F5 Networks Stock

Great. Good morning, everybody. Welcome to the F5 fireside chat at the Goldman Sachs Communacopia and Technology Conference. My name is Mike Ng, and I cover F5 and Comtech here at Goldman. It's my great privilege to welcome Cooper Werner, who is F5's CFO; and Tom Fountain, who is F5's COO. Thank you both for joining us here today. It's an absolute pleasure.

Thanks for having us.

Great. To start off, I was just wondering if you could hit a big picture strategic question. At the Analyst Day, the company highlighted several technology megatrends, the growing adoption of hybrid multi-cloud, the expanding threat landscape, growing demand for AI inference. All of these things are driving demand for F5's ADC products or performance tools. Would you talk a little bit more about what you see as the key industry trends today and how F5 is positioned in each of them?

Sure. So, thank you, Mike, for having us. And maybe before I jump into the megatrends, let me just get on record our safe harbor provision. Our discussion today may contain forward-looking statements, which involve uncertainties and risks. Our actual results may differ materially from those expressed or implied in these statements. Please see our SEC filings for more information on these risk factors.

So Mike, I think we talked a bit about this at our investor event. The world runs on applications today, and applications require performance and security and scalability like we've never seen before. And I think we today are really operating at the nexus of 3 megatrends that are shaping the architecture around us. The first is really around hybrid and multi-cloud. So 90% of organizations today have a hybrid multi-cloud architecture. They operate across, on average, 22 different environments. And this creates incredible complexity for large organizations trying to manage this hybrid multi-cloud.

The second is an expanding threat landscape. Frontier AI is fundamentally changing the way we think about security, the focus around application security. And in today's world, the relationship between vulnerabilities found and when they need to be patched to avoid exploitation has shrunk quite dramatically, and F5 sits at the front door of these applications. And we've seen the application layer attacks increase 140% over the last year. And then, of course, the third megatrend is AI and specifically AI inference. Today's organizations are either building or preparing for a large number of AI-powered applications. We sit at a really important place. The indirect use cases for AI drive additional bandwidth through our products and, as a result, sort of increased demand for them.

But we also are very specifically pursuing a set of direct use cases. And we have 3 of those. We go after the data delivery opportunity, where we can sit in front of data stores. We pursue a set of things around AI runtime security. So today's applications require additional security to really both protect against these AI threats as well as use AI capabilities to do that. And then the third is around AI factory load balancing. And here, this is really around GPU optimization for the AI factories that the world is building. And so when you put these 3 together, they layer on top of each other and create just an incredible demand environment.

Great. That's a fantastic overview. Cooper, to bring you in and perhaps just translate how this impacts the financials. The company has guidance for this year to have revenue growth of 9% to 10% on the back of 8 consecutive quarters of double-digit product growth. How would you characterize the underlying demand environment today? And what were some of the drivers of giving you the confidence to take guidance higher last quarter?

Yes. So I think it's been a very healthy demand environment over the past several quarters is what we've been seeing. Our pipeline health has been very strong. Pipeline rates continue to remain very high. I think we've been seeing some new growth vectors over the last several quarters have emerged. And we've talked a lot about some of them on the system side of the business. Digital sovereignty has become top of mind for large enterprises across Europe, and we're seeing that now across Asia Pacific as well. And so there's been kind of a renewed focus on building out data center capacity in these environments.

AI is also driving a need for digital sovereignty, as more of these workloads, customers want to retain on-premise. And so we're seeing more capacity built out supporting that. But then also just in general, as Tom said, that customers are preparing for -- they're seeing today and they're preparing for continued growth in their workloads driven specifically by AI. And so as part of the refresh that we've been seeing. We've been seeing a lot of expansion in capacity, which is kind of a new phenomenon when you look back to prior refresh cycles. And so all these trends that are kind of driving new vectors of growth in addition to the typical software and refresh related growth that we're seeing have given us that confidence to take our guidance up throughout this year and give us a pretty good outlook on momentum heading into FY '27.

Great. And is the right way to think about this focus on digital and data sovereignty is -- that's something that's enabled by hybrid multi-cloud, and therefore, there are opportunities for F5's products, systems to help support the performance of hybrid multi-cloud?

Yes. I mean that's one of the big things that differentiate F5 is that we allow customers to run their applications in any environment. And several years ago, it wasn't the popular move to continue to invest in data center capabilities, but we really felt long term customers were going to find themselves in a hybrid multi-cloud world and having the right efficacy of their delivery and security solutions, both in data center-based environments as well as cloud-based environments was going to become paramount, and we're seeing that play out now. And so it's been driving not just growth on the capacity that we're seeing, but it's also manifesting as broader expansion across the rest of the portfolio as customers are preparing for that hybrid multi-cloud world.

Great. That's very clear. And then on the systems piece, revenue grew 32% year-over-year last quarter, supported by ongoing refresh, but also broader capacity expansion, you have iSeries, end of software support, I think, starting in the fiscal -- second quarter of '27. Could you just talk about the remaining runway of the iSeries to rSeries migration? And how does that end of support deadline give you visibility into what systems demand should be over the next 1 to 2 years?

Yes. So we have an end of software support date that's in our Q2 of '27. Those customers that do not refresh their legacy iSeries infrastructure, they'll still be under customer support, but what they won't get is the software updates. And in this environment, in the post-Mythos world, that's become more front and center with our customers, is ensuring that they're running on the current supported versions of software to make sure that they're getting the update they need in response to new vulnerabilities. And so I think what you're seeing is customers are refreshing in a more orderly fashion than they had in prior cycles where some customers had an appetite to sweat their infrastructure and maybe wouldn't refresh until beyond those dates. And so we're seeing, I think, a little bit more of an acceleration of that refresh motion.

Now having said that, there is a long tail of refresh that will still happen after the end of software support date. There's customers that may be have equipment that is in kind of a lower -- has a lower risk profile in their view. And just based on the timing of their own budgets, they may still refresh beyond those dates. And so what you see is a little bit of a surge in the demand as you get closer to that date and then you'll see kind of a long tail slope on the remaining refresh motion.

Great. And what's exciting is that this is not just a simple installed base refresh. You guys have talked a little bit about this refresh plus expansion. So could you just expand a little bit around what's driving that refresh plus dynamic?

Yes. And I think that goes back to the workload growth that we've been seeing with customers. So as they're engaging in that refresh motion, they're planning for future growth needs. And so we're seeing capacity expansion. So if you think of it as a fill rate, when you go through that replace motion, you're going to decommission legacy infrastructure and you're going to replace it with new infrastructure. And so the fill rate is how much capacity do you replace and then do you expand that capacity, and we're seeing that fill rate is growing versus prior cycles. And customers, they're adding capacity to support the existing growth that they're seeing and -- in anticipation of future growth. And we're also seeing them move up the stack of our appliance lineup. So we have kind of a low, mid- and high end range of our appliance families. And so what we're seeing is customers are moving up to more performant units at that time of refresh.

Great. And F5 is continuing to invest in capabilities within the ADC portfolio and a lot of your competitors are not. And I think that's led to some competitive takeouts relative to your competitors. So I was just wondering if you could talk a little bit about what's happening in the competitive set. Why are you seeing accelerating takeouts? Does the competition provide a pricing umbrella? And how aggressive are you guys being in following that pricing?

Yes. So we have seen an inflection in that takeout opportunity. And really, it's kind of 3 dynamics that are kind of coming to a head for customers of some of these competitors. The first, the innovation that we've continued to invest in across both systems and software environments, and some of our competitors just did not continue to invest in the systems side of the technology stack. From a pricing perspective, yes, there's competitors that have taken pretty aggressive pricing tactics. It has provided a bit of a pricing umbrella for F5. We do have a price motion that monetizes the innovation we're bringing to market, but we think it's viewed as a much more sustainable practice for our customers, and it's a little bit more fair compared to what they've seen from other providers.

And then just in terms of customer support, we've continued to invest in our support capabilities. We've provided more flexibility with our pricing and commercial models. And so all of this is adding up to a choice for customers that where do they want to architect for the future and that F5 is seen as a great partner going forward.

Great. Shifting over to software. I was just wondering if we could talk a little bit about the shape of software growth this year, next year. F5 guided to double-digit software revenue growth in fiscal '27, which would be an acceleration. So what's driving that? How are expansion rates and contract terms trending within these multiyear renewals?

Yes. So we'll start with what we were seeing this year and next year, where we had said mid-single digits software growth for this year, double digit for next year. One of the dynamics that we're seeing is that there's just the kind of a math equation around the timing of some of these renewals. So we had a more flattish renewal cohort for FY '26 and we expect -- we're seeing expansion against that cohort, but that's -- that was a bit of a headwind, but then we said the same dynamic would be a tailwind for our software opportunity in FY '27. But if you normalize across that and take the math headwind, tailwind over a 2-year time frame, call that net-neutral, what we're more excited about is the expansion we're seeing at the time of those renewals.

And what we're seeing is customers are utilizing more of what they've contracted. So we're seeing higher rates of consumption. We're seeing customers adopt more of the portfolio. So more and more of our customers are running all 3 of our major product families. And then on the SaaS side of the business, that's been a bit of a headwind as we had retired some legacy offerings. And we're pretty much through that transition now. And so we're anticipating ARR growth for that part of our business in FY '26. That's a ratable business. And so that ARR growth in FY '26 will start to show up as a new growth driver in FY '27.

And then lastly, and this is earlier days that the AI security opportunity, that's a software opportunity as well. And that's top of mind for all of our customers. And so we expect to see that drive new growth as well. And so then as we look -- as long as we're talking about cohorts, we do have visibility as to what renewals are coming up and the timing. And so as we look ahead to FY '27, we anticipate that growth will be more back-end weighted just based on the timing of when some of these larger opportunities come up for renewal.

Great. And beyond the kind of mechanical elements of the 3-year contracts and the renewal cohorts, could you just provide a little bit more texture in terms of the structural drivers of that growth? How much of it is expansion with existing subscribers versus new software logos? Any kind of features or product sets that you would highlight that are resonating in particular?

Yes, I'd say it's mostly expansion, but I'll call it, new use cases in new projects. So we're in the vast majority of Global 2000 customers already. So there's -- we continue to see new logos quarter in, quarter out. But just based on the our competitive position in -- across large enterprises, service providers and government agencies, the majority of our revenue is going to come with customers that are already F5 customers. And so when we get to that renewal cycle, that's where the opportunity is for us to expand what we're doing for those customers. And so we're seeing a lot of new projects. We're seeing customers adopt new functionality from F5. And so that is the majority of the growth, is the expansion we're seeing with that existing customer base.

Great. And could you just give us some color around Distributed Cloud Services, DCS? Like, how does that fit into the broader portfolio?

Yes. So Cooper already referenced it a bit. We're very pleased with the progress that we've made around Distributed Cloud. So this is a critical part of the portfolio. And I think the numbers tell a very compelling story on that, right? So this is a product offering that we launched 4 years ago now. We've shared that we're over 1,700 customers on it. 33% of our top 1,000 customers have now adopted Distributed Cloud, and that's up from 24% a year ago. We really see the SaaS offering as a critical part of the portfolio. It is a key way that customers are able to consume the value that we deliver in a different form factor and be able to extend those benefits to all of their applications. And so it really -- it's a really essential part of our Application Delivery and Security Platform story, what we call our ADSP.

And maybe to make it sort of tangible, take a customer that has used BIG-IP in many cases, for a number of years, seeing tremendous value from it, but maybe we're only covering a portion of their applications, probably the ones that are the mission-critical apps in their data center. And many of these organizations, particularly large enterprises, have a large portfolio of applications, some of which are distributed in many locations. And so now they're able to get those same benefits that they had seen from the critical apps in their data center and extend those all the way to their Edge applications wherever they might be running. And because of the application, delivery and security platform story, they're able to get consistent policy, the same management interfaces, the same sort of benefits that they're accustomed to from BIG-IP.

Of course, that dynamic also works the other way. So there are a number of examples where customers may first experience F5 in a SaaS form factor. And because we're hybrid and multi-cloud, they're able to extend that back into their on-premise environment. And so we've seen sort of great cross-sell sort of both directions on that. I think one of the really powerful conclusions is that customers that adopt more than 1 modality, so there are 2 or more of these from us, grow 25% faster than others. And so it's, I think, a real testament to the fact that customers that get on to the platform, start to experience the benefits, enjoy sort of these different modalities, then use it even more thoroughly across their organization.

Great. I wanted to revisit a topic that you mentioned earlier, Tom, which is really about the AI opportunity for F5. And you talked about AI data delivery, AI runtime security, AI factory load balancing. So could you just walk us through where each of those opportunities fit on the customer adoption curve? For F5, which one is contributing revenue today versus which ones have longer-term market expansion potential as you think about agentic and physical AI and all those things?

Yes. We're very excited about the investments we're making and the opportunity available in AI. To frame it, though, I do need to step back and remind everybody that we have both the direct and the indirect use cases. The demand for AI is causing organizations to increase their usage of traditional ADCs and those capabilities. And in many cases, for us, those are hard to discern from some of these new use cases because customers just see it as increased capacity. In some cases, they're already seeing it with AI-powered apps that are driving more demand. In others, it's in anticipation of those applications and particularly the agentic AI world that is now ahead of us that they're planning for that and building that additional capacity.

And so we think this indirect use case is actually as big or bigger than the direct use case, but the direct use case is the one that we can really sort of put our finger on. And here, there are really 3 different use cases, each of which at a different stage in their maturity. So if I start with the AI data delivery, this one is the most mature. It most typically is a hardware-based use case. So these are customers that want to put performance enhancement capabilities in front of their disk store. That's a net new control point for us, so we didn't traditionally sit in that part of the network architecture. And so customers that are building out their AI environments need to be able to get data in and out of their data stores at incredible performance. And we're optimized and tuned really well for that sort of use cases.

The second one then is around AI runtime security. And here, organizations need to be able to secure their AI-powered applications. Those look a lot like the sort of capabilities that we've had and that we offer already. But in addition to that, they need to be able to secure the communication between the application and their AI models. And that's a new frontier of AI security functionality. We find that all of that needs to be now AI-powered. So in a world where threat actors are using AI to help find and exploit vulnerabilities in an organization, you have to have AI-powered capabilities to respond to it. So we have made some investments there, a number of investments there, and we're very proud of some of the innovation that we brought to market.

And then the third use case is perhaps the most nascent and this is really around AI factory load balancing. That could be across different AI factories or more focused. It's really about load balancing within an AI factory. And so here, we have a partnership with NVIDIA, where we have taken our BIG-IP capabilities and brought those to their DPUs. So this is a data processing unit that runs inside of an AI factory, and that provides a number of performance benefits, a number of security benefits, multi-tenancy. So there's a range of benefits that it brings. That one is by far the most nascent and the earliest in part because DPUs are still getting more broadly deployed. And there are some differences in some of the business models for people that are building out AI factory. But we're very excited about the potential for it.

Great. And then translating that into financials, is there a way to quantify how much of the revenue benefit F5 has seen from AI to date? And then anything that you could share as it relates to which enterprises or verticals are driving most demand?

Yes. So as Tom said, we've kind of got 2 categories of revenue growth. We've talked about the direct use cases, and we've sized that. First half of the year, that was roughly $50 million of bookings, and we continue to see tremendous growth from those use cases. And then of course, we're seeing a lot of the strength on the systems side of the business, is really the some of indirect related demand. We haven't been able to quantify that. But clearly, that's one of the largest drivers of the growth that we're seeing there.

In terms of adoption, what we're seeing is data delivery is the largest use case early days. We're seeing customers that are starting to inflect their inference capabilities. We're seeing customers start to evaluate a mix of public models in hyperscaler environments, and now they're evaluating more open source models that they may be running on their own infrastructure. And that as we see that continue to mature, we think that's going to drive additional data delivery demand. In terms of verticals, one thing that we're seeing is in financial institutions and government agencies, their AI security is becoming more front and center. And so we're seeing early momentum in some of our AI security use cases within those verticals.

Great. Let's shift gears and talk about the broader F5 security portfolio. What is F5 doing to address some of the enterprise application security issues? And maybe you could talk through what the portfolio looks like today and also touch on the SurePath AI acquisition that you guys just did.

Yes. So maybe the starting point for this really is where we sit. So we sit at the front door, the most mission-critical applications of the largest enterprises, service providers and governments in the world. And as a consequence of that, we see every request, every API call. And as we go forward, sort of every agentic call in and through these organizations. Today, we serve 80% of the Fortune 500. And so it puts us in a really prime position to be able to help our customers solve their security challenges.

I'd really point to sort of 3 areas of differentiation for us. The first is really around depth. And so here, we have built sort of the highest efficacy set of capabilities around securing applications in the world. That is a set of functionalities that goes very deep into each of the areas that customers need to protect for their enterprise app. The second then really is around the breadth of the portfolio, and this takes a few different forms. So we offer these application security services across a number of different categories. There are several different types of security that are required there. We provide sort of that full range of functionality. We've integrated together into a platform. And so we are the only player that offers a single-integrated platform that allows customers to have policy that runs across these different environments.

And then the third is the multiple modalities, the ability to support hybrid and multi-cloud. So the breadth there is quite unique. And then the third, which is sort of where you get to it in the question is really around the role of AI. And here, we built an AI-powered set of AI security capabilities. Our AI-powered WAF, for example, is one of the fastest-growing products in our history. And we're seeing sort of great momentum and traction with that. We are also, as I referenced, building out a number of AI security capabilities. We made an acquisition last year. We combined that with a number of the organic investments that we've been making. I feel very good about the AI security functionality that we have.

In Q3, we announced the SurePath acquisition that added to the guardrails and red teaming functionality we have new discovery capabilities, and that really build out a more complete AI security offering. I think we're very pleased with the momentum that we're seeing with customers, particularly in financial services, where we have a number of marquee wins there are continuing to very aggressively grow that business. And so we feel very good about our position in security in general, and specifically in AI security.

Great. Cooper, I was wondering if you could just turn to margins and financials. Maybe you can just walk through some of your expectations around gross margins and operating margins over the next couple of years? And then if you could please touch on just what you're seeing in terms of supply chain constraints, kind of operational constraints that may affect the margin outlook over the next couple of years here?

Yes. So gross margins have held up pretty well this year. We've seen a lot of this has to do with some of the dynamics I talked about earlier, customers moving up to higher margin offerings as they're adding capacity. And so we feel pretty good about where gross margins are this year. We've noted that because of some of the memory cost pressures that we're seeing, those will start to flow through in the model next year. So we sized at our Analyst Day, the margins would be in the kind of 80% to 82% range for next year.

We did see a little bit of stability on the pricing related to memory in Q3 and for Q4. We haven't updated our guidance for gross margin next year. It's kind of cautiously optimistic, I guess, is how we would characterize it, because frankly, we're getting some mixed signals where providers are saying that there potentially could be continued cost pressure on memory. But what we've been seeing come through over the last few weeks is signaling more stability. And so we think we'll be in a better position to provide an update on where gross margins look like they're trending in October for FY '27. But longer term, we think the gross margin should stabilize as we start to get a little bit better availability of some of these scarce components.

From an operating margin perspective, we think we have an opportunity to continue to improve our operating margins in the long term, notwithstanding the gross margin headwind for next year as we can grow our OpEx at a slower rate than revenue. We're seeing a lot of efficiency across the business, leveraging automation and AI capabilities. We're seeing really strong sales productivity. We've been adding a lot of sales capacity for some of the new growth opportunities that we're seeing. But even as we've added that sales capacity, but the productivity continues to go up. So we feel really good about our ability to continue to scale the business in terms of our OpEx as a percentage of revenue.

Great. And then on capital allocation, F5 has committed to returning at least 50% of its free cash flow to shareholders through buybacks. And you guys have also selectively done some tuck-in acquisitions. So maybe you could just provide an update on capital allocation priorities, how you weigh things like repurchases versus strategic investments in the business.

Yes. So it will be pretty consistent with our approach over the past few years. We will continue to invest both organically and look for inorganic opportunities, but it will be largely kind of the same philosophy as what you've seen with our acquisition approach over the last couple of years. We'll continue to repurchase shares with a target of at least 50% of our free cash flow devoted to share repurchases. And then you see, I think, a little bit of an increase in our CapEx as we continue to build out the distributed cloud part of our business and just building more points of presence around the world to support growth of that business.

And then the last item I would note is our inventory position will continue to build as we're sourcing some of these long lead time components, which we feel really good about. That approach, it's provided some stability in terms of our supply that we need to meet demand for FY '27 and beyond. But you'll see some of the actions we've taken to ensure that we can meet that demand showing up on our balance sheet in terms of inventory position.

Great. To close out, I mean, it certainly feels like there's a lot of exciting times ahead. So would you just talk a little bit about key priorities, goals that F5 is focused on over the next 1 to 2 years?

Yes. So the setup for the next 12 to 24 months, I think, is better than I've seen it ever in my time at F5, and I think it's many of the things we were just talking about, right? The incredible demand environment in which we're operating right now, the long-term secular demand for our architectural approach and the way we go about solving things, the platform message is really resonating with customers. And I think the team is executing really well.

And so for us, I think that translates into kind of 4 priorities that are immediately in front of us. The first is around capitalizing on this secular shift. The second then is really about capturing the growing demand for ADC. The third is around driving platform adoption across our installed base of customers. And then the fourth is around capturing this new AI opportunity that is available to us.

Excellent. Well, Tom, Cooper, thank you so much for participating in our conference. It's been a privilege to have you on stage here.

Thank you so much.

Thank you.

Good afternoon, and welcome to the F5 Inc. Third Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] 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 DuLong. Ma'am you may begin.

Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. We are here to discuss our third quarter fiscal year 2026 financial results. Francois Locoh-Donou, F5's Chairman, President and CEO; and Cooper Werner, 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 October 26, 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 6076834. The telephonic replay will be available through midnight Pacific Time, July 28, 2026. For additional information or follow-up questions, please reach out to me directly at [email protected].

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 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 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. I will now turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. Q3 was another outstanding quarter. We delivered 19% product revenue growth, driving 11% total growth. We have now delivered eight consecutive quarters of double-digit product growth, a signal that F5 is precisely where the market needs us to be. The reason is straightforward. The world runs on applications, including a new generation of AI-powered applications, and the world is changing fast, driving higher demand for application security and delivery. AI is accelerating everything, more traffic, more APIs, more distributed architectures and a dramatically larger attack surface. The complexity our customers are navigating has never been greater.

F5 targets this complexity, simplifying and unifying application delivery and security across hybrid multi-cloud environments. We sit at the front door of the world's most critical applications, delivering and securing every app in every API. It's a position we've earned over 3 decades and 1 we are strengthening everyday. F5 is at the intersection of three secular megatrends. Hybrid multicloud adoption, the expanding threat landscape and the AI inference inflection. Our strong Q3 results reflect this trend and F5's alignment with where customers are investing. They also reflect the actions we are taking to drive faster growth. We are converting hybrid multi-cloud adoption into expansion opportunities, competitive [indiscernible], digital sovereignty wins and platform consolidation to ensure we are capitalizing on heightened demand for best-in-class application and API security. And we are building AI momentum.

We had another strong quarter of wins across AI Data Delivery, AI Runtime Security and AI Factory Load Balancing. Our top line results tell that story clearly. We also continued to execute with discipline, delivering 14% non-GAAP earnings growth while continuing to invest in innovation and go-to-market capacity to sustain and extend our momentum.

Looking ahead, we see strong demand driven by durable tailwinds. As a result, we are raising our fiscal year 2026 outlook to approximately 9% to 10% revenue growth, up from 7% to 8%. And Cooper will cover more details about our outlook in his remarks. But first, let me bring our growth dynamics to life with customer examples from the quarter. Each one illustrates why the forces reshaping IT are driving growing demand for F5 and reinforcing our critical role at the application delivery and security layer.

Accelerating hybrid multicloud adoption is fueling multiple growth drivers for F5, across data center build-out and sovereignty, competitive displacement and platform consolidation. During Q3, a large energy and utilities provider with more than 1,000 mission-critical applications running on F5 expanded its footprint significantly in a major overhaul of its cloud infrastructure across three regions and multiple data centers. When problems with its cloud environment began putting critical services at risk, the customer repatriated those workloads on premises and onto F5 hardware. This shift reduced its dependency on third-party platforms and restored confidence in the reliability of its delivery infrastructure.

A European government agency wanted to standardize delivery and security across a growing multi-cloud environment while keeping select applications on-premises for privacy and compliance. F5 delivered a sovereign-by-design architecture with consistent delivery, stronger security and simpler operations across their multi-cloud environment. The customer refreshed and expanded their BIG-IP footprint. They also added Distributed Cloud Services, including AI-powered WAF to automate policy and advanced threat protection.

In an example that highlights both a competitive displacement at an AI data delivery win, we displaced an incumbent at a Fortune 100 global enterprise technology provider. The customer was looking to strengthen the delivery and security layer in front of its S3 compatible cloud storage service across 45 data centers worldwide. They selected BIG-IP for its ability to deliver the availability, resilience and security required to support their AI and data-intensive workloads at global scale. The expanding threat landscape also continues to create significant tailwinds for F5.

In the last several years, the front lines of cyber defense have shifted to the application layer. Attacks on IT assets grew more than 60% over the last 3 years. But in that same time frame, the volume of application layer attacks surged 140%. This is where F5 plays and as attacks at this layer continue to grow, our relevance and opportunity grow too. During Q3, a multi-brand telecommunications provider replaced a fragmented collection of security tools with Distributed Cloud Services. The customer consolidated web application and API protection, bot defense and DDoS mitigation on F5. We displaced both a SaaS-only competitor and a cloud-native tool set. F5's automated API Discovery aligned with the customers' shift to micro services, reducing latency and keeping sensitive traffic off the public Internet. Our unified management layer lowered operational overhead supporting the customers' cost reduction goals and establishing F5 as an always-on security layer across their digital operations.

In a similar consolidation win, a large multinational health care company pursuing a hybrid cloud strategy, identified critical security gaps with their incumbent provider. Following a competitive evaluation, Distributed Cloud Services displaced the incumbent, providing web application and API protection, DDoS mitigation and bot defense on a unified platform. Since deployment, threats that previously evaded detection are now being identified and blocked. F5 improved security outcomes while reducing operational costs by consolidating multiple functions.

Frontier AI models have escalated the threat level for organizations globally, creating a new layer of urgency on top of existing security demand. Customers know the threat equation has changed and early movers are already strengthening their defenses. For instance, a major European retail banking institution and existing F5 customer, accelerated plans to upgrade its application security infrastructure as the potential for AI-driven attacks escalated. The customer had been evaluating AI-based WAF solutions for nearly a year, and F5's AI-powered approach, including machine learning-based threat detection, granular per application policy control and behavioral bot defense differentiated us from their incumbent provider. In the first phase of their upgrade, they are deploying Distributed Cloud Services as the front door to their application environment, creating a consistent, scalable on-premises bot defense architecture. This foundation can be extended to every new environment they deploy, mitigating both a agentic and traditional bot attacks.

We saw the same urgency play out in Asia were 1 of the region's largest financial institutions and a long-standing F5 customer, accelerated its application security strategy amidst rising AI-driven attacks and zero-day vulnerabilities. The customer doubled down on F5 as a strategic security vendor deploying our AI-powered WAF to automate threat detection and accelerate virtual patching at scale.

Finally, the AI inference inflection is driving demand for F5, both indirectly as customers expand hybrid multi-cloud deployments and directly through our three AI use cases, AI data delivery AI runtime security and AI factory load balancing. Momentum is building across all three. In fact, our cumulative total customer count for direct AI use cases grew 50% just in Q3, underscoring the accelerating pace of demand. A few notable wins from the quarter illustrate our traction.

In AI data delivery, we are accelerating secure AI data pipelines, ensuring storage, networking and data delivery and keeping AI clusters fully utilized across hybrid and multi-cloud deployments. Earlier, I highlighted an AI data deliver win and competitive takeout. In another sizable win during the quarter, a leading autonomous systems manufacturer selected F5 over a competitor to handle escalating data volumes and throughput demand. The customer previously deployed F5 to repatriate AI training data from public cloud to on-premise data centers deploying BIG-IP in front of their AI storage environment to improve latency. With exploding data volumes and throughput demand, the customer needed additional capacity. F5 outperformed the competitor, simplifying connectivity and storage sharing across their data centers and expanding our role as the trusted traffic layer between storage and compute.

In AI runtime security, we are safeguarding AI applications, APIs and models from abuse, data leaks and attacks like prompt injection. We are also delivering real-time threat defense, [indiscernible] models and robust guardrails.

In Q3, a U.S.-based professional sports league was rolling out AI-powered applications to analyze highly-sensitive data, including player health information and team strategy insights. With competitive integrity and league trust on the line, they needed confidence that their applications could be proactively tested for vulnerabilities and protected continuously in production. The customer deployed AI Guardrails and AI Red Team on-premises to validate applications before launch and defend them at run time. Our breadth of functional coverage beat out a competitor and enabled the league to standardize on F5 as their single trusted vendor.

In AI Factory Load Balancing, we are optimizing traffic and GPU utilization both across and within AI factories, increasing token throughput, reducing time to first taken and lowering per token costs. In the Q3 AI Factory Load Balancing win, a service provider in our EMEA region selected F5 to power its sovereign AI factory purpose build to deliver GPU-as-a-service and AI-model-as-a-Service. To support these offerings at scale, the customer deployed BIG-IP Next for Kubernetes, Distributed Cloud Services and NGINX enabling secure multi-tenancy, traffic segmentation, token governance and large language model API endpoint protection.

Before I pass the call to Cooper, I will speak to innovation at F5. The customer examples I shared highlight what we are hearing consistently from customers. They are modernizing their architectures and at the same time, the requirements for application delivery and security are rising. That's exactly why we are innovating to lead the next generation of capabilities and get them deployed with customers faster so they are ready as requirements intensify.

Frontier AI has fundamentally altered both sides of the security equation. In the post-mythos era, attackers can use AI to discover vulnerabilities, develop exploits and vary attacks at a speed and scale that was previously impossible. This is compressing the time between vulnerability discovery and exploitation and forcing every enterprise to rethink how it protects its applications. In this environment, security cannot depend only on identifying a vulnerability and issuing a patch after the fact. Customers increasingly need run time protection, ability to detect malicious behavior and stop attacks while their applications, APIs, models and agents are running. This is precisely where F5 is accelerating innovation.

Our AI-powered capabilities in Distributed Cloud WAF use a layered detection engine to assess the intent and risk of each request, moving customers beyond static signatures and manual policy tuning. Since launching in Q2, 15% our Distributed Cloud WAF customers have adopted the capability. And of those, 75% are running in blocking mode versus monitor mode, that shift from monitor to block reflect growing customer urgency around zero-day threats, and it's warranted. In real-world use, our AI-powered WAF is already stopping zero-day attacks without requiring new signatures. We are applying the same urgency to the security of our own products.

This quarter, we shipped our first hardened software release as part of a new monthly rather than quarterly cadence. We are hardening our software releases by applying advanced and preview frontier models to vulnerability discovery and remediation. As a result, we are finding and fixing issues faster.

More importantly, we are getting those fixes into customers' hands faster. This is a rigorous approach that we believe sets F5 apart in world of security. But delivering fixes factor only matters if customers can deploy them. That is why we also introduced new Fleet Management capabilities in F5 Insight. F5 Insight gives customers visibility into software versions, security posture and update readiness across the BIG-IP estates with guided workflows that simplify upgrades and patching. F5 Insight was launched last quarter and the strong early uptake is evidence that customers want a faster, more operationally practical way to reduce risk.

Together, these innovations create a continuous defense model for the AI era. We are using AI to identify risk earlier, protecting applications at run time, delivering hardened software releases faster and helping customers deploy those protections across their environments. This is how F5 is starting the disruption created by Frontier AI into stronger security and greater resilience for our customers.

Now I will turn the call over to Cooper who will walk through our Q3 results and our outlook. Cooper?

Thank you, Francois, and good afternoon, everyone. Q3 marked another quarter of solid execution with both revenue and earnings well above the top end of our guidance. We continue to see strong demand with customers' hybrid multicloud adoption, driving expanding opportunity for F5. I will first review our Q3 results, followed by our guidance for Q4.

We delivered a strong Q3, growing revenue 11% to $865 million, with a mix of 54% Product revenue and 46% Services revenue. Product revenue totaled $463 million increasing 19% year-over-year, while Services revenue of $402 million grew 3% year-over-year. Systems revenue totaled $240 million, up 32% over Q3 FY '25. Our Software revenue of $223 million grew 7% year-over-year. Subscription-based software revenue totaled $201 million, up 9% year-on-year, representing 90% of our Q3 Software revenue. Perpetual license software totaled $22 million, down 4% year-over-year. Revenue from recurring sources contributed 69% of our Q3 revenue.

Shifting to revenue distribution by region. Revenue from the Americas grew 11% year-over-year, representing 55% of total revenue. EMEA delivered yet another robust quarter with 27% revenue growth, representing 30% of revenue. Finally, APAC was down 11% against the very strong year ago period, representing 15% of revenue. Looking at our major verticals, enterprise customers contributed 71% of Q3's Product bookings. Government customers represented 19% of Product bookings, including 7% from U.S. Federal. Finally, service providers contributed 11% of Q3 Product bookings. Our continued financial discipline contributed to our strong Q3 operating results.

GAAP gross margin was 82.2%. Non-GAAP gross margin was 84.2%. Our GAAP operating expenses were $498 million. Our non-GAAP operating expenses were $426 million. Our GAAP operating margin was 24.7%. Our non-GAAP operating margin was 35%. Our GAAP effective tax rate for the quarter was 8%. Our non-GAAP effective tax rate was 12.4%. This is below our previously guided annual range primarily driven by discrete benefits associated with the filing of our annual federal income tax return and changes in unrecognized tax benefits during the quarter.

Our GAAP net income for the quarter was $208 million or $3.62 per share. Our non-GAAP net income was $272 million or $4.73 per share reflecting 14% EPS growth from the year ago period.

I will now turn to cash flow and balance sheet metrics. We generated [ $316 ] million in cash flow from operations in Q3 and free cash flow of $281 million. CapEx was $36 million. DSO for the quarter was 45 days. Cash and investments totaled $1.63 billion at quarter end. Deferred revenue was $2.19 billion, up 12% from the year ago period. In Q3, we repurchased $100 million worth of F5 shares at an average price of $299 per share. We had $422 million remaining on authorized share repurchase program as of the end of the quarter. Finally, we ended the quarter with approximately 6,600 employees.

I will now speak to our outlook for Q4. We expect that the market trends we've outlined, hybrid multicloud adoption, threat landscape expansion and AI inference inflection will drive continued strong demand in Q4 and into FY '27. As a result, we expect Q4 revenue in a range of $870 million to $890 million, reflecting just under 9% year-over-year growth at the midpoint. We now expect Q4 non-GAAP gross margin in the range of 83% to 84%, an improvement from our prior view. This improved outlook reflects a more favorable product mix towards higher performance systems, that carry stronger gross margins, along with lower Q4 component cost increases than our early estimates. While we are encouraged by the improved gross margin outlook for Q4, we are not revising our FY '27 gross margin guidance of 80% to 82%, given the dynamic pricing environment for memory and storage components.

We estimate Q4 non-GAAP operating expenses of $430 million to $442 million. We expect Q4 share-based compensation expense of approximately $68 million to $70 million. We anticipate Q4 non-GAAP EPS in a range of $4.14 to $4.26 per share. Based on our strong Q3 results and our Q4 outlook, we now expect to finish FY '26 ahead of our prior guidance. With our Q4 revenue outlook, we now expect approximately 9% to 10% revenue growth for the full year, up from our prior outlook of 7% to 8%. 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. We expect FY '26 non-GAAP gross margin in the range of 83.5% to 84%. We expect non-GAAP operating margin in the range of 34.5% to 35.5%. We expect our FY '26 non-GAAP effective tax rate will be in the range of 18% to 19% reflecting the impact of the tax rate benefit realized in Q3. We expect FY '26 non-GAAP EPS in a range of $17.21 to $17.33 up from the prior range of $16.25 to $16.55. Finally, we expect our full year share repurchase to be at least 50% of our free cash flow.

With that, I will pass the call back to Francois.

Thank you, Cooper. To recap briefly before we go to Q&A, our wins this quarter and our financial performance tell a consistent story. The market is moving toward F5. Hybrid multicloud is accelerating, threats are growing more sophisticated, and AI inference is becoming core to how applications run. These are durable structural shifts that are benefiting F5. But we are not just writing these trends, we are using them to fuel our growth. We are innovating at a pace that is opening new markets and new use cases for F5 while deepening our relationships with existing customers and expanding our footprint across their environments. Our Application Delivery and Security platform delivers and secures every app and every API across on-premises, cloud and edge environment, on a single unified architecture. We eliminate the complexity of stitching together point products and give customers consistent performance, security and policy wherever their applications run. As traffic, data and AI workloads become more distributed, that control point becomes even more valuable.

We are executing with discipline, investing with conviction and innovating with urgency, and we look forward to continuing that momentum into Q4.

Operator, please open the call to questions.

[Operator Instructions] Your first question comes from the line of Tim Long with Barclays.

Two questions, if I could. First, on the AI front, Francois, thanks for detailing the wins and the different solutions there. Just curious, I think last quarter, you gave a little benchmark number for revenues. Are you seeing and expecting the revenues for your AI-related direct-related business to grow in line with that customer base? Should we -- should we think that 50% growth is kind of a ballpark number there?

And then the second one, maybe for Cooper on gross margin. It sounds like in the near term, the component costs are not as bad as expected, but yet you still seem to be building in a buffer for next year. So could you maybe talk about maybe near-term gross margin related easing and maybe potential for pressure? I guess, it's still a pretty dynamic environment.

Thank you, Tim. I'll start on your -- on the first part of your question. On AI, wouldn't necessarily approximate the number -- the growth in the number of customers with the growth of revenue. We did give an indicator of that last quarter that we have passed the $50 million revenue mark. That particular number, we don't intend to update every quarter. We may come back to that at the end of the year.

But I can tell you that the momentum in direct AI use cases is very strong. We've seen traffic generally increase with our customers. But specifically, AI data delivery continues to see strong momentum and a gain in customers. We also had a very strong quarter in AI Security. The number of AI Security customers actually grew 100% just in the quarter, driven by a number of customers wanting best-in-class security in front of their AI model and their AI applications. So we're very excited about the momentum that we're seeing there. In addition, Tim, I would just remind you as well that our AI opportunity isn't just the direct AI use cases, there is an indirect opportunity that manifests itself in the amount of traffic that we're seeing with our customers on our ADC systems.

And where you see that is the amount of expansion we're getting on ADC systems. The growth that we have seen this year in Hardware this quarter, I think Hardware growth was 32% year-on-year. But if you look at even the first 3 quarters of the year, the Hardware growth is above 30%. And some of that expansion is because our customers are now scaling inference for AI in their enterprise environment, and we are in front of that traffic. So two categories of opportunities, and we're seeing strong momentum with both today.

Yes. And Tim, thanks on the GM question. So yes, we saw the favorable result in Q3 and a little bit better outlook in Q4, and it was really tied to two dynamics. The first is that we've seeing a stronger adoption of some of our more high-performance appliances that carry a better gross margin profile. And then we're sourcing some of these components around memory and SSDs from vendors as part of our strategy to get in front of any potential supply chain risk on these components. And we had just a better outcome in terms of delivery from some vendors that carry a little bit lower cost profile on those components, for Q3 and Q4, and that's really what drove the improved outlook. So we're not updating the guidance at this time for next year, just given how dynamic the environment is, but that's something we'll continue to monitor.

Your next question comes from the line of Joseph Cardoso with JPMorgan.

Maybe for my first one, can you just touch on just maybe going back to the mix impact on the high-performing systems that you're seeing here. What are you seeing that's driving customers to kind of move mix up into these higher performing systems? And then the second aspect there is more how sustainable that mix up is into the high-performance systems? And then I have a follow-up.

Yes. I think it's a lot of -- the dynamics that we've been talking about over the last several quarters, and we talked about our Hardware business and how much of the growth is coming from expansion use cases and digital sovereignty and then the big one is really the traffic we're seeing from AI use cases. And I think that it's really driving a need for customers to quickly provision higher performance units in support of that expansion initiative. And those higher-performing units have higher gross margins, but that's a trend that we think will continue. I think it's still relatively early -- it's one of the dynamics that's really been driving the overall growth we've been seeing in our Systems business.

Got it. And then maybe just quickly on an update on how you're thinking about the trends between Software and System revenues and like more specifically there, as we think about software accelerating, obviously, still doing high single digits versus the long-term guidance more into that double-digit type of framework. I guess how are you guys thinking about potentially seeing an inflection upcoming? Is this still more in fiscal '27, better visibility there? Any kind of comments that you can provide around the trajectory of Software here.

Yes. I'll provide a couple of thoughts. So first off, just right now, our pipeline looks really good. So we feel good about how we're positioned for the remainder of this year in terms of Software. We're seeing strong trends on our Distributed Cloud Business as well. And we've talked about in the past that our our SaaS and Managed Service business has been a little bit of a headwind to growth in prior years because we were undertaking a transition on legacy offerings, and we're effectively through that transition now.

And so we anticipate that, that is going to be a growth driver to our Software business next year, along with a much stronger renewal cohort, on these multiyear agreements that we've been booking over time. And so we've got a really good base as we head into FY '27. We've got pretty good visibility as to the utilization that we're seeing from customers across those Software opportunities and that gives us a good window to the expansion that we would expect to see for the year. So it all adds up to what we think is a pretty compelling growth opportunity, getting back to a solid double-digit growth outlook for next year.

Your next question comes from the line of George Notter with Wolfe Research.

I guess I wanted to ask about progress with the iSeries refresh. I'm just curious like what your updated comments are and the pacing of the refresh. Obviously, the end of the support is the end of this year. I'm just curious about how much installed base is left, how you see that kind of playing out in terms of the migration of iSeries to iSeries. And then also the impact of Mythos and Frontier AI models, I assume that's going to help kind of pull forward that refresh, but I'm wondering if you guys are seeing it?

Yes, I'll start, and then I'll let Francois follow up on the Mythos effect. So yes, it's going really well. When we talk about refresh, we've talked a lot about the dynamic we've been seeing with this refresh that we've -- we'd like [indiscernible] refresh plus because of the expansion that we've been seeing at the time of refresh. But just in terms of refreshing the existing iSeries base, I would say it's been very orderly and in line with our expectations. It's been very consistent quarter-to-quarter. And so as you noted, there's an end of software support date in our Q2 of '27, which we think will be a bit of a driver for acceleration of that activity over the next few quarters.

But the thing that's been more interesting to us is that rate of expansion we're seeing at that time of refresh has continued to improve. And then, of course, the business we're seeing outside of refresh has also been very strong. So we're seeing really good growth in terms of expansion both at the time of refresh and capacity expansion outside of the refresh. And then we're seeing new projects around data center modernization, digital sovereignty and then, again, performance associated with AI-driven workloads.

And then, [ George ], on the Mythos effect, I think what we're seeing that with our customers in a couple of ways. The first is we're seeing a number of customers really focus on addressing technology debt and that includes avoiding to have aged [indiscernible]. And that's actually a tailwind to the Refresh motion because some customers that may have had aged estates and may have been dragging their feet to refresh those estates. We're actually taking that very seriously.

We're also seeing customers that are focusing a lot on remediating vulnerabilities that may exist in their environment and in some cases, stop development of new applications and new features to go and address vulnerabilities. But the other effect for F5 is what's happening in runtime security, and so what customers realize now is that if you don't have the time, if you don't have the same window that you used to have to be able to patch your applications, having the path to the applications be secure is incredibly important. And that's precisely where F5 is positioned in runtime security in front of application. And we're seeing that we had a very strong security quarter, just to give you a manifestation of that, we just launched a quarter ago, our AI-powered Web Application Firewall on Distributed Cloud. And the uptake of that has been extraordinary.

It's been the fastest-growing uptake of any product we've launched, really ever with hundreds of customers already running on this product in the first few months of the technology. And the vast majority of them actually using the product in blocking mode, to stop potential AI-powered attacks. And this product has already stopped potential zero-day attacks that would have come on to these customers. So we see a lot of energy with AI-powered Security, and that's why we're continuing to make these investments in WAF, API Security to drive that.

Even beyond just AI-powered security, we're also seeing traction with securing AI itself. And I mentioned the number of AI security customers for F5 have grown 100% this quarter, largely because there is also a realization in the market that best-in-class security is also needed for AI models. You've probably followed the last week's saga of OpenAI and HuggingFace, and that just remind all of us of the importance of having best-in-class security for AI models because the security that's provided by the Frontier model providers is inadequate, [indiscernible] application that have sensitive data around player health or team strategies and needed to have best-in-class security for these AI model and chose F5 to provide that.

So the effects of Mythos are actually wide ranging. We're seeing that in refresh for customers that want to kind of remediate tech debt. We're seeing that in more energy in AI-powered security in front of applications. And we're also seeing it in terms of the momentum we're seeing in AI security now to secure AI models.

Your next question comes from the line of Matt Hedberg with RBC Capital Markets.

Congrats on the quarter. Great to see. My first question is kind of a follow-up to a couple of prior questions. Obviously, you're seeing strong Refresh activity and Cooper. I think in a prior question, you talked about in strong capacity expansion outside of the Refresh and obviously we'll have a new business opportunities here in AI. I guess, like philosophically speaking, growth from this cycle will peak at some point. But how should we think about growth post this cycle? Do you think it will be a shallower kind of trough than prior -- post prior cycles?

Yes. I would say that is our belief, for a couple of reasons. One is just that in prior cycles, we didn't really have this kind of contribution to sales coming from new projects, whether that was Digital Sovereignty or AI-driven performance needs. The customer takeout opportunity -- or sorry, competitive takeout opportunity has been stronger this period as well compared to where we were at the last time we had a product cycle. And so those are all opportunities for us to continue to drive healthy growth. And then we think that it's kind of a bit of a wildcard, but post-quantum crypto is on the minds of a lot of our customers. And that potentially could drive an earlier adoption of the next product cycle. It's really too early for us to try to handicap that. But I think that those are all dynamics that give us confidence that we're going to continue to see healthy growth from this business over the next several years.

That's great to hear. And then, I've been really fascinated with sort of your AI factory success and being part of the NVIDIA reference architecture certainly seems to be helping you. Francois, in your prepared remarks, you talked about token cost. I guess -- I'm wondering could you talk a little bit about the ROI and maybe how it's added to growth when you're seeing customers see higher GPU utilization and optimize token spend?

Yes, Matt. So we I think as I shared before, we -- the -- our Traffic Management Software when paired with NVIDIA GPU really on a number of tests has shown the ability to generate 40% -- anywhere between 30% to 50% more tokens for a given GPU infrastructure. we think that value proposition is compelling. And here's what we're seeing in the early market work that our teams have done with customers. Where we are actually interestingly, where we are seeing traction now is more with Sovereign AI customers. This is typically telcos outside of the U.S. that are implementing AI factories and are starting to put these AI factories in production, and they are quite cost conscious and really want to get the most amount of tokens for the infrastructure that they're building.

And so we think that will continue. That said, those sovereign AI factories are generally relative to the neo cloud and neo scalers, they're not the largest builds in structure. With the neo scalers, what we're seeing today is most of them -- their business model is GPU-as-a-service and offering GPU as a service typically to hyperscalers. And so the neo scalers themselves are not concerned with how many tokens they're generating for GPU given that they're renting on a GPU unit. We think that is going to change. We think the market is going to evolve and that the economics of tokens are going to become important for neo scalers as they go into the enterprise market, or even as they sell more and more to AI native companies. So we think that market is going to evolve over time and neo scalers will have -- will care more about the tokenomics, sorry, which is really the value add that F5 provides.

Your next question comes from the line of Simon Leopold with Raymond James.

I guess I'm trying to understand why Systems are continuing to outgrow software. And I guess a couple of theories I wanted to throw out there. One is just a total cost of ownership for Systems maybe being less costly than the TCO on the software solution or whether it's a possibility that your customers are having trouble getting the servers to run software on. We've heard that from others or if there are other reasons for this growth difference?

No, it's a really good question. Look, in terms of software, the growth that we're seeing this year is actually very much in line with our expectations, the expectations we have set at the beginning of the year, I think we had shared the renewal cohort coming from the 2023 year was not a very strong renewal cohort. And so we affected growth this year that was in the mid-single digits. And I think we will do that maybe a little better. But that's been the expectation. And conversely, as Cooper shared earlier, we expect Software growth to reaccelerate next year in part because of a much stronger renewal cohort from 2024.

Now as it relates to hardware, there are a number of dynamics that are playing out that are really causing our customers to want to put more Hardware in. One, of course, is we are in a refresh cycle. And so of course, that provides strength to Hardware bookings. But there are other structural shifts we're seeing that are driving customers to want higher capacity hardware, higher throughput for higher performance. And those are -- those dynamics include some -- basically Sovereignty is a big part of it. So we're seeing the customers -- we started to see this trend in Europe a few quarters ago, but now it's expanded to the Middle East. It's expanded to Asia, where customers are repatriating workloads from global hyperscalers into local alternatives.

In fact, there is a forecast out by one of the analysts, I think, this quarter that there's an expectation now that 75% of enterprises internationally will repatriate workloads into local alternatives inside the next 3 to 5 years. So we're seeing that phenomenon. And sovereignty also implies often building on their own infrastructure stack in their private data centers. There's also a dynamic around competitive displacement. We continue to win share from our competitors in Hardware because we have placed bets on hardware innovation when they did not. And today, we find out also with hardware that has a better throughput, higher performance, higher capacity less power consumption, and those benefits are translating into customer wins.

And then there's another dynamic around Hardware, which is consolidation when customers have used multiple point solutions and want to consolidate on F5. So all of these dynamics are really driving the growth that we're seeing on Hardware. And many of these elements are structural in nature, and we think will continue, which is the reason our Investor Day a month ago, we changed our long-term guidance on Hardware, which had been in the mid-single-digit decline, and we confirm that we expect that Hardware to be growing for the next few years.

Your next question comes from the line of James Fish with Piper Sandler.

Nice quarter. Maybe just specifically, what are you seeing on the inbound interest in pipeline build, specifically on AI Guardrails as of late? And are you seeing any customers specifically budget for AI Agent Security as sort of this new line item? Or is it kind of being bundled into that broader application security platform. I just have a follow-up on the billings.

It's interesting. It varies from customer to customer. What we're seeing right now is in financial services, financial services and then other organizations that are quite advanced or sophisticated in their use of AI or their care for safety. We are seeing that they are budgeting specifically for securing AI. And that includes securing AI models, securing agents, governance around AI, discovery of what their employees are using for AI. It's a number of functions, and we have invested quite rapidly in this area in -- around testing and penetration of AI models securing AI models in production. We made an acquisition this quarter of a company called [ Shore Path ] AI that complemented our capabilities with Discovery and we launched our AI Security platform because we're seeing customers increasingly wanting more and more of these point solutions combined into a single platform.

And we think that's where the market is headed, just like the WAF market consolidated a few years ago with WAF, DDoS, API and bot defense in a single platform, we see the same consolidation of functionality happening with AI Security platforms. So that's where we're seeing very strong interest. And I shared earlier that the number of customers in that area doubled this quarter, and we expect that momentum to continue to grow with the investments we're making in this area.

And then Cooper, just for you. Obviously, good top line quarter, but actually, if I look at billings here, another exceptional quarter again. Are you seeing Product backlog build and that explains some of this? Or is it more so the Services lags here just has yet to flow into kind of the revenue line?

Yes, thanks. So no, it doesn't have anything to do with backlog because we wouldn't have billings yet -- we don't bill until we ship product. It's more to do with, as you said, the lag factor on the Service revenue and then we had a strong bookings quarter with new FCPs, and so there's a portion of the FCP booking that gets deferred. So you get 2/3 or so gets recognized upfront and the remainder gets referred. And so that drove some strength in the deferred revenue on the deferred subscription revenue, which fed into that billings improvement.

Your next question comes from the line of Meta Marshall with Morgan Stanley.

Great. Maybe first for Francois. Just in the three AI use cases, data delivery, runtime security and load balancing, noted the commentary on the growth in customers on the AI security side. But just are there any developments in terms of kind of deal sizes or just how you would size any of those opportunities versus a particularly as runtime security and low balancing mature? And then maybe just a follow-up question for for Cooper, just if there's any kind of contribution to the quarter, we should be mindful of from pricing? And if you could just outline that.

Thank you, Meta. Look, the deal sizes are -- it's interesting because there's a wide divergence. They could be as small as hundreds of case to be as large as we've done some 8-figure deals in this in this area of AI. I think in security, as we move more towards platform over time and we consolidate these functionalities, deal sizes will obviously grow. In AI Data Delivery, we are already seeing substantial deals because it's all about -- AI Data Delivery, it's all about getting data faster to models in training or for inference. So customers are highly sensitive to latency, want very high throughput. And generally, that means they want high-capacity hardware to perform that, and that leads to large deal sizes.

In AI Factory Load Balancing, the deal sizes are initially smaller when you have factory build-outs of just a few hundred GPUs. I think as more of the -- we get into more of the larger AI factories, we should see greater deal size there. Overall, look, I think our AI revenues are growing quite rapidly, and we may be able to touch on this more in -- at the end of the year once we have a year's worth of data to share with you.

And then in terms of price realization, so there's -- we saw a modest contribution from price realization that was tied more to our discount governance. We've been pretty effective this year just continuing to improve our discounting over time. The adjustments that we've made to pass through some of the cost on components will be more of a contributor to our FY '27 revenue, but nothing that really hit our revenue in Q3.

Your next question comes from the line of Tal Liani with Bank of America.

It's Tomer Zilberman on for Tal tonight. Just wanted to ask on a geographic basis, if we look at your Americas revenue, it accelerated from the last few quarters of low to mid-single digits. I think you said to 11% on the call. Just wanted to ask what the trends you were -- you saw in the geo -- was it more of a catch-up because of the last few quarters of underinvestment, or what did you see there?

Yes. I'll take that one, Tom. So really, we've seen good strength across all theaters from a bookings perspective. So it is more to do with the timing of shipments. And Francois noted that last quarter on the call because the growth rate was down a bit from Americas, and we said that the underlying demand is actually quite strong and then we thought that, that would play out over time as we were able to ship more of those orders, in this environment, there is a bit of a lag on shipping time from when we book the orders. And so we saw that come through in the reported revenue in Q3.

You'll also notice this quarter, APAC is down 11% on a revenue reported basis, that is also not indicative of the underlying demand strength that we're seeing in APAC. So I think just in this environment where there's a little more of a lag on the shipping timing, you're going to get more of that variability in the growth rates. But over a longer period of time, multiple quarters you start to see that growth rate start to normalize. Broad answer to your question, the underlying demand growth has been healthy across all of our theaters.

Got it. And maybe as a follow-up and a similar question to touch on the subscription line. Last quarter, it was, I think, flat on a dollar basis sequentially, and you talked about a weak renewal base, which I think you also mentioned in the prepared remarks today. So if I look at '23 as a week renewal base, I think in aggregate is what you mentioned, what drove the stronger performance this quarter?

Yes. So when we talked about the weak renewal base, we're largely talking about the full year. So we had flattish Software revenue in FY '22 -- sorry, FY '23 against FY '22. And so as a result, the base that we had to renew for this year, was more modest than it typically would be, and it's going to be much stronger in our FY '27. But from a sequential basis, you still get that variability. And so we did see some strength in our Subscription business this quarter tied to a stronger cohort and also good expansion in the quarter.

But overall, the growth rate has been a little bit more orderly in terms of the quarter-to-quarter variability in the growth rate this year than what we've seen in past years. Now next year, we think that the growth rates will be stronger in the second half of the year. So it's just one of these things where we're always tracking what that base is, it's coming up for renewal, what the expansion opportunities are and then trying to give some visibility if there's unusual patterns that we see. But for this year, it's been more muted the variability in the growth rates.

Your next question comes from the line of Michael Ng with Goldman Sachs.

I just had a few follow-ups on kind of implications for 2027. Maybe first on the Systems side, just given all the momentum that you have there in terms of refresh and the expanding use cases. Do you see upside to the prior outlook of mid- to high single digits for 2027? Just would love any general thoughts there? And I certainly hear you on the reiterated gross margin outlook for 2027. Just would love some commentary on whether you are seeing some better operating leverage now but are kind of reserving some margin in the case that there's some outsized commodity cost inflation. Just trying to understand like what's kind of embedded in the reiterated 82% gross margin guide next year?

Michael, thank you. Let me start, and then Cooper will address the gross margin question. On the revenue expectations for next year, as you know, we've given guidance of upper single-digit growth for '27 and actually beyond at our Investor Day about a month ago. We're not updating that guidance today. We -- generally, we feel good about the -- what we're seeing in the marketplace, the demand we're seeing, both for Hardware and our Software.

But beyond the immediate demand, what we are most pleased about is the structural demand drivers that we're seeing. Our -- we continue to drive competitive wins we continue to drive consolidation on to F5. We have a number of customers that were using point solutions for cloud providers or other players in the space, and our whole investment into a platform strategy with our application delivery and security platform. We're seeing real momentum with the ADSP platform and the real effect of that in consolidation.

Just launched F5 Insight also this quarter, which really glues elements of our platform together. We're seeing very strong adoption of F5 Insights among our customers, which tells us that they're seeing significant value in our platform. And of course, we're seeing growth in AI use cases across the data delivery and security. And so you take all of these drivers, I think we feel we feel good about the guidance we've given for the next 3 years. And we'll talk specifically about 2027 on our October call.

Yes. And then in terms of the gross margin, so we didn't reiterate our gross margin for next year. We just are not updating at this time. I know it's a little bit of a subtle nuance, but really, I think the way to think of it is we're encouraged with what we saw in Q3 and in Q4. But we are cognizant that things are fluid. And transparently, we are getting mixed signals. So we've seen a lot of signs of some stability in terms of memory pricing this quarter. But then we're -- we also hear other signals that it still could be more variable. And so -- and then we're looking at the rest of our BOM as well and other components that we're sourcing and just as early as it is right now, we felt like it was too early to make an adjustment to our gross margin forecast for next next year.

But that said, I think our manufacturing team has done an outstanding job in terms of doing -- making advanced purchases on some of these more scarce components, diversifying the supply base. And so we feel like we've got a pretty good handle on the supply that we need for our revenue for next year. And we think we'll be in a position to give a better update on the gross margin guidance in October.

Your next question comes from the line of Jeffrey Hobson with Needham.

We're seeing with AI workloads, some of a recent push to moving things on-prem for security or sovereign reasons. Just curious in those more regulated industries that are on-prem kind of where are we in that adoption of AI and where are we with newer AI companies starting to consider on-prem deployments?

Well, I think -- well, in regulated industries, frankly, it varies from an industry to the next and from one customer to the next. I think in financial services, we're seeing rapid adoption of AI. I think we're also starting to see that in health care, and we're seeing our telco customers also regulated, but leveraging AI to significantly improve profitability in operations and the experience of their customers.

In terms of what stack are people using and what models people are using, what I think we're seeing already is a very strong signs that both enterprises, government agencies and telcos are all going to use a mix of models and they are going to use closed models, some frontier AI providers and open weight and/or open source models. They are going to consume public AI from the public cloud, and they are going to build their own stack, their own infrastructure, on-premise to run their models. And they're going to want to basically find the best model for each task and ideally, the cheapest model for each task. And the multiplicity of models and types of infrastructure is exactly what plays to the strength of F5 because we have built the hybrid multicloud company precisely to serve and enable that choice for our customers.

Just in the same way that we predicted several years ago that our customers would end up with wanting to have the choice in infrastructure environments and deploy applications in multiple infrastructure environments. And we designed our company to meet that moment. We think the same thing is happening with AI where customers want the best model, the best environment for each task, and they're going to want to partner that can deliver these models and secure all these models across any environment and in any cloud. And that is the company that we've built. That is the company we're building for AI, and we are, I believe, meeting the moment. And we're very excited about the ways in which different customers are going to deploy AI and the way we're going to enable that choice for them.

Got it. And maybe just a follow-up on agentic workloads across apps. Is there any way to think about how they may be similar or different than traditional workloads and the resulting impacts on F5 then?

So agents are fundamentally just regular applications with the exception that they are invoking models. They're invoking models for inference, and agents also have the ability to make [ subsequent ] calls inside of a data center or an environment. And so what we really see is agents are increasing data center traffic or hybrid multi-cloud traffic inside these organizational environments. And so for F5, what that fundamentally means is sitting in front of more of this traffic that's going to APIs, that's going through traditional applications, securing that traffic, but then also securing and delivering traffic to these AI models as well, whether they're frontier models or models that are fundamentally set up inside of a local data center or in a local environment for an organization.

Thank you, Kunal. And Jeff, that was Kunal, our Chief Product Officer.

Your final question comes from the line of Amit Daryanani with Evercore.

Francois, you folks saw obviously some very impressive growth on the system side and you've talked about multiple factors that have got a healthy [indiscernible] out in that space right now. I think what investors are really going to struggle in trying to understand is, how many of these vectors are cyclical versus secular. And so just from your perspective, qualitatively or quantitatively, how do you think about this 32% growth and how much of this you think is cyclical versus secular going forward?

Well, clearly, I mean, we think a portion of it is cyclical. If we didn't think that we would be guiding 30% Hardware growth for the next 3 years. This is not what we -- as you know, that's not what we guided at Investor Day, we shared we expected Hardware to be in the single-digit growth to mid-single-digit growth going forward. So what's cyclical, obviously, is that we are in the middle of a refresh cycle with customers. And that, by definition, is cyclical.

But there are a number of more secular shifts that have layered on to that and that are driving hardware growth in where you're seeing it. And those secular driver as we've talked about. It's the move now outside Europe, Middle East and Asia for sovereignty that creates reinvestment in data centers. If there was a phase where customers were thinking about cloud first, anytime they were thinking about new applications. Now we're in a phase where customers think about sovereignty first, and it means that they're reinvesting in data centers or building resilience between their cloud infrastructure and their data center infrastructure. That's a driver.

A second driver, which is difficult to measure today, but I think we'll get more refined about it in the future and get -- we'll get more intelligent about it in the future is the amount of AI traffic that is now flowing on on-premise infrastructure and how much that is driving customers to either need more units from F5 or higher capacity units from F5. But that is clearly also a driver. And then there are things that are specific to our competitive position, specifically what we're doing with platform adoption, what we're doing with competitive takeouts that are also exacerbating this trend. And so all of that is it's not trivial to completely separate and quantify for you what's cyclical, what's what's -- these other drivers because sometimes these other drivers also manifest themselves in a refreshed motion, meaning we -- our teams are speaking with customers about a refresh.

And rather than refreshing just the capacity they have, we're seeing very strong expansion at refresh that is driven by new use cases. So those -- all of these factors kind of come together and manifest themselves in the numbers, but I think you can fairly think about it as -- there's clearly a refresh portion that is cyclical, and there is three or four drivers that we think are durable and that is why we have changed our view on the trajectory of hardware, not just for this year but for the next few years.

That concludes our question-and-answer session. I will now turn the call back to Suzanne DuLong for closing remarks.

Thank you, Tiffany. Thanks, everybody, for joining us. We look forward to seeing many of you out and about at conferences during the quarter. Please reach out with any questions.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Good afternoon, everybody. Thank you so much for being with us. We really appreciate it. I'm Suzanne DuLong. I lead Investor Relations at F5. We are really glad to have you here today. We've got a great agenda for you. I'm going to start with just a little bit of housekeeping, of course, before we get started.

I need to remind everybody that today's event is being recorded and will be available for replay on our IR website. The webcast replay and the slides will be posted after the event concludes today. I'll also note that today's discussion will contain forward-looking statements, which will include words such as believe, anticipate, expect, and target, and 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 risk factors in our recent SEC filings.

In addition, we'll reference non-GAAP metrics during today's discussion. Please see our full GAAP to non-GAAP reconciliation in the appendix of the slides. And please note that F5 has no duty to update any information presented today.

With all that said, let me share with you a quick overview of our agenda and timing. Francois will kick us off with some perspective on secular trends and the strategic actions we're taking to capitalize on them. Chad Whalen, John Maddison, and Kunal will dive a bit deeper into the actions we're taking to capitalize on those trends. We'll take a 15-minute break around 2:10. Those of you in the room will find refreshments in the area where we entered.

And then from there, we'll resume at about 2:30, when Lisa Citron, our SVP of Global Partner Ecosystem, will sit down for a fireside chat with a very special guest, Chris Konrad, who's VP of Global Cyber from WWT. Tom will then discuss our services growth and product adoption, and Cooper will discuss how we're driving sustainable revenue and earnings growth.

We'll then hear some closing remarks from Francois before we open the floor to questions from our in-person attendees. Thank you again for being here. We're really excited to be here with you. And it's my pleasure to introduce our Chairman, President, and CEO, Francois Locoh-Donou.

Thank you so much, Suzanne. Well, welcome, everyone. Welcome to those of you joining us here in the room and everyone joining us online. Thank you for being with us today. Okay. So this is our first analyst and investor event since 2024. And a lot has changed in the last 2 years. The world has changed, the world of IT has changed, and of course, F5's opportunity has changed. And today, I'm really excited to be here with our entire executive team, and we want to lay out for you how F5's opportunity is unfolding and how we intend to translate that opportunity into sustainable revenue and earnings growth.

Let's talk about the trends that F5 is benefiting from. F5 is benefiting from both cyclical and secular tailwinds in our business. And I will start with the secular drivers. We sit at the intersection of 3 secular mega trends that are reshaping IT infrastructure. And whilst each of these trends is unfolding separately, each actually is bigger than the one -- and has greater potential than the one that preceded it.

So I will start with hybrid multi-cloud adoption. Hybrid multi-cloud adoption has been accelerating for several years, and it's driving workloads to be distributed across multiple environments. It started several years ago as a practical way for enterprises to get the flexibility that they need in terms of where they deploy their applications. But that more tactical start has now evolved to be a go-forward strategic architecture for most enterprises. Organizations now require the flexibility, the resiliency, and digital sovereignty everywhere they operate, and they are investing in hybrid multi-cloud accordingly.

In our own research at F5, we found that 90% of enterprises now operate applications in hybrid multi-cloud environments. And on average, F5 customers operate their applications over 22 locations, multiple cloud regions, colocation facilities, multiple data center facilities. And the result of hybrid multi-cloud deployment is complexity, and complexity drives demand for a platform that can simplify the complexity for delivery and security. That platform is the F5's Application Delivery and Security Platform, and we will touch on that today. But hybrid multi-cloud accelerates demand for an application delivery and security platform.

The second very substantial trend that we're seeing is an expanding threat landscape, and it is accelerating demand for AI-powered best-in-class security. As AI models grow more capable, they are attacking applications and API with greater variation and greater scale than traditional defenses were built to handle. Our customers recognize that, that things are changing, and they are acting. Our customers are expanding their application security deployments, and they are raising the bar for what good looks like. So just good enough check-the-box security is really no longer viable for most of our customers. They need best-in-class security and increasingly, that is AI-powered security. That puts F5 in a great position to solve that need and that demand.

And the third mega trend, of course, is AI inference, and that is accelerating demand for application security and application delivery. Organizations increasingly now are connecting their applications and APIs to AI models and inputs calls are becoming a regular part of how applications run. We've done research, again, at F5 that shows that 78% of organizations are actually operating inference themselves, meaning they own the workloads and they own delivery and security for these workloads. On average, organizations today already have 7 generative AI models in production. And so as organizations standardize on the new architectures with models distributed across data center, the cloud, and the edge, demand for delivery infrastructure for these models is growing. And the next shift, which is agentic AI is already underway. AI agents are moving into production and enterprises are adapting their applications for agent interaction. And that is driving more compute, more data delivery, and more security to protect inference.

So F5 in aggregate is benefiting from all of these -- the effect of all of these drivers. Now we're not just riding these trends. We are using them to grow faster. We're building on our market leadership to capture growing demand in ADCs. We are unifying our product portfolio to drive platform adoption, and we are capturing new AI opportunities. Today, you're going to hear about each of these from our speakers.

Now you can see the combined effect to sustain that momentum going forward. Now to put our expectations in context, it helps to look at our track record because it demonstrates our ability to execute. Since our 2024 Analyst event, we have driven strong performance and met or exceeded our commitments, including exceeding our mid-single-digit revenue growth target, delivering 7 consecutive quarters of double-digit product revenue growth, and expanding our operating margins and delivering double-digit CAGR on earnings per share. And we're not seeing this in a static environment. The market around us is changing very quickly. Those shifts are widening the set of problems that our customers are dealing with, and it's expanding F5's opportunity. I highlighted earlier that we are at the intersection of these 3 secular mega trends. I'm now going to double-click on each of these, and I'm going to explore how they are accelerating demand for F5 solutions.

Let's start, of course, with hybrid multicloud adoption, which has been accelerating across the board. To talk about hybrid multicloud, I'm going to go back in time a little bit and give you a refresher on the origin story of ADCs. So if you go back 30 years ago, apps were simple to access. Data went from a user to a data center and back. And typically, in a data center, it was on applications that were hosted on a single server. With the advent of the Internet, the number of users that could and would access an application remotely exploded. And as a result, copies of apps were needed to deal with that demand. Apps were no longer hosted on a single server, but copied across multiple servers. That, in turn, created a need for load balancing technology, which at its core, was routing application traffic between users and multiple servers so that the app would be always available, always fast, regardless of who accessed it from anywhere.

F5 pioneered this category. We pioneered load balancers and then broadened their capabilities to become the Application Delivery Controllers or ADC category to solve those challenges, ensuring applications stayed fast, reliable, available, and secure as traffic scaled. Now a lot of things changed and over time, both the type of users and where applications live have changed. The types of users have gone from not just humans, but APIs and bots and machine-to-machine communications and have continued to grow at a very rapid pace. And applications are now hosted in multiple data centers, in multiple geographies, multiple clouds, colocation, and edge facilities. But what hasn't changed is that F5 sits in a uniquely valuable place in the flow of customer traffic directly in front of the applications that matter most.

And we've capitalized on that position over time by expanding what an ADC delivers. It's no longer just load balancing and availability. The same control point is where our customers need to enforce policy to ensure that their operations are resilient and, of course, to protect applications. And so we've expanded the ADC role into web application firewalls, DDoS protection, API security, bot security, DNS security, and are now allowing our customers to deliver and secure their applications consistently across any environment and at scale.

Now ADCs for the most part, have been deployed in data centers, in enterprise private data centers. And so I want to go back and share with you a little bit the growth of data center capacity over the last 20 years because it does have correlation with ADC demand. What I'm going to show you here on the X-axis is time and on the Y-axis is worldwide core enterprise data center capacity measured in gigawatts. And I should note that this does not include hyperscaler infrastructure. This is all enterprise private data centers.

So in the decade between 2005 and 2015, enterprises moved aggressively to deploy web-based application in production and many, many enterprises also undertook their digital transformation. What that meant is that a lot of customer interactions moved online, a lot of business process moved online. And as that happened, the demand for capacity in the data center grew quickly, more applications, more users, more traffic, higher availability expectations. The result of all of that is that worldwide core data center capacity grew at a CAGR of 12% in that period. In that period, F5 grew at a rate of 21% CAGR on the decade.

In the 2015 to 2023 time frame, the growth engine shifted. Enterprises embraced cloud-first strategies, many embraced SaaS applications, which did not require necessarily additional infrastructure in their data centers, and a lot of enterprises either built all their new applications in public cloud or moved a portion of their application portfolio into public clouds off-premise. And so the data center did not go away, but the growth curve fundamentally changed. In fact, data center capacity between 2015 and 2023 grew at a compound annual growth rate of only 2% as more incremental demand was absorbed by the cloud.

During this period, F5 grew roughly at a rate of 5%. Now things are shifting again. There are 3 dynamics today that are accelerating hybrid multicloud deployments and driving reinvestment in private data centers. The first of these dynamics is cost and workload optimizations. Customers are getting more surgical about placing workloads where they run best economically and operationally. So they are balancing cloud elasticity with predictable, lower-cost private infrastructure for steady-state demand. That is why we have seen workload repatriation, and we have seen a rebalancing of application portfolios.

The second is regulation and digital sovereignty. A lot of companies, for regulatory reasons, have to build true resilience, have to comply with requirements around how fast they must recover from a disruption that's happening globally, and causing companies to deploy applications in hybrid multi-cloud environments where they can achieve that resilience. And especially outside the U.S., digital sovereignty is accelerating, meaning more organizations need to have more autonomy over their data, over their technology stack, and over their operations. And for a lot of companies, that means moving away from global cloud environments into either regional or local cloud alternatives or on-premise data centers. And so that is also causing reinvestment in data centers.

And then thirdly, data gravity and governance in AI. We're seeing a large number of companies wanting to keep their proprietary data on-premise, in many cases, repatriating data that was in public cloud on-premise because they want this data that has now become enormously valuable for their AI models, they want their data pipelines to be close to the infrastructure they trust and that's causing, again, a wave of investments in private infrastructure.

The result of these dynamics is that enterprises are reinvesting in private infrastructure as part of this hybrid multicloud strategy and data center capacity growth is reaccelerating. We expect data center capacity to grow at roughly 7% CAGR, and that's a meaningful step-up from where they have been in the last decade. And as data center capacity grows, ADC demand accelerates with it. So when you take it together, these forces are driving hybrid multicloud adoption and bringing private data centers back into the investment cycle.

Let's go to the second mega trend, which is the expanding threat landscape, which is also accelerating demand for F5. The data on this slide clearly shows that the number of attack on IT asset continues to grow rapidly, growing more than 60% over the last 3 years from 180 million to 290 million attacks. But if you double-click on that, what's most relevant for F5 is that the front lines of cyber defense are actually shifting to the application layer. So it's not just that the attacks are increasing, it's where they're concentrating. Attackers are increasingly targeting the app and API layer. And they're doing that because that's where the data is. That's where the business logic lives, and that's where digital experiences are delivered.

So that is where the value is, and that has real implication for customers. It implies that traditional perimeter-oriented approaches aren't enough on their own. Security has to be enforced closer to the applications consistently across hybrid and multicloud environments and at the scale and speed that this new threat environment demands. Now if you double-click on these application layer attacks and you go into what specifically are the type of application layer attacks that we're seeing, what I'm showing you here is data from F5 Labs. F5 Labs is F5's security research and threat intelligence organization. We track and analyze cyber threats and attack trends. We publish reports and guidance, and we share data-driven insights to help security teams improve their defenses. What we're seeing in that research is as application -- as organizations modernize, they're deploying more applications, more micro services, and far more APIs and integrations. And this data is showing rapid growth in web application attacks, API abuse, bot activity, Layer 7 DDoS attacks.

So all of this is not a theoretical shift. Our customers know that defending the business now means protecting the app layer, continuing that at scale with controls that can keep pace with both the volume and sophistication of attackers. Now going further, I've talked about attacks on the application layer. I'm going to go into a specific type of application, which is AI models because AI models themselves are a new threat surface and are expanding the -- sorry, a new attack surface and are expanding the attack surface. Now what you see here is the Comprehensive AI Security Index or CASI, which is a framework developed by F5, F5 Labs, to rate the vulnerability of AI models.

And so what we're doing is our AI Red team uses a swarm of autonomous agents to run more than 150,000 attacks against these models every month, including the latest tactics and techniques. You look at the most secure or least vulnerable of these models here at the top that has a 98% score. And 98% may appear like a great score, but we are now in the realm of quadrillions of tokens that are flowing in and out of these models. And so 2% of a very large number is a large problem.

In the specific case of the attacks we run against these models in our own toolkit, 2% on 150,000 attacks, if 2% come through, that's 3,000 successful attacks against even the best-scoring model. And that's just the model layer. Now let's zoom in and look at the full attack surface. The total attack surface today on IT assets if you will, is $20 billion. It includes endpoints, humans, of course, workloads that includes AI applications, AI models, and IoT devices. That is about to explode because it's clear that AI doesn't just change applications. It's going to change the scale of interaction on the Internet. AI agents will dramatically increase machine-to-machine activity, more automated tasks, more API calls, and more always-on workflows operating on behalf of users and businesses. And the result of that is a step function increase in the attack surface.

Our estimates suggest that agents will increase, of course, by more than 10x between now and 2035. But every one of those interactions becomes a potential point of exposure, an identity to validate, an authorization decision to enforce, or traffic to inspect. So the implication of all of that is clear; that security now has to be built for a world of autonomous, high-volume API-driven traffic. And we have to protect applications and APIs in line at scale and across every environment.

Now that wasn't enough. There is also -- in terms of the expanding threat surface, there is also the risk that Quantum brings to the equation. So let me elaborate a little bit on why this is a risk and why it actually creates an opportunity for F5. A bit first on quantum. So classical computers generate bits, a series of 0 and 1 to encode data. Quantum computers use quantum bits or qubits and qubit can represent a 0, a 1, or a combination of both at the same time. And so when multiple qubits are linked together, a quantum system can evaluate many possibilities in parallel. And the result of that is that certain classes of problems can be solved dramatically faster than with classical computing.

Well that speed actually does matter because modern encryption is built on mathematical problems that are extremely hard for classical computers to solve. An example of such a problem is breaking 2048, 2048-bit encryption. With classical computers today, that would take 149 million years. But with a quantum computer that is powerful enough and stable enough, that could take as little as 8 hours. And so that is why the move to post-quantum cryptography is actually becoming very urgent. We at F5 believe that post-quantum cryptography is shaping up to be a meaningful infrastructure investment cycle, and we believe F5 is well-positioned to benefit as customers migrate. The driver for that is very straightforward. Quantum-related security risk is not hypothetical. It is starting to happen now.

And how it's happening is cyber criminals and nation-state actors are already capturing encrypted traffic and they're storing it and betting that they will be able to decrypt it later when the right quantum computers reach the necessary scale. And that threat is what we call harvest-now-and-decrypt-later. Q-day is the point at which a sufficiently powerful, fault-tolerant quantum computer becomes available and can break widely used public key cryptography. The exact timing of that is uncertain. Estimates are ranging from as early as 2029 to sometimes in the early 2030s. But generally, these estimates have been shifting and coming closer and closer as folks doing research in quantum are making more and more breakthroughs. And so in response for -- to the predictions around the coming advance of Q-day, the National Institute of Standards and Technology, or NIST, has been standardizing post-quantum cryptography and the industry is moving toward multi-year migration plans that phase out classical algorithms over time. And 2025 is the time at which the NIST has declared that classical cryptography will be the sellout.

But clearly, organizations are not going to wait for Q-day. They will start modernizing ahead of it because it affects compliance, it affects risk, and long-lived data. In our world at F5, in conversations with our customers, what we are already seeing is customers are starting to do planning, early testing, and road map work to move to the post-quantum world. The great news for F5 is that ADCs will be central to making that transition practical because PQC can introduce real overhead and handshake certificates, key management. Enterprises will not want to absorb all of that complexity into applications and impact the performance of applications. Customers will want to absorb that complexity at the infrastructure layer and not force every application team to rearchitect.

That plays to F5's strength because we can help customers adopt PQC while maintaining performance, availability, and security across environments. And as a result, we expect PQC to accelerate demand for ADCs and, in particular, hardware ADCs to drive performance.

Let's now go to the third mega trend, which is AI inference. So in just a few years, we have shifted from the build phase to the operate phase in AI, and AI traffic growth is now happening and happening quite exponentially. So if you go before AI, network traffic growth was steady and pretty predictable with conventional applications that are expected to grow at a 4% CAGR over the next decade. If you factor in AI-enhanced applications, they will grow at a much faster rate. We expect that 26% CAGR. And that's because the network traffic becomes multiplicative with AI agents. AI-enhanced applications are either traditional or modern applications that interact or include AI components, could be interacting with an agent, could be interacting with an AI model. And so the traffic between the application and the model, the application and the agent increases overall application traffic. And then on top of that, we'll see net new AI apps that will start growing very rapidly.

The result of all of this is 2 things. First, AI traffic is going to become the dominant traffic. We expect it will be at least more than half of the traffic by 2031. And AI traffic will become potentially more than 80% of the traffic within a decade. It will drive a significant increase in overall traffic, a 6x increase, in the next decade. And the result of that is demand for more infrastructure. That scale is going to show up quickly into demand for infrastructure, largely because agents will increasingly communicate with other agents, shifting interactions from one user and one assistant to many software actors coordinating in real-time. And as AI gets embedded into more applications and workflows, inference becomes always on, creating this continuous, bursty, and unpredictable traffic.

All of that accelerates demand for delivery and infrastructure in a few concrete ways. So first, it means more infrastructure because AI-driven traffic creates more connections to manage, more APIs to protect, and more services that have to stay available. Second, it demands more data delivery because there's going to be a lot of data that needs to move securely, efficiently, and at scale between data stores and AI models or between data stores and AI applications. Third, inside of AI factories, it's going to create a need for more traffic management to solve the problems of GPU utilization to improve the efficiencies of these factories that are extraordinarily constrained. And then last, it will create more demand for AI-native security, AI-powered security that can protect against -- that can protect AI models, AI applications against all these AI-native threats. So all of these are new demands that are coming from this very, very rapid growth of AI traffic.

Now I want to go into that a little more and share with you where specifically in the flow of traffic, we see net new opportunities for F5. Now this here is where we are today. Today, where F5 already sits at the front door of our customers' most critical applications. We load balance and secure all the traffic, humans, APIs, bots, no matter where those applications run. But increasingly, as attackers use AI to find and exploit vulnerabilities faster than signatures and patches can keep up, our security is AI-powered. You'll hear later today that, for example, our AI-powered WAF that released recently is rapidly gaining adoption amongst our customer base, and we expect our entire portfolio to be AI-powered within a very short time frame. And what I mean by AI-powered is what we're using neural networks to inspect Layer 7 traffic and detect attacks at a level of accuracy that our competitors simply cannot match. So that is what we are doing today in the flow of traditional and modern applications.

But with AI, new opportunities emerge. The first one is this new insertion point is AI runtime security. The future of traffic is AI, as I've just shared, and that AI traffic has to be secure. And so building on our Calypso acquisition, we secure AI traffic into the application and from the application to the AI model. That is a place in infrastructure that we have not been at before, and so it's a net new opportunity for F5. The second net new opportunity is data delivery. Now this is F5 helping data stores or helping data stores connect with AI application with the right efficiency, the right scale, and the right security. And it's also helping move data between data stores and AI factories in training, again, with the real -- the speed that's needed, the scale, the throughput that's needed and the right level of security. Again, that's a net new insertion point for F5 and a new opportunity.

And lastly, AI factories themselves. As you know, AI factories convert energy into tokens and they do so at scale. But today, these AI factories often run into low GPU utilization problems. As you may have seen, studies commonly cite 25% to 50% utilization on GPUs. F5 improves traffic efficiency and GPU utilization, both across and within the AI factory, boosting token throughput, reducing time to first token, and lowering per token cost. So when customers use F5 to load balance traffic inside of an AI factory, we've seen token throughput increase by 30% to 40%.

So those are the net new opportunities in AI. But if you step back and look at the overall picture for our customers, these dynamics are changing the way that our customers view and manage their IT infrastructure. They were already managing a complex set of challenges across multiple environments, but that complexity is magnified by the new dynamics. Most companies are managing today, 9 different AI models, which are running in different places, AI factories. In addition to that, you have AI traffic, as I shared earlier, that is growing exponentially. You have the threat of quantum. These things are compounding the challenges that our customers have had. And it creates the need for a platform that simplifies that complexity.

F5's Application Delivery and Security Platform or F5 ADSP, is uniquely positioned to address these new dynamics. We deliver and secure every app, every API, traditional, modern, or AI anywhere with one unified platform across on-premises, multiple public cloud, and the edge. Our Application Delivery and Security Platform reduces the complexity our customers are facing, but without compromising speed or scale. We are able to give customers centralized best-in-class security, industry-leading high-performance delivery, and consistent policy without having to stitch together multiple products.

Let's now talk about our addressable market as a result of these dynamics. When you look at these secular trends that are converging and you look at the actions we have taken to position F5 to capitalize on them, we see demand continuing to rise for both Application Delivery and Security. Based on a combination of third-party analysis and our own research, our own bottoms-up analysis, we estimate that our TAM today is approximately $15 billion. We estimate that it will grow to $28 billion by 2030 if we exclude AI-related demand, and that growth we expect to come from continued hybrid multi-cloud deployments, application modernization, API proliferation, and higher security requirements. Now if I include AI demand, our addressable market by 2030, we estimate to be $40 billion, driven by net new AI use cases that I'm going to double-click on now.

So if you look at specifically the use cases in AI demand, we see that AI is already driving accelerated demand in our business. But we see that demand across 3 distinct use cases: AI data delivery, AI runtime security, and AI factoring load balancing. Kunal, a little later today, will go in more depth on each of these use cases when he discusses our AI opportunity. At this point in time, these direct AI use cases are contributing modestly to our overall revenue. But what's important is the trajectory. We see clear potential for meaningful TAM expansion over time, and we expect additional AI-driven use cases to emerge in areas where F5 is uniquely positioned to win given our role in application delivery and security across hybrid and multi-cloud environments.

Now these are the direct use cases. But beyond those direct use cases, we see what may be an even larger opportunity. And that opportunity is from indirect AI-driven demand because as customers expand capacity to support a rapid acceleration in workloads and as AI capabilities get embedded into modern applications, AI is increasingly underpinning broader enterprise priorities. For F5, this is showing up in increased demand for Application Delivery and Security, data center modernization, digital sovereignty and infrastructure capacity expansion. So 3 direct use case today, more new AI use cases emerging and coming, and indirect demand from AI already playing a significant role with F5.

And so we are -- we believe that we are well placed and we're taking actions to capitalize on these trends. Now Cooper will go and elaborate on our financial outlook in more detail in today's agenda. But that said, I wanted to preview for you the key takeaways on our guidance. We expect accelerating revenue growth and earnings expansion as a result of the mega trends we are exposed to and the actions we are taking to drive growth. First, we are guiding to upper single-digit revenue CAGR through 2029. And I'll note that we do not see upper single-digits as a ceiling for our opportunity longer term. We aspire to drive the business to double-digit revenue growth beyond this horizon. We also continue to drive durable earnings growth and are guiding to double-digit non-GAAP EPS CAGR through 2029.

I'll close with the 4 takeaways we'd like you to remember today. And our next presenters will take you through the actions that we are taking. Chad Whalen, our Chief Revenue Officer, will speak to what we are doing to build on our market leadership to capture growing demand for ADCs. John Maddison, our Chief Marketing Officer, will speak to how we are unifying our portfolio capabilities and driving platform adoption. and Kunal Anand, our Chief Product Officer, will speak to how we are capturing new AI opportunities. And with that, I'm going to hand over to our Chief Revenue Officer, Chad Whalen. Thank you.

Thank you, Francois. Well, it's a pleasure to be here today. So let me go ahead and get started on what's driving -- before we get going, let me just give you a little background on myself. I've been at F5 for the last 8 years, driving our go-to-market and sales organizations. And I can tell you, at this point in time, my teams on the go-to-market side have never been more excited than we are right now. Throughout the presentation, I'm going to give you some insights as to what's driving that excitement. Market dynamics are very favorable. In many ways, the market is coming to us, and I'll point to some of those.

It's always helpful to ground ourselves before we get into a presentation on the customers and the markets that we serve. And so when you look at this slide, it's a fantastic testament to the deep and trusted relationships we have across many industries and governments, the top 15 of 15, the top 10 of 10, whether it's financial services, automotive, what's going on in insurance and the like. As a result, of these fantastic relationships, we're a foundational partner to the largest enterprises and governments of the world over. 85% of the Fortune 50 are partnered with F5. Over half, and growing every day, of the Fortune 1000 are partnered with F5.

We have earned a tremendous privilege over the last 30 years of this partnership, which provides us immense access and the ability for brand leverage to drive portfolio scale. So as Francois mentioned in reviewing the Application Delivery and Security Platform, I'm going to take this opportunity to drive down and expand a little bit on the deployment modes. The deployment modes, I want to provide some texture as to why this is so important. This was an explicit decision that we made many, many years ago about being a hybrid multicloud solutions provider. The whole premise of that was founded on our customer-centricity, giving them the ability to deploy where they wanted that was best fit for the application. That does not matter if it was cloud native, appliance, purpose-built hardware, software as a form factor, Software as a Service, or even DPUs. In fact, over the last 2 years, 1,900 customers have deployed in 2 or more modalities in the last 2 years. We have 1,600 customers leveraging our as a Service platform today.

And what does that mean? Those customers, what we're witnessing and observing, that have 2 or more modalities grow at a rate much, much faster than customers that don't. In fact, they're growing at 25%. So what is underpinning the growth that we're having? There's a couple of factors, both cyclical and structural. From a cyclical standpoint, there's no doubt we're experiencing fantastic demand dynamics in our Refresh Plus event that's going on as we speak, okay? But it's not just refreshing equipment. It's expanding that equipment, and they're doing so simultaneously.

But the 3 I want to punctuate, and to give you guys some insight and context, is the structural trends that are driving the demand, okay? And I will cover these in more detail. The first one is digital sovereignty. Next one I'll cover is competitive displacement. And finally, I'll talk about AI-driven demand. Just going through digital sovereignty. It's a very different time. Our customers are realizing they cannot meet the evolving government standards and regulations for both data and resiliency without having a hybrid multicloud architecture. That's really, really, really important, okay? If you think about what's going on in EMEA, you have DORA and NIS2. Those are regulations that are in flight today and really come to life in 2027. It doesn't just end there. We have a very similar thing in APCJ. PDPA is in Singapore, similar thing in India. This is not a one-off. This is happening in the world over.

We have over 6,000 customers that are shaped between governments, BFSI, health care, and telecom that are bound by these regulations. That customer set makes up over $700 million of opportunity for us between calendar year '27 and calendar year '30.

Let me give you some insight on a recent win. We had a non-U.S. government customer doing a sovereign data center build-out that required AI data delivery, Francois talked about earlier, web application firewall, and API security. We were the only purpose-built solution they had available, okay? Why? Hybrid multicloud. Many of our deployments are hybrid multicloud. Customers have to be able to have that flexibility. We have that with consistent services, unified security services. What this means? It's a fantastic opportunity. Not only was the size of the win great. So I have expansion with that entity, but also taking that entity to all the other ones that are tightly adjacent. Again, it was all driven by our architecture as a key differentiator from everybody else in the market.

Let me talk about competitive displacement because this is a very significant opportunity for F5. We are successfully displacing customers resulting from, A, our new products to market. Our innovation velocity is phenomenal. Kunal is going to talk about that later today. The flexibility that we offer in our consumption models and the choice that you get with how you want to deploy. All of those things are very different and unique.

So as a consequence of that, we're taking share from Citrix, we're taking share from Broadcom and others. What you see here is we have identified 3,000 enterprise and governments across the globe that we're actively targeting to expand our footprint and take share. This is creating an additional $600 million opportunity, again, from calendar year '27 to calendar year '30.

Let me talk about a recent win that we just experienced in this space. A Fortune 50 customer in oil and gas was looking for a solution that required highly performant, also on-prem as well as in the public cloud. That is the exact use case for our architecture. This happened to be a multi-billion-dollar win for the company, and we were chosen specifically because of our hybrid multicloud architecture with the unified security services, both on-prem and in the public cloud, giving them architectural flexibility and licensing simplicity. Many of our competitive displacements are multi-modal. They buy it both on-prem and in the public cloud. What's exciting about this win? Lots of expansion. These customers are looking to consolidate, and they're choosing us as they go through that consolidation.

The next trend I'll talk about is AI data-driven -- or excuse me, AI-driven demand. Not surprisingly, this is the biggest trend. So as infrastructure build-outs, they're driving a material uplift in what we see every day, whether it's going to be direct use cases or non-direct use cases. We have around 15,000 customers that we believe are in the zone for these types of use cases, representing over a $1.3 billion opportunity, again, from calendar year '27 to calendar year '30. Let me talk about a customer win in this example. We had a big 4 professional services and accounting firm that was looking and required a highly performant AI data delivery solution to front-end their S3 storage tier.

We secured that win not only because we had the most performant solution, but also because we had the technology integrations and partnerships with both NVIDIA and NetApp, where we have reference architectures for both. In today's climate, partner ecosystem integrations are critical, and we find ourselves working with many, many partners in the space. What's in front of us is we are now foundational to their AI roll-outs. And so as they continue to scale out their applications, we will benefit as a result.

So in summary, with these 3 structural trends, F5 is incredibly well positioned to capitalize on this opportunity. Digital sovereignty and resiliency requirements are not going away. It's only intensifying the growing requirement for our customers that are looking for both data custody and resiliency to meet the requirements that are imposed upon them. Our competitors' customers are looking for alternatives. Those competitors that I mentioned, the innovation velocity has not been there. They're looking for that. They're looking for flexibility in how they deploy. They want to be able to have the opportunity to go on-prem, off-prem. They want to have licensing postures that scale with their business. And then lastly, we are in the critical control point for AI workloads as ADC use cases expand and continue with the AI roll-out.

So thank you so much. I'll now introduce John Maddison, our Chief Marketing Officer, to review driving platform adoption. Thank you.

Thank you, Chad. Okay. John Maddison, CMO. I've been at F5 18 months. Before that, I was 10 years at a rather large network security company. And before that, 10 years at an endpoint company. I do my 10 years stint each of these companies. But what I thought when I was at the network security company was when AI comes, what's going to be most effective? It's going to be application security. Now F5 not only has application security, but it also has application delivery, the opportunity to create a converged platform, just like SASE.

Before I go and talk about how our customers are adopting ADSP, I thought I'd go through why we need a platform for ADSP. Three main reasons: application structure, the infrastructure itself, where the applications are, and the attackers, threat landscape. In 2015, there was a rather major change across all 3 of these. Applications themselves became more microservices. Today, it's called Kubernetes. Applications started to migrate towards the cloud and the attackers became more sophisticated, advanced persistent threats, nation-state actors were now attacking. Fast forward to today, and all 3 of those are changing even faster, applications becoming inference. I think we've talked about hybrid multicloud quite a bit. That is here to stay. And then, of course, now we're using AI technology to attack frontier models.

Just imagine a social engineering using agentic, extremely powerful. And what that means is the complexity, our networking gear now has to understand tokens, not just packets. The attack surface is becoming very dynamic and very large. And this complexity means you've got a lot of vendors because most enterprises don't give up on each of these pillars. They still have 3-tier applications, data centers, microservices. There's a survey done by Forrester last year. And one of the questions inside there was why do you want to drive towards a platform approach? And you can see some of the top reasons there. Automation, ease of integration, ease of use. And the reason is to try and make different vendors work together is extremely hard. Getting 10 vendors is hard. Imagine when you've got 60 vendors trying to make them work together.

And so the industry, enterprises are driving towards platforms, and they've already been doing that. You may recognize some of these acronyms here in our industry, we like the acronyms, EPP, endpoint protection platform, basically endpoint protection, workload protection. We even roll in SIEM and SOAR these days there. Secure Access Services Edge, SD-WAN, SSE, CASB, cloud-native application protection platform, workload protection, posture management, and of course, identity access management, single sign-on, multi-factor privileged access management. Most enterprises are working towards deploying these platforms going forward.

F5 believe is another platform called ADSP focused on application delivery and security, basically taking ADC, WAP, and AI security and bringing it together. This platform is a bit different from SASE and EPP and CNAPP and all -- and identity and all those platforms are really focused on employees. ADSP is the gateway to enterprise customers. And Francois talked about this. It is the front door to customers and to agents going forward, making it extremely important to enterprises.

So let's look at ADSP in a bit more detail. One of the foundational components is the application delivery controller, sometimes called load balancing traffic management. That definition has expanded a bit to include gateways and ingress controllers. It also includes security such as WAF, SSL termination, which I'll come back to, and optionally zero trust. The second component of ADSP is the web application and API protection. That includes WAF, that includes API, bot, and DDoS. And WAF is usually a SaaS implementation because the CISO wanted a single point, a single control point when applications move to the cloud and into the data and into the edge. Optionally, in that service, you'll have CDN, DNS, and multi-cloud networking.

Now as Chad said, our SaaS, our WAP customers, now exceed 1,600 customers. More interestingly, 50% of those customers have 4 to 6 services. So bot, API, and WAF. And this is a great cross-sell opportunity for F5. Also, 90% of those customers have WAF. We believe WAF is the virtual patching capability required now that frontier models are discovering vulnerabilities. In fact, 200 of those customers have already implemented AI-powered WAF. And 80% of those customers have implemented blocking on WAF. Sometimes customers don't like doing that. It affects sometimes the customer experience, but they're so worried now that implementing WAF in a blocking mode.

And then, of course, the third component is AI security, very fast growing, AI governance, discovery, testing, guardrails, and observability. Bringing us full circle to the ADSP platform making sure you can deliver customers, eventually agents to any application, including AI apps, being able to apply a full security stack, again, whether it be AI security, network security, WAF security, being able to sit in the data path, hardware, software, different control points, and managing it through XOps for the network ops people, SecOps [indiscernible].

And how we're building this platform? Well, we have 3 main product families: BIG-IP, which is hardware and Virtual Edition. We have our Distributed Cloud Services, which is SaaS, and NGINX, which is mainly software. And our road maps are gradually bringing these platforms together into one ADSP platform. When you look inside each of these product families, they have different use cases. Some of them are very specific to those product families like firewalling in BIG-IP, bot protection in XC, and some are common. Here's an example of a very important common application across everything, web application firewall or virtual patching. And our goal is to bring that service that capability wherever the application is, again, whether it's sitting behind hardware, software, or cloud.

So this is a graph of our 3 product families by customer. This is actually our top 1,000 customers, I think. And you can see if you go back to 2018, everyone was one product family, which is hardware. Today, 70% of our customers, top 1,000, have 2 deployment modes. In fact, 26% already have 3 deployment modes. That means SaaS, hardware, software, and cloud. Here's a couple of examples. Here is a leading financial services customer. Again, they started with hardware. They actually added WAF capability to the hardware. Then East West, virtual capability in the data center, also added NGINX for cloud-native capabilities, and then they added a SaaS console across that. Three deployment modes, 16 use cases.

Here was a global commercial bank, again, starting with hardware, but pretty quickly decided to put some of the security capabilities in WAF and SaaS. And then most recently, they added F5 Insight to provide management across everything. That's 5 deployment modes and 30 different use cases. So every enterprise is dealing with complexity. They're all driving towards a platform approach. And our market is ADSP. We're seeing great adoption of our platform as we go forward. We'll continue to push that, cross-sell, and give the customers that capability. Thank you for listening in. Next is Kunal Anand, our Chief Products Officer, who is going to do a deep dive on AI. Thank you.

Hello, everybody. As John mentioned, my name is Kunal, and I'm our Chief Product Officer. My team and I are responsible for product vision, product strategy, and product execution at F5. And the last couple of years, we've seen so much change with respect to AI. I think it's pretty clear that AI is rewriting the operating manual of applications. And it's really creating a new wave of opportunity for F5. We sit as a company at the center of users, apps, APIs, agents, models, data, and infrastructure. And as AI moves from pilots to production, that control becomes even more valuable. Over the next 15 to 20 minutes, I'm going to walk you through these new opportunities.

But what I want to start with is why AI is changing both halves of our business. AI is simultaneously expanding our delivery and security services. On the delivery side, inference is not a normal application workload. It's changing traffic patterns. We see more desire for increased utilization and, of course, brand-new insertion points in places like AI factories. On the security side, the operating model has flipped. Attackers are now able to find and exploit vulnerabilities faster. We see an expanding surface area, thanks to things like agents and APIs, and there's a greater need now for runtime protection. AI is raising the value for every routing decision, every security choice in every throughput metric in the network. This has always been F5's turf.

Now one thing I want to do is reframe how to think about an AI workload. In the real world, AI is not just a model. It's a rich and layered ecosystem. You have users and agents, which drive traffic via intent. Apps and APIs hold business logic, but they perform things like routing and they have to make decisions. Models and inference are where the intelligent lives, but they demand security and governance at scale. And you have data that underpins all of it, providing rich context and, of course, driving a lot of infrastructure load. The model may be the brain, but the ecosystem is the body. AI needs delivery, security, and control, working together to make it usable in real enterprises.

So from this ecosystem view, clear opportunities are emerging for F5. First is AI data delivery. Customers are using object storage for AI workloads, and they demand programmability and high performance. The second is AI runtime security. Attacks are getting faster. They're getting more complex. And as applications become more dynamic, protection has to also be adaptive and at the runtime. Third, AI factory load balancing. This is the most nascent opportunity, but the economics are compelling. These 3 opportunities have one common theme. F5 sits where delivery and security converge.

Now let's dive into the first opportunity, which is AI data delivery. AI is requiring so much data, not just for training, but also inference workloads. And customers need a combination of performance and control to get data to the right place at the right time. And this, this is where F5 has a natural role to play. As customers modernize their data platforms and standardize on object storage, F5 is able to provide intelligent, high-throughput capabilities in front of their data tier. We give customers 3 things that their storage controllers simply don't. First, programmability. That's really important because we can manage Layer 7 traffic intelligently while allowing customers to craft advanced controls. The second is hardware scale. We absorb traffic patterns and scale that storage controllers were never designed to handle. And third, vendor neutrality. We sit across the entire S3 ecosystem. We don't lock customers into a specific vendor or a specific architecture. All of these allow customers to remove data friction, which enables all sorts of AI workloads and capabilities in their environment.

Now I want to show you the performance lift our customers are seeing from all of this. Across the network, the lift ranges anywhere from 95% in low-latency SD-WAN environments up to 300% in high-latency edge, multi-cloud, and SD-WAN environments. That range that I just shared with you matters because data doesn't just live in one place. It can live on-prem. It can live in a private cloud, across public clouds, or at different edges. And it's important to note the way that we've engineered our underlying solutions. They have been built and designed to inspect, route, and secure all this complex S3 object storage traffic while being vendor neutral. It's a really important point. Now that is data delivery.

I want to now turn to what's going on with AI runtime security. When it comes to security, our customers have to secure 2 things at once. The first are traditional applications, but these applications are now exposed to AI-accelerated attacks. The second are AI apps themselves. These are the new workloads that are AI enhanced. They may be invoking a model. They may have a model embedded within them. What's happening across both, however, is also a natural extension of F5's existing protection of apps and APIs. Now before I get into the opportunity directly, I just want to take a second to touch on the changing security operating model. In this era, I think it's pretty clear that speed is now favoring the attacker. It's also meaning that on time protection is becoming a nonnegotiable. Today, attackers can now find, they can now exploit vulnerabilities faster than ever before, and they can do it with better precision than a human team.

What that implies is that fixed and static defenses no longer hold. They just don't work in this era. Customers need security that can inspect traffic, that can look for anomalies, that can adapt, learn from those signals, and enforce policies in real-time. And today, we're already seeing all of this play out in customer adoption. John talked about it just a few moments ago, but we recently introduced an AI-powered web application firewall, and the customer uptake has been awesome. We've already onboarded more than 200 enterprise customers in our first 70 days. It's important to note that this web application firewall was built entirely in-house, architected, designed, trained, fine-tuned all within the walls of F5. 80% of our customers have this web application firewall already in a blocking mode, meaning we're taking action and we're stopping CDEs or critical exploits from being taken advantage of in production. And we've also seen our detection accuracy increase to 98%, whilst our false positive rate has decreased to just 1%.

Security leaders are practical. They only invest and take on technology and capabilities when it lowers risk and just fundamentally works in the real world. We're seeing that with this adoption. And over time, we're going to extend AI across the entire security portfolio. We're really excited about that. In addition to AppSec, we also secure the full AI life cycle. Our customers are valuing our end-to-end model for securing AI workloads. With AI Red Team, we run tests using agents and all sorts of attack signatures that we've built up, generating 10,000 attack signatures every single month now. And we're able to go and find weaknesses in AI models and applications. Those findings then go into a solution we call F5 AI Remediate. We take those findings and automatically build guardrails, automatically build defenses out of those findings.

What that means is that we can quickly go from a vulnerability or weakness that's discovered to a protection very quickly in production. That's a big deal. Our operators no longer have to be security experts. They no longer have to be an AI expert to put a signature into production to stop these types of attacks. Then there's AI guardrails. AI guardrails can protect AI models and AI-enhanced applications at runtime. We offer centralized enforcement, observability, and governance. Now at the bottom of this slide, you'll see an independent test that was conducted by SecureIQLab. We scored 98.4% overall with F5 AI Guardrails while being 99.3% effective against direct prompt injection and 99% effective against sensitive data leakage. These are great stats. The customer adoption is strong, and we're really excited to help customers protect these AI workloads, especially as inference scales all over. So that's AI runtime security.

Let's now cover AI factory load balancing. This is the most nascent of the 3 opportunities. However, it's the one that affects the economics of inference the most. As AI shifts from training to inference, AI economics or what we call tokenomics will become even more significant. AI factories are really conversion systems. Power, GPUs, and prompts go in, tokens, outcomes, and business value come out. That conversion process can be measured. It's generally referred to as tokenomics. And you'll see a bunch of properties listed here, things like total tokens generated, time to first token, cost per token, end-to-end latency, and tokens per watt. The word that you see repeated the most in there is token because the unit of value in AI infrastructure is the token. And the control point that improves tokenomics is the one that becomes strategically important over time.

We're building this brand-new control point at F5, and I want to share the numbers with you. We now have third-party testing and early design partners who confirm that F5 can deliver better tokenomics. The independent testing results you see behind me are impressive, 40% higher total throughput, 61% faster time to first token, 34% improvement in full inference response time. And we're not just delivering these performance optimizations. For those who are familiar with F5, we're providing core delivery and security functionality. In addition to that, we've also created brand-new capabilities for AI factories, things like intent-based routing, semantic caching, and much more.

Our goal is to bring the power of the Application Delivery and Security Platform to the AI factory. And the platform we're building that on is BIG-IP for DPUs. BIG-IP for DPUs is our bet on what AI infrastructure will need in the future. It's early days, and the milestones show what we've done so far, starting with getting into NVIDIA's reference architecture, bringing on early design partners and engaging in those early POCs, performing independent testing and, of course, releasing software. But I want to be clear eyed about this. This is a nascent opportunity for F5. DPU adoption from everything that we've observed is lagging behind inference build-outs. The Neo cloud stacks are also different. They're polyglot and they're still forming. And we're only now beginning to see the shift from training workloads to inference workloads. However, as inference scales, tokenomics that we've been discussing will be decided in the data path. We at F5 are ready for this, and we are early. So that covers AI factory load balancing.

I'd love to just zoom out for a moment. What I want to do is dimension all of these opportunities, share how they contribute to the business, identify where the momentum is and close with an overall reflection. AI isn't a single market for F5. It's different demand motions, different maturity curves, different monetization models, and different product entry points. AI data delivery is our most mature. It's sold to large enterprise, government and telco customers. It's majority hardware on-premises. Adoption is strong today. Then there's AI runtime security. It's the same customer base, software licensing across cloud, edge and on-premises. Momentum is real and growing. Then AI factory load balancing, which, as I've already described as our most nascent. The targets there are sovereign AI factories and Neo clouds. It starts as hardware with a software licensing opportunity on DPUs over time.

And then, of course, there's the fourth motion, what you see all the way to the far right of the slide. And it's one that often gets overlooked, indirect AI demand. As AI-driven workloads grow, they actually drive more F5 into the surrounding infrastructure. That demand is real, and it's already showing up. One example of that is, as organizations embrace agents, those agents are making more calls to APIs and existing applications, thus driving a greater demand to put F5 technology and capabilities in front of those applications, in front of those APIs, not just for delivery, but also for security.

I want to share some customer wins that we're seeing across these. These examples should give you a sense of the momentum that we're seeing across these 3 direct opportunities. For AI data delivery, this is a health care services customer that's deployed F5 in their AI-driven voice response platform. It's a $2 million deal. The second is AI runtime security. A global financial services customer deployed F5 to secure enterprise-wide generative AI adoption with high fidelity threat detection. That was a $4-million-deal. And then AI factory load balancing. An energy and chemicals customer is using F5 to improve AI inference, to improve latency, and to stop overall time outs in their ecosystem. That was a $1-million-deal.

Across all of the opportunities, it's really important to mention that this is not just one buyer, and it's not just one vertical, and it's not just one deployment pattern. It's important to mention that because AI is creating demand across all these opportunities simultaneously, which brings me back to the core thesis. AI doesn't reduce the need for application delivery or security. It raises the stakes for both. More autonomous systems, more AI-driven traffic, more surfaces to secure, more decisions in the data layer. Now earlier, I said the model is the brain and the ecosystem is the body. F5 is what makes the body safe, reliable, and efficient. We deliver and secure traffic for any app, any API in any agent in any environment. That is the F5 thesis in the AI era. Thank you so much.

Thank you. Thank you, Kunal. Thank you very much. We're going to take a quick 10-minute break. Why don't we come back at 2:35, please.

[Break]

Thank you, everybody. We're going to get started again. I'm really happy to introduce Lisa Citron. She is F5's SVP of our Global Partner Ecosystem. So please welcome Lisa.

As Suzanne said, I have the honor of leading our global partner team. What does that mean? It means that I work with our hyperscaler partners, our reseller and distributors and our global system integrators. I have the opportunity to help develop these routes to market and to work with our biggest and best customers in the process. And I'm thrilled to be here today with one of our most important partners, WWT, Worldwide Technology. WWT works with us across some of our biggest verticals, including banking and financial services, government and telecommunications. So I'd like to introduce Chris Konrad from WWT to join me up here.

All right.

Welcome, Chris.

Great to be here.

Great to have you here. So why don't you give everyone a preview of what your role at WWT is?

Yes. No, happy to do that. But maybe before I do that, I can honestly tell you, and I think you and I have had this conversation in the past. I don't think there's a more urgent, a more consequential and a more opportunistic time than we're living in right now. And candidly, there's no better partner to be doing this with an F5. So thank you for the opportunity for me to be here.

Yes. Thank you. Thank you.

So I'm the Vice President of our Global Cyber business at Worldwide Technology. So for those who don't know WWT. We're a 36-year-old company, about $20 billion in top line revenue, about 15,000 employees. And the lines of business that we're in are all about helping -- help our customers solve the most complex challenges they're in, whether it's in AI or cloud or infrastructure and cyber. And I'm responsible for our cybersecurity business, which is a fastest-growing business at Worldwide. It's a $5 billion contributor today. And so I'm responsible for all the teams that make that engine run.

That's awesome. So how do you see AI changing the way you're working with customers? How is that security view coming to life? How is that affecting how you work with customers?

So I always fall back to a quote from Jen Easterly, former Director of the Cybersecurity and Infrastructure Security Agency, or CISA, is now the President of the RSA Conference. And she had a quote a few years ago that said AI is the biggest innovation of our lifetime. It could also be the biggest weapon of our lifetime. And where we are today, how true that really feels.

We have been in AI now for a long time. This isn't our first rodeo, over 10 years. And involved in AI, I have over 100 data scientists at WWT supporting our go-to-market strategy. We've been NVIDIA's Top Partner of the Year for 8 years in a row. But as we build out these AI infrastructures for our customers, AI security at times has been an afterthought. And so for the last couple of years, it was like we're just trying to have a seat at the table to talk about AI security. And candidly, it is the #1 topic that our customers want to hear about today. It's a Board-level initiative. And when you think about some of the frontier models that are now being released, you heard Francois talk about it, Kunal talk about it, it's changing everything.

And so what we did is we developed a framework inside of WWT called ARMOR. It's the AI readiness model for operational resilience. And essentially, that helps guide -- it's a framework to help guide our customers in securing AI from, we'll call it, from chip to cloud. And so it's just a really easy way for our customers as they start to build their AI factories and thinking about how do I secure it? Because when we're talking to CIOs and CTOs and Chief Information Security Officers, that's the first question they're asking us, okay, is this factory that I'm buying secure? How do I know it's secure? So they need a framework to be able to manage that and watch it.

Yes. That must be a huge relief to them to be able to look to you for that framework.

For sure.

So underneath the C level are the IT teams who actually have to do the work. What are you seeing in the biggest challenges that they're facing today? And what do you think those challenges look like in the next 12 months?

Well, the word I used at the beginning of this was consequential. And so when I look at IT teams today and what they have to deal with, they're facing the next essential threat. When you think about what some of these frontier models are capable of doing, so whether it's Anthropic or whether it's OpenAI or others that are coming out, it is making us rethink how we're doing security. I've been in cyber nearly 3 decades. And when I take a look at everything that I've learned and understood about cyber, that's all changed. It changed overnight. So how do you do vulnerability management? How do you do patch management?

All the basic fundamentals that sometimes it's so hard to do. And our customers sometimes struggle with that because they don't want to break something within their environment. And so I like to think is do you want to live in uncontrolled chaos or do you want to live in uncontrolled compromise. And so just really helping our customers rethink. And so -- we have done over 150 customer briefings just in the last month alone, where people want to know how do I deal with this? Are we on the right track? What's the strategy? What's the plan? How do we make this work?

Yes. I think that those teams are really in that same shift that you just talked about where they have been grounded in working in one specific way and now they're being forced, right? Because the attack surface is just wider and more complex. Absolutely. So ADC has long been an essential part of the stack, right? Working across layers 4 through 7. And how do you see ADC playing a role in the AI stack?

We heard a lot about it already today. I mean just -- it's fascinating watching the evolution of the ADC, managing application traffic. Today, it sits right in the middle of AI. So whether it's AI prompting, AI response, you talk about inference traffic, vector queries. So now it just needs to be an agent communications. And when you think about it, it now needs to be AI aware. It needs to be model aware, GPU aware.

And the work we've done inside of our advanced technology center to test in these types of complex environments is really where the value and impact of our partnership comes together, so we can put these reference architectures in front of our customers very early on and say, this is how it works in these environments. So yes, I mean, it is a control point for sure. You cannot build a modern network without thinking about that ADC.

Yes. Yes. It's been great to see how customers have come to the [ ADC ] and your AI proving ground, looking at the data delivery use case, obviously, the security -- runtime security use case and then the growing interest in the AI factory conversation that is early. So when you think about F5 specifically, how do you see us getting into this next era of delivery and security?

You've been around 3 decades.

Yes, we have.

And you think about just all the major shifts in how organizations are developing their networks. I mean, think about your roots from networking and load balancing and then to modern applications into the cloud. And now you're sitting in the front of AI. And so for me is that every major architectural shift, F5 has been involved in that, and you've adapted to that. And so I don't think you can build a modern network architecture without thinking where F5 is going to play in that. It is so consequential.

Yes. No. And it's great to hear, and it's great to have your partnership on that. So shifting to the AI factory conversation. This is an area that NVIDIA will talk about you as a top partner there. It is a key thing that I know is a growing piece of your business. So as everyone heard, we have a great piece of technology that is in the growth -- starting in that growth vector right now that will make AI factories more efficient. We're in this world of tokens, how do you see this journey that customers are on, especially as they move from training to inference there?

Yes. Just -- I'll go back to something I said a minute ago, just every CIO, CTO, CISO that we're talking to are wanting to understand the factories that they're buying from any of the vendors, is this thing secure or not? And how do I know that's secure? So I go back to the conversation around ARMOR and how that works. But I will also say token economics is a real thing. You heard Kunal talk about just a few minutes ago.

So I mean, we host customer advisory board meetings. And the top 2 or 3 topics that they're talking about is token economics and they want to get a real-life total cost of ownership of how this is being applied. And so when you think about this in the AI security world is you don't want to have an inference challenge in an incident. And so we have to make sure we square that away. And when I think of F5 in this particular category, candidly, you are the toll booth for tokens.

That front door, right?

Yes, you are the front door, you're going to continue to be. So it makes a major difference when it gets architected and done the right way upfront.

Yes. And that's what we're seeing from those conversations with customers, looking for that, not only the security, but how do they drive the efficiency in the usage of that tremendous infrastructure that we just invested in. So wrapping it up, I'll go to something that's near and dear to my heart, which is what are the factors that you see or believe that makes F5 a good partner to work with?

I think in any good relationship, it all starts with trust. And so we have a long-standing partnership, and we trust each other. We have trust at the executive leadership level and all the way down into the field. It has to start right there. The other thing that we can do, and it's part of our culture and our core values that we both share is to be able to have difficult conversations. There are some challenges we may have in the field, but you and I and others, we can have that conversation. So that is just so fundamental and not everybody has that.

But the other part that I hold near and dear to my heart is that you listen. And so when we talk about product design or what's working in the field, what do you see? What's not working? What do you think about, what products work well from an integration standpoint? We live in a multi-OEM world. Our customers have 2 and 3 of everything. So how do we work together in this system? And so that's what I really value. And not everybody does that as well as what F5 does. So I appreciate that.

No. And we appreciate WWT, and I certainly appreciate you being here with us today and the long-time partnership we have. Thank you so much.

All right. Thank you.

So I'd like to hand off to Tom Fountain, our Chief Operating Officer, and he's going to talk about delivering services. Thank you, Tom.

So thank you, Lisa, and particularly thanks to Chris for sharing a little bit about F5's role in this emerging AI stack. I'm Tom Fountain. I'm Chief Operating Officer at F5, and I've been with the company for 8 years now. And I think when I look back, I am perhaps most pleased at the foresight we had around the role of hybrid and multi-cloud. And I'm especially gratified to see the momentum and even acceleration that we're now seeing in our business as a result of the strategy we laid out a few years ago and our very deliberate execution against it.

I wanted to share with you today a little bit about the services business. F5 services business really complements our product portfolio with services that allow us to both monetize our offerings and promote adoption and consumption of our solutions. This creates a virtuous cycle that I think is a pretty key part to our differentiation. We support the application delivery and security platform through a comprehensive portfolio of value-add services. These services represent approximately half of F5's total revenue.

The world-class service offerings that we deliver span 3 broad capabilities. First is around support services. This provides around-the-clock access to engineering experts who support our broad customer base in addressing over 170,000 customer cases a year. These engineering professionals assist customers not only in their moment of greatest need, but they also create a lot of new knowledge that increasingly feeds our AI technologies. Support services also includes F5 Security Incident Response Team.

And this provides customers immediate access to an elite team of cybersecurity professionals that help customers use our solutions in responding to cyber crises. Second, with the rapid growth of our software and SaaS subscription business offerings, we've aggressively built a new customer success capability. These professionals work closely with customers throughout their ownership journey to get the most from the F5 products.

And finally, professional services executes 1,300-plus customer engagements annually to provide full-time designated and dedicated engineers in customer environments, execute against defined SOWs that architect, implement and operate F5 products on behalf of our customers and train customers on the use of all of these solutions. These services are really purpose-built for customers operating the most demanding IT environments. That's across enterprise, government and service provider. We serve over 80% of the Fortune 500 and are trusted by all of the top 10 companies in each of the verticals across banking, retail, automotive and insurance.

The services that we deliver are mission-critical to organizations that are themselves offering, delivering -- are often delivering essential services. So from early engagements of architecting our customers' environments to services designed to ensure customers get the most from our solutions, services is a critical part to every phase of the customer's ownership journey.

So Chad, John and Kunal each spoke about the actions we're taking to further accelerate our growth. Services addresses a vital need in each of these areas that they described by providing white glove human-led assistance. We construct and tune service offerings to complement each of these growth levers, including ensuring availability and trust of mission-critical workloads, supporting our commercial offerings through adoption and expansion motions and providing domain experts who work side-by-side with our customers.

Let me offer one specific example to illustrate the value of services. We launched our distributed cloud SaaS platform in 2022. And that first full year after launch, customers needed an average of 92 days from the start of their subscription to the time they first pass traffic on Distributed Cloud. Over the course of the last several years, we've systematically improved our onboarding instructions, developed detailed playbooks across different technologies and use cases, expanded our global team of onboarding engineers and built out our managed services offerings for customers seeking to outsource operations entirely.

We have focused on helping customers achieve their business objectives and rapidly extract value from distributed cloud. As a result, customers today complete initial adoption in an average of only 21 days. This means customers benefit from our solutions faster. It also, in turn, means that we increase our renewal rates and improve opportunities for expansion. This is but one example of the type of motion we develop with services to accelerate product revenue. We've embedded this approach to driving both services revenue and product usage into our operational playbook. Our services measures include ensuring a high initial attach rate and then maintaining high renewal rates leading to long service duration.

In addition, because of the strong symbiotic relationship between products and services, we've also built operational rigor around adoption measures focused on initial onboarding and usage of products throughout the subscription life and expansion measures that focus on motions to promote consumption beyond the initial contracted value. I'll highlight an example measure in each of these areas. First, our initial attach rate has remained steady in the high 90%. This shows customers see value in our services portfolio. Second, our services obligation average age is steady at approximately 4.5 years. This average age demonstrates the durable nature of the services revenue streams.

We also see healthy operational results from our product-oriented measures. I spoke just a moment ago about the improvements to initial adoption for Distributed Cloud. Over the course of the last several years, we also improved adoption of our multiyear subscriptions. Here, we show the average time to reach 80% utilization on these multiyear contracts. In our 2020 investor event, I celebrated progress in reducing the time to full utilization from 22 months down to 7 months. Through continued focus, we improved that further to 5 months in FY '23 and reduced it now to only 3 months in FY '25.

Again, customers realize value from these contract vehicles faster and establish a foundation for future expansion. And as a consequence, we've also seen robust expansion for these multiyear contracts at a 25% to 26% annual level. Services delivers impactful results to both services operating segment and product usage. To enable these results, we've been on a journey for the last several years to digitally transform services. Leveraging technology improves customer experience and expands margins. For example, in customer support over the last few years, we deployed a new case management system and focused heavily on knowledge management to build a proprietary data set that makes our employees and customers more productive. In customer success, we focused on automation. We introduced low-touch and digital touch customer success motions to extend our reach to even more customers. Both of these are examples where digital transformation improved the business.

But finally, and most importantly, though, we've also been aggressively building AI into our workflows. We've built a process to identify candidate new use cases, conduct proof-of-concept testing and then build and deploy new AI solutions in a consistent and repeatable manner. As of today, we've initiated over 70 AI projects and services across all stages, of which 23 of those projects have now graduated into production deployments. These production AI use cases have already had a significant impact on service delivery. I'll share a few examples in just a moment.

Together, though, these digital transformation efforts allow us to improve the customer experience, focus more resources on earning customer trust as a strategic adviser and deliver this value at lower cost. As I mentioned, our extensive use of AI, particularly generative AI, is already having a profound impact on the services we deliver. We benefit from using AI in many of the expected ways. For example, our professional services engineers have seen a 53% reduction in time spent generated code. More significantly, though, we are embedding AI deeply into the individual workflows within services. Our internal AI-powered [ case hero ] solution support -- helps support engineers resolve issues faster. Already 85% of our cases benefit from AI.

Certain AI capabilities are extended to end customers. Our MyF5 Guided Support, for example, increased case deflections on our website by 3x, reducing the overall case submission rate by 15 percentage points. We are automating manual content creation such as sharing insights during customer QBRs. And in manufacturing, we're applying AI for visual verification on our assembly line. While AI could hallucinate, it doesn't blink. AI vision replaced human verification and improved our manufacturing test yield by 16%. What is perhaps most telling, though, is the positive impact these changes have on customers and how customers view F5.

Services has long been a differentiator for F5 relative to competitors. The actions we've taken over the last few years to digitally transform and improve service quality is paying off in the improvement of CSAT from an already strong 9.2 to an absolutely exceptional 9.6. We enjoy a strong virtuous cycle between product and services. Post initial sale, our white glove services provides a durable source of revenue and margin. Delighting customers through these white glove services ensures customers get the value they expect. In turn, customers grow their product usage of F5, which again unlocks even more service opportunities.

Overall, we offer a comprehensive portfolio of services across the entire customer journey. Our deep expertise in app delivery and security differentiates F5. We have delivered strong operating metrics, both traditional services measures such as initial attach and contract duration, and we are accelerating product sales through adoption and expansion.

I will now hand it to Cooper Werner, our F5 CFO, to speak to our sustainable revenue and earnings growth.

Thank you, Tom. Okay. So my name is Cooper Werner. As Tom said, I'm the CFO at F5. I've been in this role. This is my second year, but I've actually been with F5 for nearly 25 years, if you can believe that. But it's been kind of fun just watching the presentations today, a little bit of a walk back in time with the history because I've lived a lot of that history. But I think what excites me most is what we're seeing with the velocity around innovation, the number of new use cases, the new products we're rolling out to market.

In my time at F5, I've never seen this pace of innovation. And I think the timing is really good right now with where the market is going and the addressable opportunity we have in front of us. So just a very exciting time to be at F5. I feel privileged to be in this role as CFO. And I'm privileged today to be able to share how we see this strategy manifesting in our financial results over the next few years.

So first, I just want to thank everybody for investing the time with us today to walk through our strategy. It's been great connecting with many of you over the past few years. And I'm going to go ahead and get going, translating how these opportunities will translate into our financial model and drive accelerating revenue and growth over the next few years.

So first, just to kind of ground the discussion, and we've kind of gone through this already, so I'll keep it high level, but I thought it would be helpful before we get into the financial results, just to kind of revisit the core building blocks behind our strategy, which really position us for an accelerating growth opportunity. And we're already seeing this in our results. You see we're off to a very strong start to FY '26. So it's -- a lot of these drivers are already manifesting in the business.

But really, the hybrid multi-cloud reality that customers are seeing today, that's the vision that we laid out years ago. And we've been very intentional about building a portfolio and a business model to support this architecture. And that set of choices is proven pivotal to the growth opportunity that now sits in front of us. And our continued innovation over the years and our commercial model and deployment model flexibility that we've provided for customers has positioned us to capitalize on our leadership in ADCs, where we're seeing growing demand across new use cases and new insertion points.

And customers are embracing the full breadth of our portfolio through the platform adoption opportunity that John walked us through earlier, and that's really driving continued strong expansion across our business. And then, of course, perhaps most exciting is the AI opportunity, which has already become a significant opportunity for us, and we're starting to see that impact show up in our revenue growth today, but we're really just kind of getting into this opportunity.

Okay. So just to kind of set up the discussion of our outlook, I thought it would be helpful just to do a quick review of our financial execution over the past few years, and then I'll get -- dive into the business model inflection that we see over the next few years.

Okay. So as we've discussed over the past few years, we committed to delivering double-digit earnings growth, and we shared that we could deliver these results through a combination of mid-single-digit revenue growth and continued operating margin expansion. And we've delivered 6% average revenue growth over this time frame, the last 6 years, 2020 to '25. And of course, this growth has been accelerating in the past several quarters with a double-digit revenue growth outcome in FY '25 and a continued strong start to the first half of FY '26.

And over this time, we've been running this business with financial discipline. We've been driving healthy operating margin improvement, bringing our operating margins up from the 30% range in 2020 to our current 34% to 35% range that we've guided to for FY '26. And this has all translated to a double-digit EPS growth rate over this time frame, which remains the North Star of our financial model.

And alongside our earnings results, we've also been very disciplined stewards of our balance sheet. We've generated very strong cash flow over the years, nearly $4 billion over the last 6 years, and we've returned well over half of our cash generation to shareholders through a consistent share repurchase program. We repurchased $2.5 billion of shares over the last 6 years, which is 63% of our free cash flow, well above the 50% threshold that we've committed to.

Okay. So we've spent some time today walking through the markets that we address, our positioning with our portfolio and our strategy to continue driving the innovation and simplicity that customers require to deliver and secure their apps and APIs. So now I want to talk about how this translates to a more exciting revenue growth opportunity moving forward.

So I'm going to start with our systems business. So we're seeing today multiple tailwinds for our systems business as shifting dynamics in application architectures are driving new performance requirements for securing and delivering apps. First, we're seeing a very strong refresh plus cycle. And in my time at F5, this is the strongest refresh cycle we've ever seen, and we expect the strength of this refresh to extend well into FY '27.

We're also seeing capacity expansions tied to workload growth from AI-enabled applications. Francois already walked us through how traffic growth has been accelerating driven by AI. Kunal gave some more details as to how that translates to new needs for infrastructure build-out for customers, and we're seeing that in the form of capacity expansions in addition to data sovereignty and resilience requirements.

And then we're seeing new use cases, particularly around AI data delivery. Again, it's relatively early, but it's starting to contribute to meaningful results. And we're seeing additional competitive takeouts. The velocity around competitive takeouts has been going up. And the net of these tailwinds is our updated view that our systems business will sustainably grow in the mid-single-digit range over this time frame.

Now that's a material change from how we had laid out our outlook for systems business if you go back to the 2020-ish time frame. And so I want to dive in a little bit deeper as to some of the new growth signals that we're seeing that are underpinning that update to our outlook on the systems business. So first, let's spend a little bit more time on the refresh plus motion.

So first, as customers are going through their refresh motion, we're looking at the replace rates. And so we think about the ratio of new appliances that customers install in their environment to replace legacy appliances that they're retiring from their environment. That ratio of replace to retire has been higher across this refresh.

The second dynamic we're seeing is when they're making that replacement, the appliances that they're replacing -- that they're adding to replace legacy appliances, they're moving up the stack in terms of performance. And that's driving a higher price point and higher ASPs. So that's also driving growth within this refresh plus motion.

And then the other phenomenon that we're seeing, unlike in prior cycles, is that a lot of times customers when they're going through this replacement motion, they're adding capacity at that time. And really, what they're doing is they're trying to address this inflection in traffic that they're seeing and also plan in advance of additional anticipated growth with their traffic. All of these 3 elements are why we're seeing such a strong refresh cycle in this period.

And I will acknowledge that there is, of course, a cyclical element to any refresh motion as customers are going through this replacement of the legacy appliances. And so there's going to be periods from the refresh of exceptional growth such as we're seeing today. And there will be periods where that growth is slower following kind of on the back end of these refresh cycles. But it's the growth signals we're seeing during that refresh that we feel are most critical as we look out over longer periods of time and what this overall growth opportunity could be.

Okay. So that's the refresh. So let's talk about other sources of growth that we're seeing in the systems business. One is capacity expansion that's outside of that refresh. So not all customers at any point in time are going through a refresh, but they're still subject to the same demands to support growth that they're seeing in their applications, particularly driven by some of this AI-embedded capabilities in their apps. And so a lot of customers are continuing to add capacity, whether they're going through a refresh or not.

And then we're also seeing digital sovereignty that we talked about, resilience. Those motions are starting to drive new capacity increases. And then further downstream, PQC, we expect to be a driver of additional capacity.

And then the third project, I touched on it earlier, but inflection in new projects. Again, AI data delivery is driving a lot of new opportunity for F5 and then competitive takeouts. Chad talked a lot about the dynamics behind that, but we're seeing an acceleration in customers that are coming from other vendors in the space that are coming to F5, largely because of the commitment we've made to hybrid multi-cloud architectures.

Okay. So that was a look at systems. So now let's spend a little bit of time on software. Software has been the biggest growth category for F5 over the past few years. And we believe that it's going to be a consistent and sustainable double-digit growth category in our revenue stream going forward. And I'll break down kind of the 2 key categories behind that growth.

Starting with our term subscription business. So this is BIG-IP and NGINX delivered in the form of term subscriptions. We've talked a lot over the years about these multiyear agreements with this flexible consumption program that we designed for customers. It's been so successful for F5. That's a category where we have really good visibility as to how customers are using our products.

We have a view as to the growth that we would expect moving forward just based on the utilization rates. We've had very strong renewal rates, very consistent renewal rates, and we've had really good expansion over the course of these -- the duration of these subscriptions. And so we've got really good visibility to this category that's been consistently growing at a strong double-digit rate, and we believe that we'll continue to see very strong double-digit growth from this category moving forward.

The second category is our SaaS and managed services business. And this is a category we've talked about over the last couple of years that we've been going through a bit of a transition with some legacy offerings that we've been retiring. And that served as a bit of a headwind to growth as that software revenue has come out of our business models, we've retired those offerings. But we're complete with that transition.

So going forward, it will be a headwind -- sorry, a tailwind to our growth because the underlying growth we're seeing from Distributed Cloud, which makes up the majority of this category has been very strong, and we no longer are going to see a depreciation of revenue related to retired offerings. And so the combination of growth from the term subscription business that's consistently been so strong and now a new growth opportunity within our SaaS and managed service business, in addition to some new use cases, particularly around AI runtime security and the continued expansion we're seeing across our platform, those all position us to see very strong growth going forward from software.

Okay. And then the last category I'm going to touch on with our revenue base is our services revenue. This makes up about half of our revenue today. Tom talked a lot about some of the underlying dynamics that we're seeing. But the 2 kind of data points that I'll point to that underpin our outlook for services revenue, start with the very high attach rates and consistent attach rates we've had, attaching services to our products that we sell into the marketplace. And this really reflects the value that customers place on our software support and our maintenance services. And those have remained very consistent over the years.

And then hand-in-hand with that, the installed base that we attach those services to is growing now that we're seeing services revenue move into a new growth trajectory. And so over time, as that installed base continues to grow and we continue to have very high attach rates, that should drive an inflection in our service revenue growth rate.

Now of course, services always has a bit of a lagging correlation to product revenue because product revenue is recognized upfront. You sell the services alongside the product revenue that gets recognized over time. And so today, we're seeing a low single-digit growth rate from our services business. But with the continued strong growth we're seeing on product and the high attach rates of services, that's going to start to manifest in our service growth rates with an acceleration to mid-single digits over time.

Okay. So we've covered the revenue base and its components. Now I'm going to jump into our operating model, and I'm going to start with our gross margins. So if you look back over time, you can see that we've been effective in driving our gross margins up from the '23 to '25 time frame. We've talked about some of the dynamics in the marketplace around cost of components that have really increased pretty dramatically, particularly for memory and SSDs. I talked about this on our last earnings call, and it's a pretty well understood dynamic across the landscape.

We did a really good job. I should credit our manufacturing team for getting in front of some of the supply chain challenges that they saw coming. Going back to FY '25, they saw some signals that this was going to start to become more of an issue across the industry, and they acted very aggressively in securing components largely to make sure that we are meeting high ends of potential revenue opportunities across our systems business.

But another consequence of acting early is that we secured a lot of components at lower cost points before prices really started to accelerate. And so as a result, we've been able to kind of navigate these cost pressures to date because we've been building in these lower-cost components into our products that we've been shipping. But we're now at that point where some of these higher costs are going to start flowing into the model. And I talked about that on the last earnings call, but we expect the initial impact to be really in Q4, and that will persist through a lot of FY '27.

We do expect things to start to stabilize around costs later in the year in FY '27. And as a result, our gross margins will stabilize. And long term, we expect gross margins to rebound to historical levels. But that's kind of the dynamic that we're looking at for FY '27. But meanwhile, we maintain disciplined driving efficiency across our cost base. Through internal use of AI to increase operational efficiency and increase sales efficiency from our land and expand motion.

And this enables us to reduce operating expenses as a percentage of revenue and fund innovation and go-to-market investments to secure long-term revenue growth opportunities. And as such, as gross margins stabilize and we continue driving productivity gains, our operating margins are expected to increase to the mid- to upper 30s range over time.

Okay. So now what I'm going to do is summarize how these trends translate into an updated overall financial outlook to deliver strong earnings on an improving revenue growth opportunity over time.

So I walked through the components of our revenue opportunity, and I'm going to tie it together now with the overall revenue outlook. So first, Francois already kind of flashed this, but we're guiding to a total revenue outlook of upper single-digit growth through FY '29. And while we're not guiding beyond FY '29, we believe we're well positioned to further accelerate our overall revenue growth rate in the long term beyond FY '29. And this opportunity is created by the continued strong product revenue growth and the accelerating service revenue outlook over this period.

Specifically, we expect product revenue to grow double digits throughout this time frame, and we expect services growth rate to increase over time based on the strength of those product sales and accounting for the lagging correlation between service growth against product revenue due to the ratable revenue recognition with services revenue. And this all equates to a strong revenue growth exit trajectory, and we also see significant upside growth opportunities as AI use cases continue to mature and PQC readiness becomes forefront in our customers' planning activities.

So turning to our operating model. In concert with the revenue growth acceleration I just discussed, we expect a short-term reduction to gross margins in FY '27, followed by an improving outlook back to historical levels by FY '29. And we continue to drive operational efficiency, enabling additional investments into long-term growth opportunities while at the same time, reducing operating expense as a percent of revenue to the mid- to upper 40s levels through FY '29. The net result of our accelerated revenue growth and continued operating efficiency is a financial model that we expect to deliver improving operating margins at the mid- to upper 30s levels by FY '29 and sustainable double-digit EPS growth.

And finally, we have a very strong balance sheet and cash position, and we've demonstrated over the years a very disciplined approach in regards to capital allocation. Our strategy remains committed to identifying and capitalizing on growth opportunities through both organic and inorganic initiatives while rewarding our investors with a strong share repurchase program.

So organic investments in product innovation and sales capacity and internal AI enablement enable us to continue this velocity that I talked about earlier with our road map. And at the same time, we're also exploring inorganic opportunities, which largely would be focused around security and AI. And we continue to expect to use at least 50% of our free cash flow for share repurchases, which we've exceeded for each of the last 4 years. And of course, we're off to a pretty fast start in FY '26.

So that concludes the overview of our financial model. I'd like to thank you all again for investing your time with us today, and I'm going to hand it off to Francois for some closing remarks, and then we'll bring the rest of the presenters up in front to go through Q&A.

All right. Thank you. Just before we move to Q&A, I wanted to recap the takeaways of today. I shared with you that we are seeing a shift in the industry to hybrid multi-cloud architectures. This is a shift that we had anticipated several years ago. We had been talking about this shift as early as 2018, 2019 when conventional wisdom was that everything would just go into the public cloud. And it's happening now, and we are benefiting from this shift, and we're capitalizing on these trends.

We are building on our market leadership in ADCs, continuing to see growing demand in ADCs, but our incumbency, our market leadership, our differentiation relative to our competitors is allowing us to gain share in ADC, and Chad talked about that today and how we're making that happen in the marketplace.

Beyond that, we are driving platform adoption. We have multiple capabilities in delivery and security. We have converged the capabilities in delivery and security into a single platform. It is the one platform, the only platform in the industry in the world of delivery and security that works across hardware, software and Software-as-a-Service and gives customers the ability to consume our technology in CapEx or OpEx or subscription or consumption in whichever model they want to consume. That flexibility is an incredible differentiator in the market, and it's complexity that we absorb in our business model to give simplicity to our customers, and we are going to continue to be rewarded by that.

And then AI is, of course, a very exciting new trend. We already have a number of direct AI use cases that we're benefiting from. And we're also benefiting indirectly from a general increase of traffic related to AI, which is growing demand for ADCs.

So with that, I'm going to invite the presenters to join me here for being able to answer any questions you may have. Thank you.

Thank you, Joe. Thank you, Michael. Okay. And we will be able to take questions from the room. There will be 2 mics circulating for anybody who wants to get us started with a question.

I guess I'll start here. George Notter from Wolfe Research. I guess I was just kind of curious about how aggressively you want to monetize this business. It seems like you guys are really in the center of some really important changes going on inside enterprises and applications and APIs and Agentic and yet -- you're kind of raising pricing, I think, on a cadence of like single digits earlier in the year.

I mean your competitors, I think, are driving much more significant price increases. I know there's a share game you're trying to play, but it seems like there's an opportunity to monetize more aggressively. And I guess along those lines, I was looking at kind of some of the deal sizes you put up on the screen. I think there was like $1 million and $2 million and $4 million deals, but yet here you are, you're in such a critical spot inside these networks, like shouldn't the deal sizes be bigger? Any thoughts there would be great.

George, thank you for the question. I'll start with that. I think the deal size that you saw was illustrating specific use cases that are emerging and of significant interest for us. We obviously do deals that are in the multiple tens of millions as well in our markets. But in terms of monetization, look, we have a very important philosophy that we stick to. F5, as you know, we're celebrating our 30-year anniversary this year. And we have been for 30 years, serving enterprise, government -- enterprise customers, government entities, telcos across all verticals. And we've done that, built a very strong franchise by building strong relationships with our customers over a period of time.

And so we believe in building long-term value for F5 shareholders starts with having very strong relationship with customers. And part of that is having practices that are sustainable over time, both for our customers and for us. And that is why we have leveraged our incumbency to continue to monetize our relationship with customers, but we've done so and we'll continue to do so in a way that is sustainable.

A good example of that, by the way, is we have been taking share from competitors in our market who have different philosophies and different behaviors around pricing, and we continue to win franchise after franchise that will pay off for us over the long term. So we will continue to be disciplined in realization, but also measured in the way we approach that with our customers. Lauren, here.

Simon Leopold with Raymond James. I want to come back to the mix between the systems growth and the software growth in that it does appear that with the demands, it would make sense that maybe more customers should be attracted to systems for the performance that's required for AI, yet you're forecasting double-digit growth coming back on the software side. It sort of feels like I think you've made a case for why systems are more attractive than we used to think. So I'm a little bit puzzled as to why we wouldn't see an offset from your software business.

Cooper, do you want to start with that?

Yes. So there's a couple of dynamics in place here. So a lot of our portfolio is software only. So we talked about Distributed Cloud, for example, where we're seeing very strong growth, AI onetime security.

And then just the expansion we're seeing across the platform has really been manifesting in our software opportunity. And so we're just seeing the trends of how customers have been deploying the technology, both in the hardware and the software form factor. But the trends we're seeing is a really strong expansion trend, and that really kind of underpins that software outlook.

But I think when we take a step back, like what we're really looking at is the growth in applications and application traffic and the solutions that we sell to support both the delivery and security of these applications. And that's the hybrid multi-cloud bet that we made 7, 8 years ago was that customers were going to need to have the flexibility to adjust as new dynamics came into the arena. And so -- and that's what we've been seeing, right? And so that's where the strength on the hardware side of the business is coming.

And it may prove that hardware is stronger than we've guided just based on how these dynamics continue to evolve. But I think the critical thing is that we've had so much success because we have intentionally provided that choice for our customers, and that's really paying off right now. So right now, it's a balance of strong growth across both. But yes, over time, I mean, especially as AI use cases continue to accelerate, there may be an opportunity for stronger growth on the hardware side than what we're outlining today.

We'll go to. Yes.

It's Tim Long at Barclays. Maybe, Cooper, for you. Curious a little bit about disclosure here. You guys gave a little snippets last quarter on kind of what you know is AI contribution in the numbers. I'm just curious if you've done any more work on -- you said there's a lot of tangential type of business.

So just curious if there's any updates there. And then going forward, I'm just curious how -- obviously, a lot going on with AI, and it matters for you guys in the industry. Are you envisioning over time this being like security, like maybe once a year, you'll give us some numbers? I know there was a time with the first few years when you started the cloud offerings, we got some numbers and then we didn't get some numbers. So maybe if you can just let us -- I know we're early stages and it's tough to define now, but anything you could kind of update us on where we are currently and your vision of how we'll see more regular data on these important new drivers for the company?

Yes, I'm happy to. So we talked today about 3 distinct direct AI use cases and then also the opportunity we're seeing driven by AI application traffic. And so we gave a $50 million update on the direct use cases that we've seen over the first half of the year. And really, that was our effort to kind of give an update kind of as to how things are trending within those use cases, but it is a subset of the overall AI revenue that we're seeing today, and we expect that the growth is potentially going to be just as strong for the indirect use cases.

Now we can't track that revenue discretely because it's still BIG-IP being sold in a new -- as part of expansion in this infrastructure, customers are buying to support all their workload growth. It may be largely driven by AI traffic. There could be other dynamics in place. So -- but what we can do is track the growth we're seeing outside of refresh motions in the form of expansion. And we are able to attribute that the majority of that is coming from AI-driven expansion. So that's just some background. Over time, we're not going to update our direct use case revenue consistently, but we will try to give more context as that business continues to manifest. And then we also talk -- we expect that additional use cases will start to emerge over time as well.

I think, we'll go to Tal.

On AI, I have a few questions. Who is the customer? And within the existing customer, is it the same buyer? Or is it a different buyer? And then what's the pricing model of AI modules? Meaning is it more like hardware pricing modules? Or does it change more like NGINX? Or does it go based on volume? So if you can talk about kind of the way to monetize AI?

Yes. So Tal, I'll take that one. We've talked about 3 use cases in AI. And the answer to your question is different depending on the use cases. So you're starting with the one that's most mature, which is AI data delivery. The target customers for that are large enterprises typically. The buyer in that organization, it varies by organization.

Sometimes it's an AI team that's been set up to build the AI infrastructure. They own the AI data pipeline, and they're building all that infrastructure. And we get to that buyer through the F5 buyer, which is typically a NetOps buyer. Sometimes the buyer in our organization is the NetOps buyer. So this is a motion, a go-to-market motion that already has scale inside of F5, where our teams and our partners understand the buyers, understand the use case, and we're seeing strong traction. And most of the revenues we've done in AI in these use cases has come from that motion.

AI security is more nascent. The buyer is typically a SecOps, CISO persona. The consumption model is largely software for securing -- AI-native security to secure AI models. And -- but it goes into our large enterprise customers, whether it's government entities, enterprise across all verticals. The ones who are doing that today are those who are more sophisticated, have already deployed AI models and are already worried about guardrails in front of these models. So it's typically large financial services, technology companies that are doing that.

And then the third use case is very different. So this is AI factory load balancing. So it's improving traffic efficiency, tokenomics, as Kunal shared, inside of AI factories. The buyers there, it's not today thousands of enterprises. It's concentrated into a few players who are doing sovereign AI and some neocloud. So that would be just a few tens of companies that could take that in. And the buyers there are the people building the infrastructure and in charge of optimizing that.

But that use case is more nascent, both because of where we are in the cycle of getting through the reference architecture and getting our products GA and getting the product tested, et cetera, and also because of the market is not yet mature. Most of the players there have been focused on GPU-as-a-Service, meaning just renting GPU capacity and have not yet been focused on selling tokens and monetizing tokens. And it's when you are focused on monetizing tokens in an inference use case that token efficiency matters tremendously and that F5 has a very important role to play. So those are the 3 routes to market and the customers we're targeting.

Yes. And each one of those has a different pricing model. So the first one is mainly high-performance hardware ports. Second one is scanners, depending how much traffic is between the model. And the third one is software on DPUs.

Samik?

Samik from JPMorgan. Francois, you're outlining that you're being a bit more mindful about pricing to offset some of these costs, whereas the rest of the industry isn't being the same way where a lot of the other infrastructure is seeing strong price increases. And what we're generally picking up is a lot of enterprises are now exploring public cloud more for the initial AI use cases versus building something that's more on-prem. How do we think about that shift or any delays on that front? How do you capture the sort of value still if enterprises are leveraging more to public cloud in the meantime, just given the overall inflationary impact we are seeing in building infrastructure. So that's maybe one.

And if I can just quickly follow up. You're talking about a big increase in traffic with AI. But probably what stood out is in terms of AI data delivery and the TAM you're outlining there is only about $1 billion for AI factories and AI data delivery, which seems pretty small for the kind of traffic growth that you're outlying. So is there an underlying assumption there of how many enterprises or what portion of enterprises are investing in 2030 to drive that TAM estimate?

Okay. Thank you, Samik. I'll start with the second part of your question, and then I'll come back to public cloud versus on-prem. Kunal may want to add on that in a moment. So on data delivery, yes, you are right. When we show this TAM, it looks -- we're saying this is going to grow to $1 billion. By the way, these are forecasts from -- I forgot which analyst firm is forecasting that.

We actually -- our belief is that it could be larger than that. But that is a very narrow use case of ADC. And so if you look at that $1 billion relative to the ADC market, it's a pretty substantial inflection in the ADC market. AI security, the TAM that we're showing is not narrow. It includes a number of security capabilities, and that's why we think it's going to be a multibillion-dollar TAM very quickly. So it's true that today, we have a lot of concentration in our AI revenues that is coming from what seems to be the smallest market opportunity. And the ones that are larger, we are not yet having a significant contribution. I think that's going to evolve over time.

In terms of enterprises and where they're building their AI infrastructure, look, what we have seen is a lot of enterprises are initially because of the cost of GPUs and the speed with which GPUs are evolving, we have seen a lot of enterprise initially say, I'm not going to invest in my own GPU infrastructure. I'm going to wait for this to mature because I can't depreciate assets at this speed. And so whilst I'm doing that, I'm going to rent GPU infrastructure in the cloud. But I fully intend to control my AI infrastructure end-to-end. And at some point, I will have that in my own infrastructure. And so that's -- I think we will see an element of that evolution.

And we're already seeing -- by the way, what we are seeing is a lot of companies realizing data, their data, their proprietary data is more valuable than it's ever been. They want that to be close to their AI models. We've seen companies repatriate data from the cloud just because they're collecting way more data from their customers, from their products. Their bills are exploding, and they want to have the data on-prem because it's lower cost. So I think we'll see a mix of both. I do see also the inflationary nature of everything now, server, storage, et cetera, potentially pushing customers to the cloud, but we're -- we've seen the reverse movement in a lot of our customers.

I don't know, Kunal, if you have a perspective on that?

Yes. We are seeing some really interesting behaviors with the enterprises that we serve. We don't typically see our enterprises move everything to one location. Specifically when it comes to the cloud, what we are seeing them do is take specific training workloads. Very few companies, though, are training by themselves. They're doing a lot of fine-tuning. So they're leveraging a lot of open models and then doing fine-tuning runs in the cloud. That's a pretty common practice to what Francois was describing. They may not have the GPUs on-prem to fulfill a pretty large training run with all their data. And then they may come back on-prem after the model is built where they don't necessarily need to run a very large model.

The phrase LLMs or the term LLM sometimes gets overused. I think in reality, there's a pretty big spectrum here between SLMs and LLMs. And most organizations, when they're doing the training and fine-tuning, they're living on the SLM side of things. In many cases, some of the models that are being built by enterprises don't necessarily need GPUs to run. They can run on CPUs or they can run on a smaller scale setup with GPUs. That said, where we are able to help organizations is the transport of that data.

So in some of these cases, where we've been able to help folks around the context of data delivery is they may have data -- source data that's living in one environment that they need to feed into another environment where the GPUs are. And in that particular case, they'll use BIG-IP at the source or at the destination to ultimately feed that data, control the flow of that information and feed that in whether it's to an object store or ultimately feeding that into a cluster where GPUs are.

It's Mike Ng from Goldman Sachs. I just wanted to ask about the multiyear software revenue outlook. In the slides, it seemed to suggest that there was an acceleration in fiscal '28 and fiscal '29. Is that the case? And what's driving that?

And then second, I was just wondering if you could talk a little bit about some of the things that inform your visibility, whether that be the timing of term contracts or a greater mix towards SaaS or an expectation of agents driving software demand? Just any color there would be helpful.

Yes. So I'll start. Historically, if you've been tracking our software business, it's been a strong growth business, but there have been some kind of ebbs and flows on that growth rate, and a lot of that is the cyclical nature of some of these renewals. As that base continues to grow, the cyclical amplitude it starts to get more normalized, right?

And so we also -- so -- but to your point, we have -- we do have very good visibility as to what that base looks like today, not just in terms of what we've sold, but also what the current adoption rate is within these contracts that customers, and we're seeing that expansion rate continue to go up. And then as we're adding new offerings, that gives customers more opportunities to consolidate additional features into this platform. And so that all gives us good visibility. The SaaS business becoming a growth business. And also, by the way, that one is a much more consistent growth rate business because it's ratable by nature.

And then the runtime security is kind of the third category of growth that we see that is also software. And so I think over time, what you're going to see is we're probably going to be a while before we're away from the quarterly variability in the growth rates. But from an annual basis, we believe that we're going to have pretty consistently double-digit plus growth rates in our software business.

[indiscernible]

So we don't -- yes, we're not going to guide within the time frame. The base that is coming up for renewal in the back half is very healthy. But of course, there's still a lot of work to do to continue to drive expansion within that base.

Jeff Hopson from Needham. With the growth in AI agents, I'm curious, it seems like API security is the most obvious or near term to see impact of that. Is it the monetization side the sheer growth of calls? Or is it different features that companies are asking for? Just kind of curious what the actual monetization looks like.

John, do you want to take that?

Yes. So right now, it really depends where the APIs are flowing. So a lot of our API services right now are sitting on our Distributed Cloud, XE, and we've seen really good growth in the last 12 months of the API services. But as we go forward, they're also looking for APIs in the data center and in the cloud. And so we're rolling out that API services across our BIG-IP. So we just introduced BIG-IP API discovery, for example.

And then for API services, you've got discovery, you've got protection and security. So it's kind of a multi-vector is it's in the cloud, in SaaS, it's in data centers and then there's different API services as we roll them out. By -- in the next 6 to 9 months, we should have all of that across all our control points and all our product families.

I'd love to add a little bit more on that. With respect to APIs, I think there's definitely going to be more API consumption because of agents. It's a structured form of input and output, which works great with AI models. What we see right now is a lot of interest around discovering these APIs. Part 1 usually is find all the APIs, and that's for multiple reasons. One, if you know where the APIs are, they can become useful for these agents upstream.

The second bit of it is also security. APIs are still one of the leading factors around data exfiltration today. So it isn't just for agents, but also for security. It serves a dual purpose of why people would want to continue to go down that discovery path. So data exfiltration is typically a problem there.

In terms of features and functionality around discovery, it can include things like sensitive data leakage, data classification, things like that at that point. Then, of course, you get to the run time around API, which involves pretty heavily for us, security. And that's a pretty important factor, again, not just because of data leakage, but also what you can do downstream with that.

The thing about agents and what we're all kind of learning in this new normal is multi-turn and reasoning, you add all those things up and the ability to stand out to multiple APIs. You can get a lot of information from everywhere, you can take action in lots of different places. And so organizations are looking for that sort of centralized governance across APIs wherever they may be, could be on-prem, it could be in the cloud. And that's the other thing that's pretty interesting in this new normal is these agents are hybrid and multi-cloud by design, right?

They're meant to fetch data locally, maybe pass that on to a model which could live in a cloud or could live on-prem and ultimately work with them. But typically, it's happening through APIs. And so again, discovery is one aspect of it, data classification is another, broad security is another and then, of course, insights around just generally what's going on with that API traffic.

And if you saw the McKinsey attack, agentic attack, that was a shadow API to begin with and it's a SQL injection. It would have stop with API discovery and protection and a WAF.

[indiscernible] from Bloomberg Intelligence. A couple of questions, Francois. You had a couple of vectors of growth. TAM of 15% to 28%, that implies a 13% growth. On top of that, you've got the $11 billion AI kicker, but you -- and you also gave us the data center growth of 7%, and you've been growing at 2x that rate. Why a high single-digit guidance relative to the TAM and the growth vectors that you provided?

And then secondly, you had mentioned the GPU-as-a-Service segment as a potential opportunity for tokenomics and tokenomics delivery. What gives you confidence that, that is a potential market, especially given that the public cloud guys build their own virtual ADCs in-house and low balances in-house. That took away share from you guys over that period of '15 to '22.

Yes. thank you. Well, actually, I'll start with the second part of the question. In terms of the GPU, the opportunity for F5 to help people who build AI infrastructure get more efficiency, get more tokens out of the factories. The target market for that is not the very large hyperscalers that, indeed, as you say, have built their own stack and will not rely on third-party software to go do that. But there is a class of customers that will likely do that.

Time will tell, but it's more the neoclouds, not the big U.S. hyperscalers, Microsoft, Google, Amazon, et cetera. But neoclouds will likely do that. People building sovereign AI, some of whom are already F5 customers outside of the U.S., it's typically telecom companies have taken on the mandate to build sovereign AI or large organizations, they are candidates to leverage our technology to improve the efficiency.

So that's -- and eventually, large enterprises who build significant GPU infrastructure will also want to have better token efficiency because, as you know, token costs are exploding for everybody and tokenomics is going to matter enormously as enterprises do more inferencing. So there's 3 classes of customers, neocloud, sovereign AI and enterprises are the customers ultimately that we will go after, not the hyperscalers.

Now to the first part of your question around our guidance given the growth in addressable market. Look, I would say when you look at our guidance, you have to balance that we see substantial opportunities, and we're giving long-term guidance here.

On the one hand, if you look at what we've baked into our guidance, we have baked the things that are -- that either have already been proven. Well, that have actually both been proven and for which we've had enough run time to know that it's sustainable. So it's things like hybrid multi-cloud deployments, continued adoption of our platform. That's a part of it, growing demand of ADCs because of the general demand we see in the general growth in traffic, those are elements we have built in.

There are things that are upside opportunities that are not, frankly, in our guidance. We talked about PQC, I think, in my presentation, PQC could have a substantial effect on demand for ADC for F5 in the horizon that we're discussing. We didn't bake that in our guidance. We didn't bake enormous success in the work with NVIDIA on DPUs because these things are nascent. There's a lot of uncertainty around how things will materialize. So that's not in.

In AI security, that is also nascent. We don't have enough run time to bake a lot of that in. So we have very modest assumptions around that today. So there is upside, but at the same time, we're giving long-term guidance, and we have to be mindful.

The world changes very quickly. The last time we gave long-term guidance in 2020, we went through COVID, we went through a massive supply chain crisis, we went through a big enterprise pullback. In the last couple of years, we've seen a lot of geopolitical uncertainty. And all of that has driven volatility in our growth and in our numbers.

And so we are also mindful of that because macro can present a risk over the next 2, 3 years. And so we've balanced those elements to build a guidance that we think is prudent. And if you look at our track record over the last couple of years, we've been really focused on giving guidance that we can meet and exceed. And our goal is to do the same thing.

Tim for return appearance.

Yes, maybe for -- I'm not sure who, but I wanted to touch on the systems business. I think you talked a little bit about this. One of the vectors was like market share gains. But I'm just curious of your views. Obviously, someone talked about pricing dynamics. You had a big competitor that went private equity. So that's always helpful for the incumbents and the bigger leaders.

So maybe when you think about that mid-single or high single-digit systems hardware number, could you just give us a little insight on -- I mean, you could only gain so much share? And how much do you see as category growth? Obviously, a lot of these new AI use cases are a positive in there. So maybe if you could just decouple how much of this is actually share gain? And when do you start bumping up against the ceiling there and it has to really be more industry growth that's going to drive the performance in the systems hardware.

Cooper can start. Chad may want to add on whether we see a ceiling on the competitive installed base.

Yes. I think that the majority of the growth is coming from workload growth, new use cases, a lot of the dynamics we outlined that are really kind of expanding what we're doing for our customer base. And then augmenting that is -- or supplementing that is the continued kind of acceleration of the takeout opportunity. But we've had very strong success with competitive takeout motions over the last few years. So there is some of that already in our baseline. And we think that, that continues to expand over time. But we do think it's a large opportunity, and it's a long-tail opportunity. I mean a lot of these competitive bases are locked into multiyear type agreements.

And so there's a lot of planning activity that we already have in sight. We're working with some of these companies that are looking to plan to migrate to F5 at the end of these terms. And there's also -- it's also akin to a land and expand motion. So typically, we get in with these customers, we do the design work with them. They roll us out into an initial segment of their environment. And then over time, there's the opportunity for us to continue to take out the rest of the infrastructure. So we think it's a nice element of the growth opportunity, and we think it's a long-term growth opportunity.

Chad, do you want to...

Yes, I think that's a really good capture. I mean, typically, when we get these competitive displacements, it's for a first part of the franchise, right, entity of the franchise. And the expansion beyond that is significant. And so we see quite a bit of runway left from a planning perspective, multiple years across competitors that we lined out along with Cooper was saying.

So we have to sequence this against what they're doing for their obligations, right? Nobody wants to pay for duplicative solutions. And all of these things have been sequenced over time. And as they come up, we compete for them and find our success that way.

Simon Leopold from Raymond James again. Considering the patterns we've seen on your free cash flow and your buybacks, what has been the Board's consideration and discussion about introducing a dividend? Has there been -- has it come up? Obviously, you haven't done so, but just wondering whether or not it's something that's been discussed and where the company stands on that.

Yes. I mean -- so it's funny, we were just having a conversation about this. If you look at the impact from a dividend versus a buyback, at least with F5, where we've been growing our market over time, I think the impact for shareholders is much more attractive with the share repurchase program. You just get better leverage with an effectively executed share repurchase program. We also do like that there is flexibility. It gives us more flexibility over time as we think about use of cash. But we've been very committed to that 50% threshold, that is really kind of where we feel is the most effective way to return cash to shareholders through a share repurchase program.

Question, but I am relaying a question from Meta Marshall, who is unfortunately traveling today, can't be with us in person. She's asked, how do you size the data sovereignty opportunity in EMEA? And how do you see that developing outside EMEA?

Chad, you want to start?

Go ahead.

Well, let me start with the part about sizing you may be better than, the part about how do we see it developing outside of EMEA. I mean, Chad mentioned there's some regulation that has happened in Europe. GDPR is one, DORA is another. NIS2 is another one. That has really forced all entities of relevance -- of national relevance in these countries, whether it's government entities or telcos or in the financial services to really drive this autonomy, this resilience, move things back on-prem or have true resilience between cloud and on-prem environment. In EMEA, that's happening.

In Asia, we actually are starting to see more of it. In EMEA, we've seen it over the last 9 months. We now start to see that developing more in Asia, not in all countries in Asia, but in certain countries in Asia Pacific, Australia being one of them, Japan and other countries, India, where we see more of that digital sovereignty playing, and we think that's likely to accelerate over the last -- over the next 12 months. In terms of sizing the opportunity over time?

Yes. So -- and I went ahead and I discussed that in my presentation today. Again, I would say this is not EMEA specific, right? We are seeing this in Asia Pac. You mentioned what's happening in Singapore, India, Japan and others. This is an overall trend in the industry period. And in terms of sizing it, we believe the collective opportunity is hundreds of millions. I think it was $600 million of incremental opportunity in the time period from calendar year '27 through '30.

We're seeing the early adoption that started in EMEA, but that is translating beyond that. And I think one of the meta points of this just isn't digital sovereignty, right, in isolation. It's really about resiliency. And so customers have to have custody of their data. And it doesn't matter where they reside. They have to have custody of their data.

And a lot of things when you look at the geopolitical situation, what's taking place with the conflict in Iran, that has changed the dynamics overnight in different parts of the world about what they're going to be doing with their assets and how they're addressing those assets. And so for us, the meta point is really resilience, and we're seeing that kind of the world over. Of course, it's easy to point to the governance that's taking place in EMEA and now the onset of new governance in APCJ.

Thank you, Chad. We'll take one last question.

George Notter again. I think you guys said last quarter that roughly half of the hardware installed base is still iSeries or maybe a little larger. Are you surprised that it's still this big at this point? I think you're only a few quarters away from going into software support. Also like with Mythos and all the security stuff going on in the world, it seems like customers will be more hesitant to continue to run these systems. I think, Cooper, you mentioned the refresh would continue into '27. But like any updated thoughts there?

Why don't we break that into -- Cooper, do you want to talk about the installed base? And maybe, Kunal, you can say a word about the implications of Mythos for what we see customers doing in terms of runtime security and ADCs.

Yes. So you're right. So we have 2 product families that were going end of software support. So the chassis-based product family, VIPRION, where we've hit end of software support, the majority of customers that were migrating on to newer offerings that have already taken those measures. But there's always been a long tail of the refresh motion even beyond end of software support dates. We'll still see that with VIPRION.

iSeries is still more than half of that opportunity has yet to be refreshed still. We're about, I think, 3 quarters out from that end of software support date. So we're definitely seeing that motion pick up and accelerate. And that's why we said we expect this opportunity to be very strong through FY '27. I do think that there will be customers that wait until after that date. There always are. And it's really just a balance of how -- where customers perceive they have risk and what the risk tolerance is.

But we -- the bigger story that we're seeing really is the growth that we're seeing alongside the refresh with the expansion opportunity. And so I think that's where we're most excited is when we're through this refresh opportunity, that base that then we can sell continued expansion against and sets up for the next refresh when we introduce the next generation, it's going to be a larger opportunity for us.

On the larger point on Mythos, we at F5 are using a combination of advanced research and preview models to ensure that we can identify and remediate vulnerabilities inside our code base. We take security super seriously as an organization. This is a program that we've been executing on for some time in terms of leveraging AI to find problems and fix those issues.

And so we're going to continue to support our customers that have our software and hardware platforms and those combinations that are under support. It's important for us that we obviously do that for them. And it's important for the industry to protect critical infrastructure.

Now the other side of this as an opportunity that is emerging in the Mythos moment is security. Application security is so important for organizations. And what we didn't spend too much time talking about with AI-powered WAF was, we are seeing the attackers leverage extremely sophisticated techniques mostly generated from AI today to try and get around defense systems.

And so the point I mentioned earlier around static defense is not being able to hold anymore is really true. And so there is a really interesting opportunity ahead of making our security software AI-powered for these organizations. And they would want to have a capability that can defend against these novel types of attacks that are out there.

So today, AI-powered WAF, we recently introduced API security, API discovery for our BIG-IP customers as well because we have seen the rise of agents. We've started to see that type of traffic show up in organizations. And so we want to make sure that we are positioning these platforms with the ability to take on that traffic, disposition it and secure all of it.

Thank you, Kunal. Suzanne?

We are ready to wrap up, Francois. I don't know if you want to say a few closing remarks or if you'd like me to.

I would like you to.

Wonderful. Thank you so much, everybody, for joining us. We really appreciate it. The slides and the webcast will be available on the website shortly. For those of you that don't have to rush off that are here with us in person, we'd love it if you join us in the reception area for some refreshments. Thanks so much.

Good afternoon, and welcome to the F5 Inc. Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] 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 DuLong. Ma'am, you may begin.

Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. We are here to discuss our second quarter fiscal year 2026 financial results. Francois Locoh-Donou, F5's Chairman, President and CEO; and Cooper Werner, 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 a slide deck accompanying today's webcast to our IR site following this call. To access the replay of today's webcast by phone (800770-2030) or (609)800-9909 and use meeting ID 607-6834. The telephonic replay will be available through midnight Pacific Time, April 29, 2026. For additional information or follow-up questions, please reach out to me directly at [email protected]. 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 summarize 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 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.

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 28, 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 multi-cloud 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 solvency requirements and get ready for AI.

Our strong Q2 performance reflects those dynamics in 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 3 forces significantly reshaping how our customers operate, had with multi-cloud adoption, threat landscape expansion and AI inference inflection. First, hybrid multi-cloud adoption. Workloads now span on-premises, private cloud and multiple public clouds. Our research shows more than 90% of enterprises on hybrid multi-cloud today across an average of 19 locations. Organizations need flexibility, resiliency and digital solvency 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 volume 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 check box 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 7 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 3 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 us 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 solvency 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 health care services organization started with a life cycle 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 has 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 a stronger performance in security with fewer tools and simple operations. We are replacing point products with a unified approach that improves performance and security and it's easier to operate at scale.

For example, during Q2, an energy and utilities provider, an existing big IP customer needed to secure APIs with better visibility and automation across their data center, cloud and edge environment. 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 frontdoor and API protections across their multiple public cloud environment 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 health care 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 to our 3 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 the scale, the 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 onetime 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, an existing F5 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 2 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 WAF, replacing manual policy tuning with automated outcome-based threat blocking. Our F5 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 BA defense to autonomous AI agents, a new and fast-growing category of traffic. The result is that customers can confidently adopt agent 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 in 2 minutes.

And finally, we launched F5 insights for ADS-B providing deeper visibility across application estates. The result is that customers can identify and resolve issues faster with less guess work. We are innovating so customers can run faster, stay protected and simplify their hybrid multi-cloud and AI environment. 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 the main 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 FY '26. 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 FY '25. Our software revenue of $184 million grew 7% 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 in 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 of $348 million, both records highlighting the strength of our operating model. CapEx was $18 million. DSO 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 selection to drive strong demand for our products and services in the second half of FY '26. 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 million to $418 million. We expect Q3 share-based compensation expense of approximately $68 million to $70 million. We anticipate Q3 non-GAAP EPS in the 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 FY '26 outlook. We now expect FY '26 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 gross and operating margin outlook for FY '26 is unchanged. We expect FY '26 non-GAAP gross margin in the range of 82.5% to 83.5%. On 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 the range of 34% to 35%. We now expect our FY '26 non-GAAP effective tax rate will be in the range of 20% to 21%. Reflecting the strength of our second quarter and our increased revenue outlook, we now expect FY '26 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 repurchase to be at least 50% of our free cash flow. I will now pass the call back to Francois.

Thank you, Cooper. Looking ahead, our strengths are well matched to the secular shifts transforming IT infrastructure, hybrid multi-cloud adoption, threat landscape expansion and AI influence inflection. We expect these trends to support continued growth for F5 in fiscal 2026 and beyond. F5 is built for hybrid multi-cloud and the AI era. We deliver and secure every app and API anywhere with 1 unified platform across on-premises, multiple public clouds and the edge. Our application delivery and security platform reduces complexity. Customers get centralized security, high performance delivery and consistent policy without stitching together point products, and we provide a control point for traffic, APIs and data flows as applications and AI become more distributed.

Operator, please open the call to questions.

[Operator Instructions] We'll take our first question from Tim Long at Barclays.

Yes, 1 question and 1 clarification. On the software side, it looks like it was a pretty good quarter, and you're keeping the mid-single digit for the year. So I know sometimes these are on 3-year cycles given the term. So maybe just touch a little bit on why not a little bit more of a raise there after a pretty solid growth quarter. And are you still looking at potential acceleration on that number into next year? And then after that, I'll come back with a follow-up.

Thanks, Tim. This is Cooper. Yes, I'll take that. So we did have a good growth quarter in Q2. I would say it was right where we expected it to be for the quarter. You're right, we do cautioned against kind of over-rotating on any individual quarter's reported revenue growth rate. The second half of the year is where we have a more balanced growth expectation for the year. And just based on where we're at with the renewal base, we continue to expect to perform as we had seen it shaping up for the year. And so that's where we're still at the mid-single-digit growth rate for the year. But all trends look very healthy. And then, yes, as we look ahead to next year, we do expect to see an inflection in the growth rate -- we're continuing to see strong trends around consumption rates across that renewal base, and we have a larger base coming up for renewal next year. And so with the expansion we would anticipate against that larger renewal base, we feel pretty confident about our higher growth rate into FY '27.

Okay. Great. And then if I could, on the AI front. -- a lot of different applications, a lot of activity. Maybe you could help us a little bit with some benchmarks or some metrics, how do we frame the success as revenues, orders, customers? How should we look at it? Any data points you can give us as far as the scale and the traction you guys are seeing on the customer side?

Yes, -- it's Francois here. The -- so -- what we're seeing in AI Tim, is that enterprises are now putting AI into production and what the term we use is inferencing. And that's creating substantial opportunity for F5. We've talked about 3 big areas where we see opportunity. The first 1 is in hardening data pipelines between data stores and AI models. A use case we call data delivery, and we're seeing growing demand for F5 in these use cases. We're also seeing growing demand in securing AI in run time for both AI applications and AI models increasingly require security that is tailored for AI models that traditional security solutions do not address.

And we also address load balancing, AI factory load balancing, which is the third area where we're starting to see growing demand. If you look at all that, we -- if you look at the first half of the year, we had approximately $50 million in sales in the first half of the year on these use cases. That's up more than 200% year-on-year. And we are now approaching about 100 customers that are using F5 for their AI use cases. That's why we have a bit of a conservative estimate because those are customers from whom we absolutely know that they are using F5 for these AI use cases. We believe there are other parts of the business where we're getting indirect benefits from customers getting ready for their AI infrastructure. But those are harder to quantify harder to count. So the ones I'm sharing with you are ones where we actually have the data and can attribute it directly to these use cases. So enterprise AI is 1 of the big trends that's fueling some tailwinds in our business. And hybrid multi-cloud and an expanding threat landscape or the other 2 very significant trends we're seeing.

We'll move next to Samik Chatterjee at JPMorgan.

Fans, pretty strong quarter. You're raising the guide for the year as well and getting ready, it seems to give us a more longer-term view of the business. Just trying to get sort of how you're thinking about sustainability of the high single-digit growth as you look forward, given that you did sort of have a softer year in software this year, but you also have the hardware sort of tailwinds in relation to end of support for some of your products. Like how should we think about sustainability of these growth rates as you look forward beyond this year how you're thinking about that, if you can help us? And then I have a follow-up.

Yes, Samik. The -- I mean, as it relates specifically to software, I think Cooper touched on it, where we expect stronger, even stronger software growth next year than this year. But let me step back a little bit and talk about the overall business, Samik, we are seeing a couple of things. One, of course, is we are seeing a very strong refresh cycle and refresh cycle, by definition, is cyclical. But we're also seeing 3 secular trends that we think are very durable and that are just growing and accelerating our business. The first 1 is hybrid multi-cloud. We went -- we've been talking at F5 about having multi-cloud for several years. If you look at the past few years. hybrid multi-cloud was by default, customers needed the flexibility to put their application in different environments.

But now we're seeing it being more of a strategic architecture that is by design and customers are implementing that for digital sovereignty reasons, to be able to rely not just on big public trials but local cloud alternatives or on-premise environments. And they're also implementing digital hybrid multi-cloud architectures for resilience reasons. And increasingly, AI is also pushing customers towards these hybrid multi-cloud architectures. That is a secular trend, Samik, that is there for the long term, and that is providing substantial tailwinds for the business that we believe are durable.

And then the other trend that we're seeing is the threat landscape is expanding. So what we're seeing is customers are having more frequent attacks that are more sophisticated attacks because of AI. There was a report published recently that showed the increase in web attack year-on-year was up 77% increase in bad attacks were up 150% year-on-year. And all of that means that our customers have more apps to protect because their apps, their APIs, they're now AI models, both on-premise and in the cloud. And with the frequency and the sophistication of attacks increasing, there is a need for best-in-class application security solutions. And that is right where F5 has been focused and we are seeing that demand in our business. To give you a couple of data points in our distributed cloud services platform, for example, we saw this quarter, the number of customers choosing F5 for web application firewalls are up 62% year-on-year. The number of customers choosing FI for API security is up 54% year-on-year. And for both defense, it's up 33% year-on-year.

So you can see these trends of increasing attacks or customers responding, needing more application security solutions that are best in class and coming to -- so these are important trends. We think they are durable, Samik. And therefore, we think the inflection we're seeing in our business is likely to continue.

Got it. Got it. And Francois, maybe I'll follow up on that aspect itself on sort of the attacks that customers have to be ready for. Have you seen any change in engagement or even a step-up in engagement following all the discussion that enterprises have to deal with in relation to Anthropics Mythos model and sort of the vulnerabilities that they've highlighted, are you seeing any step change in your engagement with customers on the security front? How you sort of looking for -- looking to your customers and trying to address some of those issues?

Thank you, Samik for the second one, the second question. Yes, we are seeing a step change, Samik, we've had a number of conversation over the last several weeks with customers. If you think about it, we are now in an era where the window of time for an enterprise to patch their applications has closed as we have AI models that are very powerful and can now find and exploit vulnerabilities in any application almost in real time. And so there are a couple of implications for that. The first is given -- if you don't have a significant window of time to patch your applications, you are going to rely more on runtime security and specifically runtime security that is protecting the front door of your applications. That's precisely where F5 has focused -- and we're having conversations with customers who are sharing with us that they're going to have to rely on us even more than they had in the past.

The second implication is that we believe that all security is going to be AI-powered -- static security, static signatures are really not going to be able to cope with the power and the speed that these new models have in terms of creating exploits. And so this is a shift that we saw coming -- we have been investing in AI-powered security for a while now. Just this quarter, you may have seen this, we released our AI-powered web application firewall. We also released our AgenticBotDefense solution. And so over time, our entire portfolio is going to be AI powered, but we are basically already fighting AI with AI, and that, we think, is a significant shift to our customers. And probably the other step change for our customers -- it's a trend that has been happening, but I think the new era really accelerates this is the consolidation towards platforms.

If you're a customer that's operating in multiple environments and 95% of our customers are operating into hybrid and multi-cloud environment. The era of having a point product solution in any 1 of these environments really just creates complexity that you don't want to have to deal with if you have to try and really patch your systems very quickly. And so I think we're going to see more customers move towards platform and the breadth of our portfolio can really help them simplify their operations. So those are 3 of the implications that we see with this change, and we're seeing that in our conversations with customers already over the last several weeks.

We'll go next to Simon Leopold at Raymond James.

I wanted to ask about I guess, a phenomenon that may be occurring and what we've heard is that some customers may be showing a preference for your hardware solutions based on the performance, the relative performance that perhaps the total cost of ownership of implementing software is actually more expensive than the relative hardware. I'm wondering if you're seeing this shift and that might explain some of the relative growth between your hardware and software?

Well, we met Simon, there is -- first of all, we are seeing, in fact, a number of customers that are recommitting to hardware. I wouldn't say that it's just about performance. Performance is a factor. There are a number of reasons for customers to want to be doing that. I think 1 of those reasons is a lot of customers are modernizing their data centers and wanting to have strong on-prem infrastructure with strong performance in their data centers. And we have seen over the -- in the first half, just to give you a data point, we generated about $60 million in sales from customers who had previously kind of stopped buying hardware and recommitted to hardware.

So we are seeing this phenomenon of customers recommitting to hardware. But if you expand from that, what we -- because we delivered 22% growth on hardware this quarter and 17% growth on software. The broader trend we're seeing, Simon, is that the hybrid multi-cloud is really what's driving customers to both modernize our data center and continue to invest in software to have the flexibility to be able to deploy the same solution, the same software stack from F5, either on-prem or in public clouds. And so yes, at this moment, there is a very strong momentum on hardware, but we continue to see customers wanting to have the flexibility of software or subscription-based software to be able to deploy license across their environment.

And just as a quick follow-up, please. Could you update us on any progress around the engagement and discussions you've had with NVIDIA. You've talked about that. And earlier calls, I'm not sure that you've updated us on the prepared remarks. Any updates you can offer?

Yes, of course. So yes, we have -- as you know, we have developed an integration with NVIDIA, where we have been able to basically refactor our software to work in our architectures and specifically work on NVIDIA BlueField technology. We've done a lot of work with NVIDIA over the last 18 months. As of December, we have now been formally put into NVIDIA's reference architecture. Since then, there have been a number of tests, including third-party tests to test the efficiency gains from this integration. Those tests have validated basically the integration of F5 software on these NVIDIA DPU helps AI factories generate 30% to 40% more tokens for a certain amount of GPUs.

And we are now taking that value proposition to market, and we are involved in a number of proof of concepts and trials around this technology and this integration. I would say that what we are seeing is that a number of customers who are building AI factories are early in terms of sophistication in that the first priority is to get these AI factories, these GPU farms up and running, get them running, get them working, get these Kubernetes clusters to work. That takes quite a bit of technical sophistication and customers are really focused on that. And for those who are really providing GPUs as a service really the goal initially is to get these GPUs to work and to be able to provide that to their customers. I think the issue of making those GPUs more efficient is the issue that comes next. And I think as more and more customers go to inferencing, we think that this value proposition is going to resonate.

We'll go next to Matt Hedberg at RBC Capital Markets.

Congrats on the results. Really good to see -- based on a lot of our conversations with partners and customers, we think F5 sits at really a critical junction in really this hybrid cloud infrastructure build-out and increasing AI app traffic. In your prepared remarks, you talked about your role in this evolving direct landscape. And I'm curious -- you have a lot of security solutions now, but are you hearing customers pull you into additional use cases or there's such a unique spot of the traffic flow with the lens that you see. Are there other opportunities for you to add either further security capabilities in this kind of this new AI era?

Well, absolutely. We -- so a couple of things. I shared earlier that in this new era, runtime security and specifically securing the front door of applications is going to be even more important than it was in the past. And especially for folks who have invested like us in best-in-class application and API security. So the first thing we're seeing is really strong growth in web application security and API security and in bot security. We're also seeing API discovery and whether on-prem or in the cloud being a growing use case with more and more customers really now worried about knowing where all their APIs are and being able to protect them.

Now when you go to AI, we also have now a new attack office, which is these AI models and these agents both of which will be using more APIs and our customers, of course, will need help discovering and securing them. But we've also introduced in the last few months AI guardrails, which is AI red team and AI guardrail. So technologies that help our customers both the tech probabilities in their AI models and mitigate these vulnerabilities, and we have introduced a product called AI remediate that automates the process of creating mitigation for these vulnerabilities. All of these are new use cases security that are going to grow as our customers deploy more AI models in production. So we are seeing new use cases and new opportunities to insert F5. Security, I think, is a very significant opportunity. But as I said earlier, we're also seeing that opportunity in delivery, specifically in data delivery for AI.

That's great. That's great. And then Francois, the other thing you touched on in your prepared remarks, you're starting to see AI inferencing inflect with your customer base, which is it makes sense given some of the AI models, innovation that we're seeing. And I guess it feels to me like the broader sort of non-native cohort of customers are becoming increasingly AI leaning. Is there a way to talk about how early we are in that? And is this part of a multiyear really inflection. Could we talk about this interesting inflection 2 years from now, for instance?

Yes. So that, Matt, I think the customers who are today really focused on -- have already started worrying about AI security and protecting AI models and AI applications that have new types of vulnerabilities like prompt injections, model abuse, et cetera. Those customers are a small minority, typically the largest customer in any vertical that the customers perhaps have a lot of sophistication in security, financial services companies very large technology companies. But today, it's a small minority of the universe of customers we serve. And I think that number of customers is only going to grow over the next couple of years as more and more customers actually implement AI in inference. So I think we are just at the very start of this trend and the number of models for inference and agents will dramatically increase over the next couple of years.

We'll go next to George Notter at Wolfe Research.

If I look back, you guys have been raising prices pretty conservatively, I think, once per year. Obviously, there's some more memory cost here. You mentioned in the context of gross margins. But -- any thoughts about raising prices a bit more aggressively or a bit more frequently. And I think if I look back historically, you guys also talked about kind of balancing price increases with the opportunity to gain share. And I'm just curious like on the share side of things, are you making progress there? Are there any metrics you can give us in terms of logos or incremental revenue or share that you can point to that kind of reinforce the idea is meaning share.

Yes, George, thanks. This is Cooper. I'll start on the pricing. So we do have kind of an annual pricing review that we do. Typically, it's in our Q2, where we make price adjustments to factor in the innovation that we've been bringing to market, and that's part of our ongoing playbook. We've also been closely monitoring what's been going on with memory and SSD pricing, which is just been accelerating through the year and really kind of had a big step-up in Q2. And that's something that we continue to look at price adjustments to pass through some of that impact through to offset the impact on our gross profits. It's a combination of price adjustments and discount discipline. And that's something that we have to stay really agile with and we'll continue to kind of monitor that and make those adjustments on a more of a one-off basis tied specifically to the rising cost of memory.

But then long term, as we think about share what we've seen, particularly recently, is our competitive takeout rate has gone up pretty materially. And I think that really speaks to the hybrid multi-cloud adoption that our customers are seeing, where we're really the only vendor in this space that can support customers' applications in any environment. And that's really been resonating particularly recently with the evolving threat landscape. These customers are looking for a platform approach to resolve a number of complexities in their environment, and they've been coming to F5. And so we've been seeing a lot of share gain in that regard.

Our next question comes from James Fish of Piper Samer.

Great quarter. Maybe you could give Francois a bit of a break, especially the Cooper for you. I'm going to get asked this tomorrow. So on the 2-point rate to guide you for the year, it looks to a point just from this past quarter's upside. Are you actually passing through memory much at this point? And what are you guys assuming from memory prices kind of in the back half of the year? Do you have enough supply still lined up given the outperformance of hardware? And how far along with you are on migrating to DDR5 from DDR4 in particular?

Yes. Okay. I'll try to make sure I hit all 3, but if I forget, please let me know. So in terms of our revenue guide for the year, it doesn't really contemplate new pricing adjustments. I just referenced the work that we're doing around that. But any pricing adjustments that we did are more likely going to flow through into FY '27 just based on where we are with the cycle -- so it is something that we can see to look at, but it's not really a significant component to our back half revenue guide for the year.

In terms of supply availability, yes, we feel pretty good about our near-term visibility. We've really been out in front of this and I'm really proud of our manufacturing team for identifying this is an issue going back to kind of mid-FY '25 where we increased our build forecast. We extended the length of our build forecast and we took on additional supply on components that we thought might have more constraints. And so that's allowed us to secure the memory that we need, not just for the revenue outlook that we had at the time, but for the upside we've been delivering over the last 6 quarters or so. And so we feel pretty good at least for the near term now you get it longer term into FY '27. The build forecast we have out there are within our needs for what we would expect to do on the high side for our systems business. Obviously, the visibility 4 or 5 quarters out is not as strong as it is in the near term, but right now, we feel pretty good with where we sit.

And then the last question, DDR force. So yes, so the current appliance lineup that we have leverages DDR4, future upon cycles will be on newer technology. We haven't discussed the timing of those -- the next generation of appliances.

Fair enough. If I could follow up, just because if I look at your billings, you had a really strong deferred here, especially on the current side. What are you guys seeing with any net pull-in of demand or build up a product backlog here as a lot of us here will kind of be revenues of the supply chain crisis just a few years ago. And that this would be about the time you guys would start to see a buildup in product backlog.

Yes. So just to be clear, backlog does not show up in our deferred revenues. So our deferred revenue strength is almost entirely tied to our services business where we have maintenance renewals, and we saw the strength both on short-term and long-term deferred maintenance is actually a little bit higher on the long term. And we did see some customers that were doing multiyear renewals. I'm certain that some of them are getting in front of perceived risk around price increases as they're working with other vendors. And so that is playing out to an extent, I would imagine on the maintenance side. But the growth is not tied to product orders.

Next, we'll move to Meta Marshall at Morgan Stanley.

Great. A couple of questions for me. One, just on the continued strength that you're seeing in EMEA and particularly around data sovereignty. Just how much further or kind of are there initiatives that you guys are taking to kind of capitalize on that opportunity?

And then maybe second, a very clean competitive landscape kind of on the ADC front, just as a lot of those vendors have kind of followed by the wayside. But just as you move more on to the security space, just what are you seeing in terms of the competitive landscape there or the chance to gain mind share there?

Thank you, Meta. On EMEA, we think the trend that we're seeing there is durable. In fact, we saw an acceleration in that trend this quarter. The -- a lot of the customers, whether it's government agencies, the defense sector, of course, all regulated industries, including financial services, all have a strong push for digital sovereignty. That implies, in a lot of cases, modernization, reinvestment in data centers and also creating consistency of security and delivery across their hybrid multi-cloud environment. We're seeing an interesting trend there where when customers went to the public cloud, they created a separate team between public cloud and on-premise environment. And now that they're kind of coming back and creating true hybrid multi-cloud architectures. They are merging those teams together, and it's creating more opportunities for the provider that can cover their needs across on-prem and public cloud with a single platform.

That trend, we think, is going to continue mean we're leveraging it more. We have increased our coverage, our field coverage in EMEA, and we'll probably continue to do that in the future and probably accentuate our focus there on the defense sector because we're seeing significant spend in defense and EMEA. As it relates to the landscape -- the competitive landscape in security, -- we are focused, as you know, on runtime application and API security. And in that space, we are seeing substantial growth both for on-premises requirements and cloud requirements. Our differentiation is really the ability to serve both environment with an extensive security portfolio that includes application firewalls, securing API, securing against bot, securing against DOS attacks, and frankly, none of our competitors, whether it's for application security or AI security are really hybrid multi-cloud.

And so the more we see customers embracing these architectures and needing a solution for both on-prem and public cloud. We are alone in that category and have a very, very strong value proposition. There are a few examples that I mentioned in my prepared remarks, where customers needed to secure APIs or they need to secure their applications. for a solution that worked both on prem and in the cloud, and they came to a 5. That consistency is more important than ever, and that's where we are focused. And we're going to continue to invest there. One of the highlights of the quarter for me, and I'm really proud of our product team for the work that we did this quarter was incredible innovation in security. We released our AI-powered WAF. We have already a significant interest for that, a new solution for agentic bot defense, which is really important now to understand which agents are authorized to access model and which agents are not.

We innovated on our AI security solutions with AI remediate a new solution. We introduced new solutions that is AI-powered F5 Insight -- we bought API Discovery on-premise with our big IP solution. So a lot of innovation that is accelerating in part, by the way, because we're also leveraging AI to do that. But I'm excited about the place we're at as the company that invested in hybrid multi-cloud architectures, I think ahead of everybody else and is now starting to rip the reward of that. And now doubling down on our innovation, accelerating the pace of our innovation to capture a growing landscape of opportunities in front of us.

We'll move next to Jeffrey Hobson at Needham.

Thank you for the question. I just wanted to follow up on the memory situation and the gross margin implications. You gave guidance for the last quarter. to be -- to have a step down from 3Q to 4Q. Just curious if there's any more color on the magnitude of that step down. I think I had like around 150 basis points -- and is this just a function of memory bought today, it takes about 2 quarters of flow-through, and that's kind of dynamics at play.

Yes. Thank you. So yes, that's the dynamic. So we've -- as I referenced earlier, we have taken a pretty extensive position early. And so we've been able to kind of mitigate any impact up through the first half of this year, but we're now starting to see some of the later purposes that we have been doing at higher price points are going to start to flow through into the model? And it will start to flow into Q3, but it will be kind of more at full run rate in Q4. It's an incredibly dynamic situation with memory pricing. It's we're trying to get the signals on what it could look like in the next few quarters.

Our expectation is that there will be relief several quarters out. But right now, for at least through the better part of FY '27, we would expect memory prices to stay elevated.

Got it. And maybe just on the U.S. federal side. It's been a couple of really nice quarters maybe just any additional information on the dynamics that are going on in U.S.

Yes. Generally, the dynamics are strong. We had a strong Fed quarter. And I would actually expand that beyond U.S. Fed to the global government sector in the first half was really strong. I think you're seeing that. That's not, I would say, just an F5 trend. I think you're seeing that generally, the defense spending across the globe has been growing, and we are a beneficiary of that trend, in part because generally, defense customers are investing more in security -- in part also because those customers are very hybrid multi-cloud. We have a number of customers in the defense sectors that want air gap environment. Sometimes they want to leverage cloud as well. But a lot of them want air gap environment in their own data centers. We have been making investments for that opportunity and we're seeing the benefit of that today. So I think the Fed has been strong for us, but globally, government spending has been strong, and I think will continue to be for the next several quarters.

We'll move next to Amit Daryanani at Evercore ISI.

This is Kevin on for Amit. I guess, services growth at 2% was fairly muted. Can you maybe just touch on what's happening there and maybe your updated thoughts on how to think about it in the long term.

Yes. I'll start. I would say, ironically, I think this is tied to a good news story, which is the strength that we're seeing with the refresh and this is kind of a dynamic that we've seen with past refresh cycles. When you see a strong refresh in the very near term, it has a little bit of a headwind to the services business. And part of that has to do with your replacing legacy appliances that have been carrying service for a number of years, and those come out of the system and then you backfill with the new appliances, there's a little bit of a lag on the maintenance revenue stream. Conversely, when we've had periods where customers were sweating assets, that's where you saw some strength in the maintenance revenue.

So the longer-term picture is that the refresh has been very strong, and it's a refresh plus expansion story. And what we're seeing is that we're getting better retention of that footprint than we had in prior cycles. Ultimately, that's going to be a great story for services because with the larger footprint, that you get risk maintenance revenue against, you're going to see a better revenue outcome, but in the very immediate term as customers are making that transition, it's a bit of a headwind on the maintenance revenue.

Next, we'll move to Tal Liani at Bank of America.

I think everyone is trying to basically get to the same question, whether this is finally signed a is showing its impact on the company's growth or whether this is just a refresh story that is temporary? And the question I have is why are we seeing -- I think you touched on some of it, but why are we seeing the growth only outside of the U.S. or less in the U.S., meaning U.S. is leading Out of $80 million growth year-over-year, U.S. was only $11 million growth. And last year, out of $56 million, it was $7 million. So the majority of the growth is outside of the U.S. And what I'm trying to understand is to link the story of AI uplift to the fact that the growth is coming only from outside of the U.S. Why don't we see more U.S.? That's number one.

And number two, why do we see a lag between system growth that is consistently growing every quarter. You went from $1.60 to $2.26 in 5 quarters, but software is back to Q1 level -- so $160 million, give or take, $164 million. So why do we see a lag between software? And at the time of refresh, don't companies upgrade their software package as well and then we should see growth in software.

Okay. Tal, thank you. I will start and then Cooper may complement me on a couple of aspects you've raised. So let me start with the U.S. First of all, the trends of our business in the U.S. are very healthy. I would not read too much into a given quarter's performance of this or that region. Some of it is the timing of what was able to ship to which customers in the quarter. But generally, the trends that we're seeing around the expanding threat ledscape, that's creating more opportunity. We had a very strong security quarter, as I shared that trend around expanding threat landscape, driving more security opportunity for F5 is a global trend.

The trend of AI that -- and I shared some numbers earlier, I shared with it, we were approaching 100 customers in AI. We did about $50 million in sales in the first half of the year in AI. That is a global trend that obviously includes the U.S. and the U.S. is actually pretty strong in that trend. The hybrid multi-cloud trend is also global and including, of course, in the U.S., where we are seeing more customers want resiliency. But that particular trend is, in fact, very pronounced in Europe, Middle East and Africa because of digital sovereignty requirements there, and we are seeing extra growth coming from there.

So I would say when you're trying to dissect, you said you're trying to dissect what's the refresh versus what are secular trend. The 3 trends that I've mentioned are secular and they are global. In addition, of course, we have a strong refresh cycle. Cooper mentioned the attributes of the refresh. It is stronger than usual because we have an even higher retention rate than we've had in the past. And we have more customers expanding at the time of refresh. That is also a global trend. But what I would take away is that the 3 big trends that I've talked about are cyclical -- sorry, they are secular and they are global and they are at play in the U.S. as well.

Yes. And then just to touch on the software and systems dynamic. Just a couple of dynamics that I would point you to is, one, the software business is largely a subscription business. We said this quarter, 90% of our software business was subscription. And of that subscription business, the majority does come through in a renewal motion. And so we are seeing strong attach of software at the time of refresh, but it's still a relatively small component of the overall software number. The majority of the software number is this base that we continue to expand over time. And we've referenced this year that because the renewal cycle is coming off of our -- a flat software year from FY '23 that there would be a bit of a slower growth rate this year followed by a much stronger growth rate next year.

So don't mistake the slower growth rate this year is having to do with expansion and attach rates at that time of refresh because those are actually pretty healthy.

And next, we'll move to Michael Yang at Goldman Sachs.

I just have 2. First, this is just on systems revenue growth in fiscal '27. Obviously, you guys have had strong back-to-back years in systems revenue. Could you just talk about your early expectations around whether fiscal 27 systems can grow just given the strong refresh that we've had in the last couple of years.

And then a related question, it's been about, I think, 4, 5 years since the launch of R-Series and big IT Velos. Are you expecting a new kind of ADC form factor system to drive another refresh cycle, particularly given all the incremental demand from AI. Just wondering how you guys think about new products on the ADC side.

Yes. Okay. So I'll start with the growth question. It's a little bit early to be guiding for next year. But yes, we do expect there to be a growth opportunity for the systems business just where we're at with the refresh cycle right now and the strong trends we've been seeing both in expansion at the time of refresh, but also new use cases. And we haven't spent as much time on that, but we really have been seeing new growth, pretty healthy growth outside of the refresh. So some of it's the AI use cases that we've talked about. We've been seeing higher takeout rates from competitors some of the data sovereignty -- digital sovereignty dynamics are coming through as new business in addition to expansion at the time of -- so all of that is kind of giving us a pretty good visibility 2 quarters out into next year, and we feel pretty good about the growth opportunity in that regard.

As far as the next range of appliances and systems offerings. We wouldn't get into specifics at this point. But yes, of course, we are well down the path of planning, but we think there's some pretty interesting growth opportunities further downstream as we start thinking about things like PQC and so continuous investment in innovation on our systems as well as our software has been something that's been critically important. And I think we're really kind of the only player in the space that has stayed steadfast in investing in systems. And I think that's really paying off right now.

We've always felt like customers are going to need choice and that their environments are dynamic and how they architect can change over time. And so giving that flexibility for customers to deploy how they need to is going to be important, and that's really coming through right now with the business that we're seeing.

And that concludes our Q&A session. I will now turn the conference back over to Suzanne for closing remarks.

Thank you, Audra. We look forward to seeing many of you during the quarter and especially at our Analyst and Investor Day in May, watch for more details in a press release about the event coming soon. And thank you all for joining us.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Everybody. We are just debating safe harbors. So I will read one to kick off. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Cooper, also you have a safe harbor you'd like to read, and then we'll go into...

Thank you. It's exciting stuff. So just to get our safe harbor on record, our discussion today may contain forward-looking statements, which involve uncertainties and risks. Our actual results may differ materially from those expressed or implied by these statements. Please see our SEC filings for more information on these risk factors.

All right. Perfect. So with that, I'm Meta Marshall. I cover networking here and cybersecurity here at Morgan Stanley. Delighted to have F5 here with us today, Cooper Werner, CFO. Thanks so much for being here.

Thank you.

F5 has seen this resurgence in ADC use cases today. Just what are you seeing as -- or your customers seeing as kind of the growing number of use cases for F5, maybe particularly in light of AI as everybody just got out of the Jensen presentation.

Yes. So I think that something we've really been seeing kind of take shape over the last couple of years, and it's something that we saw coming several years ago was really just expansion into hybrid multi-cloud architectures. And I know that there have been a narrative for a number of years that everything was going from data center to public cloud. And we believe that there was going to be significant growth in public cloud, and we made a lot of investments kind of modernizing our portfolio to address those architectures. But our belief was that over time, what you'd see is that customers are going to continue to support many of their legacy mission-critical applications in a data center and then expand into modern architectures across both public cloud and the edge.

But ultimately, they were going to be supporting these applications in all these environments and they'd be using multiple clouds. And with that, we're going to see a level of complexity that would be difficult to navigate with multiple disparate solutions. And so we had made aggressive investments in both supporting traditional applications in the data center and then expanding across into these additional environments.

And so what we're seeing now is that, that complexity is really starting to come through in these use cases with customers, with their architectures and then AI is really kind of adding an accelerant to that dynamic. And so the market is really kind of coming back to F5 is really the only vendor in the space that can support these applications in any of these environments that can allow common sets of security protocols across all these environments, common management tools.

And so that's really kind of been driving a lot of the growth that we've been seeing, both across software and hardware. And then as I said, AI has really extended that now to where API security is becoming more top of mind for a lot of our customers. And so we've made some investments in that space. data delivery is becoming a big challenge for customers because a lot of the storage arrays that are supporting these environments were not really meant to deliver -- to move data back and forth, and they're not well suited to that. And our hardware-based offerings are very well suited to delivering data just like they're well suited to delivering application traffic. And so that's kind of opened up some new use cases for us in this hybrid multi-cloud architecture.

Got it. I think you guys refer to that sometimes as the ball of fire. And so being extinguishers of the ball of fire. How -- there's also been just opportunities for share gains for you, not in only kind of these expanding use cases, but just in terms of kind of what the competitive landscape has been. And so just how are you capitalizing on some of those opportunities?

Yes. I mean, so much of the work we've done has been about taking some of the friction out of managing these environments and that they can come in various form factors. It can be managing different tools, needing different sets of expertise to manage these tools. A lot of it can be commercial friction where just as you're looking to expand and move some of these supporting services to follow where the app workload is, that can be really cumbersome on some of these IT groups.

And so we've put in place some commercial models that are very flexible that allow you to quickly spin up these services as needed across these environments. We've continued to add new features and capabilities, particularly around security. So you've got common security capabilities in any of these environments. And it's really driving a convergence to a single platform for customers.

And they -- that's really resolved some of that complexity. And then we continue to invest in something that we call XOps, which is analytic capabilities to help give customers more of a 360 view as to what's going on in their application environment so they can rapidly respond to changes, whether it's a performance degradation or newly identified security risks in their environment, and they can take faster action to improve the performance and the security across that application landscape.

Got it. On your recent earnings call, you noted kind of this demand inflection in AI use cases. Can you talk about that inflection and just the NVIDIA partnership, I think Jensen just talked about kind of partnering with people who could help deliver these ecosystems and you guys being kind of a part of that.

Yes. So we've said there's really kind of three areas where we're seeing potentially high opportunity. One is around the data delivery use case that I just mentioned, and this is really delivering this data back and forth between the models and the storage and we've seen a number of pretty sizable wins in that space. And that comes both in the form of direct use cases where it's specifically tied to a new AI use case where data delivery is an important component.

But then there's a lot of, what we call indirect demand that we're seeing come through, oftentimes in our refresh motion on the systems refresh, where customers are expanding capacity readying for their future needs around data delivery as they start to move from more kind of training use cases to inference use cases. And so that's an area of the business that we've seen pick up, particularly in the last quarter.

And then the second category is around AI security, specifically runtime security. And again, that's an area that we saw a continued inflection last quarter. If you look back to last year, the majority of our AI-related sales were on the data delivery opportunity. Last quarter, the runtime security opportunity was at about the same level. So we saw a meaningful pickup in both. And the early interest around our Calypso acquisition from September has been really strong. And so we think that opportunity is going to continue to build.

And then the third use case is around AI factory load balancing, and that's where the NVIDIA partnership comes into to play. And so this is putting the same data delivery capabilities that we would traditionally serve in a BIG-IP appliance, putting those capabilities on the DPU in a GPU cluster. And so we became -- we got designed into NVIDIA's reference architecture as of November. And so that's been great for our sales teams. It's acted as a bit of a hunting license to go identify those opportunities to drive GPU efficiency, faster time to first token, improved energy efficiency. And so it's still pretty early days, but we think the opportunity could be fairly meaningful.

Got it. Okay. That's helpful. The distributed cloud business opportunity that you guys have spoken about it's pretty early days still. How have you refined this kind of sales motion, which is slightly different than kind of your traditional data center business and differentiated yourself in a maybe slightly more competitive landscape than you normally have?

Yes. So a couple of things. So we're making additional investments in a specialist sales force, an overlay sales force that has more background in selling into those environments and really evangelizing our capabilities around web app and API security where we're best of breed, and we feel like we really set ourselves apart, especially in large enterprises and then expanding that conversation into discussing the overall platform because these workloads, again, they don't run in isolation.

And so resolving some of that complexity that you referenced when we talked about the ball of fire and presenting customers an opportunity to run these security solutions on a converged platform, so they get the benefit of the management capabilities and the insights that are coming from some of these capabilities that we've been introducing over the past several quarters.

Got it. Okay. Maybe let's just turn to the breach now. In the midst of some of these very good kind of demand environment for you with a number of tailwinds, you've also been going through a breach and a product refresh, announced -- just starting with the breach incident, can you just give a sense of how that impacted your kind of opportunity set in fiscal Q1 and fiscal Q2?

Yes, happy to. So just to kind of take a step back, as we guided going into the year, if you recall, we took a pretty conservative view on the revenue guidance for the year because we had I think it was nine businesses between the announcement of the security incident and when we are going live with our guidance on the annual call.

And so we had -- that's kind of a challenging time to be giving an annual guide. But we had not seen any evidence of any disruption to our demand through those 9 days, but we took small comfort just because it was early days. So what we did is we profiled the revenue base. And if we were to see disruption, we it would be more tied to new projects, particularly new software projects or in some cases, potentially expansion at the time of renewal.

And so we tried to size and shape where we thought any potential impact could come from. But business had been moving forward in kind of an orderly fashion. And what we saw through the course of the quarter is that the pipeline continued to build in a very normalized fashion. Close rates remain very high. And through the quarter, we didn't end up seeing any notable demand disruption. I think we had one customer that canceled the project, reevaluated their alternatives, came back to F5 and decided to move forward with that project. And that was the only signal that we had of any potential disruption.

Now having said that, that didn't just happen in a vacuum. I think a lot of that was based on the response we had with customers. A lot of these customers have been through these kinds of incidents in the past. So they had experience dealing with security incidents and the feedback we got was that our response was very strong in terms of the capabilities we were -- we had in hand for customers, the visibility we gave them as to where the potential risks could be and then the depth of the support we had as they navigated that and did their remediation activities.

And so customers were able to get through those activities in fairly short order. And I think that kind of the takeaway that they had was that while nobody wants to go through these kinds of security incidents, the response that we had in supporting them through that was built a lot of trust. And so the momentum that we saw through the quarter never really saw an impact.

Got it. I mean, how does that change how you think about some of the product refresh that's going on? Do you think it's accelerated any of the product refresh that you would have seen?

Yes. So we haven't seen any signs of it accelerating the product refresh. I think that, that likely will come later as we get closer through those end of software support dates. What we did see was a significant acceleration in terms of customers upgrading to current -- the most current version of our software that was supported on their existing appliance.

So you think of a tech refresh that -- the tech refresh is really ensuring that you continue to get the most current software updates. So as you move past end of software support dates, on an appliance, you're no longer getting those software updates. But I think it's a sign that customers have an appreciation for the need to be running on currently supported versions because they upgraded so quickly, in many cases, on their software. And so as they get closer to those end of software support dates, you would expect that some of these customers may move more quickly than they had in prior cycles.

Got it. And then just as we think about this product refresh, can you just refresh investors on the impact it had to fiscal '25 and just how you see it impacting fiscal '26?

Yes. So fiscal '25 was the first year that we really saw kind of an uptick in the refresh. And those are customers that are getting out a little bit in front of those end of software support dates. And so we saw a lot of the growth that came through on the hardware side was tied to that refresh.

What's interesting was that the growth we were seeing from the refresh motion was much higher than what we typically have seen in prior refreshes, especially the last refresh cycle that we had. And we dug into it trying to understand, is this just customers moving more quickly than in the past. We can look at what the rate of falloff is on legacy appliances is just kind of a proxy for is this all just a faster rate of replace? Or is this a replace and expand motion?

And what we've seen is while the sales through that refresh motion were really inflecting at a higher rate than what we've typically seen, the retirement on the back end was kind of at more of a normalized level. And so what that's telling us and it's still fairly early. There's always a lag factor. When you buy -- do a refresh and you buy a new product, there's going to be a couple of quarters before you replace the legacy. But we've had enough quarters of growth now where we're not seeing that a change in that rate of retirement.

And so what that's pointing to is more of the growth is tied to expansion at the time of refresh. And there's a number of factors that could be driving that. We think the biggest driver is AI readiness. So getting in front of the future performance needs that are driven by AI. A natural time to add capacity is when you're already doing a refresh. There's a lot of the -- some of the things we've been seeing around resilience and data sovereignty are coming through in the refresh motion as well as customers are very often repatriating workloads from public cloud and they're building out their capacity to support that.

So it's kind of a long answer to the refresh question, but it's an important one because with the strength we've been seeing on hardware growth, there's a lot of dynamics that are behind that. And I think that refresh cycles are going to come and go. They're not a durable source for growth over time. But if there's additional expansion and capacity needs that are kind of feathering in as part of that motion and you can identify that, that points to a better growth outlook over time.

Got it. I mean another thing that you noted on the breach and just the mitigation was that it really introduced you to like a new audience of customer, maybe getting more access to the CISO versus kind of the network operator in the past. Just how do you feel like that is giving you kind of additional inroads or ways to kind of sell other pieces of the security portfolio?

Yes. I mean it has been a silver lining is that we've been able to get into more conversations with CISOs. I think there's a renewed appreciation for just how vital F5 services are in their application environment. Very often, we're cited as kind of the heartbeat of their operations, and it's an opportunity for us to continue to earn that trust.

It's also an opportunity for us to share insights as we've navigated the security incident and some of the best practices that we've identified and how to mitigate risk going forward. And so it's giving us opportunity just to get better mind share with this audience. And then downstream, that may potentially lead to more opportunity. We talked about this crisis of complexity in these hybrid multi-cloud environments. That appreciation for how that complexity can manifest into a broader footprint of risk. ultimately gives better visibility as to why some of these security capabilities are so important. And so it potentially could lead to renewed opportunity for us.

Got it. Europe was very strong for you in fiscal Q1, and you've made comments about data sovereignty being a big reason for that upside. How are you seeing kind of this desire for increased data sovereignty kind of leading to could Europe become a stronger market for -- in the coming years? And are you seeing this dynamic in other markets?

Yes. It's a dynamic that we've seen starting to take shape over the last few quarters. It really inflected in the September quarter and then even stronger in the last quarter. We expected that trend to start to play out. I think it was more pronounced and honestly, we would have expected, especially going into last quarter.

I think that a lot of these -- a lot of customers are getting much closer to these compliance dates. And there's also kind of a better understanding of the environment with regulators and how closely that's being governed. And so it's -- there is a little bit of a catch-up that some of our customers are facing in terms of making sure that they are in compliance. But resilience is becoming more and more important as well. And so that's where customers want to be able to fail over from cloud-based environments to data center-based environments.

And we think that, that probably is a fairly sustainable trend. I think there's a little bit of a surge of just getting kind of current with some customers. But long term, those sovereignty and resilience needs, they're still pretty early stage. So it could drive a pretty good opportunity, especially in the systems business with data centers in Europe. And we're going to see that in other geographies as well. I think Europe is kind of at the leading edge, but we'll see it across Middle East and Asia Pacific, in particular as well.

Got it. And then clearly, memory pricing has been the discussion as Jensen tells us, memory is never going to get cheaper. Just how is F5 preparing for this? And just kind of what risk has been embedded into estimates?

Yes. So it is top of mind for everybody. We have spent a lot of time on this. I think there were a lot of lessons learned from the supply chain crunch of '22 that are kind of part of our playbook. We were getting in front of this as of last summer, early last summer when we first started to get indications that memory was both becoming scarce and the costs were going to continue to go up.

And so we took a number of actions. We extended our build forecast to a longer-term horizon. So that's step one is just making sure your contract manufacturers have a longer-term horizon of visibility as to what your needs may be. We increased our forecast, build forecast, both to account for the upside we were starting to see come through in the data center business, but also just to have a bias more towards a high-end scenario. So accounting not just for the upside, but weighting it more towards upside scenarios.

Now obviously, you take on a little bit of risk that you overprocure and there's an obsolescence risk on the back end. But if you're going to be balancing revenue risk versus downstream obsolescent risk in this environment, you want to be more weighted to covering any potential revenue risk on the supply side. We also took advanced positions on some of the components that we had line of sight we're becoming more scarce.

So buying on broker markets or just securing availability with existing suppliers just in raw materials, just to cover any potential bottlenecks. And then we started qualifying additional suppliers in as well. So we haven't seen any decommits. Decommits were a thing in the last supply chain crisis in '22. And so we want to make sure that we've got -- we're leveraging every tool we can to provide some resilience to any potential risk in the supply chain.

And so we think that we've taken all the right steps. We feel like we've got pretty good visibility into our supply in the near term. Now eventually, you get into a year down the road plus, I mean, that could change, but it's something we continue to watch very closely.

And any price increases you guys have had to do yet or contemplated?

Yes. So that's something that we are actively planning around. So we just introduced a price increase in February that was kind of more of our natural annual motion where we adjust prices tied to innovation that we're bringing to our customers. And so we had delayed that a month just coming out of the security incident, but that was more to do with new features and capabilities we're introducing to market. Related to memory, we'll continue to look closely at that, and we likely would explore price adjustments to offset the cost. I don't think that we would go to gross margin neutral on a percentage basis. We're not likely to put a big markup on top of these price increases. We're more looking at gross profit neutral scenarios, but we'll -- more to come on that.

Okay. Got it. Just can you walk through some of the go-to-market investments that you guys are making either expanding out between security and network, which we kind of talked a little bit about earlier or just the changing breadth of when you're getting to the network buyer? Getting to them earlier in the application development.

Yes. So I mean, the biggest one we've made over this year is we've been expanding our sales force, just adding additional capacity to support the demand that we see. And we think that -- I talked about that on the call in January about some of the investments we're making that are more oriented towards accelerating our growth opportunity in FY '27 and beyond. There could be some impact this year as we ramp the -- those additions up, but we think that's just kind of a broader investment that can help us accelerate execution on some of the demand that we're seeing.

We're also making targeted investments in specialized sales teams around AI use cases, security use cases, and we think that there is additional opportunity that we can drive. And then we've invested in our partner ecosystem as well. We've made a number of partnership announcements around AI use cases, security use cases and we talked about the storage vendors where we've been integrating our capabilities to operate well in those environments. And that helps us get -- you talked about getting in upstream on some of the demand that gives us visibility as to where some of that opportunity is earlier in the cycle.

Got it. And then, I mean, obviously, you guys generate a lot of cash, always have clearly, maybe some investments being made in inventory at this point on the memory side. But just how are you thinking about capital allocation? And as new use cases emerge, how do you think about strategic activity?

Yes. So it's -- we've committed to delivering at least 50% of our free cash flow into share repurchases, and we've exceeded that commitment over the last couple of years. We were a little bit more aggressive last quarter, but that continues to be our approach. And then we feel like that still gives us the flexibility to do strategic actions, whether it's M&A.

We've done a number of smaller acquisitions that have accelerated our road map in AI and security use cases, and we'll continue to look at where there's opportunity that can help us accelerate our positioning. We'll look at some investments we're making on distributed cloud. You could see CapEx increase a bit as we build out the infrastructure to support that SaaS-based opportunity. But broadly, I'd say there's not a material change in how we're thinking about use of cash from the posture that we've had over the last couple of years.

Okay. And then just kind of a question we've been asking everybody is just kind of how are you using AI internally? And how is it changing kind of the breadth of suppliers or software that you've been looking at in the past?

Yes. I mean we're spending a lot of energy on that. We've had really good success in some of our bigger organizations. Our support organization has been extensively leveraging AI to help customers self-solve issues that they're seeing or find the right solutions. And so that's what we call case deflection and embedding AI capabilities into that organization has helped deflect a lot of cases.

It's also helped our support teams identify the right solutions in more complex environments so that you're not out there hunting and trying to find solutions that have worked in the past, but you've got an AI engine that can surface that solution very quickly and help resolve cases much more quickly. So it's driving a lot of efficiency in how we support customers.

On the engineering side, over 60% of our engineers are leveraging AI coding capabilities. And that's really manifesting more in velocity in terms of innovation. We've got our large marketing event next week called AppWorld, where we'll be introducing a lot of new innovation to our customers. And that innovation has been really accelerated with some of these coding capabilities and leveraging AI.

And then just across the -- some of the support organizations, we're looking at Agentic AI to accelerate some of the support functions around G&A, marketing, things like content creation, sales enablement in my organization, our procure-to-pay function, we're leveraging AI to more efficiently do things like invoicing and some of the procure-to-pay functions.

Got it. Well, thank you so much for being here today. Clearly, a lot of AI and just kind of resurgence of the ADC that is driving some enthusiasm in the business. Sounds great.

Thank you. Thanks for having me.

Good afternoon, and welcome to the F5 Inc. First Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time.

And I'll now turn the conference over to Ms. Suzanne DuLong. Thank you, ma'am. You may begin.

Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. We are here to discuss our first quarter fiscal year 2026 financial results. Francois Locoh-Donou, F5's President and CEO; and Cooper Werner, 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. An archived version of today's audio will be available through April 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 (877) 660-6853 or (201) 612-7415 and use meeting ID 13757533. The telephonic replay will be available through midnight Pacific Time, January 28, 2026. For additional information or follow-up questions, please reach out to me directly at [email protected].

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 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 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.

I will now turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. We are very pleased to report strong Q1 results with 7% revenue growth driven by 11% product revenue growth, our sixth consecutive quarter of double-digit product growth. This includes a robust 37% systems revenue growth in the quarter. Our growth continues to be fueled by durable demand drivers, including hybrid multi-cloud adoption, scaling AI investment and the demand for converged platforms. Our EMEA region delivered a particularly strong quarter, and we are seeing momentum from emerging trends which may prove durable. Regulations and mandates for resiliency and digital sovereignty are prompting customers to accelerate hybrid multi-cloud deployments driving increased demand for F5 solutions.

We are especially pleased with our Q1 results, given the uncertainty following the security incident at the start of the quarter. Our global sales and support teams mobilized rapidly, enabling customers to take action and get back to business quickly. They manage more than 9,000 additional support cases and earned positive customer feedback on our response efforts. As a result, we experienced minimal demand disruption in Q1.

In addition, unexpected positive outcomes emerged, including customers gaining a deeper understanding and appreciation of F5's critical role in their infrastructure and opportunities to strengthen relationships including deeper engagement with CISOs. We remain focused on protecting customers and earning their trust, recognizing the responsibilities that come with our critical role. We are hyper focused on 3 areas: further investing in the security of our operations including security automation, enhancing the security of our products and development environments and supporting the broader security community by sharing our learnings and innovations such as introducing endpoint detection and response or EDR capabilities to perimeter devices.

As we look ahead, we see 3 forces reshaping customer infrastructure decisions and they are all accelerating simultaneously. The first is hybrid multi-cloud. Workloads now span on-premises, private cloud and multiple public clouds. Customers want flexibility without lock-in and hybrid multi-cloud has become the dominant operating model as a result. The second is enterprise AI. Customers are shifting from general purpose systems to AI-centric data centers. These environments require far higher levels of data movement and compute and these new requirements are putting real pressure on networking, storage and application delivery layers. Finally, organizations are replacing fragmented point products with converged platforms, because complexity now directly impacts performance, uptime and risk.

Consolidation is no longer simply a cost exercise. It is how customers simplify operations and improve resilience. I will double-click on the first trend. Hybrid multi-cloud adoption has been driven by enterprises need for flexibility, cost efficiency, vendor lock-in prevention and data gravity. Today, drivers like regulations, including MIS 2, GDPR and Dora, are accelerating hybrid multi-cloud adoption by imposing greater resilience and digital sovereignty requirements especially outside the U.S. Organizations are also modernizing infrastructures to enhance security, performance and efficiency. They are repatriating sensitive workloads to ensure compliance and deploying advanced ADC and API security solutions. These trends underscore why hybrid multi-cloud is the leading operating model. F5 is purpose built to lead in this space. Our unmatched ability to provide complete delivery and security for every app, deployable anywhere and in any form factor sets us apart. With a platform architected for hybrid multi-cloud, it is no surprise that customers are turning to F5 to secure and scale their environments.

Let me share a few examples of some hybrid multi-cloud wins from Q1. F5 is powering the hybrid multi-cloud strategy for a regional banking leader. The customer needed more capacity and a modern application infrastructure for digital banking services and AI-based application development. F5 is building an AI-ready infrastructure with enhanced security using BIG-IP for automated and simplified operations, NGINX for cloud-native performance and distributed cloud services for both defense and DDoS mitigation.

Second, the media and Internet provider selected F5 to standardize application delivery across its on-premises and cloud environments. With F5, the customer uses the same ingress and security approach everywhere its applications and AI services run, ensuring predictable performance, security and user experience. Team can deploy or expand applications across environments without changing operational practices. This provides a reliable foundation for scaling AI and modern applications in a hybrid multi-cloud environment. Finally, a large operator of veterinary clinics is leveraging F5 to strengthen the resilience of its hybrid multi-cloud architecture.

The customer needed to modernize their infrastructure and reduce risks tied to cloud concentration and vendor lock-in. F5 is delivering consistent networking and security functions and eliminating cloud-native dependencies. With F5, the customer is creating a durable foundation for future API and AI use cases.

Now let us look more closely at AI. AI-related investment is scaling as enterprises prepare for increased network capacity and services to support AI workloads, agentic AI and inferencing demand. The resulting AI-related demand is fueling growth across our portfolio. AI is fundamentally transforming application behavior, and we are seeing 3 consistent patterns driving demand for F5 solutions. In AI data delivery, multimodal data growth is pushing terabit-scale ingestion. With idle GPUs costing real money, customers need sustained end-to-end high throughput data pipelines across network, storage and application delivery. BIG-IP solves the AI training and inference throughput bottlenecks traditional infrastructure cannot handle.

In AI runtime security, customers are moving quickly on generative AI, but security and compliance often become bottlenecks to deployment and ROI. Systems raised the stakes by accessing and acting on sensitive data, driving demand for stronger runtime controls and guardrails. F5 safeguards AI applications, APIs and models from abuse, data leaks and attacks like prompt injection. We ensure visibility, control and trust. With our Q4 acquisition of Calypso AI, we enhanced our runtime security offerings with real-time threat defense, red seaming models and robust guardrails. We are preventing prompt injections and ensuring models act as intended, even under attack.

In AI factory load balancing, as AI deployment scale intelligent traffic distribution across models, clusters and GPUs is critical, creating new demand for load balancing across and within the AI factory. F5 optimizes traffic and GPU utilization, increasing token throughput, reducing time to first token and lowering per token costs. These trends highlight a clear reality. AI is accelerating demand for application delivery and security areas where F5 excels. In Q1, we added nearly as many AI customers as we did in all of FY '25. This growing demand is a testament to our Layer 7 expertise and decades of experience connecting applications and users, key differentiators in a rapidly evolving market.

I will highlight a few of our AI wins from the quarter. In an AI data delivery use case, one of the largest global technology OEMs is expanding its BIG-IP infrastructure to support a new high-bandwidth AI data ingestion use case. The customer is repatriating large amounts of IoT data from the cloud to enable AI and analytics workloads. F5 is modernizing their S3 data delivery tier with BIG-IP for ultra-high performance. We are also accelerating their internal large language model development powering large-scale data ingestion into AI storage and pipelines.

In AI runtime security, a global financial services leader is leveraging F5 to integrate generative AI into its AI trust framework. F5 is ensuring security, regulatory compliance and continuous access controls at scale. F5's AI guardrails with programmable risk-based controls reinforced with continuous F5 AI red team testing is enhancing trust, resilience and regulatory readiness across every AI interaction. F5's approach seamlessly integrates with the customer's existing identity, access management and governance systems and is providing advanced protection against emerging threats while delivering low latency performance.

And finally, in an AI factory load balancing win with a major energy and chemicals company, our team successfully leveraged a tech refresh into an expanded AI use case. The customer is shifting from public AI consumption to hosting private AI models and needed a solution to reduce latency and prevent timeouts. F5 is ensuring faster, more reliable AI responses with hardware level handling of layer for traffic and SSL processing significantly improving time to first token. All of these examples highlight how customers are building their AI infrastructure with F5.

Let's shift gears to the third trend, converged networking and security platforms. Growing hybrid multicloud complexity has customers desperate for ways to reduce costs and improve the performance of fragmented point solutions. F5's application delivery and security platform, or ADSP is the first platform to unite high-performance traffic management with advanced application and API security across hybrid and multi-cloud environments. ADSP converges security, scalability and operational efficiency. It enables customers to consolidate multiple point solutions in one unified platform, simplifying operations and reducing risk. ADSP also delivers valuable XOP capabilities for customers like policy management, analytics and automation. Let me highlight a few Q1 wins that demonstrate how customers are adopting ADSP, converging solutions and simplifying operations.

In banking, a long-standing BIG-IP customer is modernizing its infrastructure, consolidating networking, application delivery and security with F5. The customer is modernizing its digital banking applications and needed increased capacity and improved resilience to comply with central banking regulations. Today, the customer is leveraging a powerful combination of BIG-IP, NGINX and distributed cloud services for traffic management, WAF and DDoS protection.

A global consumer products company standardized on a converged F5 platform to address governance and reliability concerns. By expanding its use of NGINX and refreshing its BIG-IP footprint, the customer consolidated application delivery and security controls, ensuring consistent performance. Finally, a foreign national law enforcement agency selected a converged F5 platform to support its national Open Data initiative. The customer's disparate infrastructures struggled with ransomware threats, high false positive and limited scalability. F5's converged solution enabled the agency to consolidate load balancing, API protection, authentication and threat mitigation. And these are just a few of the examples of customers leveraging F5's converged platform to consolidate vendors, simplify operations and reduce risk.

F5 is unmatched in delivering complete application delivery and security across hybrid multi-cloud environments. vision for a unified converged platform is fueled by our commitment to customer-focused innovation, and we are continuing to invest to create even greater value for our customers.

In November, we launched F5 BIG-IP Version 21 scaling the core for the most demanding AI workloads. This release delivers the significant control plane enhancements required to handle the scale and complexity of modern traffic. Crucially, we have applied this performance directly to AI data delivery introducing native support for the model contact protocol, or MCP and S3. This ensures that BIG-IP is optimized for the high throughput storage and retrievable workloads that are critical to AI architectures.

We are also bringing our advanced API security to the data center. One of the primary challenges our customers face is the risk of shadow APIs, endpoints that are active, but invisible within their private networks. We have now enabled our API discovery engines to run locally in customer environments. This means we can deliver the exact same discovery and security capabilities on premises that our customers already rely on in F5 distributed cloud services. This allows customers to maintain a consistent API security posture in any environment.

In summary, our first quarter performance underscores F5's strong alignment with durable market demand drivers, including hybrid multi-cloud adoption, the acceleration of AI and the increasing need for converged platforms. We remain deeply committed to driving innovation and to delivering cutting-edge solutions that address our customers' rapidly evolving application delivery and security challenges.

Now I will turn the call over to Cooper, who will walk you through our Q1 results and our outlook. Cooper?

Thank you, Francois, and hello, everyone. I will review our Q1 results before I update our outlook for FY '26 and provide our guidance for Q2. We delivered a strong Q1, growing revenue 7% to $822 million, with a mix of 50% product revenue and 50% services revenue. Demand in the quarter came from continued hybrid multi-cloud adoption, fueled by customers' need for flexibility and their efforts to modernize architectures. AI, regulations and the resulting need for greater resilience and data sovereignty are also emerging as hybrid multi-cloud accelerants. As Francois mentioned, we saw minimal demand impact from the security incident in Q1.

Product revenue totaled $410 million, increasing 11% year-over-year, while services revenue of $412 million grew 4% year-over-year. Systems revenue totaled $218 million, up 37% over Q1 FY '25, driven by strong tech refresh and capacity expansion in connection with hybrid multi-cloud adoption and growing AI demand. Our software revenue of $192 million was down 8% year-over-year. This met our expectations given the exceptionally strong results in Q1 '25, including a sizable 8-figure renewal we discussed last year. subscription-based software revenue totaled $164 million, up 1% year-on-year. Perpetual license software totaled $27 million, down year-over-year against exceptionally strong results from Q1 '25. Revenue from recurring sources contributed 69% of our Q1 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 2% year-over-year, representing 53% of total revenue. As Francois highlighted, EMEA delivered exceptional 24% growth, representing 31% of revenue, and APAC declined 1% and represent 16% of revenue.

Looking at our major verticals, enterprise customers represented 64% of Q1's product bookings. Government customers represented a strong 23% of product bookings including 8% from U.S. Federal. Finally, service providers represented 13% of Q1 product bookings.

Our continued financial discipline contributed to our strong Q1 operating results. GAAP gross margin was 81.5%. Non-GAAP gross margin was 83.8%. Our GAAP operating expenses were $456 million. Our non-GAAP operating expenses were $375 million. Our GAAP operating margin was 26.0%. Our non-GAAP operating margin was 38.2%, an improvement of 80 basis points year-over-year. Our GAAP effective tax rate for the quarter was 19.2%. Our non-GAAP effective tax rate was 19.8%. Our GAAP net income for the quarter was $180 million or $3.10 per share. Our non-GAAP net income was $259 million or $4.45 per share, reflecting 16% EPS growth from the year ago period.

I will now turn to cash flow and balance sheet metrics. We generated $159 million in cash flow from operations in Q1. CapEx was $10 million. DSO for the quarter was 54 days. Cash and investments totaled approximately $1.22 billion at quarter end. Deferred revenue was $2.1 billion, up 6% from the year ago period. In Q1, we repurchased $300 million worth of F5 shares at an average price of $249 per share. We ended the quarter with approximately 6,400 employees.

I will now speak to our fiscal year 2026 outlook. With strong close rates in Q1 and solid pipeline creation, we are raising our FY '26 outlook. We now expect FY '26 revenue growth of between 5% to 6%, up from our prior outlook of 0% to 4%. For the year, we now expect mid-single-digit software revenue growth, double-digit systems revenue growth and low single-digit services revenue growth. We estimate FY '26 gross margin in a range of 82.5% to 83.5%. This reflects a modest reduction to our prior range, accounting for an anticipated impact to product COGS in the second half related to rising memory costs. We estimate FY '26 non-GAAP operating margin to be in a range of 34% to 35%, up from our prior range of 33.5% to 34.5%. We continue to expect our FY '26 non-GAAP effective tax rate will be in a range of 21% to 22%. And we expect FY '26 non-GAAP EPS in a range of $15.65 to $16.05, up from the prior range of $14.50 to $15.50. Finally, we continue to expect our full year share repurchase to be at least 50% of our free cash flow. Given the $300 million repurchased in Q1, we anticipate repurchase activity will be lower in the remaining quarters of FY '26.

Turning to our Q2 outlook. We expect Q2 revenue in a range of $770 million to $790 million, reflecting approximately 7% growth at the midpoint. We expect non-GAAP gross margin in the range of 82.5% to 83%. We estimate Q2 non-GAAP operating expenses of $396 million to $408 million. As a reminder, our operating margins are typically lowest in fiscal Q2 due to January payroll tax resets and expenses from our large customer event in March. We expect Q2 share-based compensation expense of approximately $70 million to $72 million. We anticipate Q2 non-GAAP EPS in the range of $3.34 to $3.46 per share.

I will now pass the call back to Francois.

Thank you, Cooper. In closing, I will say that F5's mission to help each other thrive and build a better digital world has never been more vital or more relevant. As we look ahead, we see our strengths aligning with the most significant secular trends reshaping the enterprise, hybrid multi-cloud adoption, the AI revolution and the growing demand for converged platforms. We expect these trends will provide tailwinds for continued growth in fiscal year 2026 and beyond.

Operator, please open the call to questions.

[Operator Instructions] And the first question comes from the line of Matt Hedberg with RBC.

Great. Congrats really on the results. Really good to see, especially following the security incident last year. Francois, you spent a lot of time talking about some of the drivers, and I thought it was super helpful. The one that continues to pique my interest is AI. We're basically 3 years after the release of ChatGPT. And it seems like non-AI native enterprise customers are accelerating their AI adoption. And I guess based on the results, I'd assume that customer cohort is becoming now more AI leaning. I wonder if you could talk a little bit more about this trend. And I guess, like how durable could that be? Because it feels like we could be very early in that cycle.

Thank you, Matt. I'll start with where you left off, which is we absolutely are very early in the cycle. But let's talk a little bit about how we've seen AI develop over the last couple of years. As you started, of course, we've seen a lot of investment from hyperscalers in CapEx and building out AI infrastructure. We've then seen enterprise, especially either AI-native enterprises or enterprise -- large enterprises that were very forward leaning in AI start by investing in training and starting to build models and train those models. But now we're entering a different phase of the cycle where these AI leading enterprises are now shifting from training to moving AI applications into production. So you're seeing a shift from training to inference. And with that comes new requirements. Specifically, as enterprises move to production, their data pipelines need to be hardened. They need to be able to connect their data stores to their AI models and they need to be able to do that at speed, at scale with very low latency. That requires significant performance from their traffic management solutions. So it requires low latency, high scale, high throughput, high performance, and that is perfect for F5, that's kind of the first requirement. And then the second requirement as they move into production is security, specifically run-time security becomes really, really important. And so this quarter, what we saw were a little bit of an inflection around enterprise adoption and AI. We won as many new customers in AI just in the last 90 days as we had for all of FY '25. And interestingly, the mix in FY '25 was very oriented towards data delivery, basically, high-performance load balancing for these data pipelines. But this quarter, the mix was almost balanced between data delivery and security. And we saw a lot more requirements for security. As we project forward, I think the trend is durable because the enterprises that are doing that today are kind of the largest enterprises that are very forward-leaning in AI, but we will see -- I think we'll see a lot more enterprises adopt AI in the future. And the early enterprises are doing so right now will also scale in production pretty significantly.

An example I'll give you of that is we signed a multimillion dollar deal with a global technology OEM this quarter, who have repatriated part of their data from the cloud because they're collecting more data from their customers. They know their data is more valuable. They're having a lot more telemetry from customers from their products, and they're putting all this data in large data lakes on-prem. But they then need to leverage their data in their AI applications and connecting their data to their AI applications requires significant enhancements to their infrastructure. And that is just going to scale more and more in the future. So we think the trend is durable, both in terms of data delivery and in security.

And then the last thing I'll say about security is, a lot of the security that we've seen so far when I talked about run-time security was really almost traditional security applied to AI applications. We are now in the early days of seeing AI models also go into production, there are specific threats for AI models that we now address with our AI guardrails, and we had a very strong start to our AI guardrail solution this quarter, really with strong adoption from some of the largest enterprises in sectors like financial services or technology or even management consulting for these AI Guardrail solutions. So we're pretty excited about the quality of customers that we are seeing in the early stage of this, and we think the trend is only going to grow from here.

And the next question comes from the line of Tim Long with Barclays.

Maybe if I could do one on software one on hardware. Just on the software side, I get the tough year-over-year comparison in the December quarter. But the sequential looks like it was a little worse than normal. So how do we think about that in the quarter and how we can get to mid-single digit get that business accelerating? And then just on the hardware side, I'm just hoping you could break down your views a little bit, continues to perform very well. Market share versus market growth. It seems like we're starting to see hardware that you're selling or systems that you're selling in maybe new use cases, so maybe the market growth is dynamic is changing? Just love opinions on both of those.

Yes, Tim, so this is Cooper. I'll speak to the software performance. So you're right, we did have a pretty strong compare from the Q1 period of a year ago. We had the large 8-figure renewal that we had referenced. We also had a pretty strong quarter with our perpetual software business that was tied to a couple of specific deals in the service provider space. So there's a little bit of an anomalous growth quarter a year ago. But our performance in the quarter in Q1 of '26 was right in line, is actually slightly ahead of our expectations. And I think as we look ahead, we're pleased both in terms of the execution that we saw in Q1 and that there was no demand disruption related to new software projects. So things move forward in a pretty orderly fashion. But also as we look ahead to the renewal cohort for the rest of the year, which is pretty strong, the utilization rates that we're seeing with customers is very healthy. And -- we see that as a good indicator that we should have a strong finish for the remainder of the year. And so that gives us confidence that we'll be able to grow the business in the mid-single-digit range.

And Tim, let's talk about the hardware, although it's -- the trends we're seeing really apply to both hardware and software. But if you step back, really, the thing that has changed in the market is that hybrid multi-cloud deployments, hybrid multi-cloud architectures for enterprises are now the new normal. And we've seen that shift happen over the last 2, 3 years, but it is accelerating now.

Now over the last 3 years, hybrid multi-cloud architectures have been driven by -- first of all, enterprises wanting to have the flexibility to deploy apps in any environment. Cost optimization, control, those have been the drivers of hybrid multi-cloud deployments. And we have been ideally positioned for hybrid multi-cloud because of the unique flexibility we provide with hardware, software and SaaS. We're absolutely unique in the world of delivery and security in being able to do all of that. Now we are seeing now and these have accelerated really over the last 3 to 6 months. We're seeing two new catalysts that are accelerating that and driving demand ultimately for both hardware and software, but in the near term, we're still seeing very strong demand for hardware. These two new catalysts are: Number one, regulation. Especially outside of the U.S., there is regulation that has come into force or will come into force that is forcing companies to adopt the stronger spend on resilience and a stronger stance on digital sovereignty. It means that companies need, for example, to be able to fail over from cloud back to on-premise and to have true hybrid resilience in their environment. It means, for example, that they need to have consistent security controls across all of their infrastructure environment. Regulations like NIS 2, Dora, cyber resilience regulations that have come into force in '25 and all the way through '27 will come into force are really causing reinvestment in data center and stronger resilience between data center and the cloud, and we are perfectly positioned to benefit for that, and we're seeing those tailwinds in the business. This is one of the reasons that we had a very strong quarter in Europe this quarter. And then the second new catalyst driving also strong hardware demand is enterprise adoption of AI is accelerating. I shared that earlier, but AI is hyper hybrid and it accelerates hybrid multi-cloud architectures. And we are seeing that contribute meaningfully to the hardware demand that we saw this quarter.

Okay. And I hope those sirens aren't current for you guys.

We're fine, Tim. Thank you.

And the next question comes from the line of Samik Chatterjee with JPMorgan.

Francois, maybe if I can start off with similarly on the hardware side and the upgrade cycle you're seeing from your customers as well as the incremental use cases, but there is that sort of end of software support, I believe, in early 2027. How much of the momentum that you're seeing on the hardware is you would tie to sort of the Viper and the i-Series, which are going through the upgrades versus maybe on the rest of the portfolio? And has the security in can led to any sort of BIG-IP customers coming in for those upgrades? And I have a quick follow-up after that.

I think, Samik, the -- clearly, we are -- in addition to the trends I've just talked about, which are macro trends there is a trend that is specific to F5 at the moment, which is that we are in the middle of a refresh cycle with a lot of customers. You mentioned the dates, looking to refresh their infrastructure. That said, what we are seeing -- this refresh cycle obviously is stronger than past refresh cycles because what we are seeing is not just refresh but a lot of expansion for customers. And from all the conversations we're having with customers and the data points we're seeing, we think the refresh is stronger and has a lot of expansion because customers are also getting their infrastructure ready for AI, the deployments of AI infrastructure and getting their capacity ready for AI. We think that's a substantial driver. The others have just talked about hybrid multi-cloud also accelerating this refresh cycle.

Yes. And I would add that we're continuing to see strength on not just from the refresh motion that has a lot of expansion, but also outside of the refresh motion. We're seeing continued capacity expansion with existing customers. We're seeing, we think, some readiness for AI workloads. And then, of course, some of the data sovereignty and regulation drivers that Francois mentioned earlier.

Got it. Got it. And for my follow-up, I imagine this will be a question for everyone the season -- earnings season is sort of you did highlight the increasing memory costs and sort of what you're budgeting for it. But maybe if you can outline sort of how are you managing it through your supply chain? And -- are there any sort of concerns around capacity or sort of supply constraints as well that you're baking into your guide just outside of price, is there a supply constraint to be thought of as well?

Samik, this is an important topic of discussion. And as you know, the memory prices have gone up substantially and there are worries about supply in the industry. Now you know we went through that in 2022, effectively with the same management team as we have today. So we did learn from what we saw in the supply chain crisis of 2022. We took a lot of actions early as it relates to memory. We raised our forecast and volume request with our suppliers several months ago. We give our suppliers extended visibility to our needs. We qualified additional suppliers to have more diversity. We started executing on broker buys. So we did early a lot of the elements of the playbook that we have to do in 2022. And I think because of all these actions that we have taken, in terms of supply, I think we feel very confident about where we are in the near term.

Of course, as you go further into the future, there is some risk around supply for us as for anybody else in the ecosystem. And we are all aware of it and trying to take as many actions as possible to prevent having some shortage of components. Today with the group of suppliers that we've put in place. What we have not seen -- we have not been seeing decommits from these suppliers, but we have seen, of course, substantial price increases. And so we're monitoring that very, very closely to ensure that we can continue to have the right supply, not just in the near term, but also beyond the next couple of quarters.

And the next question comes from the line of George Notter with Wolfe Research.

I just wanted to kind of button up the whole discussion of the security breach. I'm just curious about have you seen any evidence of your customers in turn getting breached since you first discovered the situation. I'm wondering if you guys are continuing to provide patches to your BIG-IP software code. I'm wondering if there was any disruptions in the field and sales organizations that kind of inhibited you from selling. Just how long did that whole distraction last? Any impact you can kind of tie to the December quarter results.

Thank you, George. No, we have not seen any evidence of customers being breached as a result of our security incidents. And of course, I should carry out and say we are not aware of any customers having reported any such incident to us. And I would say, generally, we feel that our response -- our collective response, both our customers, our partners and F5, our collective response to the security incident has been very successful. So if I go back in time, we -- back to where we were in October, we have to mobilize very rapidly. We mobilized our development teams to ensure that we had the right releases for our customers immediately upon disclosure, so they could take actions and protect themselves. We mobilized our support teams to be ready to take thousands and thousands of support calls which did happen, but we were able to take all these calls with minimum wait times and attend to customers very quickly, so they could perform upgrades in record time. And we mobilized our sales teams to engage and support customers quickly. Our customers were both extraordinarily patient with us and empathetic, but also acted with a sense of urgency around the actions they needed to take to protect themselves. And as a result of the partnership and the work with our customers, the disruption was actually kept to a minimum. We, of course, have disruption because customers had to mobilize their resources to do their upgrades and we were extraordinarily thankful for that but we also saw minimal disruption in demand for us.

In terms of where we are on patches, well, we provided -- of course, significant patches to a number of versions of software around October 15 and made those available to all of our customers. A lot of our customers upgraded really quickly, that has the benefit that today. If I spoke to where we were at this time a year ago, we had about 15% of our customers on our latest release. As I speak to you today, we have over 50% of our customers that are on our latest software release. And that is kind of a testament to the speed with which our customers acted, but we're also really happy with where the estate is at. We're going to remain, of course, vigilant with all of this. We have made significant enhancements to our security posture, and we are continuing to make enhancements to our overall security environment, our development environment, our product environment. So we will consider this an evergreen journey. But so far, we are very pleased with the response from our customers and the way that they have continued to, of course, invest in F5. And frankly, we're taking this as an opportunity not just to maintain the trust that our customers have in us, but to strengthen that trust they have in us. And we've had the opportunity to engage with dozens and dozens of CISOs over the last several months. I have personally spoken to dozens and dozens of our customers. And in every single one of these conversations, they have expressed their appreciation for F5's response. And I'm immensely proud of the way that all the F5 have rallied together with our partners and our customers on this incident.

That's great. Just as a quick follow-up, any financial impact, revenue that you lost or costs that you incurred incrementally that you can point to in the December quarter results?

Yes. No, we really didn't see any noticeable impact. We've talked about -- as we went into the call in October that we hadn't yet seen any change in terms of some of the sales metrics that we track around pipeline and close rates, but it was a very short period of time as we reported it. I think that something we're really happy with was just with the response that we have with customers, they were able to move pretty quickly through their remediation activities. And as a result, they were able to get back to business in a short period of time. And so that trend really held through -- all the way through the quarter in terms of normal velocity around pipeline generation, predictable close rates. And so it just -- it was kind of a very healthy execution throughout the quarter. And importantly, also a strong pipeline build as we head into Q2.

And the next question comes from the line of Simon Leopold with Raymond James.

I've got two pretty straightforward, I hope. First one is regarding the progress in AI. You've given metrics around customer numbers. I'm wondering if we could frame it in terms of revenue. In other words, what rough percentage of revenue is coming from AI projects today? And then what do you expect full year longer term as a portion of the mix? [indiscernible] you've had success raising product prices, passing through the higher costs. I'm wondering if you could maybe help us bridge what portion of your systems revenue growth could you attribute to your price hikes?

Simon, I'll start with, I think the first part, and Cooper will take the second part. Look, we have not, of course, broken out AI revenues in part because we feel it's too early. We want to see more quarters behind us on AI. We have shared, I think, in the past that AI, if we isolate our answer here to use cases that we know are AI. And I say that because there's a part of our business that may well be related to AI, but it's not visible to us. And so if we isolate this for use cases that we know are a direct AI use case, we said that last year, it was kind of single-digit millions of dollars every quarter. This quarter, it was above that. It was healthily in the double-digit millions of dollars a quarter. But we're not really prepared to go beyond that and qualify that. And in terms of the future, our view when we look at the trends over the last few quarters, our view is that it is likely to grow because we're seeing more use cases emerge, not just data delivery, which is an important and growing use case, but security is also going to be a growing use case we think that runtime security in AI is going to be a multibillion-dollar market. We're just scratching the surface of the very early innings of this market. So clearly, there's a lot of growth potential. But we're going to take it one quarter at a time.

Yes. And then in terms of the pricing increases and the impact on revenue. So the -- where we see the biggest impact is in the systems business, because those are applied to -- they're effectively all net new sales. And so we had a price increase that we introduced last January, so January of 2025. And so we're still realizing the benefit of that, that was a roughly mid-single-digit price increase. We had that factored into our outlook for the year. And so we'll continue to look to monetize that.

On the software side, there's a little bit more of a muted impact because a lot of our software sales are sold in multiyear agreements. And so it takes time for some of the pricing increases that matriculate through that business, but we are seeing a healthy pickup from the pricing on the software side as well.

The next question comes from the line of Michael Ng with Goldman Sachs.

I just have two. First, just on the systems revenue outlook, it's very encouraging to hear about the double-digit revenue growth for the full year. I think the guidance implies around like mid-teens system revenue growth for the full year. And if that's right, could you just maybe talk a little bit about the revenue shape throughout the rest of the year? Is there anything that you would call out that might drive a deceleration relative to the -- obviously very strong growth that we saw in the December quarter? And then second, I wanted to ask about the EPS upgrade. You beat the midpoint in the December quarter by $0.85. The full year was raised by $0.85. And just given what sounds like a very constructive outlook for the top line for the rest of the year. Is there anything that you would call out in terms of like incremental costs that would prevent more of the top line upside flowing down to the bottom line for the full year?

Yes. So I'll handle both. So on the revenue guide, I think you can see, if you take the midpoint of the guidance for the full year, it implies kind of a 4% to 5% growth in the second half and a little bit higher, I think it's around 7% for the first half. So to your point, it does reflect a little bit of a deceleration. I don't think there's anything that we're seeing today where we have visibility that there will be a deceleration, it's really just that it's early in the year. And so we've seen tremendous strength in the first quarter. We have a good pipeline in the second quarter. And I think what you're seeing is us take a little bit of a measured approach to how we look in the out quarters for the year, but nothing specific that suggests that the business should slow down.

And so then to the EPS question, the two things I would point to is we have the gross margin, we took the guidance down a little bit tied to the pricing increases. So that has a little bit of an effect on the operating margin guide. And then just based on the strength that we're seeing in some of these trends that we think are pretty sustainable beyond FY '26, we're making some targeted investments that we think can really help drive a better growth outlook in FY '27 and beyond. So we're looking at sales capacity, where we see additional opportunity that we want to get in front of with some early investments. We're making some investments in the road map, things -- we talked about XOps, so capabilities that we can bring to customers around analytics and telemetry that we think ultimately will drive a higher rate of adoption across the portfolio and then just some other features on our road map. So we think it's an opportune time for us to really invest in future growth, just given the increased outlook we've got for this current year.

And the next question comes from the line of Ryan Koontz with Needham & Company.

Congrats on a great quarter here. When you asked about the strength in EMEA, you mentioned sovereignty. I wonder if you could just double click on that a bit and expand on how long that dialogue has been going on? Is this relatively new phenomenon you didn't see happening so quickly? And if there was any contribution of deferred upgrades or expansions from customers that may have pushed them off while they were going through the kind of the recovery from the breach?

Thank you, Ryan. Well, there's an element of both. So the dialogue around sort of hybrid multi-cloud deployments in Europe driven by the need for digital sovereignty, the need for more resilience has been going on for several quarters. But we did see an acceleration this quarter. If I go back to why that is, I think, first of all, this regulation have come into force. Some of them have come into force already in 2025. And organizations that are not compliant are moving quickly to be compliant before they face some penalties. In some cases, that -- and I would say, in the majority of cases, we're seeing that translate into new project. Customers that need both some hardware and some software or software as a service to be able to deliver consistent security or consistent delivery across all their infrastructure environments. And there are some cases where we saw customers that perhaps should have refreshed their equipment several months ago did not do so and were not in compliance and in the face of coming enforcement decided to refresh quickly and upgrade their equipment, and we're seeing that come to us by way of extra hardware demand.

So we're seeing both, but it is a durable trend because there is -- for two reasons. One is there is more regulation coming -- and Dora are already in place, but there's a Cyber Resilience act that is coming. I think the enforcement date for that will be in 2027. And the regulation vary by countries. So I think we're going to see that deploy across multiple countries. And then the other phenomenon is there are a number of large enterprises have expressed to us that because they don't know yet how new regulations will be applied. It's very difficult for them to forecast where they should have their data, where they should have their workloads to be in compliance with this regulation. And in the face of that uncertainty, a partner like F5 is ideal because we give them the flexibility to deploy their licenses of F5 in any environment they want today or in the future and also to deploy it with whatever form factor they may want today or in the future, whether it's hardware, software or Software as a Service. And so we are, at this time, for that uncertainty and for matters of digital solvency, this perfect company that has the perfect flexibility, the perfect number of models and the perfect scalability for what these large enterprises are facing. And I think that is going to continue for some time.

The next question comes from the line of Tal Liani with Bank of America.

It's Tomer Zilberman on for Tal. Maybe going back to one of your earlier answers you talked about second half implied deceleration to around 4% to 5% growth. How do you balance that between the fact that as we approach next quarter and really the next 3 quarters? You're starting to lap much more difficult comparisons within systems as I think $180 million to $190 million kind of quarterly run rate versus maybe some of your large enterprises refreshing well ahead of that 2027 end of service?

Yes. So just a couple of factors. It isn't anything to do with the cadence of the refresh. So we're still relatively early in that opportunity. We have not seen any kind of an acceleration in terms of decommissioning on the legacy base. So I think it's been orderly. The strength in the refresh has really been around the expansion. And that's tied to the dynamics that Francois has been outlining that customers are facing today. So I don't think that we expect that to really slowed down in the second half of the year. Again, it's just more about where we're sitting in the cycle. It's a new calendar year. So budgets are still getting cemented with customers. There are some fluid dynamics just in the macro. And so I think we're just being a little bit pragmatic with how we approach second half. But the underlying pipeline trends that we're seeing and the momentum in the business is very strong as we entered the quarter, and that's reflected in the Q2 guide. So it's more to do with just where we sit in the calendar as we're kind of looking ahead on our guidance.

Got it. And maybe just one quick follow-up on the software side, do you see the renewal cohort equally balanced throughout the remainder of the year? Or do you think that's more clustered around the second half?

No, it's more balanced than it has been in prior years. We actually expect to have a pretty strong growth quarter in Q2 and the healthy growth in the second half of the year.

And the next question comes from the line of Meta Marshall with Morgan Stanley.

Great. A couple of quick ones for me. Francois, you mentioned kind of a lot of strength around these hybrid implementations. Just wondering, has there been any trends that have developed between kind of virtual ADCs versus product or hardware versus the last time you kind of went through one of these cycles? And then second question, maybe building on Ryan's question. The government business or public sector business was probably the highest concentration that's been in 3-plus years. Just wondering, was there any kind of strength within Europe on the public sector side that was concentrated?

Thank you, Meta. I will actually handle both. And I'll start with the -- your last question, right? Government sector was very strong. That was driven in -- by North America, in fact. And it may come as a surprise because we had, I think, the longest government shutdown in history in the quarter, over 40 days of shutdown. And of course, we had -- entering the quarter, we had the expectation of some of the portion with the security incident. But we had a very strong quarter with the Fed here in the U.S. Frankly, I'm very proud of the execution of our federal team here who put their shoulders behind the wheel and despite not having as much time to interact with customers because of the shutdown. We're able to engage in the right conversations and get really interesting projects started. Interestingly, the strength in government came from new use cases, specifically on modern applications. And also, we started to see our first AI use cases in government. So we feel very good about what we saw in the Fed this quarter and our ability to execute despite the shutdown and the continued trust that we have from our customers there. .

In terms of the -- your question around do we -- have we seen a different dynamic between software and hardware in this hybrid multi-cloud architectures. I would say that, as you know, part of what part of the -- what's really appealing for customers of F5 is the ability we give them to choose between hardware and software and to implement their software licenses across any infrastructure environment. Over the last -- I think you will continue to see a trend towards more customers wanting to move to software because they -- ultimately, it gives them more flexibility, and especially flexibility against the uncertainty that I talked about. But over the last couple of quarters, we have seen very strong demand for hardware. So I would say, at the moment, the dynamic is we're seeing more customers wanting to spend in hardware, in part because of some of the use cases in AI data delivery, where they really need the performance of hardware for high throughput in part because of some of the security use cases. So we're seeing that strong demand in hardware. I think over time, you will continue to see our software grow, and we feel pretty confident about our software growth for the long term.

I would add that one element that is going to fuel all of them. And we really started to see it this quarter is, in the past, our customers, if they were purchasing hardware or software from F5 versus Software as a Service, those were two completely different experiences. And we have talked about building our application delivery and security platform. And some of that innovation is now making its way into production for our customers. And it's fueling their desire to have converged platforms. They all want to have simpler operating environment. And a number of the wins that we had this quarter were customers consolidating spend on F5 because they had multiple point security products or point delivery products, and they went to F5 because we were a single vendor that could deliver across all of their environments and replace multiple of their point vendors. And then on top of that, we're starting to give them a single experience from a single console. Cooper mentioned some of the XOps' innovation that we are investing in, that gives them the ability to deploy policies from a single console across multiple environments. This quarter, we took the API discovery capabilities that were in F5 distributed cloud, and we're making them available on BIG-IP. So we're bringing that API discovery capability to the data center on-premise. That is a massive issue for customers. No one addressed that properly today. And so the consistency that we're bringing around the security and delivery capabilities across hardware, software, across on-premise and cloud is unique and that convergent. I think it's going to continue to fuel how growth into the hybrid multi-cloud environment.

And then, Meta, I also wanted to add on the government question. So the U.S. Fed was absolutely headline around the strength that we're seeing. But that said, we also saw fairly strong results in EMEA as well with a number of government agencies, particularly around the same data sovereignty concerns. You can imagine those are top of mind for government entities. And so that drove a lot of strength in EMEA in addition to the strength that we're seeing in the Fed.

And our final question comes from the line of James Fish with Piper Sandler.

Just circling back on product refresh. What kind of capacity plus expansion are you seeing typically? And I get -- it's hard to tell exactly what your AI exposure to Simon's earlier question, but how are you able to tell that these are capacity plus increases related to sort of traditional general environment versus sort of AI modernizations?

Yes. So one thing that we're seeing is a lot of customers have higher security needs, which is driving a performance requirement. So we've been seeing this for the last couple of quarters, and this trend is continuing where customers are refreshing very often higher up in the portfolio. And so we're seeing a higher ASP at that time of refresh and then also additional capacities in terms of more units. So it's -- I'd say it's a combination of kind of getting in front of some of the performance needs for security as well as getting in front of the kind of downstream performance needs they're anticipating related to AI workloads. And so customers are just being a little bit more front and center in terms of their planning than we had seen in prior cycles.

Ladies and gentlemen, that does conclude our question-and-answer session. I would like to turn the floor back over to Suzanne DuLong for any closing comments.

Thank you, everyone, for joining us today. We look forward to seeing many of you out and about during the quarter.

Ladies and gentlemen, thank you for your participation. That does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.

All right. Thank you, everybody, for joining. Tim Long here, IT Hardware, Comm Equipment analyst at Barclays. Very happy to have F5 with us today. Thanks, guys, for coming. Cooper Werner, CFO; and Tom Fountain, EVP, COO. Crazy time. So I really appreciate you guys taking the time here.

So maybe let me just start off with some of the hotter topics, and then we'll kind of dig a little bit deeper, and you guys could chop them up how you like. So obviously, a lot about the breach that happened. So you've talked a little bit about it, but if you could just maybe go over again kind of what the customer and feedback has been thus far? And any color on specific areas? I know it was a part of the guidance change a little bit last quarter. So any way you could couch that for us? And curious if there's been any benchmarking around when this seems to be happening with a lot of companies these days. So curious what you've gleaned from other companies that have gone through similar dynamics.

Well, Tim, thank you for having us. Before I answer, let me get our safe harbor on the record. So before I respond, I need to walk through this. Our discussions today may contain forward-looking statements, which involve uncertainties and risks. Our actual results may differ materially from those expressed or implied by these statements. Please see our SEC filings for more information on these risk factors.

So maybe I'll start and then hand it to Cooper. Just for context, we disclosed on October 15 that a highly sophisticated nation state actor had gained unauthorized access to certain F5 systems. And this really affected principally our BIG-IP product. And so a lot of the focus really right at the time of disclosure was around helping customers be able to protect their environments and specifically apply patches to their BIG-IPs. And we saw customers respond in a variety of different ways. There were certainly a number of customers that wanted to very quickly roll out updates to their system to make sure their environment was protected.

And we also saw a number of customers who concluded that they had a lot of mitigating controls already in place in their environment and would follow a more orderly sort of upgrade sequence. Prior to the disclosure, we did quite a lot of work to understand sort of how other companies have responded to this, really to extract as many best practices as we possibly could. And I'd say the overwhelming feedback from customers was one of appreciation for the high level of transparency we provided, the details that we gave them around how they could protect their environment and then the focus that we offered around the new versions of BIG-IP that we made available at the same time and the resources that we applied to help them with that.

And so I'd say the overwhelming response from customers was quite positive. In the work since then, we've seen sort of a significant uptick initially around customers who are updating those environments. And we've seen that come back down. And we're now at a place where I described it as a bit of business as usual that customers have, by and large, sort of completed the updates that they wanted to perform. Obviously, now the attention has turned more towards sort of what are the steps we're taking, both the actions that we took early on and then we plan to take over time to continue to secure and harden our environment. And again, we've gotten very positive response from customers around the way we are approaching this. And I think we believe pretty strongly that we're going to come out of this with a much more secure environment and customers will be much better protected than before.

Yes. And then just in terms of how we kind of try to size the potential impact, I think one of the challenges that we had was just the timing of the announcement in relation to when we were providing our guidance. It was about 9 business days. So we didn't have a lot of data in terms of pipeline generation, close rates. We haven't seen any impact in those 9 days. But because it was so early, we really spent more time kind of profiling our revenue base and what areas of our revenue had more kind of customer discretion where they may choose to either defer or cancel projects. It's a relatively small piece of our overall revenue base just because between our services business and our renewals business where customers are already running F5 in their environment, those areas of our business are likely to be pretty resilient in the near term.

And so the real -- if there was going to be any risk, it would be more around kind of new projects, in some cases, maybe around tech refresh if a customer chose to just kind of wait a little bit longer. And so where we thought there could be impact was if customers -- one, their operational focus was around remediation, and so that caused some kind of friction in terms of rolling out new projects. And similarly, our sales resources that in the short term are going to be very engaged with our customers kind of walking them through the remediation and then moving on to selling activity. And then kind of the third factor would be really around if there were projects longer term that were canceled as a result of perceived risk.

We felt like that was a pretty low risk. And so we talked about exiting the year, we would expect demand to be kind of returned to normalized levels. And so that's kind of what we're monitoring. But I think what we're encouraged by is just how these remediation activities have gone with customers, and it's been very orderly. They very quickly kind of moved into execution mode. There wasn't a lot of kind of impact -- relationship impact that we saw early days. And so we're pretty encouraged about that. I think the silver lining is that it has gotten us kind of deeper in the organization with decision-makers and maybe created a little bit more of an awareness at higher levels within some of the larger enterprises just to how critical F5 is in these environments. And a lot of the work that we've done through this planning is giving us an opportunity to share insights with our customers as to what we've learned and some best practices they can be thinking about as they kind of assess their broader security posture.

Okay. Great. Great. That's a comprehensive answer there. I appreciate it, guys. Maybe going over to the software business. Obviously, there's been a lot of software versus hardware with F5 for the last probably decade. I know there's no current guidance before the breach. It was kind of mid-single-digit type of growth. Maybe talk to us about the moving parts around when you're thinking about software growth in the next few years. And maybe I think the timing of term has something to do with growth rates as well. So maybe walk us through the 2 or 3 kind of main elements that would move that software growth number around.

Yes. So I mean, at the highest level, our growth is driven by expansion with our customers. And so we've talked a lot about the ADSP, our platform that allows customers to consolidate more services into a kind of a single management framework, and that's been very attractive to customers, and we've been seeing really strong expansion as customers come up for renewals as they're looking to do more with F5, new use cases, new solutions. In addition, as they've grown, their kind of capacity and performance needs have also increased. And so our software business is largely a subscription business. And so we do a lot of new projects and then we expand over time.

And so as that mix continues to increase in terms of subscription and a renewal base, that the growth is going to come from expansion. And so as we look at revenue growth rates over time, we had a really strong year last year. We started the year with an upper single-digit growth guide, and we ended at 9% for the year. We talked fairly early in the year just to kind of give investors an understanding of how that flow of the renewals would come through that this would be a mid-single-digit growth year.

And that was really had to do with the cohort that comes up for renewal largely we saw in 3-year cycles. So FY '23, there were some macro events that made it a more challenging year for software. And so the revenue growth from FY '23 that was flattish, that's what makes up the cohort that comes up for renewal in FY '26. Conversely, we'll have a much stronger or larger sized cohort coming up in '27. So just from a math perspective, there's a little bit of a headwind in FY '26 related to the renewal base that becomes a tailwind in '27. But underneath that, what we're seeing is strong expansion rates and that -- in addition, we're seeing strong growth on our distributed cloud business. And so between those 2, we expect software to be a double-digit grower beyond FY '26.

Okay. Great. Where are we with -- hardware business has been very strong the last few years, 1.5 years, at least. Where are we with -- are there still -- I think you don't go into a sale saying you should buy software or hardware. What are you seeing on like customers' appetite for software versus hardware where it's a comparable application?

Yes. So I think you're exactly right. We really go into the customer engagement focused on what their challenge is and how to solve that challenge and the choice between hardware or software really is a consequence of sort of the rest of their architecture and their environment. Having said that, we are seeing a lot of demand around hardware. I think that's a reflection of a long-term secular shift that has occurred. Customers for a number of years were very focused on cloud as the answer. Today's customers, we see quite distributed. They have accepted and come to focus around this hybrid and multi-cloud world.

With that, we're seeing a reenergy around the data center build-outs and a lot of data center modernization activity. And that's in turn sort of driving hardware demand. I think that also maybe is accelerated with AI, either because they've got AI applications or in anticipation of AI applications that is driving a lot of that. On the software side of the business, a lot of it -- we see growth opportunities longer term really around our SaaS business. We think that's a really important part of our ADSP. And increasingly, for our customers, what we're seeing is that they're buying across multiple deployment models with multiple solutions. And we think that's really encouraging because it reinforces sort of this strategy that we're pursuing around an integrated portfolio, our ADSP strategy across all of these different domains.

Okay. Yes, you mentioned distributed cloud. You had some transition a year or 2 ago. Where are we now with that as a full offering? It sounds like it's performing pretty well. Where are we in the growth curve in scaling that business?

Yes. So it's -- we're seeing good growth on distributed cloud. We've been undertaking a little bit of a transition on some legacy offerings. So if you look at kind of the headline growth from our overall SaaS and managed service business, the revenue declined last year, but that was solely to do with the transition off of some legacy offerings that we had retired. And so we expect to see the ARR grow this year, and that will translate to revenue growth in the following year.

And I think it's really speaking to the breadth of the functionality with our -- and the maturity of the distributed cloud offering. And then we have the unique trait of having our offerings available across any environment, whether that's data center, public cloud or SaaS-based environments. And that brings a lot of opportunity our way because customers are operating their applications in hybrid multi-cloud environments. And so our ability to give customers choice and flexibility to support these applications and these workloads as they move around is very attractive across all of those environments, and that's really bringing us a lot of opportunity on the SaaS side of the business.

Okay. Great. We may come back to software, but I did want to touch on AI. Tom, you mentioned it. I think on some of your calls, you announced some of the kind of key use cases where F5 is participating. So maybe if you could just walk us through how important AI is to the F5 story right now? And what are the top 2 or 3 use cases that you're really seeing traction in?

Yes. So I think a lot of the industry excitement around AI starts with the applications or lately a lot on the semiconductor side. But we're seeing it really start to change the way enterprises think about their infrastructure as well. And I think that's a reflection of the fact that the way AI applications get built really demands, really high-speed, low latency, large bandwidth data transfers to feed these AI models. And so there are really kind of 3 use cases that shake out of that for us.

The first is around AI data delivery. And this is a very classic sort of high-performance use case around getting large volumes of data from one place to another with very low latency. That's, in some ways, tailor-made for F5. That is sort of our expertise is around being able to do high-performance data delivery. And so we're seeing good demand around our BIG-IP products for that use case. The second one is around AI runtime security. And here, this is a whole new emerging class of capabilities to be able to provide security in front of AI models. And so the kind of the simplest way to think about it is a firewall, but for your AI models. And we've had a number of organic capabilities that we've built in this space.

We also recently announced the acquisition of a company called CalypsoAI. And so together, we have a really strong leadership position in this new emerging category around AI security. And then the third use case is really around AI factory load balancing. And here, this is within an AI factory being able to optimize your GPU usage and driving performance benefits there. This is really from our partnership with NVIDIA. We're quite excited that we recently announced that we are now part of the NVIDIA reference architecture. So a key step there. This one is a much earlier business for us and we've just now completed the reference architecture and are engaging with customers around those opportunities.

So a little bit earlier, but a big opportunity potentially over time. All of these are on what I'll describe as kind of the direct use cases. We also see quite a bit of activity that we would attribute to, I'll call it, indirect AI use cases or shadow AI use cases. And this is where customers are either building out AI applications and maybe the infrastructure team doesn't fully understand or know all of that or where they're anticipating that they're going to be doing it. And that links in a lot of cases back to sort of this data center modernization where they're adding incremental capacity, knowing that they're going to have a lot more volume of AI and data movement, and they're trying to get their data centers ready for that sort of activity. And that brings with it a lot of demand for BIG-IP products in particular.

And do you see the move to more inferencing or edge as an incremental driver for these solutions?

Yes. So I think inferencing in general, where the inferencing takes place, certainly, a lot of inferencing will take place in the data centers. There is opportunity to do inferencing at the edge as well. Our distributed cloud platform has a very robust set of application capabilities there. And so there are opportunities in that. But today, we're seeing a lot of it really manifesting itself around data center modernization.

Cooper, a quick one for you. I think you guys have shared some customer counts for AI use cases. Do you envision over the next year or 2, you would have visibility to give more clarity on like scaling that business for investors? Or will it always be difficult? I know you've had that problem with security where it's stand-alone security or it's a blade, it's hard to count it. So curious how would think about AI?

Yes. So there's kind of the 2 components. For the direct use cases, like we do have that visibility, and we can provide further context as that business continues to grow, and we think it's -- we're still at kind of the early stages. We think there is an inflection that's coming soon. I think especially on the runtime security, that's an emerging area, but it's very -- we're very well situated for that opportunity. On the shadow AI piece, that is, frankly, the biggest driver that we're seeing right now or the biggest growth area we're seeing.

Right now, we can track that in terms of the systems business that's not associated with refresh is about 1/3 of our overall systems business, and we saw very strong growth last year. We had not seen that as an area of growth in prior years. That's kind of a new secular trend that we're seeing, and we attribute that most closely to that shadow AI piece. Now it is harder to track. There are things that over time, we will get a little -- we think that we'll get a little bit better understanding of our integrations into S3 storage environments, and that gives us some -- a little bit better proxy as to where some of this growth is being driven by AI. And so we think that we'll be able to give a little bit more context as to what that looks like over time.

Okay. Great. Hopefully, this is working a little better. Maybe touching on the hardware part of the business. It's been pretty strong. There's a lot going on. You have some end-of-life older products. You got a new platform. You got some competitors that are taking different strategies. So maybe kind of scale that for us in the context of how sustainable of a positive move can this be? It's already been like a year, 1.5 years, but how much more runway is there on the hardware side?

Yes. So I think if you go back several years ago, as customers were kind of shifting some of their workloads to cloud and edge-based environments, we saw kind of a rebalancing as to how customers are supporting their applications and in our view that aligned with industry analysts that, that market was going to be kind of a low single-digit decliner, but we have the opportunity to continue to take share and it might be closer to flat for F5. What we've been seeing more recently is kind of a little bit of a shift back towards data center, and it's a lot of the build-outs that Tom referenced as customers are kind of modernizing and readying for AI.

And so we think that it's a little bit early to make a call on it, but there are signs that, that business may be a little bit more healthy or that market may be a little bit more healthy and see some growth opportunities going forward. And so we look at it across 2 dimensions. You've got the refresh business, which is kind of more of a cyclical business. We're seeing tremendous growth right now. That tends to be kind of -- the peak of those cycles tends to be about a 2.5- to 3-year duration, and we're still kind of in the first 1/3 of that with the base of our installed base that's coming up on those end of software support dates.

Now what's interesting is to see the long tail of that refresh motion because some customers will do their refresh beyond those dates historically. And a lot of that may be macro-driven or budget-driven. We might see some customers pull those dates in, especially in light of the security incident we recently had, there's kind of a new renewed visibility that customers have as to the importance of running on currently supported software. And so we'll see how that plays out. On the 1/3 of the systems business that's not associated with refresh, again, we saw good growth last year. We think that may be the beginning of a longer-term secular trend, and we'll just have to see how that plays out.

Okay. Great. Maybe just shifting a popular topic has been federal. You guys have a decent amount of exposure. Maybe talk about kind of what you've seen there given the shutdown and DOGE before that and no DOGE now. But there's obviously a lot of focus on the federal side, building data centers and adding U.S. technology. So how do you see that vertical shaping up the next year or 2 and bouncing back from what was a choppy time for most?

Yes. I mean, in general, our federal business is a relatively low mix of our overall revenue. there's -- the government shutdown did create some short-term disruption. Typically, what we've seen in past cycles where there have been kind of these shutdowns is that as budgets are restored, we pick that business back up. It just might be a little bit later in the year.

Having said that, for F5, Q1 is our lowest mix quarter with the federal government as it is. So I don't think there's a ton of concern in terms of the overall impact to demand. Related to DOGE, the solutions that we sell into the federal government are typically around security or high availability for their kind of mission-critical applications in their data centers. They're not the areas that the government would typically be identifying as an area of waste where you can kind of reduce over consumption. So I think that we are pretty resilient to those -- some of those initiatives.

Okay. Great. Maybe, Tom, one for you on the services side. Obviously, F5 compared to a lot of certainly networking companies, much higher intensity of services maintenance in the revenues. What are the moving parts there? It's been a pretty stable, low-growth business, but pretty profitable. So what are the moving parts? I know when you are selling more SaaS, that might impact it. But how should we think about that kind of services stream looking forward?

Yes. No, I think you're exactly right. The services business is an incredibly durable business for us. It is also one that has contributed nicely to the top line and then has been a very profitable business for us. I think a lot of it is really a product of the customer segment we serve and how vital our technologies are to our customers. We really sit in front of the most mission-critical applications generally in a customer's environment.

And rightfully, they have a very high set of expectations that are associated with that. That, in turn, means that we have to have a very capable services function that is able to rise to the occasion and meet customer demand. And so I continue to believe that services is a key part to our value proposition. I hear pretty regularly from customers. It's a source of differentiation for us because we are able to meet sort of those expectations. That, in turn, sort of gives us the ability to command a premium on the top line. And so I expect that we'll continue to use some of the pricing actions and things like that, that we've done to be able to help us grow that business.

Of course, a lot of that business is attached to either our perpetual or subscription deployable products. And so it's a function of the last several years of product growth, which I think explains a little bit of sort of the current growth rate, but it over time sort of really tracks to sort of the product -- deployable product sales. And then we're continuing to look at ways to drive profitability. We've been early adopters on a number of things, AI being a great example to be able to improve the quality of service we deliver and to do that in a very profitable way. And so I expect that the services business will remain a really durable part of the F5 financial model.

Okay. Great. I did want to touch on security itself as a -- it's been a growing mix and a good chunk of the overall in the 30s or something like that percent of revenues. Talk to me about some of the dynamics there. You're big in WAF and some other areas, application security becoming more important. So what are the key drivers for that piece of the business?

Yes. So we talked about, again, going back to our platform as being an opportunity to consolidate a lot of these point solutions, but it's not just about consolidating and driving efficiencies with customers, but it's some of the insights that you can give to customers across their entire application estate. So when you hear us talk about the platform, you'll hear us reference what we call XOps capabilities. These are really the analytics capabilities we put in the hands of customers to monitor the health and the security of their applications across all environments.

And it gives them the ability to take faster action and respond to changes in their environment which is very attractive to customers to be able to get in front of changes with their applications and ensure that they remain in a very secure posture. We've done a number of smaller acquisitions in the last few years that have further given customers the ability to profile their applications and get some of those early insights. We added the runtime security capabilities with the CalypsoAI acquisition. And I think that, that's really going to give us the opportunity to get more and more relevant in their environments just as they're able to leverage our insights and security capabilities across any of these environments.

Okay. Maybe we'll just end with the financial one for you, Cooper. Talk a little bit about margin structure of the company. Obviously, you have the benefit of a very high gross margin business. There was a nice bump up in operating margin a year or 2 ago. What are the levers on that getting more OpEx -- operating margin leverage for the business?

Yes. I mean, long term, I think there are a couple of things. We've talked a little bit about -- Tom referenced some of the work we're doing with AI and the services part of our business, but we're extending that through the rest of the operating model as well. So we're -- we have the opportunity to drive efficiencies in our engineering organization, leveraging AI coding capabilities. Similarly, we're able to leverage AI and automation around some of our content generation for our sellers and create kind of a more efficient go-to-market model in terms of how they're engaging.

I think the business model in general is designed to drive leverage over time as we increase the mix of subscription in terms of our overall revenue model. The cost of revenue on a renewal motion is much lower than the cost of new customer acquisition. And we've really been seeing that over the last couple of years is that sales and marketing expense has gone down as a percentage of revenue. And I think that's the beauty of the model is that that's something that's very sustainable. So over time, we think that we've got the opportunity to continue to drive leverage in the business and then recapture some of that leverage in terms of investing into new capabilities in our product road map.

Yes, I think we're out of time. So thank you both for joining. Really appreciate it, and thanks, everyone, for joining.

All right, everybody. Thank you. This is a home stretch. I really appreciate everybody attending this conference, and this is, I guess, the second half of day 2. And so we're -- we've had a lot of really interesting insight in the first couple of days here. And you guys -- I'm excited for this conversation with F5. I think there's just a lot of cross currents going on, whether it's AI, Cyber, Acceleration. You guys seemingly are at the crux of a lot of what's going on in kind of the modern tech landscape.

So thank you for being here. Cooper Werner, CFO of F5; and Francois Locoh-Donou, the CEO. Thank you again from all of us at RBC.

I guess from an evolutionary perspective, F5 has gone through quite a journey with the move from kind of hardware to now a multiproduct software-oriented company. I guess before we get into some of the specifics, when you sit back and you reflect on the journey and where you are today, the question I often get from F5 is like what is the market missing? Is there still a misconception out there about F5? Because you've gone through a paradigm shift. I think a lot of people still think of you as a hardware company, and you're not. But is there anything that you would offer that you're like, no, the market still doesn't get this element of the F5 story?

I will in a moment. Let me just read my safe harbor. Before I respond, I need to get our safe harbor on record. Our discussion today may contain forward-looking statements which involve uncertainties and risks. Our actual results may differ materially from those expressed or implied by these statements. Please see our SEC filings for more information on these risk factors.

Excellent. I'm glad you covered that.

Really important. Okay. So you were asking me about what maybe misconceived about F5 and what has the journey been? I think the first thing is the journey of F5 has not been one of -- going from one consumption model to another, it has been one of expansion. So yes, originally, our technology has always been consumed in hardware. And over the last several years, we have evolved to offer our technology in hardware form factor, in software form factors and in Software-as-a-Service.

And that is really a response to the big market trends that we have been seeing. So if you go back 15 years ago, the predominant mode of consumption of -- so F5 supports applications, that -- fundamentally, we -- what we are focused on and what we specialize on is delivering and securing applications in APIs. 15 years ago, that technology was consumed in hardware and private data centers. In the decades in sort of 2015 when the cloud went mainstream, customers wanted to consume this technology in software, in public clouds, in private clouds, in private cloud environment and increasingly also as a service.

And so F5 evolved and we made our technology available in software and in Software-as-a-Service. And many of our customers now consume F5 in software and Software-as-a-Service. In the last few years, what we have seen is customers have wanted to deploy their applications in multiple cloud environments and in hybrid cloud environment. This hybrid and multi-cloud environment gives customers a lot of flexibility to put the -- to choose the best environment for each application, but it also creates enormous complexity for customers.

And F5 has responded to that by bringing together our hardware, software and SaaS into a single platform. We call it the Application Delivery and Security Platform. And I think that is the thing that is misunderstood about F5. It is really that we are today the only player that has the opportunity to secure and deliver every app or API anywhere in any environment or any form factor. And that is a significant source of differentiation relative to any other player in the industry, be it hyperscaler or a point security vendor or a point application delivery vendor.

And so that position with our customers, being able to be the partner that they go to that can secure and deliver all their apps and APIs across environments is, I think, the piece that is not yet fully understood by the market.

That you sort of like read my mind for where I was going with the next question, but there's just incredible complexity with that. Because I think we went from this paradigm if everything is going to be in the cloud, and then wow, maybe not everything, right? And so I think customers struggle with -- you know better than I do, how customers struggle with what is the right underlying infrastructure map of an organization. I guess as you talk to customers and you think about that paradigm, I think for most large organizations, what is that mix of apps? Is it -- do you get a sense for now it's -- the mix is -- I don't know if -- it's probably hard to generalize, but like what is that right mix of where apps run in the future from your perspective?

As you said, it's hard to generalize because you'll have some customers who have 100% of their apps on-prem. You'll have some customers that have 100% of their apps in the cloud. And you have all kinds of variations based on their business models, their needs, regulation, compliance, security challenge, cost optimization, all of these variables come into play. Now if you fast-forward over a long period of time, because so many new apps are continued to be born in the cloud, I think over time, there'll be a general tendency that there will be more apps that are in public cloud environment.

But the mix will vary from one company to the other. And certainly, what we are seeing now, and it's frankly an inflection that has happened in the last year or 2, is we're seeing a lot more enterprises reinvest actively in private data center capacity. If you look at private data center capacity between 2015 and 2023 was pretty much flat. But there's an inflection now where it started growing again, and that's driven by a number of factors. It's companies doing cost optimization, repatriating applications more aggressively from public cloud. It's for a number of sectors, it's regulation.

Companies really have to build resilience and have maybe an environment on-prem and be able to fail over in public cloud. It's geo patriation for some customers internationally that don't want to have all their apps in hyperscalers. And increasingly, it's AI. The issue with AI is the data gravity of AI. So we have a lot more companies that are collecting a lot more data about their business than they used to because they know they're going to be able to monetize this data with AI. But increasingly, we see a lot of companies choosing to keep that data on-premise because they've learned that it's quite expensive to have that data in the cloud or to move data in and out of the cloud. And so they want to have their data on-premise, but their AI models could be on-premise or in public cloud.

So it creates a need to manage all that traffic. But for all these reasons, we're seeing a lot of companies actively reinvest in private data center capacity. And so the question isn't just where applications are going to be, it is where are application going to be and where is the data going to. And ultimately for us, it doesn't matter. We think it's going to be -- what matters to us is that it's going to be distributed across multiple environments and the complexity and scale challenge and security challenge that creates is where F5 comes in, and F5 delivers things that no other company can bring to that equation today.

One more question for you, Francois, then Cooper. I'll get you with the question. But with kind of continuing on the thought process of AI, this is -- 2 years ago, AI was sort of like the last question that I was asked, sort of just what do you think about AI and now it's sort of question 1, 2 and 3 and 4. When you think about the demands that AI puts on customers in terms of -- like you said, data privacy, speed, latency, what are the things that we need to consider from an AI lens that F5 is uniquely positioned to help customers deal with.

So I think the first thing to really, I think, internalize, which I don't think the market really understands that yet is AI requires more fine grain processing of traffic and more fine grain securing of traffic. Specifically, you have to secure every token, and you have to process every token, and that fundamentally requires Layer 7 capabilities, which is what F5 has been building for the last 20 years.

So we are very excited about the challenges that AI bring because we are very well equipped to solve these challenges. Where that manifests itself today. We're in the very early innings of that, but we are already seeing the use of F5 in places where we were not used before. So take data delivery, for example. Increasingly, companies have their data stores on-premise that are being accessed by AI models that need that data either for training or for inferencing and making a lot of read requests to these object stores.

That requires high-performance traffic management to make that work. F5 is now being put in front of these data stores to make those use cases work. We were never in front of data stores before or databases. So that's a net new use of F5 because you need that Layer 7 high-performance traffic management. Another example, which is nascent, is AI security. As I said earlier, you're going to need to secure every token, that requires Layer 7 capabilities. F5 has been fronting applications, securing and delivering -- securing apps and APIs for many years, but now we need to do that specifically for AI applications, and there are specific threats on AI applications.

We made the acquisition of a company called CalypsoAI a couple of months back in part to accelerate that, and we're starting to see demand for these AI firewalls red teaming of model, penetration testing of model and then being able to provide guardrails against AI applications or AI models, that is a net new opportunity for F5. And then a third example of that is inside of these AI factories, these large GPU clusters where some of our customers are investing in large amounts of money, the traffic in there is not optimized and sometimes it creates lack of utilization of these GPUs. You bring F5 traffic management in these environments, and you can make those environments way more efficient. And there's a lot of dollars at stake for companies.

We have partnered with NVIDIA to create an integration between our software and their DPUs that enables this traffic management to be way more efficient and includes utilization of GPUs, allow folks who have a large amount of GPUs for fixed investment on GPUs to generate way more tokens because they use F5 software in addition. So that's another environment where you bring F5's Layer 7 expertise and the AI scaling challenge gets solved way better. So that's why we're excited with these opportunities in AI, and I think it's just the start of it.

I lied Cooper. I just wanted to double-click on that AI. The -- one thing that we're picking up in some of our conversations with the executives, I think we saw these digital natives pushing the envelope on AI and the obvious frontier models and whatnot. And you have such a diverse customer base. Are you starting to see evidence of sort of the non-AI native cohort of customers increasing their AI journey. We may not be at an inflection point yet, but any observation on customer behavior in terms of their AI adoption of the non-AI native cohort?

Definitely. I mean you start with -- at the start, I would say, it was AI-native companies. I think, of course, Sora is an example, was a company in that cohort. I think you're now moving to see what I would call not AI-native company, but AI leaning companies. So it's -- typically, you take the -- in any industry vertical, you take whoever was the digital champion of that industry vertical, so had moved faster than others in that vertical to digital transformation had transformed their data faster than others, had invested in their data faster than others. Those are the AI-leaning companies. It could be in a traditional industry, but they are deploying AI models, their training models and they start to need to inference at scale, they start to need to secure these models and these AI applications at scale.

And so again, it's a minority of companies because they were kind of the single champions of their industry vertical. But I think past those, you'll start to see a lot more companies in these verticals than adopt AI at scale. But it's already shifted from AI-native companies to, I would say, more additional AI-native companies.

Yes. I'll add to that. I think that it's shifting some of the consumption patterns with customers. Is there kind of planning for their use of AI and they're seeing kind of pressures around workloads driven by AI, data gravity is becoming more of the forefront of attention. And so even as they're doing their tech refreshes, what we're seeing is customers starting to migrate up to the higher performance end of our appliances. We're seeing more kind of advanced data center capacity expansion coming through in some of the hardware business. And we think we -- sometimes we call it shadow AI, but it's kind of that invisible hand of AI at the forefront of their planning as they're thinking about the next few years of what their data centers look like and then making sure that they're ready for some of the changes that are coming driven by AI.

That's -- it's actually where I wanted to go next, Cooper. And you guys are coming off of a really strong 4Q and I want to touch on the security incident in a second here. So excluding that, could you talk -- reflecting back on the year, which was really strong results all year long. As you sit in your seat today relative to a year ago, and you're looking at your model and you're looking at your forecast, what surprised you the most about the performance that you saw in fiscal '25 versus when you kind of set that initial forecast, because it was revised up really throughout the entire year?

Yes. So also -- I mean clearly, we had very strong growth in our systems business. We closed the year at just under 10% overall revenue growth. We started the year with a 4% to 5% revenue guide. A lot of that strength is really coming through in the Systems business, and I kind of touched on it. But maybe what surprised us was the growth that we were seeing outside of Tech Refresh. So we knew that Tech Refresh was going to be a big opportunity. We expected customers would really start to refresh some of their legacy equipment starting in FY '25 and that, that would likely be a 2- to 3-year cycle.

But outside of that, we're seeing more growth for new use cases. In some cases, customers are repatriating from public cloud to data center, performance needs are clearly going up in a significant way, and we're seeing customers kind of ready their environments for the needs around performance. I talked about data gravity, having data sovereignty, those are also driving what we call data center modernization initiative across our customer base. So strong growth, both from the Tech Refresh, but also the non-Tech Refresh component of our Systems business.

And that's something that we think potentially is a durable kind of new dimension for our hardware business. Historically, we've said that, that market is likely kind of a low single-digit declining market and that we've consistently taken market share. So we likely would be closer to flattish long term. But now we're seeing growth in some new areas that we haven't seen in prior cycles. And so that's something that we're going to be kind of tracking as we look ahead.

The -- I have to ask about the security incidents. It feels like even just yesterday, I had Cloudflare on stage, and there's an outage. It feels in CrowdStrike had one and Okta. I think your transparency was refreshing. And I think you guys were as transparent as you could have been at the time, as you have had more time to pass since that, and I want to ask about kind of how you thought about from a guidance perspective. But Francois, have you learned anything more about the impact of that, the response, the customer response to your messaging?

Well, certainly, in terms of the customer response, yes. I mean we went for a period -- so we announced this on October 15, and we went through a period before October 15, of course, was several weeks of investigation into the intrusion to understand truly really what had happened and be clear and then several weeks of preparation to ensure that by the time we would announce on October 15 that we could give our customers information that was actionable. So they could decrease the risk for them.

And we were able to do that successfully. And specifically, we had a lot of work to do to build releases of BIG-IP. This bridge only affected BIG-IP, not the other products, but releases of BIG-IP that addressed all the vulnerabilities that we have not -- that we had been working on, but were not disclosed that the threat actor may have access. And we're able to make these releases available to customers, and their response has been incredible. By that, I mean, a, the -- our customers generally have gone through that with other vendors or themselves before.

So there's -- as well, there's an understanding of it and an empathy that was inspiring, frankly, but also the speed with which they mobilized resources to pass their environments, where necessary was incredible, and the collaboration with F5 has been just incredible. And F5 as a company we really mobilized. We -- as you said earlier, we have made a big choice. There's a lot of choices you make along the way of something like that. But the fundamental north star for us was we have to disclose everything that would make it possible for customers to take action to protect themselves.

And that's why we're so transparent is keeping that north star and frankly, having learned from others that went through this before. And in some cases, maybe regretted not having been as transparent upfront as they could have been. So having learned from others also drove this transparency, this north star of -- the mission is to make sure that our customers can take action and to give them as much information as possible so they can take action.

And we've done that, and I think just customers generally have been very complementary of our response. But of course, there's work that continues because we and our customers, I think, have done most of what needed to be done immediately, but we want to make sure we continue to work on code integrity, continue to test our code, leverage AI tools to try and penetration testing on our code. We have entirely rebuilt new product development environment. We are also leveraging this to bring some innovation to the industry. We've done this partnership with CrowdStrike to make their EDR available on BIG-IPs, which give us an extra layer of observability and kind of belt and braces for our customers.

So over time, there are good things that will come out of that. But the -- we're not letting go of the energy that exists in our organization to take this game to a whole new level.

Yes. And I think you said it best. In times stress, I think it can make company stronger. And I think you said there's a lot of positives that come out of a situation like this. And it feels like you guys are solely focused on that. And then I guess, Cooper, from your perspective, as a CFO, how do you -- because you weren't really seeing much of an impact. How did you kind of think about handicapping that from a full year guidance perspective.

Yes. So I mean it was a bit of a challenge just given the timing. I mean the good news was we had a very -- because the timing of the public announcement was after our fiscal year-end, we had kind of a pristine view as to what the underlying health of the business was as we exited the year, and it was -- it's very strong. We're seeing good momentum across all dimensions of the business. The downside is that with the public announcement coming out in mid-October, we had 8 business days before we're guiding.

And so we're not -- we didn't really have any new insights coming out of our pipeline in such a short period of time. And so what we did is we spent some time kind of profiling our overall revenue base and looking at which areas of the business potentially could be more exposed to some of that near-term friction that we talked about in terms of customers going through their operational activities for remediation and that could put some projects on pause, additional approvals that may be required.

But really kind of looking at what part of our revenue base might be exposed to that friction. So if you think about our services business, our SaaS business, our renewal license business. That business is all either already been contracted or it's running in customers' environments and it's just a renewal motion. It's more of a contract motion. And so that part of our business is not really exposed to any short-term friction and where we potentially would see more impact in the near term would be on new projects.

And so once we're able to kind of size that piece of our revenue base, we recognize that's a relatively small piece of the overall revenue mix. And then we just kind of layered some judgment as to what the kind of range of outcomes you could see in the near term. And then we balance that against conversations we're having with our sales leaders. So we may not have a lot of run time with the pipeline, but we are having a lot of conversations with customers. And so we took that feedback from our sales force, and that's kind of how we bracketed the range.

And -- but the ultimate position that we came to as we headed into earnings -- our earnings announcement was that the disruption should largely be short term in nature. We think it's more operational friction as opposed to customers looking to move on to alternatives and that our demand would stabilize second half of the year, and we think the long-term impact should be relatively benign.

Yes. I mean I think history has shown that for others, that's largely been the case, especially with swift action and transparency. Question for both of you sort of taking that piece aside, when you think about the '26 outlook, and if we're sitting here a year from now and we reflect back, what gives you optimism about this year? And you've alluded to some, Francois in terms of some of the steps on AI and multi-cloud, but what are some of the things that we should think about that could push you guys in a positive direction on this guidance framework?

Well, I can start on the -- for me, there's 2 trends that F5 can capitalize on that are not yet fully understood. But the first one is hybrid multi-cloud. It is hybrid multi-cloud is driven by a number of factors that are -- really fundamentally they're secular. When I talked about cost optimization, governance, regulation, geopatriation, and the gravity of data in AI. All these things are causing customers to adopt these hybrid multi-cloud architectures. And that complexity doesn't go away.

And we essentially have built the only platform that can deal with that complexity secure and deliver these apps across all environments, but create a single experience across all these environments, which reduces complexity for customers. That has me excited because as we continue to evolve this platform and engage customers with it. I think we're going to get more and more sticky, more and more embedded into their hybrid and multi-cloud environments.

So that's trend number one. Trend #2, of course, is AI. And it's really -- what we're starting to see data delivery as an example, as a use case, the need to use F5 in new and different environments, whether it's our hardware in data delivery or it's our software, in AI security or it's new software on DPUs in AI factory load balancing. But these use cases in AI, I think, are more and more are going to come and more enterprises are going to adopt them and it's going to create a net new opportunity for us.

Yes. So it sounds like it's -- the foundation has been laid for this journey. And it feels like a lot of what you saw last year just continuing that evolution. I mean, Cooper, anything to add from your point of view.

Yes. I mean the other thing that we've talked about is with the software business. There's some near-term math headwinds that we referenced for the current fiscal year just from that kind of flattish software growth that we saw in FY '23 that's part of the cohort that's up for renewal this year. But as I look ahead beyond '26, we think there's a real opportunity to accelerate our software growth. Some of it will be the math tailwind that comes in the following year. But the other thing that has me excited is where we're at with the momentum on our distributed cloud services business.

So if you look at the headline ARR, it was relatively flat this year, but that was some of the transition we've been doing with some of these legacy offerings, which were largely through those transitions, but the underlying growth we're seeing from distributed cloud is very strong, and it's going to be the majority of that -- or more than half of that ARR when we exit this year, and that's going to be a real foundation for growth contribution from that part of the business.

But then also, as Francois talked about just the complexity of hybrid multi-cloud is driving customers to adopt across the portfolio, and we think that, that can be an accelerant to that opportunity as well.

As I reflect on the DNA of F5, I wonder, you guys are such an interesting part of the network topology. And I think about your security business, in particular, I mean are there any aspirations to go even deeper into the security stack? It could seem very logical for you guys to start thinking about SASE or data security, data privacy, kind of like DSPM. Any thoughts on kind of like how far you could push the security envelope of the portfolio?

It's a great question. Look, we -- before I answer that specific, I want to say one of the trends that also has us exciting is this convergence of delivery and security. And I think AI will accelerate that convergence. So we're not just a security player or just a traffic management player. We are both. And increasingly, in these hybrid multi-cloud environments, customers need both and our ability to put both in a single platform is a huge differentiator relative to players that are security only, players that are delivery only.

So convergence of delivery and security is really our play. But in that, the number of security services that apps and APIs need is only increasing. And so our focus is not necessarily to go into other areas of security meaning leave application and API security, but it's to continuously add the security capabilities to be the player you come to that has all of the security capabilities for apps and APIs, AI security is a good example of that. So we're going to continue to do that. We're going to continue to build a portfolio of delivery and security services in a single platform that does all apps and API security.

Beyond that, going outside of security for apps and APIs, it's not a priority today, but there are adjacencies that we could consider, so data security is a good example of that. And I think AI security may lead us into that direction. And so I would say if you look at it today, it's continuing to build and grow the platform with more and more security services that create cross-sell and upsell of our portfolio and create the expansions that Cooper talked about on our multiyear subscription agreements.

It's because we're adding security services and more customers are embracing them because there's no friction in embracing a new security service from a platform that you already have. And as we do that, we're adding new -- so we've added data loss protection or data security for data in transit recently. That was from a small acquisition. But that's a new service that we're having customers adopt AI security, AI guardrails, a new service that we're going to have customers adopt. So that's more our playbook, build the platform, add security modules. And as we do that, we're going into adjacent TAMs in security.

Yes. It just -- it strikes me that you guys are in an increasingly complex world, you can take a lot of the complexity out of the equation for folks on many aspects of their network topology. Maybe just -- I mean, that was a great conversation. We have 30 seconds left. Maybe put a bow on the conversation and in summary, it's just sort of like if you were to leave us with the most important point about F5 as we think about the future, we talked about a lot of exciting things today. I mean how would you sort of like wrap the conversation up?

I would say the most exciting thing or important thing about F5 is we're building the platform, the strategic platform that can secure and deliver every app and API anywhere. And we're the only ones that have the technology assets to be able to do that. And large enterprise customers around the world need that kind of platform to reduce their complexity. And I think hybrid multi-cloud and AI will accelerate the adoption of this platform.

Yes. So exciting time to be in technology. And especially if you're -- yes. Yes.

An application.

Exactly, exactly. Well, we're out of time, unfortunately, we can use a lot more time than that. But from all of us at RBC, thank you, both. Thank you for coming. Really appreciate your time and attendance. It was great.

Thank you for having us.

Thank you.

Thanks, guys.

Good afternoon, and welcome to the F5 Fourth Quarter Fiscal 2025 Financial Results Conference Call. [Operator Instructions] 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 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 2025 financial results. Francois Locoh-Donou, F5's President and CEO; and Cooper Werner, 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 January 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 (877) 660-6853 or (201) 612-7415 and use meeting ID# 13756255. The telephonic replay will be available through midnight Pacific Time, October 28, 2025. For additional information or follow-up questions, please reach out to me directly at [email protected].

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 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 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. I'll now turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. We delivered exceptional fiscal year 2025 results, exceeding $3 billion in revenue and $1 billion in operating profit for the first time. Revenue grew 10%, while earnings per share grew 18%. Our growth was driven by data center reinvestment, hybrid cloud adoption and enterprise AI infrastructure demand.

Our product refresh cycle, competitive takeouts and the maturation of our software model and go-to-market motions also contributed to growth. In FY '25, we maintained our strong profitability delivering gross margins of 83.6%, up 80 basis points over FY '24; an operating margin of 35.2%, up 160 basis points over FY '24. This performance resulted in record free cash flow of $906 million, up 19% compared to FY '24, underscoring the strength of our financial model and execution.

Our FY '25 results demonstrate the power of our platform and our strategic role in the marketplace. They also strengthen our confidence in our vision and road map for the future. Our immediate focus, however, has been on our incident response, and I will speak to our priorities and offer an update on where we are now. Upon identifying the threat on August 9, our team immediately activated our incident response process. Our priorities were clear: first, contain the threat actor, initiate a thorough investigation and take immediate and urgent action to strengthen F5 security posture.

While the investigation will continue and the work of bolstering our security posture will expand, our initial steps have been successful. Second, we prioritized delivering reliable software releases to address all undisclosed high vulnerabilities in BIG-IP code as quickly as possible. Through the exceptional efforts of our engineering and support teams, we achieved this enabling thousands of customers to promptly deploy critical updates upon disclosure.

Our customers are moving quickly to update their BIG-IP environment and a significant number of our largest customers have completed their updates with minimal disruption. As an example, a North American technology provider completed updates to 814 devices in a 6-hour window in the first weekend. Customers have expressed appreciation for our transparency, the thoroughness of the information we provided and the clarity in the steps they need to take to improve the security of their environments.

Our third priority is raising the bar on security across all aspects of our business. We are acutely aware of the increasing sophistication of attackers and the fact that the threat surface is expanding rapidly. Each year, over the last several years, we have aggressively increased our investment in security and we are making further significant investment this year and beyond.

To further this work, Michael Montoya, a recognized cybersecurity expert and former member of our Board, has joined F5 as Chief Technology Operations Officer. Michael brings deep operational expertise and will drive the execution of a robust road map to further enhance security across our internal processes, environments and products. Our goal across all these actions is to better protect our customers, and we believe F5 will be a stronger partner to customers because of it.

We know customers will judge us by how we respond to this incident. Throughout this process, we have been committed to transparent customer communication at every step, reflecting lessons learned from how others have navigated similar challenges. We acknowledge that we may see some near-term impact to our business. We are fully focused on mitigating that impact, while doubling down on the value we deliver to our customers.

Stepping back, it is evident that advanced nation-state threat actors are targeting technology companies and most recently, perimeter security companies. We are committed to learning from this incident, sharing our insights with customers and peers and driving collaborative innovation to collectively strengthen the protection of critical infrastructure across the industry.

Now I will turn the call over to Cooper, who will walk you through our Q4 results and our outlook. Following his remarks, I will return to discuss the broader business trends and some key customer highlights. Cooper?

Thank you, Francois, and hello, everyone. I will review our Q4 results and some selected full fiscal '25 results before I elaborate on our outlook for FY '26 and Q1. We delivered a strong Q4, growing revenue 8% to $810 million with a mix of 49% global services revenue and 51% product revenue. Global Services revenue of $396 million grew 2% year-over-year, while product revenue totaled $414 million, increasing 16% year-over-year.

Systems revenue totaled $186 million, up 42% over Q4 of FY '24, driven by tech refresh and data center modernization, direct and indirect AI use cases as well as competitive takeouts. Our software revenue of $229 million was up slightly against an exceptionally strong Q4 of FY '24. Perpetual license software totaled $30 million, up 25% year-over-year. Subscription-based software declined 3% year-over-year to $198 million, reflecting the transition of our legacy SaaS and managed service revenue offerings and to a lesser extent, customers' preference for hardware-based solutions for certain use cases, a trend which emerged over the course of FY '25.

Revenue from recurring sources contributed 72% of our Q4 revenue. Our recurring revenue consists of our subscription-based revenue and the maintenance portion of our global services revenue. Shifting to revenue distribution by region. Our teams drove growth across all theaters. Revenue from the Americas grew 7% year-over-year, representing 57% of total revenue. EMEA delivered 7% growth, representing 26% of revenue, and APAC grew 19% representing 17% of revenue.

Looking at our major verticals, enterprise customers represented 73% of Q4's product bookings. Government customers represented 19% of product bookings, including 6% from U.S. Federal. Finally, service providers represented 8% of Q4 product bookings. Our continued financial discipline contributed to our strong Q4 operating results. GAAP gross margin was 82.2%. Non-GAAP gross margin was 84.3%, an increase of 138 basis points from Q4 FY '24. Our GAAP operating expenses were $461 million.

Our non-GAAP operating expenses were $384 million. Our GAAP operating margin was 25.4%. Our non-GAAP operating margin was 37.0%, an improvement of 255 basis points year-over-year. Our GAAP effective tax rate for the quarter was 11.4%. Our non-GAAP effective tax rate was 16.9%. Our GAAP net income for the quarter was $190 million or $3.26 per share. Our non-GAAP net income was $257 million or $4.39 per share, reflecting 20% EPS growth from the year ago period.

I will now turn to cash flow and balance sheet metrics, all of which were very strong. We generated $208 million in cash flow from operations in Q4. CapEx was $16 million. DSO for the quarter was 46 days. Cash and investments totaled approximately $1.36 billion at quarter end. Deferred revenue was $2.0 billion, up 11% from the year ago period. We generated $906 million in free cash flow for all of FY '25, up 19% from FY '24, resulting in a free cash flow margin of 29%, highlighting the strength of our business fundamentals.

In Q4, we repurchased $125 million worth of F5 shares at an average price of $297 per share. For the year, we repurchased shares equivalent to 55% of our annual free cash flow. We ended the quarter with approximately 6,580 employees.

Francois recapped our high-level FY '25 results at the start of the call, I will elaborate on our annual software and security revenue results. Software grew 9% year-over-year, totaling $803 million with software subscriptions representing 85% of FY '25 software revenue. Our software revenue is comprised of perpetual software licenses, term-based subscriptions and SaaS and managed services. Perpetual software licenses contributed $120 million in software revenue, up 7% year-over-year.

Term-based subscriptions contributed $508 million to our software revenue, up 18% year-over-year, driven by continued strong renewals and expansions. SaaS and Managed Services contributed $176 million in revenue, down 9% year-over-year, reflecting growth from F5 distributed cloud services, offset by the transition of our legacy offerings. Total annualized recurring revenue for our SaaS and managed services offerings ended the year at $185 million, up slightly from FY '24, including 21% growth in ARR for our core SaaS and managed services solutions.

ARR from legacy offerings declined to $15 million as we wound down legacy SaaS and managed service offerings and transition customers to F5 distributed cloud services. We expect to complete any remaining transitions in the first half of FY '26. Several years ago, we began breaking out our security-related revenue annually. This year, our total security revenue, which includes stand-alone security, attached security and maintenance revenue related to security, grew 6% to approximately $1.2 billion or 39% of total revenue.

Stand-alone security revenue totaled $463 million, representing 31% of product revenue. Let me now address our outlook beginning with FY '26. Unless otherwise noted, our guidance references non-GAAP metrics. We delivered an exceptional FY '25, exceeding expectations with stronger-than-expected systems demand and continued healthy expansion in our software subscription business. As we enter FY '26, we see several persistent demand drivers, including hybrid multi-cloud adoption, driving expansion across our platform, continuing strong systems refresh opportunity with more than half of our installed base on legacy systems nearing end of software support.

Growing systems demand beyond tech refresh for data sovereignty and AI readiness use cases, and a return to growth in revenue from our SaaS and managed services with the transition of legacy offerings largely completed in FY '25. These drivers in our current pipeline support mid-single-digit revenue growth in FY '26 against our exceptional 10% growth in FY '25. However, we also anticipate some near-term disruption to sales cycles as customers focus on assessing and remediating their environments.

Taking this into account, we are guiding FY '26 revenue growth in the range of 0% to 4% with any demand impacts expected to be more pronounced in the first half, before normalizing in the second half.

Moving to our operating model. We recognize the revenue guide may lead to a modest impact to our operating margin near term. We are committed to driving continued operating margin leverage and believe any demand impact is likely to be short term and therefore, any effect on our operating model would also be temporary. With that context, we estimate FY '26 gross margin in a range of 83% to 83.5%. We estimate FY '26 non-GAAP operating margin to be in the range of 33.5% to 34.5%, with operating margins lowest in our fiscal Q2 due to payroll tax resets in January and costs associated with our large customer event in March.

We expect our FY '26 non-GAAP effective tax rate will be in the range of 21% to 22%, and we expect FY '26 EPS in a range of $14.50 to $15.50. Finally, we intend to continue to use at least 50% of our free cash flow towards share repurchases in FY '26.

Turning to our Q1 outlook. We expect Q1 revenue in the range of $730 million to $780 million. This is a wider range than we would typically guide, reflecting the potential for some near-term disruption to sales cycles. While we are not guiding revenue mix, we expect Q1 software to be down year-over-year given the strong growth in the year ago period. We expect non-GAAP gross margin in the range of 82.5% to 83.5%. We estimate Q1 non-GAAP operating expenses of $360 million to $376 million. We expect Q1 share-based compensation expense of approximately $61 million to $63 million. We anticipate Q1 non-GAAP EPS in a range of $3.35 to $3.85 per share. I will now pass the call back to Francois.

Thank you, Cooper. Our immediate priority remains supporting customers as they evaluate and safeguard their environments. As we help our customers navigate this period, market dynamics are moving in a direction where F5 solutions are more essential than ever. The accelerated adoption of hybrid multi-cloud architectures and AI-driven infrastructure is driving demand for advanced application delivery and security solutions, areas where F5 is uniquely positioned to address our customers' most complex challenges.

The industry has platforms for end points, network access and for cloud workloads, but the F5 application delivery and security platform is the first to unify high-performance traffic management with advanced application and API security across hybrid and multi-cloud environments at scale. Unlike fragmented point solutions, the ADSP is purpose-built to simplify hybrid multi-cloud complexity. It integrates security, scalability and operational efficiency while enabling valuable [ XOps ] capabilities like policy management, analytics and automation. By the end of Q4, nearly 900 customers were leveraging XOps capabilities, up from just 20 in 2024.

Innovations like our AI assistant and application study tool have been instrumental in driving this growth, which underscores the power and potential of the ADSP. Over the last several years, we also have been evolving our go-to-market strategy, focusing on landing, adoption, expansion and renewals within our solutions portfolio. This approach has delivered results. 26% of our top 1,000 customers are now using F5 distributed cloud services, up from 17% in 2024.

By delivering integrated solutions and accelerating customer outcomes, F5 is uniquely positioned to lead in a rapidly growing and dynamic market. I will speak to a few customer highlights from Q4 that demonstrate the power and the benefit of our holistic platform approach. An APAC-based bank is driving secure and scalable digital transformation with F5's comprehensive application delivery and security solutions. Leveraging F5 BIG-IP, NGINX and distributed cloud services, the bank is modernizing its critical infrastructure to enable 24/7 Internet banking and mobile application access while meeting strict regulatory requirements for service resilience and disaster recovery.

F5 ensures business continuity and robust security protecting against DDoS attacks and API vulnerabilities. By enabling seamless migration to containerized applications, F5 is positioning the bank for hybrid multi-cloud success. A leading North American investment manager partnered with F5 to modernize its infrastructure and hence resilience and ensure uninterrupted operations. By migrating from legacy iSeries platforms to BIG-IP Next R-Series ahead of end of software support dates, the customer avoided compliance risks and ensured seamless operational continuity.

The customer also deployed F5 for secondary DNS services to reduce reliance on a single provider and deliver critical redundancy to prevent outages. F5's lightweight platforms and cloud solutions helped the customer optimize performance within existing budgets. Finally, a major energy and gas company partnered with F5 to modernize its critical infrastructure and drive its cloud migration while ensuring seamless security across hybrid and multi-cloud environments.

F5's BIG-IP and distributed cloud services extend application delivery, security and identity management into hybrid multi-cloud environments, ensuring seamless operations and operational continuity. The customer is also leveraging F5's advanced WAF to strengthen the protection of revenue-generating B2B applications and business critical platforms.

With F5, the customer simplified operations, achieved cost savings and accelerated the modernization efforts. These examples highlight the strong impact F5's ADSP approach is having for our customers. While we continue to work towards realizing the platform's full potential, we are confident that our commitment to innovation will drive even more value and outcomes for our customers.

Before closing, I will highlight the traction we are building in AI use cases. We are seeing clear evidence that AI-related demand is contributing to our growth. AI is prompting a wave of data center refreshes as enterprises prepare for increased network capacity and services to support AI workloads, agentic AI and inferencing demands. Beyond benefiting from broader AI-driven trends, F5 is directly powering key AI use cases.

In FY '25, we secured AI use case wins with more than 30 customers who are leveraging F5 to enable seamless, scalable and secure AI workflows. These wins represent net new insertion points and growth opportunities built on decades of expertise. Today, we are actively supporting 3 critical AI use cases. Number one, AI data delivery. F5 secures and accelerates high-throughput data ingestion for AI training and inferencing and forcing policies and protecting sensitive data while eliminating bottlenecks.

Number two, AI runtime security, F5 safeguards AI applications, APIs and models from abuse, data leakage and attacks like prompt injection, ensuring visibility and control. And number three, AI factory load balancing, F5 optimizes traffic and GPU utilization in AI factories to increase token throughput, reduce time to first token and lower cost per token.

In Q4, we secured several new AI wins across these use cases. In an AI data delivery use case, an asset manager in EMEA partnered with F5 to overcome challenges in managing their AI workloads and ensuring reliable data performance. Their existing server could not handle high levels of demand, causing outages that disrupted operations. F5 provided a customized solution with advanced technology to improve systems reliability, efficiently manage data traffic and seamlessly work with their existing infrastructure.

A government ministry in EMEA chose F5 to secure and scale AI security runtime operations for its AI-driven weather prediction platform, expanding on a prior AI data delivery project. The ministry required a comprehensive solution to ensure real-time access to AI-driven data with robust security for sensitive operations. F5 delivered a comprehensive solution suite, including [ AWAF ] for application security, SSLO for traffic infection, APM for access control and LTM for reliable data delivery. With F5, the ministry transitioned from manual inefficient forecasting to a secure, real-time AI-powered platform, improving performance, accuracy and operational efficiency.

In an AI factory load balancing use case, a North American service provider specializing in providing high-performance computing solutions for AI and machine learning workloads needed a high-performance solution to manage and scale AI workloads. They required enhanced scalability, reliability and accessibility for GPU-driven workloads as well as a proxy for container functions to optimize AI data pipeline performance. FI provided an integrated solution featuring container ingress services with BIG-IP virtual editions delivering a critical control layer for performance, scalability and reliability across AI data pipelines.

F5's ease of installation and ability to address the customer's specific needs set it apart from competing open source alternatives. In Q4, we strengthened our AI runtime security capabilities with the acquisition of CalypsoAI. Their cutting-edge technology enhances our offerings with real-time threat defense and red teaming at scale, addressing critical needs for enterprises deploying generative and agentic AI. We are integrating these capabilities into our ADS-B, creating the most comprehensive solution for securing AI inference.

In fact, we launched 2 new offerings in Q4, leveraging Calypso's technology. F5 AI Guardrails establishes and monitors how AI models and agents interact with users and data, while defending against attackers. And F5 AI Redteam identify threats and informs exactly where and how urgently guardrails should be implemented.

Wasting no time, our team secured wins for these offerings with a top tier investment bank and a global AI compute platform leader. Collectively, our Q4 successes underscore F5's growing leadership in the hybrid multi-cloud landscape and the real value our platform approach delivers to customers, empowering them to simplify operations and hence security and accelerate innovation across their environments.

I want to express my deepest gratitude to our customers and partners. Your urgency, collaboration and trust through every step of our incident response have been invaluable. We are truly honored to work alongside you and remain steadfast in our commitment to earn your confidence every single day. I also want to extend my heartfelt thanks to all [ F5ers ] who came together with incredible focus and dedication to drive a strong and effective response.

Looking ahead, we are resolute in our commitment to emerge stronger from this experience and to working across the security community to build a better and safer digital world. In closing, I am deeply honored by the Board's appointment as Chair effective with Al Higginson's retirement in March 2026. As a Director for nearly 30 years and chair for 20, our leadership has been essential to F5's growth and transformation.

He has provided outstanding stewardship and [indiscernible] at the top that has shaped the F5 we are today. I am humbled by the Board's trust and confidence in me to help lead F5 through its next chapter. I look forward to working alongside this talented management team and the Board to continue F5's trajectory of creating long-term value for shareholders. Operator, Please open the call to questions.

[Operator Instructions] Thank you. Our first question comes from the line of Meta Marshall with Morgan Stanley.

Sorry, there was music for a second. Just a question in terms of what form of kind of conservatism have you put into the estimates. I guess I'm just trying to get a sense of are you accommodating customers through discounting? Is this you're pushing off purchase -- maybe people are pushing off purchasing decisions while they're handling kind of servicing or upgrading incidents? Or are you having to give other incentives to kind of upgrade boxes? Just trying to get a sense of kind of what form that kind of customer conservatism is taking? And then maybe just a second question. Just as you think about kind of the underlying growth of the systems business, like any way to contextualize how much of fiscal '25 growth was kind of due to the product upgrade cycle that was happening.

Meta, it's Francois. Let me start with the first part of your question. I think Cooper will take the second question. Let me just start from -- you saw that we delivered a very strong quarter, and in fact, a very strong fiscal 2025. And the momentum in the business has been very, very strong, and that is driven increasingly by the secular trends that we've talked about, specifically hybrid multi-cloud and AI, and I can come back to that a little bit later.

Based on these trends, we felt the trajectory of the business going into 2026 was more in the mid-single-digit growth. But we said we are guiding to 0% to 4% growth for 2026 based on what we see as potential near-term impact related to the security incident. And when I say near-term impact, we think we would see probably the majority of the impact in the first half of the year with trends kind of normalizing in the second half of the year. So let's double click on this near-term impact for your question.

What we have in there, Meta, is really 3 categories of things that could create near-term disruption. The first is that we have our own resources, field resources and sales resources over the last couple of weeks, and I think that will go on for a few more weeks. I've really been focused on attending customers, helping them upgrade their environment, remediate issues, answer any questions, et cetera. And inevitably, that takes time away from a normal sales cycle. And the same is true for customers for putting a lot of resources on upgrading their big IPs, ensuring their environment is in the right place, and that takes time away from considering the next project. So that is a short-term [indiscernible] option around allocation of resources, both at F5 and with our customers.

There's a second potential disruption that we have considered in our guidance, which is that given the visibility that this security incident has had, it would be natural that install of our customers at an executive level, we may see some worries of approvals or delays of deals or additional approval as customers across a complex organization, make sure that they want to be reassured that their projects should move forward and they have no further interrogation around that. That's the second consideration.

And then the third one is potentially for some of our customers, there may be some projects that they were going to move forward with, and they end up deciding not to do that. And we have considered that as a broad potential impact. Now I want to be clear, everything I've just talked about, as you know, Meta, more than 70% of our revenues are recurring. Everything I've just talked about was the impact that would be mostly with new projects or new footprint acquisition.

And so far, it is very early days because this was disclosed only 2 weeks ago. We haven't seen any of the impacts that I'm talking about, but we are very prudent about this because we are very, very early after the exposure and the interaction with customers. Cooper?

Thanks. Yes. And then in terms of the systems business, we're seeing strength in both the product [indiscernible] and capacity expansion. The growth has been pretty balanced actually across both. Roughly 2/3 of our systems business in FY '25 was tech refresh with about 1/3 coming from what we call data center increasing capacity, data sovereignty use cases.

A lot of it is really driven by AI that can be [indiscernible] indirect. So it's just been a trend that we continue to see over the course of the year where we're seeing growth from both the refresh motion as well as some of these newer use cases. And then on the refresh motion, I would also note that I think we're still relatively early days on that refresh cycle with more than half of our installed base currently so on the legacy product families that can be going in a software support [indiscernible]

Our next question comes from the line of George Notter with Wolfe Research. .

Thanks a lot, just continuing on that line of discussion. I guess I'm curious about how you actually size and the potential impact from the security breach. I would imagine it's probably a complex exercise. But I was curious if you could just kind of walk us through like the logic here. And then maybe related to that, can you give us a sense for how many customers were affected where there was configuration information taken or are there specific customer issues that you can point to? .

Yes. Sure, George. This is Cooper. I'll take the first part, and then Francois can drill the second question. So Francois Instructions] kind of touched out a little bit at a high level when he kind of reference the percentage of our business that is recurring in nature. But as we went through this process, we really took a fairly granular approach. It's kind of profiling our revenue base across all the different revenue streams and kind of taking a look at which of these revenue streams could be more impacted and which ones would be more resilient in the near term.

So if you think about our revenue base, a lot of the revenue that we recognize come straight off the balance sheet. So -- our service revenue, that maintenance revenue is mostly coming off of deferred revenue. We've got our -- the delivery example. Our SaaS revenue is coming out of beginning ARR. And then we've got a lot of our software businesses coming through in the form of subscription results. So those are revenue streams that are highly resilient, and we wouldn't expect to have much of a near-term impact.

And then if you look at kind of newer use cases, whether that's competitive takeout or new software projects, that's where potentially could be more of a near-term impact. And so we kind of looked at the [indiscernible] our revenue base. And this kind of made a judgment as to what the potential impact could be in the near term as customers are kind of going through some of their operational activities around the incidents.

And then we also have [indiscernible] just looking at other peers, historically, they have gone through similar incidents in what revenue impacts they saw. And then, of course, we've spent a lot of time with our sales teams just kind of assessing at the outset what your view was is what impact, if any, they might be. And then continuing those conversations as they've engaged with their customers in the field. And I think we're very encouraged by some of the early feedback we've gotten from those conversations. There have been very healthy discussions with customers and helping them kind of address some of [ really concerted ] and I think we're feeling pretty good about our relationship and how those interactions are going for customers.

And I'll take the second part of your question, George, on customer impact. First of all, I do want to take this opportunity to say that, of course, we are disappointed that this happened and very aware as a team and as a company of the burden that this has placed in our customers who have had to work long hours to upgrade their BIG-IP and secure their environment and we're continuing to work with all of our customers in ensuring that they are in the place they want to be.

With that said, the customers who were impacted, so we shared that there was no evidence of access to F5 distributed cloud services, environment or NGINX environmental. It was essentially big customers that were impacted there, there were really 2 categories of impact. All of our big IP customers, we recommended strongly to all of them that they upgrade their Big-IP through the latest releases that we work very hard to make available on the day of the closure.

And we were very impressed, frankly, with the speed with which our customers have normalized resources to be able to make these upgrades and put them in production fairly rapidly. So the impact really on them was having [indiscernible] resources to do that work shortly after our disclosure.

And we're actually pleased that a lot of customers are to that work. People continue, but we're very pleased to see the speed with which customers have upgraded their V. The second category of impact was related to data exfiltration that impacted a small percentage of our customers or -- and we will continue to go through the sort of e-discovery [ process ] around what specific data with the customer -- but from the first body of work that we have done on that, we have already identified the customers that were reflected, and we have sent them their information their data package for the date that mine infiltrated. The most common to back from customers so far has been that that data is not sensitive and they're not concerned about it.

There was no impact to our CRM or our support system.

Our next question comes from the line of Michael Ng with Goldman Sachs.

I just have 2. First, just on OpEx. It seems like the implied OpEx growth for fiscal '26 is about 4% at the midpoint. Just wondering, if you're seeing any additional costs as a result of the data breach, are there investments in systems internally or costs related to [indiscernible] EDR subscriptions to affect the customers. And then second, certainly Encouraging to hear that it was just Big-IP that was impacted, not NGINX or DCS.

Could you just tell us what percentage of the revenue comes from BIG-IP?

Yes. So I'll start with the latter. We don't break out our product by revenue line. We're a single-segment company, but it's a big idea is the highest revenue product, of course but we don't actually break out what the contribution is. And then in terms of investments in security. So yes, we actually have been investing aggressively in cybersecurity over the last several years has more than doubled our investment in cybersecurity just in the last 3 years alone. And we had already accounted for continued investment in our planning for this year, even before we learn the business. And of course, we've learned a lot in the last several weeks, and so there's some additional investments incorporated into our planning. But that was among the highest priority areas of investment in our plan going ...

And any costs related to the [indiscernible] EDR subscription?

Yes. So there are a number of [ costs ] related to the incident remediation and the offering that you're referencing as part of that, those are either going to be accounted for in our -- with our cyber insurance or they would be remediation costs that are accounted for separately as a onetime expense.

Our next question comes from the line of Tal Liani with Bank of America.

By the way, the sound quality is bad on your end, hard to understand you. I have 2 sets of questions on software revenues and system revenues. On systems, if I look at the dollar revenue for this year, and you started the year with [ $160 million ], but then it accelerated to [ $180 million ] a quarter, give or take, $181 million, $186 million but $180 million a quarter. .

Do you think you can further grow from this level? Or is the growth rate going to decline substantially because this level reflects kind of the level of the refresh going forward, kind of steady-state refresh going forward? Or what are maybe different drivers. I'm just trying to understand if they increase from $130 million to $140 million last year to about $180 million this year, if there is further growth from this level or we stabilize at this level? And on software, I have the same question almost. If I look at the quarterly level of revenues this year and I average it out, there was a step-up in this year versus last year, but we stayed at the level of about $210 million.

I mean, some quarters are below, some quarters are above, but there is kind of a straight line. And this is on the heels of refresh of renewals. So the question is what drives software to grow from here, if that's the growth we're seeing with renewals and only -- we spoke about in previous quarters and all the accounting treatment of renewals. So bottom line is what drives software and system growth from here versus the temporary items that are impacting it right now?

Okay. I will start with hardware. So I think you're right, we saw a significant growth [indiscernible], of course, this year. I think that, that -- you referenced the -- hardware revenues were at down in FY '24. And then that really is the kind of the starting point. That was a low watermark ], and we had talked about customers were in a period of sweating assets where they have not been investing in the data center and a lot of that was tied to the macro at the time in customer budgets. And what we've been seeing is a bit of a catch-up period over the last year with some of that deferred investment, and that's is bringing a lot of the growth just in FY '25. But we are still early in the refresh cycle.

So we think there is still ability to grow that business. And then as I said on an earlier question, we're also seeing kind of a new vector of growth, and this is kind of more of an emerging growth category, which is in some of the data center capacity expansion that we've been seeing. And we think a lot of that is tied to AI readiness.

And so that one, it's still relatively early, but that's kind of a newer growth trend that we don't think it's cyclical that it could potentially have growth for years to come. And so from the refresh perspective, we believe that this year should be a strong year refresh [indiscernible] we in the cycle. And then on the new -- the performance in decenter capacity expansion that could continue to have growth as well. And having said all of that, this is all kind of looking back at our view that the business was pointing to mid-single-digit growth for this year. So there's still the near-term impact that you could see related to the security incidents. So we'll see how that plays out.

And Tal, I'll take the second part of your question. So let me just be clear. We believe that our software is going to continue to grow at a healthy clip. And that's driven in the trends -- I make that statement on the trends that we're seeing in the business. So if you look in this year, the multiyear software agreements that we have that are active just this year were 20% year-on-year. And we expect that to continue to grow. Our erosion of the flexible consumption agreements that allow customers to consume over multiple years and consume over multiple parts of our portfolios are growing because customers are embracing these hybrid multi-cloud architectures more and more and need multiple form factors, including software and Software as a Service, a manifestation of that is.

So I'll give you kind of 2 manifestations of that. One is in our SaaS adoption. We -- the number of SaaS customers this year who almost 6%, I think they grew 57%. We have over 1,300 distributed cloud customers today, and we have a little more than 800 a year ago. so that adoption and that adoption is growing, including in our largest customers. So our top 1,000 customers, we're seeing that now over 26% of them are consuming F5 distributed cloud.

As you know, in the SaaS part of the business, we have been going through some transitions. We are largely through these transitions, and we expect the asset managed services line to contribute to growth in software going forward. The second dynamic is that customers are seeing the benefits of our entire portfolio, and we're seeing that in the number of customers that are consuming multiple product families IND. If you go back 4 years ago, we have 30% of F5 customers that were consuming multiple product families from [indiscernible] amongst our top 1000 customers. That's now up to 70%. And we're seeing the ADS-B, our application delivery and security platform, the capabilities in that platform, including software capabilities, especially in our xOps capabilities, we're seeing rapidly and growing adoption around that.

And so when you combine all of this, you combine what we expect to see with the growth of our flexible consumption agreement that has continued to happen what we expect to see in SaaS edoption, which we have already seen this year. And the approach we've taken with application delivery and security platform and the adoption we're seeing of that. All of these are catalysts or continued growth of the software business going forward.

But Francois, if that's the case. And I know you reduced the guidance a little bit because of the breach -- because of the cybersecurity issue. But even before that, you only guided growth to 5%. So if that's the case, why don't we see a faster growth rate? .

Right. So Tal, I mean we've talked about this -- we've tried to talk about this on several calls. There is a timing nature because of these 3-year cycles on the renewals. And so the subscription business that we sold in FY '23 had a lower growth rate because new projects were under pressure 3 years ago. And so that's what's coming up for renewal in FY '26. And so the base with which we're starting doesn't have as much growth in FY '26 and that's what was behind what we said was a good single-digit growth opportunity when we talked in July, That same base has [indiscernible] in FY '27, and we don't have the headwind related to our SAS managed service business because we're through the transition. So we tried to lay out that there are going to be some ups and downs in the annual growth rates to the timing of those renewal motions. But we've given that look ahead beyond the current year into '27 to give that visibility that we expect a reacceleration of software growth rate. The underlying trends are very healthy.

Francois laid out several metrics to point to the underlying health of the software business. And we saw that last year, looking at our term license business that was [indiscernible] We have the headwinds related to SaaS where our SaaS [indiscernible] service was down 9%. But again, that's going to be behind us. And so it points to a very healthy software view beyond FY '26.

Got it. Thank you so much for your candor and openness. I know these questions are tough, but thank you for taking the time to answer them in such detail .

Our next question comes from the line of Tim Long with Barclays.

Two quick ones, if I could. I just wanted to follow up, Francois on distributed Cloud Services. Part of my question was about multi-products. I think you answered that there. But could you talk about some of the other economics that you see as you transition to DCS, things like [ deal ] sizes, win rates, maybe when we get to it dollar retention or add-ons on top of that, number one.

And then number two, if you could just quickly touch on a few of the verticals, at least on a bookings basis, we're a little out of band, enterprise was really strong year-over-year and service provider was pretty weak, all for pretty weak numbers. So anything that's driving kind of a little bit of out-of-band performance on those 2 verticals, that would be great.

Please hold, we are experiencing some technical duties

Okay. Great. I was starting with your question, Tim, on distributed cloud. I'm saying this is a land-and-expand motion. So typically, the deals will start rather small in the multiple kinds of case and expand [ after that ]. I'll give you a better point on that. We have 1/3 of our distributed cloud customers that have expanded their ARR with us and they've extended -- their expansion has been 90% for those of whom who have extended. So it could be pretty significant growth in a customer after [ we sign ] them. And that will continue to grow as we add more services onto F5 distributed cloud and we're continuing to add services as part of building this application delivery security platform. We're adding more and more of the services that customers have enjoyed on BIG-IP onto F5 distributed cloud.

To the second part of your question on the verticals, the -- generally, what we're seeing is kind of the most important enterprise verticals are all embracing hybrid multi-cloud postures for different reasons. But in the end, it all points to F5. So financial services, for example, in a lot of cases, are keeping their core banking data on-premise, but are also having to build sort of disaster recovery to comply with operational resilience regulations. And so they're leveraging public cloud for that and any time customers using both on-prem environment and public cloud environment, it creates a strong case for F5. The same is true in healthcare.

We're seeing the same in manufacturing, in retail and even in public sector environment. So these verticals embracing hybrid multi-cloud really allow us to [ pull ] our share of wallet into these verticals, and that's what's driving the cross-sale of our portfolio. the service provider space, Tim, that you mentioned, it's true that generally, that segment has been, I would say, rather tepid in part because 5G has not really taken off in the way that we all expected a couple of years ago. And there hasn't been a real growth driver frankly, for service providers, either in ARPU or 5G services adoption. So we have seen stability there, but not significant growth to date.

Our next question comes from the line of Simon Leopold with Raymond James.

A couple of things I wanted to check on. One, hopefully, easy is, what are you seeing in terms of U.S. federal in light of the government shutdown? Is that an aspect that's affecting the outlook for your December quarter? And the other thing I wanted to get a better sense of is you've given us some commentary around the mix of software and hardware for the December quarter. But what's baked in for software versus hardware growth in that full year 0% to 4% guidance?

Let me start with the -- in terms of the U.S. [indiscernible] federal government. We have, in our guidance assumes some level of disruption in that segment of our business, especially in the first quarter with the government shutdown. That clearly is having an impact on projects being delayed or approvals being delayed we -- it is our hope that this normalizes over the course of the year. But certainly, in Q1, we have assumed that the numbers that we would see from the federal sector would not be what we have seen historically in that part of the business because of the government shutdown. .

Yes. Thanks, Simon. We're not guiding mix at this point, just given that we're 12 days since the announcement of the incident, and we've done a lot of work to provide a range on the growth outlook, which, as we said, we've discounted some risk of short-term disruption to demand. We expect the demand to normalize in the second half of the year. And I think as we see demand starting to normalize, we'll look to give an update of what software and hardware growth can look like for the rest of the year.

Just maybe you could clarify because you've got big IP as the appliance system business, but you have virtual additions of BIG-IP. So when you talked about the breach, you said it affected BIG-IP. Does that mean that the breach affects both software and hardware equally? .

Yes, it does.

That's what I wasn't sure about. Appreciate it. .

Our next question comes from the line of Samik Chatterjee with JP Morgan Case. .

Francois, just curious to hear your thoughts in terms of how the market share dynamics change on account of the potential impact that you're outlining for the first half? Because I'm just wondering if sort of we should expect to see some of the spend from your customers if it does get delayed from first half to see some catch-up in the second half, particularly when it comes to potentially the systems part of your business? And I have a quick follow-up after that, sorry.

Yes. So we cannot know [indiscernible] on a 1- or 2-quarter basis, that's enough of a runway to see substantial change in market share. So if I think more on an annual basis and what I expect going forward, my expectation is that we continue to gain share in the app delivery and security market. The reason I say that is relative to other players in the space, we are investing more in our road map. We have been very aggressive in investing in security.

And I think through the competitions with our customers around what we are doing to secure environment, [ be able to trust center ] to allow customers to come and do penetration testing of our code, all of the work that we are doing with partners to continue to look for any vulnerability to secure our code that our customers are going to continue to see that F5 is really the right partner, is 100% committed to maximum security in our products and in their environment.

And that will be in terms of over time, Customers, of course, continuing to partner with F5 and where possible consolidated spend on our application delivery and security platform in their environment. And we have a world-class road map for our customers to continue to deliver functionality in delivery and security. So I think you have to look at it over a period of time. There may be a short-term blip in the first half of our year because of the factors that I described earlier. But in terms of our market share, our market position and relationship with customers, I think, if anything, over time, we will continue to strengthen.

Got it. Got it. And for my follow-up, I was just looking at the disclosure that you had on stand-alone security revenues. I think you said $463 million for this year. Looks like it's been fairly consistent for the last couple of years without material growth, like I have $458 million for fiscal '24, $475 million for the year before. Any sort of more details you can provide in terms of what you're seeing on the standalone security side?

And why hasn't there been more significant growth on that front?

Yes, I'll take that. So our overall security business grew about 6% last year. So I think what you're seeing is this is going back to the trend that we've talked about with customers preferring to consume via the platform and consolidate multiple functions onto a single platform. And so you're seeing less -- maybe less growth coming from stand-alone solutions in more of a preference to consume through our flexible consumption program where they're adding additional modules and attaching more security on to existing footprint. And so that growth is really coming through more in a platform factor. And then other thing to consider also is just there's a little bit of an impact on the stand-alone security from the SaaS transition that we've done with some of the legacy offerings, which, again, that will be kind of behind us as we look ahead .

our next question comes from the line of Amit Daryanani with Evercore ISI.

I've got 2 as well. I guess, Cooper, maybe just to start with you, can you just walk through the operating margin for the year? I think you're implying 34% margins for fiscal '26. But it's also the same, I think, for fiscal Q1. So I'd love to just get a sense on why aren't we seeing leverage in the back half of the year versus the front half. And then if you could just quantify what the OpEx uptick in the March quarter will be for some of the events you talked about, that would be helpful.

Yes. And we talked -- I had in my prepared remarks that the low watermark for operating margins would be Q2. That's typically the case, just seasonality with payroll tax rate [indiscernible] and our large customer event in March. And so you actually would expect to see some leverage in the back half of the year, coming off of the lower operating margins in Q2. And we're not going to guide Q2's operating expense today. But you could look at kind of seasonal trends to get a feel for what that uptick in the operating expense typically is in Q2.

Got it. And then Francois, just on the [ breech ] side and the challenges you're having. Can you -- maybe just help us understand if the source code is compromised, how do you give customers the confidence that there's no [ 0-day ] threat that's kind of hiding in there over time. Just maybe walk through that. And then does this also dampen your ability to implement price increases when it comes to the hardware side, really to reflect what Citrix has been doing to some extent in that space. So I'd love to just understand kind of the 0-day risk and the potential for price increases maybe being a bit more muted there as you go forward.

Thank you. Well, let me start with the code, and then let's come back to price increases as a separate topic. Look, I said earlier that I think customers will continue to choose F5 because we provide best-in-class [ app ] delivery and security capabilities for our customers. Now when you look at the code. I shared earlier some of the things that we are doing to ensure that we remain vigilant about potential vulnerabilities in our code.

So we have engaged partners that are scaling our code and we'll continue to do so to ensure that if there are any vulnerabilities that we remediate them immediately. I shared with you that we are setting up a trust center that will be there to allow our customers to come and do penetration testing with our code. We are going to leverage AI or hunting for penetration as well in our code. We are enhancing our [ bug bounty ] program. So there are a number of things that we are putting in place all the time to ensure we remain hypervigilant about this, and we give customers maximum contract on the security of our code going forward.

And I think in our industry, we really intend to be best in class. In doing this, I think as we have this competition and frankly, as we have shared these plans and these roadmaps with all the things we're going to do with our customers, they have been very pleased with our response and I think are getting a lot of comfort that we are doing all the right things to ensure that the products they get from F5 continue to be safe and free of potential vulnerabilities or 0 days. I was also saying that we have taken this further, as you may have seen in our disclosure that we are working with across trying to implement [ EDR ] capabilities on BIG-IP and that's an extra layer of protection that we are offering customers to have way more obtainability, monitoring into their BIG-IPs, which is something that hasn't been done in the industry, you haven't seen [ perimeter ] devices really enabled with EDR.

And so it's just 1 example of where we are innovating with other industry partners to raise the game on security for our customers. So I think the issue of price increases is a separate issue. As you know, you mentioned one of our competitors earlier. We have taken an approach here that is to have durable relationship with our customers and to really show the value of what we're doing for them over time. We don't intend to change our policy and our approach. We think we're going to be very consistent with that. And frankly, we can be consistent with our approach because with customers recognize all of the investments that we're making, the road map that I just talked about in terms of security, but also the world-class roadmap we have in terms of building delivery and security and having the best delivery and security platform for hybrid multi-cloud environment.

We're the only company today that can serve them in hardware, software and [ SaaS ], and throughout their traditional apps, their modern apps and their AI applications. and we're continuing to make these investments, both organically in our portfolio and inorganically. You probably just saw this quarter we made the acquisition of CalypsoAI. We did that to add capabilities to our platform, specifically tailored for AI applications, securing AI applications in our application delivery and security platform. So customers will continue to see these investments on the side. And I think based on that, we can justify the value that we're getting in the interactions with our customers.

Our next question comes from the line of Ryan Koontz with Needham & Company. .

Most of my questions have been answered, but just a quick clarification. When you talked about the migration of your end-of-life products out there today, kind of where are you now in that migration. How do you think about that going forward? Are you seeing some push out [ giving ] customers any kind of time frame because of the breach to migrate those products going end of life.

Yes. So we have said that we're still pretty early days in the refresh motion just in terms of the percentage of the installed base being well over 50% that's on those 2 platforms. There's -- no, we haven't adjusted the end of software support base. Those have been public for a long time, and we're working with customers to ensure they have an orderly path to make those refreshes [indiscernible]. .

Got it. Helpful. And maybe circling back to your comments on the telecom segment. Obviously, 5G has been disappointing there in terms of kind of the deployment of virtualization. But are you seeing any new activities in the telecom domain around the new 5G core, maybe picking up momentum or anything else to call out on the telecom front here?

Yes, we're -- look, I think what we're seeing is that the 4G to 5G transition continue with some geographies ahead of others, those customers who have implemented 5G, we're seeing growth inside of these environments, capacity, in some cases, growing fairly rapidly. But generally, this transition for 5G and frankly, the revenues that telecom operators expected from that transition have not really materialized. And that, in turn, has put pressure on their CapEx spend. So we are continuing to find new use cases inside of our service provider customers, but it hasn't been significant enough to drive a substantial uptick in the overall segment for F5.

Thank you. I would now like to pass the call back over to Ms. Suzanne DuLong, for any closing remarks.

Thank you, everybody, for being with us today. We look forward to seeing many of you during the quarter.

This concludes today's teleconference.

You may disconnect your lines at this time. Thank you for your participation.