FFIV - NASDAQ

F5, Inc.

F5, Inc.

FFIV·NASDAQ

$405.66

+2.5%
TechnologySoftware - Infrastructure

F5, Inc. provides multi-cloud application security and delivery solutions for the security, performance, and availability of network applications, servers, and storage systems. The company's multi-cloud application security and delivery solutions enable its customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. It offers application security and delivery products, including BIG-IP appliances and VIPRION chassis and related software modules and software-only Virtual Editions; Local Traffic Manager and DNS Services; Advanced Firewall Manager and Policy Enforcement Manager that leverage the unique performance characteristics of its hardware and software architecture; Application Security Manager and Access Policy Manager; NGINX Plus and NGINX Controller; Shape Defense and Enterprise Defense; Secure Web Gateway, and Silverline DDoS and Application security offerings; and online fraud and abuse prevention solutions. The company also provides a range of professional services, including consulting, training, installation, maintenance, and other technical support services. F5, Inc. sells its products to large enterprise businesses, public sector institutions, governments, and service providers through distributors, value-added resellers, managed service providers, and systems integrators in the Americas, Europe, the Middle East, Africa, and the Asia Pacific region. It has partnerships with public cloud providers, such as Amazon Web Services, Microsoft Azure, and Google Cloud Platform. The company was formerly known as F5 Networks, Inc. and changed its name to F5, Inc. in November 2021. F5, Inc. was incorporated in 1996 and is headquartered in Seattle, Washington.

StatementsValue Model

At a Glance

Live Snapshot
Market Cap$22.89B
EPS11.9600
P/E Ratio33.92
Earnings Date07/29/2026

Earnings Call Transcript

FFIV • 2024 • Q2

Operator
Good afternoon, and welcome to the F5, Inc. Second Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions] Also, today's conference is being recorded. [Operator Instructions] I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.
Operator
[Operator Instructions] Our first question comes from Tim Long with Barclays.
Operator
Our next question comes from Samik Chatterjee with JPMorgan.
Samik Chatterjee
I guess for the first one, Francois, Frank, you have some strong momentum here on the software subscription revenue quarter-over-quarter. Just how should I think about sustainability of that momentum going forward? And maybe the same one, sort of a bit disappointed to see the perpetual revenue on the software side moderate this much quarter-over-quarter, but it also seems like that's the lowest we've seen it track. So is there any potentially sort of more downside to that perpetual revenue number? But any thoughts on both of those aspects and the outlook there would be helpful. And I have a follow-up.
Francis Pelzer
Yes. Samik, why don't I start with that? So this is one of those areas that will fluctuate quarter-to-quarter. Obviously, with last quarter, we had several large perpetual deals that gave us in-quarter revenue and lifted that software number up. We were not surprised this is the way it's playing out internally in our model, to dip back down in Q2, and would expect other results, obviously, with the software guidance that we've given for the back half of the year. That subscription revenue at 88% of total software revenue was an all-time high for us. It's going to fluctuate, but I would expect that it's going to be higher as a percentage than obviously what we saw in Q1.
Operator
Our next question comes from Alex Henderson with Needham & Co.
Operator
Our next question comes from Meta Marshall with Morgan Stanley.
Operator
Our next question comes from Michael Ng with Goldman Sachs.
Michael Ng
I just have 2. First, just as a follow-up to the earlier question around software, I was just wondering if you could talk about the components of subscription software between term base and SaaS, how did those perform. And then second, on services, I can appreciate we're lapping some of the price increases that I think were first implemented in -- I think it was July of 2022. Could you just remind me if there are opportunities to periodically increase pricing on services? What has that time line been historically? And is this 5% growth a good way to think about services growth going forward?
Francis Pelzer
Yes. Michael, why don't I take that? Look, on the sort of components of the subscription business in terms of SaaS and ARR, that one, ARR versus the term base, we talk about that annually, but it's not something we talk about quarterly. But the components of those businesses, we're really excited about what we're seeing for Distributed Cloud adoption, particularly the value proposition around WAAP and specifically API security that Francois just mentioned as well as our multi-cloud networking. So those are great. We do see AI having a big boost in application demand over the coming years, but it's not something that we expect a ton of revenue in FY '24 from. We are still seeing the high end of the bot market being a bit challenged, but those are the underlying aspects of what we're seeing in the SaaS business as well as strong renewals that we're continuing to experience in our multiyear flexible consumption programs. And so those are the dynamics, but we don't split the components out except for at the end of the year. In terms of the services side, you're right. The last time we raised prices was in July of '22. It's one of those things that we continue to evaluate on what's the best strategic use of price increases for our customers. And I don't have anything new to report there, but more to come in the coming quarters. It's probably been 6 quarters, and so you're seeing the lapping effect of that services revenue starting to come down. That was due to price increasing last year largely as well as some of the sweating of the assets. And so 7% is what we saw in Q1, 5% in Q2, and we do expect that to trail down in Q3 and Q4 as we lap even more of those annual increases from last year.
Operator
Our next question comes from Amit Daryanani with Evercore ISI.
Amit Daryanani
I have 2 as well. I guess, Frank, maybe just start with you. I think in the past, you talked about software growth for the full year being flat to, I believe, up modestly, I think was the statement. Given the performance you just saw this quarter, which I think was much better than expected on software, how do you think the back half of the year stacks up on the software side?
Francis Pelzer
Sure. So look, we had a strong software growth number in Q2. It was in our expectation range. And largely, software to date in the first half has been ahead of our software expectation. But having said that, we did not change our outlook from flat to modest growth, but I think we'd be disappointed if we weren't at the higher end of that or better by the end of the year given the strong first half performance that we saw. Obviously, we're hitting a second half where the comparable numbers are a little more difficult. Having said that, we're really excited, particularly in Q4, about the subscription base of renewals that we're seeing on our flexible consumption programs and so have strong visibility into that.
Operator
Our next question comes from James Fish with Piper Sandler.
James Fish
Francois, I think we get the product strategy here. So my question is more directed at Frank. So talking about stronger renewals on the subscription side in the second half, Frank, is there any way to quantify this magnitude? Or what is giving the confidence in those second half numbers, especially after -- this quarter came in a little bit lighter than we're used to seeing F5's report and implies a sizable fiscal Q4 ramp to roughly $40 million-ish kind of sequential ramp here in fiscal Q4. And additionally, have you seen any changes in subscription durations?
Francis Pelzer
Sure. Absolutely, Jim. So I appreciate the question. And when we take a look at the results of this quarter in relation to our expectations, where we saw a softer performance was in the system side, not the software side of the business. And when we take a look at the back half of the year, that's really where we saw the strength of the pipeline in that area as well as for the renewals that we have in the outlook. And those renewals specifically are coming in -- in both quarters, they are stronger than what we have seen in Q2, but they just ramp up because of the nature of when the deals were done 3 years ago in Q4. And if you take a look back 3 years ago between Q3 and Q4, I think you'll see a similar dynamic in the software growth that we expect. And so that is really that $40 million swing that you're referring to between those 2 quarters. So that's really the visibility. It's the strength that we've seen in the renewals. It's the true forwards sense and the second or the interims of what's available to renew in Q4.
James Fish
Anything on the duration side of what you're seeing?
Francis Pelzer
The duration side really has not changed. These are not universally, but almost always 3-year deals.
Operator
Our next question comes from Ray McDonough with Guggenheim Partners.
Raymond McDonough
Maybe to start, Frank, as we think about cash flow dynamics going forward with term renewals and the opportunity in the back half, as you just discussed, and as renewals generally become a larger portion of the mix, combined with the product availability you mentioned earlier in the call, should we expect cash flow margins to continue to trend up from here as well?
Francis Pelzer
Ray, it's a great question. So the biggest dynamic of the cash flow changes between the quarters right now continue to be maintenance that just outweighs some of the subscription revenues that we've seen. And so the dynamics that you're implying absolutely are happening just on the smaller base of the overall cash flow that is coming out of that deferred revenue bucket, which is still largely maintenance related. And so I think, obviously, we had a very large accounts receivable balance going into Q2 you saw us collect and we're to a normalized level. So I think from where we had our cash flow from ops in Q2, likely, we're going to come down in Q3 and then my expectation would be back up in Q4. But that's the dynamics of the SaaS business is, as you're describing, it's not just a major portion, though, of what's driving the change in deferred right now and some of our cash flow from ops.
Operator
Due to timing, our last question will be from Sebastien Naji with William Blair.
Transcript from April 29, 2024

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