Q3 2024 Summary
Published Jan 6, 2025, 8:15 PM UTC- F5 is uniquely positioned to benefit from the increasing complexity of application environments, as customers deploy applications across multiple infrastructure environments, leading to massive complexity that F5's platform can address. This trend is expected to accelerate with AI, which further distributes applications and components, playing to F5's strengths in securing and optimizing applications regardless of location.
- F5's unmatched flexibility and choice in offering both hardware and software solutions allows them to meet customers where they are, differentiating them from competitors. This approach is expected to drive continued growth, with expectations of a return to double-digit software growth next year.
- F5 is successfully cross-selling its Distributed Cloud security solutions, both displacing competitors and capturing greenfield opportunities. With their SaaS solution, customers can consolidate vendors, reduce complexity, and achieve consistent security across all environments, leading to increased traction and new customer acquisitions.
- F5 has faced increased competition leading to poaching of key sales staff by competitors, as acknowledged in their earnings call.
- The shift from hardware to software has been slower than expected, with many customers still preferring hardware solutions, potentially impacting software growth.
- The company's Bot Manager product has faced challenges, with customers seeking lower-cost alternatives and integrated platform solutions, indicating pressure on this segment.
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Software Growth and Outlook
Q: What drove the strong software growth this quarter?
A: Our software growth was stronger than expected due to robust new business activity, which lifted us to the top end of our guidance. While we typically update ARR metrics at the end of Q4, we can say that subscription renewals remain strong with some expansion, and our Net Revenue Retention (NRR) remains world-class. -
Hardware Outlook and AI Catalysts
Q: Is hardware demand stabilizing, and what is the outlook?
A: Hardware has stabilized over the past several quarters as customers have digested inventory, and we expect hardware next year will certainly not decline and could possibly be up relative to this year. This is driven by a strong pipeline of tech refresh activity and new demand from service providers and enterprises building large AI factories, where our BIG-IP solutions improve efficiencies. -
Fiscal 2025 Guidance and Margins
Q: Should we expect the same growth rates for fiscal '25?
A: We are still planning for mid-single-digit growth off a flat to low single-digit fiscal '24, and we will deliver 35% operating margin off that revenue number. We expect more of the growth to come in the back half of fiscal '25, driven by subscription renewals and new business activity. -
Return to Double-Digit Software Growth
Q: Will software growth accelerate in the next upgrade cycle?
A: We anticipate returning to double-digit software growth next year and see catalysts in both hardware and software. We don't force customers to adopt one delivery model over another; we meet them where they are to modernize their environments. -
Bot Manager Challenges and Platform Transition
Q: How are you addressing challenges with Bot Manager?
A: We've been challenged with our high-end Bot Manager point solution, as some customers seek lower-end solutions or platform bundles. We're integrating our sophisticated bot technology into our F5 Distributed Cloud platform and now offer bot protection as part of a bundle, leading to the number of WAAP-as-a-service customers doubling over the last year. -
AI Opportunities and API Security
Q: How does enterprise AI adoption present opportunities for F5?
A: AI presents opportunities in cost and security. Our high-capacity load balancing solutions increase efficiency in AI factories, reducing the cost per query. In the long term, securing AI models is key, and we believe securing APIs is essential. We've invested significantly in API security, seeing a tripling of API security customers year-over-year. -
Customer Incentives on Multiyear Maintenance
Q: Why are you no longer incentivizing multiyear maintenance agreements?
A: Given our very high attach rates and quality of service, we don't need to offer higher discounts to lock in customers for multiyear maintenance. We are a cash-generative company, and the service and products themselves retain customers without the need for upfront cash incentives. -
Impact of Competitor Poaching and Sales Attrition
Q: Are competitors poaching your sales staff, affecting staffing levels?
A: Our attrition in sales is well below industry norms. We have an extraordinary sales team, and while competitors may try to poach individuals, it would take much more to replicate our 20-plus years of enterprise go-to-market experience. -
Impact of Broadcom’s VMware Pricing Adjustments
Q: Is Broadcom's VMware pricing affecting your business?
A: Anecdotally, a few customers have reallocated budgets due to VMware's price increases, but we haven't seen it as a significant trend across our customer base. -
Cross-Selling Distributed Cloud Solutions
Q: Are you displacing other vendors with your Distributed Cloud solutions?
A: It's both. About two-thirds of our Distributed Cloud customers are existing F5 customers, and one-third are new logos. Sometimes we displace SaaS players as customers consolidate to our platform for consistent security across environments; other times, we address greenfield opportunities where customers lacked a dedicated solution.