Release Date: July 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- F5 Inc (FFIV, Financial) delivered Q3 revenue of $695 million, which is at the top end of their revenue guidance range.
- Non-GAAP EPS of $3.36 exceeded the top end of guidance due to continued operating discipline and tax favorability.
- Total software revenue grew 3% year over year and 13% sequentially, indicating strong customer satisfaction and momentum.
- Global services revenue grew 3% in Q3, contributing to overall revenue stability.
- F5 Inc (FFIV) expects Q4 revenue in the range of $720 million to $740 million, indicating strong future performance.
Negative Points
- Systems revenue was $130 million, down 16% year over year, indicating a decline in hardware sales.
- The company faced challenges in the bot defense point solution, with some customers opting for less sophisticated, lower-cost options.
- Deferred revenue was $1.77 billion, down 1% from the year-ago period, reflecting a shift towards term-based subscriptions.
- The Americas region saw a 4% year-over-year decline in revenue, representing 55% of total revenue.
- The company is no longer incentivizing customers towards multi-year maintenance agreements, which could impact future deferred revenue.
Q & A Highlights
Q: Can you provide more details on the strong sequential growth in software revenue?
A: (Francois Locoh-Donou, CEO) The strong sequential growth in software revenue was driven by robust new business activity and strong subscription renewals. We saw an uptick in new business momentum, which was not fully anticipated in our guidance. The renewals continue to be strong with some expansion, although we faced challenges in the bot defense point solution area.
Q: How do you see the hardware segment performing, given the current market trends?
A: (Unidentified Company Representative) We have seen hardware stabilize over the last several quarters. We expect hardware demand to be strong next year, driven by tech refresh activities and large programs in the service provider space. Additionally, AI is emerging as a catalyst for hardware demand, particularly for high-capacity traffic management technology.
Q: Can you elaborate on the better pipeline and expansion trends in your business?
A: (Francois Locoh-Donou, CEO) The stronger pipeline is driven by the increasing complexity of hybrid and multi-cloud environments. Our portfolio, including NGINX and distributed cloud, addresses this complexity by providing a single platform for application and API security, delivery, and optimization. This has led to significant customer wins and strong pipeline growth.
Q: What are you doing to address the challenges in the Bot Manager business?
A: (Francois Locoh-Donou, CEO) We are transitioning our high-end Bot Manager solution to be part of our F5 distributed cloud platform. This allows us to offer bot management as part of a comprehensive security bundle, which is more aligned with customer preferences. We are seeing traction in this area, with a doubling of customers using our bundled security services.
Q: How should we think about the fiscal 2025 outlook, given the updated guidance for fiscal 2024?
A: (Francis Pelzer, CFO) We expect mid-single-digit growth for fiscal 2025, with more growth coming in the back half of the year. This is based on the strength of our subscription renewals and the momentum in new business activity. We are confident in delivering a 35% operating margin for fiscal 2025.
Q: How is the migration of legacy SaaS businesses to the distributed cloud platform progressing?
A: (Francois Locoh-Donou, CEO) The migration is progressing as expected, with about $65 million of legacy ARR being transitioned. We are seeing strong growth in our distributed cloud platform, driven by new customer adoption and the comprehensive security offerings, including API security.
Q: Why are you no longer incentivizing customers toward multiyear maintenance agreements?
A: (Francis Pelzer, CFO) We have high attach rates and strong customer relationships, so we no longer need to offer higher discounts for multiyear agreements. Our services and products sell themselves, and we are strategically moving away from incentivizing multiyear maintenance to better align with our cash flow and deferred revenue management.
Q: Are there any changes in sales staffing levels or increased poaching by competitors?
A: (Francois Locoh-Donou, CEO) Our sales attrition is well below industry norms, and we have a strong sales team with deep customer relationships. While competitors may try to poach talent, our enterprise go-to-market model and channel partnerships are robust and not easily replicated.
Q: How should we view the impact of enterprise AI adoption on F5's business?
A: (Francois Locoh-Donou, CEO) AI adoption presents significant opportunities for F5. Our high-capacity data ingestion and load-balancing solutions improve the efficiency of AI factories. Additionally, securing APIs is crucial for AI workloads, and our comprehensive API security solutions are well-positioned to address this need.
Q: What is driving the mix shift between software and hardware, and how do you see this evolving?
A: (Francois Locoh-Donou, CEO) We provide flexibility and choice to our customers, meeting them where they are in their modernization journey. While we see catalysts for both hardware and software growth, our focus is on delivering a comprehensive platform that addresses the complexity of hybrid and multi-cloud environments.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
