F5 Growth Slows as Cyber Costs Weigh on Margins
The application-security provider raised its full-year revenue outlook despite a sharp deceleration in systems sales.
The application-security and delivery company F5 (FFIV) reported second-quarter revenue of $812 million, up 11% from a year earlier, as product growth slowed and newly disclosed cyber-incident costs trimmed profitability. The results marked a sharp deceleration from the 22% product-revenue growth posted in the prior quarter and fell short of the company’s own expectations for a stronger rebound in software sales.
The quarter underscored a mixed trajectory across F5’s business lines. Systems revenue growth plunged to 26% year-over-year, down from 37% in the January quarter, while software revenue rebounded to 17% growth after an 8% decline in the prior period. Product revenue overall rose 22%, extending a streak of seven consecutive quarters of double-digit gains, though the pace lagged the 37% systems growth seen in the first quarter. Services revenue remained flat at 2% growth, unchanged from the prior quarter.
Earnings reflected the uneven performance. GAAP net income fell to $2.58 a share from $3.10 in the prior quarter, while non-GAAP earnings declined to $3.90 a share from $4.45. Gross margins held steady—GAAP at 81.4% and non-GAAP at 83.7%—but operating margins contracted. GAAP operating margin narrowed to 22.1% from 26.0% in the prior quarter, and non-GAAP operating margin slipped to 33.8% from 38.2%. The company attributed the squeeze to $6 million in costs tied to a cyber incident, its first disclosure of such expenses.
Despite the margin pressure, F5 raised its full-year outlook. Revenue growth guidance was lifted to a range of 7% to 8%, up from 5% to 6% previously, and non-GAAP earnings per share guidance was increased to $16.25 to $16.55 from $15.65 to $16.05. For the third quarter, the company projected revenue of $820 million to $840 million, implying sequential growth of 1% to 3%.
Shareholder returns remained a priority. F5 spent $401 million on share repurchases in the quarter, bringing the six-month total to $401 million, up from $301 million in the prior quarter. The company also recorded a $0.3 million restructuring credit, reversing modest charges from earlier quarters.
The results left F5 navigating a slower-growth environment even as it invests in software and security capabilities. With systems growth cooling and cyber-related costs emerging as a new headwind, the company’s ability to sustain margin expansion will depend on the durability of its software rebound.