F5's Q4 2025 Earnings Call: Contradictions Emerge on Security Incident Impact, Systems Refresh, Software Growth, and Macroeconomic Risks

Date of Call: October 27, 2025

Financials Results

• Revenue: $810M in Q4, up 8% YOY
• EPS: $4.39 non-GAAP, up 20% YOY; $3.26 GAAP
• Gross Margin: 82.2% GAAP; 84.3% non-GAAP, up 138 bps vs Q4 FY '24
• Operating Margin: 25.4% GAAP; 37.0% non-GAAP, improved 255 bps YOY

Guidance:

• FY'26 revenue growth guided 0% to 4% (mid-single-digit secular backdrop but near-term incident disruption).
• FY'26 non-GAAP gross margin 83.0%–83.5%; non-GAAP operating margin 33.5%–34.5% (lowest in fiscal Q2).
• FY'26 non-GAAP tax rate 21%–22%; EPS $14.50–$15.50.
• Q1 revenue $730M–$780M; Q1 non-GAAP EPS $3.35–$3.85; Q1 gross margin 82.5%–83.5%.
• Continue to use at least 50% of free cash flow for buybacks.

Business Commentary:

* Record Revenue and Profitability: - F5 reported record revenue of $3 billion for fiscal 2025, marking the first time the company achieved this milestone. - Earnings per share grew by 18%, with gross margins of 83.6% and an operating margin of 35.2%. - The growth was driven by data center reinvestment, hybrid cloud adoption, and enterprise AI infrastructure demand, along with a strong product refresh cycle and competitive takeouts.

• Security Incident Impact:
• F5 experienced a significant security incident in August, leading to near-term impacts on revenue, particularly in the first half of fiscal 2026.
• The company is seeing potential disruptions due to resource allocation, delays in approvals, and some customers reevaluating projects.

• F5 is investing heavily in security measures and enhancements to mitigate risks and rebuild customer trust.

• Subscriptions and Software Growth:

• Software revenue grew by 9% year-over-year, with term-based subscriptions contributing 85% of FY 2025 software revenue.
• The transition of legacy SaaS and managed service offerings impacted total software revenue, but recurring revenue contributed 72% of Q4 revenue.

• The growth in subscriptions is attributed to strong renewals and expansions, while transitions in legacy offerings impacted growth.

• Hardware and Systems Revenue:

• Systems revenue increased by 42% year-over-year in Q4, driven by tech refresh and data center modernization, direct and indirect AI use cases, and competitive takeouts.
• More than 50% of F5's installed base is still on legacy product families, indicating significant potential for future refresh cycles.

• The increase in hardware revenue is attributed to catch-up in deferred investment and growth driven by AI readiness and data sovereignty use cases.

• Regional Performance:

• Revenue from the Americas grew 7% year-over-year, representing 57% of total revenue.
• EMEA revenue grew 7%, accounting for 26% of revenue, and APAC experienced 19% growth, contributing 17% of the revenue.
• Growth was driven by strong performance in enterprise and government sectors, with regional variations influenced by geopolitical factors and market dynamics.

Sentiment Analysis:

Overall Tone: Neutral

• Management highlighted 'exceptional fiscal year 2025' results (revenue +10%, record FCF $906M) but warned of 'near-term impact' from the security incident and guided FY'26 revenue to 0%–4%. They emphasized significant security investments, customer remediation progress, and confidence in longer-term demand drivers (hybrid cloud, AI), balancing strong results with cautious near-term outlook.

Q&A:

• Question from Meta Marshall (Morgan Stanley): What form of conservatism have you put into the estimates? Are you accommodating customers through discounting, are customers pushing off purchases while handling incidents, or offering incentives to upgrade? And how much of fiscal '25 systems growth was due to the product upgrade cycle?
  Response: Guidance reflects prudence for three near-term disruptions—F5 resource diversion to remediation, customer approval/delay risk, and possible project cancellations—impacting mostly new projects (recurring revenue seen as resilient); systems growth in FY'25 was ~2/3 tech refresh and ~1/3 capacity/AI, with >50% of installed base still on legacy, so refresh runway remains.

• Question from George Notter (Wolfe Research): How did you size the potential impact from the breach and can you quantify how many customers had configuration data taken or specific customer issues?
  Response: They profiled revenue cohorts (deferred revenue, ARR, subscription resilience vs new-project risk), benchmarked peers and sales feedback; the incident impacted BIG-IP customers only, a small percentage experienced data exfiltration (those customers were identified and notified; most reported non-sensitive data), and DCS/NGINX were not accessed.

• Question from Michael Ng (Goldman Sachs): Is the implied OpEx growth (~4% midpoint) reflecting additional breach-related costs, internal security investments, or costs for offering Falcon EDR? Also, what percentage of revenue comes from BIG-IP?
  Response: They won't disclose a BIG-IP revenue percentage; security spend had already more than doubled over three years and additional investments are included in planning, while remediation and Falcon EDR costs will be covered by cyber insurance or recorded as one-time remediation expenses.

• Question from Tal Liani (BofA Securities): Can systems grow further from current ~$180M quarterly level or will it stabilize; similarly, what drives software growth beyond the current ~$210M quarterly run-rate?
  Response: Systems: FY'25 rebound reflects catch-up tech refresh and early-stage AI-driven capacity expansion—management believes more growth is possible as refresh cycle is early; Software: longer-term drivers are multiyear/term subscriptions (+20% YoY in active multiyear agreements), flexible consumption, and accelerating SaaS/distributed-cloud adoption (SaaS customers +57% YoY; top1k DCS penetration rising).

• Question from Timothy Long (Barclays): On Distributed Cloud Services, what are deal economics (deal sizes, win/retention/expansions)? And can you comment on vertical trends—enterprise strong, service provider weak?
  Response: DCS is a land-and-expand model: ~33% of DCS customers have expanded ARR and those expansions average ~90%; enterprise verticals (financial services, healthcare, manufacturing) are driving hybrid multi-cloud adoption, while service provider demand remains tepid due to slower-than-expected 5G monetization.

• Question from Simon Leopold (Raymond James): Is U.S. federal affected by the government shutdown and is that in your Q1 outlook? Also, what software vs hardware mix is baked into the FY'26 0%–4% guide? Does the BIG-IP breach affect both hardware and virtual/software editions?
  Response: They assumed federal disruption (especially Q1) in guidance; they are not guiding software/hardware mix yet given early timing post-incident; and the breach affects both BIG-IP hardware and virtual/software editions.

• Question from Samik Chatterjee (JPMorgan): How might market-share dynamics change given the H1 disruption—should we expect catch-up in H2? And why has stand-alone security revenue been relatively flat?
  Response: Management expects any H1 blip to normalize and sees continued market-share gains over time due to roadmap and security investments; stand-alone security growth is moderating as customers consolidate onto platform/flexible-consumption models and SaaS legacy transitions weighed on stand-alone figures.

• Question from Amit Daryanani (Evercore ISI): Why isn't there more operating margin leverage in H2 vs H1 and can you quantify the March quarter OpEx uptick? Also, if source code was compromised how do you assure customers against hidden zero-days and will pricing power be muted?
  Response: Q2 is the low point (payroll tax resets and large March customer event); leverage is expected in back half though Q2 OpEx wasn't quantified; for code risk they are implementing code scans with partners, a customer-accessible trust center for pentests, AI hunting, enhanced bug bounty and CrowdStrike EDR on BIG-IP to increase observability; pricing policy remains unchanged—value will be justified by roadmap and security investments.

• Question from Ryan Koontz (Needham): Where are you in migrating end-of-life products; are you offering timing breaks due to the breach? And any new activity in telecom/5G core momentum?
  Response: Migration is early—>50% of installed base still on legacy; no change to end-of-support schedules and they are working with customers on orderly refreshes; telecom shows some 5G-related pockets of capacity growth but overall telecom capex and 5G monetization remain subdued so segment performance is muted.

Contradiction Point 1

Security Incident Impact on Market Share and Customer Behavior

It involves the potential impact of a security incident on market share dynamics and customer behavior, which are crucial for understanding the company's competitive positioning and revenue expectations.

Could the security incident change market share dynamics? - Samik Chatterjee (JPMorgan Chase)

2025Q4: Expect continued market share growth due to investment in security and platform capabilities. Short-term disruption possible, but long-term market share expected to strengthen. - François Locoh-Donou(CEO)

Can you discuss the strength in hardware and software, the driving factors, and expectations for next year's performance? - Timothy Patrick Long (Barclays)

2025Q2: Customers are concerned about the ability to handle regulatory and performance requirements for their businesses. And that's why you see us gaining share in the systems business. - François Locoh-Donou(CEO)

Contradiction Point 2

Systems Refresh Opportunity Duration and Drivers

It involves the expected duration and drivers of the systems refresh opportunity, which are critical for revenue forecasting and market positioning.

Will the $180 million systems growth continue, and how will software grow given current trends? - Tal Liani (BofA Securities)

2025Q4: Strong refresh cycle and AI readiness driving growth. Systems growth expected to continue. - Cooper Werner(CFO)

Can you outline the systems refresh plans for the next few years? What is the software revenue growth forecast for fiscal 2026? - Michael Ng (Goldman Sachs)

2025Q2: Continued strong tech refresh expected to last into 2026, with durable trends in hybrid multi-cloud, resiliency, and AI readiness. - François Locoh-Donou(CEO)

Contradiction Point 3

Software Revenue Growth Expectations

It involves expectations for software revenue growth, which are key for understanding product strategy and financial forecasts.

Will the $180 million systems growth continue, and how will software grow under current trends? - Tal Liani (BofA Securities)

2025Q4: Software will continue to grow driven by multiyear agreements and SaaS adoption. Ups and downs expected, but healthy trends indicated for future years. - François Locoh-Donou(CEO)

What are the systems refresh opportunities over the next few years? What are the expectations for software revenue growth in fiscal 2026? - Michael Ng (Goldman Sachs)

2025Q2: Software growth for next year expected in mid-single digits, driven by increased consumption and new use cases. A math headwind from FY '23 software base, but FY '27 will see a tailwind. - Edward Cooper Werner(CFO)

Contradiction Point 4

Impact of Security Incident and Macroeconomic Uncertainty

It involves the company's responses to the security incident and macroeconomic uncertainty, which can impact investor expectations and strategic decisions.

What is the potential impact of the security breach? Can you provide specific customer issues? - George Notter(Wolfe Research, LLC)

2025Q4: We definitely had customers that were affected by the incident. We were able to work quickly with them. There was a mobilization of their resources to upgrade from BIG-IP. But I want to give you a bit more context in that. The immediate impact of the incident was on access to Distributed Cloud Services and NGINX. And obviously, that's where data exfiltration was also detected. - François Locoh-Donou(CEO)

What factors contributed to the software segment's Q2 underperformance, and what macroeconomic risks are present? Additionally, how significant is the hardware replacement driver? - Tim Long(Barclays)

2025Q2: As we look ahead to the second half, we do expect hardware to grow at a mid-teens growth rate, whereas software will be a mid-single-digit to high-single-digit grower. - François Locoh-Donou(CEO)

Contradiction Point 5

Security Breach Impact on Revenue and Market Share

It involves differing views on the impact of a security breach on revenue and market share, which are crucial for understanding the company's resilience and growth potential.

What conservative assumptions underlie your estimates? Are customers delaying purchases or offering incentives for upgrades? - Meta Marshall (Morgan Stanley)

2025Q4: Near-term impact includes allocation of resources, executive delays, and potential project deferral. - François Locoh-Donou(CEO)

How has the recent security incident affected market share dynamics? - Saket Kalra (Equity Research)

2025Q1: Security performance is one of the most important areas of differentiation for us. And we believe that this security incident will actually strengthen our brand and strengthen our commitment to security. - François Locoh-Donou(CEO)