line of Tal Liani with Bank of America. Please proceed.

Tal Liani: Hi, guys. By the way, the sound quality is bad on your end. I can't understand you. I have two sets of questions on software revenues and system revenues. On systems, if I look at the dollar revenue for this year, and you started the year with $1.60, but then it accelerated to $1.80. Quarter, give or take. $1.80, $1.81, $1.86, but $1.80 a quarter. Do you think you can further grow from this level, or is the growth rate going to decline substantially because this level reflects kind of the level of the refresh going forward, kind of steady state refresh going forward? Or what maybe different drivers.

I'm just trying to understand if the increase from a $130 to a $140 million last year about a $180 this year, if there is further growth from this level or we stabilize at this level. And on software, I have the same question almost that if I look at the quarterly level of revenues this year, and I average it out, there was a step up in this year versus last year, but we stayed at the level of about $2.10. I mean, some quarters are below, some quarters are above, but there is kind of a straight line. And this is on the heels of refresh or of renewal.

So the question is, what drives software to growth from here if that's the growth we're seeing with renewals and only account we spoke about it quarters and all the accounting treatment of renewals. So bottom line is what drives software and system growth from here versus the temporary items that are impacting it right now? Thanks.

Cooper Werner: Okay. I will start with hardware. So I think you're right. We saw significant growth here, of course, this year. I think that, you know, you referenced where hardware revenues were at in FY '24. And then that really is kind of the starting point. That was a low watermark. We had talked about customers were in a period of sweating assets where they had not been investing in the data center, and a lot of that was tied to the macro time in customer budgets. And what we've been seeing is a bit of a catch-up period over the last year. With some of that deferred investment, and that's just in FY '25.

But we are still early in the refresh cycle. We think there is still ability. And then, as I said on an earlier question, kind of a new vector of growth. And this is kind of more of an emerging growth category, which is in some of the data center capacity expansion that we've been seeing. And so that one is still relatively early, but kind of a newer growth trend that we don't think it could potentially have growth for years to come. And so from the refresh perspective, we believe that this year should be a strong year of refresh. We are in the cycle.

And then on the new performance and data center capacity, that near-term impact that you could see related to strongly believe that our software is going to continue to grow. At a healthy rate, and that's driven in the trends. You know, I make that statement on the trends that we're seeing in the business. So the multiyear software agreement that we have that are active 20% year on year. And we expect that to continue to grow. Our motion of the flexible consumption agreement that allows customers to consume over multiple years and consume over multiple parts of our portfolios.

Are growing because customers are embracing this hybrid multi-cloud architecture more and more and need multiple form factors in software and software as a service. Software is a manifestation of that. You know, the number of SaaS customers this year grew almost six distributed cloud customers today. And we have a little more than 800 a year ago. That so that adoption and that adoption is growing, including in our largest customers, so our top 1,000 customers. We're seeing that now over 26% of them are consuming F5 distributed cloud. As you know, in the SaaS part of the business, we have been going through some transitions. We are largely through these transitions.

And we expect the SaaS and managed services line to contribute to growth in software going forward. The second dynamic is that customers are seeing the benefits of our entire portfolio. And we're seeing that in the number of customers that are consuming multiple product families from that side. To go back four years ago, we had about 30% of F5 customers that were consuming multiple products. And we're seeing the ADSP, our application delivery security platform. Especially in our XOps capabilities. We're seeing rapidly and growing adoption around that. And so when you combine all of this, you combine what we expect to see with the cost of our flexible consumption agreement that has continued to happen.

What we expect to see in SaaS adoption, which we have already seen, this year, and the approach we've taken with application delivery and security platform and the adoption we're seeing of that. All of these are catalysts for continued growth of the software business going forward.

Tal Liani: But, Francois, if that's the case, and I know you reduced the guidance a little bit because of the breach, because of the cybersecurity issue, but even before that, you only guided growth to 5%. So if that's the case, why don't we see a faster growth rate?

Cooper Werner: Right. So, Tal, I mean, we've talked about this. We've tried to talk about this on several calls. There is a timing nature because of these three-year cycles on the renewals. And so the subscription business that we sold in FY 2023 had a lower growth rate because new projects were under pressure three years ago. So that's what's coming up for renewal in FY 2026. And so the base with which we're starting doesn't have as much growth in FY 2026. And that's what was behind what we said was a good single-digit growth opportunity when we talked in July.

That same base has much more growth in FY 2027, and we don't have the headwind related to our SaaS managed service business. Because we're through the transition. So we tried to lay out that there aren't going to be some ups and downs in the annual growth rate timing of those. But we've given that look ahead beyond the current year into '27 to give that visibility that we expect a reacceleration of software growth rate. The underlying trends are very healthy. And Francois laid out several metrics to point to the underlying health of the software business.

And we saw that last year, you look at our term license business, that was a But, again, that's going to be behind us. And so it points to a very healthy software view beyond the FY '26.

Tal Liani: Got it. Thank you so much for your candor and openness. I know these questions are tough, but thank you for taking time to answer them in such detail.

Francois Locoh-Donou: Thank you.

Operator: Our next question comes from the line of Tim Long with Barclays. Please proceed.

Tim Long: Thank you. Two quicker ones if I could. I just wanted to follow-up Francois, on Distributed Cloud Services. Part of my question was about multiproducts. I think you just answered that there. But could you talk about some of the other economics that you see as you transition to DCS, you know, things like deal sizes, you know, win rates, maybe when we get to it, you know, dollar retention or, you know, add-ons on top of that. Number one. And then number two, if you could just quickly touch on, you know, a few of the verticals, at least on a bookings basis, were a little, you know, out of out of band. Enterprise was really strong.

Year over year, and service provider was pretty weak, all for pretty weak numbers. So anything that's driving kind of a little bit of out of band performance on those two verticals, that'd be great. Thanks.

Francois Locoh-Donou: Hello?

Operator: Please hold. We're experiencing some technical difficulties. Yes. We can hear you now.

Francois Locoh-Donou: Okay. Great. Was starting with your question, Tim, on distributed cloud. I'm saying this is a land and expand motion. So typically, the deals would start rather small in the multiple tens of k. And expand after that. After you have a data point on that, we have one-third of our distributed cloud customers that have expanded growth in a customer after. And that will continue to grow as we add more services onto our F5 distributed cloud. And we're continuing to add services as building this application delivery and security platform. So the second part of your question on the vertical generally, what we're seeing is most important enterprise verticals for different reasons.

But in the end, it all points to F5. So financial services, for example, but are also having to build sort of disaster recovery to comply with operational resilience regulations. And so they're leveraging public funds for that. And anytime a customer is using both on-prem environment and public cloud environment, it creates a strong case for F5. The same is true in healthcare. We're seeing the same in manufacturing, in retail, and even in public sector environment. So these verticals embracing hybrid multi-cloud really allow us to pull our share of wallet these verticals, and that's what's driving this cross-sell of our portfolio.

The service provider-based team that you mentioned, you know, it's true that generally that segment has been, I would say, rather tepid. In part because 5G has not really taken off in the way that, you know, we all expected a couple of years ago. And there hasn't been a real growth driver, frankly, for service providers either in our queue or 5G services adoption. Not significant growth to date.

Tim Long: Okay. Thank you, Francois.

Francois Locoh-Donou: Thank you.

Operator: Our next question comes from the line of Simon Leopold with Raymond James. Please proceed.

Simon Leopold: Thank you. Appreciate you taking the question. A couple of things I wanted to check on. One, hopefully easy is what are you seeing in terms of US federal in light of the government shutdown? Is that an aspect that's affecting the outlook for your December quarter? And the other thing I wanted to get a better sense of is you've given us some commentary around the mix of software, hardware for the December, but what's baked in for software versus hardware growth in that full year 0% to 4% guidance? Thank you.

Francois Locoh-Donou: Let me start with the in our guidance assumed some level of disruption. In that segment of our business. Especially in the first quarter with the government shutdown. That clearly is having an impact on, you know, we it is our hope that this normalizes. You know, we would not be what we have seen.

Cooper Werner: Yeah. Thanks, Simon. We're not guiding mix at this point just given that we're twelve days since the announcement of the incident and done a lot of work to provide a range on the growth outlook which, as we said, we've discounted some risk of short-term disruption to demand. We expect the demand to normalize in the second half of the year. And I think as we see demand start to normalize, we'll look to give an update on what software and hardware growth could look like for the rest of the year.

Simon Leopold: Just maybe you could clarify because you've got BIG-IP as the appliance system business, but you have virtual editions of BIG-IP. So when you talked about the breach, you said it affected BIG-IP. Does that mean that the breach affects both software and hardware equally?

Francois Locoh-Donou: Yes. It does.

Simon Leopold: Thank you for that. That's what I wasn't sure about. Appreciate it.

Francois Locoh-Donou: Thank you. Thank you.

Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan Chase. Please proceed.

Samik Chatterjee: Great. Thank you for taking my questions. Francois, just curious to hear your thoughts in terms of how the market share dynamics change on account of the potential impact that you're outlining for the first half? Because I'm just wondering if sort of we should expect to see some of the spend from your customers if it does get delayed from the first half to see some catch-up in the second half, particularly when it comes to potentially the systems part of your business? And I have a quick follow-up after that. Sorry. Thank you.

Francois Locoh-Donou: Yeah. So we cannot do it if we follow, you know, on a one or two-quarter basis. Hopefully enough of the runway to see substantial change in market share. So if I speak more, you know, on an annual basis and what I expect going forward, my expectation is that we continue to gain share in the app delivery and security market. The reason I say that is relative to other players in the space, we are investing more in our roadmap.

We have been very aggressive on investing in security, and I think through the conversations, our customers, around what we are doing to secure our environment, you know, build trust center to allow customers to come and do penetration testing of our code. All of the work that we are doing with partners to continue to look for any vulnerabilities and secure our code. That our customers are going to continue to see that F5 is really the right partner in a 100% committed to maximum security in our products and in their environment. And that will be and where possible consolidate spend on our application delivery and security platform. In their environment.

And we have a world-class roadmap for our customers to continue to in delivery and security. So you have to look at it over a period of time. There may be a short-term blip. In, you know, the first half of our year. Because of the factors that I described earlier. But in terms of our market share, our market position, our relationship with customers, I think, you know, if anything over time, it will continue to strengthen.

Samik Chatterjee: Got it. Got it. For my follow-up, I was just looking at the disclosure that you had on standalone security revenues. I think you said $463 million for this year. Looks like it's been fairly consistent for the last couple of years without growth. Like, I have $458 million for fiscal 24, $475 million the year before. Any sort of more details you can provide in terms of what you're seeing on the standalone security side and why hasn't there been more significant growth on that front?

Cooper Werner: Yeah. I'll take that. So, you know, our overall security business grew about 6%. So I think what you're seeing is this is going back to the trend that we've talked about with customers preferring to consume via the platform and consolidate multiple functions onto a single platform. And so you're seeing less maybe less growth coming from standalone solutions and more of a preference to consume through our flexible consumption program where they're adding additional modules and attaching more security onto existing footprint. And so that growth is really coming through more in a platform form factor. Got it.

And then the other thing also is just there's a little bit of an impact on the standalone security from the SaaS that we've done with the legacy offerings, which, again, that'll be kind of behind us.

Samik Chatterjee: Thank you.

Operator: Our next question comes from the line of Amit Daryanani with Evercore ISI. Please proceed.

Amit Daryanani: Yep. Thanks, Octu, as well. I guess, Cooper, maybe just to start with you, can you just walk through the operating margin for the year? I think you're implying 34% margins for fiscal 26. It's also the same, I think, for fiscal Q1. So I'd love to just get a sense on why aren't we seeing leverage in the back half of the year versus the front half. Then if you just quantify what the OpEx uptick in March will be for some of the events you talked about, that would be helpful.

Cooper Werner: Yeah. And we talked I had in my prepared remarks that the low watermark for operating margins would be Q2. That's typically the case just seasonality with payroll tax resets and our large customer event in March, and so you actually would expect to see some leverage in the back half of the year coming off of the lower operating margins in Q2. And we're not going to guide Q2's operating expense today, but you could look at kind of seasonal trends to get a feel for what that uptick in the operating expense typically is in Q2.

Amit Daryanani: Got it. And then Francois, just on the brief side, and the challenges you're having, can you just maybe just help us understand. Right? If the source code is compromised, how do you give customers the confidence that there's no zero-day threat that kind of hiding in there over time? Just walk through that, and then does this also dampen your ability to implement price increases when it comes to the hardware side? You know, really to reflect what Citrix has been doing to some extent in that space. So I'd love to just understand kind of the zero-day risk and the potential for price increases maybe being a bit more muted there as you go forward. Thank you.

Francois Locoh-Donou: Thank you. Well, you know, let me start with the code, and then let's come back to, you know, price increase as a separate topic. Look. I said earlier that I think our customer. Now when you look at the, you know, our code, I should some of the things that we are doing to ensure that we remain vigilant about potential vulnerabilities in our code. So we have engaged partners that are getting to ensure that if there are any vulnerabilities, that we would need it and immediately.

I've shared with you that we are, you know, setting up a trust center that will be there to allow our customers to testing for hunting for penetration as well in our code. We are enhancing our above balance place. To ensure we remain hypervigilant about this. Around the security of our code going forward. And I think, you know, in our industry, we really intend to invest in fast. As we have these politicians and, frankly, as we have shared with our customers. They have been and I think are getting a lot of comfort that we are doing all the right things.

To ensure that they're the product they get from F5 to be safe and free of potential vulnerabilities or zero-day. I would also say that we have taken this further. You may have seen in our disclosure that we are working with CrowdStrike to implement ideology capabilities on BIG-IP. And that's an extra layer of protection that we are offering customers to have way more observability monitoring into it's just one example of where we are innovating with other industry partners to win the game. On security for our customers. Is a separate issue.

As you know, you mentioned one of our competitors earlier, we have taken an approach here that is to have durable relationships with our customers and to really show the value. Of what we're doing for them over time. We don't intend to change our policy and our approach. Think we're going to be very consistent with that. And, frankly, we can be consistent with our approach because with customers, you know, recognize all of the investments that we're making, the roadmap that I just talked about in terms of security, but also and having the best delivery and security platform for hybrid multi-cloud environment. We're the only company today. That can serve them in hardware, software, and SaaS.

And so the traditional apps, the modern apps, and we're continuing to make these investments, capabilities to our platform specifically tailored for AI applications securing AI applications. In our position deliver and security platform. So customers will continue to see these investments. And I think based on that, we can justify, you know, the value that we're getting in the interactions with our customers.

Amit Daryanani: Thank you very much.

Operator: Thank you. Our next question comes from the line of Ryan Koontz with Needham and Company. Please proceed.

Ryan Koontz: Great. Thanks. Most of my questions have been answered. But just a quick clarification, when you talked about the migration of your end-of-life products out there, they kind of where are you now in that migration? How do you think about that going forward? Are you seeing some pushouts? Are you giving customers any kind of timeframe breaks because of the breach to migrate those products going into life? Thanks.

Cooper Werner: Yeah. So we've said that we're still pretty early days in the refresh motion just in terms of the percentage of the installed base. Being well over 50%. That's on those two platforms. There's no we haven't adjusted the end of software support dates. Those have been public for a long time, and we're working with customers to ensure they have an orderly path to make those refreshes.

Ryan Koontz: Got it. Helpful. Maybe circling back to your comments on the telecom segment. Obviously, 5G has been disappointing there in terms of kind of deployment of virtualization. But are you seeing any new activities in the telecom domain around the new 5G core, maybe picking up momentum? Or anything else to call out on the telecom front here?

Francois Locoh-Donou: Yeah. We're look. I think what we're seeing is the sort of four to 5G transition continue with some geographies ahead of others. Those customers who have implemented 5G were saying, growth inside of this environment. Generally, this transition to 5G and, frankly, the revenues that telecom operators expected from that transition have not really materialized, and that in turn has put pressure on that. So we are continuing to find new use cases inside of our service provider customers, but it hasn't been significant enough to drive a substantial uptick in the overall segment.

Ryan Koontz: Well, thanks, Francois.

Francois Locoh-Donou: Thank you.

Operator: I would now like to pass the call back over to Suzanne DuLong for any closing remarks.

Suzanne DuLong: Thank you, everybody, for being with us today. We look forward to seeing many of you during the quarter.

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