Welcome to Fort Knox earnings. I'm John Fort here again with Francois Locoh-donou, the CEO of F5. Earnings results just out and it looks like convincing beats across the board, particularly on product revenue here. Francois, what made the difference in the quarter?
Well, John, as you saw, it was a very, very strong quarter. And what I'm most excited about is this was our sixth consecutive quarter of double-digit product revenue growth. And so if you look back at what's fueling that, it's largely that enterprises are adopting hybrid multi-cloud deployments. We have seen hybrid multi-cloud deployments accelerate over the last couple of years largely because companies want to control their costs, to have better control, to have compliance. But over the last quarter, we saw two new catalysts really accelerate these hybrid cloud deployments. The first one is regulation, especially outside of the US, that is pushing companies to build hybrid multi-cloud deployments for resilience, to be able to fail over from on-premise to cloud deployments, and also for digital sovereignty, to have their assets under control, typically in their own data centers. And that really creates tailwind for F5 because we were designed to support and enable deployment across on-premise and cloud environments. And so digital sovereignty, resilience, these new requirements create more demand for F5 solutions. And then the second catalyst we saw in the quarter is an acceleration in AI deployments. And AI deployments also are hybrid because data often is on-premises. AI models could be anywhere, in public clouds or on-premise. And so it requires companies to build these data pipelines that need to be hardened. And it requires investment in solutions that support these hybrid AI deployments. And F5 was also designed to move data securely and rapidly across multiple infrastructure environments. So we saw an acceleration also from AI in hybrid deployments. So those are two of the factors that have helped us achieve a very, very strong quarter.
Francois, help me understand how long the legs are on this on-premise part of this hybrid scenario that you sketched out. It seems like I've been hearing hints of this for a couple of quarters now. This quarter's result seems particularly strong and I wonder to what degree the on-premise data component of the AI piece of this also influences that product revenue number.
It's an important catalyst, John. What you're seeing is whether it's enterprises or telcos or government agencies, we're seeing reinvestment in data center capacity. Now, a lot of discussion about data centers has been centered around hyperscalers and neoclouds investment in data centers. But enterprises across the board, large enterprises are reinvesting in data center capacity in preparation for AI, in preparation for resilience requirements and new requirements, especially strong in Europe, and also are reinvesting generally to get ready for leveraging more of their data. We're seeing a number of companies repatriate data from the cloud, largely for cost reasons and for control reasons. As companies realize they're going to leverage more of their data into their AI applications, they want to have control of that data, repatriating data on-premise, but they then need to connect this data to their AI models. And F5 plays a very strong role. In fact, we have the best technology to move data at speed, at scale, from object stores to AI models, and that is a very strong tailwind for F5.
Why isn't that counterintuitive? It seems to me like the balance of the mix is shifting a bit toward product, toward on-premise in this move. But everything that I've been hearing is that hey, the cloud is supposed to be more efficient for security, for data. You need to have this standard data management across all locations in your hybrid strategy and you know eventually this stuff is going to move to the cloud. So this investment in corporate data centers ahead of an expected AI expansion, why isn't that counterintuitive?
Well, there's a couple of things, John. First is a lot of companies are seeing that their data is actually more valuable than ever. And as a result, they're collecting way more data than they used to from their customers, from their endpoints, all the telemetry they have. But the cost of storing that data in the cloud or moving that data in and out of the cloud becomes prohibitive and that's causing a lot of companies to repatriate data but then want to use that data, build data links on-prem and then use that data for their AI models. So that's factor number one that's causing a lot of infrastructure investment on-prem to connect data to AI applications. Now when it comes to security, the issue that a lot of companies are facing is they have had to put their workloads across multiple cloud environments because companies generally want to choose the best environment for each application. So they are in multiple public clouds and they are also on-premise. Securing applications and securing APIs across all these environments is very complex. It is very hard and F5 has been working for several years to design a platform, an application delivery and security platform that actually gives a consistent layer of security across all infrastructure environments for applications and APIs. And we are absolutely unique in our capabilities and our ability to do that and that's also creating tailwinds in the business. We're seeing more and more companies consolidate their security on F5 to deliver security across all environments and also consolidate their delivery on F5 across all environments.
So speaking of security and given the strong results in this quarter, give me an update on the incident that you had a couple quarters ago. How customers have responded to it, how you've responded to it, where you judge F5 to be in the process.
Well, John, our response to the security incident has been very successful over the last several months. I have personally engaged with dozens and dozens of our customers and they have all expressed to me that our choices of being very transparent, being very responsive, the way that we mobilized our support teams, the way we mobilized our development teams, our sales teams to be able to provide very quickly actionable information that allowed our customers to continue to protect themselves, that has been very well-received by our customers. And as a result, we have seen very minimal disruption to demand and we're taking this opportunity not just to maintain the trust that our customers have always had in F5 but to strengthen the trust and strengthen the relationships we have with our customers.
How much of this beat this quarter now with that in context has to do with the guide having some uncertainty based on not knowing exactly how customers were going to respond, how long it would take them to respond perhaps positively to that transparency, to that effort that you had at outreach. Is there a recalibration now noting that your guide is above the high end I believe of the previous range? Is there a recalibration now that you've gotten a sense from your customers on how they're responding to your efforts here?
