Good afternoon, and welcome to the F5 Fourth Quarter Fiscal 2025 Financial Results Conference Call. [Operator Instructions] Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. We're here with you today to discuss our fourth quarter and fiscal year 2025 financial results. François Locoh-Donou, F5's President and CEO; and Cooper Werner, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the F5 executive team are also here to answer questions during the Q&A session. Today's press release is available on our website at f5.com where an archived version of today's audio will be available through January 27, 2026. We will post the slide deck accompanying today's webcast to our IR site following this call. To access the replay of today's webcast by phone, dial (877) 660-6853 or (201) 612-7415 and use meeting ID 13756255. The telephonic replay will be available through midnight Pacific Time, October 28, 2025. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements which include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today's discussion. Please see our full GAAP to non-GAAP reconciliation in today's press release and in the appendix of our earnings slide deck. Please note that F5 has no duty to update any information presented in this call. I'll now turn the call over to François. François Locoh-Donou: Thank you, Suzanne, and hello, everyone. We delivered exceptional fiscal year 2025 results exceeding $3 billion in revenue and $1 billion in operating profit…

Thank you, François, and hello, everyone. I will review our Q4 results and some selected full fiscal '25 results before I elaborate on our outlook for FY '26 and Q1. We delivered a strong Q4 growing revenue 8% to $810 million with a mix of 49% global services revenue and 51% product revenue. Global services revenue of $396 million grew 2% year-over-year while product revenue totaled $414 million, increasing 16% year-over-year. Systems revenue totaled $186 million, up 42% over Q4 of FY '24, driven by tech refresh and data center modernization, direct and indirect AI use cases as well as competitive takeouts. Our software revenue of $229 million was up slightly against an exceptionally strong Q4 of FY '24. Perpetual license software totaled $30 million, up 25% year-over-year. Subscription-based software declined 3% year-over-year to $198 million, reflecting the transition of our legacy SaaS and managed service revenue offerings and to a lesser extent customers' preference for hardware-based solutions for certain use cases, a trend which emerged over the course of FY '25. Revenue from recurring sources contributed 72% of our Q4 revenue. Our recurring revenue consists of our subscription-based revenue and the maintenance portion of our global services revenue. Shifting to revenue distribution by region. Our teams drove growth across all theaters. Revenue from the Americas grew 7% year-over-year, representing 57% of total revenue. EMEA delivered 7% growth, representing 26% of revenue and APAC grew 19%, representing 17% of revenue. Looking at our major verticals. Enterprise customers represented 73% of Q4's product bookings. Government customers represented 19% of product bookings including 6% from U.S. Federal. Finally, service providers represented 8% of Q4 product bookings. Our continued financial discipline contributed to our strong Q4 operating results. GAAP gross margin was 82.2%. Non-GAAP gross margin was 84.3%, an increase of 138 basis…

[Operator Instructions] Our first question comes from the line of Meta Marshall with Morgan Stanley.

Can you hear me?

We can.

Sorry, there was music for a second. Just a question in terms of what form of kind of conservatism have you put into the estimates? I guess I'm just trying to get a sense of are you accommodating customers through discounting? Is this you're pushing off -- maybe people are pushing off purchasing decisions while they're handling kind of servicing or upgrading incidents? Or are you having to give other incentives to kind of upgrade boxes? Just trying to get a sense of kind of what form that kind of customer conservatism is taking? And then maybe just a second question. Just as you think about kind of the underlying growth of the systems business, like any way to contextualize how much of fiscal '25 growth was kind of due to the product upgrade cycle that was happening? François Locoh-Donou: It's François. Let me start with the first part of your question. I think Cooper will take the second question. Let me just start from -- you saw that we delivered a very strong quarter and, in fact, a very strong fiscal 2025. And the momentum in the business has been very, very strong. And that is driven increasingly by the secular trends that we've talked about, specifically hybrid multicloud and AI, and I can come back to that a little bit later. Based on these trends, we felt the trajectory of the business going into 2026 was more in the mid-single-digit growth. But we said we are guiding to 0% to 4% growth for 2026 based on what we see as potential near-term impact related to the security incident. And when I say near-term impact, we think we would see probably the majority of the impact in the first half of the year with trends kind of normalizing in…

Thanks. Yes. And then in terms of the systems business, we're seeing strength in both the product or tech refresh and capacity expansion. The growth has been pretty balanced actually across both. Roughly 2/3 of our systems business in FY '25 was tech refresh, with about 1/3 coming from what we call data center, increasing capacity, data sovereignty, use cases. A lot of it is really driven by AI that can be both direct and indirect. So it's just been a trend that we continue to see over the course of the year where we're seeing growth for both the refresh motion as well as some of these newer use cases. And then on the refresh motion, I would also note that I think we're still relatively early days on that refresh cycle with more than half of our installed base currently still on the legacy product families that would be going into software support.

Our next question comes from the line of George Notter with Wolfe Research.

Just continuing on that line of discussion, I guess I'm curious about how you actually size the potential impact from the security breach. I would imagine it's probably a complex exercise, but I'm curious if you could just kind of walk us through like the logic here. And then maybe related to that, can you give us a sense for how many customers were affected where there was configuration information taken or are there specific customer issues that you can point to?

Yes. Sure, George. This is Cooper. I'll take the first part, and then François can address the second question. So François kind of touched at it a little bit at a high level when he kind of referenced the percentage of our business that is recurring in nature. But as we went through this process, we really took a fairly granular approach at kind of profiling our revenue base across all the different revenue streams and kind of taking a look at which of these revenue streams could be more impacted and which ones would be more resilient in the near term. So if you think about our revenue base, a lot of the revenue that we recognize comes straight off the balance sheet. So our service revenue -- that maintenance revenue is mostly coming off of deferred revenue. We've got our -- this is, for example, our SaaS revenue is coming out of beginning ARR and then we've got a lot of our software businesses coming through in the form of subscription renewals. So those are revenue streams that are highly resilient, and we wouldn't expect to have much of a near-term impact. And then if you look at kind of newer use cases, whether that's competitive takeout or new software projects, that's where there potentially could be more of a near-term impact. And so we kind of looked at these different cohorts of our revenue base and just kind of made a judgment as to what the potential impact could be in the near term as customers are kind of going through some of their operational activities around the incident. And then we also kind of balance that just looking at other peers historically that have gone through similar incidents and what revenue impacts they saw. And then,…

Our next question comes from the line of Michael Ng with Goldman Sachs.

I just have two. First, just on OpEx, it seems like the implied OpEx growth for fiscal '26 is about 4% at the midpoint. Just wondering if you're seeing any additional costs as a result of the data breach, other investments in systems internally or costs related to offering free Falcon EDR subscription to affected customers. And then second, certainly encouraging to hear that it was just BIG-IP that was impacted, not NGINX or DCS. Could you just tell us what percentage of the revenue comes from BIG-IP?

Yes. So I'll start with the latter. We don't break out our product by revenue line. We're a single-segment company, but it's -- BIG-IP is the highest revenue product, of course, but we don't actually break out what the contribution is. And then in terms of investment security and the OpEx, so yes, we actually have been investing aggressively in secured -- cybersecurity over the last several years. We've more than doubled our investment in cybersecurity just in the last 3 years alone. And we had already accounted for continued investment in our planning for this year even before we learned of this incident. And of course, we've learned a lot in the last several weeks, and so there's some additional investments incorporated into our planning, but that was among the highest priority areas of investment in our plan going into the...

And any costs related to the Falcon EDR subscription?

Yes. So there are a number of costs related to the incident remediation and in the offering that you're referencing as part of that, those are either going to be accounted for in our -- with our cyber insurance or they would be remediation costs that are accounted for separately as a onetime expense.

Our next question comes from the line of Tal Liani with Bank of America.

By the way, the sound quality is bad on your end, hard to understand you. I have two sets of questions on software revenues and system revenues. On systems, if I look at the dollar revenue for this year and you started the year with $160 million, but then it accelerated to $180 million a quarter, give or take, $181 million, $186 million, but $180 million a quarter, do you think you can further grow from this level? Or is the growth rate going to decline substantially because this level reflects kind of the level of the refresh going forward, kind of steady-state refresh going forward? Or what are maybe different drivers? I'm just trying to understand if the increase from $130 million to $140 million last year to about $180 million this year, if there is further growth from this level or we stabilize at this level? And on software, I have the same question almost that if I look at the quarterly level of revenues this year and I average it out, there was a step-up in this year versus last year, but we stayed at the level of about $210 million. I mean, some quarters are below, some quarters are above, but there is kind of a straight line, and this is on the heels of refresh, of renewals. So the question is what drives software to growth from here if that's the growth we're seeing with renewals and all the -- we spoke about it previous quarters and all the accounting treatment of renewals. So bottom line is what drives software and system growth from here versus the temporary items that are impacting it right now.

Okay. I will start with hardware. So I think you're right, we saw a significant growth here, of course, this year. I think that that -- you referenced the -- where hardware revenues were at in FY '24 and then that really is the kind of the starting point. That was a low watermark, we had talked about customers were in a period of sweating assets where they had not been investing in the data center and a lot of that was tied to the macro at the time in customer budgets. And what we've been seeing is a bit of a catch-up period over the last year with some of that deferred investment, and that's what's driving -- has driven a lot of the growth just in FY '25. But we are still early in the refresh cycle, so we think there is still ability to grow that business. And then as I said on an earlier question, we're also seeing kind of a new vector of growth, and this is kind of more of an emerging growth category which is in some of the data center capacity expansion that we've been seeing. And we think a lot of that is tied to AI readiness. And so that one, it's still relatively early, but that's kind of a newer growth trend that we don't think is cyclical that it could potentially have growth for years to come. And so from the refresh perspective, we believe that this year should be a strong year of refresh because of how early we are in the cycle. And then on the new -- the performance and data center capacity expansion that could continue to have growth as well. Now having said all of that, this is all kind of looking back at…

But François, if that's the case, and I know you reduced the guidance a little bit because of the breach -- because of the cybersecurity issue, but even before that you only guided growth to 5%. So if that's the case, why don't we see a faster growth rate?

Correct. So Tal, I mean we've talked about this, and François talked about this on several calls. There is a timing nature because of these 3-year cycles on the renewals. And so the subscription business that we sold in FY '23 had a lower growth rate because new projects were under pressure. This was 3 years ago. And so that's what's coming up for renewal in FY '26. And so the base with which we're starting doesn't have as much growth in FY '26 and that's what was behind what we said was a mid-single-digit growth opportunity when we talked in July. That same base has much more growth in FY '27 and we don't have the headwind related to our SaaS and managed service business because we're through the transition. So we tried to lay out that there are going to be some ups and downs in the annual growth rates tied to the timing of those renewal motions. But we've given that look ahead beyond the current year into '27 to give that visibility that we expect a reacceleration in software growth rate. The underlying trends are very healthy. François laid out several metrics to point to the underlying health of the software business and we saw that last year. If you look at our term license business, that was up 18%. We have the headwind related to SaaS where our SaaS and managed service was down 9%. But again, that's going to be behind us and so it points to a very healthy software view beyond FY '26.

Our next question comes from the line of Tim Long with Barclays.

Two quicker ones, if I could. I just wanted to follow up, François, on Distributed Cloud Services. Part of my question was about multiproducts. I think you just answered that there. But could you talk about some of the other economics that you see as you transition to DCS, things like deal sizes, win rates, maybe when we get to it, dollar retention or add-ons on top of that, number one? And then number two, if you could just quickly touch on a few of the verticals at least on a bookings basis, we're a little out of band. Enterprise was really strong year-over-year and service provider was pretty weak, all for pretty weak numbers. So anything that's driving kind of a little bit of out-of-band performance on those 2 verticals, that'd be great.

Please hold. We're experiencing some technical difficulties. François Locoh-Donou: Tim, let me start again. Can you hear me?

Yes, we can hear you now. François Locoh-Donou: Okay, great. I was starting with your question, Tim, on distributed cloud, I would say this is a land-and-expand motion. So typically the deals would start rather small in the multiple kinds of case and expand after that. I'll give you a data point on that. We have 1/3 of our distributed cloud customers that have expanded their ARR with us and they've expanded -- their expansion has been 90% for those of whom who have expanded. So it can be pretty significant growth in a customer after we sign them and that will continue to grow as we add more services onto F5 distributed cloud and we're continuing to add services as part of building this application delivery and security platform. We're adding more and more of the services that customers have enjoyed on BIG-IP onto F5 distributed cloud. To the second part of your question on the verticals, the -- generally, what we're seeing is kind of the most important enterprise verticals are all embracing hybrid multicloud postures for different reasons. But in the end, it all points to F5. So financial services, for example, in a lot of cases are keeping their core banking data on-premise, but are also having to build sort of disaster recovery to comply with operational resilience regulations. And so they're leveraging public cloud for that. And anytime a customer is using both on-prem environment and public cloud environment, it creates a strong case for F5. The same is true in health care. We're seeing the same in manufacturing, in retail and even in public sector environments. So these verticals embracing hybrid multicloud really allow us to grow our share of wallet into these verticals, and that's what's driving this cross-sell of our portfolio. The service provider space, Tim, that you mentioned, it's true that generally that segment has been, I would say, rather tepid in part because 5G has not really taken off in the way that we all expected a couple of years ago. And there hasn't been a real growth driver frankly, for service providers, either in ARPU or 5G services adoption. So we have seen stability there, but not significant growth to date.

Our next question comes from the line of Simon Leopold with Raymond James.

A couple things I wanted to check on. One, hopefully easy is, what are you seeing in terms of U.S. federal in light of the government shutdown? Is that an aspect that's affecting the outlook for your December quarter? And the other thing I wanted to get a better sense of is you've given us some commentary around the mix of software and hardware for the December quarter, but what's baked in for software versus hardware growth in that full year 0% to 4% guidance? François Locoh-Donou: Let me start with the -- in terms of the U.S. federal government, we have, in our guidance, assumed some level of disruption in that segment of our business, especially in the first quarter with the government shutdown that clearly is having an impact on project being delayed or approval being delayed. We -- it is our hope that this normalizes over the course of the year. But certainly, in Q1, we have assumed that the numbers that we would see from the federal sector would not be what we have seen historically in that part of the business because of the government shutdown.

Yes. Thanks, Simon. We're not guiding mix at this point, just given that we're 12 days since the announcement of the incident and we've done a lot of work to provide a range on the growth outlook which, as we said, we've discounted some risk of short-term disruption to demand. We expect the demand to normalize in the second half of the year and I think as we see demand start to normalize, we'll look to give an update of what software and hardware growth can look like for the rest of the year.

Just maybe you could clarify because you've got BIG-IP as the appliance system business, but you have virtual editions of BIG-IP. So when you talked about the breach, you said it affected BIG-IP. Does that mean that the breach affects both software and hardware equally? François Locoh-Donou: Yes, it does.

Our next question comes from the line of Samik Chatterjee with JPMorgan Chase.

François, just curious to hear your thoughts in terms of how the market share dynamics change on account of the potential impact that you're outlining for the first half. Because I'm just wondering if sort of we should expect to see some of the spend from your customers if it does get delayed from first half to see some catch-up in the second half, particularly when it comes to potentially the systems part of your business. And I have a quick follow-up after that, sorry. François Locoh-Donou: Yes. So we cannot know if on a 1- or 2-quarter basis that's hopefully enough of a runway to see substantial change in market share. So if I speak more on an annual basis and what I expect going forward, my expectation is that we continue to gain share in the app delivery and security market. The reason I say that is relative to other players in the space, we are investing more in our road map. We have been very aggressive at investing in security, and I think through the conversations with our customers around what we are doing to secure our environment, build trust centers to allow customers to come and do penetration testing of our code. All of the work that we are doing with partners to continue to look for any vulnerabilities and secure our code, that our customers are going to continue to see that F5 is really the right partner, is 100% committed to maximum security in our products and in their environments. And that will pay in terms of over time, customers, of course, continuing to partner with F5 and where possible, consolidate spend on our application delivery and security platform in their environment. And we have a world-class road map for our customers to continue to deliver functionality in delivery and security. So I think you have to look at it over a period of time. There may be a short-term blip in the first half of our year because of the factors that I described earlier. But in terms of our market share, our market position, our relationship with customers, I think if anything, over time, it will continue to strengthen.

Got it. Got it. And for my follow-up, I was just looking at the disclosure that you had on standalone security revenues. I think you said $463 million for this year. Looks like it's been fairly consistent for the last couple of years without material growth, like I have $458 million for fiscal '24, $475 million for the year before. Any sort of more details you can provide in terms of what you're seeing on the standalone security side and why hasn't there been more significant growth on that front?

Yes, I'll take that. So our overall security business grew about 6% last year. So I think what you're seeing is this is going back to the trend that we've talked about with customers preferring to consume via the platform and consolidate multiple functions onto a single platform. And so you're seeing less -- maybe less growth coming from standalone solutions and more of a preference to consume through our flexible consumption program where they're adding additional modules and attaching more security onto existing footprint. And so that growth is really coming through more in a platform form factor. And then the other thing to consider also is just there's a little bit of an impact on the standalone security from the SaaS transition that we've done with some of the legacy offerings, which, again, that'll be kind of behind us as we look ahead.

Our next question comes from the line of Amit Daryanani with Evercore ISI.

I have two as well. I guess, Cooper, maybe just to start with you, can you just walk through the operating margin for the year? I think you're implying 34% margins for fiscal '26, but it's also the same, I think, for fiscal Q1. So I'd love to just get a sense on why aren't we seeing leverage in the back half of the year versus the front half. And then if you just quantify what the OpEx uptick in the March quarter will be for some of the events you talked about, that would be helpful.

Yes. And we talked -- I had in my prepared remarks that the low watermark for operating margins would be Q2. That's typically the case, just seasonality with payroll tax resets and our large customer event in March. And so you actually would expect to see some leverage in the back half of the year coming off of the lower operating margins in Q2. And we're not going to guide Q2's operating expense today, but you could look at kind of seasonal trends to get a feel for what that uptick in the operating expense typically is in Q2.

Got it. And then François, just on the breach side and the challenges you're having, can you just -- maybe just help us understand if the source code is compromised, how do you give customers the confidence that there's no zero-day threat that's kind of hiding in there over time? Just maybe walk through that. And then does this also dampen your ability to implement price increases when it comes to the hardware side, really to reflect what Citrix has been doing to some extent in that space. So I'd love to just understand kind of the zero-day risk and the potential for price increases maybe being a bit more muted there as you go forward. François Locoh-Donou: Thank you. Well, let me start with the code and then let's come back to price increase as a separate topic. Look, I said earlier that I think customers will continue to choose F5 because we provide best-in-class app delivery and security capabilities for our customer. Now when you look at the code, I shared earlier some of the things that we are doing to ensure that we remain vigilant about potential vulnerabilities in our code. And so we have engaged partners that are scanning our code and will continue to do so to ensure that if there are any vulnerabilities that we remediate them immediately. I shared with you that we are setting up a trust center that will be there to allow our customers to come and do penetration testing with our code. We are going to leverage AI for hunting for penetration as well in our code. We are enhancing our bug bounty program. So there are a number of things that we are putting in place, all designed to ensure we remain hypervigilant about this, and we give…

Our next question comes from the line of Ryan Koontz with Needham & Company.

Most of my questions have been answered, but just a quick clarification. When you talked about the migration of your end-of-life products out there today, kind of where are you now in that migration? How do you think about that going forward? Are you seeing some pushouts? Are you giving customers any kind of time frame breaks because of the breach to migrate those products going end of life?

Yes. So we have said that we're still pretty early days in the refresh motion just in terms of the percentage of the installed base being well over 50%. That's on those 2 platforms. There's -- no, we haven't adjusted the end of software support dates. Those have been public for a long time and we're working with customers to ensure they have an orderly path to make those refreshes across our estate.

Got it. Helpful. And maybe circling back to your comments on the telecom segment. Obviously, yes, 5G has been disappointing there in terms of kind of the deployment of virtualization, but are you seeing any new activities in the telecom domain around the new 5G core, maybe picking up momentum or anything else to call out on the telecom front here? François Locoh-Donou: Yes, look, I think what we're seeing is the sort of 4G to 5G transition continue with some geographies ahead of others. Those customers who have implemented 5G were seeing growth inside of these environments, capacity, in some cases, growing fairly rapidly. But generally this transition from 4G to 5G and frankly the revenues that telecom operators expected from that transition have not really materialized and that, in turn, has put pressure on their CapEx spend. So we are continuing to find new use cases inside of our service provider customers, but it hasn't been significant enough to drive a substantial uptick in the overall segment for F5.

I would now like to pass the call back over to Ms. Suzanne DuLong for any closing remarks.

Thank you, everybody, for being with us today. We look forward to seeing many of you during the quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.