F5, Inc. (FFIV) Earnings

Management highlights

**Core Strategic Alignment** - F5 aligns with three durable secular megatrends: accelerating hybrid multi-cloud adoption, expanding application-layer threat landscape, and the AI inference inflection, creating sustained demand for the company's unified application delivery and security platform - F5 holds a strategic position at the entry point for all critical applications and APIs, simplifying security and delivery across hybrid multi-cloud environments, which grows more valuable as workloads and traffic become increasingly distributed **Quarterly Operational Wins** - Secured multiple large customer wins across growth segments: expanded footprint at a large energy utility that repatriated cloud workloads to on-premise infrastructure; delivered a sovereign-by-design multi-cloud architecture for a European government agency; displaced an incumbent at a Fortune 100 tech provider for global AI data delivery infrastructure - Won multiple security platform consolidation deals, displacing competing point tools at a telecommunications provider and a multinational healthcare company, delivering unified web application/API protection, DDoS mitigation, and bot defense while improving security outcomes and lowering operational costs - Saw 50% quarter-over-quarter growth in cumulative total customer count for direct AI use cases, with notable wins in AI data delivery, AI runtime security, and AI factory load balancing across enterprise, service provider, and sports league customers - AI security customer count grew 100% quarter-over-quarter, as customers accelerated infrastructure upgrades to defend against AI-driven attacks **Product Innovation Highlights** - Launched AI-powered distributed cloud WAF in Q2 FY26; by Q3, 15% of distributed cloud WAF customers have adopted the capability, with 75% running it in blocking (not just monitor) mode, and the tool has already stopped zero-day attacks without requiring new static signatures - Shifted to a monthly (from quarterly) hardened software release cadence, using frontier AI models to accelerate internal vulnerability discovery and remediation, getting security fixes to customers faster - Introduced new fleet management capabilities in F5 Insight to give customers full visibility into software versions, security posture, and update readiness across their entire F5 estate, with guided workflows to simplify upgrades and patching; early uptake has been strong - Completed an acquisition of Short Path AI in Q3 to expand AI discovery capabilities for AI security, and launched a consolidated AI security platform to meet growing customer demand for unified AI protection

Guidance

- Full year FY26 revenue growth guidance was raised to 9-10%, up from the prior 7-8% guidance; full year guidance continues to call for mid-single-digit software revenue growth, double-digit systems revenue growth, and low single-digit services revenue growth - Q4 FY26 revenue is expected in a range of $870 million to $890 million, representing ~9% year-over-year growth at the midpoint - Q4 non-GAAP gross margin guidance was improved to 83-84%, from prior estimates, driven by a more favorable product mix toward higher-margin high-performance systems and lower-than-expected component cost increases - FY26 non-GAAP gross margin is expected in a range of 83.5-84%, with non-GAAP operating margin expected between 34.5-35.5% - FY26 non-GAAP effective tax rate is projected to be 18-19%, adjusted lower following discrete tax benefits realized in Q3 - FY26 non-GAAP EPS guidance was raised to $17.21-$17.33, up from the prior range of $16.25-$16.55 - Full-year FY26 share repurchases are expected to equal at least 50% of annual free cash flow - FY27 gross margin guidance is maintained at 80-82%, as management retains a buffer amid dynamic pricing for memory and storage components; F5 expects software growth to reaccelerate to solid double-digits in FY27 following a multi-year transition of legacy SaaS offerings

Segment performance

Total Q3 FY26 revenue grew 11% year-over-year to $865 million, with 54% product revenue and 46% services revenue. Product revenue totaled $463 million, up 19% YoY; services revenue was $402 million, up 3% YoY. Systems revenue reached $240 million, up 32% YoY; software revenue was $223 million, up 7% YoY. Subscription-based software revenue hit $201 million, up 9% YoY, representing 90% of total software revenue; perpetual license software revenue was $22 million, down 4% YoY. Recurring revenue contributed 69% of total Q3 revenue. By region: Americas revenue grew 11% YoY, representing 55% of total revenue; EMEA revenue grew 27% YoY, representing 30% of total revenue; APAC revenue fell 11% YoY versus a strong year-ago quarter, representing 15% of total revenue. By vertical, enterprise customers contributed 71% of Q3 product bookings; government customers represented 19% of product bookings (7% from U.S. Federal); service providers contributed 11% of Q3 product bookings.

Risks & headwinds

- Memory and storage component pricing remains dynamic and uncertain, creating potential gross margin pressure for FY27 that management has incorporated into current guidance - AI-driven attacks have compressed the window between vulnerability discovery and exploitation, forcing enterprises to rework security strategies and creating pressure on F5 to continuously accelerate security innovation and delivery - Geographic revenue volatility can occur in the near term due to lags between order booking and product shipment, leading to quarterly reported growth rates that do not reflect underlying demand trends - The exact magnitude of long-term AI-driven demand growth for F5's offerings is still evolving, with current demand signals still early-stage for some AI use cases

Analyst Q&A

• Q: Can we expect AI-related revenue to grow in line with the 50% QoQ growth in AI customer count? Also, what is driving near-term gross margin improvements and why maintain FY27 gross margin guidance? /

  A: Customer growth does not directly equate to equivalent revenue growth; the company passed the $50 million direct AI revenue mark and will update that number at year-end. Direct AI momentum is strong, with 100% QoQ growth in AI security customers, while indirect AI demand drives strong ADC hardware growth (over 30% YoY YTD) from increased inference traffic. Gross margin improvements stem from higher adoption of higher-margin high-performance systems and lower-than-expected component costs from multi-vendor sourcing. Management maintains FY26 guidance because the component pricing environment remains too dynamic to update at this time.

• Q: What is driving the shift toward higher-performance systems, how sustainable is this mix, and when will software growth return to double-digits? /

  A: The shift to higher-performance systems is driven by hybrid cloud expansion, digital sovereignty initiatives, and AI-driven traffic growth, a trend management expects to continue, as it is still early in this cycle. The software business is progressing in line with full-year expectations, held back by a weaker renewal cohort from 2023. F5 has completed its transition of legacy SaaS offerings, so stronger renewal cohorts from 2024 will drive a return to solid double-digit software growth in FY27.

• Q: How is the I-Series to R-Series refresh progressing, and what impact have AI and the Mythos vulnerability event had on the business? /

  A: The refresh is proceeding orderly and in line with expectations, with end-of-support in Q2 FY27 expected to accelerate migration over the next few quarters. A key positive is that expansion at the time of refresh continues to improve, alongside strong new business outside of refresh. The Mythos event has driven multiple tailwinds: it pushed customers to address aging technology debt, accelerating the refresh, created strong demand for runtime security (F5's core position) because patching can no longer keep up with attack speed, and drove extremely high uptake of F5's new AI-powered WAF, with hundreds of customers already adopting it just months after launch.

• Q: What is the adoption driver for F5's AI factory load balancing, and when will this opportunity scale with large cloud players? /

  A: F5's load balancing delivers 30-50% more tokens per GPU, reducing per-token costs, which creates strong early traction with cost-conscious sovereign AI factory customers (mostly EMEA-based telcos). Hyperscaler and neoscaler AI factories currently rent GPUs by the unit, so they have less near-term incentive to optimize token output per GPU. Management expects this will change as neoscalers target enterprise customers and AI-native companies, where token economics will become a larger competitive priority.

• Q: How much of the 32% YoY systems growth is cyclical refresh versus secular demand drivers? /

  A: A portion of the strong growth is cyclical, tied to the ongoing I-Series refresh cycle, which aligns with management's long-term guidance of mid-single-digit hardware growth over the next three years. There are multiple durable secular drivers layered on top of the cyclical refresh: growing digital sovereignty demand leading to reinvestment in on-premise data centers, increased AI-driven traffic that requires higher capacity hardware, and strong competitive displacement gains driven by F5's hardware innovation when competitors pulled back. These secular drivers led F5 to upgrade its long-term hardware outlook from mid-single-digit decline to growth, and the trends are expected to persist.