Q1 2025 Summary
Published Feb 7, 2025, 7:58 PM UTC- F5 expects double-digit growth in hardware this year, driven by a strong pipeline on refresh activity and significant competitive displacements, indicating robust revenue growth prospects.
- F5 is seeing significant opportunities in AI across multiple areas, including moving data securely and at speed, security in inferencing, and load balancing for AI factories, with early customer wins and a partnership with NVIDIA, which could drive future growth.
- The company's investments in next-generation software and hardware for hybrid multi-cloud environments are yielding competitive advantages, leading to sustainable growth across their software, hardware, and services businesses, as customers recognize the need to invest in solutions that address hybrid multi-cloud complexity.
- The exceptional software revenue growth in Q1 was significantly driven by large subscription renewals leading to upfront revenue recognition, which may not be sustainable and could result in lumpy software revenue in future quarters. The company acknowledged that it would be premature to assume the same level of expansion in the second half of the year.
- The strong 18% year-over-year growth in systems revenue was partially due to pull-in of orders ahead of a mid-single-digit price increase effective January 1. This pull-in might temper systems demand in future quarters, potentially impacting revenue growth.
- The company maintains that over time, customers will move towards adopting more software solutions, and the trajectory of the hardware business is expected to decline. Without sufficient software revenue growth to offset this decline, overall growth may be negatively impacted.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +11% | Stable IT spending and strong software renewals lifted overall revenue compared to slower growth in the prior period, which was partially elevated by backlog fulfillment. This sustained momentum in Q1 2025 reflects broad-based product strength across both Systems and Software. |
Products | +20% | An uptick in customer refresh activity and competitive wins improved Products growth. In the previous year, reduced Systems demand moderated growth, but a shift toward subscription-based offerings supported the rebound in Products during Q1 2025. |
Systems | +18% | Technology refresh cycles kicked in, driving a recovery from the prior year’s reduced sales. Stable macro conditions and heightened refresh demand led to stronger Systems revenue in early FY 2025 compared to the backlog-driven revenue dynamic in the previous period. |
Software | +22% | Subscription renewals and expansions spurred Software growth, exceeding the prior year’s pace. Increased visibility from multi-year renewal cycles and the shift away from hardware-based solutions contributed to continued double-digit increase in FY 2025. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q2 2025 | no prior guidance | $705M to $725M | no prior guidance |
Non-GAAP Gross Margin | Q2 2025 | no prior guidance | 82.5% to 83% | no prior guidance |
Non-GAAP Operating Expenses | Q2 2025 | no prior guidance | $362M to $374M | no prior guidance |
Share-Based Compensation | Q2 2025 | no prior guidance | $58M to $60M | no prior guidance |
Non-GAAP EPS | Q2 2025 | no prior guidance | $3.02 to $3.14 | no prior guidance |
Revenue Growth | FY 2025 | 4% to 5% | 6% to 7% | raised |
Software Revenue Growth | FY 2025 | upper single digits | at least 10% | raised |
Non-GAAP Gross Margin | FY 2025 | 83% to 84% | 83% to 84% | no change |
Non-GAAP Operating Margin | FY 2025 | ~35% | ~35% | no change |
Non-GAAP Effective Tax Rate | FY 2025 | 21% to 23% | 21% to 23% | no change |
Non-GAAP Earnings Growth | FY 2025 | 5% to 7% | 6.5% to 8.5% | raised |
Share Repurchases | FY 2025 | at least 50% of annual free cash flow | at least 50% of annual free cash flow | no change |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q1 2025 | $705 million to $725 million | $766.0 million | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Hardware refresh cycles and strong pipeline | • Q4 2024: Mid-single-digit hardware growth expected, aided by tech refreshes and competitive takeouts. <br>• Q3 2024: Stabilizing hardware demand; strong service provider refresh pipeline. <br>• Q2 2024: Pipeline strong, but hardware spending cautious amid macro concerns. | Seeing robust demand, with customers moving from “sweating assets” to hardware refreshes, driving double-digit growth. | Sentiment improved from cautious to double-digit growth expectations. |
Shift from hardware to software and subscription-based revenue | • Q4 2024: FY ’24 software up 11%, with 85% from subscriptions; recurring revenue 76% of total. <br>• Q3 2024: Subscription renewals remained strong, with software representing majority of product revenue. <br>• Q2 2024: 20% total software growth, 88% from subscriptions, hardware revenue down. | Emphasized ongoing transition, with Q1 software revenue up 22% and subscription-based software revenue up 30%. | Consistent growth in software and subscriptions; major pivot away from hardware reliance. |
AI-driven opportunities | • Q4 2024: Collaboration with NVIDIA for high-performance ADC on AI infrastructure; emphasis on security for AI inferencing. <br>• Q3 2024: Positioned to optimize GPU clusters and secure AI APIs; early deployments in automotive use case. <br>• Q2 2024: Highlighted secure multi-cloud networking and API security for AI workloads; still early in adoption. | Focus on AI factory load balancing, data movement, and API security; partnership with NVIDIA for traffic management. | Growing momentum; still early-stage, but could significantly impact future growth. |
Hybrid multi-cloud complexity solutions | • Q4 2024: Solutions extend across public clouds, edge, and on-prem, reducing complexity for multi-environment users. <br>• Q3 2024: Portfolio of BIG-IP, NGINX, and Distributed Cloud aims to simplify hybrid deployments. <br>• Q2 2024: Emphasis on streamlining environments; single platform approach for security and networking. | Positioned to “tame the ball of fire,” offering converged solutions across hardware, software, and SaaS to simplify operations. | Consistently highlighted as a core differentiator; central to long-term strategy. |
Software revenue volatility from large subscription renewals | • Q4 2024: Timing of large renewals creates variability; renewal base heavier in 2H. <br>• Q3 2024: Renewals strong, but no direct mention of volatility. <br>• Q2 2024: Renewals expected to ramp in 2H; three-year cadence drives lumpiness. | Acknowledged lumpiness due to upfront revenue recognition (63% of a 3-year deal), causing quarter-to-quarter swings. | Ongoing lumpiness remains a factor in quarterly software results. |
Competitive displacements and market share gains | • Q4 2024: Driving growth via competitive takeouts in systems revenue. <br>• Q3 2024: Displacements in SaaS security and greenfield API security opportunities. <br>• Q2 2024: Wins in ADC space (hardware + software), displacing incumbent vendors. | Record displacements, especially in ADC hardware; strong pipeline for both hardware and distributed cloud security. | Steady gains across hardware and software, reinforcing market leadership. |
Churn in high-end bot management | • Q4 2024: High-end bot defense churn offset some SaaS growth. <br>• Q3 2024: Noted some churn as customers chose lower-cost or integrated solutions. <br>• Q2 2024: Mentioned challenges at high-end of bot market but limited detail. | No mention in Q1 2025. | No longer mentioned after Q4 2024, indicating reduced focus or improved retention. |
Sales talent poaching | • Q4 2024: No mention. <br>• Q3 2024: CEO noted below-industry sales attrition; minimal impact from poaching. <br>• Q2 2024: No mention. | No mention in Q1 2025. | No longer mentioned after Q3 2024, suggesting stable salesforce retention. |
Budget reallocation away from F5 due to vendor price changes | • Q4 2024: No mention. <br>• Q3 2024: Anecdotal budget shifts due to VMware price adjustments, but not widespread. <br>• Q2 2024: No mention. | No mention in Q1 2025; small pull-in of demand before price increases, but not material. | Topic not resurfacing; prior mentions suggest limited impact. |
Evolving sentiment on hardware demand | • Q4 2024: Improved outlook to mid-single-digit growth in FY ’25. <br>• Q3 2024: Stabilization in hardware demand, optimism for FY ’25. <br>• Q2 2024: Still cautious on hardware spending. | Now forecasting double-digit hardware growth driven by refreshes, AI interest, and expansions. | Gradual shift from caution to strong growth prospects. |
Potential flattening or lumpiness in new software revenue | • Q4 2024: New software expected to be “flattish” in FY ’25; renewals heavily weighted to second half. <br>• Q3 2024: New software outperformed expectations. <br>• Q2 2024: New subscriptions flat, but renewals strong. | Cited strong expansion but noted caution about 2H due to large deal timing. | Continues to show quarter-to-quarter variability tied to large deals. |
Risk of increased AI workload management competition | • Q4 2024: Acknowledged potential entrants but stressed unique Layer 4-7 expertise and NVIDIA collaboration. <br>• Q3 2024: Focused on F5’s technology-agnostic approach and early AI customer wins. <br>• Q2 2024: No direct mention of competitive risk; highlighted F5’s AI-ready platform. | No explicit mention of competitive threats; F5 emphasized differentiation in AI, citing strong momentum. | F5 remains confident despite acknowledging more players may emerge. |
Long-term AI revenue potential | • Q4 2024: Significant revenue from AI expected in FY 2026 and beyond. <br>• Q3 2024: No specific projections; sees 1-2 years before AI at scale. <br>• Q2 2024: No long-term forecast; AI adoption expected to drive new use cases. | Not quantified for FY 2026+; company sees AI as still early and fast-evolving. | Potentially large impact starting FY 2026+, but still in early phases. |
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Sustainability of Hardware Growth
Q: Can you discuss the sustainability of hardware systems growth?
A: Management expects a strong year for hardware, projecting double-digit growth driven by a robust pipeline of refresh activity. Customers who had been sweating assets are now upgrading due to application capacity growth and deployments in hybrid multi-cloud environments. Significant competitive displacements and investments in next-generation hardware are also contributing to this growth.
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AI Business Opportunities
Q: What are the key opportunities for F5 in AI?
A: F5 sees three main AI opportunities:
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High-performance data delivery to and from data stores during training and inferencing, which is where the majority of deals have been won, particularly with large enterprises building AI factories across Europe, Asia, and North America.
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Security in inferencing using API security and discovery solutions, currently in the early stages.
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Load balancing traffic for AI factories, including partnerships like the one with NVIDIA for intra-cluster traffic management. This opportunity is expected to develop longer term.
F5's immediate opportunity is largely in inferencing for large enterprises, unaffected by concerns about AI compute intensity for training models.
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Software Expansion and Second Half Outlook
Q: How are software expansion rates affecting the outlook for the second half?
A: A strong Q1 featured exceptional expansion rates, including a large eight-figure deal where a customer converged multiple security solutions onto F5's platform. While this trend is positive, management remains cautious about assuming similar expansion rates in the second half due to the concentration among a few large customers and the early stage of the fiscal year.
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Distributed Cloud Business Growth
Q: Can you provide an update on the distributed cloud business?
A: The distributed cloud business, part of F5's SaaS and managed services portfolio with approximately $180 million in ARR at the end of fiscal 2024, surpassed 1,000 customers this quarter. The majority are large enterprises, with two-thirds being existing F5 customers and one-third net new. Over 20% of F5's top 1,000 customers now use distributed cloud services, reflecting the trend of embracing hybrid multi-cloud environments.
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Triggers for Hardware Refreshes
Q: What is triggering the current wave of hardware refreshes?
A: The refresh activity is driven by enterprises revitalizing data center capacity in preparation for AI and embracing hybrid multi-cloud as their long-term operating environment. Additionally, F5-specific factors include customers who were cautious in recent years now upgrading due to application and capacity growth, and upcoming end-of-support dates in 2026 prompting proactive refreshes.
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Supply Chain and Fulfillment
Q: Are there any constraints in fulfilling hardware demand?
A: Management feels confident about fulfilling near-term hardware demand, with no real constraints currently seen. F5 has largely moved to newer generation platforms and developed a more resilient supply chain during the supply chain crisis.
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Seasonality and Back-Half Loaded Year
Q: How are you thinking about seasonality and the back-half loaded year?
A: Despite a strong Q1 driven by tech refresh and hybrid multi-cloud demand, the large renewal base for the second half remains unchanged. Expansion rates have been exceptional, but management is not assuming these rates will continue to increase in the second half due to early concentration in a few large customers. They will continue to monitor expansion and engage closely with customers.