The paragraph is an introduction to F5's Fourth Quarter Fiscal 2024 Financial Results Conference Call. The operator and Suzanne DuLong, F5's Vice President of Investor Relations, are conducting the call. Presenters include Francois Locoh-Donou, President and CEO; Frank Pelzer, Executive Vice President and CFO; and Cooper Werner, SVP of Finance and incoming CFO. The call discusses F5's financial results and includes a Q&A session. A press release and slides are available on F5's website, and an audio replay is accessible until January 27, 2025. The discussion will contain forward-looking statements and non-GAAP metrics, with disclaimers regarding uncertainties and risks.

The paragraph discusses F5's strong financial performance in Q4, highlighting record revenues of $747 million, a 6% increase year-over-year, driven by a 19% growth in software revenue. The company exceeded its guidance range for non-GAAP EPS and EBIT, indicating improved operating margins. F5 outperformed its fiscal year 2024 plans despite challenging macroeconomic conditions, achieving 11% software revenue growth compared to fiscal year 2023 and 14% non-GAAP growth. The paragraph emphasizes F5's transformation from a hardware-centric company to a leader in security and software for the hybrid multi-cloud environment, which expanded its total addressable market and diversified its revenue streams.

The paragraph discusses the growth and future outlook of the company's revenue and earnings. Since FY '17, the company's software and subscriptions have significantly increased in both absolute terms and as a percentage of product and software revenues, respectively. Recurring revenue has also grown, providing strong revenue visibility for the following year. Looking ahead, the company anticipates revenue growth of 4% to 5% and earnings growth of 5% to 7% in FY '25, driven by software renewals, demand trends, and a growing pipeline. The company is confident in its long-term growth due to alignment with industry trends, particularly the shift to hybrid multi-cloud environments, and effective go-to-market strategies.

The paragraph discusses the increasing complexity and challenges in managing and securing distributed applications and APIs due to their growth and proliferation. Security needs have risen significantly, with organizations now deploying more services to maintain app performance and security. The rise of AI and AI-powered applications adds further complexity and demands on IT teams. F5 identifies these industry dynamics as a "ball of fire" and believes it is well-positioned to address them, driving growth by acquiring new customers, leveraging channel relationships, and expanding its footprint among its existing 20,000 customers.

The paragraph highlights F5's success in expanding its platform to enhance security and streamline operations, particularly through its distributed cloud services launched in February 2022. With over 800 customers, one-third of whom are new, F5 attributes its growth to effective customer renewals and expansions. The company's strategy focuses on app and API security, simplification, and standardization/automation. F5 offers a comprehensive app and API security platform that consolidates various security functions into a single, integrated solution. An example provided is of a global energy company choosing F5 over competitors for superior security capabilities. Additionally, F5 emphasizes simplifying IT operations while enabling hybrid multi-cloud flexibility.

F5 provides solutions that integrate public clouds, edge, and on-premises environments, simplifying connections and applications across diverse infrastructures. In Q4, F5 helped a large Southeast Asian mobile provider manage IP conflicts post-merger by using multi-cloud networking technology. Additionally, F5 has streamlined operations for an Australian bank by automating and modernizing its application infrastructure, reducing manual processes and improving security and reliability. Their solutions focus on standardization, automation, and scalability, allowing customers to consolidate vendors and efficiently manage IT operations.

The paragraph discusses F5's strategic differentiation and opportunities in AI-related use cases. F5 is leveraging its expertise in traffic management to address new demands in AI infrastructure, particularly in networking that supports AI development. They see significant opportunities in three areas: AI data ingestion, AI factory load balancing, and high-performance traffic management. An example is provided where a global conglomerate selected F5 to optimize data ingestion for AI model training. Additionally, F5 has partnered with NVIDIA to enhance AI infrastructure with high-performance software ADC, including enabling BIG-IP Next to run in Kubernetes environments.

The paragraph highlights how F5 is driving demand for advanced semiconductors like GPUs by developing AI factories and integrating AI workloads with Kubernetes. F5 has partnered with NVIDIA to enhance its BIG-IP Next for Kubernetes, enabling NVIDIA BlueField-3 DPUs to act as AI accelerators, improving performance and security for AI training and inference. F5 also focuses on AI use cases like application delivery controllers (ADCs), and web application firewall and API protection (WAAP), with current deployments expected to grow as AI inferencing scales in the next 18 to 24 months. F5 is not just adapting to the AI revolution but shaping it, providing essential infrastructure for safe and efficient AI use. The company also implements generative AI solutions to assist customers and expects to play a significant role in multiple AI use cases. F5 enters fiscal year 2025 with a strong portfolio aligned with industry trends and customer needs.

The paragraph discusses the financial performance and revenue distribution of a company for Q4 and FY '24. It highlights a total Q4 revenue of $747 million, with a split between 52% Global Services and 48% product revenue. Global service revenue grew by 2%, and product revenue increased by 10% year-over-year, led by strong software sales. Software revenue, particularly subscription-based, showed significant growth, emphasizing a trend towards recurring revenue, which accounted for 78% of total revenue. It also breaks down revenue growth by region, with the Americas showing a 9% increase, EMEA a 4% rise, and a 3% decline in APAC revenue.

In Q4, enterprise customers accounted for 72% of product bookings, while government and service provider bookings were 18% and 10% respectively. The company's Q4 GAAP and non-GAAP gross margins were 80.8% and 83%, with operating margins of 25.6% and 34.4%. Net income was $165 million GAAP ($2.80/share) and $217 million non-GAAP ($3.67/share). Cash flow from operations was $247 million, and CapEx was $6 million. The company had $1.08 billion in cash and investments, with deferred revenue at $1.8 billion. F5 repurchased $100 million worth of shares in Q4 and $500 million in FY '24. The Board authorized an additional $1 billion for stock repurchases, bringing the total to $1.4 billion.

At the end of the quarter, the company had approximately 6,560 employees and concluded FY '24 with a revenue of $2.82 billion, slightly higher than FY '23 and at the upper limit of initial revenue guidance. Global Services revenue grew by 4% to $1.54 billion, constituting 55% of total revenue. Product revenue, making up 45% of total revenue, declined by 5%. Within this category, systems revenue was $537 million, a 20% decrease, but underlying systems bookings increased. Software revenue rose by 11% to $735 million, surpassing initial expectations due to strong renewals and new business trends. Software made up 58% of product revenue, with 85% from software subscriptions. Software revenue was split into SaaS and managed services, term-based subscriptions, and perpetual licenses. SaaS and managed services revenue was $193 million, down 5% due to planned legacy retirements. The ARR for these services was $182 million, down from $198 million, affected by planned churn but balanced by growth in core offerings.

The paragraph discusses F5's legacy offerings and software revenue components. The legacy offerings include discontinued SaaS and managed services, and transitioning Silverline managed services to F5 distributed cloud services. The decline in legacy annual recurring revenue (AR) from FY '23 to FY '24 is primarily due to planned churn from discontinued offerings, with some Silverline services transitioning to the new platform. The core SaaS and managed services, including F5 distributed cloud services and other solutions, showed growth despite some churn. Term-based subscriptions, recognized in part as product revenue, increased by 22% year-over-year, contributing $430 million in FY '24, driven by strong renewals and new business. Lastly, perpetual software licenses contributed $112 million, up 3% from the previous year. Security-related revenue has also been tracked separately for several years.

The paragraph discusses the company's financial performance and future outlook. It reports total security revenue of $1.1 billion, making up 41% of total revenue, with standalone security generating $460 million. For FY '24, the GAAP gross margin was 80.2% and the non-GAAP gross margin was 82.8%. The GAAP operating margin was 23.4% and the non-GAAP operating margin was 33.6%. The GAAP net income was $567 million or $9.55 per share, while the non-GAAP net income was $794 million or $13.37 per share. Looking ahead to FY '25, the company expects 4%-5% revenue growth, assuming stable macro conditions and no major increases in IT budgets. The revenue growth is expected to be stronger in the second half of the year due to significant renewals.

The paragraph outlines the financial outlook for the fiscal year 2025, with a focus on software, systems, and global services revenue growth expectations. Software revenue is expected to grow in the upper-single digits following an 11% increase in FY '24. Systems revenue is projected to grow mid-single digits and global services low-single digits. The company anticipates gross margin improvements leading to a non-GAAP gross margin of 83%-84% and a non-GAAP operating margin of about 35%, with seasonal variations. An effective tax rate of 21%-23% and 5%-7% non-GAAP earnings growth are projected. Additionally, the company plans to allocate at least 50% of its free cash flow to share repurchases. For Q1 of FY '25, revenue is expected to be between $705 million and $725 million.

The paragraph discusses financial expectations for the company, including an anticipated non-GAAP gross margin of 83% and Q1 operating expenses between $343 million and $355 million. It also predicts Q1 non-GAAP EPS of $3.29 to $3.41 per share and share-based compensation of $55 million to $57 million. Additionally, Francois Locoh-Donou announces Kunal Anand as the new Chief Innovation Officer, praising his technical expertise and leadership background at Imperva. Acknowledgements are given to Frank for his leadership and to Cooper as the new CFO. Looking forward, the company anticipates a stable environment in FY '25, with hybrid multi-cloud architectures expected to be prevalent.

F5 is thriving in the era of AI and hybrid multi-cloud, positioning itself as a leader in the cloud WAAP market by securing apps and forming global partnerships. This year, F5 collaborated with 2,000 partners in 138 countries to support over 20,000 customers and secure millions of apps and APIs. Their services recently blocked over 2.3 billion attacks in one quarter, enhancing security for global activities like shopping and banking. The CEO expresses gratitude to employees, partners, customers, and shareholders for their contributions. The paragraph ends with Samik Chatterjee from JPMorgan preparing to ask a question about software performance.

The paragraph discusses the factors contributing to a company's outperformance in a recent quarter. Frank Pelzer explains that the outperformance came from two main sources: the expansion of contracts within the existing customer base, which included some significant renewals, and new business activity from delayed projects that moved forward once architectural designs were completed. This unexpected new business activity occurred in the latter part of the fiscal year, particularly in Q4. Cooper Werner adds that they had good visibility into the consumption patterns of their multiyear contracts, which met expectations. These factors led to strong software performance and improved the outlook for the upcoming fiscal year.

The paragraph discusses the company's performance in terms of customers consuming new offerings and expanding their usage, particularly in multiyear subscriptions. Samik Chatterjee asks about the future growth prospects for software given the early stage of AI adoption by enterprises. Francois Locoh-Donou responds by explaining that the company's guidance is influenced by a broader trend of enterprises adopting hybrid and multi-cloud environments. He notes that, contrary to earlier expectations of a single public cloud adoption, most customers are now operating in hybrid and multi-cloud settings, aligning with the company's strategic optimization.

The paragraph discusses how F5 Networks is benefiting from the growing trend of automation and hybrid multi-cloud architectures, with customers increasingly adopting these technologies. This shift has led to a rise in software consumption and new projects with F5. There is also an increased demand for securing APIs and applications, contributing to hardware growth for F5. Customers' confidence in data centers and hybrid architectures has reduced hesitation in refreshing hardware. Despite early days for AI, it presents new opportunities for F5 in both hardware and software, as the company leverages its expertise in securing and managing network and application traffic.

The paragraph discusses the growing need for expertise in managing AI workloads, particularly in handling data movement between devices, storage tiers, and GPU clusters. The company is finding opportunities for its BIG-IP hardware platform in these areas, despite being in the early stages with only a few companies currently involved. They also see potential in software opportunities within GPU clusters, underscored by a partnership with NVIDIA. However, they have not factored significant AI contributions into their fiscal year 2025 guidance, as they expect meaningful revenue from these opportunities to emerge in 2026 and beyond. Additionally, Meta Marshall from Morgan Stanley queries whether the better-than-expected systems revenue for fiscal '25 is due to market share gains or accelerated refreshes among customers, noting that share gains might occur in a robust spending environment.

The paragraph discusses the positive trends F5 is witnessing in terms of system sales, particularly in fiscal year 2024. Francois Locoh-Donou mentions that F5 has successfully replaced competitors in the latter half of the year and is seeing a tech refresh among its customer base, driven by improved budget certainty. This trend supports a mid-single-digit growth outlook for their hardware business. Frank Pelzer adds that F5 continues to gain market share in the traditional ADC market by outperforming competitors in performance and commercial relationships. Additionally, customers appear more comfortable with F5's hybrid multi-cloud architectures, leading to increased adoption and deployment of hybrid multi-cloud projects that combine hardware and software across their applications.

In this segment of the earnings call, Michael Ng from Goldman Sachs asks about the anticipated decline in subscription revenue for the upcoming period, given its strong performance in the recent quarter. Cooper Werner explains that this is due to the timing of the renewal base, which was stronger in the fourth quarter than expected. While FY '25 has a larger renewal base compared to FY '24, it is more concentrated in the second half of the year, affecting the sequential subscription revenue. The renewal base's expansion in the September quarter exceeded expectations, and there is potential for strong performance in FY '25 due to these dynamics. Additionally, Werner notes that term-based license revenue is recognized upfront, adding variability to reported revenue.

The paragraph involves a conversation between Cooper Werner and Michael Ng about the company's assumptions for software renewals and growth. Werner states that they have adjusted their assumptions for fiscal '25 renewals based on past strength and consistent expansion. They expect the new software business to remain flat year-over-year but note improved results for FY '24. Amit Daryani then asks Francois Locoh-Donou about the BIG-IP Next for Kubernetes product and its target customer base. Francois explains that the product integrates their traffic management software with NVIDIA's DPU to benefit customers building AI factories, highlighting its potential appeal to enterprises rather than just hyperscalers deploying NVIDIA AI solutions.

The paragraph discusses the benefits and target customers of a solution that improves GPU utilization through traffic management and multi-tenancy, allowing a single GPU cluster to handle multiple AI workloads. This is aimed at service providers and enterprises with significant AI infrastructure needs, as GPUs are costly. The joint solution with NVIDIA is in early stages, with a validated technical architecture, but many questions about the go-to-market model remain. Significant opportunities are expected to materialize by fiscal year 2026. Amit Daryanani inquires about software growth projections, noting anticipated high-single-digit growth in fiscal 2025, with more muted growth expected in the first half and an increase in the second half.

The paragraph features a discussion about software revenue growth expectations for the year, led by Cooper Werner. He explains that they anticipate low-single digit growth in the first half and mid-single digits in the second half due to a larger renewal base. While individual quarters might show variability in growth rates, they expect overall software growth in the upper-single digits. Werner expresses confidence based on their existing business and visibility into their software footprint. Following this, Amit Daryanani acknowledges the response, and James Fish from Piper Sandler questions the impact of potential price increases in the systems space, noting a competitor's recent changes in packaging and pricing.

The paragraph discusses the potential for price increases in legacy systems or their maintenance, referring to past expectations of a mid-single digit decline in unit demand for this segment. Francois Locoh-Donou notes that this trend has generally materialized since projections in 2017-2018 but could change due to factors like customer commitment to hybrid multi-cloud architectures and AI opportunities, including a partnership with NetApp. Modest price increases have been announced for the year, responding to supply chain changes, with ongoing adjustments based on competitive environment and customer value considerations.

The paragraph discusses the timing and impact of price increases and AI-related opportunities for a company. The price increase in hardware is mentioned to be in the single-digit percentages, occurring at the beginning of the calendar year. Regarding AI opportunities, the first is immediate, involving deployments with large enterprises and service providers creating AI factories, particularly in the U.S. and internationally. These are not expected to significantly contribute to revenue until 2025. The second opportunity involves software improvements for GPU clusters, in partnership with NVIDIA, aimed at enhancing efficiency using F5 traffic management software. This is expected to materialize in 2026 and beyond, as there is still commercial preparation needed.

In the paragraph, Simon Leopold is seeking clarification about the updated financial forecasts provided by Cooper Werner. Previously, the company had expected flat performance in the first half of fiscal '25 with growth anticipated in the second half. However, the latest guidance indicates about 3% year-over-year growth for the first quarter, suggesting a similar trend for the second quarter and implying overall low-single digit growth for the first half. This change is attributed to factors such as renewals, software strength, and mid-single-digit growth in systems. Simon also inquires about the performance of different business verticals, noting that while the U.S. Federal sector showed decent growth, other public sectors remained flat sequentially.

In the paragraph, Frank Pelzer discusses the performance of different sectors of a business in the recent quarter. The enterprise sector performed stronger than expected, leading to an overall positive outcome. The U.S. Federal sector met expectations, and while there were some successful engagements with specific service providers, the service provider sector as a whole showed weaker demand. Simon Leopold and Sebastien Naji then ask questions regarding the source of growth from new customers and the implications of the new BlueField NVIDIA announcement on the company's offerings versus potential NVIDIA solutions. Francois Locoh-Donou is mentioned as the respondent to Sebastien's inquiry.

The paragraph discusses F5’s customer growth and strategy. The company gains new customers each quarter across its portfolio, particularly with distributed cloud services, which grew from 500 to over 800 customers within a year. While they acquire new customers, most growth is from existing ones through expanding agreements and cross-selling products, driven by trends in hybrid multi-cloud architectures. F5 is consolidating multiple point solutions into a single platform for efficiency. Additionally, F5 has a unique approach to enhancing GPU utilization in clusters, particularly within Kubernetes environments, in collaboration with NVIDIA.

The paragraph discusses a company's collaboration with NVIDIA to develop a unique technical solution, leveraging their two decades of expertise in high-performance traffic management and security for AI workloads. They believe they have a compelling early market solution unmatched by others in the industry. The focus ahead is on determining effective go-to-market and commercial strategies for customers. During a Q&A session, Matt Dezort asks about changes in sales compensation and partner programs for fiscal '25. Francois Locoh-Donou responds by highlighting the company's strong global partner program, involving 2,000 partners who have successfully embraced the expanded product portfolio, including distributed cloud, NGINX, and the BIG-IP product family.

The paragraph discusses F5's strategy to incentivize its sales force to focus on cross-selling its product portfolio, particularly within the hybrid multi-cloud architecture. The company sees an opportunity to expand its reach by encouraging customers who currently use only one F5 product family to adopt additional product families. F5 has been working on technical synergies across its portfolio to facilitate this cross-selling and enhance customer value.

This summary was generated with AI and may contain some inaccuracies.