Earnings call transcript: F5 beats Q3 2025 earnings expectations, stock dips

F5 Networks Inc. reported its third-quarter 2025 earnings, surpassing analysts’ expectations with an 18.86% surprise in earnings per share (EPS). The company posted an EPS of $4.16, exceeding the forecast of $3.50. Revenue reached $780 million, beating the anticipated $752.79 million. According to InvestingPro data, F5 maintains impressive financial health with a "GREAT" overall score, supported by strong profitability metrics and robust cash flow generation. Despite these strong results, the stock saw a slight decline of 0.08% during regular trading hours, closing at $299.24, and continued to dip by 0.41% in aftermarket trading.

Key Takeaways

• F5 reported a significant EPS surprise of 18.86% for Q3 2025.
• Revenue grew by 12% year-over-year, driven by strong product and software sales.
• The stock price experienced a minor decline despite positive earnings results.
• The company launched new AI and security platforms, enhancing its product offerings.
• Forward guidance projects continued growth in revenue and operating margins.

Company Performance

F5 Networks demonstrated robust performance in Q3 2025, with total revenue climbing 12% year-over-year to $780 million. The company saw substantial growth in its product revenue, which increased by 26%, and software revenue, which rose by 16%. F5’s recurring revenue model contributed to 73% of the total revenue, showcasing the company’s successful transition to a subscription-based business model. InvestingPro analysis reveals the company maintains an impressive gross profit margin of 80.9%, with 6 additional ProTips available to subscribers highlighting the company’s operational excellence.

Financial Highlights

• Revenue: $780 million, up 12% year-over-year
• Earnings per share: $4.16, reflecting 24% growth
• GAAP net income: $190 million ($3.25 per share)
• Non-GAAP net income: $243 million
• Cash flow from operations: $282 million, a record high

Earnings vs. Forecast

F5’s actual EPS of $4.16 surpassed the forecasted $3.50, marking an 18.86% positive surprise. This performance indicates strong operational execution and effective cost management. The revenue also exceeded expectations, with a 3.61% positive surprise over the forecasted $752.79 million.

Market Reaction

Despite the earnings beat, F5’s stock declined by 0.08% during the regular session and continued to fall by 0.41% in aftermarket trading. The stock closed at $299.24, slightly below its 52-week high of $313. Year-to-date, InvestingPro data shows the stock has gained 18.9%, though current trading levels suggest slight overvaluation based on InvestingPro’s Fair Value model. This reaction could reflect investor caution amid broader market trends or profit-taking following the earnings release. Discover comprehensive valuation insights and more through InvestingPro’s detailed research reports, available for over 1,400 US stocks including F5 Networks.

Outlook & Guidance

Looking forward, F5 expects Q4 2025 revenue to range between $780 million and $800 million, indicating a 9% annual growth. The company forecasts a full-year non-GAAP gross margin of 83-84% and an operating margin around 35%. Analyst consensus from InvestingPro sets price targets between $260 and $340, with projected EPS of $14.90 for FY2025. F5 anticipates modest hardware growth and mid-single-digit software growth in FY2026, supported by its strong balance sheet with more cash than debt.

Executive Commentary

CEO Francois Loco Danu highlighted the company’s strategic initiatives, stating, "F5 delivers and secures every app and API anywhere." He emphasized the importance of modernizing data centers and embracing hybrid multi-cloud architectures to meet rising performance and security demands in an AI-driven world. Danu noted, "Our platform approach that brings all these form factors together speaks to customers’ pain points of wanting simplified operations."

Risks and Challenges

• Supply chain disruptions could affect hardware availability and delivery timelines.
• Increased competition in the AI and security sectors may pressure margins.
• Economic uncertainties could impact enterprise IT spending.
• Potential market saturation in key segments may limit growth opportunities.
• Regulatory changes in data privacy and security could pose compliance challenges.

Q&A

During the earnings call, analysts inquired about F5’s hardware growth drivers beyond tech refresh cycles and the landscape of AI adoption opportunities. The company addressed its strategies for software renewal and expansion, as well as dynamics in the service provider market. These discussions highlighted F5’s focus on innovation and customer-centric solutions to drive future growth.

Full transcript - F5 Networks Inc (FFIV) Q3 2025:

Conference Operator: Afternoon, and welcome to F5 Incorporated Third Quarter Fiscal twenty twenty five Financial Results Conference Call. At this time, all participants are on a listen only mode. Afterwards, there will be a question and answer session. Also, today’s conference call is being recorded. If anyone has any objections, please disconnect at this time.

I will now turn the call over to your host, miss Suzanne Dulong. Thank you. You may begin.

Suzanne Dulong, Vice President of Investor Relations, F5: Hello, and welcome. I’m Suzanne Dulong, F5’s vice president of investor relations. We’re here with you today to discuss our third quarter fiscal year twenty twenty five financial results. Francois Loco Danu, F5’s President and CEO and Cooper Werner, F5’s Executive Vice President and CFO, will be making prepared remarks on today’s call. Other members of the F5 executive team are also here to answer questions during the Q and A session.

A copy of today’s press release is available on our website at f5.com, where an archived version of today’s audio will be available through 10/27/2025. We will post the slide deck accompanying today’s webcast to our IR site at the conclusion of today’s call. To access the replay of today’s webcast by phone, dial (877) 660-6853 or (201) 612-7415 and use meeting ID 13754228. The telephonic replay will be available through midnight Pacific time, 07/31/2025. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com.

Our discussion today will contain forward looking statements, which include words such as believe, anticipate, expect and target. These forward looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We’ve summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will be referencing non GAAP metrics during today’s discussion. Please see our full GAAP to non GAAP reconciliation in today’s press release and in the appendix of our earnings slide deck.

Please note that F5 has no duty to update any information presented in this call. During today’s call, Francois will speak to our Q3 highlights and our strategy and growth opportunities. Cooper will then review the details of our Q3 results and our outlook. I’ll now turn the call over to Francois.

Francois Loco Danu, President and CEO, F5: Thank you, Suzanne, and hello, everyone. Our exceptional q three results highlight the strength of our business and f five’s strong alignment with important secular trends. Customers are modernizing their data centers, adopting hybrid multi cloud architectures, and scaling to meet growing application capacity and performance needs. Our Q3 results demonstrate F5’s position at the forefront of these transformative shifts. We delivered 12% total revenue growth, including 26% growth in product revenue, our strongest in fourteen years.

This performance is a testament to our team’s execution, our continued innovation, and the enormous trust the largest enterprises and service providers across the globe place in F5. F5’s unique ability to deliver and secure every app, every API, anywhere, on premises, in the cloud, at the edge, and across hybrid multi cloud environments is a significant competitive advantage. It powered strong demand across both hardware and software deployment models in q Our systems revenue grew 39%, fueled by data center modernization, increased capacity requirements, and adoption of our latest generation of hardware. Our software revenue grew 16% driven by hybrid multi cloud architecture adoption, which is contributing to continued strong software subscription renewals and expansions. We continue to operate the business with discipline.

Combined with our strong revenue performance and continued operating margin leverage, we delivered exceptional EPS results in the quarter, reflecting 24% growth year over year. Looking ahead, our Q4 pipeline reflects continued strong demand in support of future forward architectures, data center modernization and an increasing range of application delivery and security services. As a result, we expect Q4 revenue in a range of $780,000,000 to $800,000,000 implying approximately 9% revenue growth for FY ’25. Cooper will provide a detailed overview of our q three performance and our outlook shortly. Before that, I will highlight early traction with our f five application delivery and security platform.

I will also recap recent centric innovations and speak to some of our latest wins supporting AI workloads and infrastructure. We expect the long term structural shift driving data center modernization will persist, continuing to reshape how companies invest in their IT infrastructure. Managing a skyrocketing number of apps and APIs across increasingly distributed environments is creating enormous challenges for IT teams, and preparing for and implementing AI is only making it worse. At F5, we have made it our mission to dramatically simplify this complex array of operational and cybersecurity challenges with the f five application delivery and security platform. While there are platforms for endpoints, for network access, and for cloud workloads, before the f five ADSP, there was no platform that fully converges high performance traffic management with advanced application and API security capabilities across hybrid and multi cloud environments at scale.

The f five ADSP is unique in that it enables customers to, a, consolidate multiple delivery and security PON solutions for applications and APIs on f five, leveraging a single platform with best in class capabilities, B, consistently deploy delivery and security across their hybrid multi cloud environments by hardware, software, and SaaS form factors. And c, dramatically simplify operations and reduce manual efforts by leveraging AI powered analytics, insights, and policy management. With these powerful benefits, it’s no surprise that initial customer response is very positive. In q we won a number of deals that demonstrate the power and the benefit of F5’s platform approach. For example, a North American health insurer chose F5 Distributed Cloud Services and BIG IP, consolidating multiple security and delivery vendors across both its on premises and SaaS environment.

Leveraging our unique hybrid multi cloud approach, F5 is significantly reducing operational complexity while also providing enhanced security and improved API visibility. In another example, an airline in our EMEA region selected f five to modernize its application delivery and security posture. Already an f five BIG IP customer, they faced escalating application growth and challenges securing a rapidly growing base of APIs across multi cloud environments. After extensive competitive evaluation, they consolidated both their on premises and SaaS environments on f five, replacing their incumbent SaaS provider and deploying f five distributed cloud services with comprehensive WAP and secure multi cloud networking. F five is enabling the airline to securely connect and manage more than a 100 b to b applications across multi cloud environments, ensuring scalability, security, and operational efficiency.

In a final example, a South American service provider consolidated all of its multi cloud and on premises security services on f five. Through discovery during the sales process of what was initially a WAF only opportunity, our team learned the full scale of the customer’s challenges. The customer embraced the benefits of a unified f five approach, consolidating their WAF, bot protection, and API security on f five distributed cloud services. F five is streamlining their operations, eliminating multi vendor complexity, and reducing cost by consolidating across all of its on premises and multi cloud environment. These examples underscore the significant value f five delivers to customers through our ADSP.

While there is still work ahead to unlock the full potential of the platform, we are confident that our ongoing innovation will enable us to deliver even greater benefits to our customers. Over recent quarters, we have been unveiling a suite of groundbreaking customer centric innovations that showcase the power of the F5 ADS B while also highlighting how we are leveraging advanced AI technologies to enhance customer experiences and drive business growth. These innovations fall into two categories. The first is AI for ADC. These are innovations that leverage AI to reduce the operational complexity of delivering and securing applications in a hybrid multi cloud world.

These innovations empower customers to unlock the full potential of f five, simplifying deployment and accelerating their ability to scale f five solutions seamlessly. The second is ADC for AI. These innovations highlight how we are applying our strength in delivery and security to enable AI driven applications. During q three, we continued to make advances in both of these categories. In AI for ADC, we introduced advancements to our f five AI assistant.

Our goal is to make the f five AI assistant an indispensable member of every NetOps and SecOps team. We are systematically building it around a simple, powerful loop, understand what’s happening, prioritize what matters, and act to solve it. To dramatically improve our customers’ ability to understand potential threats and streamline prioritization, we are integrating technology from our Fletch acquisition. This integration will enable the F5 AI assistant to provide a real time contextualized view of the threat landscape along with proactive, actionable recommendations that help cut through the noise. But insight without action is incomplete.

That’s why we enabled the assistant to act starting with its new ability to generate iRules from a simple prompt. This translates customer intent into secure performance code, making it easier for more customers to harness and leverage f five’s unmatched programmability. This complete loop from deep understanding to automated action is how we move our customers from reactive firefighting to proactive control. In ADC for AI, we announced expanded capabilities for our f five AI gateway to prevent data leaks and deliver cutting edge AI data protection. Additionally, we introduced new functionality for f five BIG IP SSL Orchestrator to classify and defend encrypted data in motion and block unapproved AI use.

Through industry leading technology partnerships, F5 is also providing integrated, secure, and streamlined solutions to support complex emerging AI ecosystems. We recently announced advances with two of our AI focused partners. In June, building on our prior work with NVIDIA, we announced we are expanding F5’s performance, multitenancy, and security capabilities for large scale AI infrastructures. We are leveraging BIG IP Next for Kubernetes running natively on NVIDIA BlueField three DPUs. Feedback from customers who have tested the solution has been very promising.

One customer reported an 18 increase in HTTP throughput, an 11 x improvement in time to first byte, and a 190 x boost in network energy efficiency. Another customer reported a 20% improvement in GPU utilization. We believe this level of performance improvement could be meaningful to customers looking to scale and enhance performance of their AI infrastructures, and we continue to work toward validating the solution with customers and NVIDIA. With customers leveraging F5 to move incredible amounts of data at high speed to and from data stores for AI modeling and inferencing, our work with storage partners is also critical. In July, we announced that we are deepening our alliance with MinIO, advancing our AI application and data delivery solution to manage training and inference driven data growth.

These innovations and partnerships highlight f five’s role in enabling AI driven applications. Today, dozens of leading enterprises are deploying f five to ensure AI workflows operate flawlessly, scale seamlessly, and remain resilient against evolving threats. These AI use cases represent net new insertion points for f five and leverage technology and expertise built over decades. Today, customers are leveraging f five across three primary AI related use cases. The first is AI data delivery.

In these use cases, customers are deploying f five in front of data stores to ensure secure, high throughput data injection for AI model training and inferencing. F five is enforcing policy based controls and eliminating bottlenecks, enabling performance delivery of massive datasets while safeguarding sensitive information. The second is AI runtime security. In these use cases, f five is protecting AI applications, APIs, and models with f five WAP and AI gateway. F five prevents abuse, data leakage, and attacks like prompt injection while ensuring full visibility and control over how AI models and applications interact across environments.

The third is AI factory load balancing. In these cases, f five is optimizing traffic both across and within AI factories. In AI, performance is measured in terms of token throughput. By intelligently distributing AI traffic to maximize GPU utilization, f five AI factory load balancing directly increases token generation, reduces time to first token, and lowers cost per token. In q three, we secured several new AI wins.

In an AI data delivery use case, a government institution in our EMEA region needed to dramatically accelerate data ingestion for its AI platform, but its existing infrastructure could not meet the throughput and traffic modification demands. The core challenge was processing data at a 100 gigabits per second while performing intensive SSL decryption and inserting critical data for audit trails. To solve this, they placed high performance f five BIG IP hardware in front of their s three data stores. BIG IP is able to perform SSL decryption at line rate while preserving critical data for auditing and policy enforcement. This combination of hardware based decryption, intelligent traffic modification, and robust traffic management allowed the institution to meet its demanding performance goals and build a scalable foundation for future AI workloads.

In an AI factory load balancing use case, an ecommerce provider based in our APAC region strategically deployed f five BIG IP and NGINX in key layers of their GPU as a service cloud platform. They use high performance BIG IP hardware to manage and secure the main entry point to their infrastructure, while f five NGINX is embedded directly in front of each AI cluster to enforce fine grained authentication and authorization. This ensures that as their cloud scales, performance and security scale with it, enabling them to provide a foundational AI resource for their customers. Collectively, these successes underscore f five’s expanding leadership in the hybrid multi cloud landscape and the tangible value our platform approach delivers to customers, empowering them to simplify operations, enhance security, and accelerate innovation across their environment. Now I will turn the call to Cooper to elaborate on our Q3 results and our Q4 outlook.

Cooper?

Cooper Werner, Executive Vice President and CFO, F5: Thank you, Francois, and hello, everyone. I will review our Q3 results before I elaborate on our Q4 and FY ’twenty five outlook. As Francois noted, we delivered a strong Q3, growing revenue 12% to $780,000,000 reflecting a mix of 50% Global Services revenue and 50% product revenue. Global services revenue of $392,000,000 grew 1%, while product revenue of $389,000,000 grew 26% year over year. Our software revenue grew 16% year over year to two zero eight million as customers continue to expand consumption and adopt additional capabilities across our platform.

Our subscription based software revenue grew 19% year over year to $185,000,000 representing 89% of our total software revenue. Perpetual license software totaled 23,000,000, down slightly year over year. Systems revenue totaled 181,000,000, up 39% year over year with strength driven by tech refresh and data center modernization, including customers preparing for AI as well as competitive takeouts. Revenue from recurring sources contributed 73% of our Q3 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 13% year over year, representing 55% of total revenue. EMEA delivered 6% growth, representing 26% of revenue, and APAC grew 21%, representing 19% of revenue. Looking at our major verticals, enterprise customers represented 70% of q three’s product bookings.

Government customers represented 15% of product bookings, including 5% from US Federal. Finally, service providers represented 15% of Q3 product bookings. Our continued operating discipline contributed to our strong Q3 operating results. GAAP gross margin was 81%. Non GAAP gross margin was 83.1%.

Our GAAP operating expenses were $435,000,000 Our non GAAP operating expenses were $381,000,000 Our GAAP operating margin was 25.2%. Our non GAAP operating margin was 34.3%, an improvement of more than 80 basis points year over year. Our GAAP effective tax rate for the quarter was 10.8%. Our non GAAP effective tax rate was 14.4%. This includes a discrete benefit associated with the filing of our annual federal income tax return during the quarter.

Our GAAP net income for the quarter was $190,000,000 or $3.25 per share. Our non GAAP net income was $243,000,000 or $4.16 per share, reflecting 24% 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 a record $282,000,000 in cash flow from operations in Q3. CapEx was $9,000,000 DSO for the quarter was forty two days.

Cash and investments totaled approximately $1,440,000,000 at quarter end. Deferred revenue was $1,960,000,000 up 10% from the year ago period. In Q3, we repurchased $125,000,000 worth of F5 shares at an average price of $256 per share. As of the end of Q3, we had 1,000,000,000 remaining on our authorized stock repurchase program. Year to date, we repurchased shares equivalent to 52% of our annual free cash flow.

Finally, we ended the quarter with approximately 6,540 employees. I will now speak to our Q4 outlook. With the exception of revenue, my guidance comments reference non GAAP metrics. As Francois noted, visibility into our Q4 pipeline and customer demand remains strong. We expect Q4 revenue in the range of $780,000,000 to $800,000,000 implying 6% growth at the midpoint.

We expect growth driven by tech refresh demand, data center modernization and adoption across our ADSP platform in support of customers’ hybrid multi cloud architectures. We expect non GAAP gross margin in a range of 84% to 84.5%. We estimate Q4 non GAAP operating expenses of $376,000,000 to $388,000,000 We expect Q4 share based compensation expense of approximately $57,000,000 to $59,000,000 We anticipate Q4 non GAAP EPS in a range of $3.87 to $3.99 per share. As we look ahead to Q4 and beyond, we see customers increasingly leveraging both the breadth of our solutions across our portfolio and the flexibility only F5 offers to deploy in any form factor. As evident in our strong systems performance this year, customers’ holistic hybrid multi cloud approach spans hardware, software, and SaaS deployments, and they are increasingly investing in high performance hardware to address factors including resiliency, data sovereignty and AI readiness.

With that backdrop, I will recap the implications of our Q4 guidance on our fiscal year twenty twenty five outlook. Our Q4 revenue guidance implies revenue growth of approximately 9% for FY ’twenty five. This is up from our prior guidance for growth of 6.5% to 7.5% and reflects robust systems revenue growth and software growth at or around 10% for the year. As implied by our Q4 guidance, we continue to expect FY ’twenty five non GAAP gross margin in a range of 83% to 84% and non GAAP operating margin at or around 35%. We are adjusting our expected FY ’twenty five non GAAP effective tax rate to a range of 18.5% to 19.5% from the prior range of 20% to 22%.

This change reflects the onetime benefit recorded in Q3. Our Q4 guidance implies FY ’twenty five EPS in a range of 14% to 15% growth, up from our prior guidance of 8% to 10% growth. The increase is driven by the improvement in our revenue outlook and the benefit from the tax rate change. Finally, we expect our share repurchases for the full year to be at or above 50% of our free cash flow. With that, I’ll turn the call over to Francois.

Francois Loco Danu, President and CEO, F5: Thank you, Cooper. F5 delivers and secures every app and API anywhere. On prem, cloud, edge, or hybrid environments, we lead in solving today’s toughest business challenges. Our F five application delivery and security platform is the first in the industry, offering consistent policies, full visibility, and AI driven insights. We are enabling customers to modernize data centers, embrace hybrid multi cloud, and scale for rising performance and security demands in an AI driven world.

Operator, please open the call to questions.

Conference Operator: Thank you. At this time, we’ll be conducting a question and answer session. If you’d like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you’d 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. Our first question comes from Tim Long with Barclays. Please proceed with your question.

Tim Long, Analyst, Barclays: Hi. Thanks thanks for the time here. Two if I could. First, on the hardware side. Could you talk a little bit about, obviously, a lot of strength here, a lot of things going on with, you know, maybe tariffs and pull ins and end of life and, you know, good competitive environment.

So you kinda break down that you talked about the applications and the reasons there, but some of the other factors that that maybe contributed and and how you think the sustainability of that will be going into next year. And then second, on the software side, could you just touch on kind of, you know, pipeline and how you’re thinking about, you know, renewals and and and new deal activity heading into the end of

Cooper Werner, Executive Vice President and CFO, F5: the fiscal year? Thank you.

Francois Loco Danu, President and CEO, F5: Hi, Tim. Why why don’t I start with your, question on hardware, and then, Cooper will take the the second question. On hardware team, as you as you, you know, as you saw, the the results were very strong, 39% growth year on year on hardware. And if I separate it, you know, we have two dynamics. One, of course, is, you know, tech refresh, which which is a dynamic in the business, And we expect that at this point giving some platforms that are going end of life in in the, you know, in the next twelve to twenty four months, and that that’s having an effect.

So we’re seeing strong tech refresh this year. But there are other dynamics at place. And when we look at you know, when we kinda separate our our hardware revenue between what’s coming from tech refresh and what is not associated with tech refresh, The part of the the revenue that’s non tech refresh is actually growing faster, than, any other part of the of the, hardware sales. So what are the dynamics that are driving that? It’s really secular trends that we’re seeing and and specifically around hybrid cloud and data centers, and around AI.

So in in hybrid and multi cloud, what we’re seeing is the basically, we’re seeing a lot of customers, that are embracing hybrid multi cloud architectures. They are modernizing their their data centers, investing in data center capacity to get ready for, you know, future growth in applications and future architectures. That’s a trend that’s providing tailwind to the to the hardware business. We’re also seeing customers respond to, especially in financial services, more regulation requiring customers to have better resiliency better resiliency, you know, drives them to be able to to fail over from public clouds to on premises environment and ideally vice versa. So that drives customers to have a stronger infrastructure in on premises, in hardware that, they can control.

That is the second secular trend. And, of course, the the third one is AI. And in AI, we’re seeing customers invest both in AI use cases, which we are seeing already today. And this revolves around moving large amounts of data between, data stores and AI application or AI models. And we have, you know, we we are we have won several dozens of customers now that are deploying AI models today and using f five to be able to move their data to those models.

But we also see a number of customers investing in what we would call AI readiness. Meaning, they’re not yet, you know, in in full swing of having deployed AI models, but they want to have their data in a good place. They wanna have enough capacity for what they expect are are going to be large flows of data that needs to be moved with with AI, and they’re investing in that capacity to be ready to to deploy AI. So those are some of the the trends that we’re seeing in hardware that I think are pretty durable. Now you asked about, you know, how does that affect next year.

We we’ve seen very strong growth next year. Yeah. Our current expectation would be that, you know, hardware next year would probably be up year on year, but, obviously, we would expect more modest growth than than what we have seen this year. To your last point, we have not seen any evidence of pull in to date in hardware, and we have not seen any effect of any of the tariff discussions on our business, whether it be hardware or software.

Cooper Werner, Executive Vice President and CFO, F5: And with that, Cooper? Sure. Yeah. Thanks. So I’ll I’ll speak a little bit to the software dynamics that we’re seeing.

So we talked about that we had a large renewal base that was coming up the second half of the year, and that gave us really good visibility. And and what we saw again in this quarter was very healthy expansion, against that renewal base. And so that’s really coming in in two forms. One is increased consumption that customers have been driving over the course of their their prior, subscription term. And then at that time of renewal, that consumption then comes through at at a higher, contract value at the renewal as well as additional expansion across the portfolio.

So we’re seeing new use cases built in at that time of renewal. And so that’s really where we’re seeing the growth in the software. On the the new what what when we reference new, we’re talking about either net new customers or net new software projects where the customer wasn’t previously consuming in software. That business is up year to date, but it was down a little bit in q three. And and some of that one kinda goes back to what Francois was referencing around, you know, an appetite from customers to support their applications, in an environment where, you know, regulatory concerns are more prevalent, resiliency is is more kind of at the forefront, and just generally a bias for more performance.

And so at the margins, we you know, there were a couple of opportunities that that actually closed in hardware where previously the the customer might have chosen to go with software. And so that’s really kinda what’s behind the the business coming from new projects coming through more in in hardware than software. And so we we feel good about the year. We have, again, a strong base in q four. And just based on the expansion trends that we’ve seen and continue to see, we feel pretty good about our view into q four.

Tal Liani, Analyst, Bank of America: Okay. Thank you.

Conference Operator: Our next question comes from Meta Marshall with Morgan Stanley. Please proceed with your question.

Suzanne Dulong, Vice President of Investor Relations, F5: Hi. This is Mary on for Meta. I had a question on gross margins. Are there any reasons for why gross margins came in at the lower end of the range despite the upside on revenue? Thanks.

Cooper Werner, Executive Vice President and CFO, F5: Yeah. So it, you know, it’s pretty, you know, slightly below end of the range. That was really driven more by some of the high performance use cases on the systems business. When, you know, we had some deals that had FIPS compliance demands, which tend to have a a slightly lower gross margin profile. And and then just broadly, the the strength in the systems business in general, you know, of course, hardware has a a still a very high gross margin profile, but it’s not quite as high as software.

And so that was the other dynamic that that really was behind our gross margin. But as you see from our guidance, for q four, we expect gross margins to improve in the in the current quarter.

Suzanne Dulong, Vice President of Investor Relations, F5: Awesome. Thanks.

Conference Operator: Our next question comes from Michael Ngai with Goldman Sachs. Please proceed with your question.

Michael Ngai, Analyst, Goldman Sachs: Hi. Good afternoon. Thanks for the question. I just have two. First, on the hardware piece, it’s encouraging to hear that you expect systems revenue to be up next year.

In the past, you’ve talked a little bit about how much of the installed base was on the legacy I Series and Viprion. I was just wondering if you could talk about where you are today and how much of that systems refresh we should expect over the next couple of years? And then second, just on software, kind of relatedly, could you see software revenue growth in fiscal twenty twenty six, just given the very strong term renewals that we’ve seen this year?

Francois Loco Danu, President and CEO, F5: Michael, thank you for the question. We’ll do the same thing. I’ll start with hardware and ask, Cooper to take the second part. On, hardware, Michael, you know, we we have indeed some, end of, you know, software support dates that are coming up in in ’26 and early twenty seven. We expect the the the the refresh to continue to be strong, certainly over you know, throughout 2026 and and beyond because customers continue to refresh even after these end of of software support dates.

Well, after that, they continue to refresh. So not the the entire install base is not refreshed at at those dates. So we continue to expect to see that to be strong, you know, over the next eighteen months. Now that said, Michael, there is you know, we’re seeing a part of our hardware business that is driven not by tech refresh motions, but by other trends that I’ve just articulated around hybrid multi cloud architectures, data center modernization, and increasingly customers investing in AI readiness and and in AI use cases. We think these trends are are less cyclical and more durable.

And so, you know, we’re we’re we’re excited to see these developments, and we’ll see how this play out over time. But for the time being, we’re really encouraged by what we’re seeing outside of the tech refresh motion in in our hardware.

Cooper Werner, Executive Vice President and CFO, F5: And then on the software side, you know, it’s a little bit early. We wouldn’t guide software for next year, but I’ll I’ll kinda give you just a a few, dynamics for consideration. It’s kinda what’s a reasonable estimate from where we sit today. So I’ll I’ll start with just a way to think about f y twenty six in terms of growth rates, and then I’ll get into some of the dynamics that we’re looking at. I think it’s reasonable to assume software would grow in the mid single digits for next year, and then it would it reaccelerate in the following year.

And just to kinda walk through some of the the things to consider. So first, we we’re still seeing really strong consumption in that renewal motion. So as I I said earlier, this increased performance and consumption along with new use cases that are that are part of that renewal motion. And and just the point of emphasis, the the growth comes from over time, it’s coming from new use cases and that increased consumption that’s embedded in the renewal renewal and expand motion. So it’s not simply repeat business.

Then a second dynamic, and we talked about this a little bit on the the last call in April, is that the subscription base that comes up for renewal in f y twenty six, that base largely comes from our software revenue from f y twenty three because of that three year renewal cycle. And so our f y twenty three software sales were roughly flat, over f y twenty two. So that represents a bit of a mass headwind on that subscription base where we do that renewal and expand motion. And then that same dynamic becomes a tailwind in the f y twenty seven, and it’s why we would expect the growth rate to to reinfluct from there. And then the last dynamic we we touched on a little bit is just some of the evolving customer preferences around deployment models.

And this is really the one of the the big strengths around our ADSP platforms that we do give customers choice in how they want to deploy. And so when we talk about hardware and software, something to keep in mind is that those are not products. They’re delivery models. BIG IP is a product, and some customers are choosing to to deploy BIG IP in that hardware form factors because of the evolving need for more performance. And so those are all just things that we consider as we look ahead to next year, and then we’ll see how that plays out.

Michael Ngai, Analyst, Goldman Sachs: Thank you, Francois. Thank you, Cooper.

Conference Operator: Our next question comes from Samik Chatterjee with JPMorgan. Please proceed with your question.

Priyanka Thapa, Analyst, JPMorgan: Hi. This is Priyanka Thapa on for Samik. Great job this quarter.

Francois Loco Danu, President and CEO, F5: Thank you. Thank you. Yeah.

Priyanka Thapa, Analyst, JPMorgan: I I got a couple questions. First of all, on the concept of software next year, what does the new business pipeline for software look like next year? And is that kind of incremental to your expectations of mid single digits software growth? And I have a follow-up.

Cooper Werner, Executive Vice President and CFO, F5: Sure. Thank you, Priyanka. So, yeah, our pipeline right now is is healthy. So it’s it’s early again. I mean, our pipeline gives you really good visibility into the current quarter and then decent visibility into the the next quarter.

And so as you get beyond that, that’s gonna be business that we are surfacing now, as we’re engaging with our customers. But, generally, I would say that as we do our planning for next year, we feel good about new opportunities for for software. And, again, these are net either net new customers or customers that are consuming for the first time in software. So that that’s kind of factored into some of our thinking around the growth rate for next year. But but, of course, the majority of our software revenue now comes through that renew and expand motion, which is great for visibility, and that that’s where we would expect the majority of the growth to come from next year.

Priyanka Thapa, Analyst, JPMorgan: Alright. Thanks. And on to my second question. You anticipate hardware to grow strongly in twenty twenty twenty six. How much of that strength is this newfound shift where people are using systems instead of software that you would otherwise expect for them to use software like you saw in this particular quarter.

Was there was this unexpected, and this is is this a trend that you think might continue?

Cooper Werner, Executive Vice President and CFO, F5: Thanks. Yeah. So we did we would expect hardware to grow, albeit it will be at a more modest growth rates than what we’re seeing this current year because clearly, we’re, you know, well into the 20% growth rate year to date for, the current year, but we expect, continued growth next year. I would say that there’s a portion of it that is coming from, you know, customer preferences to to moving into hardware model. I don’t think that’s the main driver.

It’s really, both tech refresh and some of the dynamics where customers really need more performance, and they’re trying to scale out their data center capacity to to support those performance needs. And then at the margin, there are cases, you know, where customers may choose a hardware deployment model in lieu of, what previously they may have been thinking software for the deployment model.

Priyanka Thapa, Analyst, JPMorgan: Thank you so much.

Conference Operator: Our next question comes from George Notter with Wolfe Research. Please proceed with your question.

George Notter, Analyst, Wolfe Research: Hey guys, thanks very much. I was just curious on kind of an update on some of the newer products. I was thinking about the NVIDIA DPU product. I think you mentioned it earlier in the monologue. Can you just remind me, is that GA now?

How have you guys priced that? How significant can that be in the context of your model? Just anything you can say on progress there. And then similar question on the AI gateway platform. I know you’re just getting it under the marketplace right now.

I’m just curious on initial views, feedback on the product. What what perspectives can you share? Thanks a lot.

Francois Loco Danu, President and CEO, F5: Thank you, George. Let me start with the the, you know, the partnership with NVIDIA. Our solution is GA, and we are and and as a reminder, it’s really taking the big IP software that we have refactored to work on an on ARM architectures and specifically, integrate with NVIDIA’s BlueField three DPUs. And the solution is GA, and we’re now engaging customers in proof of concept to validate the benefit in their production and and architectural environment. And the early, you know, early feedback from customers around these proof of concept and test are are generally very positive.

I mentioned a couple in my prepared remarks earlier, but, you know, everything in in AI, as you know, is is about tokens and, you know, time to first token, the cost per token, the, you know, GPU utilization, and the number of of tokens one can generate in a given GPU infrastructure. And we’re we’re finding opportunities to basically increase all these metrics and increase the efficiencies of of these AI factory. Now it’s very early days because, whilst we’re doing this proof of concept, we think the real strength of the value proposition comes when customers go into inferencing for their AI workloads. And most most customers are not there yet. So the the target customers for the solution are either the the GPU as a service providers or, you know, selling or renting GPUs to customers and will want to make that infrastructure as efficient as possible or enterprises that will build self hosted AI factories and will also wanna make their own investments in AI factories as efficient as possible.

We think so we think as enterprises start building more of these AI factories and really moving to inferencing these factories, then our opportunity to move more to revenue will be will be more concrete. But the technical validation has to proceed that with customers, and that’s what we’re doing, and it’s pretty promising. If as it relates to the AI gateway, that solution is also early in the market. We have, I think, more than a dozen proof of concept, in place with customers. This really is about routing AI traffic and processing AI traffic at layer seven to really understand, you know, what what is the cost per token that customers have, the cost of this model versus that model providing security to this AI traffic.

And we think this is gonna be the the whole area of AI delivery and security, we think it’s going to be, you know, a pretty important area in AI because if you step back, from it, you know, web infrastructure has really been about, largely processing packets. And we think that which is which is largely, you know, a layer three activity. And we think that AI infrastructure is really going to be about, delivering and securing token, and that is the layer seven activity. And we think f five with our layer seven expertise built over decades is gonna be really well positioned for that. So more to come on the AI gateway over time and and what we’re gonna do with AI security, but it’s an area that we we are going to invest in and and take a position.

George Notter, Analyst, Wolfe Research: Super. Thank you.

Conference Operator: Our next question comes from Matthew Heiberg with RBC Capital Markets. Please proceed with your question.

Suzanne Dulong, Vice President of Investor Relations, F50: Hey, guys. This is Mike Richards on for Matt. Thanks for taking the question. Two quick ones for me. Just first, anything to call out on Fed?

I know you guys were expecting there might be some pull in in Q3 and, you know, anything to call out as we’re one month into the Fed fiscal year end? And then secondly, any, you know, guardrails you put around free cash flow looking into next year as as we think about the r and d credits? Thanks. That’s it for me.

Cooper Werner, Executive Vice President and CFO, F5: Yeah. So I’d Fed has been, right at kind of our plan for the year. Q three was a little bit softer, I think. And, you know, there were a couple of projects that pushed out or were downsized related to some of the government efficiency initiatives. But broadly, the the pipeline is still healthy for for federal, so nothing else that we would really call out.

And then can you remind me the question on free cash flow?

Suzanne Dulong, Vice President of Investor Relations, F50: Yeah. Just as we’re thinking about the tax changes around the r and d credits, just anything around free cash flow as we look to next year?

Cooper Werner, Executive Vice President and CFO, F5: No. There there wouldn’t be a big impact, from from what we see in our business right now. There are certain elections that you you have, you know, have the the, discretion to take. So that’s something we’re evaluating right now, but no material change from where we sit today.

Conference Operator: Thanks, Jess. Our next question comes from James Fish with Piper Sandler.

Suzanne Dulong, Vice President of Investor Relations, F51: This is Brent here. Francois, keep talking about the nonrefresh piece on systems growing faster, but let let’s be frank. Most of the systems is is refreshed. So, really, the crux of my question, though, is is can you just help us with how big essentially that the nonrefresh piece is and and really, like, trying to understand how much of an AI benefit you’re seeing today.

Francois Loco Danu, President and CEO, F5: So, you know, the the so let me just resize this for you. About two thirds of the you know, what we’re seeing in hardware deployment models is what we would attribute to tech refresh, and about one third is what we would attribute to not tech refresh. K. Just to just to give you a little bit of the weighting of of what we are what we are seeing this year. Now to your second question about AI, there really are a couple of answers to that.

There there is what we are seeing as direct AI use cases where, you know, our sales teams working with customers can actually attribute a a project or a certain, order specifically to a net new AI initiative. And today, I would say that this is, you know, still small in, you know, single digit millions of dollars on a quarterly basis, several dozens of wins over the last, several quarters. There is, however, another portion of AI which is harder to estimate exactly, but it’s kind of indirect AI spend coming to us. And this is where, you know, customers are investing in, you know, having higher capacity for data connections that may be related to an AI use cases, but the the folks who are interacting with f five may not be involved directly in this AI use case and don’t know about the ultimate use, of the of the technology. And the we’re calling that internally kind of shadow AI use cases.

We we think there are more and more of these growing, but it’s difficult to give you an exact sizing of how much that is is impacting the business.

Suzanne Dulong, Vice President of Investor Relations, F51: Understood. And maybe if I could follow-up there. Appreciate that added color. How are you thinking about maybe the magnitude of customers that on tech refresh could actually become, more virtual or even DCS given, you know, the nearly and given the nearly 40% growth here, you know, and and we’ve talked about this in a piece we did earlier this week, but but what inning of refresh do you think we’re actually in?

Cooper Werner, Executive Vice President and CFO, F5: Yeah. So, Jim, we’re pretty early in terms of the refresh opportunity for the I series and Viprion product families. You know, well over half of the base is still on those those families. And Francois said that every customer is different in terms of their timelines, and we would expect that base to get refreshed really over the next two plus years. So we think that it’s it’s a good growth opportunity for f y twenty six and into ’27, and then you would expect that to to start to tail off in f y twenty eight.

And and for for where we sit we’re we’re also we’re not seeing a lot of migrations in from those legacy systems into software form factors. I think that the dynamic that we’re actually seeing right now is where customers are really getting more consideration to their performance needs as they evaluate between hardware and software.

Conference Operator: Our next question comes from Simon Leopold with Raymond James.

Suzanne Dulong, Vice President of Investor Relations, F52: I guess one of the things I’m curious about is you’ve cautioned us in the past about your service provider or telco vertical having a tendency towards lumpiness. And this was a particularly strong quarter. Looks like it was up more than 40% sequentially and nice year over year growth. How should we be thinking about that? Should we you know, take this as more of a one off, or is there some new trending that we should think about?

And then I’ve got a quick follow-up.

Francois Loco Danu, President and CEO, F5: Thank you, Simon. You know, the service provider business continues to be lumpy, and it is it is tied to specific projects that some of our large carrier customers. And so I wouldn’t read too much into a single quarter trend in service provider, whether it’s, you know, a big quarter with things going, you know, north very quickly or a a down quarter. Generally, what we’re seeing with service providers, I mean, is, you know, the the promise of five g hasn’t fully materialized, I’d say, for them or or for equipment providers to a large extent, in part because there hasn’t been the the takeoff that we expected. We continue to see service providers invest in four g to five g infrastructure.

Over the last couple of years, they have tended to sweat their assets significantly. We have seen that relax, a little bit over the the last couple of quarters, but I don’t think the dynamics are fundamentally changing in that segment.

Suzanne Dulong, Vice President of Investor Relations, F52: Thanks. And then I I wanna see if you could talk a little bit more about how to think about the longer term trends or fiscal twenty six, expectations for services. In that, I I would have thought we’d see some correlation to the stronger hardware business, but maybe there’s a lag effect. And I’m assuming there’s very little correlation to your software stand alone business. So how should we think about services trending?

Thank you.

Cooper Werner, Executive Vice President and CFO, F5: Yeah. So you’re you’re actually right. There is a lag effect on product, and so we would expect to see the growth rate kind of come up from where, know, what we just reported with the 1%. I think there’s a kind of a an outlier dynamic that’s behind the deceleration, you know, in the the last couple of quarters, which is really around the kind of the last of the refresh from the the prior product family, the those laggard customers that that, have finally retired some of those end of technical support units. So those came out of the the maintenance base that drives our services revenue.

That’s now behind us. And so what we do expect is to see the services revenue start to grow now, from that lag effect on the strength of the product revenue. And you can see that in in the deferred revenue, which is up 10% year over year. The short term deferred revenue, which is really kind of a a proxy for the maintenance revenue growth, that’s up 5% year over year. And so we do expect to see the services growth rates to be a little bit better in FY ’twenty six.

Conference Operator: Thank you. Our next question comes from Tal Liani with Bank of America.

Tal Liani, Analyst, Bank of America: It’s Thomas Zilberman on for Tal. Two questions for you. Maybe going back to hardware but asking it a different way. I believe last quarter, you mentioned you expected hardware systems to moderate. So what changed in the last ninety days for that to accelerate?

Was it better tech refresh than you initially expected? I know you called out last quarter that you were seeing competitive displacements in hardware. Are you still seeing that?

Francois Loco Danu, President and CEO, F5: Yeah. So, yes, to the last point, yes, we still continue to see competitive displacements. You know, our value proposition is very strong relative to competitors, both with our current offering and our road map, and so that that continues. I think what’s changed over the last ninety days is, we saw more of these, you know, secular trends gathering pace on, you know, customers investing in more capacities in the more capacity in their data centers. In part because they are embracing hybrid multi cloud, in part because they are, you know, sometimes getting, more resiliency in place, sometimes in response to regulation in certain sectors, and in part because of, you know, getting ready for AI.

We see customers repatriating some apps. We see customers repatriating data in in readiness for AI, and doing so because the cost of of having this data, in in public clouds and accessing this data are quite prohibited. So we see more customers also doing data repatriation and and needed to securely connect these data stores that are on prem with their AI application. So some of these these trends, you know, when you aggregate them, created a positive surprise on on our hardware deployment model. That said, you know, we’ve talked a lot on this call about hardware versus software.

I really, you know, wanna make sure that what what we convey to you is what we’re seeing is the power of F5 platform, our application delivery and security platform, which really brings all of these deployment models together, hardware, software, and software as a service in a single platform. Increasingly, we’re seeing if that’s what’s differentiating us in the marketplace. So this quarter, we are we are happy about the numbers, of course, but we are even happier about where we are winning. We are winning in, you know, customers that may have had a a a single SaaS vendor and or a single hardware vendor, and we are consolidating all that spend on f five because we can deliver in hardware in software and SaaS. We are seeing customers that have point security solution, maybe in software or hardware, and they’re consolidating on their size because we bring this platform that brings all these form factors together, all the delivery and security capabilities together, and and a single pane of glass, to make the operation of these technologies much easier.

And increasingly, that’s what you’re seeing from large enterprise customers is they want their life to be simplified, and the the platform approach that we have taken speaks to that pain point, and we’re getting significant traction as a result of that. So that that’s what, you know, is exciting for us in the business is really the early traction we’re getting on our platform strategy and the wins across multiple form factors.

Tal Liani, Analyst, Bank of America: Got it. Maybe as a follow-up, Francois, on the AI piece. You mentioned that it’s still early days as we’re awaiting enterprises to really build out these AI factories. We generally viewed that phase maybe by the 2026 moving into 2027. My question for you is do you see that adoption timeline actually accelerating as we move more into the world of GenTyc?

And then generally speaking, how big do you view the opportunity in AI delivery versus AI security? You know, what’s gonna be more beneficial to you?

Francois Loco Danu, President and CEO, F5: Well, that that is both are both are great questions, and I’ll pick up my crystal ball to give you an answer. Of course, it’s it’s very difficult to extrapolate when you’re very, very early stage in markets with these big predictions, about the impact. But I would say, AI data delivery is probably more immediate for us, because, you know, it it’s it’s things that f five has always done, you know, the ability to process traffic at layer seven and securely connect applications to applications or users to applications. Now we have to connect data stores to applications. It requires new protocols, but f five is ideally positioned to do that.

And the more, customers need high performance and high scale, the more they come to f five, because of our ability to do that, at at high speed, and to support protocols like m c three and and and other protocols that are specific to, you know, AI in general and and increasingly, agentic AI. AI security, we think, especially as in the case of f five, AI runtime security, protecting AI workloads in production, we think it’s gonna be a very substantial opportunity for for a five. Again, that that AI layer seven security is going to be extremely important where you have to look at every token and make sure that it’s going in the right place and and, you know, there’s no malicious prompt injection and then other threats that are that are dealt with, we think that is going to be a very large opportunity. I think it will develop a little it will take a little longer to develop that AI data delivery, which we’re starting to see right now. But we’re starting to see customers already be very sensitive to securing their AI workload and starting to investigate what solutions they could have to do that.

So we think that market is absolutely going to happen. The pace at which it happens is is less clear for us.

Tal Liani, Analyst, Bank of America: Got it. Thank you.

Conference Operator: Our next question comes from Ryan Coons with Needham and Company. Please proceed with your question.

Suzanne Dulong, Vice President of Investor Relations, F53: Great. Thanks. First, just a clarification on when you talk about tech refresh, I assume you’re talking about f five to f five, legacy to modern product. Second, question I have is regarding your your modest price increase. You’ve talked about, phasing in.

Kinda where are you in terms of that way can it make its way through the model, and what’s been the customer feedback on that relative to some of your competitors’ moves? Thanks.

Cooper Werner, Executive Vice President and CFO, F5: Sure. Yeah. When we talk about tech refresh, we’re talking about refreshing f five. We also have had good success displacing competitors. So there is a kind of a separate refresh motion around competitive installed base, but that’s not part of, you know, that dynamic board speaking specifically to tech refresh.

And then in terms of the price increases, so, yeah, we we announced the price increase in January. That’s we’re starting to see that through come come through in the numbers. I think that customer reception has been, reasonable. We’ve we’ve seen other peers in the in the space that have had much more aggressive pricing practices that have frankly turned off a lot of customers, and that’s driving some business our way. You know, we wanna make sure that we’re delivering value commensurate with the price increases that we introduced in in January.

So we feel pretty good about where we sit from that perspective.

Conference Operator: Got it. Thanks. That’s all I have. We have reached the end of the question and answer session. I’d now like to turn the call back over to Francois Lecaux de Nuit for closing comments.

Francois Loco Danu, President and CEO, F5: Thank you for joining us today. We look forward to seeing many of you during the quarter and to discussing F5’s growing role in the broader hybrid multi cloud landscape. Thank you.

Conference Operator: This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.