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Building off an encouraging Q3 earnings report in which F5 Networks (FFIV) experienced improved close rates and an upswing in new business wins, the network security and application delivery company posted one of its strongest quarterly reports in recent history last night. Not only did FFIV comfortably exceed Q4 EPS and revenue estimates while returning to positive top-line growth after three consecutive quarters of yr/yr declines, but it also issued 1Q25 and FY25 EPS and revenue guidance that was mostly above analysts' expectations. To top it off, the company authorized an additional $1.0 bln for its stock repurchase program, speaking to its more bullish view heading into FY25.

• The company's FY25 guidance, which calls for revenue growth to accelerate to 4-5% from flat in FY24, assumes that the macro environment remains stable without any meaningful improvement. Therefore, the upswing is a function of company-specific drivers, most notably including its successful transition to a software-centric company from a hardware-centric one that relies on a single product.
• For some context on this transition, in FY17 software accounted for only 13% of total revenue. Today, that percentage has jumped to about 58% of total product revenue. Furthermore, subscriptions now represent 85% of FFIV's total software revenue compared to 20% in FY17. This transition has enabled the company to diversify its revenue stream, reduce volatility and improve the predictability of revenue, and enable it to more fully capitalize on the hybrid multi-cloud trend.
• Strength from existing software customers was a key factor behind FFIV's beat-and-raise performance. Overall, software revenue increased by 19% to $228 mln, representing a significant acceleration from last quarter's 3% growth. Looking ahead, the company sees a substantial opportunity for software renewals, providing it with good visibility into FY25.
• On the hardware side, the turnaround for Systems continued to gain traction as revenue decreased by just 3%, marking a vast improvement from the 16% drop last quarter and the 32% plunge in Q2. During the earnings call, FFIV noted that customers are beginning to refresh older systems, while its also winning more deals against competitors. In FY25, the company expects Systems revenue to grow by mid-single-digits after falling by 20% in FY24.
• From a longer-term perspective, FFIV remains bullish about its AI growth opportunities. More specifically, the company believes it will benefit from the massive amount of data generated from AI model training, requiring high performance traffic management technologies. Additionally, FFIV is focusing on leveraging web application firewall and API protection, and it already has deployments addressing this use case today.

Following a rough stretch in 2H23-1H24, FFIV has turned the corner as a combination of a more stable macro environment and a successful transition to a software-centric company has bolstered its turnaround. With the proliferation of AI technology, the company looks positioned to keep this momentum going and deliver even stronger growth down the road.