Q4 2019 Earnings Call

Good afternoon, and welcome to that Ffive networks fourth quarter fiscal 2019 financial results Conference call.

At this time, all participants are in listen only mode.

After the speaker presentation, there for your question and answer session.

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I will now turn the call over to Miss Suzanne interval Suzanne you may begin.

I can do long, a vice vice president of Investor Relations.

Chris I might go there now.

President and CEO .

No Sir emphasize executive Vice President of Yeah, So we'll be making prepared remarks on today's call.

Other members of the aside executive team are also enhanced answer question three to any portion of today's call.

A copy of today's press release is available on our website at <unk> Dot Com, where an archived version of the call out there will be available through January 27 2020.

A replay of today's discussion will be available for midnight Pacific time Tomorrow October 24 by dialing 805 8.8367.

Well 166 to one for six or too.

For additional information.

Question. Please reach out to me directly and I've talked to long at a five dot com.

Our discussion today will contain forward looking statements, which includes words like believe anticipate expected target. These forward looking statements involve uncertainties and risks that may cause our actual results to differ materially.

Well I buy these days.

Factors that may affect our results are summarized in the press release announcing our financial results and described in detail in resi filing.

Please note.

No duty to update any information presented in this call.

With that I'll turn the call over to Francois.

Thank you Susan and good afternoon, everyone.

Thank you for joining us today.

I will talk briefly to our business drivers before handing over to from to review the quarter's results in detail.

Customer demand for consistent application security and reliable application performance across multi cloud environment drilled 5% total whether your growth you know fourth quarter.

Strong customer demand for security use cases, including web application firewall and I don't if your proxy as well as computer you all attraction.

Our second consecutive quarter of 91% software growth and true overall product revenue growth.

With that.

That's fine application services are making it possible enterprises and service providers across the globe deliberate digital experiences with the reliability and speed that customers expect.

Oh, so for this was partially offset by our systems business, which was down [laughter] customers increasingly look to consume a five services a software.

Oh. So this is the deliberate is strong 6% revenue growth and continues to produce with both gross margin with consistently strong attach rates.

I will speak more to our business dynamics later in my remarks.

Overall, we are pleased by the acceleration in our transition to more of a software driven business and the team is executing very well against our long term strategy.

Drunk.

Thank you Francois and good afternoon, everyone.

Friends, One noted we delivered another quarter of strong revenue growth.

I'll speak first to our fourth quarter, and then to our fiscal year results.

Q4 was our first full quarter was Enginetics LNG Nexus contribution is fully integrated into our results.

Fourth quarter revenue of 590.4 million was up approximately 5% year over year and above the top end of our guided range, a 577 to 587 million.

GAAP net income for the quarter was 94.8 million or $1.57 cents per share.

non-GAAP net income was 156.7 million or $2.59 per share also above the top end of our guidance range.

Q4 product revenue of 265 million was up 3% year over year and accounted for approximately 45% of total revenue.

As far as Ron mentioned software revenue grew 91% year over year for the second consecutive quarter.

Software represented approximately 31% of product revenue in Q4 up from approximately 27% in Q3 and from 17% in the year ago corner.

We continue to experience strong uptake on our software solutions sold as he always an annual subscriptions.

The contribution from L.A.'s was up quarter over quarter end up substantially year over year.

I will take a moment to elaborate on the impact of the implementation of six so six which was the source of some discussion with investors last quarter.

Let me give you the punch line, though which is that the adoption of six so six hardly impacted our year over year software revenue growth in Q4.

Let me explain why.

Under the modified retrospective approach to assay six so six we're required to compare our six so six Q4 19 results to what they would've been under six so far.

In Q4, we estimate the implementation of 66 had a similar impacted Q3.

The six so six to six so five comparison is not meaningful for a measuring our software growth because nearly all of our 2018 revenue came from perpetual licenses or other consumption models not impacted by six so six.

In the year ago quarter had six so sex been in effect.

The net impact to the software revenue would have been de minimis slightly more than $100000, which means our Q4 software growth rate using six so sick enough why 19 compared to F 18 would've been approximately 90%.

Said differently, our software revenue growth is being driven by new offerings, and new consumption models and not an acceleration of existing run rate of subscription revenue.

Moving on.

Systems revenue of 182 million made up approximately 69% a product revenue and was down 15% you every year as customers continue to accelerate their transition to software based solutions.

Services revenue of 325 million grew 6% year over year and represented approximately 55% total revenue.

On a regional basis in Q4 America's delivered an exceptionally strong quarter with 11% revenue growth year over year and represented 59% of total revenue.

EMEA was down 3% and accounted for 23% of revenue, while a pack was down 2% and accounted for 18% of revenue.

Looking at our bookings by vertical enterprise customers represented 61% a product bookings and service providers accounted for 17%.

Our government business was very strong representing 22% a product bookings, including 13% from U.S. federal.

In Q4, we had three greater than 10% distributors Ingram micro which accounted for 18% of total revenue in Paris, often tech data each of which accounted for 10%.

Let's now discuss our alkali Q4 19 operating results.

Gross margin in Q4 was 84.6%.

non-GAAP gross margin was 86.3%.

GAAP operating expenses were 385 million.

non-GAAP operating expenses were 317 million.

non-GAAP operating expenses were higher than our expectations as a result for higher sales commissions related software sales our GAAP operating margin in Q4 was 19.4% and our non-GAAP operating margin was 32.6%.

Our GAAP effective tax rate for the quarter was 19.7% our non-GAAP effective tax rate was 20%.

Turning to the balance sheet.

In Q4, we generated 206 million in cash flow from operations up slightly from last year.

Cash and investments totaled approximately 1.3 billion at quarter end.

Yes, So was 49 days and capital expenditures for the quarter were 21 million down sequentially as we completed the final phases, a building out our new downtown Seattle facility.

Deferred revenue increased 18% year over year to 1.2 billion.

Less than half the increase over the prior year quarter relates to the adoption of six so six.

We ended the quarter with approximately 5325 employees up approximately a 130 employees from Q3, reflecting our continued investment in growth areas, including sales and research and development.

In Q4, we did not repurchase any of our common stock.

We continue to view cash as a strategic asset for our future growth.

So our primary focus with cash generation is augmenting our strong balance sheet and building a war chest for strategic purposes.

We may opt to repurchase shares during any open trading window.

Let's briefly discuss our fiscal year results.

For the full year total revenue grew 4% to 2.24 billion.

Product revenue of 900, and the 86 million grew 3% from the prior year and accounted for 44% of total revenue.

Within product revenue software grew 60% while systems revenue declined 8%.

Services revenue of 1.26 billion grew approximately 5% during the year and represented 56% on revenue.

GAAP net income for F. Why 19 was 427.7 million or $7, an eight cents per share.

non-GAAP net income was 626.3 million or $10.36 per share.

Why 19 cash flow from operations totaled 748 million down 13 million from F 18, largely as a result of the Enginetics acquisition.

Capital expenditures were 104 million.

Now, let me share our guidance for fiscal Q1 of 2020, unless otherwise stated. Please note that my guidance comments reference non-GAAP operating metrics.

We continue to make strong progress transitioning our business to a software driven model.

We remain confident in our position in the market and expect our growth will be driven by the growth of applications and increasing demand for our multi cloud application services.

We also expect continued strong demand for our software solutions as subscription and easily offerings.

With this in mind, we are targeting Q1 20 revenue in the range of 560 to 570 million.

We expect gross margins of approximately 86%, we estimate operating expenses of 296 to 308 million.

We anticipate our effective tax rate for Q1 will remain in the 21% to 22% range.

Our Q1 earnings target is $2.41 to $2.44 per share.

In the quarter, we expect share based compensation expense of approximately 46 million and 4.6 million in amortization of purchased intangible assets.

Finally as has been our practice, we want to provide you with a high level fiscal 2020 modeling assumptions.

First we are tracking to our horizon, one outlook for mid single digit total revenue growth and anticipate a continuation of the trends we saw in the second half of that for a 19 with customers accelerating the transition of their applications to software based solutions.

On slide 20 operating metrics, we anticipate gross margins of approximately 86% for the year.

Following our typical seasonal pattern.

We would expect operating margins to move down in Q2 from Q1, and then increase in the second half with full year results within the horizon, one range of 33% to 35%.

We expect slide 20 stock based compensation in the range of 185 to 195 million and capital expenditures in the range of 50 to 70 million.

We expect to update our horizon two outlook at our next analyst and Investor Day, which we have scheduled for March Threerd 2020 in New York.

Details will follow as we get closer to the date with that I will turn the call back over to Francois that's well.

Thank you Frank I'll speak to some of the business trends, we're seeing highlight some customer wins in the quarter and speak to why we think we are well positioned to capitalize on sky rocketing application growth before moving to acuity.

But first I want to highlight the partner news, we announced today with Amazon Web services.

We have signed a strategic collaboration agreement with Mws.

The agreement outlined specific areas of collaboration across South field sales solution architecture professional services team.

That's five will now have dedicated it obviously was solutions architect and professional services resources train on five technical architecture.

And our application services across all product lines and geographic theaters.

They will be designing a five into their solutions for existing and new cloud native customers.

Additionally, we have agreed to jointly collaborate on new offerings integrating five application services would it have the rest services control tower cloud front and other core offering.

We expect this will result in improved customer experience with those customers extending their existing workloads to eight of do us and for new cloud native applications being deployed in public cloud.

We are excited with this next step in our partnership with their Ws.

For our joint customers, our collaboration will reduce the complexities of securing their assets with a consistent security posture and policy management in hybrid cloud deployments.

Now, let me turn to the fourth quarter and the tremendous progress, we're making in transforming a five business and driving software revenue growth.

Last quarter, we said that from our customers perspective. It is clear that five has moved beyond traditional AIDC player.

This quarter's results provide another data point of our progress and highlight the fact that five is emerging as a leader in a rapidly expanding multi cloud application services space.

Our customers increasingly want to consume more five services a software as to securely deploy application faster.

We have taken a number of steps to unlock this market demand.

Yes.

We have created new consumption models, making five services available in subscription and Ellie.

In doing so we are reducing friction for both enterprise and service provider customers and showing easier software provisioning and reducing operating complexity.

As Frank mentioned, we continued to see strong subscription and early traction in Q4.

In some cases, we're seeing opportunities to expand our revenue opportunity with customers with who we have already secured in the late.

For instance, last quarter, we mentioned, we had pools immediately with a large next generation mobile carrier in APAC, where our Fiveg ready NFC solutions would address their growing fourg mobile broadband consumer services.

I'm pleased to announce today that the customer is rakuten and during Q4, we secured a second all software used case with them for Gi firewall.

Second.

We are enabling more automation and orchestration on our platforms to enable faster application provisioning.

In a real World example of customer impact we are providing one of the world leading converged video broadband and communication companies a cloud based disaster recovery solution for their mission critical Entertainment back office support so.

In the case of high failure, a disaster recovery solution is activated replicating the customers back office support service in helping us.

Five big Guy to the Central management solution for Big IP provides the functionality to automatically start as five big IP virtual edition emailed to us when needed.

It also provides application performance visibility of the activated disaster recovery system.

In addition, big I Q is providing on the men licenses for the big IP virtual editions, which are being consumed under an equally to ensure cost effective consumption based licensing for the disaster recovery infrastructure.

Third with Enginetics, we are enabling application services consumption in may two container environments.

As an example.

During Q4, we secured a joint as five engineer within EMEA based financial Tech customer.

This customer within existing five customer and also a long time user Avenger next open source for application services in their microservices environments.

The customers development team have built functionality on top of engine exited open source addition to achieve the level of functionality the business amended.

As the scaled however, this do it yourself approach became difficult to manage.

The combined five an engineering team worked together to demonstrate the standardizing on engine X plus with software support would deliver better value for the customers development and operations teams.

Fourth.

We are extremely all our security offerings to software form factors.

We continue to see strengthen our software security business as customers top into the efficiency and scale of the public cloud, while utilizing a five to secure their applications and maximize availability.

During Q4 for instance.

A large credit union with well over 1 million members chilled five to protect their apps as the extends to the public cloud.

The customer wanted the efficiency of the cloud along with a consistent set of applications protection policies that matched the on premise security.

They are fully integrating the five solution into a CIO CD pipeline utilizing the five automation tool chain Big Q and advanced security features in our web application firewall.

First on finally.

We also are providing solutions specific to the software consumption needs of our service provider customers.

In a Q4 when within EMEA based service provider for instance.

We sold virtual JCI and land capacity extensions with DNS manager in a win that included system software and at the and professional services.

As a result of these actions and our customers' ability to operationalize and manage virtual infrastructures. We are also experiencing changes in our systems business.

What I would ask that you keep in mind as we work our way through this model transition is that as five is different from traditional hardware did a center vendors.

Value proposition is and always has been.

Off where an application fluency.

As a result, the value we bring to our customers is not tied to the data center.

Rather it moves would be application.

So as we continue to take steps to another our software from purpose Bill hardware, we are capturing growth in new forms of consumption of our application services.

While we believe software used case are and will remain top of mind for customers. We do see systems demand is certain high performance use cases.

With customers that wants to control and manage end to end application delivery in certain key customer segments.

And in some emerging geographies as an example during Q4, we worked with a state owned real estate company in APAC that was looking to refresh at five solutions that we're approaching the end of support.

We initially viewed this as simple systems refresh opportunity.

However, we learned the customer was also looking to enhance and improve the current WAFS solution.

We're also planning an upgrade to comply with the application infrastructure architecture standard had issues with our single sign on solution and suffered from an inefficient security chain.

We won the deal with the systems based solution that combines our local traffic manager without application security manager.

Silicon attrition and access policy manager.

Before I move on from Q4, let me also provide a brief update on Enginetics.

In our first full quarter as the United five Enginetics theme, we continue to drive value creation plan at a rapid pace.

Combined solution the controller that bill on the already successful Enginetics controller within hence enterprise class features is on plan are released by the end of January 2020.

We expect this converged solution will be an accelerator for engineers business expanding both the addressable market and potential deal sizes I spend a broader set of use cases across desktop and super Annette ups customer persona.

As five and engine ECS sales team are coming together, well with tighter go to market teamwork and collaboration which we expect will only accelerate in 2020.

I will spend just a few minutes speaking to how we see our opportunity unfolding in fiscal year 2020, and beyond before we move to Q1.

We are focused on expanding our leadership in multi cloud application services on driving continued software growth on big IP virtual edition as well as on Enginetics and our cloud services SaaS platform.

At the same time, we're working to forge new World go to market capabilities.

To expand our reach today about.

Strengthen enterprise competencies on supporting and growing subscription business.

Scale, our public cloud partnerships.

And we believe the size of our opportunity is growing.

And our March 2018 analyst and Investor Day, We said five growth opportunity was intrinsically linked to global application growth.

Do you see estimates there were more than 340 million enterprise application workloads globally in 2018.

Forecast that number will grow to approximately 1.8 billion by 2023.

At the same time the number of applications is growing nearly fivex the complexity of deploying managing and securing these applications is increasing.

Enterprises are embracing new highly distributed architectures and multi cloud environments.

Hi, I know previously the risk of cyber attacks and security threats is increasing with the majority of threat targeting applications or the identity of the person accessing that application.

This set of challenges is as fives opportunity.

In an increasingly fast moving and complex environment, we are unique position actually reduce the complexity of deploying applications across multi cloud environments to help our customers develop deploy and scale the business driving applications significantly faster with substantial.

Will cost savings on the infrastructure required to support managed and secure those applications.

Perhaps most importantly, we are approaching this challenge with a customer focused mindset.

Let me elaborate.

Over the course of 2019 I have had the opportunity to talk to customers around the globe that manage their applications capital well.

Our strategic assets similar to how we manage physical and human capital.

They all share to common attributes.

They consistently deliver a higher volume and fast the velocity of code to user.

What do I mean by that.

Developers are core to building applications. The right. The code that is the foundation of application the business logic backend components and customer facing interfaces.

However, build a great application is only half the journey.

The other half is delivering that application that code all the way through the mobile device machine or browser not a NAND customer uses to access the application.

The world more competitive companies have mastered how to push code from development into production with velocity at high volume.

They do it in minutes.

Good companies do it in days.

For most however is still takes weeks.

And at five can change that.

For example, we recently helped a large banking customer reduced the amount of time it takes to deliver code to users.

From 23 days down to just six minutes.

Within five solution. This customer is driving new revenue generating services and powering developers to be more productive and saving time and money on the infrastructure needed to support their application capital.

Our customers can achieve results like this because we deliver the most comprehensive set of technologies and services available and we remove friction from the code to use our delivery chain.

So how is this different from other approaches.

Vendors are trying to vertically integrate application services.

Tightly coupling the infrastructure at a silos set of application services.

We believe application services need to be infrastructure ignostic spanning from code to user.

Ours is the only portfolio of application services that stretches horizontally from the server, but how developer code all the way out to the devices that our customers use.

In other words, we are obstructing the application services from the infrastructure and making it possible foreign customers applications to run anywhere cloud container legacy.

With access to a consistent set of application services.

We believe this horizontal approach better serves our customers and provides a sustainable differentiation in the market.

During Q4, we shared this vision with more than 75 of our most important customers and 90 of our key partners out aspire, our premier customer engagement Forum hosted in Seattle.

The that's booked 550 attendees to our new customer engagement center, including customers from every theater and every industry.

The benefit of obstructing application services from network infrastructure resonated very well with attendees, who received custom demos and tailored sessions showing how as five can help them move faster and more cost effectively.

The reaction was very positive and we're looking forward to sharing this perspective were all of our customers in 2020.

In summary, we are entering 2020 in a position of strength.

We have built on our market, leading 80 cm security portfolio with Big IP Enginetics I find cloud services Silverline and other investments.

And continue to add new application services.

We have added technologies that either provide our power observers web servers container networking apiay solution DNS distributed denial of service capabilities and content delivery networks.

We are leveraging best in class application management and security services.

Thank you base of thousands of enterprise customers.

And real time intelligence and action.

And we will continue to enhance our ability to meet applications wherever they are to simplify multi cloud complexity for our customers and to expand the breadth of our application services, including extending security services across all our platforms.

In closing my thanks to the entire five team for driving a great quarter and here.

Your gripped the termination and flexibility is behind a significant transformation of our business that we believe will bring new long term returns to our customers and shareholders.

Hi, Thanks also to our partners, our customers and our shareholders for joining us on our journey.

With that operator, we will now open the call acuity.

Certainly as a reminder, in order to ask a question you will need to press star one on your telephone.

Withdraw your question, that's the pound or hash key please standby will be compiled accumulate roster.

And our first question is from semi Patrick with Credit Suisse. Your line is open.

Hi, Thank you. So you commented on the strength of software in the dynamics to expecting 2020, just to give us a little bit more of an idea on how we should be modeling systems growth would you say that the dynamics and the growth rates that we've seen in the last two quarters in systems growth should all be should also be extended through halfway 20.

With the software dynamics maintained.

Hi, sorry, thanks for the question.

So what you saw in the second half of 2020 is an acceleration in the decline of the systems business.

And a also very significant acceleration in our.

Software business I think that dynamic generally is going to continue in 2020.

Relative to what we would have expected a year ago. We think we are ahead of plan on our transition.

And that the the software growth is going to be higher than what we thought and the systems decline is also going to be faster than what we will start in the past.

That's that's driven by a combination of things on the one him.

Customers, we are seeing customers.

Mature in their ability to consume application services and software. So a number of customers have software for us policies.

Hi policies to leverage multi cloud, we have more operational maturity around virtualization and we seeing that both in enterprise and the service provider segment now so there's a there's a demand pull from the market.

And there are also a number of things that we have done to accelerate not transition.

By enabling customers to consume.

Big IP software in new consumption format, specifically subscriptions enterprise license agreements.

Model, one from public cloud marketplaces, we've done things like automation and orchestration that allow them to.

Deploy applications faster in software.

We spent a lot of our software in security security software consumption factors.

And we've also done a lot of.

To help service lighters move to software so when you combine.

A lot of the things that we have done as well.

The demand from the market youre going to see that trend continue and for US. It's good that because we feel that our strategic thesis is intact and we are ahead of our plan on transition.

Got it. Thank you for the color on that and then the the second question I had is if you were to categorize the movements or I guess, you can say the growth and strength in software and systems across your customer types across enterprise Sps and government.

Which one of these buckets is accelerating the systems decline versus which one of these buckets is actually accelerating the software adoption growth right. Just we can get an idea which customers are driving these changes.

I think all three have somebody I think all three have both trends to a degree.

But I'll take them separately so.

In the enterprise.

We I think the transition towards software started in the enterprise earlier than the other two segments that you mentioned and that trend is only accelerating for the reasons I mentioned around operational maturity.

Ability to operationalize virtualization technologies.

Also the freedom of consumption, but we have given them.

The in the service provider segment I would say, it's only in the last couple of quarters that we are customers have spoken about and as the.

For a number of years, but we're now seeing them really start to implement these virtualization technologies.

Our.

In combination with fiveg or in getting ready for Fiveg architectures.

We're seeing more of our service provider customers adopt software architecture as I mentioned in the script one of the one of the customers, we won reputations, which who are building up essentially.

A telco next Gen telco infrastructure, that's 100% virtual.

And so there I think at one of the spectrum, but we're seeing a number of carriers move in that direction and then I would say in the government. The transition is also happening, but at a slower pace relative to the other two segments.

Got it. Thank you and then my last question for you is regarding the cash pile and war chest can you just give us an idea on specifically what you're looking for you mentioned that the security offerings are not going to be following software form factors is that we're going to spend the majority of your time to consider.

Bolstering the business or using the war chest or can you give us a better I'd on what exactly you're looking for.

As opportunities.

No.

Somebody out without the way I'd characterize it for you is.

We want to become Z Beth application services platform in the industry and I think the way to look at it is.

If you look at.

Everything that exists between an application and the use of that application. There is a set of services that are in that shame that include things like load balancing and security and firewalls and Outsourcers and web servers.

We have significantly broaden our presence in the code to customer chain with the acquisition of engineers.

And our strategy is essentially to own that horizontal chain and provide the best.

Allocation services that enhance this customer experience for users have been applications and so when we look out and that's kind of different than others, who helped us a props pursuing more vertical approach where there are tied to.

A single silos of infrastructure, we will also be 100% infrastructure agnostic enable those application services for any up anywhere regardless of how we built and regardless of where deployed.

And so in the context about horizontal.

Our strategy you know, we're looking at opportunities to broaden our portfolio organically or inorganically.

Hey, we're not shameful go to customer so security budget is of course, an important component to that but it's not the only one.

Got it thank you.

Your next question is from James Fish with Piper Jaffray. Your line is open.

Hi, guys congrats on a great quarter here and thanks for the questions.

Frank more for you called out largely being up year over year again sequentially can you just gives a sense as to how much you always got booked as virtual versus appliances or any sense of how big.

Businesses as a percentage now within five as it seems like it's becoming more material over the last few quarters.

Sure and James Thanks, So much for the congratulations we also thought it was a great quarter, we don't quantify the effects of La and I did say that we were up in terms of dollars for for sequential quarters in the deal Count was also up over a broader base and we're seeing our asps up as well.

And so we're really really happy with the way you laser trending and that they are unlocking the spend that we see we see a very robust pipeline going forward, because we really only scratched the surface on the opportunities that are within our customer base.

Unfortunately, not going to quantify the amount of plays but I will say that it has been a positive trend for us.

Got it and then.

You guys have talked about the five and genex control or kind of coming at year end. It sounds like it actually got pushed a month.

Also been are here to too much around sort of the Wap as a service and glowed global load balancer as a service.

Any sense of the timing around those and how you guys are thinking about it for 2020. Thanks.

Engines.

I'll take that one no control of the combined controller.

With Enginetics was not first on a monthly said.

January when we last folk and we're well on track.

To to be able to deliver on that.

We're pretty excited about it because it enhances the addressable market.

For engine eggs in the number of persona inside of the enterprise.

Large enterprises.

As it relates to.

The other question I think related to as time cloud services, which is outside.

Offering and as you know we have released our DNS offering a few months ago. When just released earlier this month.

Our global server load balancing out of service offering.

And we're seeing strong interest in that and then web application firewall as a service watts as a service is next on our roadmap and that should happen before the end of the calendar year.

Got it thanks, Congrats again guys.

Your next question as from Rod Hall with Goldman Sachs. Your line is open.

Hi, Thank you for taking my question does is ashwin on behalf of fraud.

Just wondering if you could comment on the sustainability of this trend in the U.S federal vertical.

And how you're thinking about that interest because 20.

And another question related to comedy do dynamics.

Can you.

Can you comment on any changes you're seeing in the comedy do landscape.

Any color on when rates.

And then you can give us.

Post the acquisition completion of invariably networks acquisition will be great.

Just.

I should can you repeat the second part of the questions. The first part was around the federal government, but on the second part.

Okay got it really on the competition do landscape.

Following the acquisition of volume there, obviously can you comment on any changes in wind rates.

Our anything there will be helpful.

Yes, actually I'll take the second part on the competitive landscape and then John will take the my question on the federal government and the sustainability of Australia there.

So essentially we haven't seen a change in the competitive landscape after the acquisition of.

Vmware.

By the sorry by the end, where a lot call I mentioned to you we were not seeing.

The in very many deals and where we see them.

We have been pretty hot the uncomfortable without without win rate.

And so essentially that hasn't changed I.

I would expect it to change with the the presence and distribution that PM warehouses has around the world.

And to see them more overtime, especially in customers that have gone all ended on NSX.

And really are tied to that infrastructure.

But we don't see that at the very large proportion of the market so more to come on that but so far no change.

Perfect. Good afternoon Ashwin. This is Chad whalen regarding the strength of the fed business in 2020.

As we didn't their release.

At all.

Performance in Q4 was fantastic.

Much of this is sustainable for a very simple reason were a built into very large programs across the federal government government base from three later agencies all the way through.

The department of Defense and so for 2020, we're planning for a very robust here in the federal government space as well built on much of what we've done over the last number of years within this with this Oh excuse me within this segment driving some of the key tenants within our security portfolio and some of the needs that are unique to the federal government.

Thank you.

Your next question is from Tim along with Barclays. Your line is open.

Thank you.

Thanks, a lot could you talk a little bit two questions for me also first.

The new new idea a ws partnership sounds like a nice expansion can you talk a little bit about the the timing and when you think that could.

Material materially pickup.

Kind of the cloud businesses for you and are there any other.

Potential public cloud partnerships or expansions that we should expect to see.

And then the second I wanted to follow back up on the systems business.

Obviously there is this transition going on just curious is is this scenario, where we're going to need some kind of refresh for some of the current customers.

And if not given that it's becoming a smaller piece.

From an investment standpoint does this change the investment profile of the overall company, where maybe there is little less R&D or less.

Sales push on the hardware side, and maybe that that that means some overall better leverage.

On Opex for the for the entire business. Thank you.

Thank you Tim.

So let me start with the the your questions around the Ws and the public cloud.

Just for context Tim.

The outlook our software business as we see has accelerated very significantly in 2019.

And.

If you look at the second half a year, where our software grew about 90% year on year, our public cloud business has actually grown faster than that all year.

So.

It has.

Continues to grow because of the the.

Integrations, we already done with public cloud providers, the availability of our solutions and marketplaces and also enabling our customers to hold the license into public clouds and so as a result of all this our public cloud business have become a meaningful portion of our overall software business now the partnership.

Dws.

Thanks to a new level, because we have been meeting in addressing the market where customers want NWS and five an opt out to get together and help them what move forward with a public cloud initiatives, but now we're going to have.

A number of.

Hey, Ws solution architects and professional services people, who are trained on that five and are designing in.

Five into their architectures and their solutions, when they're engaging customers and it'll be less obviously has a lot more resources than than we do so we look at that at a multiplier effect our own resources.

In the markets to design often for customers that want to leverage public cloud.

Infrastructure. So we're very excited about that and we're also very excited about the collaboration we've agreed with them on the product side.

Integrating things like our last into cloud, France to complement their CDN with a.

Security solution to enable them to compete with the likes of Akamai.

And other integrations with our control tower, which is really how customers manage and deploying their applications in public cloud. So it's just going to give us a and expanding surface into the public cloud and more visibility.

When that will impact.

Our our numbers I think overall this is going to provide further acceleration to an already fast growing public hub business.

And this specific impact or partnership I think is more of a second half for 2022 to 2021.

But could be could be significant.

The second follow your question.

Which is on the.

On the hardware to decline in what does that mean for.

Our investments and.

But potentially operating leverage.

We're going to continue to.

Manage the investment overall in the.

The hardware.

We have a number of platforms that are in development that are going to come to market.

In the next few quarters.

But overall.

Look at where we're not in terms of what we've guided to.

On.

Operating profit. So this year, we've said, we do about 33% to 35%.

For the year and we expect to be Matt range. This year and then you know.

Our analyst and Investor meeting, we will gives you an update on what we think is going to accommodate horizon, two which is 20 122.

Okay. Thank you.

Your next question is from Paul Silverstein with Cowen Your line is open.

Our guys. Some clarifications on couple of questions first off just give us the engineers contribution I know the revenue was small if it's on a record number did you provide a number for into next.

Paul We did not I mean, I told you at the in the call last quarter that we thought that it would be approximately 8 million it was slightly more than than ever so slightly but it was it was spot on and when you take a look at the inorganic and organic growth. There was almost the exact same as we had.

Last quarter.

All right I trusted in millions all software or primarily software.

No actually Theres a split between.

Software and services the software component.

It was approximately 6 million and and the services was just slightly over over too.

All right. Appreciate Thats helpful. Now, let me ask your question relative to that so your hardware was down 15% falling 11% decline.

And you obviously made that almost software and then some.

And we all know that soffer price and I always like thanks, all for pricing mechanism to some cavalier about it with the softer pricing is well below hardware pricing I trust funds given.

Yes, the real question.

No I don't think Thats, a given default.

Hello.

Consistent with the logic there goes much front I just want to try to decipher looking forward is normally when when one sees hardware decline of this magnitude I.

I would expect.

That to swallow you're going to transition the model at least over on Transitionary fares.

But you just put a growth just from a big picture perspective, I'm trying to decipher as we move forward.

What's going on and that trend and I must admit centerpoints or call you said a lot of things on a lot of trends.

Slide Vaps. This first this is the first quarter in the Americas, we've seen 11% nerve growth, 14% sequentially you have another quarter of that type of growth in the Americas region in the us you'd have to go back about three years at the same time yourself cited macro conditions for compressing for that.

Fine in the media, which has been strong opens or beginning of this year.

And impact which has been more mixed so Jim first of all if I could ask you took a step back and I appreciate it.

A lot of detailed information on call, but from a big picture perspective, when you look at the regional trends wonderful hardware to software mix before he asked about margins.

Ill.

It's going on from a revenue perspective, the growth we saw in the Americas.

At the new norm.

Yes, Paul I appreciate the there is.

There are lots of signal there that you're trying to make sense also let let's talk about hardware software for US and then let's talk a little bit by geography.

And.

Sure I mean I think.

Oh, the reason I'd say, it's Linda the software price per unit is lower than the hardwood price per unit is because it really depends on the use case the type of application words deployed what bundle of application services are used for that application.

And in some cases, yet is what were but there are lot cases, where.

The software software deal ends up being larger than.

The hardware deal would have been because.

Deploy more of it and more onshore well so that's why I apologize for me interruption, but this this exact where it was going on with US I Trust. The reconciliations that unit volume weather weather literally measured by units are measured but use case that you're making up for the degradation on like for like pricing base.

This is the differential between hardware software and free data here rival in a five five consistently for ever would cite virtual additions at 80% of the price point of the hardware I was assuming that hadn't changed if anything it is change for the worst and after the better but assuming that's still the case.

Point, you just made I trust. These deals are getting bigger and scope match. The that's why there is a positive offset on the revenue.

Yes, yes, I think you're correct on both counts. So it is still the case on your pricing president of the versus hardware, but but in terms of the margin dollars to a five.

Nets out to being about the same if you just pure functionality software also software software versus hardware exactly the same functionality why you said about the 70% to 80% plus 100% our price per unit is true, but what happens when we are in when we move to a software consumption form factor.

Is that it's easier for us to expand our role with a customer.

Because they have more freedom to deploy the technology. They can use cases faster.

They can replicate the solution in multiple environment and so the overall consumption becomes larger now if you look at the but not as a point to receive if you look at our fiscal year 2018.

Our hardware only declined 4%.

But our product revenue for the full year was flat with zero percent growth. If you look at 2019.

Hi declined 8%.

Total product revenue was plus 3%.

So you have.

Kind of several quarters of us showing that the software growth is more than offsetting the hardware decline.

And that's because.

Our software story elevates, our relevance with customers and gives us an opportunity to expand our role.

I'll give you some examples in the script the ratchet that deal I mentioned in Japan is a good example, where.

We did a very large software deal with them and we can buy three months later and already expanded not with more.

Multimillion dollar software opportunity.

Because of the speed of consumption and the number of use cases were addressing.

So that's all hardware software all engineered I'll touch a little bit on geography, so to your question.

I think we have seen.

We continue to see micro uncertainty in Europe .

And I don't see that changing in the first half of 2020.

For for a number of reasons, but Greg. This is a part of it and just generally I think continental Europe , where things.

Actual softness there.

In North America, we had very strong quarter in in the federal government.

Got a softer quarter in financial services, and I would expect that we see better performance from financial services for Hopper of 2020, and so generally I expect North America to be healthy going into 2020.

All right to ask your question on margins. Your services has consistently been 87% plus minus 30 basis points over the past quarters.

Product margin was just over.

Over 85% following almost 34 last quarter from 80 to 83 in the non previous quarters I Trust the improvements driven by the shift to software from hardware and I Trust that trend should continue.

That's that's write offs.

All right I'll pass it on thank you.

Your next question.

Your next question is from Alex Kurtz with Keybanc capital. Your line is open.

Yes. Thanks, just a clarification then a question that the long term deferred I think was strong in a quarter just kind of what was the dynamic short and long term and then France Watt just kind of following up on Paul's question around.

Kind of share of wallet or or how you're increasing use case within existing customers. So how did how does one of the what are the applications or the use cases that when you transition of software you make it more.

Easily consumable that you're capturing right within existing account like whats at Bell curve type of outcome that you're seeing right now.

Sure. So thanks, Alex I think the on the.

On the long term deferred a lot of that was driven by the growth of the allays and some unbilled receivables and so that's why you saw the strength in the long term deferred revenue.

Okay.

And then I'll answer your second question is on the types of use cases that were seeing.

When you're when you're.

When you translate youve transition.

Most of your portfolio to software you're talking about increased incremental use cases that allowing you to grow your share of wallet, so above and beyond the traditional 80 see like what are you seeing in these in these bigger software deals.

That are that are driving the bigger outcomes.

Oh.

So Alex do two things.

Number one.

You might you might see a deal in hardware that it load balancing only.

And then what we were in software because it's it's kind of natural for customers to consolidate multiple software module.

We will do.

Well balancing DNS laugh.

Other other capabilities, so you're you're adding.

More capabilities to the deals but the other the other factor also is that when we're in software customer has an ability to deploy that not just in our data center.

To the public clouds still deployments.

Multiple public cloud, sometimes private cloud so you'll see.

More.

Replication of a virtual expense of about five and then the third factor that expands our opportunity in software is that the the public cloud model for security is a shared security model, where the Paul public cloud provider secures the neighborhood and.

Customer the enterprise has to secure their home.

And by definition, that's a forcing function for our customers to add more security software in the public cloud and so as a result of that our security attach rates in software used cases, but at the point.

Is much higher occupancy level the security attach rates in on prep. So those are three factors that are driving expansion of the opportunity software.

Thank you.

Ladies and gentlemen, if you do have time for one last question last question is from Simon Leopold with Raymond James Your line is open.

Hi, guys. This is Victor Chiu in for Simon Leopold can you tell us by your estimation what portion of the PC market has gone to the public cloud and what your view is on the trajectory in the rate of continued adoption and I guess off that of your existing customers that have migrate at least some portion of their workloads or what portion continues to utilize.

Five solutions there.

What was the second part of the other question Victor.

For existing customers that have migrated at least some portion of the workloads what portion of.

Thank you.

Expect continued or are continuing to utilize I thought solutions.

I'll take the second part of your question.

First and then we'll come to the first part.

Generally Victor customers, who are on as five.

On Prem who migrate to the public cloud.

For choice two of them.

Integrating with website.

And that's because it's a lot easier to do that and to go ahead than if you don't want to how to restock through an application, it's a lot easier to migrate without five than not.

And that's one of the one of the benefits rate of US also of the partnership with US It allows us.

I wish into happened a lot faster, but the net of it as the vast majority of our customers who are on it five five in public cloud.

Yes Kara.

Regarding your first question no question about roughly what share of AC market, you may see having known to public cloud, but yes.

Yeah, what we actually see as these applications are getting laid up in public cloud expansion in terms of the use cases for AIDC like technology.

So what has typically been bucketed into the market has the thing that include well now one thing that part that application security and other things those capabilities are getting laid out in public cloud either through the public needed providers or through third party providers like I in many cases those applications that are there are often times net.

Neil Cloud native applications that are taking advantage of those services.

So that has been an expansion of the town.

For that market.

Right and are there any headwinds competing with.

You know.

Now in the public lateral alternative solutions.

Guys like Amazon.

Well when you talk from a strategic agreement if we see there's a lot more synergy between our two companies that a lot more partnership opportunity the actual competition.

In fact, I want to big benefit.

That brings to that five has been the go too easy solution provider or our enterprise customers for their most important applications. Many of those most important applications are still sitting on print.

And they're looking at numerous public cloud vendors for selection for their new workloads worker modernizing their old applications and the case of the new Mark well, they're finding use cases that five for the public cloud native capabilities as well as use cases that apply for vendors.

Especially where the value that multi cloud story and for the modernization of their old applications. What we're finding is that our customers really why those applications and modernizing five.

Because it gives them an easier path into public cloud.

Great. That's helpful. Thank you.

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