FFIV Q1 Earnings Call: Hardware Refresh Cycle and AI Initiatives Drive Outperformance

Network application delivery and security specialist F5 (NASDAQ: FFIV) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 7.3% year on year to $731.1 million. The company expects next quarter’s revenue to be around $750 million, close to analysts’ estimates. Its non-GAAP profit of $3.42 per share was 10.2% above analysts’ consensus estimates.

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StockStory’s Take

F5’s first quarter results reflected higher-than-expected revenue, driven by robust demand for hardware systems and a steady pace of technology refreshes. Management credited the 27% year-over-year systems revenue growth to customers modernizing their data centers and preparing for hybrid multi-cloud environments. CEO Francois Locoh-Donou emphasized that the company’s competitive positioning in application delivery and security remains a central factor, highlighting ongoing momentum in vendor consolidation and expansion into new use cases related to artificial intelligence (AI).

Looking ahead, the company’s guidance for the next quarter is based on anticipated continued hardware refresh activity and an expected increase in software renewals. However, management noted that the outlook incorporates caution due to potential macroeconomic uncertainty in the latter half of the year. CFO Cooper Werner explained that while current demand trends remain stable, the company has factored in the possibility of a changing environment to avoid overcommitting on future growth.

Key Insights from Management’s Remarks

F5 management’s remarks on the call focused on the operational drivers behind the quarter’s revenue outperformance and the evolving product strategy. They also discussed major product innovations and customer dynamics influencing current and future results.

• Hardware refresh cycle momentum: Management attributed the strong systems revenue growth to widespread customer upgrades, driven by aging hardware and upcoming end-of-support dates for key product lines. These refresh cycles are expected to continue into 2026, supporting durable demand.
• Hybrid multi-cloud adoption: The company is benefiting from customers seeking flexibility across on-premises and cloud environments. F5’s ability to offer solutions that span hardware, software, and cloud deployments positions it to win consolidation deals and displace competitors.
• AI-driven product innovation: F5 introduced its Application Delivery and Security Platform (ADSP), integrating load balancing, security, and AI-driven insights. Management highlighted new features such as the iRule Code Generator and expanded AI assistant capabilities, aimed at improving automation and observability for customers.
• Early traction in AI use cases: F5 reported new customer wins in securing and delivering data for AI applications, particularly in data delivery for AI model training and inference. Management views this as an emerging, but growing, source of revenue.
• Stable demand across regions and sectors: Revenue grew in all major geographies, with notable strength in EMEA. The mix of customer verticals—enterprise, government, and service providers—remained broadly consistent with previous quarters, indicating balanced demand.

Drivers of Future Performance

Management’s outlook for the coming quarters centers on continued hardware refresh activity, a substantial software renewal pipeline, and the expansion of AI-related use cases, while remaining mindful of potential macroeconomic risks.

• Sustained hardware upgrade demand: Ongoing refresh cycles for legacy systems are expected to contribute meaningfully to revenue, with management indicating this trend could extend well into next year.
• Software renewal visibility: The company anticipates stronger software revenue growth in the second half, primarily from a concentrated base of subscription renewals, supported by high renewal rates and expansion opportunities within existing customers.
• AI adoption and product enhancements: F5 believes early adoption of its AI gateway and related security offerings will play a growing role in future quarters, especially as enterprise clients scale AI workloads across hybrid environments. Management sees this as a long-term growth driver, though it remains in the early stages.

Top Analyst Questions

• Tim Long (Barclays): Asked about the weighting of software growth to renewals and the durability of the hardware refresh cycle. Management clarified that software growth is highly renewal-driven and the hardware upgrade opportunity remains significant through 2026.
• Ryan Koontz (Needham & Company): Questioned the scale and longevity of competitive displacement opportunities. CEO Francois Locoh-Donou said the company is still in the early stages, with considerable room to expand both in new and existing accounts.
• Amit Daryanani (Evercore): Inquired about the expected deceleration in hardware growth in the back half of the year. Management attributed the conservative outlook to macroeconomic caution rather than observed demand changes.
• Samik Chatterjee (JPMorgan): Sought assurance that hardware demand was not being pulled forward by tariff concerns. Management stated there was no evidence of order pull-ins related to tariffs and that hardware demand was broad-based.
• Tal Liani (Bank of America): Asked why software growth relies on renewals rather than new product sales and about the timing for AI to become a larger revenue driver. Management indicated the subscription renewal base is the main driver, with AI revenue expected to grow gradually.

Catalysts in Upcoming Quarters

The StockStory team will be watching (1) the pace and breadth of hardware refresh cycles as more of F5’s installed base reaches end-of-support milestones, (2) the realization of software revenue growth from the large renewal pipeline in the second half of the year, and (3) customer adoption rates of new AI-focused offerings and security features. Expansion into competitive displacement opportunities and the company’s ability to maintain demand across diverse geographies will also be important indicators of execution.

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