F5, Inc.

Good afternoon and welcome to the F5 Inc. Second Quarter Fiscal 2026 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. 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 DeLong. Ma'am, you may begin. Hello and welcome. I'm Suzanne DeLong, F5's Vice President of Investor Relations. We are here to discuss our second quarter fiscal year 2026 financial results. Baswaloko Dinu, F5's Chairman, President, and CEO, and Cooper Warner, 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 Today's press release is available on our website at F5.com, where an archived version of today's audio will be available through July 27, 2026.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 800-770-2030 or 609 800-9909, and use meeting ID 607-6834. The telephonic replay will be available through midnight Pacific time, April 29th, 2026. 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 risk, that may cause our actual results to differ materially from those expressed or implied by these statements. We've 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 gap 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. Before I pass the call to Francois, I am pleased to announce that F5 will be hosting an analyst and investor event in New York on Thursday, May 28th, 2026. Details about the event will be provided in a press release soon. I'll now turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. Our team delivered another robust quarter with 11% revenue growth. Product revenue grew 22%, marking our seventh consecutive quarter of double-digit product growth. This includes strong 26% systems revenue growth and 17% software revenue growth. Hybrid multicloud has become a strategic architecture, and it is increasing demand across F5's core markets. Customers are rapidly scaling their digital infrastructures to improve resiliency, meet data sovereignty requirements, and get ready for AI. Our strong Q2 performance reflects those dynamics and F5's alignment with where customers are headed. We captured robust international demand for digital sovereignty initiatives. We also converted hybrid multi-cloud adoption into meaningful systems and software growth. We capitalized on heightened demand for best-in-class security solutions and we built on AI momentum with another standout quarter for AI wins. As a result of our strong growth and our proven operating model, we delivered 14% non-GAAP earnings growth and a record $348 million in free cash flow. The powerful combination of secular and cyclical demand trends is providing strong Q3 visibility and a growing pipeline. As a result, we are raising our fiscal year 2026 outlook to reflect revenue growth of 7% to 8% up from 5% to 6% previously. Cooper will elaborate on our outlook in his remarks. Our outlook for stronger growth is reinforced by what we are seeing in the market. We see three forces significantly reshaping how our customers operate. Hybrid multicloud adoption, threat landscape expansion, and AI inference inflection. First, hybrid multicloud adoption. Workloads now span on-premises, private cloud, and multiple public clouds. Our research shows more than 90% of enterprises run hybrid multicloud today across an average of 19 locations. Organizations need flexibility, resiliency, and digital sovereignty in every environment, and they are investing to support these demands. Second, threat landscape expansion. As AI models become more capable, attackers are using them to launch attacks against production applications at higher volumes and with greater variation than traditional defenses were designed for. Our customers see this and they are responding. They are deploying more application security and prioritizing best-in-class defenses. The era of checkbox security is over. AI applications require best-in-class security to match both the volume and the sophistication of AI-driven attacks. Third, the AI inference inflection. Organizations are connecting their applications and APIs to AI models, and inference calls are becoming a regular part of how applications run. Our research shows 78% of enterprises run inference themselves using more than seven models on average. Organizations are standardizing on a new architecture with models distributed across the data center, the cloud, and the edge. And the next shift is already underway. AI agents are moving into production and enterprises are adapting their applications for agent interaction. This is driving more compute, more data delivery, and more security to protect inference. These three market forces are driving demand across our business. Because of accelerating hybrid multi-cloud adoption, we are taking an already strong refresh cycle and leveraging it into significant opportunities for expansion, competitive displacement, and platform consolidation. I will double click on each of these spotlighting customer examples from the quarter. With this refresh, we are seeing a refresh plus dynamic that is different from prior cycles. Customers are deploying higher performance, higher capacity F5 systems as they upgrade their data centers to support modern applications, digital resilience and sovereignty, and AI. And as customers refresh, we are capitalizing on that moment to attach new use cases expanding our footprint and growing overall wallet share. For example, this quarter, a large healthcare services organization started with a lifecycle refresh across hundreds of legacy systems. As the project progressed, they expanded the scope to support an AI-driven consumer engagement platform. F5 became the control point for secure, low-latency traffic and data movement across applications, storage, and their GPU server environment. That gave the customer a more resilient foundation for both sensitive internal workloads and new AI interactions at scale. Our deliberate investment in hybrid multi-cloud solutions is translating into market share gains. We are winning customers from competitors who did not build the same breadth and depth of capabilities across on-premises, software, and SaaS. In Q2, we displaced a long-standing incumbent at a Fortune 100 energy company whose environment had hit scalability limits. The customer needed a platform that could scale into cloud while maintaining strong on-premises performance. Their incumbent provider was unable to serve workloads in hybrid multi-cloud environments. F5 modernized traffic management and simplified operations improving reliability and creating a clean path for long-term cloud adoption. Hybrid multi-cloud customers require stronger performance and security with fewer tools and simpler operations. We are replacing point products with a unified approach that improves performance and security and is easier to operate at scale. For example, during Q2, an energy and utilities provider and existing BIG-IP customer needed to secure APIs with better visibility and automation across their data center, cloud, and edge environments. They selected F5 distributed cloud services to simplify their approach and standardize API protection across their full footprint with simpler management. Moving on to Threat Landscape Extension. The pace and scope with which the threat landscape is expanding is driving demand for best-in-class application and API security, both on-premises and across cloud environments. For example, this quarter, a software and managed service provider needed to standardize application and API security across a rapidly expanding hybrid multi-cloud estate built through acquisitions. they lacked a consistent way to enforce front door and API protections across their multiple public cloud environments and on-premises. With F5, they deployed a single policy and management layer with security enforced locally in every environment, supporting strict privacy, audit, and healthcare requirements. F5 enabled faster regional expansion with stronger security and improved data sovereignty alignment. Finally, The AI inference inflection is driving demand for F5. We are seeing this indirectly through hybrid multi-cloud adoption and the requirements that come with it. We are also seeing it directly through our three primary AI use cases. With our industry-leading traffic management, we are winning new AI insertion points, including AI data delivery and AI factory load balancing. and we are capturing AI runtime security wins, protecting AI applications, APIs, and models from emerging threats such as model abuse, data leakage, and prompt injection. In an AI data delivery win, a global payment company needed a more resilient way to move rapidly growing AI data between storage and compute as they scaled training and retrieval workloads. F5 improved performance and resiliency while displacing both an in-house solution and a competitor, positioning us at the center of the customer's AI infrastructure strategy. In an AI runtime security win, an industrial automation firm needed a scalable way to assess risk and govern a growing number of AI applications and models. They chose F5 based on the depth of our red teaming insights and strong integration with their existing security stack. In an AI factory load balancing win, a major manufacturer and existing S5 customer needed to support operations and establish a digital twin of their manufacturing environment for simulation and optimization. They deployed BIG-IP as the production traffic layer across their GPU server environment, improving availability and offloading encryption. Taken together, these wins underscore two things. The forces reshaping our customers' environments are real, and F5 is well-positioned to capture them. Staying ahead of the pace of change requires relentless innovation. In Q2, we brought multiple new capabilities to market, strengthening our leadership in application delivery and security for the AI era and driving greater value for customers. We introduced AI-powered capabilities in distributed cloud WAFs replacing manual policy tuning with automated outcome-based threat blocking. Our S5 train model helps customers stay ahead of increasingly sophisticated AI-driven attacks that are growing in both speed and complexity. We launched agentic bot defense, extending our industry-leading bot defense to autonomous AI agents, a new and fast-growing category of traffic. The result is that customers can confidently adopt a Gentic AI while ensuring only verified, trusted agents reach their applications. We released F5 AI Remediate, which closes the loop between our AI Red Team and AI Guardrails products. It collapses the path from vulnerability discovery to runtime protection from days or weeks into minutes. And finally, we launched F5 Insight for ADSP. providing deeper visibility across application estates. The result is that customers can identify and resolve issues faster with less guesswork. We are innovating so customers can run faster, stay protected, and simplify their hybrid multi-cloud and AI environments. And we are accelerating that innovation by rapidly integrating AI into our solutions to create practical capabilities customers can deploy quickly. That innovation engine is also sharpening our view of what's next. As we look ahead, we have conviction in the power and durability of hybrid multi-cloud, the expanding threat landscape, and inflecting AI inference as demand drivers for F5. We look forward to digging deeper into these drivers and our expectations for how they will shape F5's longer-term growth outlook at our May Analyst and Investor event. Now, I will turn the call over to Cooper, who will walk through our Q2 results and our outlook.

Cooper? Thank you, Francois, and hello, everyone. I will review our Q2 results before I provide our guidance for Q3 and update our outlook for FY26. We delivered a strong Q2, growing revenue 11% to $812 million, with a mix of 51% product revenue and 49% services revenue. Product revenue totaled 411 million, increasing 22% year-over-year, while services revenue of 401 million grew 2% year-over-year. Systems revenue totaled 226 million, up 26% over Q2 FY25. Our software revenue of 184 million grew 17% year-over-year. Subscription-based software revenue totaled 165 million, up 20% year-on-year, representing 90% of our Q2 software revenue. Perpetual license software totaled $19 million, down 4% year-over-year. Revenue from recurring sources contributed 70% of our Q2 revenue. Our recurring revenue consists of our subscription-based revenue and the maintenance portion of our services revenue. Shifting to revenue distribution by region. Revenue from the Americas grew 3% year-over-year, representing 50% of total revenue. Both our EMEA and APAC regions delivered very strong quarters. EMEA grew 22%, representing 32% of revenue. APAC grew 19%, representing 18% of revenue. Looking at our major verticals, enterprise customers contributed 66% of Q2's product bookings. Government customers represented a strong 24% of product bookings, including 8% from U.S. Federal. Finally, service providers contributed 9% of Q2 product bookings. Our continued financial discipline contributed to our strong Q2 operating results. GAAP gross margin was 81.4%. Non-GAAP gross margin was 83.7%. Our GAAP operating expenses were $482 million. Our non-GAAP operating expenses were $406 billion. Our GAAP operating margin was 22.1%. Our non-GAAP operating margin was 33.8%. Our GAAP effective tax rate for the quarter was 21.9%. Our non-GAAP effective tax rate was 21.5%. Our GAAP net income for the quarter was $148 million or $2.58 per share. Our non-GAAP net income was $223 million or $3.90 per share, reflecting 14% EPS growth from the year-ago period. I will now turn to cash flow and balance sheet metrics. We generated $366 million in cash flow from operations in Q2, and free cash flow was $348 million, both records highlighting the strength of our operating model. CapEx was $18 million. ESO for the quarter was 47 days. Cash and investments totaled $1.46 billion at quarter end. Deferred revenue was $2.12 billion, up 10% from the year-ago period. In Q2, we repurchased $100 million worth of F5 shares at an average price of $269 per share. We had $522 million remaining on our authorized share repurchase program as of the end of the quarter. Finally, we ended the quarter with approximately 6,500 employees. I will now speak to our outlook and guidance, beginning with Q3, followed by our full year view. We expect the market trends we've outlined hybrid multi-cloud adoption, threat landscape expansion, and AI inference inflection to drive strong demand for our products and services in the second half of FY26. We expect Q3 revenue in a range of $820 million to $840 million, reflecting approximately 6.5% growth at the midpoint. We expect non-GAAP gross margin in the range of 82.5% to 83.5%. we estimate Q3 non-GAAP operating expenses of $406 to $418 million. We expect Q3 share-based compensation expense of approximately $68 to $70 million. We anticipate Q3 non-GAAP EPS in a range of $3.91 to $4.03 per share. Turning to our fiscal year 2026 outlook, with continued strong close rates in Q2 and strong pipeline creation into the second half, we are raising our FY26 outlook. We now expect FY26 revenue growth of 7% to 8%, up from our prior outlook of 5% to 6%. We continue to expect mid-single-digit software revenue growth, double-digit systems revenue growth, and low single-digit services revenue growth for the year. Our growth and operating margin outlook for FY26 is unchanged. We expect FY26 non-GAAP gross margin in a range of 82.5 to 83.5%. On a modeling note, we expect higher component costs, primarily related to memory, will cause gross margins to step down sequentially from Q3 into Q4. We expect non-GAAP operating margin in a range of 34 to 35%. we now expect our FY26 non-GAAP effective tax rate will be in a range of 20 to 21%. Reflecting the strength of our second quarter in our increased revenue outlook, we now expect FY26 non-GAAP EPS in a range of $16.25 to $16.55, up from the prior range of $15.65 to $16.05. Finally, we expect our full-year share of the purchase to be at least 50% of our free cash flow. I will now pass the call back to Francois.