Good afternoon, and welcome to the F5, Inc. First Quarter Fiscal 2025 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 first quarter fiscal year 2025 financial results. Francois Locoh-Donou, 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&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 A copy of today's press release is available on our website at f5.com, where an archived version of today's audio will be available through April 28, 2025. We'll 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 1374-9373. The telephonic replay will be available through midnight Pacific Time, January 29, 2025. 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 our 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 Q1 highlights and our strategy and growth opportunities. Cooper will then review the details of our Q1 results and our outlook. I'll now turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. We are really pleased to share our robust Q1 results with you today. F5's alignment with significant secular trends, a more stable IT spending environment and our strong execution contributed to another record quarter. We delivered 11% total revenue growth, including 20% product revenue growth. Software revenue grew 22% and systems revenue grew 18% with strength from all geographies. Our revenue outperformance also drove Q1 non-GAAP EPS of $3.84, a beat of $0.43 above the top end of our guidance range. The quarter's strength is multifaceted and reflects a continuation of the trends we observed in the second half of last year. First, we are benefiting from consistently strong expansion of our software subscriptions, many of which have exceeded our expansion forecast. Second, with a more stable IT spending environment, new software demand continues to grow as customers resume transformative and modernization projects. And third, technology refresh activity is increasing, driving demand for both software and systems. Our pipeline shows these drivers will persist into Q2, contributing to our expectations for Q2 revenue in a range of $705 million to $725 million, implying roughly 5% growth at the midpoint. In addition, reflecting our Q1 outperformance and our better-than-expected Q2 forecast, we are raising our FY '25 revenue expectations to 6% to 7% growth, up from our initial guidance of 4% to 5% growth. Cooper will speak to our outlook in greater detail in just a few minutes. Before he does, I will spend a few minutes discussing F5's differentiation and highlighting some customer wins from Q1. Over the last several years, we have substantially reshaped F5 for the hybrid and multi-cloud architectures of the AI era. With all its advantages, hybrid multi-cloud also brings with it new challenges. IT teams are being overwhelmed by high costs, crushing complexity and escalating cyber risks, a set of challenges we call the ball of fire. As AI becomes ubiquitous, it will add fuel to the ball of fire, requiring more capacity to handle massive amounts of data, more sophisticated traffic management to deal with complex traffic patterns and enhanced security capabilities to stay ahead of new security threats. Unlike competitors who invested solely in cloud or SaaS, or significantly reduced investment limiting their applicability in a multi-cloud world, over the last several years, F5 innovated across hybrid SaaS and next-generation software and hardware. As a result, we stand alone with the only complete hybrid multi-cloud portfolio for application security and delivery. We are the only player that can partner with a CIO or CISO to secure and deliver all of their applications and APIs across hybrid, multi-cloud environments. We are differentiated across three primary vectors. First, F5 has the most effective and comprehensive application 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. A notable example of the power of our ability to consolidate multiple security point products comes in the form of a significant Q1 renewal and expansion with a major financial services customer. Along with the anticipated renewal and expansion of its sizable BIG-IP and NGINX term subscription, the customer converged multiple security point solutions onto F5, adding SSLO and DDoS use cases. The result was a larger-than-expected expansion on what was already an eight-figure renewal. Second, F5's hybrid multi-cloud strategy enables consolidation on a single vendor for app security and delivery. Only F5 delivers solutions that extend from customers' on-premise environments across public clouds to the edge. F5 simplifies connecting disparate infrastructure environments and the applications deployed in and across them. In Q1, a regional utility company in North America modernized its BIG-IP application hosting, security and remote access infrastructure. The customer also deployed F5 distributed cloud services to support its modern applications, displacing two F5 competitors and consolidating their traditional and modern applications and investment on F5. Third, F5 solutions streamline customers' operations with consistent policies, comprehensive automation and rich analytics. We enable customers to simplify their operational management across all environments. One of the largest private sector banks in APAC offers a great example of this dynamic. The customer has deployed F5's Unified Security Policy, displacing two point security competitors and consolidating on F5 for multiple use cases across their on-premises, public clouds and Kubernetes environments, leveraging F5 in SaaS, software and hardware deployment models. F5 is vastly simplifying hybrid multi-cloud complexity for customers. By converging multiple point solutions to address high-performance traffic management, full web app and API security, multi-cloud networking and AI gateway capabilities, we are empowering customers with simplicity and choice. F5 enables them to tame the ball of fire with the right mix of hardware, software and SaaS that best fits their operating model, deploying securely and consistently on-premises, in the cloud or at the edge. F5's differentiated approach to hybrid multi-cloud is also driving competitive displacement momentum across our full range of hardware, software and SaaS deployment models. In fact, in Q1, we achieved a record number of competitive displacements. These included a notable win with a home improvement retailer. Following a series of escalating challenges with its incumbent ADC provider, the customer is replacing them with F5 BIG-IP, leveraging BIG-IP's automation capabilities to support their application delivery infrastructure and to streamline operations. In another example of a competitive takeout in Q1, a leading American insurance provider and longtime BIG-IP customer chose F5's distributed cloud services to eliminate its growing security tools sprawl and reduce associated administrative burdens and costs. The customer is replacing their prior API protection provider with F5's distributed cloud services, web application and API protection or WAP solution. In doing so, they are enhancing their application and API security while consolidating tooling. Before I pass the call to Cooper, as I have in prior quarters, I will discuss the latest developments we see emerging with AI. In the last year, organizations across the globe have embraced AI as a strategic imperative. We expect that within three years, 80% of applications and processes will be infused with AI. There is evidence of this ramp in our own business with more than 50% of our F5 distributed cloud customers already leveraging our AI agent, which provides configuration assistance and insights. While AI promises to bring massive productivity benefits, it is also creating new compliance, infrastructure, networking and security challenges for customers. AI is already exacerbating the ball of fire and accelerating the pressure to simplify hybrid multi-cloud deployments. Our early AI opportunities are concentrated on three areas of high-performance data delivery and security. The dominant AI opportunity for F5 thus far is delivering and securing data for both AI model training and inference. AI model training requires higher performance traffic management to ensure the efficiency, speed and reliability of lengthy and expensive training processes. Customers are using F5 BIG-IP to move incredible amounts of data at high speed to and from their data stores, providing greater efficiency for the training process. AI inference is having a profound effect on infrastructure as well. When customers perform retrieval augmented generation or RAG, as a part of inference, they see a sharp increase in the number of queries going to their data stores. As a result, these data stores experience congestion and latency, slowing overall infrastructure performance. By deploying BIG-IP in front of their data stores, customers are able to scale to handle the vast and increasing amounts of queries related to RAG. The result is improved availability and resiliency for their AI workloads. The second AI opportunity we see today leverages our market-leading WAP solution for secure AI inferencing. APIs connect the AI ecosystem and AI APIs are subject to the same security challenges and vulnerabilities as traditional APIs. F5's WAP solutions protect hybrid and multi-cloud applications with functionality that spans from API discovery to API security, which is essential for AI workloads. Customers are leveraging F5's complete security portfolio to protect their AI workloads, including BIG-IP, NGINX and F5 distributed cloud services. We expect secure AI inferencing will become a bigger opportunity for F5 as organizations move from experimenting to leveraging AI inferencing at scale. The third AI opportunity we are focused on is AI factory load balancing. Here, F5 is optimizing the performance and scalability of AI factories with advanced traffic management. We are doing this across AI factories and are working with partners toward deploying our solutions within AI factories. Across AI factories, customers are deploying BIG-IP to improve the efficiency and performance of data going to and from massive GPU clusters. Within AI factories, and as we described last quarter, we have partnered with Nvidia to ensure BIG-IP NeXT for Kubernetes works seamlessly with Nvidia's BlueField-3 DPUs. The combination of F5 BIG-IP and Nvidia's DPUs provides customers with improved performance, multi-tenancy and observability. While it is early, we are seeing growing momentum with AI opportunities. I will share just a couple of wins from Q1. The first is with a net new customer, a large mobility platform in APAC, who is using BIG-IP for high-performance data delivery. They selected F5 BIG-IP to support their robust AI computing stack, addressing high-velocity load balancing for AI data ingestion and replacing costly public cloud infrastructure. F5's SSL performance and compatibility with AI protocols with orchestration was a major factor in winning this customer. The second Q1 AI win I will highlight is with a leading multinational bank headquartered in our EMEA region. The customer selected F5's BIG-IP to secure, optimize and scale their AI applications. They are leveraging BIG-IP for traffic management and WAF, ensuring efficient distribution and security of their critical AI and data infrastructure with seamless integration with their existing infrastructure. Now I will turn the call to Cooper to elaborate on our results and outlook.

Thank you, Francois, and hello, everyone. I'll review our Q1 results before I elaborate on our Q2 and fiscal year '25 outlook. As Francois noted, we delivered an exceptional Q1, growing revenue 11% to $766 million, reflecting a mix of 52% global services and 48% product revenue. Global services revenue of $398 million grew 3%. Product revenue totaled $368 million, up 20% year-over-year due to a combination of strong software and systems growth. Our software revenue grew 22% year-over-year to $209 million, reflecting exceptional expansion in several large multiyear subscription renewals as well as healthy growth in new software projects. Subscription-based software revenue totaled $162 million, up 30% year-over-year, representing 78% of our total software revenue. Perpetual licensed software totaled $46 million in Q1, up 2% year-over-year. Systems revenue totaled $160 million, up 18% year-over-year. Our systems revenue is benefiting from a number of factors. First, technology refresh momentum is building as customers refresh aging hardware estates. The refresh activity is now widespread. In fact, some of the quarter's most significant demand came from customers outside of our top 1,000 customers. A second factor that has begun to accelerate the pace of refresh for many customers relates to upcoming end of software support dates for our VIPRION and iSeries families. Having gained clarity on the need for a balance of both hardware and software solutions in hybrid multi-cloud environments, customers are moving forward with plans to standardize on our next-generation hardware offerings. Lastly, our commitment to continuous innovation in both software and hardware is driving increased competitive displacement momentum and resulting in new customer wins. As we've discussed previously, we implemented a price increase on January 1, and we believe we did see a modest amount of systems orders pulled into Q1. Revenue from recurring sources contributed 72% of our Q1 revenue, reflecting 10% year-over-year growth. Our recurring revenue comes from a combination of our subscription-based revenue and the maintenance portion of our global services revenue. Shifting to revenue distribution by region. As Francois noted, our teams drove growth across all theaters. Revenue from the Americas grew a strong 15% year-over-year, representing 56% of total revenue. EMEA grew 6%, representing 27% of revenue, and APAC grew 6%, representing 17% of revenue. Looking at our major verticals, enterprise customers delivered another very strong quarter, representing 71% of Q1's product bookings. Government customers represented 16% of product bookings, including 4% from U.S. Federal. Finally, service providers represented 13% of Q1 product bookings. We also delivered strong Q1 operating results, driven by our robust revenue growth. GAAP gross margin was 81.7%. Non-GAAP gross margin was 83.9%. Our GAAP operating expenses were $421 million. Our non-GAAP operating expenses were $356 million. Our GAAP operating margin was 26.8%. Our non-GAAP operating margin was 37.4%, up 189 basis points from the year-ago period. Our GAAP effective tax rate for the quarter was 20.4%. Our non-GAAP effective tax rate was 21.8%. Our GAAP net income for the quarter was $166 million or $2.82 per share. Our non-GAAP net income was $227 million or $3.84 per share, reflecting 12% EPS growth from the year-ago period. I will now turn to cash flow and balance sheet metrics, all of which remain very strong. We generated $203 million in cash flow from operations in Q1. CapEx was $8 million. DSO for the quarter was 57 days. Cash and investments totaled approximately $1.16 billion at quarter end. Deferred revenue was $1.95 billion, up 6% from the year-ago period, driven by our subscription software strength and very healthy maintenance renewals. In Q1, we repurchased $125 million worth of F5 shares at an average price of $255 per share. As of the end of Q1, we had $1.3 billion remaining on our authorized stock repurchase program. Our Q1 share repurchases represented 64% of free cash flow. Finally, we ended the quarter with approximately 6,440 employees. I will now speak to our outlook for Q2. With the exception of revenue, my guidance comments reference non-GAAP metrics. We expect Q2 revenue in the range of $705 million to $725 million, implying 5% year-over-year growth at the midpoint. As a reminder, and as we noted on our October call, U.S. payroll tax resets and our large customer event in February significantly impact our Q2 expenses. This results in it being our seasonal low quarter for both gross and operating margins. We expect non-GAAP gross margin of approximately 82.5% to 83%. We estimate Q2 non-GAAP operating expenses of $362 million to $374 million. We expect Q2 share-based compensation expense of approximately $58 million to $60 million. We anticipate Q2 non-GAAP EPS in a range of $3.02 to $3.14 per share. In light of our strong Q1 results and our Q2 guidance, I will also provide an update to our fiscal year '25 full year outlook. We are raising our FY '25 revenue growth forecast to a range of 6% to 7%. This is up from our initial guidance for 4% to 5% revenue growth and reflects our outperformance in Q1 and our healthy pipeline heading into Q2. Given our strong Q1 performance and continued strong expansion trends, we now expect our software revenue to grow at least 10% in fiscal year '25. This is up from the upper single-digit range we spoke to last quarter. We continue to expect FY '25 non-GAAP gross margin in a range of 83% to 84% and non-GAAP operating margin of approximately 35%. Our FY '25 non-GAAP effective tax rate estimate remains at a range of 21% to 23%. We are also raising our EPS outlook and now expect to deliver 6.5% to 8.5% non-GAAP earnings growth in FY '25, up from our prior guidance of 5% to 7% growth. Finally, we intend to continue to use at least 50% of our annual free cash flow towards share repurchases in FY '25. With that, I'll pass the call back to Francois.

Thank you, Cooper. To conclude, we are benefiting from our alignment with powerful secular trends. Most significant among these is our unique ability to address the crushing complexity of hybrid multi-cloud. Unlike competitors who invested solely in cloud or SaaS or significantly reduced investment, we innovated across hybrid SaaS and next-generation software and hardware. We are reducing complexity for customers by converging multiple point solutions to address high-performance traffic management, full web app and API security, multi-cloud networking and AI gateway capabilities. We are empowering customers with simplicity and choice, enabling them to choose hardware, software or SaaS and to deploy securely and consistently on-premises, in the cloud or at the edge. And we believe we are increasing our opportunity as a result. It's early still, but we also see building momentum with AI opportunities. Our industry-leading ability to rapidly and securely move the large amounts of enterprise data necessary for AI model training and inferencing positions F5 as indispensable as businesses start to implement AI at scale. Operator, please open the call to questions.

Thank you. Our first question comes from Tim Long with Barclays. Please go ahead with your question.

Thank you. Just too if I could Francois, could you talk a little bit about the AI business? I don't know if you can scale for us how big it is currently, but more importantly if you can just touch on kind of the breadth of who you're selling into in AI and what type of customers is - large data centers, enterprises, government combination anything there would be helpful. And then second, if you can just touch on kind of sustainability of the hardware systems business, it sounds like there might have been a little bit of pulling into the December quarter, but still pretty solid numbers. So where do you think we are with inventory, or ability to keep those numbers going? It sounds like there are some share gains helping? Thank you.

Thank you, Tim. Let me start with hardware actually, your second question on the sustainability. Look, we think we're going to have a pretty strong year on hardware, and we're seeing that because we have a strong pipeline on refresh activity. That's largely driven by the fact that a number of customers were sweating assets for a period of time. Their applications have been growing in capacity; they continue to deploy in hybrid multi-cloud environments, and it's creating the need for more hardware. So we think hardware this year is likely to be in the double-digit growth rate for the year. And in addition to growth within our existing customers in hybrid multi-cloud environment, we're also continuing significant competitive displacements. I mentioned earlier on the call, one of the big home retailers was one of the competitive take-outs we had in the quarter. And we continue to see more opportunities of that, because of the investments we've made in next-generation hardware where competitors have not.

Yes. And Tim, one thing I'd also add on the supply front, we feel really good about our ability to fulfill this demand in the near term. No, no real constraints that we're seeing right now. We're largely onto newer generation platforms, and we did a lot of work during the supply chain crisis in terms of developing a more resilient supply chain and base of partners. So we should be in really good shape from that perspective.

Great. And then Tim, on the first part of your question on AI, so let me just frame the opportunity that we're seeing for F5 in AI. There are really three categories of opportunity we're seeing. The first one is really moving data securely and at speed to and from data stores, both when models are being trained and need to access data from data stores. Or in inferencing where customers are inferencing with retrieval augmented generation. And I would say the majority of the deals that we have done to-date are really in this first category of opportunity. The types of deals that we have won are typically large enterprises that are either building AI factories or are deploying AI applications. And typically have data on-premise or have repatriated data from the cloud to their own on-premises to be able to use it with these AI models, and they are across the board. It's really across Europe, Asia and North America. So we've had deals across all three geographies. The other two categories of opportunities, is category two is really security, and it's really security in inferencing and it's with our API security and API discovery solutions. We're starting to see opportunities there. But it's early days. And then the third category is for load balancing traffic for AI factories, both inter-cluster and intra-cluster. Inter-cluster is really load balancing the traffic in and out of AI factories. We would typically do that with our traditional ADC technology. And then as we've announced the partnership with NVIDIA for traffic management intra-cluster though this is early days, and we think that opportunity will develop longer term.

Okay. Thank you and congrats Cooper on the new role.

Great, thank you, Tim.

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

Great, thanks. Maybe just on, if you could kind of help us size kind of the distributed cloud business at this point, just kind of given the growth that we've seen kind of in the API security cases that you were talking about. And then maybe second for Cooper, just you kind of had noted a more back half loaded year, or Frank had maybe noted a back half loaded year, last quarter. Just how are you kind of thinking about any seasonality to the year, particularly with just such a strong start to the beginning of the year? Thanks.

Sure. So I'll take the latter question. We saw obviously a pretty strong Q1. The tech refresh really picked up speed, and we're seeing that broadly hybrid multi-cloud is just driving an overall inflection in demand. Having said that, the large renewal base that we discussed for the second half of the year, that base is still the same base. So really when we're trying to look at the rest of the year, we're looking at how does tech refresh continue to play out, and then how do expansion rates play out within that software base? Q1 was a very strong quarter for, an exceptionally strong quarter for expansion. And we referenced as an example a large eight-figure deal where we saw even better expansion than we had already anticipated. And that was really more to do with that customer choosing to converge multiple security solutions onto our platform. That's a trend we've been seeing across a number of our larger software customers. But having said that, that expansion - that growth in the expansion rate that we saw in Q1 was fairly tied to a number of large customers. And it's early in the year, so we wouldn't necessarily further increase our expansion rate that we're assuming in the second half. We'll continue to engage closely with the larger customers that are in that second half base. But we already took the expansion rate up that we were assuming coming out of a strong finish to FY '24. And so, it's something that we'll continue to track, but not necessarily making an assumption that that expansion rate should continue to go up in the second half.

Thanks, Cooper. And Meta to the first part of your question around distributed cloud. As you know we, distributed cloud is part of our SaaS and managed services portfolio. We shared that the total ARR for SaaS and managed services was roughly around $180 million at the end of our fiscal year 2024. We haven't broken out distributed cloud within that, but it is in there and growing fairly rapidly. In fact, we passed an important milestone this quarter. We passed over 1,000 customers on distributed cloud. The vast majority, if not all of these customers are large enterprises. Two-thirds of them are roughly existing F5 customers that also adopted distributed cloud, and about a third of them are net new customers. The trend I mentioned earlier, about customers embracing hybrid multi-cloud is also visible in the growth we're seeing in distributed cloud. Because a number of our existing customers who are using F5 for hardware, or software on-prem, are also using us for software-as-a-service, because they get consistency of their security solutions, they get consistency of their app delivery solutions. And that's a strength for us, having invested in software and hardware and in SaaS, being able to consolidate spend on F5. In fact, this quarter we passed the milestone, where more than 20% of our top 1,000 customers are now using distributed cloud. So our largest customers around the world, are also choosing F5 for SaaS, and that gives us a lot of comfort around the potential growth of the platform.

Great. Thanks. Congrats.

Thank you.

Thank you. Our next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Hi, thanks for taking my questions and congrats on the results here, I guess. Francois, just sort of going off your earlier commentary, and two questions as clarification. One, you mentioned the refreshes that you're seeing largely on account of customers having sweat assets earlier. I mean, is that more as part of a broader refresh of customers doing broader refreshes of their data center, or is there something more specific related to their readiness for AI that's driving that? Can you just flush that out a bit in terms of what's the trigger? We all know that customers if they want to, can sweat assets as long as want, or at least to some extent. So is there a necessarily sort of a trigger that's driving them to now refresh? And then secondarily, you talked about AI and over the last couple of days we've seen a lot of more concerns around sort of the compute intensity going into pre-training, or training of AI models relative to probably more favorable sentiment now on how AI inferencing sort of shapes out. Can you just talk about sort of where do you see your leverage to in that sort of overall AI process, and some creative exposure to training versus inferencing? How would you sort of quantify that for us? Thank you.

Thank you, Samik. Let me start with the first part around the refresh activity we're seeing. I think there are a couple of factors there Samik. The first one is, more of a general factor that is not F5 specific, but I think there is a revitalization of data center capacity, data center builds that is in part driven by large enterprises preparing for having the right infrastructure for AI. And in part driven by large enterprises also embracing hybrid multi-cloud as not just the transient state, but the destination of where they're going to operate for the next decade and beyond. And I think that is driving strength in data center spend or data center infrastructure. And clearly we are benefiting from some of that. But that's not F5 specific. There are factors around refresh that are specific to F5 that have to do with the fact that our customers over the last couple of years, were very frugal in their refresh activity, very cautious, tried to sweat their assets as much as possible. And because of application growth and capacity growth, they kind of have to proceed with these refresh. And there are also some end of support dates that are coming in the portfolio in the 2026 timeframe that also customers have to get ahead of, and make sure that they do refresh. So those are I would say two factors driving the refresh pipeline and activity we're seeing. To your second question on AI, when you look at our opportunity, what we see, the three categories of opportunity I described earlier for AI. The first one, which is really high-performance data delivery to and from data stores, the vast majority of that opportunity is in retrieval augmented generation, which is inferencing for large enterprise. And so, this one is unaffected by the discussion about how large will be the GPU cluster build-out in AI factories. And today, our immediate opportunity really, and I would say the majority of the deals that we have won, are in that category. As it relates to the news from yesterday, and the discussion from yesterday around the size and scale, of AI factory buildouts in the future. That's tied to our opportunity to go - to load balance in front of clusters, or even go inside of clusters and provide traffic management intra-clusters. We are not yet - you are in very early days in that opportunity. We haven't yet started to actually drive revenue from that opportunity. We think it's a very sizable opportunity down the road, but it's very early days and frankly too early for us to quantify it. In general though, I would say that the stance of F5 is that if in fact we can have more open-source models that allow more enterprises to adopt AI faster and build their applications, and it creates a faster proliferation of AI applications. That is really good news for F5, because it means that we will have more opportunity to do high-performance data delivery for data stores and more opportunity to secure AI workloads. And if in fact it is cheaper to build and train these models than we thought it would be, that is also good news because it will accelerate adoption of AI. So, we're at this point it's early days. I think we don't want to get too ahead of ourselves in terms of these opportunities because it's not yet meaningful or material to our revenues. But we are excited about the opportunities we're seeing and the engagements we're having with customers.

Great. Thank you. Thanks for all that color. Thank you.

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

Hi, good afternoon. Thank you very much for the question. I just have two as well. First, I wanted to ask about the perpetual revenue in the quarter. This is the, I think third consecutive year where you had a very strong seasonal fiscal 1Q. I was wondering, if you could just provide a little bit more color there. Is it related to the financials expansion that you talked about? Is it indeed seasonality, or should we think about this as a run rate? And then second, I can appreciate U.S. Federal, is a small part of the business. I think you mentioned 4%. Could you just comment directionally? Was that strong? Was it weak? Any directional color would be helpful there? Thank you.

Sure. Yes. Thanks, Michael. I'll start on the perpetual question speaking to our perpetual software results. And you're right, we have seen stronger results in our Q1. Typically, customers that prefer a CapEx model have gravitated to our perpetual commercial model. And we see that more pronounced in the service provider vertical, where we tend to see some of that investment coming in kind of near the end of the calendar year as part of their business model planning. So I don't know yet that we're ready to say this is kind of the new seasonality, but we tend to see our largest strength in our fiscal Q1. And I think this really does point to the flexibility that we give customers in terms of the commercial models that best fit their business model. It's something that has really helped continue to drive differentiation in our software.

And I can take your question on the federal business. Look, the 4%, it's an important, of course, part of our business, but a relatively small component. Overall, our business in Q1 in the Fed was pretty solid. Our pipeline looks very healthy. And so of course there, for everybody that's doing business with the federal government, there's some level of uncertainty at this point in time with the change in administration, but generally we had a pretty good Q1 and the pipeline looks healthy.

Excellent. Thank you, Cooper. Thank you, Francois.

Thank you.

Thank you. Our next question comes from the line of Tal Liani with Bank of America. Please proceed with your question.

Hello, can you hear me?

Yes.

Oh, good. I have two questions. Some of them were asked, but I want to ask it in a different way. So you're increasing the guidance for the year by about $40 million, $50 million, and you beat the numbers for this quarter, $50 million beat. And the second quarter has a $10 million beat. So the growth in the annual guidance is in line slightly below the Q1, Q2. And the question is, is there something special in Q1, Q2 that bring things forward, or is it just conservatism that they're not willing now to make a call on second half? The second question.

Thanks, Tal.

Sorry, should I continue or should I…?

Sure, go ahead.

Second question is on software and I want to. I'm trying to separate new software from renewals, because when you renew a contract, you recognize 62% up front. So, and the way that accounting works is between in a three year contract, between year three and year four, which means the renewal, there's a very big jump in revenues because only the leftovers are left for the third year. And then there is upfront recognition in the fourth year. So the question is, can you separate off the software growth that we're seeing, phenomenal software growth? Can you separate how much of it is, because of accounting and renewals, and how much of it is because of real growth, growth with customers, new kind of use cases for products, etc.? I just want to, because we're talking about renewals, I just wanted to have the understanding of kind of old revenues versus new growth opportunities?

Sure, I guess I'll probably take both of them. And Francois, you can jump in. Let's start with the software question. So you're right, the number one vehicle that we sell software in is what we call our flexible consumption program. These are the large multi-year subscriptions that we sell both as a, for license-based offering, or deployable-based offerings as well as SaaS-based offerings. But the deployable offering is the larger opportunity. And that is where you get that upfront revenue recognition of 63%, typically if it's a three-year deal and then the remainder is recognized as service revenue over time. And so that is, you are speaking to the dynamic of why our software revenue is not a smooth growth trajectory. And so, we've had quarters where the growth rate on the headline revenue number was a bit lower than the underlying strength of the business. And then there are quarters where you've got large opportunities at renewal, where you do have an upfront revenue recognition. And so that's something, when we talk to the longer-term software growth opportunity, that's something that eventually kind of smooths out. But in any given quarter you're going to see some degree of lumpiness. Now having said that, looking at what's behind the strength that we saw in this quarter. Clearly we saw upside to the reported revenue from software compared to how we had guided for the quarter. And that was really driven by the very strong expansion we're seeing at that time of renewal across those large subscription offerings. And this is really customers that are converging multiple solutions onto our platform. So we're winning at a higher rate in the marketplace, and we're seeing customers do a lot more with F5 across our portfolio. And that's really what's behind that strength. And it's what has allowed us to take our guide up for the full year for software.

Got it.

And I would also note that we did also see growth from new software projects where we had said going into the year that we were assuming revenue from new projects would be roughly flat year-over-year when we saw healthy growth in Q1. And so that's something we'll continue to monitor over the course of the year.

Great. And about the second half question.

Yes. So the guide for the full year, we had said that it would be low single-digit growth in the first half and mid-single-digit second half. And so, we saw strength in Q1 that was both on hardware and software. We did note that there was likely some pull in of demand into Q1 related to the pricing increases. We don't think that was the headline on the hardware growth, but that was some of it. So as we look ahead to the back half of the year, we are factoring that in a little bit. But on the software side, as I said on a prior question, the base against which we assess that growth opportunity in the second half of the year, it's the same base. And so that's something that if we continue to see exceptional expansion rates on that base, we could see a better outcome from a revenue perspective. But given that it's early in the year and that a lot of that strength was really kind of more pronounced across some of our largest deals in Q1, we think it would be a little bit premature to just assume that same level of expansion in the second half of the year. But we'll continue to engage closely with those customers, and we certainly see the opportunity.

Thank you.

Thank you. Our next question comes from the line of Amit Daryanani with Evercore ISI. Please proceed with your question.

Yes. Thanks. I have two as well. I guess maybe just talk on the system side. You folks had really good 18% growth year-over-year on the system side. How much of that do you think was driven by pull-ins ahead of the price increases that you're implementing? And if you just quantify what sort of price increases went into - got implemented on January 1, that'll be helpful?

Sure. Yes. So it was a modest, I mean it's kind of hard to fully break that out. But as we worked our sales teams, our view is that it was a modest amount of pulling. It wasn't super material to the results, but we did want to acknowledge that there likely was some demand pulled in. These price increases are kind of mid-single-digits across hardware and software. So they're not at the same magnitude of previous price increases we saw in the systems business, where we saw a more pronounced pull-in of demand.

Got it. And then, if I just go back to that software discussion you're having a minute ago, the way you folks are guiding at this point, it looks like you know, 22% growth in Q1 and then you see some fairly notable deceleration as the year progresses to hit that at least 10%. Is that kind of deceleration just conservativeness? Because you don't know what the expansion metrics could look like, the new projects could look like. Or is there something more nuanced that's happening in the next few quarters that we should be aware of?

No. I mean, I think you could say that maybe we're being prudent. The last couple of quarters, the expansion rate has been well ahead of our historical norms. Again, because it's so early in the year and it tends to be centered around our larger deals. I think that we're just wanting a little bit more time to really assess do those expansion rates continue to go up through the year. But as I said, it's the same base of opportunity that we see in the second half of the year, as when we originally put together our guidance. So what you're really seeing is just the strength that we saw in Q1, against what we had previously said would be kind of more flat, flattish to low growth on the software side. And given the strong expansion rates we saw on those largest customers, that's where the strength is coming through in Q1.

Got it. Thank you.

Thank you. Our next question comes from the line of Matt Hedberg with RBC. Please proceed with your question.

All right, thanks for the question, because I have two as well. Maybe the first one, just a point of clarification on some of the improving IT spending trends that you mentioned. I guess Francois, I guess specifically, did you see any change in enterprise buying behavior in the U.S., post the Presidential election? I guess is the first question?

I want to say, no, however, I mean our quarter, as you know, started on October 1 and ended on December 31. So the Presidential election was in the middle. Our quarter is typically back end-loaded. So naturally, we would have expected significant amounts of our bookings to come after the Presidential election. But we cannot point to that being a factor because the pipeline going into the quarter was pretty strong. And it was more of a continuation and a bit of acceleration of trends that we actually had seen in the last quarter of fiscal 2024, really around customers embracing hybrid multi-cloud and wanting to invest in data center capacity to support application growth.

I got it. Okay. That's helpful. And then maybe just an AI question from me. You talk a lot about on your prepared remarks, and I guess digging into it a little bit more, the other big topic, and it didn't come up in this call, it really does feel like agentic AI is kind of changing the way. We think about GenAI and how organizations think about workflow and automation. You guys obviously have a focus on app delivery and API security, etc. Do you think an agentic AI tailwind could start to emerge, as that technology proliferates amongst customers?

Well, in terms of F5, yes. Because the more AI applications and agents are part of that exist, that means the more data needs to move between data stores and these agents or these models. And it also means that it's way more APIs to secure and way more AI modules that require security. So, for us an agentic world, where also drives more complexity. So I should step back a little bit. When we talk about hybrid multi-cloud, we framed that before as this ball of fire, meaning customers have more and more applications or components of applications that are distributed across multiple cloud environments, and/or multiple infrastructure environments. And they have to connect all these application or app components together. They have to secure them. And it is complex to do that across multiple infrastructure environments. And that's what we call the ball of fire. And that's what's driving customers, enterprise customers, to sometimes consolidate spend on a player like F5 that can provide security and delivery across all of these environments and simplify the process of securing and delivering across hybrid multi-cloud. Now, if you think about an agentic world, this is one where AI applications are going to be calling agents that are of course in a different infrastructure environment. Sometimes folks don't even know where that agentic application resides. And so, it creates even more complexity around hybrid and multi-cloud environments and it creates even more need to secure those applications across all these environments. And so, that exponential growth in complexity that could come from an agency world is actually tailwind to a company that solves the ball of fire and solves that complexity. So we feel that that could be significant tailwind. But it's very early days for us in AI and as you know, and as we have found out over the last several days, we continue to learn something new every week about AI. So we have to remain both excited, but also humble about the opportunity.

Great, great perspective. Congrats on the result, guys. Thanks.

Thank you.

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

Hi guys. Cooper, I don't want to dwell on this. But I think what we're all trying to get at here, is these were impressive results. The largest beat we've seen out of F5, I think ever. Can you help us understand the differences in terms of what's driving the sustainability here? How do we think about, you talked about the mid-single-digits on pricing across systems and software? How to think about also the Citrix share gains, the budget flush, the pull-in, the large yield and refresh. Just help us level set what the sustainable, kind of longer-term vision here is for growth?

Sure. I mean I'll start with, kind of what the underlying driver is that's really kind of lifting all facets of our revenue base and that's the complexity that we resolve for customers with hybrid multi-cloud environments. And so, we're seeing that show up in the software business, and the hardware business and the services business. On the software side, it's really manifesting in expansion. And that is something that we do think is durable. It's accelerating that rate of expansion across the portfolio. That is something that we think is very sustainable, and that we think long-term is really going to benefit our software opportunity. Now of course there's going to be some spikiness and whether that's some price pull-in that we may have seen in the current quarter. Which we don't think was super material, but there was a little bit of that in terms of the timing of the rev rec on the software expansions. But broadly the underlying theme is something that we think will continue to help drive the revenue opportunity for us over time.

Got it. And then you guys used to talk about F5 as having roughly 200,000 systems, and we think about refreshes every, five, seven years on average. Obviously, the supply chain stuff changed a lot of things. Are we starting to see that call it 50,000, 60,000 cohort or even more, create a bigger bulge? And that's what's giving you guys the confidence around double-digit hardware refresh this year? I'm sorry, double-digit hardware growth this year?

Yes, that's certainly part of it. It's not so much that the bulge is bigger, it's just that the bulge is a lot closer to us now. And that's where we referenced the end of software support dates that are pending in FY '26 and '27. And those really are associated with two product families that are more than half of our installed base today. And so, customers really look to start planning in advance of those dates, and every customer is different. Some will look to drive those refreshes much earlier, like well ahead of those dates. Other customers may run right up to those dates. But that's where we're seeing kind of more near-term visibility on the size and shape of what that tech refresh opportunity could look like. And we think it extends well beyond the current year, at least through FY '26.

Thanks.

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

Hi guys, this is Victor Chiu for Simon Leopold. I just wanted to follow-up on the earlier question that someone asked around the specific triggers around the system refreshes. It makes sense that these large customers have been sweating assets for quite a while. But I guess it's just surprising, the timing around how they're kind of aligning together. So I guess, was there some specific dynamic that caused that triggered these upgrades to kind of align around the same time and kind of, what was the delta, I guess, versus your expectations previously, I guess?

Well, I would say the first of all, we had said, already at the start of the year. And in fact, I think we said it during the summer of 2024 that we expected 2025 to be a stronger year for hardware, after a year and a half where customers were sweating assets. And so, we had said we expected growth in hardware this year. And so, but we now expect growth in hardware to be actually stronger than we thought at the beginning of the year. And that is because the refresh activity and the expansion activity and the takeout rates of competitors are stronger than we anticipated. If you go back to the root cause of that, we think it's really driven by customers embracing their hybrid multi-cloud architectures, realizing they need more capacity in their data centers, and therefore we're getting expansion, both refresh and expansion on that. We're also getting a number of customers consolidating use cases on F5. So we had a number of customers this quarter that chose F5 to consolidate multiple security use cases and displaced other point security vendors and go on to F5. That's driven by the investments we've made in security and in next-generation software and hardware over the last several years. All of that's coming to align on the opportunity for us to on, both on our systems business and on our software business.

Okay, so given that dynamic, I mean does your expectation around systems growth over the long-term change, given these dynamics or do you still expect, over time that systems continue to decline? Is that your expectation?

Look, what we have said, we're not here to give long-term guidance, but what we have said is that over time, we expected that more and more customers would move towards adopting more software in their environment. That said, I'd say a lot of these customers, the majority of customers are actually deploying software and hardware in their environment. That's why we talk about hybrid multi-cloud. They want the flexibility to deploy the software in different places, but they continue to deploy hardware. So over time the trajectory of the hardware business is we, our views on that haven't changed. Of course, AI and the AI use cases I mentioned earlier are a bit of a wildcard on that. It's too early to know what impact they have on the trajectory of the hardware business, but we are starting to see some opportunities for hardware related to AI. And that could have some impact down the road, on the long-term trajectory of the business.

Great. Thank you.

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

Great, thanks for taking the question, and congrats on the results guys. I guess Francois, on that AI opportunity you were just talking about, I guess, what visibility do you guys have to those initial opportunities? Where are we at in the rollout of those? Can you talk a little bit about your go-to-market for these AI opportunities, whether that's requiring any incremental investment and how are you winning these opportunities and who are you seeing? Thanks.

Thank you. So there's a bundle of questions there. I'll try and hit all of them. Let me start by saying, I am very cautious when I speak to our opportunity in AI because I feel things are developing very quickly, and there's always new learnings. And frankly there is the body of data that's available to us, to make pattern recognition and long-term projections is those samples are very small today. That said, we are, the kinds of deals that we are winning right now are generally large enterprises. And as F5 is a company that is focused on large enterprises. So this is where our account teams are already working and having relationships with customers. We are typically winning these opportunities either because our traditional customers are deploying the infrastructure for AI or because the folks deploying AI infrastructure get to know about F5 from their internal stakeholders who deploy F5. We haven't had to make very significant departures from our existing products to-date because our existing products are ideal for securing and moving significant amounts of data at speed in these environments. And so, it's a fairly straightforward go-to-market motion for our existing account teams. Both to find these opportunities and to prosecute these opportunities with our existing solutions. Now going forward, as we learn more about these environments, we may make some targeted customizations, development, etc. for these opportunities, but that will come down the road. In terms of the competitive landscape again, we stand alone in having made the investment in both software and hardware for hybrid multi-cloud environments. These AI architectures are inherently hybrid and multi-cloud because you have data that can reside on-prem or in the cloud. You have AI models that are largely in public clouds today. But some enterprises are starting to deploy AI applications on-prem. And so, you do need the ability to connect these environments together, and solutions that operate across them. We're very uniquely positioned to serve those needs and that is why we have a good win rate on the opportunities that we have engaged to-date. Have I addressed all of the elements of the question?

Yes, thanks Francois. And then I guess on the competitive environment, it sounds like things are really opening up for you guys. Anything you can give us on the pipeline of opportunities there. How are win rates trending for hardware as well as in cloud with NGINX and DCS? Do you anticipate any changes to the competitive opportunity as you take up prices here in January?

We don't anticipate changes to our competitive opportunity as it relates to prices. As well as your first part of your question, I would say in the software and hardware ADC market. We feel very, very good about our competitive position, which is the result of several years of investment in next-generation software and hardware, going against competitors that chose not to do that. And so large customers, as ADCs are extraordinarily sticky as a technology. And despite that, we are able to take out some estates that are pretty significant in large Fortune 500 companies. So we continue to feel very good about that. And we think that opportunity, a lot of it, is still in front of us, and will continue. In distributed cloud services, we are early, we are an attacker. We are very happy that we just passed 1,000 customers there. We went from zero to 1,000 customers in roughly 30 months. All enterprise customers, all paying customers, of course. And the maturity of our platform is growing every quarter, and we expect to become more and more competitive over time and increase our win rate over time.

Fantastic. Thanks guys. Congrats again.

Thank you.

Thanks, Matt.

Thank you. As our last question, we'll have Sebastien Naji from William Blair. Please proceed with your question.

Oh, great. Well, I guess thanks for squeezing me in. I think a lot of my questions have been sort of asked and answered. So maybe just one from me and somewhat of a pointed question. Could you perhaps update us on your CDN product that came out of the Lilac Cloud acquisition, and maybe talk a little bit about how much success you're having here? That seems to be a space that is growing very fast right now. And I'm just wondering if this is a part of that DCS business that could be inflecting, or growing more rapidly here in the near future?

Well, thank you, Sebastien. We are, yes, we. Let me bring a clarification here. We did bring Lilac and now CDN capability into our overall distributed cloud services platform. You're absolutely right about that. And we did that not because we want to go and compete in the CDN market, as a principle in the CDN market. We feel that is well served, with strong players in the market like Akamai. But we did that rather because we have a number of customers that want the security capabilities from F5, like web app firewall, API security, DDoS protection, things like web app scanning, etc. And at times want that bundle with some caching capability. And so, we felt it was important that we be able to offer the entire bundle to them. And I mentioned we have passed 1,000 customers earlier. A number of these customers actually took a full bundle that includes our CDN capability, into the solution that they're purchasing from F5. But generally customers don't come for F5 looking for a CDN. They come for F5, looking for a bundle of capabilities, security of course, that includes a CDN. And on that we're doing well with the solution that we got from Lilac.

Got it. Makes a lot of sense. Congrats on the quarter again. Thanks.

Thank you so much.

Thank you. And there are no further questions at this time. I would like to turn the floor back to CEO, Francois Locoh-Donou for closing remarks.

Well, thank you for joining us. We look forward to seeing many of you during the quarter, and to discussing our hybrid, multi-cloud and AI opportunities. Thank you.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.