F5 (FFIV)

Application security provider F5 (NASDAQ:FFIV) reported revenue ahead of Wall Streets expectations in Q4 CY2025, with sales up 7.3% year on year to $822.5 million. On top of that, next quarter’s revenue guidance ($780 million at the midpoint) was surprisingly good and 4.7% above what analysts were expecting. Its non-GAAP profit of $4.45 per share was 21.9% 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. Unfortunately, F5’s 5.4% annualized revenue growth over the last five years was weak. This was below our standard for the software sector and is a tough 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 5.9% 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 7.3%, and its $822.5 million of revenue exceeded Wall Street’s estimates by 8.8%. Company management is currently guiding for a 6.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

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 $884.9 million in Q4, and over the last four quarters, its growth was underwhelming as it averaged 9.5% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in acquiring/retaining customers.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

F5 is extremely efficient at acquiring new customers, and its CAC payback period checked in at 21.5 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 81.4% gross margin over the last year. That means F5 only paid its providers $18.61 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 1.9 percentage points over the last 2 year, which is solid in the software space.

This quarter, F5’s gross profit margin was 81.5%, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

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 24.7%. 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 might fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q4, F5 generated an operating margin profit margin of 26%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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 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 27.4% over the last year, quite impressive for a software business.

F5’s free cash flow clocked in at $149.5 million in Q4, equivalent to a 18.2% margin. The company’s cash profitability regressed as it was 7.2 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’ consensus estimates show they’re expecting F5’s free cash flow margin of 27.4% for the last 12 months to remain the same.

We were impressed by how significantly F5 blew past analysts’ billings expectations this quarter. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 13.3% to $306.17 immediately after reporting.

Updated: January 27, 2026 at 4:36 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

F5 falls short of our quality standards. For starters, 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 operating margin hasn't moved over the last year.

F5’s price-to-sales ratio based on the next 12 months is 5x. This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $295.30 on the company (compared to the current share price of $306.17), implying they don’t see much short-term potential in F5.