FFIV Q3 2025: hardware growth from cloud & AI; Q4 margins to improve
- Secular Hardware Tailwinds: Durable growth is driven by strong demand from non–tech-refresh components, as customers increasingly invest in hybrid multi cloud architectures, data center modernization, and AI readiness. This diversification in hardware demand indicates a sustainable, non‐cyclical growth path.
- Robust AI Opportunity: F5’s integration of its platform with NVIDIA BlueField three DPUs and early, positive proof-of-concept outcomes highlight its strong positioning in the fast-growing AI data delivery and AI security markets, setting the stage for significant future revenue.
- Solid Software Renewal and Expansion Momentum: With a strong renewal base and increasing consumption that drives expand and renew opportunities, the company's software business is expected to deliver stable, recurring revenue growth alongside its platform consolidation strategy.
- Reliance on Legacy Product Refresh: A significant portion of hardware revenue is tied to tech refresh, with about two-thirds of systems revenue attributed to legacy product replacement. This dependency leaves future growth vulnerable if the pace of refresh slows or if customers delay upgrading their legacy I Series and Viprion products.
- Uncertainty in Monetizing AI Innovations: Although the company is investing in AI data delivery and AI security, current AI-related orders remain small, and a substantial part of this revenue comes from less quantifiable “shadow AI” spend. This early-stage positioning creates uncertainty regarding how quickly and significantly AI initiatives will contribute to overall growth.
- Volatility in Service Provider Revenue: The service provider segment is inherently lumpy and driven by sporadic, project-specific demand. Such unpredictability can lead to revenue variability, especially if industry trends like the anticipated 5G takeoff or regulatory pressures do not materialize as expected.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q4 2025 | no prior guidance | $780 million to $800 million, implying 6% growth | no prior guidance |
Non-GAAP Gross Margin | Q4 2025 | no prior guidance | 84% to 84.5% | no prior guidance |
Non-GAAP Operating Expenses | Q4 2025 | no prior guidance | $376 million to $388 million | no prior guidance |
Share-Based Compensation Expense | Q4 2025 | no prior guidance | $57 million to $59 million | no prior guidance |
Non-GAAP EPS | Q4 2025 | no prior guidance | $3.87 to $3.99 per share | no prior guidance |
Revenue Growth | FY 2025 | 6.5% to 7.5% | approximately 9% | raised |
Non-GAAP Gross Margin | FY 2025 | 83% to 84% | 83% to 84% | no change |
Non-GAAP Operating Margin | FY 2025 | at or around 35% | around 35% | no change |
Non-GAAP Effective Tax Rate | FY 2025 | 20% to 22% | 18.5% to 19.5% | lowered |
EPS Growth | FY 2025 | 8% to 10% | 14% to 15% | raised |
Share Repurchases | FY 2025 | at least 50% of annual free cash flow | at or above 50% of free cash flow | no change |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Hardware Revenue Growth | Q2 2025: Grew 27% year-over-year driven by tech refresh and data center modernization ( ); Q1 2025: Expected double‐digit growth with strong pipeline and refresh momentum ( ) | Q3 2025: Achieved 39% year-over-year growth, with a dominant tech refresh contribution and outlook for more modest growth in FY 2026 ( ) | Continued strong performance with a higher growth rate in Q3, though future growth rates are expected to moderate. |
Refresh Cycle Dynamics | Q1 2025: Emphasized extended refresh cycles due to end-of-support for legacy systems ( ); Q2 2025: Refresh cycle driven by tech refresh as the top driver with plans extending into 2026 ( ) | Q3 2025: Over half of the installed base remains legacy; robust refresh activity expected to continue with a tapering beyond FY2027 ( ) | Consistent attention with strong momentum; messaging now includes plans for a tapering long-term cycle. |
AI Initiatives | Q1 2025: Framed AI as a strategic imperative, highlighting secure data delivery, AI inferencing, and load balancing ( ); Q2 2025: Launched an AI Gateway and addressed key AI use cases like data delivery and security ( ) | Q3 2025: Expanded focus on AI with initiatives including an AI Gateway platform, integration with NVIDIA, and dedicated efforts in AI data delivery and security, alongside emerging uncertainties about adoption pace ( ) | Increasing investment and detailed focus on AI, with a more nuanced view that blends optimism with cautious uncertainty. |
Software Renewal-Driven Growth | Q1 2025: Renewal-driven growth with strong expansion in large multiyear deals despite revenue recognition lumpiness ( ); Q2 2025: Heavy reliance on renewals with visibility into a robust renewal base even as subscription revenue remained flat ( ) | Q3 2025: Noted healthy expansion in the renewal base, with subscription revenue growing 19% year-over-year to $185 million, while concerns about headwinds from flat FY2023 sales continue ( ) | Renewal-driven growth remains a core driver, with consistent visibility and expansion, although caution persists around new business opportunities and legacy sales challenges. |
Hybrid Multi-Cloud Architectures and Data Center Modernization | Q1 2025: Positioned as a strategic focus with emphasis on modernizing data centers and supporting AI on a consolidated platform ( ); Q2 2025: Highlighted the role in enabling hybrid multi-cloud deployments and data center overhauls with durable tailwinds ( ) | Q3 2025: Continued strong customer adoption in hybrid multi-cloud environments leading to robust hardware growth and modernization efforts, further strengthened by data center capacity investments ( ) | Steady and positive sentiment with consistent emphasis across periods, now reinforced by strong hardware performance and integrated modernization initiatives. |
Platform Consolidation and Competitive Displacement Strategies | Q1 2025: Focused on consolidating point security products onto a unified platform with record competitive displacements ( ); Q2 2025: Emphasized integration of product families into a comprehensive ADSP and success in both new and existing account displacements ( ) | Q3 2025: Continued emphasis on a unified platform that integrates hardware, software and SaaS, driving competitive displacements and consolidation of customer spend ( ) | Ongoing strategy with reinforced messaging and execution, reflecting seamless consolidation and robust competitive displacement. |
Service Provider Revenue Volatility in Project-Driven Segments | Not mentioned in Q1 or Q2 earnings calls (N/A) | Q3 2025: Addressed as a lumpy, project‐driven segment with volatility linked to specific carrier projects and the slower-than-expected 5G takeoff ( ) | A new topic in Q3 that introduces caution regarding the service provider segment’s future performance. |
Pricing Strategy and Order Pull-In Effects on Future Demand | Q1 2025: Discussed mid‐single-digit price increases coupled with modest order pull-in effects impacting early results ( ); Q2 2025: Detailed 5% portfolio-wide price increases with clarification that no significant pull-in occurred in Q2 ( ) | Q3 2025: Not mentioned in the earnings discussion (N/A) | Previously a focus area, but its absence in Q3 suggests diminished emphasis or a resolution of prior concerns. |
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Revenue Dynamics
Q: Hardware/software trends impact revenue?
A: Management highlighted that hardware benefited from strong tech refresh and secular trends like hybrid cloud and AI, while software growth remains robust through renewals and expanding consumption, with no tariff impacts noted. -
Margin Dynamics
Q: Why were margins at lower range?
A: CFO explained that margins came in at the lower end mainly because high-performance, FIPS-compliant deals in the systems segment slightly reduced margins, though Q4 guidance shows an expected improvement. -
Legacy Refresh & AI Impact
Q: How do legacy refresh and AI affect hardware?
A: Management noted that roughly two-thirds of hardware is driven by tech refresh while the remaining third is fueled by non-refresh trends, including initial, modest AI initiatives—both direct and “shadow” AI spending—as part of sustained growth. -
New Technology Products
Q: What’s the status on NVIDIA DPU and AI gateway?
A: The company confirmed that the NVIDIA DPU solution is now GA with promising proof-of-concept feedback, and the emerging AI gateway platform is already undergoing multiple POCs to secure AI traffic at layer seven, signaling future market opportunities. -
Software Revenue Outlook
Q: Will software revenue accelerate next year?
A: CFO expects mid-single digit growth in FY26 driven by strong renewal and expansion dynamics, with growth likely accelerating in FY27 as the renewals from the flat FY23 base begin to deliver enhanced consumption. -
Pricing & Tech Refresh
Q: Updates on pricing strategy and tech refresh scope?
A: Management clarified that tech refresh refers to replacing legacy F5 products, and they have steadily phased in modest price increases that have met with reasonable customer acceptance, especially compared to more aggressive competitor moves.
Research analysts covering F5.