F5 (FFIV)

Network application delivery and security specialist F5 (NASDAQ:FFIV) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 7.3% year on year to $731.1 million. Guidance for next quarter’s revenue was better than expected at $750 million at the midpoint, 1.6% above analysts’ estimates. Its non-GAAP profit of $3.42 per share was 10.1% above analysts’ consensus estimates.

Company Overview

Initially started as a hardware appliances company in the late 1990s, F5 (NASDAQ:FFIV) makes software that helps large enterprises ensure their web applications are always available by distributing network traffic and protecting them from cyberattacks.

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.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, F5’s 3.5% annualized revenue growth over the last three years was weak. This was below our standard for the software sector and is a rough starting point for our analysis.

This quarter, F5 reported year-on-year revenue growth of 7.3%, and its $731.1 million of revenue exceeded Wall Street’s estimates by 1.7%. Company management is currently guiding for a 7.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 3.4% over the next 12 months, similar to its three-year rate. This projection doesn't excite us and implies its newer products and services will not lead to better top-line performance yet.

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 came in at $707.5 million in Q1, and over the last four quarters, its growth was underwhelming as it averaged 8.7% year-on-year increases. However, 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 very efficient at acquiring new customers, and its CAC payback period checked in at 22.3 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing 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 80.9% gross margin over the last year. That means F5 only paid its providers $19.10 for every $100 in revenue.

In Q1, F5 produced a 80.7% gross profit margin, marking a 1.4 percentage point increase from 79.3% in the same quarter last year. F5’s full-year margin has also been trending up over the past 12 months, increasing by 1 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).

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 24.4%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, F5’s operating margin rose by 3.6 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, F5 generated an operating profit margin of 21.7%, up 1.2 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

F5 has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 28.4% over the last year.

F5’s free cash flow clocked in at $246.1 million in Q1, equivalent to a 33.7% margin. This result was good as its margin was 2.5 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts’ consensus estimates show they’re expecting F5’s free cash flow margin of 28.4% for the last 12 months to remain the same.

Companies with more cash than debt have lower bankruptcy risk.

F5 is a profitable, well-capitalized company with $1.26 billion of cash and $236.6 million of debt on its balance sheet. This $1.02 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 enjoyed seeing F5 beat analysts’ billings, revenue, adjusted operating income, and EPS expectations this quarter. We were also glad its revenue guidance for next quarter exceeded Wall Street’s estimates. On the other hand, its quarterly EPS guidance missed. Zooming out, we think this was a decent quarter featuring some areas of strength. The stock traded up 1.6% to $269.29 immediately following the results.

Updated: May 21, 2025 at 10:14 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own F5, you should also grasp the company’s longer-term business quality and valuation.

F5 isn’t a terrible business, but it isn’t one of our picks. First off, its revenue growth was weak over the last three years, and analysts don’t see anything changing over the next 12 months. And while F5’s impressive operating margins show it has a highly efficient business model, its ARR has disappointed and shows the company is having difficulty retaining customers and their spending.

F5’s price-to-sales ratio based on the next 12 months is 5.5x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. 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 $289.84 on the company (compared to the current share price of $285.88).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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