Earnings call transcript: F5 Networks Q2 2025 beats earnings estimates

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Overview

The earnings call showed strong financial performance with significant revenue growth in systems and non-GAAP EPS. While software revenue was flat, the company expects strong growth in the second half due to renewals. The hardware segment is benefiting from a refresh cycle, and AI opportunities are emerging. The raised FY 2025 guidance and share repurchases further support a positive outlook. Despite some unclear responses in the Q&A, the overall sentiment is positive, likely resulting in a stock price increase of 2% to 8%.

Key Financial Performance

Total Revenue $731,000,000, up 7% year-over-year due to strong demand across various verticals.

Product Revenue $337,000,000, up 12% year-over-year driven by strong systems growth.

Systems Revenue $179,000,000, up 27% year-over-year due to hardware refresh activity and customer reinvestment.

Software Revenue $158,000,000, flat year-over-year; subscription-based software revenue was $138,000,000, down 2% year-over-year.

Perpetual Licensed Software Revenue $20,000,000, up 9% year-over-year.

Non-GAAP EPS $3.42, representing 18% year-over-year growth.

GAAP Gross Margin 80.7%.

Non-GAAP Gross Margin 83.1%, up 98 basis points year-over-year.

GAAP Operating Margin 21.7%.

Non-GAAP Operating Margin 31.9%, an improvement of 103 basis points year-over-year.

GAAP Net Income $146,000,000 or $2.48 per share.

Non-GAAP Net Income $201,000,000 or $3.42 per share, reflecting 18% growth from the year-ago period.

Cash Flow from Operations $257,000,000, a record for the company.

CapEx $11,000,000.

Deferred Revenue $1,920,000,000, up 6% from the year-ago period.

Share Repurchases $125,000,000 worth of shares at an average price of $259 per share.

Employees Approximately 6,500 at the end of the quarter.

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Operating Highlights

New Product Launch: Introduction of the F5 Application Delivery and Security Platform (ADSP), which converges load balancing and traffic management with advanced app and API security capabilities.

AI Innovations: Launch of AI-driven tools such as the iRule code generator and AI assistant functionalities across product families.

AI Gateway: General availability of the F5 AI Gateway, designed to secure and manage enterprise AI applications.

Market Expansion: Continued growth in EMEA with a 20% increase in revenue, and strong demand in APAC and the Americas.

Competitive Displacement: Successful displacement of traditional ADC competitors, including wins in new accounts and consolidation of functionalities.

Operational Efficiency: Increased automation capabilities and improved operational management through the ADSP.

Revenue Growth: 7% total revenue growth in Q2, with 12% growth in product revenue.

Strategic Shift: Raising FY25 revenue growth guidance to 6.5% to 7.5%, reflecting strong first half performance and market dynamics.

Focus on AI: Emphasis on AI-driven solutions and infrastructure to support evolving customer needs in hybrid multi-cloud environments.

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Risk or Challenges

Competitive Pressures: F5 is experiencing competitive displacement momentum, particularly in the ADC market, where they are displacing traditional competitors. However, the company acknowledges that the majority of this opportunity is still ahead of them.

Regulatory Issues: There is potential concern regarding the impact of government budget disruptions on federal contracts, which could lead to demand pull-ins or push-outs.

Supply Chain Challenges: F5 has low tariff exposure due to USMCA compliance, but they estimate FY 2025 tariff-related costs to be in the low single-digit millions. They do not expect material impacts on lead times or availability due to a resilient and diversified global supply chain.

Economic Factors: The company is being conservative in its outlook due to macroeconomic uncertainties, despite not seeing any immediate signs of demand erosion.

Software Revenue Risks: F5's software revenue was flat in Q2, attributed to a smaller subscription renewal base. The company expects a substantial renewal opportunity in the second half of the year, but there is a risk of lower engagement on the perpetual software side.

AI Integration Risks: While F5 is seeing early traction in AI-related use cases, the company acknowledges that the full impact of AI as a growth driver is still developing.

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Guidance & Outlook

Application Delivery and Security Platform (ADSP): F5 introduced the ADSP, which converges high-performance load balancing and traffic management with advanced app and API security capabilities, addressing hybrid and multi-cloud challenges.

AI Innovations: F5 launched several AI-driven innovations, including an iRule code generator, expanded AI assistant functionality, and an application study tool to enhance customer experiences and operational efficiency.

AI Gateway: F5 announced the AI gateway, designed to secure and manage enterprise AI applications, addressing governance and compliance needs.

Competitive Displacement: F5 continues to displace competitors in various sectors, leveraging its comprehensive solutions to consolidate vendor management for customers.

Q3 Revenue Guidance: F5 expects Q3 revenue in the range of $740 million to $760 million, implying approximately 8% growth at the midpoint.

FY 2025 Revenue Growth Guidance: F5 raised its FY 2025 revenue growth guidance to a range of 6.5% to 7.5%, up from the previous range of 6% to 7%.

Non-GAAP Gross Margin: F5 anticipates a non-GAAP gross margin of approximately 83% for Q3.

Non-GAAP Operating Margin: F5 expects a non-GAAP operating margin at or around 35% for FY 2025.

EPS Growth Guidance: F5 raised its FY 2025 EPS growth outlook to 8% to 10%, up from the prior guidance of 6.5% to 8.5%.

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Shareholder Return Plan

Share Repurchase: In Q2, F5 repurchased $125,000,000 worth of shares at an average price of $259 per share. As of the end of Q2, there is $1,200,000,000 remaining on the authorized stock repurchase program. Year to date, F5 has repurchased shares equivalent to 57% of its free cash flow.

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Key Q&A

Q:On the software side, it seems like you know, a little bit of a underperformance in q two, maybe that we just had it modeled incorrectly, but pretty big growth in the second half embedded to get to double digits. So could you just give us a little color? It sounds like the subscription pipeline is strong. Just curious how that’s, you know, gonna break out between, you know, maybe renewals or or new business. And given the macro uncertainty, is there any risk to that?

A:The growth is really weighted to the second half of the year tied to a substantial renewal opportunity we have across both q three and q four. We have good insights as to how customers have been deploying their software that’s coming up for renewal. We’ve seen a continuation of the trend of expansion at renewal across the portfolio.

Q:On the hardware side that you, Cooper, I think you listed a number of things that are positive. I’m just curious how big of a driver and and how, how the ramp of these replacements will go. Is that, you know, currently, one of the major things that customers are talking about as far as their upgrades and that 50%, is that do you expect that to move rather quickly away from the, you know, the the base that’s aged?

A:Hardware was up 27% year on year this quarter with strong revenue growth. A meaningful portion of that is driven by strong momentum on the refresh cycle, and we think that cycle will last into well into 2026. We are seeing more investments in data center modernization and expansion of data center capacity, and customers also getting ready for AI.

Q:How would you characterize kind of where you are in that cycle? Or do you feel like you’ve got, you know, enough, you know, critical mass here in terms of really getting sizable wins, in displacing, and how long do you think that cycle can last?

A:We still think we are in early innings in that opportunity and that the majority of the opportunity there still is ahead of us. We have won several hundred accounts in that category.

Q:Can you just talk about at least qualitatively, you know, which of these three use cases you think is the largest opportunity from a dollar basis for the company? And then where are you seeing better traction right now versus not?

A:The largest use case for us today in terms of where most we’re seeing most of the dollars is in data delivery for AI models.

Q:Can you just talk a little bit more about the I Series, Diprion installed base being 50% of the total systems installed base?

A:The Viprion family goes end of software support in April of twenty six, and iSeries is in January of twenty seven. Combined, those two product families are well over half of our installed base today.

Q:Can you just highlight what did you see in terms of the customer sort of overall lower engagement on the perpetual side this quarter? What drove that?

A:The sequential decline that we saw in perpetual software was really kind of in line with our expectations going into the quarter and what we’ve seen in prior years.

Q:Can you just talk about the timing of AI starts to be a meaningful driver or a notable driver to growth?

A:We are already driving revenue from AI today. We think it’s early days, but it is going to grow over time.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer or lacked clarity on the following questions: 1. The specifics of how the subscription pipeline will break out between renewals and new business, especially in light of macro uncertainties. 2. The exact impact of the tariff situation on hardware purchases and whether there was any pull-in of orders. 3. The details on how the company plans to drive growth from new business in the software segment, particularly in relation to the renewal base.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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