Earnings call transcript Q1 2023

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Operator

Greetings, and welcome to the F5, Inc.

First Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Suzanne DuLong. Thank you, Suzanne.

begin. may You

Suzanne DuLong

be I are Investor welcome. and DuLong, Vice questions the Q&A CFO, FX's Pelzer, call. the on Hello, members during on Other François am hand Locoh-Donou, of of will and President Relations. Executive executive CEO; prepared FX's President remarks FX's today's team and FX Vice Suzanne making also President session. Frank answer and to

version are fX.com, of press today's is at on telephonic or release Time, January available of and an available at April (XXX) site access XXX-XXXX, will accompanying Pacific archived conclusion by replay To the through audio A XXXX. meeting copy of midnight XXX-XXXX our call. the today's and through today's our available posted XXXXXXXX. be viewable will ID will or IR use Visuals website replay be to webcast A of phone, the be XX, XX, today's on our webcast dial XXXX. (XXX) discussion

For follow-up questions, out at reach additional information directly or to s.dulong@fX.com. me please

to expressed today any these which that as and Please statements. that press materially results include results filings. duty expect Factors anticipate, statements in words These discussion FX actual that will financial those are may has affect the by presented announcing statements, note update release forward-looking call. believe, detail to SEC our results uncertainties cause our information from this our our summarized in target. and and in contain no in described may or involve risks implied such Our differ forward-looking

to over François. With that, I call the will turn

François Locoh-Donou

experienced end backdrop revenue QX, came tough our to deal our all the for midpoint and we and more Thank in America. would our In heightened concentrated pervasive at Thank guidance close per the into team joining delivered that spread QX QX, would delays you, of Suzanne, North Against and you dynamics everyone. and We high quarter EMEA budget above expecting we the environment, share hello, scrutiny deteriorating the earnings rates see range of of first us continued a in and across today. APAC range. geographies.

are multiyear last transformational-type most noted we challenging were be for affected. which Like new software last on year. quarter, software new to on were particularly The focused. subscriptions quarter year-over-year dynamics We projects, planning us business not growth from larger this that tend

was down it QX, double-digit in year-over-year. However, percentage a

or contrast customer spending scrutiny broader feedback, from on budget new seeing to impact believe as pervasive economic opposed financial quarter. the software Based we caution we are decisions and we what saw in business, In expected the architectural uncertainty, decisions. performed technological, competitive on as of to resulting largely renewals software

it At same systems conditions the for improving us revenue, customers. ship hardware possible waiting chain aided our time, supply making to to

which with particularly expect year, XX% X% in renewals forecasted. the initially mix strong, our sweating with we we Despite a In environment, the were customers' to past, albeit revenue different for than maintenance correlated has addition, assets. QX the continue to growth

of mix challenging precision. quarter, call to the is the our demand revenue trends Given with last it

a of to acceleration benefit coming redesign the our continue However, to and supply with system fruition, second systems improvements our we see chain efforts revenue. in half

revenue year. and solid global the In for QX stronger expect we in renewals anticipated for will initially on QX, our addition, forecast we we maintenance based experienced than services the be

revenue to and headwinds offset we global in result, year. services combination software the revenue of expect a As the systems stronger

our year as earnings further cost take expect goal. growth FY to maintaining this in and to non-GAAP to earnings and double-digit non-GAAP We annual base to for the 'XX. will continue basis going also continue achieve an and action on remain We forward, needed to low we growth mid-teens evaluate this

while customers environment, optimizing also and investments spend on revenue. existing their their current minimizing drive are focused the continuing In to

are positioned we that do confident help We that. to them are exactly well

such For win selected that based Tier for simplifying customer across service service a environments. Services a infrastructure. agile Distributed the providers provider. X instance, North ability edge the their a platform's and the The The as American critical Cloud we significant on QX, Cloud the dynamic customers operations deliver like service service for investments with solves managed of multi-cloud network applications to possible and closed it its platform. for makes monetize a next-generation offering platform FX FX scalable, to enables second win Distributed substantial networking This the XG. and including investment, enterprise challenges multi-cloud managed Services during deployment is core in for offering

also focused Distributed and remain application cases. use also Customers winning FX security is on security Cloud Services

a QX, after selected firewall more a application their proof-of-concept cloud-native CDN protection and FI web Cloud solution. selected customer solution customer effective provider against both against In and API manage. healthcare Services The to evaluation a our because being while incumbent proved easier managed also it Distributed threats

stringent customer's requirements. regulatory Our solution met the also

focused of Finally, cost total customers on ownership. are

ownership to drive traction our hardware platforms platforms, These benefits and customers' of we reduce continue result, good cloud-like offering total on-premises a for As with by dramatically cost rSeries next-generation VELOS. next-generation can systems.

of of complex. manage help Customers simplify, like FX and who need and spending Clearly, infrastructure the to them changed That have. make applications to from budgets and has can the continue months six breadth cost ago. our of The and us of reduce more the our the they continues secure to positions a said, ownership them applications environment the deliver, get number those well. needed grow, partner portfolio most enterprise

Our combined broad with we consumption model solutions offer, these addresses the portfolio, squarely flexibility requirements.

Frank. Now Frank? I the turn to will call

Frank Pelzer

some everyone. afternoon, on to quarter our second expectations. speak our Thank provide our you, François, 'XX additional I review FY and outlook good color QX before I will results and

quarter growth reflecting We year-over-year. François price grew in mentioned high delivered million and the of Global maintenance million, X% strong to announced revenue also reflecting revenue $XXX due part $XXX of services increases. first previously X% a renewals

quarter. demand across year-over-year all Our softer global the and geographies services reflecting revenue revenue total of remained roughly XX% split product down and with representing between revenue in product, slightly

systems software million, year-over-year. against $XXX chain X% QX million, of down supply grew improvements comp revenue revenue to X% Continued last $XXX tough a enabled year.

software overall look closer a growth. our take at Let's

revenue perpetual software of includes XX% revenue. license our utility-based comprised SaaS total and subscriptions, offerings is Subscription-based revenue, of and or million term QX's subscription-based $XXX which software revenue totaled sales. Our

revenue. the XX% renewals our portion recurring utility-based software from subscriptions million sales Perpetual our François below revenue. includes $XX license term XX% as services plan multiyear largely of of subscription sources significantly subscription, Within of represented new while SaaS performed QX of maintenance Revenue revenue as well revenue business, expected. in as QX, noted, as contributed and QX's This from performed revenue.

bookings revenue. year-over-year, the of XX% of declined XX% Federal. revenue. from XX%, total XX% from Americas and representing government quarter, representing in of XX% represented Enterprise EMEA flat XX% providers grew U.S. represented On a regional of revenue XX%, customers X% basis, revenue APAC service represented and representing was including customers product X%,

QX to million, was margin expenses where million. will year. and with share line margin in I for be for GAAP Non-GAAP operating guided with GAAP the XX.X%, gross our operating was we quarter line in results. operating range. were XX.X%. our $XXX Non-GAAP now expenses $XXX below the expect gross our guidance were

margin operating was GAAP Our XX%.

non-GAAP operating XX.X%. margin Our was

for the quarter rate tax was effective GAAP Our XX.X%.

$X.XX share. $X.XX top to was end GAAP above range part EPS net to related dollar Our or $XXX rate income or our quarter. per of income was million $X.XX aided per currency net a for of guided was Non-GAAP the weaker the was $X.XX tax XX.X%. million non-GAAP per the gains share. $XX in quarter effective share, U.S. by in

was for from We flow $XXX operations in now balance expenditures the million quarter in the Capital turn to cash million. quarter sheet. will linearity supply DSO I to generated in quarter challenges. cash resulting maintenance for from the flow from ongoing degree, $XX and This QX. were up chain strong XX and, historical shipping levels, primarily a the is to lesser back-end days. contract due service renewals

million our acquisition. the approximately in approximately at and Cash debt from end, of reflecting quarter investments totaled million paydown term Shape remaining $XXX $XXX

renewal particularly During strong billion, we XX% QX. reflecting customers quarter, approximately repurchased Deferred increased $XX service maintenance existing $XXX largely shares per trend which the is or million $X.XX increase the was This sweating in $X.XX XXX,XXX share. budgets. an price up recalibrating while to driven billion from sales revenue worth year-over-year infrastructure of at by FX their of average of shares approximately

quarter approximately X,XXX employees. ended with the we Finally,

will outlook QX. stated, otherwise metrics. guidance operating non-GAAP Unless share reference I comments for now my our

margins We gross XX%. expect million, QX in revenue $XXX of the range with approximately $XXX million of to

We continue two in for to margin expect will reasons. main the improve gross the of our second year half

with redesign costs to on nearing been our broker engineering be expect challenged First, completion, critical expedite we market to of the the cost exorbitant. around expect has for second, abate; ancillary more supply the some less dependent where efforts will of fees chain-related like to components parts some we begin

QX our operating QX per $XXX million share. is estimate non-GAAP to target $XXX and expenses $X.XX $X.XX of earnings million, to We

$XX share-based million approximately $XX to compensation We expect QX expense million. of

on to outlook. our QX results our Given elaborate our want QX FY I and 'XX expectations, also

We growth for continue to year. of expect X% to revenue the XX%

Given we seen months, revenue expected software will towards weighted contribution more last services 'XX trends our and the four hardware we than in towards reflect expect have a less the demand revenue mix FY we quarter and ago.

to new software to redesign probability the supply is Our improvements initially the of system and delays, stronger expected than budget the XX% of given our pressuring FY to offset growth we coming growth be contracts. systems is fruition. to software and 'XX due XX% lower scrutiny likely efforts project by chain This benefit

and maintenance strong for we we growth Global mid-single of forecast low which growth digits now the Services to is on QX, based addition, previously. from mid-single up In expect digits, forecasted

mid-teens double-digit François year earnings we continue an annual to As growth committed on earnings 'XX. growth the FY non-GAAP expect forward. to going basis remain low We to this maintaining in and noted, for

base achieve action to this to continue cost will goal. needed further We and as take our evaluate

over back will now to the turn François? I François. call

François Locoh-Donou

durable. Frank. adjust the growth services on two, is our operating ask to proven call: is base XX-XX you us committed to that one, we double-digit we to cost remain things Thank going recurring product has hardware number year this Number goals; earnings that built earnings signals despite strong year and I XX% global the have to take demand revenue growth this will discipline environment, an if not, and while away revenue split basis we you, that number a nearly three our between we revenue, order annual get and from in achieve achievable, per In X% model delivering share tell XX% forward; it for and revenue software three, we with is closing, believe that exercise business would and

resilient operating revenue The and environment. is to earnings this in us drive and when growth diversified combined with result base, a which enables revenue discipline

please Operator, call open questions. the to

Operator

Our from with Instructions] question Suisse. Badri Sami [Operator is Credit first

Sami Badri

question much very two. you Thank have I questions. least or right. ask for the to at All opportunity

split of we could and kind increases was each revenue decompose the what that is, then you it number price et services into one reported maintenance like Was that? mentioned if just First stronger? just more Could can renewals. -- renewals, You cetera, growth? decompose you

I get landscape demand business get or that if worse, we signals have questions. question is, that mean asking that other mean if risk -- output? into big on IT how year on that question I kind unless FX's of The far deterioration ourselves say And those and results? incremental the is kind the other backlog yield manifest sitting does themselves as get shifted. signals two would has canceled? And to think investors the your they your question those that deteriorates, get as decay product is comments the a is things myself that I or just through are clearly, and demand good changing will there of a orders example, Is the is,

Frank Pelzer

Sure, Sami.

So and I'm your start take question, I'll the François let with going It's first second. Frank. then to

say out, would exact I an two. So the give we even split it's didn't between but roughly

on of through that revenue. the rates sweat and to think people I price the in taking a starting environment and up, see assets come services focus of renewal that that we're services to less the put quarters benefits and those continue we of particularly the to discounting, that putting couple on we've ago, seen go were increases place see to the given business, continuing

split, going the and between not roughly think to you as second give I'm the . but equal them of question. your I let François to exact So would refer I'll two,

François Locoh-Donou

mainly what the yes, meaningfully mean environment seeing six environment, And terms seeing ago. deteriorated softer has that months. the in six we're IT clearly last quite than were demand I in of the spending terms months we of overall over overall

it's to results, that Now would the cancellations capacity. in the buy order our you way see because customers our that that from deliver are applications actually us not typically in on the need appliances mission-critical

of any order cancellations any we to that. expect So we trend nor in seen do haven't see

fact, the backlog and have that orders haven't couple the of our to the ship a lot that displaced have we In customers been last pressing over we of years to us on. them built delivered that

in able continue we hard chain to supply so to order And our that. meet improvements in work on to be

results. in software, of in Where been delayed, environment quarter results, but across our you terms on different seeing we're had a have And demand more projects this that seeing and quarter we've hardware this demand it, that the the that software we scrutiny number seeing deals frankly, in board you're affecting also and and of is ago. rate in a actually a softer softer are in growth than a clearly, software year our lot seen

Operator

next Tim Our question from is with Barclays. Long

Tim Long

impact of But And you're hardware lot of you really know some to others? Could sell an way. that, are -- it related you software? seeing split talk to little you Two, solutions software I could, of anything Is bit we and a it think the kind pieces if SaaS the let that. like the deals? why don't the about what I the or of than on more sounds about a term there businesses apart businesses, it which can distinction of maybe that still between guys then talking us sorry.

that update look just you we need at could us distinction? why to So an give still

François Locoh-Donou

Thank questions. two you, will Tim. take I your

we So start on where -- let demand on the the what me softer on question are software. seeing

demand renewal or business had that we largely expansion to existing new grown between projects, which and I where expected years, was we new on saw new significantly as most the had performed split softer we software have in software expected versus contracts pretty year on if and contracts, the past existing of contracts new said, year-on-year. this think we or forward three the business renewals the contracts

it flat would more digits we double last of coming year be QX. project relative to that expect the in was And the year-on-year. a We in it new what saw software -- was quarter first down

So this or But saw. revenue the was SaaS say, on the in That's term significant terms Whether deals. the was impact more in-quarter pressure. multiyear would of product quite indiscriminate the really was course, bigger we QX impact is I across of subscription of really of most where what a we business, more this what in revenue. saw affected it term subscription it lines, business

of supply orders supply backlog. do our on all a supply I also of Tim, a last improve a that In and terms it's of the year hardware this we be year, ship looking we've that there this that lot ship software progress to because chain certainly, distinction, of year our lot to to and effect that the the a was we've are and year chain able in Look, had And to dynamic good last we couldn’t there question. we think able demand really where on is made around issues had be chain that. hardware

that our want continue the both a of and consume to to lot that's more be ultimately. And customers true of environment. it's software-first hardware trend think to We that's because software. a technology from going But way the customers they towards consume our

hardware total But regardless look dynamics between when the on focus and and double-digit that that at specifically of we to growth distinction committed we and absolutely earnings of earnings driving we're performance company, the than growth, less driving the software.

Operator

Alex question Our with is next Needham. from Henderson

Alex Henderson

little bit what about like. systems helping you Great. a address in backlog your looks

is insights think systems. I terms of could us four-quarter I what sales hoping And the there in XX% running give to of was it product backlog at? was XX% you some in

refresh June give And in a of the lot the quarter, get replace large that to important that customers' the functionality where could milestone, that? needed last And us update but in say, March was the iSeries. base on a it cycle rSeries you solve was I iSeries? on of year do you of think to And second, application was built to order on getting then post, you there order an an then are creates in into installed you out obviously, needs hoping individual that,

Frank Pelzer

going with your the let start over François backlog question. question. Alex, turn me it for Yes. second to I'm to

where a is largely will what we meaning to product and move some result QX, based material, percent talk off we were year, will it's down that backlog, a disclose if of we were than we've up, ended talked we any able weren't in the we quarter. in about more backlog going year our similar on this from I was So talked redesigns achieve. but of to to ability once than say about quarter that one more XX%, a of that in bit that we specifics XX% ship to last QX given where

we customer François, second And then happy seeing so talk your And satisfaction backlog to a from with reduction quite think were we'll I standpoint. that in question.

François Locoh-Donou

the rSeries, there quarters sort the launched growth and we gated two been last it. over of several have ramp factors So since Alex, the the on that were rSeries of there have --

you use was and iSeries. First been cover has significantly rSeries, some cases our the which ability And components. is what number mentioned, that could rSeries the to build the constrained and relative of to second of applications with ship

these of The couple over quarters. going is next of are good news factors both the away

a already had factors, on rSeries. are we So and better access chain be are redesigned end the availability that seeing have we quarter. by component where on to done of supply have the efforts We also We lot still but second still we [we're still QX, and of broker the constrained. in complete our markets will still constraints having]

terms And beyond. case then that number cover And be our the on if the parity quarter the be with iSeries, can times second rSeries are not much lead June pretty seeing rSeries in quarter, in will at in quarter. use the the in will and application, aspect September so of second we of improving

So think terms that ship in we should 'XX rSeries. of I both rSeries expect a progress. to vast demand lot is will majority There you in what into cases, grow of there's for lot FY a appliances. And become of of the certainly

Operator

Samik question Chatterjee from is with Our next JPMorgan.

Samik Chatterjee

I guess terms if regions a share well I on of customer... bit as the for scrutiny, ask budget sort more first to you as François, color which in one, can, of

Frank Pelzer

time having a hearing hard you. we're Samik,

You may up. want speak to

Samik Chatterjee

hear now? me you Can

Frank Pelzer

better. much Yes,

Samik Chatterjee

Yes.

of and the you're cycle or question of sales cycle? stand get as first from? quantifying longer time sort comments are sort on So continuing follow-up. a Or well, extended scrutiny either it relation do scrutiny set early really sort in of starting of extended? most to are that conversion days you budget of seeing as And regions sort was you find where Are like cycles see in cycle? you conversion those in are terms a about get François' more customer XQ of which verticals in seeing, the or a I have terms of the to of to terms fiscal conversion in of And to maybe the you duration a you sort levels line

François Locoh-Donou

Samik. you, Thank

software, we in of softer was across verticals So where terms in and it saw in of demand the terms geographies. board

North this see in most So And EMEA of international said across well the quite I quarter. was we actually in America say, as our verticals. did Pacific, if were Asia in would that particular, you affected I it remember also, clearly QX, and

would companies large of services. effects budget pronounced revisions more substantial perhaps These pronounced. extent, some going was the sector, say, it more the to think tech their were financial I are technology where I in through and

of have to that the will largely year. of the quarter the second dynamics of fiscal expectation in full it's too in our say terms our too is first quarter. the relates we early software our continue have seen as early beyond visibility visibility. it to that, would speak on that to I rest the But fiscal In it's year, the rest to

Samik Chatterjee

a how which -- it. But side. is sort mean, the for supply about of a the as of follow-up, recapturing thinking here. of demand are as are looking the upside which systems What projects is piece obviously had from how would on chain transformation of level you the that, that to sort great hardware -- Got Thanks sweating demand, sort side some you and of the upside system I bit drives for customers delay services appliances, of system of maybe performance? of some François. some And the assets there mentioned in that of you are delayed software are well? on you utilization So of get what more, the sort at sort terms and that? But quantify you the how always

François Locoh-Donou

system as we the think, terms of this we I in also saw -- said the softness in demand, systems Samik, demand earlier, quarter.

we really said is the at at frankly, the of The the hardware. and sorry, on hardware was hardware scrutiny we beginning in is the year, customers we shipping for to software and the more a and that forecast. And is this -- felt an our budgets see in So hardware large affected really from the stronger demand driven revenue year effect both ship revenue ability extent. to half second in by our in forecast the demand, upside hardware upside

a we've So first the you the in revenue chain. in of half supply should QX step on year QX made our from because the and improvements hardware of increase see

don't not the necessarily point sweat exceed limit stronger the already the assets our think create demand in demand would can. in they their In because utilization terms I environment I the place extent think to to to time this trying are try pressures they really software on hardware specifically, and customers capacity of in have that at the on and

in supply fact I that have by we're able gated I has will think which ship. that -- they times is the we demand some so lead that and not point go only at chains to as improve, to long, think capacity. can that add will see for buy do the that been and improvement But on latent

as and they place there these project or able that solution the lot able demand five they I next a ship to think or So able customers implement haven't three, some to our of we order. customers. place because in that, not four, orders And should ago, been two, see we improvement we months haven't resolve to been from

Operator

from with Our Amit Evercore. Daryani next is question

Amit Daryanani

I have soft systems Yes, under folks bit. budgets remains risk the maybe the macro IT of well. sweat pressure, remain back push why more. to the a this two and the guess have wouldn't discussion is I out if as going just appliances François, would fear product little customers or listen,

And so back confidence maybe can recovers systems you this half in appliance remains how then about just have do the that macro business if the remain backlog or strong. challenging and the

François Locoh-Donou

have because ship, I don't have in to is than Well, we us would achieve say, where we forecast and a for have revenue hardware, fundamental very look, including hardware ability visibility need our revenue backlog. we strong visibility on have we to the our today in we of demand strong the necessarily recovery

buy and the multi-cloud to still the these in live And gets I that there's of can I think are applications you But a in these picks It's to tell of what the applications fundamental to when up difficult question grow predict. fact real software hybrid models, growth is or terms In what hardware that to applications. applications recovers increasingly again. as environments. -- and I what are tied the do to complexity deployment of and customers think the continue this demand there. drivers They

of All drivers there. are these fundamentally

will going have come be demand a is ton couple quarters, of of that suppressed time, where quarters, a period back we four it for of is But to So confidence can a what quarters. three of on our for customer say, is and doing fundamental applications. our drive should for there attacks drivers including, business I applications security that demand are continue, the because and still

some In gives things models it's to of that think confidence them on a CapEx, of way And pressures you're provides model. what current very those models, that the to our customers we mitigant, deployment our that built the plays the we serve of one and OpEx fact environment, because on have aspects that come it's in of our one others around and other going we've that the if back. or you the seeing part are one and well flexibility all lot will. So have our business resilience operating us this built consumption is ability

Amit Daryanani

range And growth XX% That's then really be? ability this look would does Or this just on helpful. talked of the all what I Got be range the had software about longer-term the beyond the what will if in what know to talked that trajectory the fiscal about XX% alter does folks you've about you're through software from side. it. And software you previously. just -- 'XX? new the I your Is anything sub touch year? you the then at there expectations seeing business

François Locoh-Donou

and and sure we're our start and multi-cloud hybrid part. going are need me environment. the think Let think not We we we in will to a deploy our through. customers go back to with hearing favors architectures FX software be single continue that where the cloud continue I not why last cloud just deploy that customers and because to of an cloud is that in long-term the were Amit, alter you view, to we'll We I've taking It to were does we're that our drivers evolving software -- five if architectures, ago ADC. years absolutely location, everything when to going go to sorry,

Today, we in to where very are architectural architectures multi-cloud. positioned conversations. going. these They're going well the We're are positioned

not from we're is away we're architecture seeing what pressure. an perspective, so shift the And seeing decisions just financial and from FX

term FX, multi-cloud are the shorter security, that So and to growth environment applications the there term. about XX% for of long growth in drivers confident -- we're and the very drive going in long-term be modern that software plus the we've talked

XX% a imply half the patterns that it in will a get second in be was Yes, less software. There It's demand because a mentioned. we of than in path change we've we quarter terms on to the have the we said path narrower would it's a likely it XX% to ago range there. seen is that have

likely That's we're And that's we to that would it's rebound us see to XX% to that. for less this quickly able and why saying unclear, things growth. be XX% deliver so whether would that

will You services we've our have Part seeing mentioned on earlier. of the and also on on hardware however, upside I the model -- the upside made us supply model is operating the you're revenue. Amit, the built improvements have and of perhaps business that that revenue we benefit the note, chain allow to balanced

So to revenue XX% feel achievable. balance, still range X% is on we our

Operator

Marshall Meta Our Stanley. next question is from Morgan with

Meta Marshall

hybrid are Maybe kind kind kind upgrades of we you two about me. could helpful One, thinking often questions other back? some out that software maybe new or software larger of these most figure of security for at when tied indicators kind coming migrations cloud thinking -- deals architectures, just be to software lay looking associated new what what of of or be just could if they about the with, out growth to are would

then margins just little on longer. bit gross question. staying for the And maybe are Product second depressed a

you of it get Just to or about we've thinking time might to how the kind supply of margins some to chain the rid just product the these of some take that past? year gross are the getting in of progression guys of back fees costs the throughout broker seen

François Locoh-Donou

the but modernization. the take projects are mentioned, I'll one that first so application Frank on modernization The factors -- second margins. to of take will you infrastructure large the all Meta. gross Thanks, tied the software or typically one.

to they're So or be lift in partially these environment, -- had, software-first it and have or cloud could and our hardware in their be a public could move a cloud would are to that be private with wholly shift. a environment. companies deciding This a implementation say, that

on of up More not, actually part often they than software environment whilst their estates the are setting hardware. application keeping

an even will move we private own in higher deployment or really more want applications they and time cloud whether a cloud that's to modernize and So cetera, time et automation environment automated, in gives to of whether to their it's of frames levels cetera. a faster better set them market, public the pick that it's that

of project of So that's for large the multiyear the type subscription. kind

there test NGINX move projects are of when need a new that complement orchestration. other example, now a is development, that modern a security been typically moving Kubernetes that also as There in production, And they have capabilities applications We to, new NGINX. brings strong into just production. for are have applications, and and for they're into number and networking with

a of we're seeing lot So projects. these

a solution, protect with model of we're Cloud Distributed front them deployment would typically, that of business, it's long traditional FX. SaaS I is, applications choosing them SaaS and a also are have of but now our that a with different to had not missing a tail part would where in the our offering ADC offerings, customers say, solution of for past, security And in a

of multiyear I sort course, the So those of the on are three model subscription would are, more I that first of types the But mentioned. anchored implementations. say,

Frank Pelzer

And relation the in Meta, margins talked product way QX. improvements really supply into our that margins, up of view the to year this latter even in particularly gross about gross of to benefit changed. margins, has all product gross we not year, the for our starting the half chain

improvement. terms we're where We components But product broker we're of components few benefit see builds have expedite and that in variance up going gross a that go are our working we FY got the we this through critical through margin fees price year, still be purchase in the the 'XX having still box and had make real market. the to to that going in is to

So improvement will will QX, largely, in more it but 'XX. in start see see of you we to FY

Operator

from James Piper Fish Our Sandler. is question with next

James Fish

don't kind main after number, question XX%, to On missing point. I the give to I this of it's we're the not getting reluctance get number -- hours. get the at the XX% a we're but software

kind that So be decline of business, for the to software comp new business helpful, would are continue year? should as the new any the in double-digit you improve the that net of of the recurring easier second half And assuming remainder in this we Frank. expecting And clarity be quick new of year? have gets on should follow-up kind after. I Or just a

Frank Pelzer

do ago, question, And still We Sure. Jim. get because Again, we path a as harder mentioned, second François I are -- to to again, XX% updating the there. our see it's XX% appreciate path. we a guidance not

in reason into we And is came now we're updating is in demand. cloudy year, of over I the environment. to And we because about the with terms necessarily expecting back -- why right of the we're the think that change not talked when not part visibility we grow, to part percentage growth that And expected that that half declines XX% we expect didn't QX. as the to of new saw of revenue from XX% of business to types the expect come activity. but that didn't to XX% in going we was see that we

lack do to be likely like today. to got that with right offer range less But it's now, And the we we've so that you range. in new that feel have we will just we visibility of a don't

James Fish

this newer of of this on to And but François, or it and is kind that able with experience side like inside deal. no hope Lilac surprised product What's to an competitive this environment? it with some Lilac? get more to to advantage? point, be Why done competitors why it at against with And more And NGINX just SaaS-like trying asked couldn't Okay. Akamai is then Cloudflare one's understand customers' the a Volterra your already? offer strategy align the about overlap I'm

François Locoh-Donou

Thank you, Jim.

Yes. So

On start couple the the months. Lilac, Cloud a about ago. with of a -- let year good our with really years and security very, seen traction Distributed the Services platform we've And me over last acquired Volterra offering ago. XX a launched very with we

a We acquisition And platform. offering in so started want build deliver CDN to services term. with essentially talked the edge innovative an on Services technology And order with we that team, in-source offering also improve longer based And on to and offering be Volterra Cloud OEM the Lilac. was able this agreement traction. the in work increasingly was Distributed that and this on to the on to to secure recently platform. to a with continue the the team That for

pretty innovation CDN being So on on API offering we services us of the our Distributed Cloud. anti-bot we're to protection, the about accelerate into joining able that our application And DDoS security, and web excited of and team completes offer it now bouquet firewalls, in terms front. that

Operator

is Raymond Simon with from question Leopold next Our James.

Victor Chiu

This is Victor Chiu in for Simon Leopold.

FX a you're noting? You factors versus migration slowing noted are that But is specific that software headwinds gives the like cyclical still reflection the that confidence secular that point the cloud there that you largely intact. slowing to more fundamental of you can demand around isn't

François Locoh-Donou

are want think years the to that than that last shift tech Yes, lift I to because is cloud, seen migrations seen migrations, have of the a is single than couple not have it's is tailwind cloud. multiple security services. I are and to even actually cloud ideally Victor, infrastructure customers for environments what FX to more we essentially that headwind. call is say model suited agnostic have for we that portfolio customers a to applications public that, we over portfolio interesting you their and But a if delivery leveraging be them which And would migrating of the like public an Increasingly, multiple different that built, more and clouds, private applications, an of on-premise. that application architectural

that and very application And in the so that accelerates and hybrid we enterprises strongly way as deploy trend that that of their becomes more more mainstream feel and large enterprises portfolio. cloud multi-cloud deployment

FX drive software to going and services. for is and growth specifically, It FX for SaaS

macro-driven is long-term All indiscriminate our are spending again, modern that environment to an kind which a comes architectural across it's and that's issue. absolutely security, will now, applications. are contribute on growth we competitive drivers right is those is not cautious of our It I views intact. So mentioned or it What our we that very seeing earlier, is lines. of product the largely why a where feel multi-cloud three software, confidence environments,

Victor Chiu

kind Well, gives the macro see trends things that, those that confidence that I of of observed any you you normalize? regarding multi-hybrid cloud resume we the to you see you started mean did mentioned you when trends will observe seeing, did and prior headwinds -- trends of those kind do that so -- you and that

François Locoh-Donou

Yes, them, saw the three environment, was of growth I at XXXX, XXXX, to prior we our software Victor. look also mean, our 'XX was software first look the And which change think XX%. our around the you is growth in it close in in XX%. software why if I you at quarters to if growth

Services, these it modern from serve and of Shape for with now we all security multi-cloud So with deployments more applications in more Distributed that we Cloud drivers, solutions, three need of with and -- environments came in large we our serve with BIG-IP Cloud, that customers. applications more NGINX security Distributed front deployment

Operator

Capital Blakey question next from is with Markets. Tom KeyBanc Our

Thomas Blakey

you to into, on that renewal, the growth in of for questions of you've kind of number? back kind Or guess first both as us anything business that growth any well. can believe, question -- fiscal software lead I that in is my quarter. strong the double-digit that -- The also are numbers can't -- true-up or -- are I remaining? given believe Is into 'XX, onetime into kind have kind there in that anything of don't that, visibility would you us

Frank Pelzer

Yes. think versus We unusual the benefits, business, subscription was want quarter. to there you the perpetual experience but about of in I the sort the business onetime did not any nothing -- think however

Thomas Blakey

true-ups. and Yes. to Frank, sorry, And with focusing subscription as -- renewals ahead. go business on regard I'm the sorry, just I'm then mentioned you

Frank Pelzer

no. Absolutely, Tom. No, no,

Thomas Blakey

little about beating have with kind last into years you trend of be of where kind Comments maybe. comments the quarters François, on your there? jive license of handily last -- and could trend of perpetual your from of couple a perpetual a what last if in doesn't above couple from maybe helpful. in spending like a pause perspective, line really in line, And you slowdown that been couple juxtapose would the that bit do just you've Okay. the the line the -- pretty with just And then side, business the perpetual pipeline years, visibility this over

Frank Pelzer

in in people he cases, have think have certainly wants that, our with other the they model François Tom, cases, and and Yes. And the add, start to flexibility some of can. customers we of consume. let power budgets. budgets to of CapEx some the Again, me want OpEx is way

we And they'd CapEx basis, revenue on between a spend not consume of so rather the happy that and some in the through think perpetual. either. falls something when in of to try split time two. ton We're forecasting a certain will I It's that come instances,

million. up tick to customer a seen a million, preferences quarters, those solutions. last low from was of they $XX-ish that may our for the consume generally, what and sort upper quarter couple have are million to $XX the want But low $XX And business you of how so

Operator

Citigroup. with Suva Jim from is question next Our

Jim Suva

in is maybe of hardware Your of customers is, two with that, both towards Because your the that the would and supply absorbing is think they it then commentary outlook buying will about the hardware to software shift to things. during the going this year issues but some and being chain that impact face stronger together. such to kind especially all past question more I orders are customers did at headwind? I or the due all, the the which understand and about mix impacted that and a normally,

Frank Pelzer

to to on able the we've own in supply a to customers by sale affected chain, it demand general the possible our next said And three not of be year, soon is us we what both all reduce as to demand. quarters. a of the these which get because have supply have made that believe last to able our this be is tailwind we over environment and ship customers our Jim, we to reduce to a will lot lead and we always and going lot The our answer suppliers as chain? our to able wanted times, orders to were when from that our give orders actually to we're ship platforms we of we're in better yes, be improvements that visibility redesign

So -- actually of what we'll improved it ago. yes, the is by months the see It's was today that. we ship hardware affected side for soft our where it in to of view three the it part But be able has year. from why because is that's

Jim Suva

of given should for XX holding up, kind reserving then Okay. capital think versus makes just a there? think how not about how the cautiousness, Or more M&A, macro ago? any we maybe sense. buyback, That Are lot months capital stock you holding, And should deployment functions? we six, little a of about organic deployment, changes

Frank Pelzer

Jim. Yes,

the share loan this the outlook -- really associated of use deployment flow pay in not still on over capital we a quarter. as it the cash which little term we spend -- on mentioned expect We to million our our you year. earlier, of changed. XX% was So $XXX debt repurchase with hasn't free Shape has did acquisition, cash as down And

a the the reflects and cash QX. in obviously sum. million which was we change that that balance our so we we share repurchase $XX in small announced Lilac, was did And It did acquisition And undisclosed an today.

balance changed, going use and to change will And forward. so and our capital we're that not the has how we don't of the said activities we it going anticipate

Operator

with Fahad Our question Najam from is Loop Capital. next

Fahad Najam

the software revisit to issues want I again.

look you If perpetual, at it's growing fairly steadily.

renewals, help more? you you anything understand what terms a net maybe maybe said analysis the of can rate that can little elaborate in So just us if you the maybe was saw retention bit line? cohort it in So

applications also legacy we thinking share modern on versus then should mix about is is applications? with question be exposure And new us that how you your trending. to there's anything I can And guess the furthermore, if how

François Locoh-Donou

All right.

are production in me are I with the applications terms the and how going of modern in the number and the percentage applications growing, that say, of on these mix trending range is applications actually number annual think trending. in the which in an of with deployed Whereas are XX% world. that is of range growing the applications, it's out we in start basis. there Let them overall, in I applications modern terms into say of the would the line would single-digit legacy population legacy

simplify advantage is is in NGINX already FX applications than seeing a to excluding folks applications. applications And are modern And has an in we adding is legacy where gets though, the component blurred been of so our than also has that, a we're there number applications like application think more and modern generating get where of legacy over this I is a this But lot that revenue. time, play with more already that will modernized components where our like production applications specific the be yes, environment and that of we vendors a consolidate to an especially is deliver to vehicle have legacy on requirements operations, for or where legacy Yes, a to modern But our have Services. their your you in modernizing application play these both services customers ability and commercial involve and implementations Cloud looking single a platforms Distributed of where are lot application with plate legacy critical. BIG-IP. in traditional want customers, to actually they deliver can both

skew it faster. needs. modern one be And company of will ways as both more they towards that applications so we've to Over grow able the the serve that's to positioned time,

Frank Pelzer

largely we net business any second SaaS true I retention which business, of subscription with renewal the we're is came new mentioned not offering we includes as of software agreements rates. expected. on terms in business the the like some of multiyear forwards the the that as the side and our will say as associated for And metrics

The largely shortfall to due didn't was in the that drive expected new that growth have just the in we software would way experienced we QX. business that it

Fahad Najam

Shape years progress able how I have how of your the under give integrating is one year next maybe sell have and how more in assets acquisitions FX? update you think to fiscal solutions? on -- Can follow-up. François, these these now that Is had it about are Any you've 'XX? do the these you your a and on upsell an we integration few acquisitions gone? -- belt. sorry, acquisitions post us NGINX, And update into integrate

François Locoh-Donou

absolutely. Yes,

NGINX and say integrations them complete. I on take So order. Shape let me largely would quickly are in

in single if sales complete increasingly, go-to-market security example, a from enabled to we NGINX, And to engage of customers will, offer, NGINX, pane and NGINX both can promote NGINX. so a deployments. both mainstream -- terms resources already BIG-IP also so of on visibility we're go-to-market, from they're they're glass on capabilities, have on our offering for customers our marketing able get and we whereby be to be have now to BIG-IP able perspective on and product so FX we NGINX. or And from you onto you've complete perspective ported And a,

Shape large I in BIG-IP. have on XX% behind thing that, we're we done the integration almost We've now but complete. say the Shape, where available little a is would there

on offering. Shape anti-bot platform quickly. also as a in capabilities is and standard more Shape the turn who can customers defense BIG-IP our integration. also Distributed have tie done And Cloud available lot a we've Our of go-to-market

to the say marketing when from to -- drive continue way, are a integrations us perspective. they a better I from go-to-market, because those operating they leverage allowed critical sales and quite from have By

sales it's chain. So the of revenue if marketing was expense, in XXXX, because look XX% supply it in you XX% had of our XXXX we think and so or despite at pressures and revenue I

to you XX% a roughly to OpEx XXXX, So operating see at gone 'XX look XX% leverage there. you And XX.X% guidance. of our implied our overall percentage in FY revenue in as from has down

the have synergies to also enabled drive us right operating So the and integrations leverage.

terms -- of about if I know And is Volterra, asked the then course, in don't you of newer.

deployment they agnostic manage which modern cover legacy and with get whether that their that a policies models is all a by and single they still can all pane is these chunk ultimately, to we're all or in to FX, hardware, whether SaaS quite offer the through getting we're that's bit it's we glass can going that, our software from a to integrations platform onto that of player infrastructure. a positioning it's security done already Cloud, can underlying of but going, to or way and Distributed quite so visibility unique be we've that deploying capabilities which of traction And where from regard, all single that console all a the call that of environment. And are a security their we're our we in now in of customers going

Operator

Ray Guggenheim. we Due question constraints, will from time our with to McDonough be last taking

Ray McDonough

now. Just first were you two right three-year can how license contract about It's any understand trended I duration? you deals the you're really talk renewals? contract you're seeing renewals I could. giving duration on in software Are if any cohort term seeing not I this of year. new you understand cohort. selling contraction of metrics But that that

growth we EPS I then And think of normalizing flow margins about as lap there. cash commitment how year? be the annual this more double-digit the invoicing kind change terms would question growth around But the the towards flow cash and you should and comment appreciate second

Frank Pelzer

monitoring take on those? first in Sure. term on not or the we The Ray, terms why change the of of that contracts, changes but in primary we the second seen are contracts I putting in contract we in that, place. are in renewals both any certainly sensitive of don't discernible duration have duration

impacted stage. that so And not has us at this

because our cash consumption of and of are terms EPS commitment benefits programs we're to on the of will the we not yield the half some in in In revenue we then are receiving. double-digit in new the more that see actual as upfront much adding flexible to the the cash the cash growth relation we -- of back will flow, slowdown recognition that

will So normalize bit. to see that we a benefit start that the and of see out

that will cash is Part flow had fees the of purchase those going see those will for come extra out, that variance price issues operations. to help our we're supply the other and benefit cash largely the that and flow expedite chain from we've and

more it forward. the I to will see of both of to in going start model normalization. think, one predict a But those, the difficult So is areas

Operator

conference. end today's Thank question-and-answer you. of today's is This session. This the concludes

your this you participation. lines at your for time. disconnect Thank You may

F5 (FFIV) 24 Jan 232023 Q1 Earnings call transcript