Story Stocks^®

F5 Networks (FFIV) is getting a high five from its shareholders after the networking equipment and software company crushed 1Q25 estimates and provided a bullish outlook for FY25. With this impressive earnings report, the company has now strung together three consecutive quarters of top and bottom-line beats, cementing a turnaround that's built on its transition to a software-centric business model. Additionally, FFIV has emerged as a top AI play as its systems and software help to securely deliver data for AI model training and inference use cases.

A confluence of macro-related, company-specific, and AI-based factors are merging together to drive FFIV's stronger revenue growth, which achieved its second highest growth rate over the past three years at +10.5% in 1Q25.

• FFIV is benefitting from a more stable IT spending environment with healthy demand for new software that helps enterprises execute their transformation and modernization projects, including the adoption of hybrid multi-cloud architectures. This transition to a hybrid multi-cloud setup creates several challenges for enterprises, such as more complexity across the IT stack and more vulnerability to cyber-attacks. FFIV's products help simplify these environments, enabling its customers to consolidate data delivery and security apps onto a single platform.
• The impact from the above items is reflected in the 22% increase in software revenue to $209 mln. FFIV noted that it saw stronger-than-expected expansion activity within several large multi-year subscription renewals, in addition to solid growth in new software projects. Furthermore, in a testament to the effectiveness of its full range of software and hardware offerings, the company achieved a record number of competitive displacements in Q1.
• Shifting to the hardware business, revenue growth sharply accelerated to 18% from the 3% decline seen last quarter. FFIV has been waiting on a technology refresh to breathe new life into its struggling hardware business and that finally came to fruition this quarter. During the earnings call last night, FFIV stated that refresh activity is now widespread with some of the most significant demand originating from customers outside of its top 1,000 customers. One minor caveat is that FFIV acknowledged that a modest amount of hardware orders was pulled forward into Q1 as customers looked to get ahead of the price increase that was implemented on January 1, 2025.
• Looking ahead, the company is quite bullish about its prospects, as illustrated by its upwardly revised FY25 EPS and revenue guidance. The one blemish is that FFIV's Q2 EPS guidance fell short of expectations, but participants are looking past that to instead focus on the company's AI-based opportunities. Currently, FFIV's primary AI opportunities center on delivering and securing data for AI model training, but in time, the company also expects to capitalize on its WAAP (Web app and API protection) solutions for AI inferencing and AI factory load balancing.

The main takeaway is that FFIV's turnaround is reaching a higher gear, bolstered by its ongoing transition to a software-centric model and building momentum for AI-based use cases. Lastly, the company's strong results and outlook should bode well for competitors like Cisco (CSCO), Akamai Technology (AKAM), and Cloudflare (NET), each of which are slated to report earnings over the next several weeks.