Good afternoon, and welcome to the F5 Fourth Quarter Fiscal 2024 Financial Results Conference Call. Today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. You may begin.

Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. We're here with you today to discuss our fourth quarter and fiscal year 2024 financial results. Francois Locoh-Donou, F5's President and CEO; Frank Pelzer, F5's Executive Vice President and CFO; and Cooper Werner, our SVP of Finance and incoming 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&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 A copy of today's press release is available on our website at f5.com, where an archived version of today's audio will be available through January 27, 2025. We will post the slide deck accompanying today's webcast to our IR site at the conclusion of our call. To access the replay of today's webcast by phone, dial (877) 660-6853 or (201) 612-7415 and use meeting ID 13749373. The telephonic replay will be available through midnight Pacific Time, October 29, 2024. For additional information or follow-up questions, please reach out to me directly at [email protected]. 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 have summarized factors that may affect our results in the press release announcing the financial results and in detail in our SEC filings. In addition, we will reference 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 Q4 highlights, our strategy and growth opportunities and our expectations for FY '25. Frank will then review the details of our Q4 and FY '24 results, and Cooper will speak to our outlook for FY '25. I will now turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. We delivered a record Q4 across a number of metrics, including $747 million in revenues, which is up 6% year-over-year and above the high end of our guidance range. Q4's top line growth is the result of strong software performance, including 19% software revenue growth. Just as importantly, we delivered Q4 non-GAAP EPS of $3.67, EBIT of $0.17 above the top end of our guidance range, highlighting our improving operating margins, in addition to top line strength. Q4 was the cap to a fiscal year during which the F5 team outperformed our plan, even with a challenging macro backdrop to start the year. In FY '24, we delivered revenue at the top end of our guidance. We also outperformed our initial expectations for software revenue, delivering 11% software growth compared to FY '23, and we demonstrated continued operating discipline generating 14% non-GAAP growth for the year. These results speak to the power of our solutions, the strength of our operating model, and the resilience of our business. In a relatively short period of time, we have substantially reshaped F5 from a hardware-centric single product company into a security and software leader in today's hybrid multi-cloud world. Our transformation has redefined F5's role beyond the data center, increasing our value to customers, diversifying our revenue and expanding our total addressable market. The change is evident in several important metrics. In FY '17, software contributed $122 million or just 13% of our product revenue. Today, software is $735 million and 58% of our product revenue. In FY '17, subscriptions represented just $24 million or 20% of our software revenue. Today, they totaled $624 million and 85% of our software revenue. And finally, in FY '17, our recurring revenue was $1.1 billion or 52% of our total revenue. And today, it is $2.1 billion and 76% of our total revenue. A growing percentage of our business is coming from existing software customers, providing us with very good visibility to a large portion of our revenue for the coming year. As a result of our large software renewal opportunity, improving systems demand trends and our growing pipeline, we expect revenue growth to accelerate in FY '25. We expect FY '25 revenue growth in a range of 4% to 5% from FY '24. This is ahead of the expectations we outlined when we first shared our FY '25 outlook a year ago. In addition to top line growth, we expect to drive continued operating margin leverage. As a result, we expect to deliver 5% to 7% earnings growth in FY '25. On a tax neutral basis to FY '24, the midpoint of this range reflects 10% EPS growth. Beyond the visibility we have into our recurring revenue and pipeline for FY '25, we remain confident in F5's long-term growth prospects for several reasons. These include F5's alignment with robust and sustainable industry trends and the effectiveness of our go-to-market strategies. I will speak first to the industry trends. First, hybrid multi-cloud environments are now the norm and will remain so. According to our latest State of Application strategy report, nearly 90% of customers are operating across multiple environments with the benefits of choice clearly outweighing the challenges of managing apps across different deployment models. Second, applications and the APIs that connect them are becoming increasingly distributed which means traditional single environment solutions are not capable of managing and securing them. Third, the number of application instances continues to grow. In fact, it is projected to grow from roughly $2 billion today to $6 billion by 2029. Fourth, APIs are rapidly proliferating creating new challenges and risks for application owners. A recent F5 survey found that nearly one-third of customer-facing APIs lack fundamental protection. Fifth, applications and APIs require more security and delivery services today than they used to. In 2016, organizations deployed a minimum of two app services to ensure an app remain performant and secure. Today, that number has grown to 13 on average and 27 in total. And finally, the emergence and eventual widespread adoption of AI and AI-powered applications will accelerate and further complicate all of these trends while also leading to new demands related to data ingestion and optimization of GPU environment. Individually, these dynamics are driving new complexity, cost, and security risks for customers. The fact that they are all happening simultaneously is creating significant challenges for the IT teams managing them. You have heard us describe the confluence of these dynamics as the ball of fire, and we continue to believe that F5 is uniquely positioned to address it. The powerful industry dynamics I just outlined are contributing to our ability to drive growth through our land, expand and renew go-to-market motions. We are landing new customers by winning competitive entry opportunities, targeting competitive takeouts and leveraging and expanding our strong channel relationships. Our biggest growth opportunity, however, comes from the potential to expand our footprint and wallet share across our base of approximately 20,000 customers. At times, this means expanding as an application utilization grows over time. At others, it means leveraging the synergies and power of F5's platform to create a strong unified security posture, simplify multi-cloud complexity or streamline operations. The power of this expand motion is evident in the early success of our F5 distributed cloud services. We launched this platform in February of 2022 and now have more than 800 customers on it, one-third of whom are new customers to F5. And finally, we are growing as we successfully renew and expand with existing customers. This motion has been a powerful driver for our business and is a testament to the value F5 delivers. Our sales and customer success teams are focused on ensuring it remains so. The relative success of these motions is further evidence of F5's differentiated ability to tame the ball of fire for our customers. We do this across three vectors: app and API security, simplification, and standardization and automation. First, app and API security. F5 delivers the most effective and comprehensive app and API security platform in the industry. We enable our customers to consolidate point products, targeting specific threats onto a single integrated platform with a suite of best-in-class capabilities. As an example, during Q4, a global integrated energy company selected F5 distributed cloud services web application firewall and API protection to enhance and streamline its multi-cloud application security across two major public cloud platforms. Previously, the customer had been running two distinct cloud native WAF and API Gateway solutions. The customer selected F5 distributed cloud services following a comprehensive evaluation, which included two competitive offerings. F5, one, based on its superior ability to provide a unified security posture effectively defending against advanced threats and delivering comprehensive API security. Second, simplification. F5 enables the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require. Only F5 delivers solutions that extend across public clouds to the edge and customers' on-premises environments. Our solutions simplify connecting disparate infrastructure environments and the applications deployed in and across them. As an example, during Q4, F5 distributed cloud services was selected by the largest mobile provider in a Southeast Asian country to simplify a complex IT challenge. Following a merger with another large mobile provider, the customer faced complications arising from overlapping IP addresses between their core business applications and retail branches. Overlapping IP addresses can cause connectivity issues and operational inefficiencies, especially when different systems and networks merge. F5's multi-cloud networking technology provided virtual IPs and translation services which allowed the new entity to easily manage IP conflicts across 500 branches. And third, standardization and automation. F5 solutions enable more cost-effective and scalable IT operations. We streamline customers' operations with consistent policies, comprehensive automation and rich analytics. This enables customers to consolidate vendors and tool sets, rationalize operational silos and automate life cycle management of their on-premises deployments. As an example, during Q4, a large Australia-based multinational bank and financial services organization selected F5 to reduce operational overhead and to refresh, consolidate and modernize its application infrastructure. Automation enabled by F5 Velos hardware and software eliminated tens of thousands of lines of hard-to-maintain custom code. F5 automation is also enabling application self-service streamlined certificate management and hitless upgrades. The new F5-enabled practices have improved security and reliability of the customers' applications while eliminating massive amounts of manual processes and labor. These three points of strong differentiation, combined with the well-established role F5 plays embedded in the flow of application traffic enable us to address the ball of fire for our customers in ways our competitors cannot. Before I pass the call to Frank, as I have the last several quarters, I will speak to the opportunity we see emerging with AI use cases. As we discussed earlier this year, 2024 was the year of AI infrastructure build-out in preparation for AI apps. AI-driven use cases are already driving significant investment in new application and infrastructure requirements across compute, storage and networking layers. In networking specifically, AI factories have extremely high data and throughput demands. F5's initial opportunities in AI are concentrated on three networking use cases. The first is AI data ingestion requiring high performance traffic management for AI model training and retrieval augmented generation or RAG. Over the last several quarters, we have highlighted customers leveraging F5's industry-leading traffic management capabilities to optimize data ingestion. During Q4, we had another example of a customer choosing F5 for data ingestion. A global conglomerate with businesses across IT, automotive, media and financial services chose F5 to optimize data ingestion for its AI model training. The customers' AI factories are collecting information and telemetry to power its connected vehicle business. In this deployment, F5 is providing high performance load balancing between the customers' enterprise storage clusters and their AI factories. The second AI use case we are focused on is AI factory load balancing where we are optimizing the performance and scalability of AI factories with advanced traffic management. Just last week, we announced our exciting collaboration with NVIDIA to enable high performance software ADC on AI infrastructure. There are two important pieces of this news. First, we have enabled BIG-IP Next to run in Kubernetes. Enterprises and service providers building AI factories are driving strong demand for advanced semiconductors such as GPUs. AI workloads that run within this infrastructure are running on Kubernetes. F5 BIG-IP Next for Kubernetes brings our market-leading networking traffic management and security capabilities to these modern environments. Second, we partnered with NVIDIA to ensure that BIG-IP Next for Kubernetes works seamlessly with NVIDIA BlueField-3 DPUs. When combined with BIG-IP Next for Kubernetes, these DPUs effectively become AI accelerators, increasing the performance and security of training and inference workloads delivering superior AI-driven customer experiences. The first two AI use cases I have just highlighted are ADC opportunities, a market where we have been the leader for the last two decades. The third AI use case we are focused on leverages web application firewall and API protection or WAAP for secure AI inferencing. We have deployments supporting this use case today and expect it will become more prevalent as enterprises begin to leverage AI inferencing at scale over the next 18 to 24 months. As you can see with these examples, F5 is not just adapting to the AI revolution, we are actively shaping it, providing the critical infrastructure that enables our customers to harness the full potential of AI safely and efficiently. Our sales, engineering and product teams have identified multiple additional AI use cases where F5 is likely to have a significant role to play. In addition, we continue to implement generative AI solutions across our portfolio, leveraging AI to help customers with their policies and configurations. To conclude, we are confident that F5 is entering fiscal year 2025 with an industry-leading converged portfolio tightly aligned with significant industry trends and customer demand. Because of our unmatched Layer 4-7 functionality and expertise, we are unique in our ability to address escalating application and API complexity. We bring consistent industry-leading security. We simplify hybrid multi-cloud complexity and we streamline operations with standardization and automation. Now I will turn the call to Frank.

Thank you, Francois, and good afternoon, everyone. I will review our Q4 and FY '24 results before I pass the call to Cooper, who will elaborate on our Q1 and full year FY '25 outlook. We delivered strong Q4 revenue of $747 million with a mix of 52% Global Services and 48% product revenue. Global service revenue of $388 million grew 2%, in line with our expectations. Product revenue totaled $358 million, up 10% year-over-year due to strong software growth. Systems revenue totaled $130 million, down 3% year-over-year. I will note that demand for systems improved over the course of the quarter, which Cooper will speak to more when discussing our FY '25 outlook. Software revenue totaled $228 million, representing 19% growth year-over-year. Our solid execution and renewals drove subscription-based software revenue of $204 million or 89% of total software revenue, growing 23% year-over-year. Rounding out our software revenue, perpetual license software contributed $24 million. As Francois mentioned, the percentage of our revenue that is recurring continues to grow, thereby enhancing our revenue visibility. During Q4, 78% of our total revenue came from a combination of subscription-based revenue and the maintenance portion of our global services revenue, this is up from 76% a year ago. Shifting to revenue distribution by region, revenue from the Americas grew 9% year-over-year, representing 58% of total revenue. EMEA delivered a strong quarter with 4% growth, representing 26% of revenue. Meanwhile, APAC declined 3%, representing 16% of revenue. Looking at our major verticals, enterprise customers delivered a very strong quarter, representing 72% of Q4 product bookings. Government customers represented 18% of product bookings, including 8% from U.S. Federal. Finally, service providers represented 10% of Q4 product bookings. Our Q4 operating results were strong reflecting our continued operating efficiency improvements. GAAP gross margin was 80.8%. Non-GAAP gross margin was 83%. Our GAAP operating expenses were $412 million. Our non-GAAP operating expenses were $363 million. Our GAAP operating margin was 25.6%. Our non-GAAP operating margin was 34.4%. Our GAAP effective tax rate for the quarter was 18.8%. Our non-GAAP effective tax rate was 19.5%. Our GAAP net income for the quarter was $165 million or $2.80 per share. Our non-GAAP net income was $217 million or $3.67 per share. I will now turn to cash flow and balance sheet metrics, all of which remain very strong. We generated $247 million in cash flow from operations in Q4 on strong net income and cash collections in the quarter. CapEx was $6 million. DSO for the quarter was 47 days. Cash and investments totaled approximately $1.08 billion at quarter end. Deferred revenue was $1.8 billion, up 1% from the year-ago period. In Q4, we repurchased $100 million worth of F5 shares at an average price of $206 per share. Over FY '24, we repurchased $500 million worth of F5 shares at an average price of $177 per share. Our share repurchases represented 66% of our annual free cash flow in FY '24, exceeding our commitment to use at least 50% of our free cash flow for this purpose. As announced in the earnings release, our Board of Directors has authorized an additional $1 billion for our common stock repurchase program. This new authorization is incremental to the $422 million remaining in the existing program and as of today, brings the total available under the authorized stock repurchase program to $1.4 billion. Finally, we ended the quarter with approximately 6,560 employees. I will now recap our FY '24 results. Our FY '24 revenue of $2.82 billion was up slightly from FY '23 and at the top end of our initial revenue guidance for the year. These results speak to the strength of our business, particularly given the revenue growth headwind we faced in FY '24 due to the elevated backlog fulfillment in FY '23. Global Services revenue grew 4% to $1.54 billion, representing 55% of total revenue for the year. Product revenue representing 45% of revenue, declined 5% year-over-year. Within product revenue, our FY '24 systems revenue totaled $537 million. While this represents a decline of 20% compared to FY '23, our underlying systems bookings grew year-over-year. Software revenue of $735 million grew 11% compared to FY '23. This is up from our initial expectation of flat to modest growth as a result of continued strong renewals performance in addition to a stronger new business trend compared to FY '23. Software represented 58% of our FY '24 product revenue and software subscriptions represented 85% of our FY '24 software revenue. Let's take a closer look at the components of our annual software revenue. Our software revenue is comprised of three elements: one, SaaS and managed services; two, term-based subscriptions; and three, perpetual software licenses. I'll expand on each of these, starting from the top down. Our SaaS managed services, which is the portion of our software recognized ratably over the duration of the subscription term delivered $193 million in revenue in FY '24, a decline of 5% year-over-year, largely as a result of planned legacy offering retirements and transitions. FY '24 SaaS and managed services annualized recurring revenue, or ARR, of $182 million is down from $198 million in FY '23 and primarily as a result of planned churn related to retiring legacy offerings, offset by continued growth in our core SaaS and managed services offerings. I'll speak first to our legacy offerings represented by the gray bar in our accompanying charts. There are two portions of our legacy offerings. The first is discontinued SaaS and managed service offerings. The second is Silverline managed services, which we continue to work to transition to F5 distributed cloud services. The vast majority of the legacy AR decline from FY '23 to FY '24 is related to planned churn associated with discontinued offerings. During FY '24, we transitioned a modest amount of Silverline managed services to F5 distributed cloud services. We noted last year that the Silverline transition would be back-end weighted over the course of FY '24 and FY '25. The green portion of the bar represents our core SaaS and managed services, which includes F5 distributed cloud services, our high-end bot defense point solutions and our recently launched NGINX as a service offering. F5 distributed cloud service delivered strong growth off a relatively small base, offset by churn within our high-end bot defense solution. The second portion of our software revenue comes from term-based subscriptions, which are recognized largely upfront as product revenue with a portion deferred and recognized ratably as global services revenue over the subscription term. These include new renewal and true forward revenue for both annual and multiyear subscriptions of BIG-IP and NGINX. In FY '24, revenue from term-based subscriptions contributed $430 million to our software revenue, up 22% year-over-year as a result of continued strong renewals and expansion performance as well as growth in new software business compared to FY '23. The third and final component of our software revenue is perpetual software licenses, which contributed $112 million in software revenue, up 3% year-over-year. Several years ago, we began breaking out our security-related revenue annually. This year, our total security revenue, which includes standalone security, attached security and security related to maintenance revenue, was approximately $1.1 billion or 41% of total revenue. Standalone security revenue totaled $460 million, representing 36% of product revenue. I will now turn to our FY '24 operating performance. GAAP gross margin in FY '24 was 80.2%. Non-GAAP gross margin was 82.8%, up 132 basis points from FY '23. Our GAAP operating margin for FY '24 was 23.4%, and our non-GAAP operating margin was 33.6%, up 337 basis points from FY '23 as a result of continued operating discipline. Our GAAP effective tax rate for the year was 18.5%. Our non-GAAP effective tax rate for the year was 19.2%. GAAP net income for FY '24 was $567 million or $9.55 per share. Non-GAAP net income was $794 million or $13.37 per share representing growth of 14.3% over FY '23. I will now pass the call to Cooper to speak on our outlook.

Thanks, Frank, and hello, everyone. Francois outlined our FY '25 outlook at the start of the call. I'll recap it now with some additional color. I will also provide our outlook for Q1. With the exception of revenue, my guidance comments reference non-GAAP metrics. I'll start with FY '25. First, our FY '25 outlook assumes continued macro stability, but does not assume a significant improvement to the macro environment. It also does not assume substantial growth in our customers' IT budgets. In FY '25, we expect to deliver 4% to 5% revenue growth over FY '24. Similar to FY '24, we anticipate our FY '25 revenue will be relatively back-end weighted. We expect low-single digit revenue growth across the first half of the year and mid-single digit revenue growth in the second half. Our stronger second half expectations are based on the visibility we have to the sizable renewal base coming up during that period and our consistently strong renewal performance over time. Taking a closer look at the components of FY '25 revenue, I'll start with software. Our expectation for FY '25 software revenue has improved from our initial view a year ago. At the beginning of our fiscal year 2024, we guided to flat to modest software growth in FY '24 and shared our expectation that software would grow by double-digits from that level in FY '25. Against the much improved 11% software growth outcome in FY '24, we now expect FY '25 software to grow in the upper-single digits year-over-year. Looking at systems revenue. As Frank referenced in his comments related to Q4, we have recently seen an improvement in systems demand as customers begin to refresh older estates, and we drive momentum from competitive takeout opportunities. As a result, we expect systems revenue will grow mid-single digits in FY '25. And finally, we expect global services revenue will grow low-single digits in FY '25. From an operating perspective, we expect to deliver gross margin improvements resulting in FY '25 non-GAAP gross margin in a range of 83% to 84%. We also expect to drive continued operating expense discipline, resulting in FY '25 non-GAAP operating margin of approximately 35%. Seasonally, we expect operating margin in the low 30% range for the first half of FY '25, moving to the upper 30s in the second half. We expect our typical seasonal low for operating margin in Q2, reflecting the combination of payroll tax resets and costs associated with a large customer event in February. We expect our FY '25 non-GAAP effective tax rate will be in a range of 21% to 23%. We expect to deliver 5% to 7% non-GAAP earnings growth. On a tax neutral basis to FY '24, the midpoint of this range reflects 10% EPS growth year-over-year. Finally, we intend to continue to use at least 50% of our annual free cash flow towards share repurchases in FY '25. I will now speak to our outlook for Q1 of FY '25. We expect Q1 revenue in the range of $705 million to $725 million. We expect non-GAAP gross margin of approximately 83%. We estimate Q1 non-GAAP operating expenses of $343 million to $355 million. We expect Q1 share-based compensation expense of approximately $55 million to $57 million. We anticipate Q1 non-GAAP EPS in a range of $3.29 to $3.41 per share. With that, I'll pass the call back to Francois.

Thank you, Cooper. Before we conclude, I will provide an update on our executive team. I am pleased to announce that Kunal Anand will lead our product organization as Chief Innovation Officer. After a thorough search that included interviews with leaders from across our industry, it was clear that Kunal had both the experience and perspective required for the role. Through his prior experience, leading the technical and security teams at Imperva, Kunal brings deep domain expertise and technical knowledge across cloud, security, networking, SaaS and AI, his entrepreneurial mindset will be a tremendous asset as we execute the next phase of our portfolio roadmap, and I am excited to work with him in his new role. I will also take this opportunity to express my sincere and heartfelt thanks to Frank for his leadership during his time at F5. For the record, I want to share with you all that Frank informed me recently when I asked how I could have been a better boss, that his real name is not Frank. In all seriousness, Frank, you have been a true partner and friend, and I cannot thank you enough for the impact you have had on this team and our business. And Cooper, I am looking forward to working with you more closely in your new role as CFO. As we enter FY '25, we see a more stable environment overall. Importantly, customers no longer have architectural ambiguity. Most believe that hybrid multi-cloud architectures will be the norm for the foreseeable future, in part because they enable organizations to choose the best environment for each application. This is good news for F5 because it means customers must also select partners capable of taming the inherent complexities, risks and costs that come with the benefits of hybrid multi-cloud architectures. We have firmly entered the era of AI and hybrid multi-cloud, which will characterize the next decade of our industry. F5 is emerging as an important player in this new era. We are developing robust SaaS capabilities and presence and establishing ourselves as an emerging leader in the cloud WAAP market. Our unique strength lies in our ability to secure any app anywhere. F5 has an outsized impact on the world. This year alone, we worked with 2,000 partners across 138 countries to deliver extraordinary experiences for more than 20,000 F5 customers. Together with those customers, we secured, delivered and optimized millions of apps and APIs that power the world. Our work allows billions of people to live their lives day in and day out. People across the globe can shop, bank, fly, drive and live more securely, thanks to F5. Last quarter alone, distributed cloud services blocked more than 2.3 billion attacks. I offer my humble and deep thanks to our employees, partners, customers and shareholders. It is truly an honor and a privilege to lead a company that plays such an important part in building a better digital world. Operator, please open the call to questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Samik Chatterjee with JPMorgan. Please proceed with your question.

Thank you for taking my question and congratulations on the strong results. I have a couple of questions regarding software. To start, Francois and Frank, the software performance was impressive this quarter. Can you elaborate on the composition of those results? Did the outperformance stem more from renewals or true-ups? Where did you identify the strength coming from, or can you share insights on what you're hearing from enterprises that contributed to the positive results this quarter? I have a follow-up after that. Thank you.

Thank you, Samik. This is Frank. Let me address that question and see if Cooper or Francois has anything to add. In the quarter, when we updated our guidance in July, we expected to achieve a specific target for the full year. We ended up surpassing that expectation due to two main factors. First, we saw significant expansion within our existing customer base as they renewed their contracts, which was impressive overall, with a few large renewals in particular. Second, we experienced new business activity from projects that had been postponed; once clients completed their architectural designs, they were ready to proceed with some software engagements. This was a factor we did not anticipate for fiscal year 2024, but it emerged in the latter half of the year, especially in the fourth quarter. Both of these elements contributed positively and led to a strong increase in software revenue for the quarter, which also enhanced our outlook for fiscal year 2025.

Got it. And I'll add, this is Cooper. On the expansion revenue opportunity, so we've got really good visibility as to the consumption that our customers have within some of these multiyear contracts and so that came through as expected. But what we also see was maybe a little bit better performance in terms of consuming new offerings when they did renew those agreements. And so there's kind of two different forms of expansion that we see. And so the consumption expansion really kind of landed in line with our expectations and then we saw some incremental opportunity as customers are consuming more of the portfolio in their second generation multiyear subscriptions.

Got it. For my follow-up, I have a broader question regarding the guidance you've provided for software, which indicates high-single digit growth after the strong performance in fiscal '24. It seems that companies are still in the early stages of adopting AI. I would like to understand your thoughts on why software growth is expected to decelerate a bit. Specifically, how should we interpret the level of conservatism in that projection, and should we really be anticipating a slowdown at this point in the cycle, considering the enterprises' investment journey in AI? Thank you.

Thank you, Samik, I'll take this one. Look, I'll come to AI in a moment, but the guidance we're giving here is really driven by the macro trend of enterprises adopting a hybrid and multi-cloud posture. And so if you pull way up, Samik, at the time where everybody thought that all applications will go into a single public cloud, we saw a number of companies optimized for a world where all apps would be in the cloud, and we’re all apps would consume app security and delivering delivery services as fast. We are in time we did not optimize for that world. We optimized for a world that would be hybrid and multi-cloud. And today, that's what we're seeing. We're seeing that more than 90% of our customers are in hybrid and multi-cloud environments. And that's generating a number of tailwinds that are serving the business that we have optimized for specifically, we're seeing a lot of customers do automation on-prem to get the benefits of the cloud in their private cloud environment. We're seeing applications becoming increasingly distributed over multiple infrastructure environments. We're seeing a large proliferation of APIs that need to be secured. We’re seeing more need for security services for each application. And all of these aspects of implementing hybrid and multi-cloud architectures are benefiting F5. And that is why we're seeing outperformance in the consumption of existing software agreements as well as customers starting new software projects with us. It's also having a positive impact. As you saw, we're saying that our hardware will actually grow next year. And this is also in part because customers are comfortable with the hybrid multi-cloud architectures. They're comfortable that they will be in their data centers for the foreseeable future. And so any hesitation that existed in the past around refreshing existing hardware estate, we have seen any of that hesitation fade away with customers having full confidence in our current architectures.

Sounds any comments on sort of why should there be a deceleration, particularly with AI still being a major driver of investment for the enterprises?

So in terms of guidance for next year, it's early in the year, and we'll see how the year plays out. But, of course, we want to remain prudent with our guidance overall. AI, we are in the very early days of deployments of AI, but we're seeing opportunities for F5, both in hardware and in software. And the positive news on that is these opportunities are new insertion points for F5. So if you step back, F5 over the last two decades, has really mastered the expertise of securing and delivering a critical network and application traffic across data centers and cloud. It turns out that, that expertise in managing, securing and optimizing critical application traffic is very much needed for AI workloads, where there is significant movement of data between the device and storage tiers or between storage tiers and GPU clusters. And so we are finding insertion points for those early companies that are building AI factories. We are finding insertion points with our BIG-IP hardware platform fronting some of these storage tiers or sitting between storage tiers and GPU clusters. It's early days in terms of the volume of yields because at the moment, there are very few companies doing that. But we will see how the other opportunity develops over time. And we are also seeing opportunities potentially in software inside of these GPU clusters. And the partnership we just announced with NVIDIA is a manifestation of that opportunity. of marrying our software with the world's most advanced semiconductor technology to create AI factories that scale better and more efficiently for customers. So we see opportunities in AI. That being said, we have not really baked very significant contribution from AI in our FY '25 guidance because our current belief system is that these opportunities will develop over time, and it's more of a '26 and beyond where we would see meaningful revenue contribution from these opportunities.

Thank you. Thanks for taking the questions.

Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Thanks for the update. Regarding systems revenue potentially exceeding expectations as we move into fiscal '25, do you attribute this more to gaining market share or an accelerated refresh cycle among your customers? Also, as a follow-up, I would assume that market share gains would occur in a more favorable spending environment, where customers are more inclined to make decisions about their enterprise IT. What insights do you have about your customers' outlook for fiscal '25, particularly in terms of sales and spending cycles? Are you noticing any improvements in that area? Thank you.

Yeah. I'll start Meta, and this is Francois, if you want to follow up. I think the strength we're seeing on systems is both from competitive replace opportunities. We had a really good success, especially in the latter half of FY '24, displacing some of the competitors states and some of the customers that we're bringing on to F5. And then we are also starting to see a more material tech refresh of our installed base with our customers. And this goes back to the long period we've had where a lot of our customers were sweating their infrastructure. We're starting to see our customers have a little bit better certainty around their budgets and they're starting to move forward now with reinvesting in their hardware structure. And so that's a trend that we think will likely continue to play out over the next several quarters, and that's kind of behind our mid-single digit growth outlook for the hardware business.

I mean I’ll just add that, yes, we do continue to gain share from the data we look at. We continue to gain share in the traditional ADC market we have been quite successful at taking out certain competitors where customers have not been satisfied with their either performance or commercial approach to the relationship. And so we’ve had gained shares on that. But I think there is perhaps some more macro effect here that customers have become from what we can see quite comfortable with our hybrid multi-cloud architectures. And as a result, they’re really comfortable with moving forward with refreshing their estate, and they’re comfortable deploying the new hybrid multi-cloud projects that sometimes it’s hardware and software combined across the estate.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

Hey, good afternoon. Thanks for the question. I wanted to ask about the cadence of subscription revenue obviously, very strong in the quarter. As we head into, I guess, the first half of next year and the December quarter, it seems like there's an implied decline in subscription revenue sequentially. I was just wondering, if you could speak to some of the dynamics there, whether that was the outperformance of things like true forwards in the September quarter or the timing of term base. But any color about that and how that kind of plays out through the rest of fiscal '25 would be very helpful. Thank you.

Thank you, Michael. This is Cooper. The discussion revolves around the timing of the renewal base and the strong performance we experienced in the fourth quarter. We had notable expansion within that renewal base. However, we mentioned last year that the renewals due up were more heavily concentrated towards the end of the year, which also applies to fiscal year 2025. The renewal base in fiscal year 2025 is larger than in fiscal year 2024, but it is still more weighted toward the latter half of the year. Therefore, any perceived slowdown in software growth is primarily related to the timing of renewal negotiations. Additionally, for term-based licenses, revenue is mainly recognized upfront under ASC 606, which introduces some variability in the reported revenue from those sales. Overall, we see this as a significant opportunity for us in fiscal year 2025.

Great. Thanks Cooper. And just as a quick follow-up. You had an expansion of the renewal base in the September quarter that was better than expected. I guess, are you assuming a similar level of expansion of the renewals that come up in fiscal '25 or smaller or bigger? Thank you.

Yeah. So we adjusted our assumptions a little bit on the renewals just to take into account the continued strength we've had. I mean every year, that base gets bigger. And so we have to take that into account when we're setting our guidance, but we have been very consistent in terms of both renewing and driving expansion. So that is something that we're factoring in, in the growth outlook. And then from the new side of the software business, that also has increased. We're looking at the new software as being flattish year-over-year, but that's against an improved FY '24 result from the new software projects for our customers.

Good afternoon. I have two questions as well. I guess, maybe to stop it, Francois, can you just talk a little bit more about the BIG-IP Next for Kubernetes? You've talked about it a little bit already, but just talk about which customer base do you think this will resonate more with it? Is it sort of the hyperscalers that are deploying more of the NVIDIA AI solutions right now? Or do you think it's going to be more with the enterprises over time? Where do you think this product will gain more traction? And any way to think about how big this opportunity could be for F5 as you go forward?

Right. Okay. So let me start a little bit on that solution. So BIG-IP Next for Kubernetes is really what we're doing here is taking our traffic management software, which we have refactored for Kubernetes environment, and we're marrying that with NVIDIA's DPU to provide key benefits to customers building AI factories. The number one benefit is really increasing utilization of GPUs in part because we do traffic management, and so we can get data to GPUs faster in part because we also enable this a single GPU cluster, to serve multiple AI workloads or AI models, what we call multi-tenancy in the industry. And so who are the customers who would benefit from that? It would be, of course, all service providers that provide GPU as a shared infrastructure shared service to a number of customers. It would be enterprises that are building even their own AI factory, but want to maximize the utilization of GPUs and GPUs are expensive resources today. So that's going to be generally either enterprises or service providers that are building AI factories at significant scale. So that's really who we're targeting with this joint solution. Now I want to be clear that we are early days. We have a validated technical architecture with NVIDIA. We're starting to get interest from the folks we speak to who are building these factories and who see a significant opportunity to improve the efficiency and the utilization in their factory. But there's a number of questions around the go-to-market model that we have not yet answered. And so we also see that opportunity materializing more in FY '26 and beyond. But that said, it could be a pretty significant opportunity for F5, assuming that the go-to-market model works and that we find a way to embed the software technology on a large number of NVIDIA DPUs over time.

Got it. That's really helpful. And then, if I can just get a clarification on the software growth, right, which I think you folks have talked about high-single digits in fiscal '25 is the right way to do it. Is it fair to think that software growth, just like we've talked about the top line will be a bit more muted, maybe low single in the front half and then ramps up in the back half? We going to understand this because you do have a very tough compare in the March quarter where you got some term license deals on the software side. So just any kind of cadence on the first half versus back half on software and how to think about that would be helpful. Thank you.

Yeah. So we provided some context on the overall revenue growth seasonality for the year where we said it would be kind of low-single digit growth in the first half of the year in mid-single digits second half. And really, the leading contributor to our overall growth in software as you kind of get an idea that the software growth will also probably be stronger in the second half. And again, that's tied to that larger renewal base that we have coming up in the second half of the year. And so we'll see how that plays out over the course of the year. But a lot of these opportunities, as we said, they can be pretty material in size. So in any given quarter, there's going to be some variability up or down in the growth rate. And so we wouldn't prescribe too much emphasis on an individual quarter's growth outlook, but probably the upper-single digit growth, we feel really good about for software. And again, as Francois noted earlier, we have pretty good line of sight to about two-thirds of the footprint of where that software is going to be coming from because it's business we’ve already attracted. So that gives us a lot of confidence in the outlook for the year.

Got it. Thank you very much.

Thank you. Our next question comes from the line of James Fish with Piper Sandler. Please proceed with your question.

Hey, guys. Nice quarter. Just curious, as going back to Meta's prior question around systems. You guys have talked in the past about potential price increases? And clearly, your largest competitor in that space changed their packaging and pricing. So how are you guys thinking about a potential price increase for some of your legacy systems or the maintenance itself given kind of that change? And is that included in sort of the growth rate around mid-single digits for systems, especially when this is a segment that Francois back in, I think, '17 or '18, you talked about it as kind of a mid-single digit decline kind of segment. So just additional color would be great, guys.

Yes, our perspective on the segment has been that demand for units will decline at a mid-single digit rate over time. If you look at the trends since our statements in 2017 and 2018, you would see that this has largely happened. However, this could potentially change due to a couple of factors. One is the growing commitment from customers to hybrid multi-cloud architectures and the strength of their on-prem deployment plans, which includes some data center expansions. The second factor is AI, where we see opportunities for hardware in front of the storage tiers. Recently, we announced a partnership with NetApp to accelerate our joint efforts in AI, which could influence our outlook on the segment. For now, our assessment of a mid-single-digit decline remains accurate. Regarding price increases, we have announced modest price increases for the beginning of this year and have implemented similar increases in the past due to supply chain changes. We continuously monitor the competitive environment and the value we provide to our customers, and we will keep making adjustments accordingly in the future.

Got it. And just to clarify those price increases when we say beginning of the year, that's calendar year, those going into effect.

You guys care to quantify how much that price increase is? And then Francois building off of what you just said as well as your AI commentary before in terms of those three buckets. Is there a way to think about when to expect each of those tailwinds to come in, if there's any sort of difference on timing or if we should think about them all coming in kind of together at the same time?

So the price increase in hardware, Jim, is in the single-digit percentages. And as it relates to the AI opportunity in terms of quantifying things, Jim, the first opportunity that we see that is immediate is with big IT hardware sitting between an AI app in the storage tier or between the storage tier and the GPU cluster. And those are deployments that we're seeing right now. We have one already a handful of opportunities when we're doing that. Those opportunities are with large enterprises, building AI factories or service providers also building AI factories, and we've seen that both in the U.S. and internationally. We're not planning on that being a very significant contributor to revenue in 2025, but we're starting to see more deployment and we'll see how fast they scale. But that's the opportunity, that's the multimillion. The second opportunity then is in software, and that's where we're going into the GPU clusters. Our partnership with NVIDIA is about that, and it's about improving the efficiencies of the GPU clusters using F5 traffic management software. I think that opportunity from a timing perspective is really 2026 and beyond because there's still a lot of go-to-market and commercial work to be done before we are ready to go into production with these solutions.

Thanks, guys.

Thank you. Our next question comes from the line of Simon Leopold with Raymond James. Please proceed with your question.

Great. Thank you for taking the question. First, I just want to see if I can clarify how you've updated the cadence forecast. On the last earnings call, you had indicated the first half of fiscal '25 would be relatively flat with strength in the second half of the year. Now you've given us this forecast for the first quarter that at the midpoint, it's about 3% year-over-year growth I think you're implying that the second quarter should be somewhat similar year-over-year growth. And so you've essentially guided up from the prior quarter's flat first half rather than implying that Q2 should be down a lot to compensate for the 3% growth in the first half? And then I've got a quick follow-up if you can just clarify that guidance comment first.

Thank you, Simon. We have revised our expectations for low-single digit growth in the first half of the year. We provided guidance for Q1, and you can make your own assumptions for Q2. What you may be noticing is some of the renewed strength from our expansions, which is impacting the software segment, along with the robust performance in systems. We expected growth in this area for the year but hadn't set a specific growth rate, and now we are seeing mid-single digits. You can expect to see some of that benefit sequentially in the first half of the year.

Great. And then I just wanted to see if we could talk a little bit about how the verticals performed relative to your expectations in that in the past, you've had meaningful seasonal benefit from the U.S. Federal, which was on a dollar basis, decent and certainly a nice percentage, but other public sector was basically flattish sequentially this quarter. Just wondering, it sounds to me like your enterprise was the positive surprise that offset others, but how did your verticals perform relative to expectations that you guided? Thank you.

Sure, Simon. It's Frank. Let me take that one. So you're absolutely right. The enterprise was the strong sector in the quarter and was above our expectations, and that's what led to the outperformance. U.S. Fed as a percentage was maybe not criticized, but when you map out the dollars, there was some sort of the expectations that we had. They largely lived up to. And then service provider, as we said all year, as a sector has been a little weaker on the demand side, we've had a few specific service providers where we've had a lot of success with, but as a broad industry it has not come back. There still serve a lot of constraint on demand there. So this largely performed as we expected with the exception of enterprise, which came in stronger than we expected at the beginning of the quarter.

Thank you.

Thank you. Our next question comes from the line of Sebastien Naji with William Blair. Please proceed with your question.

Thanks for squeezing me in. Two quick ones here. Just the first one, can you give us a sense for how much of your growth each quarter is coming from new customers? Just one helpful to get your view on how much growth in 2024 came from competitive share gains? And then how much customers are expected to contribute to growth in fiscal year 202? And then my second question, just so it's out there is around the new BlueField NVIDIA announcement. What are you serving as an alternative to here? Are you replacing a native NVIDIA load balancer? And if so, what is the risk for them to build a more competitive offering and drive that higher utilization internally with their own solution? Thank you.

Thank you, Sebastian. Let me start with the first part of your question about new customers. We consistently gain a number of new customers each quarter across our entire portfolio, including BIG-IP, NGINX, and distributed cloud services. For instance, last year at this time, we had about 500 customers using our distributed cloud services, and now that number has grown to over 800. We've seen significant traction with distributed cloud, particularly among new customers who have never before purchased from F5. We also gained new customers through competitive takeout opportunities with our ADC solutions. However, the bulk of our growth is driven by existing customers, a trend that was evident in 2024 and will continue into 2025. This growth typically comes from expanding existing agreements and cross-selling various product families to our current customers. As we observe more customers adopting hybrid multi-cloud architectures, we find greater opportunities to engage with existing clients who have bought multiple point solutions over time. We aim to consolidate these solutions onto a single F5 platform, as we've developed a comprehensive software stack that addresses all the security and delivery needs of large enterprise customers. One approach we take with existing clients is to consolidate functions and application services onto a single site. Regarding your second question about BlueField with NVIDIA, we view our solution as a compelling way to tackle GPU utilization issues in GPU clusters, a challenge facing the entire industry. GPUs are costly, and F5 possesses unique expertise in Layer 4, 7 traffic management and security within a Kubernetes environment. No other company in our industry has this level of expertise or capabilities. NVIDIA recognizes this, which is why we have collaborated extensively to develop this technical solution. Of course, we expect that others in the industry will eventually try to address this issue as well, leading to a broader range of solutions over time. We believe we are early in the market and have a compelling solution that directly applies our two decades of expertise in high-performance traffic management and security to AI workloads. Currently, no one else in the market brings that level of expertise, and we are confident in the distinctiveness of our technical solution. Moving forward, our focus will be on determining the go-to-market and commercial strategies that will be effective for our customers in the field.

Helpful. Thank you.

Thank you. Our next question comes from the line of Matt Dezort at Needham. Please proceed with your question.

Great. Thanks for taking the question and congrats on the great results, guys. On the go-to-market, I guess, just quickly, as you turn the page to fiscal '25, any changes in sales comp incentives especially as you start to more cross-sell NGINX One? And any changes to the partner program as you think about fiscal '25? Thanks, guys.

So on the partner program, we have a pretty strong program. I mentioned earlier that we work with 2,000 partners across the globe that are all involved in our Unity program. And frankly, I have been very pleased with the way our partners have embraced the growing portfolio at F5 and have contributed to wins with distributed cloud with NGINX and of course, with our BIG-IP product family. This year, in terms of incentives for our sales force, of course, we're going to continue to win in hybrid multi-cloud architecture and incentive our teams to cross-sell the portfolio of F5. We have a number of customers, it's a diminishing number, but a number of customers that today have only one product family for F5, and we think a big opportunity for F5 is to cross-sell our second or third product family into these customers. And our incentives to our sales team increasingly go to that cross-selling the portfolio and of course, we have been working hard with our teams in research and development, in building the technical synergies across the portfolio that make it easier for the sales teams to cross-sell and make it easier for our customers to consume multiple product families from F5 because they see tremendous value from doing so and doing so across all their application infrastructure environment.