The paragraph is the introduction to F5, Inc.'s First Quarter Fiscal 2025 Financial Results Conference Call. The operator announces the start of the call and allows for any objections to its recording. Suzanne DuLong, F5's Vice President of Investor Relations, welcomes attendees and outlines that F5's President and CEO, Francois Locoh-Donou, and CFO, Cooper Werner, will present prepared remarks. A Q&A session will include other executives. The press release and webcast details, including access information and replay options, are provided. The discussion will include forward-looking statements and non-GAAP metrics, with associated risks detailed in their SEC filings.

The paragraph reports strong Q1 results for F5, with 11% total revenue growth and significant increases in product, software, and systems revenues across all regions. The company's success is attributed to robust software subscription expansion, growing new software demand due to stable IT spending, and increased technology refresh activity. F5 expects these trends to continue into Q2, with projected revenue growth of around 5% at the midpoint. As a result of the Q1 performance and a positive Q2 forecast, F5 has raised its FY '25 revenue growth expectations to 6% to 7%. Francois Locoh-Donou will also discuss F5's differentiation and customer successes from Q1.

Over the last several years, F5 has strategically adapted to support hybrid and multi-cloud architectures in the AI era, addressing challenges like high cost, complexity, and cyber risk, referred to as the "ball of fire." As AI becomes more prevalent, it exacerbates these challenges by demanding more data handling, sophisticated traffic management, and enhanced security. Unlike its competitors focused on cloud or SaaS, F5 has invested in hybrid SaaS and next-gen software and hardware, establishing itself as the only company offering a complete hybrid multi-cloud portfolio for application security and delivery. F5's unique value is highlighted by its comprehensive application and API security platform, allowing customers to consolidate multiple security solutions into a single integrated platform. This capability was demonstrated through a significant Q1 renewal and expansion with a major financial services customer who consolidated several security solutions onto F5, resulting in a noteworthy contract expansion.

The paragraph highlights F5's hybrid multi-cloud strategy, which allows customers to consolidate app security and delivery with a single vendor across different environments, from on-premise to cloud and edge. By simplifying infrastructure connectivity and application deployment, F5 is helping organizations like a North American utility company and an APAC private bank to modernize and manage operations through consistent policies, automation, and analytics. F5's approach displaces competitors by offering solutions for traffic management, security, and networking in various deployment models, providing customers with the flexibility to securely deploy according to their needs.

In the first quarter, F5 achieved record competitive displacements, notably replacing an incumbent ADC provider with its BIG-IP solution at a home improvement retailer, leveraging its automation capabilities. Additionally, a leading American insurance provider chose F5's distributed cloud services to consolidate its security tools, replacing their prior API protection provider with F5's solution to enhance application and API security. The company expects AI to increasingly integrate into applications and processes, with a majority of F5 cloud customers already using its AI agent. While AI offers productivity benefits, it also introduces new challenges in compliance, infrastructure, networking, and security, with F5 focusing on delivering and securing data for AI model training and inference.

The paragraph discusses the role of F5's BIG-IP solutions in enhancing AI model training and inference processes by providing efficient traffic management for data movement and handling increased query loads associated with retrieval augmented generation (RAG). Additionally, it highlights the use of F5's Web Application Firewall (WAP) solutions to secure AI inferencing by protecting APIs involved in AI ecosystems. The paragraph also touches on F5's efforts in optimizing AI factory performance through advanced traffic management, showcasing their focus on improving scalability and security for AI workloads.

The paragraph describes the deployment of F5 BIG-IP by AI factories to enhance data handling efficiency for GPU clusters, highlighting a partnership with Nvidia for seamless integration. It mentions successful customer acquisitions in Q1, including a large mobility platform in APAC that chose BIG-IP for data delivery and AI stack support, and a multinational bank in EMEA that uses BIG-IP for secure and optimized AI application scaling. The paragraph ends with Cooper Werner discussing the company's financial performance, noting an 11% revenue growth in Q1 to $766 million, driven by a 3% increase in global services revenue and a 20% rise in product revenue.

The software revenue increased by 22% year-over-year to $209 million, driven by large multiyear subscription renewals and new projects. Subscription-based revenue rose by 30% to $162 million, making up 78% of the total software revenue, while perpetual licensed software saw a slight 2% increase to $46 million. Systems revenue grew by 18% to $160 million, spurred by widespread technology refresh efforts and the need to upgrade due to the upcoming end of software support dates for certain product lines. The company's strategic focus on balancing hardware and software in hybrid environments and continuous innovation is leading to competitive gains and new customer acquisitions. A price increase implemented on January 1 may have shifted some demand to Q1. Recurring revenue, comprising subscription and maintenance services, grew by 10% year-over-year and represented 72% of Q1 revenue. Geographically, revenue from the Americas increased by 15%, accounting for 56% of the overall revenue.

In Q1, EMEA and APAC each grew by 6%, contributing 27% and 17% to the revenue respectively. Enterprise customers accounted for 71% of product bookings, while government and service providers accounted for 16% and 13% respectively. The company achieved robust Q1 operating results with GAAP gross and operating margins at 81.7% and 26.8%, and non-GAAP margins at 83.9% and 37.4%. GAAP net income was $166 million, and non-GAAP net income was $227 million, showing a 12% EPS growth. Operating cash flow was $203 million, with capital expenditures at $8 million, and deferred revenue increased by 6% to $1.95 billion. The company repurchased $125 million in shares, ending Q1 with $1.3 billion remaining for repurchases. They closed the quarter with 6,440 employees and positive outlooks for Q2 were mentioned based on non-GAAP metrics.

The company expects Q2 revenue between $705 million and $725 million, representing a 5% year-over-year growth at the midpoint. Due to U.S. payroll tax resets and a large customer event, Q2 will be a seasonal low for margins. Non-GAAP gross margin is predicted to be 82.5% to 83%, with non-GAAP operating expenses estimated between $362 million and $374 million. Share-based compensation for Q2 is projected between $58 million and $60 million. Q2 non-GAAP EPS is anticipated to be $3.02 to $3.14 per share. Reflecting strong Q1 results, the fiscal year '25 revenue growth forecast has been raised to 6% to 7%. Software revenue is expected to grow by at least 10% for FY '25. The FY '25 non-GAAP gross margin is projected at 83% to 84%, with operating margin around 35%. The effective tax rate estimate remains at 21% to 23%. EPS growth is forecasted at 6.5% to 8.5%, up from prior guidance. The company plans to use at least 50% of annual free cash flow for share repurchases. The organization is aligned with trends like addressing hybrid multi-cloud complexities.

The company has diversified its investments across hybrid SaaS, next-generation software, and hardware, unlike competitors who focused solely on cloud or SaaS. They're simplifying customer solutions by integrating multiple services to enhance traffic management, security, multi-cloud networking, and AI capabilities. Customers are offered choices to deploy solutions in various environments. The company sees increasing opportunities, especially with AI, thanks to their ability to efficiently handle large data for AI model training and inferencing. They believe their approach positions them as vital for businesses adopting AI at scale. The paragraph also introduces a Q&A session where Tim Long from Barclays asks about the scale and customer base of their AI business and the sustainability of their hardware business. Francois Locoh-Donou begins addressing the second question about hardware sustainability.

The company anticipates strong hardware growth due to increased demand from customers expanding their applications in hybrid multi-cloud environments. They expect double-digit growth in hardware sales, driven by both refresh activity and competitive displacements. The company is confident in their supply chain's ability to meet the demand, thanks to their advancements during previous supply chain challenges. Additionally, in terms of AI opportunities, the main focus is on moving data securely and quickly, especially during model training and inferencing processes, which constitutes the majority of their current deals.

The paragraph discusses the types of deals being won, which are primarily with large enterprises focused on building AI factories or deploying AI applications, often using on-premise data across Europe, Asia, and North America. The opportunities are categorized into three areas: AI applications, security related to inferencing and API solutions, and load balancing traffic for AI factories using traditional ADC technology and a partnership with NVIDIA for intra-cluster traffic management. It's noted that these are still early days for the latter two categories. Tim Long congratulates Cooper Werner on his new role before Meta Marshall from Morgan Stanley asks about sizing the distributed cloud business and its growth in API security, as well as any seasonality anticipated for the year. Cooper Werner acknowledges the strong Q1 performance in response to the latter question.

The paragraph discusses the increasing demand driven by a tech refresh and hybrid multi-cloud adoption. While the large renewal base remains unchanged, the expansion of software solutions, especially in security, has seen significant growth, exemplified by a substantial eight-figure deal in Q1. However, this growth was largely tied to major customers, and the company does not anticipate further increasing their expansion rate assumptions for the second half of the year. They are monitoring progress but remain cautious in expectation adjustments. Francois Locoh-Donou adds that the distributed cloud is part of their SaaS and managed services offerings, contributing to a total ARR of roughly $180 million at the end of FY 2024, with distributed cloud growing rapidly and reaching a significant milestone recently.

The paragraph discusses F5's progress with over 1,000 customers using their distributed cloud services, primarily large enterprises. Two-thirds of these are existing F5 customers, while the rest are new. The growth in distributed cloud is linked to a trend of customers adopting hybrid multi-cloud solutions; existing customers use F5's on-prem hardware or software and also its SaaS for consistent security and app delivery, consolidating their spending on F5. The milestone achievement of over 20% of the top 1,000 customers using distributed cloud highlights the platform's growth potential. Following this update, a question arises regarding customer asset refreshes, querying whether they're part of general data center updates or readiness for AI, with the acknowledgment that customers can delay refreshes to some extent.

The paragraph discusses the factors driving the current refresh activity in data centers, highlighting both general and F5-specific influences. Generally, there's an increased revitalization of data center capacity due to large enterprises preparing for AI infrastructure and embracing hybrid multi-cloud as a long-term solution. This trend boosts data center spending and indirectly benefits F5. Specifically for F5, refresh activity is driven by customers who were previously cautious and minimized upgrades, but now need to update due to application and capacity growth. Additionally, impending end-of-support dates in 2026 necessitate timely refreshes to stay ahead.

The paragraph discusses F5's current and future opportunities in the AI market, emphasizing their focus on high-performance data delivery for large enterprises through retrieval augmented generation. This opportunity is largely unaffected by the size of AI factory GPU clusters. While there is potential in load balancing and traffic management within AI clusters, these areas are still in early stages with no current revenue impact. F5 sees growth potential if open-source models make AI adoption more widespread and affordable, as this would increase demand for their data delivery and security solutions. However, these opportunities are not yet significant enough to affect their revenues.

The paragraph is from a financial discussion involving Samik Chatterjee and Michael Ng, where Michael Ng from Goldman Sachs asks about the company's strong perpetual revenue in the first fiscal quarter, inquiring if it's due to financial expansions, seasonality, or a new trend. Cooper Werner explains that strong Q1 results have been typical, driven by customers, especially in the service provider sector, who prefer a CapEx model. He notes that this flexibility in commercial models aids their software differentiation. Francois Locoh-Donou is set to address the question about the U.S. Federal business, which is mentioned as a small portion of their overall business.

The paragraph is part of a discussion during a conference call where Tal Liani from Bank of America asks about the company's financial performance and guidance. He notes that the company has increased its annual guidance by $40-50 million and has exceeded expectations by $50 million in the first quarter and $10 million in the second quarter. He questions whether these figures reflect something specific to the first half of the year or if it's due to conservatism in forecasting the second half. He also inquires about software revenue, specifically trying to distinguish between revenue from new software sales versus renewals, highlighting that renewals often involve significant upfront revenue recognition due to accounting practices. Francois Locoh-Donou responds to his questions.

The paragraph addresses the challenge of distinguishing true software growth from revenue fluctuations due to accounting practices and renewals. Cooper Werner explains that their software sales primarily occur through a flexible consumption program, involving large multi-year subscriptions that include license-based, deployable, and SaaS offerings. The deployable offerings provide significant upfront revenue recognition, leading to inconsistencies in software revenue growth. Despite these fluctuations, they maintain good visibility and predictability in their software opportunities. Over time, these variations are expected to stabilize, reflecting the underlying strength of the business.

The paragraph discusses the financial performance and future outlook for a company's software and hardware revenue. In the reported quarter, there was notable revenue growth, particularly driven by strong renewals and expansion of large subscription offerings, as customers consolidated multiple solutions on the company's platform. This success led to an upward revision of the full-year software guidance. The company also saw growth from new software projects, despite earlier predictions of flat revenue from such projects. For the full year, they project low single-digit growth in the first half and mid-single-digit growth in the second half. Some demand shifted to Q1 due to pricing changes, particularly affecting hardware growth. However, if high expansion rates persist, there could be better-than-expected revenue outcomes in the second half for software.

The paragraph discusses the company's performance and future expectations. It mentions that while there was significant growth in large deals during Q1, the company is cautious about assuming the same level of expansion for the second half of the year, hence they plan to continue engaging with customers. Amit Daryanani from Evercore ISI asks two questions: one about the 18% year-over-year growth in the system side and how much of it was due to demand pull-ins before price increases, and the second about the deceleration in software growth throughout the year. Francois Locoh-Donou responds that the pull-in effect was modest and the price increases were mid-single-digits. Regarding software, the expected deceleration might be attributed to conservativeness due to uncertainty about future expansions and projects.

In the paragraph, Cooper Werner discusses the company's prudent approach in assessing expansion rates early in the year, noting that the expansion has been ahead of historical norms. Despite the uncertainty, they see the same opportunity base for the second half of the year and attribute Q1 strength to strong expansion rates, especially among large customers. Amit Daryanani acknowledges this explanation, and then the operator transitions to a question from Matt Hedberg of RBC, who inquires about changes in U.S. enterprise buying behavior after the Presidential election. Francois Locoh-Donou responds that although their quarter encompasses the election period, they did not notice any significant changes attributable to it, as the pipeline was already strong.

The paragraph discusses trends in technology, particularly the embrace of hybrid multi-cloud environments and increased investment in data center capacity to support application growth. Matthew Hedberg inquires about the impact of agentic AI on workflow and automation. Francois Locoh-Donou from F5 responds that the proliferation of AI applications increases the need for data movement, API security, and module security. He notes that this complexity, especially with applications distributed across multiple cloud and infrastructure environments (referred to as the "ball of fire"), provides opportunities for F5 given their focus on app delivery and security.

The paragraph discusses the growing complexity of securing and delivering applications across hybrid multi-cloud environments, especially with the rise of AI applications operating in diverse infrastructures. This complexity serves as a potential advantage for companies like F5 that provide comprehensive security and delivery solutions. The speaker acknowledges the early stages of AI development and the continuous learning process involved. During a Q&A session, James Fish acknowledges F5's impressive performance and seeks clarity on the factors driving its sustainability and growth, including pricing strategies and market share gains from Citrix.

The paragraph discusses how the complexity of hybrid multi-cloud environments is driving growth across multiple facets of the company's revenue base, including software, hardware, and services. The software business, in particular, is experiencing durable expansion due to multi-year agreements with large customers, which can lead to significant upfront revenue recognition. The hardware business is also benefiting as customers invest in systems and software solutions for hybrid multi-cloud setups. Although there may be some short-term fluctuations in revenue recognition, the overall trend is expected to sustain the company's growth over time.

The paragraph discusses the factors contributing to anticipated double-digit hardware growth for F5. Cooper Werner explains that upcoming software support end dates in fiscal years 2026 and 2027 for two major product families, which make up over half of their installed base, are prompting customers to plan system refreshes. Some customers may refresh earlier, while others might wait until closer to these dates. This situation provides clearer visibility into future tech refresh opportunities, expected to continue beyond the current year. Victor Chiu then inquires about the specific triggers for these refreshes, noting the alignment of customer timelines.

Francois Locoh-Donou discusses the unexpected stronger growth in hardware for 2025, surpassing initial expectations due to increased customer demand for hybrid multi-cloud architectures and data center capacity. This growth is fueled by refresh and expansion activities, along with customers consolidating security use cases on F5 products, displacing other vendors. This success is attributed to F5's investments in security and next-generation technology. In response, Victor Chiu inquires whether the long-term expectations for systems growth have changed or if a decline is still anticipated.

Francois Locoh-Donou discusses the evolving customer trend towards adopting more software alongside hardware, emphasizing a hybrid multi-cloud approach for deployment flexibility. He notes that the trajectory of the hardware business remains unchanged, although AI and its use cases present new, uncertain variables. There are emerging opportunities for hardware related to AI, potentially impacting the hardware business's long-term direction. In response to Matt Dezort's question about AI opportunities, Locoh-Donou expresses caution, noting the rapid developments and continuous learning in the AI landscape.

The paragraph discusses F5's current success in securing large enterprise deals, particularly in deploying AI infrastructure, leveraging their existing products which are well-suited for data security and transfer. The company has not needed significant changes to their products but may consider targeted customizations as they gain more insights. F5 is uniquely positioned due to its investment in hybrid multi-cloud environments, which are essential for connecting on-premises and cloud-based AI architectures. This strategic positioning has contributed to a high win rate in the competitive landscape.

In this paragraph, Matt Dezort asks about the competitive environment and opportunities for their hardware and cloud services, particularly regarding pricing changes. Francois Locoh-Donou responds by stating that they don't expect pricing to affect their competitive opportunities. He expresses confidence in their position in the software and hardware ADC market due to prior investments, allowing them to gain significant market share. Regarding distributed cloud services, they have reached over 1,000 enterprise customers in about 30 months and expect to become increasingly competitive. Matt Dezort congratulates the team, and the conversation wraps up with a segue to Sebastien Naji for the next question.

The paragraph discusses F5's integration of CDN capabilities from the Lilac Cloud acquisition into their distributed cloud services platform. CEO Francois Locoh-Donou explains that while F5 does not intend to compete directly in the CDN market, which is already well-served by major players like Akamai, the integration allows them to offer a comprehensive bundle of services, including security features like a web app firewall and DDoS protection, with CDN capabilities. This bundled offering is appealing to customers seeking a complete solution from F5 rather than just CDN services. The company has successfully incorporated the CDN solution from Lilac, resulting in positive customer engagement and growth.

The paragraph expresses anticipation for engaging with attendees during the quarter to discuss hybrid, multi-cloud, and AI opportunities, and concludes the conference, thanking participants for their involvement.

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