F5 (FFIV)

Application security provider F5 (NASDAQ:FFIV) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 8.5% year on year to $810.1 million. On the other hand, next quarter’s revenue guidance of $755 million was less impressive, coming in 4.7% below analysts’ estimates. Its non-GAAP profit of $4.39 per share was 10.6% above analysts’ consensus estimates.

Company Overview

Originally named after the F5 tornado, the most powerful on the meteorological scale, F5 (NASDAQ:FFIV) provides security and delivery solutions that protect applications across cloud, data center, and edge environments for large organizations.

The amount of content on the internet is exploding, whether it is music, movies and or e-commerce stores. Consumer demand for this content creates network congestion, much like a digital traffic jam which drives demand for specialized content delivery networks (CDN) services that alleviate potential network bottlenecks.

F5 competes with Citrix and Broadcom in application delivery, cloud providers like AWS and Google in cloud-native traffic management, and security specialists including Akamai, Cloudflare, Fortinet, and Palo Alto Networks in application security and DDoS protection.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, F5 grew its sales at a weak 5.5% compounded annual growth rate. This fell short of our benchmark for the software sector and is a rough starting point for our analysis.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. F5’s annualized revenue growth of 4.8% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

This quarter, F5 reported year-on-year revenue growth of 8.5%, and its $810.1 million of revenue exceeded Wall Street’s estimates by 2%. Company management is currently guiding for a 1.5% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 3.7% over the next 12 months, similar to its two-year rate. This projection is underwhelming and suggests its products and services will see some demand headwinds.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

F5’s billings punched in at $851.6 million in Q3, and over the last four quarters, its growth slightly outpaced the sector as it averaged 15.9% year-on-year increases. This alternate topline metric grew faster than total sales, meaning the company collects cash upfront and then recognizes the revenue over the length of its contracts - a boost for its liquidity and future revenue prospects.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

F5 is extremely efficient at acquiring new customers, and its CAC payback period checked in at 15.5 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give F5 more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

For software companies like F5, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

F5’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 81.4% gross margin over the last year. That means F5 only paid its providers $18.59 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. F5 has seen gross margins improve by 2.5 percentage points over the last 2 year, which is very good in the software space.

This quarter, F5’s gross profit margin was 82.2%, up 1.5 percentage points year on year. F5’s full-year margin has also been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

F5 has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 24.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, F5’s operating margin rose by 1.4 percentage points over the last two years, as its sales growth gave it operating leverage.

In Q3, F5 generated an operating margin profit margin of 25.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

F5 has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 29.4% over the last year, quite impressive for a software business.

F5’s free cash flow clocked in at $191.9 million in Q3, equivalent to a 23.7% margin. The company’s cash profitability regressed as it was 8.5 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict F5’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 29.4% for the last 12 months will increase to 32.6%, giving it more flexibility for investments, share buybacks, and dividends.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

F5 is a profitable, well-capitalized company with $1.34 billion of cash and $230.7 million of debt on its balance sheet. This $1.11 billion net cash position is 6.7% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly F5 blew past analysts’ billings expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed and its EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 5.4% to $274.79 immediately following the results.

Updated: December 3, 2025 at 9:24 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in F5.

F5 isn’t a terrible business, but it doesn’t pass our bar. To kick things off, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its impressive operating margins show it has a highly efficient business model, the downside is its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. On top of that, its expanding operating margin shows it’s becoming more efficient at building and selling its software.

F5’s price-to-sales ratio based on the next 12 months is 4.4x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $291.50 on the company (compared to the current share price of $240.68).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.