F5, Inc.

Good afternoon and welcome to the F5 fourth quarter fiscal 2024 financial results conference call. If you require operating assistance during the conference, please press star zero on your telephone keypad. 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. Susannah 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 2024 financial results. Francois Locodonou, F5's President and CEO, Frank Pelzer, F5's Executive Vice President and CFO, and Cooper Werner, our SVP of Finance and incoming 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. A copy of today's press release is available on our website at F5.com, where an archived version of today's audio will be available through January 27, 2025. We will post the slide deck accompanying today's webcast to our IR site at the conclusion of our call. To access the replay of today's webcast by phone, dial 877-660-6853. or 201-612-7415 and use meeting ID 1374-9373. The telephonic replay will be available through midnight Pacific time, October 29th, 2024. For additional information or follow-up questions, please reach out to me directly at s.dulong at 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 the 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. During today's call, Francois will speak to our Q4 highlights, our strategy and growth opportunities, and our expectations for FY25. Frank will then review the details of our Q4 and FY24 results, and Cooper will speak to our outlook for FY25. I will now turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. We delivered a record Q4 across a number of metrics, including $747 million in revenues, which is up 6% year over year and above the high end of our guidance range. Q4 stop-line growth is the result of strong software performance, including 19% software revenue growth. Just as importantly, we delivered Q4 non-gap EPS of $3.67, a beat of 17 cents above the top end of our guidance range, highlighting our improving operating margins in addition to top line strength. Q4 was the cap to a fiscal year during which the F5 team outperformed our plan, even with a challenging macro backdrop to start the year. In FY24, we delivered revenue at the top end of our guidance. We also outperformed our initial expectations for software revenue delivering 11% software growth compared to FY23. And we demonstrated continued operating discipline, generating 14% non-gap EPS growth for the year. These results speak to the power of our solutions, the strength of our operating model, and the resilience of our business. In a relatively short period of time, we have substantially reshaped F5 from a hardware-centric single-product company into a security and software leader in today's hybrid multi-cloud world. Our transformation has redefined F5's role beyond the data center, increasing our value to customers, diversifying our revenue, and expanding our total addressable market. The change is evident in several important metrics. In FY17, software contributed $122 million, or just 13% of our product revenue. software is $735 million and 58% of our product revenue. In FY17, subscriptions represented just $24 million or 20% of our software revenue. Today, they total $624 million and 85% of our software revenue. And finally, in FY17, our recurring revenue was $1.1 billion or 52% of our total revenue And today it is $2.1 billion and 76% of our total revenue. The growing percentage of our business is coming from existing software customers, providing us with very good visibility to a large portion of our revenue for the coming year. As a result of our large software renewal opportunity, improving systems demand trends and our growing pipeline, we expect revenue growth to accelerate in FY25. We expect FY25 revenue growth in a range of 4 to 5% from FY24. This is ahead of the expectations we outlined when we first shared our FY25 outlook a year ago. In addition to top line growth, we expect to drive continued operating margin leverage. As a result, we expect to deliver 5% to 7% earnings growth in FY25. On a tax-neutral basis to FY24, the midpoint of this range reflects 10% EPS growth. Beyond the visibility we have into our recurring revenue and pipeline for FY25, we remain confident in F5's long-term growth prospects for several reasons. these include f5's alignment with robust and sustainable industry trends and the effectiveness of our go-to-market strategies i will speak first to the industry trends first hybrid multi-cloud environments are now the norm and will remain so according to our latest state of application strategy report nearly 90 percent of customers are operating across multiple environments with the benefits of choice clearly outweighing the challenges of managing apps across different deployment models. Second, applications and the APIs that connect them are becoming increasingly distributed, which means traditional single environment solutions are not capable of managing and securing them. Third, The number of application instances continues to grow. In fact, it is projected to grow from roughly 2 billion today to 6 billion by 2029. Fourth, APIs are rapidly proliferating, creating new challenges and risks for application owners. A recent F5 survey found that nearly one-third of customer-facing APIs lack fundamental protection. Applications and APIs require more security and delivery services today than they used to. In 2016, organizations deployed a minimum of two app services to ensure an app remained performant and secure. Today, that number has grown to 13 on average and 27 in total. And finally, the emergence and eventual widespread adoption of AI and AI-powered applications will accelerate and further complicate all of these trends while also leading to new demands related to data ingestion and optimization of GPU environments. Individually, these dynamics are driving new complexity, cost, and security risks for customers. The fact that they are all happening simultaneously is creating significant challenges for the IT teams managing them. You have heard us describe the confluence of these dynamics as the ball of fire, and we continue to believe that F5 is uniquely positioned to address it. The powerful industry dynamics I just outlined are contributing to our ability to drive growth through our land, expand, and renew go-to-market motions. We are lending new customers by winning competitive entry opportunities, targeting competitive takeouts, and leveraging and expanding our strong channel relationships. Our biggest growth opportunity, however, comes from the potential to expand our footprint and wallet share across our base of approximately 20,000 customers. At times, this means expanding as an app's utilization grows over time. At others, it means leveraging the synergies and power of F5's platform to create a strong, unified security posture, simplify multi-cloud complexity, or streamline operations. The power of this expand motion is evident in the early success of our F5 distributed cloud services. We launched this platform in February of 2022 and now have more than 800 customers on it, one third of whom are new customers to F5. And finally, we are growing as we successfully renew and expand with existing customers. This motion has been a powerful driver for our business and is a testament to the value F5 delivers. Our sales and customer success teams are focused on ensuring it remains so. The relative success of these motions is further evidence of F5's differentiated ability to tame the ball of fire for our customers. We do this across three vectors, app and API security, simplification, and standardization and automation. First, app and API security. F5 delivers the most effective and comprehensive app and API security platform in the industry. We enable our customers to consolidate point products targeting specific threats onto a single integrated platform with a suite of best-in-class capabilities. As an example, during Q4, a global integrated energy company selected F5 distributed cloud services web application firewall and API protection to enhance and streamline its multi-cloud application security across two major public cloud platforms. Previously, the customer had been running two distinct cloud native WAF and API gateway solutions. The customer selected F5 distributed cloud services following a comprehensive evaluation, which included two competitive offerings. F5 won based on its superior ability to provide a unified security posture, effectively defending against advanced threats and delivering comprehensive API security. Second, simplification. F5 enables the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require. Only F5 delivers solutions that extend across public clouds to the edge and customers' on-premises environments. Our solutions simplify connecting disparate infrastructure environments and the applications deployed in and across them. As an example, during Q4, F5 distributed cloud services was selected by the largest mobile provider in a Southeast Asian country to simplify a complex IT challenge. Following a merger with another large mobile provider, the customer faced complications arising from overlapping IP addresses between their core business applications and retail branches. Overlapping IP addresses can cause connectivity issues and operational inefficiencies, especially when different systems and networks are merged. FI's multi-cloud networking technology provided virtual IPs and translation services which allowed the new entity to easily manage IP conflicts across 500 branches. And third, standardization and automation. F5 solutions enable more cost-effective and scalable IT operations. We streamline customers' operations with consistent policies, comprehensive automation, and rich analytics. This enables customers to consolidate vendors and tool sets, rationalize operational silos, and automate lifecycle management of their on-premises deployments. As an example, during Q4, a large Australia-based multinational bank and financial services organization selected F5 to reduce operational overhead and to refresh, consolidate and modernize its application infrastructure. Automation enabled by F5 Velos hardware and software eliminated tens of thousands of lines of hard-to-maintain custom code. F5 automation is also enabling application self-service, streamlined certificate management, and hitless upgrades. The new F5-enabled practices have improved security and reliability of the customer's applications while eliminating massive amounts of manual processes and labor. These three points of strong differentiation combined with the well-established role F5 plays embedded in the flow of application traffic enables us to address the ball of fire for our customers in ways our competitors cannot. Before I pass the call to Franck, as I have the last several quarters, I will speak to the opportunity we see emerging with AI use cases. As we discussed earlier this year, 2024 was the year of AI infrastructure build-outs in preparation for AI apps. AI-driven use cases already are driving significant investment and new application and infrastructure requirements across compute, storage, and networking layers. In networking specifically, AI factories have extremely high data and throughput demands. F5's initial opportunities in AI are concentrated on three networking use cases. The first is AI data ingestion requiring high-performance traffic management for AI model training and retrieval augmented generation, or RAG. Over the last several quarters, we have highlighted customers leveraging F5's industry-leading traffic management capabilities to optimize data ingestion. During Q4, we had another example of a customer choosing F5 for data ingestion. a global conglomerate with businesses across IT, automotive, media, and financial services chose F5 to optimize data ingest for its AI model training. The customer's AI factories are collecting information and telemetry to power its connected vehicle business. In this deployment, F5 is providing high-performance load balancing between the customer's enterprise storage clusters and their AI factories. The second AI use case we are focused on is AI factory load balancing, where we are optimizing the performance and scalability of AI factories with advanced traffic management. Just last week, we announced our exciting collaboration with NVIDIA to enable high performance software ADC on AI infrastructure. There are two important pieces of this news. First, we have enabled Big IP Next to run in Kubernetes. Enterprises and service providers building AI factories are driving strong demand for advanced semiconductors such as GPUs. AI workloads that run within this infrastructure are running on Kubernetes. F5 Big IP Next for Kubernetes brings our market leading networking, traffic management, and security capabilities to these modern environments. Second, We partnered with NVIDIA to ensure that BigIP Next for Kubernetes works seamlessly with NVIDIA Bluefield 3 DPUs. When combined with BigIP Next for Kubernetes, these DPUs effectively become AI accelerators, increasing the performance and security of training and inference workloads, delivering superior AI-driven customer experiences. The first two AI use cases I have just highlighted are ADC opportunities a market where we have been the leader for the last two decades. The third AI use case we are focused on leverages Web Application Firewall and API Protection, or WAP, for secure AI inferencing. We have deployments supporting this use case today and expect it will become more prevalent as enterprises begin to leverage AI inferencing at scale over the next 18 to 24 months. As you can see with these examples, F5 is not just adapting to the AI revolution, we are actively shaping it, providing the critical infrastructure that enables our customers to harness the full potential of AI safely and efficiently. Our sales, engineering, and product teams have identified multiple additional AI use cases where F5 is likely to have a significant role to play. In addition, we continue to implement generative AI solutions across our portfolio, leveraging AI to help customers with their policies and configurations. To conclude, we are confident that F5 is entering fiscal year 2025 with an industry-leading converged portfolio tightly aligned with significant industry trends and customer demand. Because of our unmatched layer four through seven functionality and expertise, we are unique in our ability to address escalating application and API complexity. We bring consistent industry-leading security. We simplify hybrid multi-cloud complexity, and we streamline operations with standardization and automation. Now I will turn the call to Franck. Franck?