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    F5 Inc (FFIV)

    Q1 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$160.71October 1, 2023
    Final Price$178.98December 31, 2023
    Price Change$18.27
    % Change+11.37%

    What went well

    • F5 is gaining market share due to a strong competitive position and disruptions among competitors, leading to increased customer wins and migrations from competitors to F5.
    • F5 is well-positioned to benefit from the upcoming enterprise AI adoption, as AI workloads rely heavily on APIs, and F5 excels in API security and distributed architectures, making it an enabler for AI deployment.
    • Demand is meaningfully up compared to last year across geographies and verticals, with improving predictability and stability in customer spending, along with an uptick in pipeline and tech refresh activities, indicating a positive outlook for F5.

    What went wrong

    • F5 expects its SaaS and managed services Annual Recurring Revenue (ARR) to remain flat over FY'24 and FY'25, limiting growth in this area.
    • F5 faces strong competition from more mature CDN companies like Akamai and Cloudflare in the SaaS market, where F5 is a newer, less established player.
    • F5 is retiring products worth $65 million, posing risks if customers do not migrate successfully to new platforms, potentially impacting future revenue.

    Q&A Summary

    1. Demand Trends and Revenue Outlook
      Q: How are revenue trends excluding backlog headwinds?
      A: Management noted that excluding backlog headwinds from a year ago, they saw mid-single-digit growth. Demand is meaningfully up in the first half of '24 compared to the first half of '23. This increase is broad-based across all major theaters and industry verticals.

    2. Software Performance and Guidance
      Q: Is software growth outlook still flat to modestly up?
      A: Management reaffirmed that software growth is expected to be flat to modestly up for fiscal year '24. They are encouraged by Q1 performance but are not changing the outlook. The strong perpetual sales in Q1 were due to specific customer preferences and may not repeat next quarter.

    3. Competitive Position and Market Share
      Q: How is F5's competitive position and opportunity to gain share?
      A: F5 feels they are in a strong and growing competitive position, seeing increased inbound interest from customers and partners. They note that three competitors have undergone change of control, leading to customer interest shifting to F5. Their investments in rSeries and next-generation hardware and software are creating an exciting roadmap for customers.

    4. Operating Margin and One-offs
      Q: Were there any one-off items affecting operating margins in Q1?
      A: Operating margin outperformance in Q1 was partly due to expenses pushed into Q2 or beyond. They also benefited from tax impacts in the quarter. They expect seasonal declines in Q2 due to tax resets and marketing event expenses.

    5. AI Contribution to Growth
      Q: What is the expected impact of AI on future growth?
      A: Management is starting to see initial AI use cases but believes enterprise AI deployments are 12–24 months away. F5 is well-positioned as AI workloads heavily use APIs, presenting significant opportunity in API security. The distributed nature of AI workloads aligns with F5's ability to serve applications anywhere.

    6. Customer Migration Feedback
      Q: How is customer feedback on migrating to Distributed Cloud Services?
      A: Early migrations from Silverline to Distributed Cloud Services have gone very well, with customers being very happy with the outcome. It is still early days in the process.

    7. Service Provider Demand and Wins
      Q: What are the trends in service provider spending?
      A: Service providers are generally continuing to sweat their assets and suppress CAPEX. However, F5 secured a significant win with a North American service provider for their 5G architecture, reflecting benefits from investments made over the past four years.

    8. Global Services Revenue Growth
      Q: What drove the strong growth in global services revenue?
      A: Global services revenue grew 7%, driven by high maintenance attach and effects from a prior price increase. They are not changing their outlook for low single-digit growth for the full year.

    9. Enterprise Behavior and Application Growth
      Q: Are enterprises increasing application development spending?
      A: Enterprises are focusing on application portfolio rationalization, reducing non-critical apps while traffic on important apps continues to grow. F5 benefits as applications are distributed across multiple environments.

    10. rSeries Upgrade Cycle
      Q: How is the upgrade cycle from iSeries to rSeries progressing?
      A: Adoption of rSeries is strong, with over 50% of appliances shipped now being rSeries. Majority of use cases are now covered, and the pipeline of tech refresh is increasing.

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