Good afternoon, and welcome to the F5 Inc. Second Quarter Fiscal 2025 Financial Results Conference Call. All participants are currently in a listen-only mode, and a question-and-answer session will follow the formal presentation. This conference is being recorded. If anyone has any objections, please disconnect now. 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 second 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 A copy of today's press release is available on our website at f5.com, where an archived version of today's audio will be available through July 29, 2025. We will post the slide deck accompanying today's webcast to our IR website 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 1375-2445. The telephonic replay will be available through midnight Pacific Time April 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 Q2 highlights and our strategy and growth opportunities. Cooper will then review the details of our Q2 results and our outlook. I will now turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. F5's continuous innovation, technology leadership, and unique ability to solve our customers' hybrid multi-cloud challenges were key drivers of our strong Q2 results. We delivered 7% total revenue growth, including 12% product revenue growth. Systems revenue grew 27%, while software revenue was flat with a year ago quarter. We also delivered Q2 non-GAAP EPS of $3.42, representing 18% year-over-year growth, $0.28 above the top end of our guidance range. Q2 strength reflects continued technology refresh momentum and expansion, as customers leverage F5 to modernize their data centers, consolidate vendors, and prepare for AI. We have good visibility into a Q3 pipeline that reflects continued healthy demand in support of data center modernization, competitive takeout momentum, and a large available to renew software subscription base. As a result, we expect Q3 revenue in a range of $740 million to $760 million, implying roughly 8% growth at the midpoint. In addition, we are raising our guidance for FY '25 revenue growth to a range of 6.5% to 7.5%, up from our prior range of 6% to 7%. Our updated range reflects our strong first half revenue and the dynamics we are currently seeing in the business. Cooper will speak to our outlook in greater detail in just a few minutes. Before he does, I will highlight how we are innovating to address the key challenges faced by our customers: high cost, crushing complexity, and escalating cyber risks. During Q2, we hosted our AppWorld event for customers and partners where we announced a number of exciting innovations. The most significant of these was the introduction of the F5 Application Delivery and Security Platform or the ADSP. The ADSP is the industry's only platform that fully converges high-performance load balancing and traffic management with advanced app and API security capabilities. While there are platforms for endpoints, network access, and cloud workloads, there hasn't been any platform that delivers and secures all apps and APIs across hybrid and multi-cloud environments at scale until now. With the F5 ADSP, we are enabling consistent policies, full visibility, and AI-driven insights, all from a single platform that is flexible to deploy. We are delivering new capabilities that give CISOs the visibility, compliance, and protection they need to deliver and secure any app, any API, anywhere. Crucially, we are providing powerful automation that helps customers manage large complex digital estates with greater efficiency, reducing manual overhead, increasing agility, and ensuring consistent enforcement across diverse environments. We are solving these complex challenges. The F5 ADSP provides comprehensive delivery and security for every app and API, seamless deployment across any environment and form factor, unified management with a single consistent policy framework, deep analytics and actionable insights, programmable data planes for maximum flexibility, and end-to-end lifecycle automation. Just last week, we unveiled broad cybersecurity enhancements to the F5 ADSP. These enhancements significantly improve organizations' ability to identify and remediate vulnerabilities and threats to AI and other modern applications. At AppWorld, we also unveiled a suite of groundbreaking customer-centric innovations that showcase the power of the F5 ADSP while also highlighting our commitment to leveraging advanced AI technologies to enhance customer experiences and drive business growth. These innovations fall into two categories. The first is AI for ADC, which are innovations that make it easier for customers to harness the power of F5. The second is ADC for AI, which showcases how we are applying our strength in delivery and security to enable AI-driven applications, particularly inference workloads and model interactions. There are three innovations I will highlight in the AI for ADC category. The first is our iRule Code Generator, which will be available later this year. Programmability and flexibility have always been at the heart of F5's success, and iRules are central to that value. The iRules code generator, developed by our F5 AI center of excellence, makes this programmability and flexibility more accessible than ever. This solution analyzes existing iRules and configurations to summarize their purpose, components, and structure. It also generates new iRules based on business or application requirements and optimizes existing iRules to boost performance, reduce resource usage, and accelerate delivery. With the iRule code generator, customers can fully leverage F5's programmable capabilities with greater ease and sophistication. The second AI for ADC innovation is expanding our AI assistant functionality across our product families. Today, more than 50% of F5 distributed cloud customers use our AI assistant to better understand and operate their environments. At AppWorld, we expanded this functionality by introducing the AI assistant for NGINX One, and we announced that the AI assistant for BIG-IP will launch later this year. These assistants empower customers with contextual intelligent guidance that reduces time to resolution, improves operational efficiency, and enhances visibility across the stack. The third AI for ADC innovation, our new application study tool addresses the heightened awareness and focus on observability among operators, ensuring they can monitor and optimize performance with unprecedented clarity and precision. In an era where observability is mission critical, our application study tool delivers unmatched visibility into app and API behavior. It offers deep insights into feature usage, application types, quality of service, and system utilization patterns, both average and peak. As one customer put it, this tool has given us insights we never thought possible. It's like turning on the lights in a room we've been navigating in the dark. Moving to ADC for AI, in Q2, we announced the general availability of the F5 AI gateway, an offering that is purpose-built to secure and manage the new frontier of enterprise AI. As organizations embed generative AI into critical workflows, they need greater governance, visibility, and control. That's where our AI gateway comes in. It inspects both prompts and responses to prevent data leakage and enforce policies to reduce the risk of unpredictable model behavior. The AI gateway market is just getting started, but we are seeing strong early interest in our solution, particularly with customers who need to scale AI adoption without compromising on trust or compliance. F5 is continuously innovating based on rapidly evolving market demands. We are already beginning to see the emergence of an agentic future, one where AI systems don't just respond to prompts but operate as autonomous agents capable of completing tasks, collaborating with other agents, and adapting over time. This shift is reshaping how applications are built and how infrastructure must respond. To support this evolution, we are expanding our platform with native support for the Model Context Protocol or MCP, a foundational standard created by Anthropic and now being adopted by leaders like OpenAI and Google. MCP enables agents and models to share memory, context, and objectives across interactions, powering persistent multi-turn reasoning and coordination. By bringing MCP support to BIG-IP, we are enabling our customers to route, observe, and enforce policy across agentic workflows, turning BIG-IP into a trusted control plane for AI agents operating at scale. As AI architectures shift from stateless queries to contextual autonomous systems, F5 is building the infrastructure foundation to support this next era of intelligent computing. Collectively, these advancements highlight F5's growing role in a hybrid multi-cloud landscape that is increasingly influenced by AI. Today, we continue to win AI use cases across three areas of high-performance data delivery and security. One, delivering and securing data used for both AI model training and inference. This is where F5 is deployed in front of data stores like our partner NetApp. Two, delivering and securing access to AI models for inferencing. This is where organizations are deploying F5 in front of AI models like OpenAI's ChatGPT and Anthropic's Cloud. And three, AI factory load balancing both across AI factories and within AI factories as a result of partnerships, including our collaboration with NVIDIA. We are winning deals across all three use cases today. In Q2, we secured several new AI wins, including an AI gateway and F5 distributed cloud services win with a service provider in our APAC region. The customer aims to establish central governance controls and robust security guardrails within their AI infrastructure. By utilizing F5, they are protecting their ChatGPT interface from prompt injections and abuse while scaling cost-effectively for multilingual customer support and ensuring compliance with government regulations. We also secured a win with a North American-based retailer who is leveraging F5's BIG-IP to deliver responsive, real-time AI-powered consumer voice interactions at scale. BIG-IP ensures fast, accurate, and low latency performance by optimizing traffic and load balancing across the customer's GPUs, plus enabling seamless real-time decision-making and response. We are also delivering robust security features to protect sensitive consumer data and the scalability to handle growing AI workloads. In addition, in the second quarter, increased capacity demands with two existing AI customers drove expansion revenue. Before I hand the call to Cooper, I will wrap up my prepared remarks with some examples of how customers are leveraging F5 to address their real challenges. I will categorize these across F5's three primary differentiators. 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. 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-premises environments across public cloud to the edge. F5 simplifies connecting these infrastructures and the applications deployed in and across them. And 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. As an example of a customer win that resulted from our comprehensive app and API security, during Q2, we secured a win with a leading insurance company in our LATAM region. The customer required a modern, flexible, scalable API security solution that could support their rapidly growing API landscape while also ensuring high availability between their main and secondary data centers. F5's hybrid approach strongly appealed to their needs, and they deployed a combination of systems and SaaS deployment models with F5 BIG-IP and distributed cloud services. A standout example of F5's consolidation power came from a win with a major health insurer in our EMEA region. After initially pursuing a cloud-native strategy, the customer turned to F5 to consolidate and unify its security posture across its hybrid on-premises and cloud environment. The customer deployed BIG-IP hardware and software as well as Web Application and API Protection via distributed cloud services resulting in greater operational efficiency and enhanced observability. Finally, representative of F5's ability to automate and streamline, we landed a win with a large financial institution in our EMEA region. The customer is modernizing its network and needed a solution that provided scalability with enhanced security while also enabling them to automate using infrastructure as code. The customer is leveraging BIG-IP's automation capabilities to remove manual processes and lifecycle risk. In addition, they are taking advantage of F5's BIG-IP scalability and distributed cloud services ability to support their multi-cloud strategies. F5's differentiated approach to hybrid multi-cloud also continues to drive competitive displacement momentum across our portfolio. For instance, during Q2, we successfully displaced a traditional ADC competitor at a leading North American insurance brokerage. F5's superior ADC capabilities and exceptional responsiveness capitalized on the customer's growing concerns about its incumbent provider, allowing us to secure a deal for F5 BIG-IP to support the customer's internal application and delivery solution. Also in Q2, we underscored F5's value as a strategic partner to our customers. A North American-based service provider, already an F5 customer, chose F5 to replace its longtime incumbent DDoS provider. This decision was driven not only by our robust DDoS capabilities but also by our ability to consolidate multiple functionalities, enabling the customer to streamline vendor management. Collectively, these wins highlight F5's growing role in a hybrid multi-cloud landscape that is increasingly influenced by AI. Now, I will turn the call to Cooper to speak to our Q2 results and provide some additional color on our outlook.

Thank you, Francois, and hello, everyone. I will review our Q2 results before I elaborate on our Q3 and FY ‘25 outlook. As Francois noted, we delivered a strong Q2, growing revenue 7% to $731 million and reflecting a mix of 54% global services revenue and 46% product revenue. Global services revenue of $394 million grew 3%. Product revenue totaled $337 million, up 12% year-over-year due to strong systems growth. Our software revenue of $158 million was flat, as Q2 had our smallest subscription renewal base of the year. Q2 subscription-based software revenue totaled $138 million, down 2% year-over-year, representing 87% of our total software revenue. Perpetual license software totaled $20 million in Q2, up 9% year-over-year. Systems revenue totaled $179 million, up 27% year-over-year. Our systems revenue is benefiting from a number of factors. First, customers continue to refresh aging hardware states. Similar to last quarter, we experienced widespread refresh activity in Q2 with strong customer demand across verticals and geographies. In addition, upcoming end-of-software support dates for our VIPRION and iSeries families are also driving reinvestment by customers. Combined, these families account for more than 50% of our installed base, representing a significant ongoing refresh opportunity. Beyond these F5-specific drivers and the mechanics of a normal refresh cycle, we believe there are several durable tailwinds benefiting our systems business. First, customers are building out their future hybrid multi-cloud architectures as they modernize and expand data centers. Second, customers are investing to prepare for AI. Third, we are driving continued competitive displacement and new customer wins as a result of our commitment to innovation. We believe all of these factors are contributing to our system strength and to our opportunity going forward. Revenue from recurring sources contributed 72% of our Q2 revenue. 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, our teams drove growth across all theaters. Revenue from The Americas grew 3% year-over-year, representing 54% of total revenue. EMEA delivered 20% growth, representing 29% of revenue, and APAC grew 3%, representing 17% of revenue. Looking at our major verticals, enterprise customers represented 69% of Q2's product bookings. Government customers represented 20% of product bookings, including 7% from U.S. Federal. Finally, service providers represented 11% of Q2 product bookings. Our continued operating discipline contributed to our strong Q2 operating results. GAAP gross margin was 80.7%. Non-GAAP gross margin was 83.1%, up 98 basis points year-over-year. Our GAAP operating expenses were $431 million. Our non-GAAP operating expenses were $374 million. Our GAAP operating margin was 21.7%. Our non-GAAP operating margin was 31.9%, an improvement of 103 basis points year-over-year. Our GAAP effective tax rate for the quarter was 15%. Our non-GAAP effective tax rate was 18.1%. This reflects a one-time benefit recorded in Q2, related to foreign operations. Our GAAP net income for the quarter was $146 million or $2.48 per share. Our non-GAAP net income was $201 million or $3.42 per share, reflecting 18% growth from the year-ago period. I will now turn to cash flow and balance sheet metrics, all of which remained very strong. We generated a record $257 million in cash flow from operations in Q2. CapEx was $11 million, DSO for the quarter was 47 days. Cash and investments totaled approximately $1.27 billion at quarter end. Deferred revenue was $1.92 billion, up 6% from the year-ago period. In Q2, we repurchased $125 million worth of F5 shares at an average price of $259 per share. As of the end of Q2, we had $1.2 billion remaining on our authorized stock repurchase program. Year-to-date, we have repurchased shares equivalent to 57% of our free cash flow. Finally, we ended the quarter with approximately 6,500 employees. Before I speak to our outlook, let me touch on the topic of tariffs with respect to potential cost impacts as well as our supply chain. On the cost side, we have low tariff exposure across our systems business as the majority of our finished goods are USMCA compliant and are therefore duty free on import into the United States from our Mexico-based contract manufacturing facility. Outside of our finished goods, we have a small amount of tariff exposure related to peripherals and other internal use goods imported from various countries. In total, we estimate our FY 25 tariff-related costs will be in the low single-digit millions, which we expect to offset through ongoing efficiency gains in our manufacturing and support operations. From a supply perspective, we do not expect any material impacts to lead times or availability as a result of our resilient and diversified global supply chain. I will now speak to our Q3 and full-year outlook. With the exception of revenue, my guidance comments reference non-GAAP metrics. As Francois noted, visibility into our Q3 pipeline and customer demand remains strong, and we are not seeing any direct signs of near-term demand erosion. Accounting for these factors, we expect Q3 revenue in the range of $740 million to $760 million implying 8% year-over-year growth at the midpoint. We expect growth will be driven by sustained strong demand for F5 solutions in support of data center modernization and strong software revenue growth supported by a substantial subscription software renewal base in Q3. We expect non-GAAP gross margin of approximately 83% to 83.5%. We estimate Q3 non-GAAP operating expenses of $366 million to $378 million. We expect Q3 share-based compensation expense of approximately $57 million to $59 million. We anticipate Q3 non-GAAP EPS in a range of $3.41 to $3.53 per share. I will now speak to our fiscal '25 outlook. Balancing the strength we are currently seeing in the business with some prudence in relation to the macro environment, we are raising our revenue outlook for FY '25 to 6.5% to 7.5% growth, up from our prior range of 6% to 7%. This view incorporates our expectations that both systems and software revenue will grow double digits for the year. We continue to expect FY '25 non-GAAP gross margin in a range of 83% to 84% and non-GAAP operating margin at or around 35%. We are adjusting our expected FY '25 non-GAAP effective tax rate to a range of 20% to 22% from the prior range of 21% to 23%. This change reflects the one-time benefit recorded in Q2 related to foreign operations. We are raising our FY '25 EPS outlook to growth of 8% to 10%, up from our prior guidance of 6.5% to 8.5% growth, driven by the increase in our revenue outlook and the benefit from the tax rate change. 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 turn the call over to Francois.

Thank you, Cooper. Today, F5 is delivering the hybrid multi-cloud solutions our customers need. We are alleviating the high costs, crushing complexity, and escalating cyber risks IT teams face in an increasingly AI-driven hybrid and multi-cloud world. With the recently introduced F5 Application Delivery and Security Platform, we are enabling consistent policies, full visibility, and AI-driven insights all from a single platform that is flexible to deploy. We are delivering new capabilities that give CISOs the visibility, compliance, and protection they need to deliver and secure any app, any API, anywhere. F5 is also claiming a growing role across the broader hybrid multi-cloud landscape and building the infrastructure foundation to support the next era of intelligent computing. Operator, please open the call to questions.

Our first question is from Tim Long with Barclays.

Thank you. Maybe one and then a follow-up if I could as well. Yes. Thanks for the comments here, guys. On the software side, it seems like a little bit of an underperformance in Q2, maybe we just had it in the whole thing correctly, but pretty big growth in the second half embedded to get to double-digits. So, could you just give us a little color? It sounds like the subscription pipeline is strong. Just curious how that's going to break out between maybe renewals or new business. And given the macro uncertainty, is there any risk to that? And then, on the follow-up on the hardware side that you, Cooper, I think you listed a number of things that are positive. I'm just curious how big of a driver and how the ramp of these replacements will go. Is that, currently, one of the major things that customers are talking about as far as their upgrades and that 50%, is that, do you expect that to move rather quickly, away from the base that's aged?

Sure. Thanks, Tim. I'll start with the software question. You're right. The growth is really weighted to the second half of the year, tied to a pretty substantial renewal opportunity we have across both Q3 and Q4, and that's something we outlined at the beginning of the year. So, I think that software really is kind of progressing with the seasonality that we're expecting going into the year. The mix related to the renewals in the second half is that that's a higher weighting. We talked about going into the year, roughly two-thirds of our software business would likely come from renewals and that renewal component is more weighted to the second half. And so, the last thing I'll say on that is the visibility we have within that renewal opportunity is pretty good. So, we have good insights as to how customers have been deploying their software that's coming up for renewal. We've seen a continuation of the trend of expansion at renewal across the portfolio. And so, just based on everything that we're seeing across that base in the second half, we think we've got a pretty good insight as to what that growth rate looks for the second half, in line with the double-digit guide for the year.

And Tim, I'll take your question on hardware. So obviously, you saw hardware was up 27% year-on-year this quarter with strong revenue growth. And as we shared in the prepared remarks, a meaningful portion of that, of course, is driven by strong momentum on the refresh cycle, and we think that cycle will last into well into 2026. Given the fact that we had a number of customers that didn't sweat assets in 2023 and early 2024 and are now proceeding with this refresh, and as Cooper mentioned, there's a significant portion of our installed base that is going to be up for refresh over the next coming two quarters. That said, the strength that we are seeing in hardware, if you dig into it, it's a lot more than just refresh. We're seeing some tailwinds in what I would call the non-refresh business that are driven by three factors. One is, we are seeing as customers really embedded us in their future-forward architectures, those hybrid and multi-cloud architectures, we are seeing more investment in data center modernization and expansion of data center capacity and customers also getting ready for AI. So that's one tailwind to the hardware business. We're also continuing to displace competitors and that's also creating tailwind on the hardware business. And then the third tailwind, of course, is AI where we are seeing growing momentum in a number of use cases around supporting AI workloads. So data delivery for AI workloads and increasingly also some use cases in security. So those are three tailwinds we're seeing on the hardware business.

Our next question is from Ryan Koontz with Needham & Company.

Great. Thanks for the question. Congrats on a great quarter there. Nice to be on the call. I want to ask about your competitive displacement opportunity here. How would you characterize kind of where you are in that cycle? Or do you feel like you've got enough critical mass here in terms of really getting sizable wins in displacing and how long do you think that cycle can last?

Thank you, Ryan. I'll put it in two categories. The first category is essentially going into new accounts or accounts where we have not been the main provider, specifically in ADC, and displacing competitors that are not performing. We still think we are in early innings in that opportunity and that the majority of the opportunity there still is ahead of us, and we think will continue for multiple quarters. We have won several hundred accounts in that category, but in the vast majority of these accounts, when we are winning the initial lending, we are winning less than half of the installed base upfront. And therefore, there's opportunity to expand within the accounts where we have already made a displacement. And of course, there are a lot of other accounts we'll be going after over the next several quarters. So, I think it's early innings and the majority of the opportunity is ahead of us. There is a second category of displacement, which is where we are already present in an account, but we are consolidating, increasingly consolidating functionality onto F5 typically displacing a competitor that offers a point product, be it in security or in app delivery and we're consolidating on F5. Now, that motion has been in place now for several quarters. You may have seen that we announced earlier this quarter the launch of our application delivery and security platform, which really converges more delivery and security functionality into a single stack and brings a lot of analytics and insights to make it way easier to manage, visualize, and provision app delivery and security services. And so, we expect that with the launch of that platform, our ability to consolidate functionality and take share from consolidating vendors will accelerate. And when you combine those portfolio capabilities, if you will, with the commercial flexibility that we offer our customers to consume in hardware, to consume in perpetual license, in hardware or software, subscription model, and in a Software-as-a-Service model. And the fact that we brought these consumption models under the right commercial vehicle that accelerates our ability as well to consolidate functionality into F5 into our large accounts. So those would be the two categories of displacement. Both opportunities we think are still largely ahead of us.

Super helpful color there. A quick follow-up if I could around the platform. How fully featured is this? It's around BIG-IP, right, the platform play?

No. The platform play is really bringing our three product families together. So, you have BIG-IP, F5 distributed cloud, and NGINX, all coming under the single umbrella of the application delivery and security platform.

Our next question is from Amit Daryanani with Evercore.

Thanks a lot. Good afternoon for taking my question. I guess, Francois, maybe just start off with you folks obviously are seeing very good growth on the hardware system side in the front half. First half of the year, it's up like 22%. Just given everything you've talked about, both from a displacement side plus the refresh cycle, can you just talk about why the embedded assumption that this growth would decelerate to, I think you're implying high single-digit growth in the back half of the year? Maybe just help understand like what's decelerating to that magnitude on the hardware side in the back half of the year?

Yes. So, look, essentially, you will have seen, Amit, that we raised our total revenue guidance from 6% to 7% to 6.5% to 7.5% for the full year. Now when we look at the second half of the year and the revenue guidance raised on the revenue, we were appropriately conservative in that raise largely because of the volatility we see in the macro. Now, I want to be very clear about this. We are not seeing today any change in the buying behavior or demand patterns of our customers as a result of the macro. We have been looking at this very closely. We are looking at pipeline creation, we are looking at close rates on pipeline, we are looking at linearity, we are looking at the time it takes to close deals. And we haven't seen any change frankly over the last quarter with our customers. That said, when we were projecting to full year guidance, we decided to, whilst raising guidance, we decided to be appropriately conservative given what could come to be seen later on in the year if the macro environment deteriorates from where it is today.

Got it. That's perfectly helpful. And then if I could just follow-up, we talked about sort of three use cases on AI that are starting to ramp up from what you folks see. Can you just talk about at least qualitatively, which of the three use cases you think is the largest opportunity from a dollar basis for the company? And then where are you seeing better traction right now versus not?

That's a really important topic. The largest use case for us right now, in terms of revenue, is data delivery for AI models. Our BIG-IP solution is typically integrated in front of data stores to facilitate the quick and secure transfer of large volumes of data between these data stores and AI applications used for training or inference. This represents the majority of our current opportunity. As we look at the next two use cases, we believe they are still developing. We are initiating efforts in security, specifically by securing AI-powered applications using our WAF solution and the AI gateway that we recently launched, which is designed specifically for AI and became generally available this quarter. We are beginning to see initial traction with this, although this opportunity is still in its infancy. The third opportunity, which involves AI factory load balancing, is also in early stages. Again, BIG-IP will be essential in managing traffic both in front of and within AI factories.

Our next question is from Samik Chatterjee with JPMorgan Chase.

Hi, thanks for taking my question. I guess Francois, if I can start off with the going back to the hardware revenue that you're seeing. In terms of sort of overall giving investors comfort that it's not driven by any pull forward of hardware purchases by companies because of sort of pre anticipating some of the tariff-led price increases. Can you just talk a bit more about which products you're seeing this hardware sort of acceleration in? Is it just products end of life in this year? Or is it more broad-based across the sort of hardware portfolio? It'll be just interesting to know and sort of how are you driving your own confidence that it's not a bit of a pull forward ahead of tariffs. And secondly, if I can just ask more on the software perpetual revenue, if I look at the trends last quarter relative to sort of this quarter where you had a step down. Can you just highlight what did you see in terms of the customer sort of overall lower engagement on the perpetual side this quarter? What drove that? And any insights that you're drawing in terms of what the overall customer engagement or pipeline looks like from that perpetual revenue?

Yes, let me begin with hardware. I believe Cooper will address your software question. In the second quarter, we did not observe any hardware pull-ins. We collaborated closely with our customers. As a reminder, in the first quarter, we announced a price increase planned for January, and during the December quarter, we noted that some customers were placing orders early to avoid that increase. We recognized these customer behaviors. However, in the second quarter, we did not experience any instances of customers advancing their orders to mitigate tariff impacts or similar concerns. There was no significant push out of demand, nor did we see any pull in of demand in Q2. The only area where we might see potential changes is with the U.S. federal government. Given the current disruptions, those customers may become cautious about future budgets. However, it’s worth noting that the federal government constitutes a small portion of our overall business, so any impact would be limited, and we did not see significant changes across the business in Q2.

Yes. And then I'll just add to that. I mean, broadly, in the quarter, I would say we share very orderly. So we track all the signals around things like price pull-ins, related pull-ins or other unnatural demand behaviors. We look at things like just the weekly close rates against our quietly committed forecasts, and it really kind of just tracked to our expectations throughout the quarter, both on hardware and our software business. Now speaking to perpetual software, it was really kind of in the range that we typically would see for Q2. Just as a reminder, most of our customers prefer to buy in a subscription model for software. We do have a handful of customers that may have a CapEx need, particularly in the service provider space. That has tended to align more to our fiscal Q1 tied to search provider budgets. So the kind of sequential decline that we saw in perpetual software was really kind of in line with our expectations going into the quarter and what we've seen in prior years. So basically, it was pretty much in line with our expectations through the quarter for both hardware and software.

Our next question is from Michael Ng with Goldman Sachs.

I have 2 as well. First, just on systems. I was wondering if you could talk a little bit more about the iSeries, VIPRION installed-base being 50% of the total systems installed-base. I guess, first, like how big is the installed base in nominal terms? And could you just talk about the typical price increase or price mix increase that you see when you transition to, I guess, it would be rSeries and VELOS, respectively?

Yes, I'll address that. We've talked before about the upcoming end of software support dates for the VIPRION and iSeries product families. To recap, VIPRION will reach the end of software support in April 2026, while iSeries will follow in January 2027. Together, these two families make up more than half of our current installed base, which we view as a significant opportunity over the next few years. The iSeries is the larger contributor to our installed base. Regarding pricing, we implemented a general increase of 5% across our portfolio, with a slightly larger increase for the rSeries due to its performance advantages over earlier models. We expect to see the impact of these price adjustments manifest in our financials. However, we did not observe a significant uptick in Q2, as the price increases were just introduced and typically take a few quarters to affect the deals we are quoting. Overall, that outlines the dynamics of our price increases.

Great. And just my second question, just on software. You talked about the subscription renewal base picking up as we head into the second half of the year that drives the acceleration in software growth. Just wondering if we'll be largely through that renewal by the end of this year. Said differently as the renewal base in '26 is going to be smaller than '25. And how should we think about the implications for growth?

Thank you for your question. Our software business primarily relies on renewals since we have been offering subscriptions for several years. The main vehicle for our software subscription is our flexible consumption program, which generally involves 3-year contracts. This structure creates a renewal cycle aligned with that 3-year timeline, though it’s not exactly the same as a refresh cycle. You can track the pace of this by looking back at our software performance from previous years. This is where you'll notice our strong renewal base in the latter half of this year. The visibility on this is quite good; we have very high renewal rates and a solid history of expansion. This underpins our confidence in software growth for the year. As we consider FY '26, referring to the 3-year renewal cycle, you can observe that in FY '23, software revenues were fairly stable compared to '22, with some growth in the subscription segment. However, this might create a slight headwind in FY '26. Looking into FY '27, we anticipate a more favorable situation due to the 3-year renewal cycle. Although we expect a bit of a challenge in FY '26, we are still experiencing increased expansion rates across our portfolio. We believe there is a continuing opportunity for growth with the increased software adoption by our customers, which remains our primary focus. These are some key considerations as we look beyond FY '25.

Our next question is from Matthew Hedberg with RBC.

This is Mike Richard on for Matt. You touched a little bit earlier on maybe seeing some pull-in from Fed in Q3. Just any other color around how Fed performed relative to expectations and your assumptions for Fed moving to the year? And any other color on dose impacts there would be helpful.

Thank you, Matt. Overall, we had a strong quarter, and the Federal business performed as we expected or slightly better. We did not experience any significant disruptions in Q2 with our Federal business. However, when we talked to our customers in the Federal sector towards the end of the quarter and looking into Q3 and Q4, there were signs of increased concern regarding potential disruptions. The situation is quite dynamic and varies from one agency to another, making it hard to predict whether the disruptions will lead to delays or accelerated timelines. Yet, I believe we will begin to notice the cumulative effects in the second half of the year. Additionally, the projects we are involved with are predominantly security-related, which tend to be prioritized and are quite critical for the agencies we collaborate with. Regarding overall budget levels, the feedback indicates that they are likely to prioritize their work with F5.

Great. And then maybe just from a geographic perspective, anything to call out. It looked like EMEA was pretty strong in the quarter. So just any commentary there.

Thank you, Matt. No, I think things geographically landed as we expected. The international business was actually pretty strong. Both EMEA and Asia performed largely within our expectations. And North America was pretty strong. So there was nothing really out of the ordinary to note. Of course, we have an easy comp with EMEA because the revenues a year ago were not strong there. So it grew substantially in the quarter. But overall, in line with our expectations.

Our next question is from Meta Marshall with Morgan Stanley.

Yes. Maybe kind of following up on a couple of questions. Understanding that you didn't see any pull in, in fiscal Q2. But I guess just we are a month into the quarter. Is the linearity that you're seeing in fiscal Q3 any different than you would have traditionally kind of seen end of fiscal Q3 versus expectations? And then second, just on the last question about kind of international. The dollar has weakened a little bit in the last month. I guess, has that changed your expectation or change the behavior of international customers where that business has actually gotten stronger as the dollar has weakened slightly.

Yes. Thanks, Meta. So on the pull-in question, we didn't really see any material pull-in. I think as we're looking at the first few weeks of the quarter, we're seeing really strong results, hitting our weekly targets. Again, that's the first leading indicator that we look at, and it's been very healthy linearity is right where we would expect it to be for the quarter. I mean, clearly, in this environment, we're being extra mindful and focused on any indicators that we could see if there was any erosion. We just have not seen any thus far. So we feel pretty good from where we sit. On the international side, yes, the weakening dollar does provide a little bit of a benefit just in terms of pricing. But having said that, the dollar had strengthened early in the year. So I think that's just kind of balancing out nothing that we've really seen that's driving any kind of increased velocity around sales cycles or kind of operating just within a relevant range that we've been at over the last several quarters.

Our next question is from Tal Liani with Bank of America.

I want to revisit the first question raised by Tim Long regarding the lack of growth in software for this quarter. It’s important to understand the underlying factors. If the stagnation in growth is driven by renewals, then any future growth would primarily stem from these renewals. My inquiry is why we’re not seeing growth from new products, new markets, or other potential drivers during a time when renewals are weak. Does this indicate that future growth will predominantly hinge on the accounting related to renewals? Additionally, we often discuss AI and its promising role in our enterprise sector. When do you believe AI will begin to significantly contribute to our growth?

I'll start on the renewals and new components of our software growth. So we do believe that the renewal motion is going to be the driver of growth over time. But let's be clear, this isn't just a refresh or a repeat buy. This is the maturity of the subscription model where every year when you sell new, that then adds to that renewal base. So over time, the renewal base growing in size year in, year out is what's going to drive our renewal revenue opportunity. And then especially important is the ability to expand on that growing base. And so that's what we expect to happen over time. It's what we've been seeing in any given quarter, again, there's going to be some lumpiness on the reported revenue just because they come on these 3-year refresh cycles where you have the upfront revenue recognition. And so we said that last quarter when the growth was very strong on a reported basis, and we'll say it again this quarter when it's flat. And then we said in the second half of the year, we expect to see healthy growth again on that renewal basis. So when we look at the new projects, that's really an opportunity for us to engage with new customers, and that's an important part of our model. But it's not going to be the driver of the overall growth over time. It's really just an opportunity for us to continue to add to that renewal base from which we drive our revenue growth.

Tal, regarding your question on AI, we are already generating revenue from AI at this time. I previously mentioned that we are focusing on three specific areas where we are experiencing increased momentum in AI, which our customers have identified as key use cases. Additionally, we believe that some of the current strength we're seeing in hardware sales is linked to our customers preparing for AI. They are expanding their data center capacities for AI purposes, even if they do not specifically target that when engaging with us. This trend is happening now and, while it's still early, we anticipate significant growth in the future. We are also excited about the innovations we are introducing in the AI space. For example, we just launched an AI Gateway that we expect will gain traction in the market due to the necessity of securing AI applications and large language models. Moreover, we are integrating AI into our existing portfolio, enhancing our competitive edge. Our newly launched application delivery and security platform leverages AI to provide analytics and insights, simplifying the process for our customers to deliver and secure their applications. This integration is set to be a catalyst for growth as we incorporate more capabilities into F5 and expand our reach within our existing customer base. Overall, we are very pleased with our position regarding the AI opportunity. The main challenges in AI involve data movement and ensuring that data is moved securely. We possess the best technology in the industry for securely moving data quickly for our customers, and we view this opportunity as sustainable moving forward.

Our next question is from James Fish with Piper Sandler.

Francois, for you, going back a bunch of questions ago, you gave 4 sort of ranking on the hardware side? Is there a way to you either rank or give a mix as to what's impacting between that refresh data center modernization competitor displacements and AI? And then Cooper for you, to get to your software number in the second half, given what you have disclosed and even in kind of mapping out the renewals and all that, is it that new recurring business or even assigned to the perpetual side of things, is it that new piece would be up year-on-year versus what you're doing today for the second half. So I guess what's giving the confidence that we're going to actually see growth on the new business side or either or an expansion on the expansion rate?

Jim, I can address the first part of your question regarding the factors driving the strong demand for systems. I would say that tech refresh is currently the top driver. Following that, data center modernization and net expansion, particularly in hybrid multi-cloud architectures, come in second. This also involves customers preparing for AI, although the trend is broader than just AI; it encompasses modernization and capacity expansion. The third factor would be competitive displacement, and lastly, AI itself, referring to the direct use cases we are currently winning. Overall, we are experiencing a very robust refresh motion along with significant tailwinds that we expect will continue to grow in the coming quarters.

Yes. Regarding software, we are not expecting significant growth from new customers, as the primary growth is driven by renewals. We have a clear understanding of how customers utilize our software within their current contracts. For large contracts, we work closely with customers to size and plan for their next renewal, allowing us to accurately predict the expansion rate for the second half of the year, which gives us confidence. While there is potential for growth from new customers that could exceed our software expectations for the year, we anticipated software growth to be relatively flat year-over-year, with renewals being the main source of growth. We experienced strong expansion in Q1 with a couple of our large deals, and the renewal base is well established as we move forward. We closely monitor the consumption levels within that renewal base, which remains healthy and bolsters our confidence for the second half regarding software.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Francois Locoh-Donou for any closing remarks.

Thank you for joining us today. We look forward to seeing many of you during the quarter and to discussing F5's growing role in the broader hybrid and multi-cloud landscape. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.