F5 - Earnings Call - Q2 2025

Executive Summary

• Beat-and-raise quarter: Revenue $731.1M (+7% y/y) and non-GAAP EPS $3.42 both exceeded S&P Global consensus, with product strength led by systems (+27% y/y); FY25 revenue growth outlook raised to 6.5–7.5% and EPS growth to 8–10%. Q2 revenue beat vs. consensus $716.5M and EPS beat vs. $3.09* (see Estimates Context). Values retrieved from S&P Global.*
• Mix and margins constructive: GAAP gross margin 80.7% and non-GAAP gross margin 83.1% (+100 bps y/y), while non-GAAP operating margin rose to 31.9% (+103 bps y/y).
• Systems cycle accelerating: Refresh, end-of-support (VIPRION Apr-26; iSeries Jan-27), data center modernization and AI workloads drove systems to $179M (+27% y/y); software was flat at $158M given the smallest renewal base of the year, with H2 weighted renewals expected to re-accelerate growth.
• Q3 guide in line: Revenue $740–$760M (midpoint +8% y/y) and non-GAAP EPS $3.41–$3.53, supported by large subscription renewal base and sustained systems demand.
• Cash generation and capital returns strong: Record Q2 operating cash flow $257M; repurchased $125M of stock (avg $259), with $1.2B remaining authorization.

What Went Well and What Went Wrong

What Went Well

• Systems-driven outperformance: Systems revenue $179M (+27% y/y) on broad refresh activity, end-of-support tailwinds, modernization, AI-related demand, and competitive displacement.
• Margin expansion and EPS beat: Non-GAAP gross margin 83.1% (+100 bps y/y), non-GAAP operating margin 31.9% (+103 bps y/y), non-GAAP EPS $3.42 (+18% y/y) above guidance top end by $0.28.
• Guidance raised and macro visibility: FY25 revenue growth lifted to 6.5–7.5% (prior 6–7%) and EPS growth to 8–10% (prior 6.5–8.5%), with no signs of near-term demand erosion and healthy Q3 pipeline. Quote: “We are not seeing any direct signs of near-term demand erosion”.

What Went Wrong

• Software growth paused in Q2: Software revenue was flat y/y at $158M due to the smallest renewal base of the year; management reiterated H2 weighting of renewals for acceleration.
• EBITDA vs. consensus softness: S&P Global standardized EBITDA missed consensus in Q2 and Q3 despite EPS beats, reflecting accounting mix and seasonality in renewal recognition (see Estimates Context). Values retrieved from S&P Global.*
• Federal/government risk watch: While Q2 Fed performed in line or better, management noted potential budget-related timing effects in H2 (push-outs or pull-ins), albeit on prioritized security programs and small mix.

Transcript

Operator (participant)

Afternoon, and welcome to the F5 Second Quarter Fiscal 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. Also, this 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. Ma'am, you may begin.

Suzanne DuLong (VP of Investor Relations)

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. François 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, François 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 François.

François Locoh-Donou (President and CEO)

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 the year-ago quarter. We also delivered Q2 non-GAAP EPS of $3.42, representing 18% year-over-year growth, $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 $740million-$760 million, implying roughly 8% growth at the midpoint.

In addition, we are raising our guidance for FY 2025 revenue growth to a range of 6.5%-7.5%, up from our prior range of 6%-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 ball of fire 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, for network access, and for cloud workloads, there has not 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 the ball of fire.

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 App World, 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. These are innovations that make it easier for customers to harness the power of F5. The second is ADC for AI.

These innovations showcase how we are applying our strengths 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 iRules Code Generator, which will be available later this year. Programmability and flexibility have always been at the heart of F5 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 iRules 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 App World, we expanded this functionality, introducing AI Assistant for NGINX One, and we announced 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, enforce policies, and 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 do not 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 Claude. 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, an 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, thus 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 very real ball of fire 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 clouds to the edge. F5 simplifies connecting disparate infrastructure environments and the applications deployed in and across them. 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 environments. The customer deployed BIG-IP hardware and software, as well as WAAP 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. Cooper?

Cooper Werner (EVP and CFO)

Thank you, François, and hello, everyone. I will review our Q2 results before I elaborate on our Q3 and FY 2025 outlook. As François 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's subscription-based software revenue totaled $138 million, down 2% year-over-year, representing 87% of our total software revenue. Perpetual licensed 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 estates. 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 systems 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 US 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 2025 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 François 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-$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%-83.5%.

We estimate Q3 non-GAAP operating expenses of $366million-$378 million. We expect Q3 share-based compensation expense of approximately $57million-$59 million. We anticipate Q3 non-GAAP EPS in a range of $3.41-$3.53 per share. I will now speak to our fiscal 2025 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 2025 to 6.5%-7.5% growth, up from our prior range of 6%-7%. This view incorporates our expectations that both systems and software revenue will grow double digits for the year. We continue to expect FY 2025 non-GAAP gross margin in a range of 83%-84% and non-GAAP operating margin at or around 35%.

We are adjusting our expected FY 2025 non-GAAP effective tax rate to a range of 20%-22% from the prior range of 21%-23%. This change reflects the one-time benefit recorded in Q2 related to foreign operations. We are raising our FY 2025 EPS outlook to growth of 8%-10%, up from our prior guidance of 6.5%-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 2025. With that, I'll turn the call over to François.

François Locoh-Donou (President and CEO)

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.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull up for questions. Thank you. Our first question is from Tim Long with Barclays. Please proceed with your question.

Tim Long (Managing Director)

Thank you. Maybe one and then a follow-up if I could as well. Yeah, thanks for the commentary, guys. On the software side, it seems like a little bit of an underperformance in Q2, maybe that we just had it modeled incorrectly, but pretty big growth in the second half embedded to get to double digits. 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?

Then on the follow-up on the hardware side, 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%? Do you expect that to move rather quickly away from the base that's aged? Thank you.

Cooper Werner (EVP and CFO)

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. That is something we outlined at the beginning of the year. I think that software really is kind of progressing with the seasonality that we were 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. The last thing I'll say on that is the visibility we have within that renewal opportunity is pretty good. 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. 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.

François Locoh-Donou (President and CEO)

Tim, I'll take your question on hardware. Obviously, you saw hardware was up 27% year-on-year this quarter with strong revenue growth. As we shared in the prepared remarks, a meaningful portion of that, of course, is driven by strong momentum on the refresh cycle. We think that that cycle will last well into 2026, given the fact that we had a number of customers that did sweat assets in 2023 and early 2024 and are now proceeding with these refreshes. As Cooper mentioned, there's a significant portion of our install base that is going to be up for refresh over the next coming few 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 embed us, sorry, 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. That is one tailwind to the hardware business. We are also continuing to displace competitors, and that is also creating tailwind on the hardware business. The third tailwind, of course, is AI, where we are seeing growing momentum in a number of use cases around supporting AI workloads. Data delivery for AI workloads and increasingly also some use cases in security. Those are three tailwinds we are seeing on the hardware business.

Now, if you pull way up from your question, which was part about software and hardware, the overall strength we're seeing on the business is really driven by these hybrid multi-cloud architectures where we have more and more customers that want to have applications on-premise, want to have applications in public cloud, are operating across multiple infrastructure environments, really want the flexibility to be able to deploy in software, in software as a service, or in hardware. Don't necessarily know what model they will deploy at what time, but really look at F5 as a partner that really is the only company that can serve all these models and deploy across all these environments. That's driving both the strength I think we're going to see this year in software and the strength in hardware.

Tim Long (Managing Director)

Okay. Thank you.

François Locoh-Donou (President and CEO)

Thanks, Tim.

Operator (participant)

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

Ryan Koontz (Senior Analyst)

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? Do you feel like you've got enough critical mass here in terms of really getting sizable wins in displacing? How long do you think that cycle can last? Thanks.

François Locoh-Donou (President and CEO)

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 we'll 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 install base upfront. Therefore, there's opportunity to expand within the accounts where we have already made a displacement. Of course, there are a lot of other accounts we'll be going after over the next several quarters. 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 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. 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, to visualize, to provision app delivery and security services. We expect that with the launch of that platform, our ability to consolidate functionality and take share from consolidating vendors out will accelerate. When you combine those portfolio capabilities, if you will, with the commercial flexibility that we offer our customers to consume in perpetual license in hardware or software, in subscription model, and in a software as a service model, and the fact that we've brought these consumption models under the right commercial vehicles, that accelerates our ability as well to consolidate functionality into F5, into our large accounts.

Those would be the two categories of displacement. Both opportunities, we think, are still largely ahead of us.

Ryan Koontz (Senior Analyst)

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

Cooper Werner (EVP and CFO)

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.

Ryan Koontz (Senior Analyst)

Got it. Super. Thanks for the color.

François Locoh-Donou (President and CEO)

Thank you.

Operator (participant)

Our next question is from Amit Daryanani with Evercore.

Amit Daryanani (Senior Managing Director)

Thanks, a lot. Good afternoon. Thanks for taking my question. I guess, François, if I could 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 what's decelerating to that magnitude on the hardware side in the back half of the year?

François Locoh-Donou (President and CEO)

Yep. Look, essentially, you will have seen, Amit, that we raised our total revenue guidance from 6-7% to 6.5-7.5% for the full year. Now, when we look at the second half of the year and the guidance raise on the revenue, we were appropriately conservative in that raise, largely because of the volatility we see in the macro. 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. We have not 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, 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.

Amit Daryanani (Senior Managing Director)

Got it. That is perfectly helpful.

If I could just follow up, you 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 these three use cases you think is the largest opportunity from a dollar basis for the company? Where are you seeing better traction right now versus not?

François Locoh-Donou (President and CEO)

Yeah. That's a really important topic. The largest use case for us today in terms of where we're seeing most of the dollars is in data delivery for AI models. This is where our BIG-IP is typically actually in hardware, being inserted in front of data stores to enable the rapid movement and secure movement of massive amounts of data between data stores and AI applications in training or in inferencing, frankly.

That is, I would say, the lion's share of the opportunity today. When we go to the next two, we think they're largely ahead of us. We are starting with security and securing web app, securing AI-powered applications, both with our WAP solution and with the AI Gateway that we just recently announced, which is a new solution that's purpose-built for AI that went 1GA this quarter, and we're starting to see early traction with that. Again, that opportunity is very early. The third opportunity is also early, which is AI factory load balancing. Again, BIG-IP will play an important role in that load balancing traffic in front of AI factories or within AI factories.

Amit Daryanani (Senior Managing Director)

Got it. Thank you very much.

François Locoh-Donou (President and CEO)

Thank you.

Operator (participant)

Our next question is from Samik Chatterjee with JPMorgan Chase.

Samik Chatterjee (Managing Director and Equity Research Analyst)

Hi. Thanks for taking my question.

I guess, Frans, 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-lifing 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?

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? Any insights that you're drawing in terms of what the overall customer engagement or pipeline looks like from that perpetual revenue? Thank you.

François Locoh-Donou (President and CEO)

Yes. Let me start with the hardware. I think Cooper will answer your question on software. I mean, we did not see any hardware pull-ins into 2020. We looked at, with our customers, any—I should go back a little bit. If you recall, in our first quarter, we had announced a January price increase.

During the December quarter, we mentioned that we had seen some level of pull-ins from customers looking to avoid that price increase in January. We kind of recognized the patterns of when customers do that. In this quarter, in Q2, we did not see any of these patterns of customers pulling in orders prematurely in order to avoid tariff impacts or anything else like that. We did not see any push-out of demand, but we did not see any pull-in of demand either in Q2. The only place where perhaps we think that may be the case, but it would be more of a Q3 effect, is in the U.S. federal government, where with the disruptions from the efforts from DOGE, customers may get a little nervous about budgets down the road. That is where we might see it.

I remind you that the federal government is in high single digits in terms of total amount of our business. It would be a limited effect anyway, but we didn't see it in Q2 across the business. That's on the overall hardware demand. I'll have Cooper answer your question on software.

Cooper Werner (EVP and CFO)

Yeah. I'll just add to that. I mean, broadly, the quarter, I would say we would characterize it as very orderly. We track all the signals around things like price pull-ins, related pull-ins, or other kind of unnatural demand behaviors. We look at things like just the weekly close rates against our weekly commits and linearity, 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 service provider. That has tended to align more to our fiscal Q1 tied to service provider budgets. 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. Basically, it was pretty much in line with our expectations through the quarter for both hardware and software.

Samik Chatterjee (Managing Director and Equity Research Analyst)

All right. Okay. Thank you. Thanks for taking the questions.

Cooper Werner (EVP and CFO)

Thank you.

Operator (participant)

Thank you. Our next question is from Michael Ng with Goldman Sachs.

Michael Ng (Managing Director of Global Investment Research)

Hey, good afternoon.

Thank you very much for the question. I have two as well. First, just on systems, I was wondering if you could talk a little bit more about the iSeries and VIPRION install base being 50% of the total systems install base. I guess first, how big is the install base in nominal terms? Could you 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? Thank you.

Cooper Werner (EVP and CFO)

Yeah. I'll take that. We have discussed in the past some upcoming end-of-software support dates for the VIPRION and iSeries families. Just as a reminder, the VIPRION family goes end-of-software support in April of 2026, and iSeries is in January of 2027. Combined, those two product families are well over half of our install base today.

We think that that represents a pretty durable opportunity over the next couple of years. iSeries is the larger of those two in terms of mix of our install base. In terms of pricing, we increased our pricing generally 5% across the portfolio, although the price increase was a little bit larger on the rSeries, just accounting for the price performance advantage that our newly introduced rSeries appliance family has against the prior generations. We will start to see that flow through the model. We did not really see a big pickup in Q2 just because we just introduced the price increases, and it takes a couple of quarters for those to kind of flow through into the deals that we are quoting. Broadly, that is kind of the mechanics of our price increases.

Michael Ng (Managing Director of Global Investment Research)

Great. Thank you.

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, is the renewal base in 2026 going to be smaller than 2025? And how should we think about the implications for growth? Thank you.

Cooper Werner (EVP and CFO)

Thanks. Yeah. No, that's a great question. Our software business is weighted towards renewals because we've been doing the subscription for several years now. Our lead commercial vehicle for our software subscription business is what we call our Flexible Consumption Program, and those tend to be three-year contracts.

You kind of get these—they're not the same as a refresh cycle, but it's a renewal cycle that tends to wait to a three-year cadence. One kind of way that you can track the pace of that is to look back at what we did in software in prior years. That's where you'll see that we've had a lot of strength in that renewal base in the back half of this year. The visibility on that is really good. We have very high renewal rates, and we've had a really good track record of expansion. That's what's giving us the confidence in the software growth for the year. As we look ahead to fiscal year 2026, again, on that three-year renewal cycle, you can look back to fiscal year 2023, where software was flattish over 2022.

There was some growth in the subscription component of that software revenue outcome, but that will be a bit of a math headwind in FY 2026. You could look ahead to the next year in FY 2027, and you'll see more of a math tailwind just tied to that three-year renewal cycle. Having said that, while that's a little bit of a headwind in FY 2026, we're continuing to see increased rates of expansions across the portfolio. We think there is an opportunity to continue to drive growth just in terms of the adoption of software by our customers, and that's what we're most focused on. Those are just some of the things that we're thinking about as we look ahead beyond FY 2025.

Michael Ng (Managing Director of Global Investment Research)

Great. Thank you. That's all very clear. Appreciate it, Cooper.

Our next question is from Matthew Hedberg with RBC.

Mike Richards (Equity Research Senior Analyst)

Hey, guys.

This is Mike Richards on from Matt. Thanks for taking the question. 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 through the year? Yeah, any other color on DOGE impacts there would be helpful. Thanks.

François Locoh-Donou (President and CEO)

Thank you, Mike. Generally, we had a strong quarter and the Fed performed in line with our expectations or a little better. We did not see any disruption really in Q2 to our Fed business. That said, when we spoke with our customers in the Fed towards the end of the quarter and looking into Q3 and Q4, I think they were starting to feel a little more nervous about the potential disruptions that would come from DOGE. It's a very dynamic situation.

It's different from one agency to the other. So it's difficult to say exactly whether the disruption will be some push-outs or some pull-ins. But I think we're going to start to feel more of the DOGE effect in the second half of the year. That said also, generally, the projects that we are associated with are security projects that tend to be prioritized and are pretty important for the agencies that we work with. So in terms of the overall budget envelope, the feedback we do get is that they would tend to prioritize the work that they're doing with F5.

Mike Richards (Equity Research Senior Analyst)

Great. Thanks for the color. 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? Thanks again, guys.

François Locoh-Donou (President and CEO)

Thank you, Mike. No, I think things geographically landed as we expected.

The international business was actually pretty strong. Both the EMEA and Asia performed largely within our expectations. North America was pretty strong. There was nothing really out of the ordinary to note. Of course, we had an easy comp with EMEA because the revenues a year ago were not strong there. It grew substantially in the quarter, but overall, in line with our expectations.

Operator (participant)

Thank you. Our next question is from Meta Marshall with Morgan Stanley.

Meta Marshall (VP)

Yeah. Maybe kind of following up on a couple of questions. Understanding that you did not see any pulls in in fiscal Q2, but I guess just we are a month into the quarter. Is the linearity that you are seeing in fiscal Q3 any different than you would have traditionally kind of seen in a fiscal Q3 versus expectations?

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 changed the behavior of international customers where that business has actually gotten stronger as the dollar has weakened slightly? Thanks.

Cooper Werner (EVP and CFO)

Yeah. Thanks, Meta. On the pull-in question, we did not really see any material pull-in. I think as we are looking at the first few weeks of the quarter, we are seeing really strong results hitting our weekly commits. Again, that is the first leading indicator that we look at, and it has been very healthy. Linearity is right where we would expect it to be for the quarter. I mean, clearly, in this environment, we are 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.

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 the street pricing. Having said that, the dollar had strengthened early in the year. I think it's just kind of balancing out. Nothing that we've really seen is 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.

Meta Marshall (VP)

Okay. Great. Thank you.

Operator (participant)

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

Tal Liani (Technology Analyst)

There you go. I was on mute. You can hear me now? Can you hear me now?

François Locoh-Donou (President and CEO)

Yes. Yes, Tal.

Tal Liani (Technology Analyst)

Yes. Sorry. I was on mute. I want to go back to the first question we had by Tim Long.

The question is, I'm trying to learn from a quarter where you have no growth in software because that's when we can see the drivers. If you had no growth because of renewals, it means that when you have growth, it's always coming just from renewals. The question is, why don't we see growth from new products, new markets, new drivers that you have? In a quarter that renewal is weak, why don't we see the other drivers? Does it mean that when it grows, is it mostly about the accounting of renewals? That's kind of the first question. The second question is, we talk a lot about AI, and you have a great position in AI. This is enterprise AI, right? The question is about timing.

When do you think AI starts to be a meaningful driver or a notable driver to growth? Thanks.

Cooper Werner (EVP and CFO)

Thanks, Tal. I'll start on the renewals and new components of our software growth. We do believe that the renewal motion is going to be the driver of growth over time. 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 we sell new, that then adds to that renewal base. Over time, the renewal base growing in size year in, year out is what's going to drive our renewal revenue opportunity. Especially important is the ability to expand on that growing base. 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 three-year refresh cycles where you have the upfront revenue recognition. We said that last quarter when the growth was very strong on a reported basis. We'll say it again this quarter when it's flat. We said the second half of the year, we expect to see healthy growth again on that renewal base. 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. 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.

François Locoh-Donou (President and CEO)

Tal, on your question on AI, look, we are already driving revenue from AI today. I mentioned earlier that there were really three areas where we were driving and seeing growing momentum in AI. Those are specific use cases that our customers identify as AI use cases. We also believe that some of the strength we're seeing in AI, sorry, in hardware, even in hardware refresh from customers, is actually driven by some of our customers getting ready for AI and increasing capacity and driving expansion in their data centers for AI, even though they do not necessarily target to that at the time of a transaction with us. Those things are happening today. We think it is early days, but it is going to grow over time.

We're also very excited, Tal, by the innovation that we are starting to bring to market in AI. I mentioned earlier that we just launched an AI Gateway, which we think is going to gain traction in the market with the need to secure AI applications to secure large language models. We're also driving innovation with AI inside of our own portfolio that will further our differentiation and competitiveness in the market. We just launched our Application Delivery and Security Platform. We're leveraging AI in that platform to bring analytics, to bring insights to customers, to make it way easier for them to deliver and secure their applications. That is a catalyst for growth over time as we consolidate more functionality onto F5 and expand into existing customers. The AI opportunity, when you look at it in aggregate, we're really happy with where we are.

It so happens that the big challenges in AI are moving data and moving data securely. We happen to have the best technology in the industry to move data securely and at real speed for customers. The opportunity is in front of us, and I think it will be durable over time.

Tal Liani (Technology Analyst)

Great. Thanks, François.

François Locoh-Donou (President and CEO)

Thank you, Tal.

Operator (participant)

Our next question is from James Fish with Piper Sandler.

James Fish (Managing Director)

Hey, guys. François, for you, going back a bunch of questions ago, you gave four sort of rankings on the hardware side. Is there a way to either rank or give a mix as to what's impacting between that refresh, data center modernization, competitor displacements, and AI?

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 just the 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? I guess, what's giving the confidence that we're going to actually see growth on the new business side or an expansion on the expansion rate?

François Locoh-Donou (President and CEO)

Jim, I can start on the first part of your question, which was ranking the drivers of the strength we're seeing in systems demand. I would say that tech refresh is the number one driver today of that demand.

I would probably put DC modernization and expansion, but it is really these hybrid multi-cloud architectures as really number two in what we are seeing in the strength in demand. Now, that, we believe, includes customers also getting ready for AI. You could say there is an element of AI that is into that. It is a broader theme than just AI. It is data center modernization and capacity expansions. Third would be competitive displacement. Fourth would be AI, would be the ranking, meaning by that direct AI use cases that we are winning today. That would be the ranking that I would put to that. Overall, we are seeing refresh motion very strong and significant tailwinds as well that are building up and hopefully will grow over the next several quarters.

Cooper Werner (EVP and CFO)

Yeah. Just to speak to software, we actually do not—we are not assuming strong growth from new.

The growth is really coming from the renewal. Again, we've got strong visibility as to how customers are using our software within their existing contracts. For these large contracts, we engage early with the customers just to do the sizing and plan that next renewal. We've got a really good handle on what that expansion rate will look like for the second half of the year. That is where we feel very good. Now, there's an opportunity to grow on new that could be upside to our expectation for the year for software. We went into the year saying that software we had sized as being kind of flat year-over-year and that the growth was coming from renewal. We had very strong expansion in Q1 on a couple of our larger deals.

The rest of the renewal base, really, that's set going into the year. We have that visibility. What we track is what the consumption is within that renewal base. That is what we see as being very healthy. It gives us that confidence in the second half for software.

James Fish (Managing Director)

Got it. Thanks, guys.

Operator (participant)

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

François Locoh-Donou (President and CEO)

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.

Operator (participant)

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