F5 will be the 'beneficiary of investment' into AI: CEO

F5 Networks (FFIV) reported first-quarter earnings on Monday that beat analyst expectations despite a slight hit in revenue year-over-year. F5 CEO François Locoh-Donou joins Yahoo Finance Live to discuss the results, expressing confidence in F5's ability to "execute over the next two quarters."

Locoh-Donou notes over the past three months they've seen "more stability" from large enterprise customers compared to last quarter when many projects were halted due to budget issues. This quarter reflected enterprise projects with clearer budgets and planning, giving F5 "more visibility and stability" for their own positioning moving forward.

He explains that as enterprises utilize multiple clouds to deliver "digital experiences," there is a "crisis for securing" all these environments. This benefits F5 since they have built "a portfolio that is unique in its ability to secure all applications regardless of where they're at."

With the growth of "modern applications" like AI, Locoh-Donou sees increased demand for security, which can fuel F5's success long-term. He stresses security is a "huge issue" for AI, requiring infrastructure and money to perfect F5's ability to "really secure" AI workloads across clouds. While currently expensive, he believes it's an investment that should pay off over time.

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Editor's note: This article was written by Angel Smith

Video Transcript

- F5 topping estimates on the top and bottom line for the first quarter. The multicloud application services company seeing earnings growth despite a dip in revenue from a year ago. And while customers continue to watch their budgets, F5 sees encouraging signs of stabilizing demand trends. Here to discuss this and more is Francois Locoh-Donou F5 chief executive officer and president. Francois, it is great to see you again. Thanks so much for joining us.

FRANCOIS LOCOH-DONOU: Thank you.

- Talk to me about the stabilizing demand. Talk me through what you are seeing from customers and their willingness to spend.

FRANCOIS LOCOH-DONOU: Julie, I think last year, we were seeing a lot of customers that were canceling projects or delaying projects because they were surprised, you know, sometimes in the middle of a project that their budget would go away. We have not been seeing that over the last six months. And specifically over the last three months, we have seen more predictability and more stability with large enterprise customers around the globe.

We've seen that both in the US and outside of the US where customers are clear on their budgets going in. And they move forward with the projects that they have planned. So it gives us a little more visibility and stability in the business.

- And Francois, I know in that earnings printed-- and it's great to see you and have you on the show again. I know the Street, Francois, was impressed by the strength in profitability. EPS came in ahead of consensus. How confident can you be, Francois, that that kind of continues here over the next few quarters?

FRANCOIS LOCOH-DONOU: Well, thank you, Josh. Yes, we did deliver a revenue at the top end of our range. And earnings per share growth well above our guidance range.

And so, you know, we're confident that we're going to be able to execute over the next few quarters based on the stability and the predictability we're seeing on the market. But beyond that, Josh, there's a broader trend in the market, which is that today businesses are run by apps and APIs. And there was this idea a few years ago that, you know, all applications that large enterprise would move all of their applications to a single cloud. And that idea is pretty much dead today.

The reality is large enterprises-- to deliver the digital experiences that we all enjoy, large enterprises, you know, are moving their applications across multiple clouds. Today, 90% of organizations actually deploy their applications in multiple public clouds, in data centers, and on edge sites. And that's great from a flexibility perspective.

But it has created a crisis for securing all these applications and all these APIs. And F5 has built a portfolio now that is unique in its ability to secure all applications regardless of where they're at. And so we think that that position and the trends in the market for the explosion of apps, explosion of APIs is going to give us a very strong, you know, mid to long-term opportunity to grow the business.

- And, Francois, how much has generative AI been a factor in that change that you're talking about with these various application-driven clouds?

FRANCOIS LOCOH-DONOU: Julie, generative AI is going to play a very important role because generative AI is an accelerator of what I just described. So I just said that the world is run by apps and APIs today. And we are going to-- you know, and AIs are going to be modern applications that themselves are going to be highly distributed.

So AI workloads are going to make heavy use of APIs. They are going to live in multiple public clouds. And the needs for security, specifically securing these apps, securing these APIs are going to be significantly accelerated by generative AI. And this is something we're going to see play out over the next several quarters and even over the next several years.

- And, Francois, has AI, you know, changed or impacted the way you at F5 think about hiring and spending?

FRANCOIS LOCOH-DONOU It hasn't impacted how we think about hiring today. But it is impacting how we think about spending because we have started-- across multiple functions at F5, we have started testing and experimenting large language models in areas where we can increase productivity. And so we're looking at that for software development and accelerating productivity in software development. We're looking at that for support and for our sales and marketing efforts.

I think at this point in time, we're-- you know, I think large enterprises are all going through the learning curve. We are going through the learning curve pretty quickly. So I would expect that we start seeing these things in production more in the 2025 time frame and beyond.

- And, Francois, something I have been wondering amongst, you know, the enterprise-reliant companies like yourselves, as we see this AI spending cycle, is there any concern because of the huge investments at AI that other places will not be getting the attention that they need? And

FRANCOIS LOCOH-DONOU It is likely that other categories of spend for large enterprises could suffer from the focus and the spend on AI. F5, you know, we are pretty confident about where the spend is going to go because we are an enabler of AI as a company. If you think about all these AI workloads and large language models that are going to be deployed, they're going to need more traffic management capacity, and they're going to need more security.

Security is a huge issue for AI. And we have positioned ourselves to have unique value proposition to really secure all these AI workloads across all cloud environments. And therefore, we think from a category spend perspective, over time, we should be a beneficiary of investment in AI.

- And, Francois, I also want to get your take on kind of the broader competitive landscape. It's an issue you touched on during the call, Francois. You talked about how a few of your rivals have now gone through this kind of change of control, as you said. Maybe just kind of walk us through how the landscape is shifting.

FRANCOIS LOCOH-DONOU You know, the landscape is changing. You know, in our traditional application delivery market, we have had a couple of competitors, both in hardware and software, that have had a change of control. And their customer playbook has changed materially. And that contrasts with F5.

We have been investing in this category for many years. And we're just now releasing next-generation hardware and software that's very exciting to our customers because it brings the benefits of the public cloud to their on-prem, their data center environment. And so we're seeing a contrasting approach from us versus competitors that we think will benefit over time.

And then in the areas of security specifically, we have been really focused, Josh, on securing applications and APIs. We have competitors that look at a lot of areas of security. But we are absolutely focused on apps and APIs because we think that is where the value is. And we think that AI will accelerate the needs for more apps and APIs. And that's where we are focusing our competitor attention. And hopefully, we'll continue to deliver value for customers in these areas.

- Francois, it is always great to have you on the show talking about F5's earnings and what's ahead. Thank you so much, as always, for your time.

FRANCOIS LOCOH-DONOU Thank you so much.