F5, Inc. (FFIV) Q4 2026 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the F5 Inc. Fourth Quarter Fiscal 26 Financial Results Conference Call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press *1 on your telephone to raise your hand. To withdraw your question, press 1 again. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I will now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Hello, and welcome. I am Suzanne DuLong, FI's vice president of investor relations. We are here to discuss our fourth quarter and fiscal year 26 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. Or an archived version of today's audio will be available through January 26, 2027. We will post the slide deck accompanying today's webcast to our IR site following this call. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks, that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release announcing 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. Fiscal 2026 was an exceptional year for F5, and Q4 closed it out with strong execution accelerating strategic momentum. We delivered Q4 revenue of $917 million up 13% year over year and above the top end of our guidance range. Importantly, that top line performance was powered by product revenue growth of 23%. With Q4, we have now delivered 9 consecutive quarters of double digit product revenue growth, a clear signal that our customers are choosing F5 consistently and at scale. For the full year, total revenue reached $3.4 billion representing 11% annual growth, including 19% product revenue growth. These results reflect 3 megatrends we have consistently highlighted. Hybrid multi cloud adoption, the expanding threat landscape, and accelerating AI inference. We called these trends early, and we built for them. Our FY 2026 results demonstrate how these trends are actively reshaping customer behavior right now. They also frame our FY 27 revenue outlook. Against an FY 26 baseline that finished well above our main investor event expectations, we are guiding to f y 27 growth of 8% to 9%. We expect to deliver a third consecutive year of double digit product revenue growth in FY 2027, providing a solid foundation to our outlook. Cooper will elaborate on additional guidance details in his remarks? Before I highlight some customer wins from the quarter, I want to speak to another factor driving confidence in our outlook. The pace and quality of our innovation and the structural position it is reinforcing. The fundamental truth of modern enterprise security is that you cannot enforce consistent runtime protection without being in the data path. For 3 decades, F5 has built and defended exactly that position in the flow of traffic for many of the world's largest enterprise application environments. That footprint is the foundation. What we are building on it is the advantage. In the last 6 months, that advantage has become more pronounced because the threat environment has fundamentally changed. Frontier AI has accelerated vulnerability discovery to machine speed, expanding the attack surface through APIs, agents, and AI models, while compressing the time available to respond. 70 thousand+ vulnerabilities were discovered and published through September this year. This is up approximately 50% over all of 2025. NIST reported a 208% year-over-year surge in vulnerabilities between July and September alone. Mean time to exploit has collapsed to -7 days. A typical 43-day patching cycle is now a liability. Customers know it, and security is increasingly leading our customer conversations. And investment is moving away from fragmented point products towards converged platforms that enforce consistent policy in real time across every environment where applications and AI run. That is precisely where F5 is differentiating. In <6 months since launching in March, we ended Q4 with 300+ customers deploying our AI powered WAF capabilities. And >75% of these deployments are operating in blocking mode. That figure matters. It means customers are not just evaluating AI assisted security. They are trusting it to stop malicious activity in production. Let me make that real with something that happened just last week. On Wednesday, 2 critical vulnerabilities were disclosed in PHP, the software behind ~70% of the world's websites. When a disclosure like that hits, a race starts. Attackers begin weaponizing exploits within hours. Defenders typically wait for vendors to write, test, and ship a new signature. Last week, we all saw websites being taken down so as not to risk attack. Our AI powered WAF customers did not have to wait. After the disclosure, our researchers hit an F5-protected application with multiple attack variations. Our AI powered WAF stopped every 1 of them in blocking mode while letting legitimate traffic through. Our customers did not have to write a new rule and they stayed protected while they patched. That is the shift we are betting on. Security that adapts at the speed of the attacker not the patch cycle. We are applying that same AI based detection capabilities to API security, moving protection beyond static signatures and rules to models that identify and stop malicious API requests in real time. As AI agents drive more machine to machine activity, APIs have become the primary pathways agents use to reach models, data, and critical business systems. Protecting those interactions at run time is becoming essential, and F5 is already doing it. Protecting customers at runtime is 1 dimension of our advantage. Strengthening the software itself is another. We are leveraging frontier open source and open weight AI models to identify and remediate vulnerabilities in our own code base faster than was ever previously possible. We are continuously scanning more than 140+ million lines of code with F5 built AI harnesses and leveraging AI to remediate thousands of vulnerabilities. As a result, in just the last 3 months, we have implemented engineering fixes that previously would have taken 7 years of work. In Q4, as part of an accelerated security cadence, we delivered 2 software updates focused entirely on remediating vulnerabilities before they can be exploited. And we are pairing that accelerated cadence with F5 Insight our solution for fleet wide visibility, upgrade orchestration, and life cycle management across big IP environments. Launched in March F5 Insight has gained the trust of 200+ customers with automated fleet management already dramatically reducing upgrade times, and operational risk. Together, accelerated critical releases and F5 insights automated deployment capabilities create a faster path from vulnerability to protection enabling customers to find, fix, release, and deploy at greater speed and scale. F 5's differentiation in this fundamentally new threat environment is showing up in our pipeline and our wins. It is also being reflected by the analyst community. In July, F5 was named a leader in Secure IQ Labs Cloud WAF Cyber Risk Validation comparative report. In September, IDC named F5 a leader in its marketscape for worldwide WAF platforms. And also in September, just 4 months after we launched the F5 AI security platform, Gartner recognized F5 as 1 of only 2 market shapers in AI application security. 3 recognitions in 3 months. We believe this progression reflects both the pace of our innovation and strength of our market position. Our application delivery and security platform is 1 platform, 1 policy framework, 1 management plane. We deliver consistent security and delivery policy from data center to edge to cloud for every app, every API, and every AI workload the enterprise runs. No point product vendor can replicate that position and we are investing and innovating to extend it. Before I pass the call to Cooper, let me bring our differentiation to life with a few customer wins from the quarter. Each 1 shows why the megatrends we are shaping IT are translating directly into demand for F5. I will start with wins driven by hybrid multi cloud adoption which is driving demand for F5 across data center build out, digital sovereignty, competitive displacement, and platform consolidation. Customers operating across on premises, colocation, and cloud environments cannot meet data residency and compliance requirements with disconnected point tools. They need consistent policy enforced everywhere and that requires a converged platform. That fact is showing up directly in our business. 29% of our top 1 thousand customers now deploy 3 or more F5 product families up from 22% in 2025, and we are seeing strong platform traction across all theaters. In an 8-figure win from Q4, a large regional North American financial institution selected F5 as its unified application delivery and security platform across its on premises, colocation, and cloud environments. The customer had accumulated a fragmented architecture over time, including 2 incumbent ADC providers and 2 separate cloud security and CDN tool sets. This approach created policy inconsistency and operational complexity that sovereignty and compliance requirements increasingly prohibit. Following a competitive evaluation, F5 consolidated the entire estate, displacing all 4 incumbent vendors. BIG IP anchors high performance application delivery across on premise and colocation environments. Distributed Cloud WAF, Data Intelligence, and CDN extend consistent protection into the cloud. F5 Insight centralizes visibility and management, across their full environment. 1 platform, 1 policy framework, from on premises to cloud. In another win from the quarter, a central bank technology authority in Asia selected F5 as the unified platform for a national financial services cloud built to keep critical banking infrastructure under domestic control. Following a rigorous public sector tender on technical merit and cost, F5 displaced 2 incumbent application delivery competitors. BIG IP powers high performance traffic management and high availability delivery across the customer's own data centers. Distributed Cloud WAF, Data Intelligence, and CDN extend consistent application security and API protection into the cloud, all managed through a single F5 management plane. The expanding threat landscape continues to accelerate demand for F5, and the data from our own solutions tell the story. In Q4, F5 distributed telemetry recorded an 84% year-over-year increase in WAF requests and a 103% surge in API security events. Frontier AI models have escalated the threat level for organizations globally. As a result, the volume and velocity of attacks at the application layer is compounding and organizations are acting to defend themselves. During Q4, a leading European financial institution determined that signature based tools could no longer keep pace with the speed and scale of AI driven threats. Following a competitive evaluation, the customer standardized on F5 as their single application delivery and security vendor across EMEA, APAC, and The Americas. They deployed our AI powered WAF and BotDefense on distributed cloud alongside advanced WAF on Big IP. This approach established proactive signatureless virtual patching across their global digital banking infrastructure. The ability to consolidate onto a single vendor, while maintaining consistent protection across every region and every environment was the decisive factor. This win reflects both the urgency customers feel around post-Mythos threat velocity and the growing demand for platform standardization at global scale. The expanding threat landscape is also driving demand for purpose built API security. A central bank and financial regulator in our APAC region selected distributed cloud API security to protect a rapidly expanding API ecosystem underpinning the nation's digital payment and banking infrastructure. The customer had invested in an API management platform expecting it to provide sufficient security, but shadow APIs were going undetected and critical banking APIs were exposed to operational and reputational risk. Tightening regulatory requirements made the status quo untenable. Following a competitive proof of concept, F5 displaced 3 security incumbents. Distributed Cloud API security now delivers automated discovery across public, external, and internal APIs. F5 brings real time OWASP API top 10 threat mitigation that integrates seamlessly with the customer's existing BIG IP infrastructure deepening F5's platform footprint in a strategically important regulated account. Finally, the AI inference inflection is driving multiple vectors of growth. The center of gravity in enterprise AI has shifted decisively from training models to operationalizing inference. Industry analysts estimate that industry spending on AI inference has reached $23 billion surpassing training related spend of $19 billion. Within our customer base, 78% of organizations now run their own inferencing, and 77% say inference not training is their main AI activity. The AI inference inflection is benefiting F5 across 2 dimensions. Through our direct AI use cases and indirectly across our business. During Q4, we saw accelerating demand across our 3 direct AI use cases, AI data delivery, AI runtime security, and AI factory load balancing. Direct AI use case bookings for the year more than doubled from the first half to well over $100 million in FY 2026. This is up nearly 300% year-over-year. In addition, in FY 2026, our active DirectAI use case customer count grew 4x to 200+. Those numbers reflect strong momentum today, and we see significant runway ahead as enterprises move from AI experimentation into production at scale. In AI data delivery, we are accelerating secure AI data pipelines, ensuring high throughput storage networking, and data delivery that keeps AI clusters fully utilized across hybrid and multi cloud deployments. And demand is scaling. Customers deployed 29.2 Tb of F5 powered AI data delivery capacity in Q4 alone. This is up nearly 250% year-over-year with our banking, financial services, and health care verticals leading adoption. In an AI data delivery win from Q4, a large conglomerate spanning energy, retail, and digital services in our APAC region put a planned BIG IP capacity expansion out to competitive evaluation. F 5 successfully defended and grew the account against 3 challengers. BIG IP is now the single high throughput control point for data moving between storage and GPU compute at scale. In AI runtime security, we are safeguarding AI applications, APIs, and models from abuse data leaks, and attacks like prompt injection. We are delivering real time threat defense, red teaming, and robust guardrails. And we are seeing a noticeable uptick in momentum that we believe reflects AI moving from pilots into production. In addition, open weight models now account for 34% of enterprise token volume. Because safety and guardrail behaviors vary widely across open weight models, enterprises cannot rely on the models for security. Protection must be enforced in the inference path. Customers are choosing F5 because best in class security for AI models requires runtime protection that large and frontier model providers cannot deliver. Runtime protection at scale and with specificity is precisely where F5 is differentiated. In a milestone win, a global AI infrastructure leader selected F5 AI guardrails as the production safety layer for up to 500 AI models hosted on its flagship model platform. The customer's requirements were exacting. Out of the box protection against prompt injection and sensitive data leakage, custom guardrails built to their own framework, and self hosted deployment at scale. With the EU AI act mandating in production monitoring of Frontier AI models, the urgency was regulatory as well as operational This customer also selected F5 as a launch partner in its zero trust AI agent security architecture embedding F5 at the center of how they think about AI safety at scale. AI is moving so fast that new threats emerge almost monthly and customers are turning existing F5 capabilities against them. Recently, 1 of the world's largest financial institutions used its F5 Bot defense to solve a problem that barely existed 6 months ago. Personal AI agents logging into customer accounts. The bank decided the risk to its clients and to itself was too high. F5 Bot Defense now identifies and blocks those agents at the front door. And this bank is not alone. Several other large enterprises are turning on the same advanced detection and protection. This is what we mean when we say AI is changing everything. Across our bot defense deployments, traffic from self identifying AI agents more than doubled in a single quarter. Agents are becoming a new class of user and we believe we are at the very beginning of that curve. Since F5 sits in the data path, we can respond in real time often with capabilities customers already have. 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 token, and lowering per-token cost. While this remains our most nascent DirectAI opportunity, we saw a notable pickup in activity in Q4. Earlier this month, we announced that Indosat Ooredoo Hutchison, 1 of Southeast Asia's largest telecommunications providers, selected F5 to power the Indosat Intelligence Suite. This is an enterprise AI platform purpose built to solve a challenge we are hearing consistently across regulated markets. Enterprises are ready to move AI from pilot to production, but cannot do so without sovereignty, governance, and cost predictability in place. The Indosat Intelligence Suite addresses all 3 giving businesses governed access to 300+ open and closed AI models through a single interface. BIG IP Next for Kubernetes provides the infrastructure layer delivering tenant isolation, container security, and GPU aware load balancing to optimize latency and token throughput at scale. For organizations with data residency requirements, workloads can be processed in market with policy governing what can be routed to global models. A similar sovereign AI dynamic is playing out in Europe. Last week, we announced that Telenor AI factory selected F5 BIG IP Next for Kubernetes as the intelligence service plane for its sovereign AI infrastructure. The Telenor platform is purpose built to give Norwegian and European access to trusted high performance AI services under full domestic control. Where Indosat is solving the model access and governance challenge, Telenor is solving the infrastructure governance challenge, including how to operate shared sovereign GPU capacity securely across multiple tenants while meeting European data residency and compliance requirements. Big IP Next for Kubernetes on NVIDIA BlueField-3 DPUs delivers secure multitenancy, policy based traffic control, and real time observability directly in the AI service path preserving host CPU capacity for AI workloads. Together, IndoSat and Telenor illustrate that as AI factories transition from infrastructure projects into commercial service platforms, service providers need a governed policy enforced delivery layer, and F5's AI factory load balancing is a proven solution. I noted we also continue to benefit from indirect AI demand. While it is challenging to quantify as AI adoption accelerates broadly, it is generating exponentially more traffic driving higher security requirements, and accelerating digital investments. All of which are showing up in systems demand and the rapid adoption of solutions like our AI powered WAF. Now I will turn the call over to Cooper who will walk through our Q4 results and our outlook. Cooper.

Thank you, François, and good afternoon, everyone. Q4 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 multi cloud adoption driving expanding opportunity for F5. I will review our Q4 results, and close with our guidance for FY 2027 and Q1. We delivered a strong Q4, growing revenue 13% to $917 million with a mix of 56% product revenue and 44% services revenue. Product revenue totaled $510 million, increasing 23% year over year while services revenue of $408 million grew 3% year over year. Systems revenue totaled $239 million, up 29% over Q4 fiscal year 2025. Our software revenue of $271 million grew 19% year over year. Subscription based software revenue totaled $229 million, up 16% year on year representing 85% of our Q4 software revenue. Perpetual license software totaled $42 million, up 37% year over year. Revenue from recurring sources contributed 68% of our Q4 revenue. Shifting to revenue distribution by region. Our teams drove strong growth across all theaters, Revenue from The Americas grew 5% year over year, representing 53% of total revenue. EMEA delivered another robust quarter with 31% revenue growth, representing 30% of revenue. And APAC grew 14% year over year, representing 17% of total revenue. Looking at our major verticals, enterprise customers contributed 69% of Q4's product bookings. Government customers represented 18% of product bookings, including 6% and service providers represented 13% of Q4 product bookings. Our strong top line performance in the quarter carried through the rest of our operating model, driving earnings outperformance in Q4. GAAP gross margin was 82.2%. Non GAAP gross margin was 84%. Our GAAP operating expenses were $543 million. Our non GAAP operating expenses were $462 million. Our GAAP operating margin was 23.1%. Our non-GAAP operating margin was 33.7%. Our GAAP effective tax rate for the quarter was 18.9%. Our non GAAP effective tax rate was 20.9%. Our GAAP net income for the quarter was $186 million, or $3.23 per share. Our non GAAP net income was $255 million, or $4.42 per share. I will now turn to cash flow and balance sheet metrics. We generated $118 million in cash flow from operations in Q4 and free cash flow of $91 million These results reflect deliberate and strategic working capital decisions to mitigate supply chain risk, including inventory builds and supplier pre payments executed to secure supply for FY 2027 revenue. CapEx was $27 million, reflecting our ongoing investment in our global POP infrastructure to support growing demand for distributed cloud services. DSO for the quarter was 44 days. Cash and investments totaled 1.62 billion at quarter end. Deferred revenue was 2.2 billion up 10% from the year ago period. We remain committed to returning cash to shareholders. In Q4, we repurchased $100 million worth of F5 shares at an average price of $422 per share, bringing our total share repurchase for FY 26 to 600 million. Finally, we ended the quarter with approximately 6.65 thousand employees. I will now briefly recap our full year software and security revenue results before moving on to guidance. Software grew 8% year over year, totaling $870 million, with software subscriptions representing 87% of FY 26's software revenue. Our software revenue spans 3 categories. Perpetual licenses, term based subscriptions, and SaaS and managed services. We provide a breakdown of each category's contribution annually. Perpetual software licenses, contributed $111 million in software revenue, down 8% year over year. Term based subscriptions contributed $578 million, up 14% year over year, driven by strong renewal rates and continued expansion within our multiyear agreements. And SaaS and managed services contributed $182 million, up 3% year over year. We also disclose annualized recurring revenue, or ARR, for our SaaS and managed services offerings on an annual basis. Over the past 3 years, we have been executing a planned transition away from certain legacy offerings. In FY 26, we completed this transition, ending the year with $211 million in total SaaS in managed services ARR, up 14% from FY 2025. Our core SaaS and managed services ARR grew 24% year over year. The legacy transitions completed, our SaaS and managed services offerings are now positioned to be a growth driver for our software business in FY 27 and beyond. Finally, we also break out our security related revenue annually. This year, our total security revenue, which includes standalone security, attached security, and maintenance revenue, related to security grew 10% year over year to approximately $1.3 billion. Our product security revenue, which includes both our stand alone and attached security revenue, totaled $746 million, up 15% year over year. I will now speak to our outlook for FY 27. FY 26 was an exceptional year. We exceeded expectations on systems demand, delivered healthy software subscription expansion, and we enter FY 2027 with momentum. The 3 secular megatrends Francois described hybrid multi cloud adoption, the expanding threat landscape, and AI inference are accelerating. And F5 is positioned at their intersection, creating healthy demand across each of our revenue categories. That positioning, combined with the strength of our pipeline as we exit FY 26, supports our FY 27 revenue growth outlook of 8% to 9%. Let me address each revenue category in turn. On systems, the strong refresh cycle we have described throughout FY 2026 persists into the first half of FY 2027. Beyond refresh, systems demand continues to be driven by competitive takeouts, digital sovereignty and AI readiness investments, and capacity expansion as AI enabled workloads drive higher throughput requirements. Taken together, these dynamics support our expectation of upper single digit systems growth for the full year. An improvement over our mid to upper single digit growth target outlined at our May investor event. Given the cyclical nature of our ongoing systems refresh, we expect the growth in the systems business will be stronger in the first half of the year. For software, we exit FY 2026 with strong momentum. Our multi-year subscriptions give us visibility into the renewal and expansion timing and activity in FY 2027. We continue to see strong growth in utilization rates across our software subscription base. In addition, with the legacy offering transition now complete, our SaaS and managed services business is positioned to accelerate in FY 2027. Putting each of these factors together, we expect to deliver solid double digit software growth for the year. Given the timing of term renewals, we expect this growth will be stronger in the second half of the year. Finally, for services, we continue to expect low to mid single digit growth for FY 2027. On gross margin, we expect FY 2027 non GAAP gross margin in a range of 80.5% to 82.5%, reflecting the higher component costs we have discussed previously. We will continue to balance operating leverage with investment in innovation and go to market capacity to drive our revenue growth opportunity in FY 2027 and beyond. We expect non GAAP operating margin in a range of 33% to 35%. Operating margins will be lowest in our fiscal Q2, with a similar seasonal sequential decline to prior years. This reflects payroll tax resets in January, investments to expand sales capacity, and costs associated with our annual customer event in March. We expect our FY 2027 non GAAP effective tax rate will be in a range of 19% to 21%. Finally, we expect FY 2027 non GAAP EPS in a range of $18.00 to $18.30. Turning to a few items that will be relevant to cash flow in FY 2027. First, on inventory. As I discussed earlier, we are strategically leveraging our cash generation to meaningfully increase our inventory position. And we expect to continue to increase inventory in FY 2027, with the strongest increases in the first half of the fiscal year. This is a deliberate action to increase delivery capacity to support systems demand. Second, a note on bonus timing. In FY 2026, we transitioned our employee bonus plan from a quarterly payment cadence to an annual cadence to better align incentives to full year performance. As such, full year bonuses earned across FY 2026 will be paid out in November 2026. These 2 items will have an effect on operating cash flow in Q1. We expect to return to normalized patterns for the remainder of the year. Finally, on capital allocation. Our philosophy remains unchanged. We are committed to a balanced approach that returns cash to shareholders while preserving flexibility for strategic investments. As announced in our earnings release, our board has authorized an additional $15 billion for share repurchases. We have $322 million remaining on our authorized share repurchase program as of the end of Q4, bringing the total authorized to 1.8 billion. Consistent with our practice over the last several years, we expect full year share repurchases in FY 2027 to represent at least 50% of our annual free cash flow. I will now wrap up with our outlook for Q1. We expect Q1 revenue in a range of $875 million to $895 million We expect Q1 non GAAP gross margin of approximately 81.5% to 82.5%, We estimate Q1 non GAAP operating expenses of $420 million to $432 million We expect Q1 share based compensation expense of approximately 70 million to $72 million anticipate Q1 non GAAP EPS in a range of $4.25 to $4.37 per share. With that, I will now pass the call back to Francois. Francois?

Thank you, Cooper. Let me close with this. When I step back and think about what we have built and where the market is going, I keep coming back to the same conclusion. The world is deploying more applications, more AI, more agents across more environments under more regulatory scrutiny against the faster and more sophisticated threat landscape than at any point in our history. Every 1 of those dynamics is a reason for our customers to have F5 in their architectures. That is not a coincidence. is the result of decisions we made years ago about where to build and what to build for. We are meeting this moment and our opportunities are growing as a result. Operator, please open the call to questions.

We will now begin the question and answer session. Please limit yourself to 1 question and 1 follow-up. If you would like to ask a question, please press *1 on your telephone to raise your hand. To withdraw your question, press *1 again to withdraw your question. We ask that you pick up your handset when answering and asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from the line of Matthew Hedberg with RBC Capital Markets. Your line is now open. Please go ahead.

Great. Thanks for taking my questions. Congrats, really, on a very strong year and a really, great outlook. Lot of things to parse through here. I wanted to start out with the direct AI use cases. François, you talked about it, I think, reaching over $100+ million in bookings. I think that grew 300% year-over-year. Can you kind of help us just step back and think about what is the addressable TAM that you guys are focused on from an AI perspective? And how should we think about the scaling of that bookings trajectory and its potential to accelerate overall growth?

Matthew. thank you. So let me just start with your question about TAM. I think we shared at our Investor Day that we expected our addressable market, by 2030 to be ~$11 billion in AI, of which $9 billion was AI security about $1 billion in AI data delivery, and $1 billion in AI factory load balancing. $11 billion in 2030, up from what we believe is about $1 billion this year. So it would be a 10x increase in the addressable market over the next 4 years. So that is in terms of the TAM. In terms of the opportunity we are seeing, let me break this down into those 3 categories because what we have seen this year is very promising. So I will start with AI data delivery. Which represents the majority of the. You know, we said the bookings have grown to over $100 million for the year. Which is up 300% year-over-year. The majority of that is actually AI data delivery. And what we are seeing there is increasingly the AI data delivery features are important criteria in selection of ADC technologies by our customers. So in our, you know, in our core ADC market, AI data delivery is playing an important role. We are already differentiated, and we have accelerated that differentiation with new features for data delivery specific specifically, support for S3 protocol, support for MCP. Protocol, our partnerships with some of the key storage players. And so we see that market continuing to grow and we feel very, very good about the opportunities that we are we are seeing in data delivery this year and we will continue to grow next year. The next use case that we have talked about is AI security. And this 1 is. You know, I think it is still early days. We launched our AI security platform earlier this year, just about 3 or 4 months ago, but we are already seeing quite a very significant traction in this area. If you look at the last 6 months, in, you know, cybersecurity, 1 of the things that has become painfully clear is that model providers, frontier model providers cannot provide appropriate guardrails and security for their models or agents. Number 1. and number 2, the dynamic we are seeing with our customers is that all of them are really deploying AI in environment that are hybrid multi cloud and also multimodal, meaning they are deploying open weight model, open source models, and frontier models for cost reasons, for compliance reasons, for protecting their intellectual property. And all of that calls for a player that can secure all of these models whether, you know, in the cloud or on premise. And that is where our hybrid multi cloud advantage, we think, is going to be pretty significant. And we are already seeing a number of use cases on that. 1 of the ones I mentioned in my prepared remarks is that 1 of the largest companies in the world that is at the heart of the AI revolution is using F5 to protect 500 of their models that are being accessed by developers. External developers, and they are they are, you know, pretty, the requirements are pretty stringent, but they have chosen F5 because we have the programmability. We have the ability to customize models for the most demanding environment. And that is 1 of the reasons that we also have had this recognition from Gartner as 1 of the 2 market shapers in AI security. So we feel really good about AI security, but we feel this market is just gonna grow substantially over the next several years. And then in the third area, Matt, AI factory load balancing, we saw a pickup in activity this quarter You saw the announcement of the 2 sovereign AI implementations we have. In Asia and in Europe. I shared earlier that the you know, the neo clouds, which will be a target market and is growing in terms of the infrastructure spend, initially have been very focused on offering GPU as a service, basically bare metal GPU as a service primarily for hyperscalers. that is not a use case where you know, there is a need. A significant need for F5. But as we see either the neo clouds or sovereign AI players, start to offer token as a service for enterprises, then F5's benefits become very clear around tenant isolation, for helping with governance, helping with security. And those are the initial wins we have had in this market, but I expect more to come in 2027. When you take all that together, you know, we are looking at a TAM that is going to grow, you know, very significantly over the next 4 or 5 years. And in all 3 of these areas, we have initial wins and traction that we believe can accelerate in 2027. Great answer. Thanks a lot, guys. Congrats. Thank you, Matthew.

The next question is from the line of Joseph Cardoso of JPMorgan. Your line is now open. Please go ahead.

Hey, thank you for the question here, and congrats on the results. Maybe just wanted to touch on the operating leverage. It was a bit lighter this quarter, and the outlook for Q1 and next year, I guess, in aggregate. Kind of suggests more of the same. Can you maybe just walk through what drove that this quarter? It looks like OpEx investments stepped up meaningfully. And then as we kind of look ahead, it seems like the guide is also implying, you know, a little bit of limited flow through of revenue and obviously, there is a bunch of moving pieces there around margins and OpEx, etcetera. But maybe just talk about the key assumptions that is driving the outlook here. And maybe more importantly, what needs to go right for you to kind of flip the script here on that trend and maybe see a better flow through than what is implied in the outlook? Thank you.

Yeah. Sure. Thanks, Joe. This is Cooper. So, yeah, I can talk to both Q4 and Q1. But essentially, the biggest driver on the OpEx are investments that we are making to drive future growth. So we have been increasing our sales capacity. We started in Q4, and we have been aggressively ramping, additional, capacity, both kind of broad based capacity as well as specialists for the AI security opportunity. And, really, what you are seeing is a reflection on our belief that it is a growth opportunity that we think extends beyond FY 2027. We are being, a little bit earlier in this cycle in terms of making those investments to ensure that we have got that capacity fully ramped as that opportunity continues to mature. We are also making, other go to market investments across marketing to support our sellers and raise visibility. We think that we are really positioned to win in the AI security space, and so we just make sure that we are capitalizing on that opportunity. And that is largely what you see in the Q1 guide with OpEx. And then as over the course of the year, we do expect that you will see OpEx as a percentage of revenue come down. For the full year, it should be down year over year as a percentage of revenue as we start to see the growth, you know, continue to flow through in the year. And then just from Q4 this year, the other dynamic was we. In the end of the year, just with the outperformance that we had, there is an impact to accelerators both on a commission and bonus perspective across the employee base.

Connor, can we go to the next question, please? Yes, absolutely. The next question is from Timothy Long of Barclays. Your line is now open. Please go ahead.

Thank you. I will start with 1 on the system side, and then I will come back with a follow-up on software. Yeah. So thanks for the, you know, the color on the linearity into the year. It sounds like strong first half. So more front end loaded. Just curious when looking at you know, kind of a medium, longer term trend here, and knowing that you guys have seen a lot of these refreshes, which has obviously been a very good 1. So when you look at the kind of first half to second half deceleration, do you. Is this just timing of you know, the impact of the refresh kind of running its course? Is it you know, you have had enough. You know, you have had the bulk of the share wins, you know, competitive takeouts, or is there something else at play? Then I had a software follow-up.

Hey. Thanks, Timothy. Yeah. it is entirely around the part of the refresh motion, and you have heard us refer to as a refresh plus, where we see, a deceleration is just on that part of the motion. And as we pass those end of software support dates, we expect that the revenue we are getting just from replacing legacy installed base, we are going to see that decline over the back half of the year. But I think what is more interesting is that the growth that we are seeing in new use cases and expansion continues to be very strong. In fact, it accelerated over the back half of the year. And then the competitive opportunity, we do not think that is slowing down. We think that is gonna grow over time. But the real story around the growth over the course of the year is gonna be the AI data delivery opportunity that Francois already referenced. We think that is really early. Continued expansion, and then, of course, the digital sovereignty concerns that we are seeing in international theaters, those are all still relatively early as well. So we think on balance, you will see growth through the year. That growth likely will be slower in the second half just from the cyclical part of the refresh. But on balance, the underlying kind of secular drivers will continue to see drive a lot of opportunity in our systems business. Okay. Thank you.

And then just the software follow-up. I think you would beat Q4 pretty handily on the software number. Curious if that means that more likely to be term and just would love any color on you know, whether it is you know, true ups or whatever you call them now or new activity. That drove that. Just curious how that would carry into next year the upside in Q4. Thanks.

Yeah. It was. it is really just new use cases and expansion that were driving that. I mean, a lot of that does come through in the form of these renewals. But where we saw the upside growth, it was higher rate of expansion. We also won, some perpetual use case opportunities that we largely had visibility going into the quarter. But broadly, I think the trend that we are excited about is that we have had a long history of driving healthy expansion. The adoption we are seeing across the full portfolio, customers that are leveraging product families, is. Continues to increase. And just given that we have got a large base that comes up for renewal next year, it is important that we see those strong utilization rates. It gives us that visibility on a strong growth opportunity. And then the second 1, which we talked a little bit about, is our SaaS and managed service business. Which historically, we had not seen growth because we were undertaking a transition from some legacy offerings. You saw that the ARR on that group grew pretty substantially in FY 2026. that is a rat. The ratable part of our software business. So that growth that we saw in the ARR in FY 2026 will come through in the model as revenue growth in FY 2027. So it is for the first time, it is an additional leg to our software growth opportunity, and we expect that growth to continue beyond FY 2027.

Timothy, I will just add about. I wanna come back to the competitive dynamics that you mentioned in your question. Because part of it is you know, taking out, kind of more traditional ADC competitor direct That continues. In fact, I think this quarter was 1 of our strongest quarters of the last several years in terms of direct competitive takeouts for ADC. We expect that to continue to grow because in a lot of cases, what we have taken out is just an initial implementation of a very large install base in a customer. So we expect to continue to take wallet share with existing customers where we have had an initial takeout win. But the other phenomenon that we are seeing from a competition perspective is consolidation with a lot of our customers. As they, you know, 93% of enterprises are now deploying this hybrid multi cloud architectures and to try and remove the complexity of hybrid multi cloud Many of our customers really wanna consolidate across, you know, private cloud and public cloud environment and have a single platform provider as for both. In fact, in our prepared remarks, we mentioned 1 such win this quarter, which was an 8-figure deal with a financial institution where we took out not 1 or 2 competitors, but 4 competitors to replace both ADC players and CDN players in cloud players into the single platform of F5 on prem hardware software plus F5 distributed cloud and we. That ability for us to consolidate for large enterprise customers in hybrid multi cloud environment, is core to our strategy. It is a part of our differentiation that is accelerating and where we are going to see more wins in the future as our platform develops. This quarter, we just introduced a capability called F5 Insight that gives our customers basically 1 policy, 1 place to look at all their environment, and monitor the performance of their applications and get a lot of AI powered insights. And that just further accelerates this ability to consolidate environment and simplify operations for customers. So we will we will come back to that more as our competitor's differentiation develops, but that is. that is core to what we are doing and to our growth. Okay. Thank you. Appreciate it. Thank you, Timothy.

The next question is from the line of George Notter of Wolfe Research. Your line is now open. Please go ahead.

Hi, guys. Thanks a lot. Wanted to ask about sort of the sales and marketing push behind the AI GuardRail product. I hear the commentary about increasing expenses in sales and marketing. I get that. But I am just wondering if you are putting enough of a push behind guardrails. Is there any way you could quantify how much you are investing there from a selling and marketing perspective? Maybe talk about anything you are doing in terms of incentivizing the Salesforce headcount, I would just be really interested to learn more about that because it seems like it is a terrific opportunity, but at the same time, there are a lot of competitors with products that you know, trip upon some of the functionality that you guys have. And obviously, I think a lot of this is gonna be a sales and marketing game. So any. Anything you can tell us there would be great. Thanks.

Well, thank you. There may be a lot of but if you look at the, you know, the initial recognitions that we have received and the perceptions of the market, We are clearly 1 of the top companies in this area already and we are investing significantly First is, of course, our platform because it is not just about guardrails. It is the ability to discover vulnerabilities in models through red teaming, turn these vulnerabilities into mitigations, custom mitigations for customers, the ability to discover shadow AI, and have usage control. All of these are capabilities that are converging and we are converging all of that in a single platform and we are going to expand from that. Of course, sales and marketing investments are absolutely critical to our success. We have been ramping our sales and marketing resources throughout the year in this area. We will be doubling our head. The specialist seller headcount that we have will be doubling in 2027. Marketing investment in this area will be more than doubling in 2027. And in addition to the specialist organization that we have put in place for that, We have put also incentives for all of our field force to engage customers in AI security conversations because our belief is that every single 1 of our large enterprise customers is looking to solve the problem of securing AI. So all of our field sellers will have incentive to engage in AI security in terms of their compensation structure. Great. Thank you very much. Thank you.

The next question is from the line of James Fish of Piper Sandler. Your line is now open. Please go ahead.

Hey guys. Cooper,, do you feel like you have enough supply today in terms of visibility to meet the guidance and then some? Or will you need to find more and that is why we have the continued meaningful increase in inventory Just kind of help us bridge inventory to kind of what you are seeing on the system side. And just overall how the transition towards the latest memory is going.

Yeah. Thanks. No, we have been investing pretty aggressively as you have seen. We have talked about that over the course of the year. And there are long lead times on these parts, which is why we got in, you know, started making these investments early. And what you are seeing is they are starting to flow through onto our balance sheet. So we feel very good, particularly around memory and storage, which is the area that we felt like would be at most at risk. And just based on the inventory, we have we have been able to secure we are very well positioned, not just for our guidance, but for upside. Now it does not mean to say that the supply chain has been completely derisked. I mean, there are always different areas of components where there can be risk from time, and it is something that we aggressively monitor. Our inventory strategy is not just around raw materials, but it is also being, you know, having an upside build forecast that we put out to our manufacturers early to make sure that we are driving the full set of components The other thing that we are doing is we are also investing in the supply for our next generation of appliances. Just given the nature of lead times, getting in front of that as well. And so that is what. that is really kind of what is behind the growth that we expect to see in our inventory balance over the course of this year. So we are not just thinking short term. We are making sure we are well positioned to support growth going beyond FY 2027. Helpful.

And just as a follow-up to the guide side of things, you are talking double digit. Software growth. We have been talking about that level for a little while. But is there a way to think about you know, it sounds like SaaS, we should think about as that 14% ARR growth continuing at roughly mid teens in terms of the translation to revenue. And we should roughly expect that in terms of term license then, or how should we think about each of the pieces, guys?

Yeah. Thanks. So great question. And we would not specifically guide, but that is in the right way to think about it. We think we are gonna see very healthy growth across both of those areas of our software business. You know, of course, with ARR growth, you have really good visibility there because of the ratable nature, and we expect to continue to see strong momentum with new bookings and expansion across the SaaS business. And then the term license piece, we think we will also see really strong growth. that is where that growth will be weighted higher in the back half just because the timing of when some of those opportunities come up for prosecution. But the growth, we think it will be pretty good growth across the year, just a little bit more growth on the back half.

The next question is from the line of Meta Marshall of Morgan Stanley. Your line is now open. Please go ahead.

Great. Thanks. Wanted to ask a couple of questions. First, just on the continued strength out of EMEA. And a lot of that having to do with data sovereignty projects. Just are those anything that we should be mindful of just in terms of project based nature of those that create difficult comps? And then maybe just a second question on disaggregating some of the product growth that we saw this year. I know last year, at the end of the fiscal year, you guys kind of gave how much of the product growth you thought was attributable to the product refresh, Just any sort of disaggregation you were doing this year. Thanks.

I will start with the question about EMEA. Now, you have we have seen consistent growth in Europe, Middle East and Africa over the last several quarters that have been at or about 30%. And that is driven by a few things. 1, of course, is the continued adoption of hybrid multi cloud architectures. Specifically in Europe, sovereignty is a driver customers repatriating to local clouds or repatriating applications to private data centers. That we are. You know, we expect that to continue. And it is not a project-based, 1-off set of decisions that are made. it is generally a change in philosophy and a change in architecture. That then drives an ongoing relationship with a customer on ongoing set of deployment or expansion of deployments into new data centers. So that. that is how I would think about it, and I would not as a result, expect a dramatic shift in what we are seeing not just in Europe, but internationally in our in our business.

Yeah. And then just in terms of kind of disaggregating, I think you are talking about just the systems piece of our business. With the refresh, the mix that we have seen over the last couple of years is about a third of the business has been coming in as new opportunities, whether that is, AI. Direct AI use cases or capacity expansion or competitive takeouts, and then about 2 thirds of the business has been coming through that refresh plus motion. The good news is that we. The growth has been very high across both of those categories. So the mix is actually stayed stable in spite of the fact we have been having such a strong refresh. And so as we go into next year, we think the mix will be more weighted, towards the new and expansion opportunities. Some of that business that is come through the refresh motion where it was expansion that was just timed with the re. Refresh, that business will start to come through in the form of net new opportunities. It will be kind of out-- Outside of a refresh opportunity. So we would expect in the second half of the year that replacement bookings will be down year over year and that we will continue to see strong growth from new and expansion leading to an overall positive growth profile. Great. Thank you.

The next question is from the line of Tal Liani of Bank of America. Your line is now open. Please go ahead. Be sure to unmute your headset if you were muted before. Connor, why do not we move on, and we will come back to Tal? Yeah. We are having problems hearing Tal, so we will move on to John Jeffrey Hopson from Needham. Your line is now open. Please go ahead.

Hi. Thank you for the question. Just wanted your updated thoughts on the pricing environment. I think you guys had gotten into a, you know, yearly kind of revisiting the pricing cadence Just wanted your thoughts on go forward basis considering the memory situation is, you know, changing quarterly or even monthly? Thank you.

Yeah. In general, we have had a program where we revisit pricing on an annual basis to capture the value of the innovation and adjust to any cost component pressures that we are seeing. that is still our philosophy from time to time. If we see an acceleration in cost, we may make an off cycle adjustment. But our plans right now would be to, stick to an annual cadence with price increases. Got it. Thank you very much.

The next question is from the line of Simon Leopold of Raymond James. Your line is now open. Please go ahead. Simon, you may still be muted. All right. Okay. I believe we are having trouble hearing Simon. So at this point, there are no more questions. Will now turn the call back to Suzanne DeLong for closing remarks?

Thank you, Connor. Appreciate it. And if there are any technical difficulties. We will definitely look into it with the provider here. But if those of you that were not able to ask questions need anything and follow-up please reach out to me directly. Broadly, thank you all for joining us today. We look forward to seeing you during the quarter. We will be at several conferences. So much for your time today.

This concludes today's call. Thank you for attending. You may now disconnect.