Q2 2020 Earnings Call
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Oh, so today Scott.
If you have any objections. Please disconnect at this time I'll now turn the call over to Miss Suzanne do long Ma'am you may begin.
Hello, and welcome I can do long Fife, Vice President of Investor Relations.
Hi, Salobo do you have vice president and CEO and Frank outside.
Executive Vice President and yeah, so well be making prepared remarks on today's call.
Other members of the a hobby executive team are also on him answer questions. During its running portion of today's call.
A copy of today's press releases are available on our website <unk> dot com werent archived burden on the call will be available through July 27 2020.
A replay of today's discussion also will be available for midnight [laughter] Tomorrow April 20 by dialing 800, Bobby fine decreasing seven for one.
Six to one Horsing watch it.
For additional information or follow up question. Please reach out to me directly I stopped do long.
Oh.
Our discussion today will contain forward looking statements, which include words, such as believe anticipate expecting target.
These forward looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these days.
Factors that may affect our results are summarized in a press release announcing our financial results.
Described in detail in RFP, but.
Please note that I pod no duty to update any information presented in this call.
With that I will turn the call over [laughter].
Thank you Susan and good afternoon, everyone.
Thank you for joining us today.
For all of US this has been an extraordinary few months.
Koby 19 has altered just about everything above our daily lives.
My deepest sympathies go through those that have been personally affected by the disease.
An already enormous number.
Sadly grows each day.
Oh, that's five our culture prioritizes the human that's about salt.
Like most companies Oh first party in a crisis is ensuring the health and safety of our employees their families and our communities.
For most of March and April our entire global team has been working remotely.
The on health and safety, though we have taken a human first approach to this crisis.
For all that means supporting our customers and each other however, we can.
Over the last week I have witnessed small and large fibers generosity.
Perseverance and creativity around the world.
They have supported our customers to crisis. They have donated to communities both they need and they have led to a helping hand colleagues who are struggling.
These oh humanity are what make me so proud to be a fiber.
Frank and I will speak in greater detail about corporate 19 impact on our business during our remarks today.
Overall, we delivered a very strong second fiscal quarter.
Oh, 7% total revenue growth was driven by customer demand for reliable application access and performance and consistent application security.
Our analysis shows Cobot 19 had a net neutral impact on business in the quarter.
The first two and a half months of Q2, we experienced minimal disruption outside of Asia.
Beginning in March we experienced accelerated activity in our access and control solutions.
We worked with customers to quickly and in some cases massively scale access and capacity to deal with increasing numbers of remote workers.
We also saw some evidence on certain customers accelerating purchases on the five solutions.
Strengthen their critical application infrastructures. These tailwinds were offset by some project push outs of Gulf must prioritized shoot cobot 19 properties.
Strong customer demand for software subscriptions and security use cases shoes are 96% overall software.
And other customer highlights from the quarter after phone could use the quarters financial results and I'll choose three outlook.
Drunk.
Thank you friend Swat and good afternoon, everyone as France, one noted we delivered a very strong q. too.
You will know we are reporting nongaap revenue this quarter Nongaap revenue excludes the impact of the purchase accounting right down on shapes assumed deferred revenue.
For transparency, we are committed to providing both gap and non gap revenue during the period when purchase accounting will have an impact on shape related revenue.
On a cat basis shoe to revenue was 583.4 million.
Second quarter Nongaap revenue, a 585.6 million was approximately seven per cent you every year and at the midpoint of our 582 590 million guidance range.
<unk> net income for the quarter with 61.4 million or one dollar per share.
Non cap net income was 135.9 million or $2.23 per share. This was above the top end of our guidance range due to our strong revenue performance as well as our disciplined operating expense management in the corridor.
Please note as I review, our revenue mix I will be referring to nongaap revenue measures.
Q to product revenue of 262 million was up 10 per cent you every year and accounted for approximately 45 per cent of total revenue.
<unk> ancient software revenue grew 96% year over year.
Software represented approximately 35% product revenue into two up from approximately 19% in the year ago quarter.
Excluding the partial quarter contribution from shape software grew 65 per cent in Q. too.
We continue to see strong uptake in our software solutions, so oldest subscriptions, including longterm subscriptions.
Service revenue of 324 million grew 5% year over year and represented approximately 55% of revenue.
Recurring revenue, which includes the maintenance portion of our service revenue and subscription revenue totaled 65 per cent of revenue in the quarter.
Systems revenue of 171 million was down 11% you every year as customers continued to transition to software based solutions.
Systems accounted for approximately 65% product revenue and 29 per cent of total revenue in the quarter.
On a regional basis into two we saw strength across our global theaters.
America's delivered 7% revenue growth you every year, representing 56% of total revenue.
Me, a grew 8% and accounted for 25 per cent of revenue, while a pack grew 9% and accounting for 19 per cent of revenue.
Looking at our bookings by vertical enterprise customers represented 69% product bookings and service providers accounted for 15%.
Government customers represented 16% of product bookings, including seven per cent from U.S. federal.
Let us now discuss our two two operating results.
Gap gross margin into two was 83%.
Non gap gross margin was 85%.
Gap operating expenses or 399 million.
Nongaap operating expenses or 327 million.
Q twos operating expenses reflect our normal seasonality as well as approximately $4 million encoding 19 related costs.
This includes 2 million dollar increase to our global good funding for Coven 19 relief efforts and approximately $2 million related to events cancelled as a result of cup in 19.
Are gap operating margin into two was 14.3% and our Nongaap operating margin was 29.1% are gap effective tax rate for the quarter was 26.5% and our nongaap effective tax rate was 20.2%.
Turning to the balance sheet into two we generated 182 million in cash flow from operations.
Cash and investments totaled approximately $1 billion at quarter end.
As a reminder, we added 400 million in term loan debt as part of the shape acquisition, which closed in the quarter.
Thank you too we repurchased approximately 50 million of F. five shares or 442000 shares at an average price of $113 an 18 cents.
We have an estimated 1.3 billion remaining on our share repurchase authorization.
D.S.L. was 52 days and capital expenditures for the quarter, we're 13 million.
Deferred revenue increase 10 per cent you every year to 1.3 billion driven by an increase in maintenance contracts as well as acquired shaped deferred revenue. We ended the quarter with approximately 5825 employees up approximately 525 employees from Q1, including 380.
Associates added from shape.
Now, let me share our guidance for fiscal Q3 of 2020.
Unless otherwise stated please note that my guidance comments reference nongaap metrics.
Over the last three years, we have taken steps to significantly strengthen our business and financial model.
We believe our actions have built meaningful resiliency into F. five business.
For example, recurring revenue as a per cent of total revenue has increased from 52% in F.Y. 17 to 65 per cent in the latest quarter.
Likewise software subscription as a percentage of software revenue has increased from 22% in F.Y. 17 to over 73% into two of 2020.
R. Q3 outlook factors in the expected impact of global uncertainty related to cope in 19, as we understand it today.
As we speak to you today, we have not seen a meaningful impact on bookings or in our supply chain.
That said visibility is understandably less clear beyond the current quarter.
As a result, we are withdrawing the fiscal year 2020 outlook. We provided in December 2019, when we announced our shape acquisition.
In the near term, we expect customers will continue to evaluate their ability to support their employees and consumers in prolongs social distant seen scenarios.
We expect to benefit from being the trusted and operationalize partner of the largest enterprises around the world.
We also expect customers will scrutinize investment priorities, which could lead to longer purchasing cycles or different projects.
As a result, we are targeting Q3 20 nongaap revenue in the range of 555 to 585 million.
We expect gross margins out or around 85%.
We estimate operating expenses of 320 to 332 million in two three reflecting a full quarter of shape related expenses.
We anticipate are effective tax rate for Q3 will remain in the 21, 22% range.
Are two three earnings target is one dollar and 91 sense to $2.13 per share.
In the quarter, we expect Sharebased compensation expense of approximately 52 253 million.
Let me speak briefly to our capital allocation philosophy.
With the current environment and interest rates declining we have reprioritize building, our task position had a pain down the 400 million term loan a associated with the shape acquisition.
Consistent with what we have said previously we also retain the option of repurchasing shares opportunistically in any open trading window.
With that I will turn the call back over there Francois Francois.
Beg your trunk.
I mentioned previously that we have embraced human first approach to the covert 19 crisis.
I will speak to what that means in terms of our response for our employees our communities and our customers.
For our employees.
We implemented work from home for our <unk> in January and reached a global wide work from home state by mid March.
We also implemented progressively more stringent work related travel restrictions of the quarter progress and pencil or postpone large infer some events.
Our human Frost approach also means that we embraced and encouraged flexibility.
We want to ensure that fibers have the time and space to deal with emergencies.
Simply to new realities of working from home.
Most importantly today, we are making it plans to our employees that they will be no layoffs on f. five in fiscal year 2020.
And this time of adversity and difficulty we want to remove any worry our employees may have about their jobs are providing for their families.
We believe having the certainty will enable us to better focus on our customers and their needs.
We are confident the go there may be micro uncertainty around the second half of office go here, we have built in resilient business that will allow us to whether that uncertainty without making substantial changes to our workforce.
Turning to our community response.
As I have shared in my last two annual shareholder letters.
I recently has taken a strongest bands in our communities because we believe we have a room complain.
As a result are covered 19 response include actions to help on communities globally.
Our global good program established in 2000 and the team includes paid time off for employees to volunteer and charitable donation matching as well as opportunities for employees to participate localized philanthropic campaigns and community impact grants.
In response to cope with 19 related means we increased our global good funding by $2 million that it Kitty a total of two and a half million dollars to be allocated three ways.
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Targeting localized response supporting the communities, where we live and work.
Second career employee director, giving.
And third two nonprofit empowerment, including the tech for good Coven 19 response grants.
We are also leveraging our resources to support healthcare nonprofit educational organizations.
These organizations are thinking he more weeks steps to keep us all save during this global crisis, and we want to help them with 80 security and technology challenges. So they can stay focused on doing their essential work.
For instance on Mars 17, the same day of the United States per sheltered in place was announced in San Francisco.
I wish they'd program designed to help organization handle exponentially increased website traffic demands.
We are providing one year free and your next gloss when needed.
Today more than 20 healthcare educational and nonprofit are taking advantage of this assistance.
Since then.
We have made additional services available for free to assist healthcare education, and other nonprofit including remote access and security solutions.
As well a 5000 free service hours.
Our human first approach also includes doing what it takes to ensure our customers can protect their employees, while continuing to serve their customers.
I I'm very proud of the way the F. five team have confronted and Concord knew an impossible to foresee challenges often under extreme circumstances.
For most of our customers coded 19 related remote application access quickly became a priority.
In fact by mid March we were experiencing it 400% increase in access related support calls.
Customers needed to quickly and security scale remote access capabilities.
That five words were there to help.
With thousands of employees suddenly working from home, we enable one of the largest banking and investment institution in the United States to scale is B.B.N. access from 400 500000 remote users.
This insured uninterrupted secure financial services the customers around the world.
We also upgraded the traffic management solutions at a major Multihospital health system in the U.S.. So it's six hospitals and 10 specialty centres continue providing exceptional care to patients.
You know another example, we helped a multinational mass media conglomerate increase network capacity within one day, so that 100000 additional employees could work from home in the U.S. in London.
Understanding the urgent need it to continue supporting consumers with their prescriptions and health insurance claims a fortune pen retail health care Corporation added 160000 remote workers to its network in under 24 hours.
And these are just a handful of the access and remote work related challenges are teams move mountains to solve for customers into too.
We continue to see strong demand coming from T. growth areas, including subscriptions security and then genetics.
Are 96% software growth points to solid sales execution and continued customer adoption of our big Eyed peas software for application delivery and security.
During cute too we saw continued rocket acceptance of our subscription based offerings, both for one and three euro terms.
Customers look to accelerate automation afterwards.
Stability of our subscription model enabled them to take full advantage of their f. five investment.
A quarter into its launch we also we're seeing promising early wins and genetics control or three auto.
Controllers application centric design incorporates his self service bottle configuration they'd be I application reporting on analytics and built in security capabilities.
These features appeal to new engine x. customers as well as current engine x. customers looking to scale.
We are beginning to see real traction with R.F. five and engine next better together vision in fact, we secured and then your next when with that five security in the quarter after an existing f. five customers.
A leading oil and gas company in the Middle East.
The customer has been working to consolidate it's critical applications across all its operating companies into his main data center.
With literally hundreds of application the customer was facing massive challenges and one of the biggest with M.T.I. management.
Security was also a t. concern given the industry and the increase risk of attacks.
They opted to the point engine X. for it P.I. management would that five advanced walk for security.
As you know the ship acquisition clones in late January.
Shape is already contributing and expanding the conversations we are having with customers.
It has been roughly three months since we close the acquisition and our teams hit the ground running.
Integration is going very well.
As we did with Enginetics, we immediately augmented the shape engineering efforts with F. five cyber security engineers to accelerate delivery of shapes next generation products.
Near term, we are leveraging our big I.P. and several line medic services presence demonstrated shapes capabilities to have five customers and reduce the friction of implementing shape solutions.
[noise] and find fellows have already identified of dozens of shape opportunities in that five accounts, including securing our <unk> joint when with a large Canadian banking customer.
The customer was an existing f. five big I.T. customer and began experiencing account takeover attacks on their web application.
With the customers permission, we've turned shape on Informatization mode and block a major attack that amounted to 90% of the total traffic.
We believe there is significant opportunity for shapes current and next generation solution with an f. five accounts and would need logos.
Longer term shapes machine learning and powered capabilities also will scale and extend F. five is brought portfolio of application services.
With shape, we will expand our ability to optimize and protect customers application in an increasingly complex multiply world.
As we worked through the scope of 19 crisis, we expected customers will shift their concern from application access to applications security.
Tacos prey on curiosity, the desire for information about covert 19 or stimulus checks combined with increased use of personal and home devices offers uncle opportunities for bad actors.
Both crisis, we expect customers will increasingly look toward cloud bayes and M.S.P. based solutions for better user experience more costs and better security as they looked to accelerate their digital transformations.
We are confident that the investments we have made it to evolve f. five have position does well for the shift ahead.
We are creating an application services platform that will help customers accelerate their digital transformations and fundamentally changed the way application services are delivered and secured.
For many enterprises today application services live in operational files with multiple vendors often managed by different teams.
It is an inefficient process that makes managing use experience it complex and often manual fast.
When applications, where static with infrequent changes and update this approach could survive.
But that era has long path.
Today's world is dynamic with new applications based on Microservices.
The manual fire load approach creates too much friction and application delivery and security become real hindrances to digital transformation efforts.
We have built the brought us portfolio of application services to enable our customers to eliminate silos.
Who are getting Catherine and the acquisition of ends you're next we have expended the breadth of Iraq, when kitchen delivery services to address the need of both traditional and modern applications.
Likewise.
Do the work of our teams and the acquisition of shape, we have consolidated powerful applications security services.
Into our portfolio, including the Dos Wow.
P.I. security and that I bought protection.
Our customers increasingly choose off to cover a sweet.
Applications are too because they care most about the user experience about the application knock the infrastructure that underpins it.
And we see that trend accelerating as we move increasingly to software deployed services.
In clothing.
As far as noted when he discussed aren't you three outlook.
Covert 19 has brought with it a degree of uncertainty.
While we may not be able to control the duration of the pandemic or our customers short term.
Priorities.
We are confident that we have built resilient five that can withstand short term uncertainty and emerge stronger.
Over the last several years.
We have transformed F. five we have built a strong base of recurring revenues.
We have strengthened opposition in t. vertical globally, including government financial services.
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We have a great balance sheets and exceptionally strong operating model.
We have future approved.
That's fine with organic and inorganic investments to establish composition in modern environment and our leadership in application security.
It is more we are trusted and operationalized in the critical infrastructures of the largest enterprises around the world.
Because of all those we are confident we will weather the storm.
We have good near term visibility and are confident that longer term investments, we have made position us well.
In short we remain committed to our multi club mission to enable insecure every anywhere.
Confident our vision, our investment and our innovation well aligned with book near and longer term customer demand.
My sincere thanks to the entire F. five team and our partners for their perseverance and can do out into and for driving a great quarter. Despite adversity.
Through this crisis the team have been tested and proven runs most pool and customer upset.
I feel very confident we will continue to rise to the challenge of whatever may come next.
Without operator, we will now from the call for <unk>.
As a reminder to ask the question no need to press start one on your telephone.
Oh your question it has to pound or husky see Sam I've only compiled a cute name roster.
Your first question comes from Jane says what type of sampling line is open.
Hey, France, while on Frank first off just just congrats on an incredible quarter given the market conditions and also hope everything as well with your family. Some you have five team all started off with.
I'd love to be one a few infrastructure companies to likely guide even a quarter out I guess, Frank why do you feel the need to do so and what makes you call thing. It was not just a large pulling up demand.
Strictly to software demand into fiscal cute too.
Short time and thanks, so much for your question and thanks much for the well wishes. We obviously you wish to save it for you and your family.
We actually in looking.
Prepared remarks to that I am Francoise stated, we have not seen the impact on on demand.
In any meaningful way and it was a balance of gives and takes for what happened at the end of the quarter. So we felt that it was prudent and took the S.C.C. guidance on you know what you to to please give investors your best few at the time and that it. This is our best few at a time now I wouldn't note that the revenue Rangers three.
What we normally do and we think that takes into account the uncertainty, but but we thought that this was the prudent thing to do for investors.
And just just to that you know the second part of your question on what why we are confident it's not just the pool.
We we looked carefully what we were able to close this quarter and we we tried to assess the impact of covert 19 on our numbers.
And when we look at what's happened, we actually did see some deal get pushed out into the following quarter and a number of these deals have now closed in in April, but we did see some deals get pushed out as a result of covert 19, either because people can physically get the deals done or because they just shifted to.
Other immediate priorities N. Conversely, we also saw some things that were were pulled in by some some customers and so when you balance those things out we actually landed where we expected to win and Phil What you look at our second quarter, we feel that covert 19, essentially had had no real.
Impact when your balance the puts them that takes.
Got it that makes a ton of science guys and just want to dive into the enterprise Verticalize at my follow up how should I think about the vertical exposures within that understanding usually it's a a large financial services exposure, but just wanting to understand across the board, especially in some troubled areas like energy retail and travel.
Or hospitality related.
So to be.
It is as you as you know the largest vertical for four or five or you know financial services government Teleco.
And technology to to a large extent and so.
These vertical or at least at the moment, but at least one step removed.
From the immediate effect of of the crisis relative to other vertical.
And we've seen that in in our enterprise business. If you look at the vertical that are most impacted or at least most directly impacted to date by the crisis, which would be the ones you mention so retail transportation travel and entertainment.
Hospitality industry, those vertical thick and altogether represent less than 10% of our of our own business. So are exported there is limited.
Oh, Thanks, <unk> guys on best wishes.
Like such.
Your next question comes from Tim Long, Berkeley Lightness open.
Thank you you know too too quick ones, if I could first when you think about the kind of the access control security some of the the the piece of business that really accelerated in the in the second half of March could you give us a little color on on how you view this.
Sustainability of that is this kind of a bubble or will there be some some more more follow on to that type of business, where it could represent a real market share move <unk> within that a piece of the market and then secondly can you talk a little bit about cloud business and how they did maybe with.
Some of the larger hyperscalers or or the cloud vertical however, you're comfortable talking about that if you can give us a sense on how how that vertical is is shaping up thank you.
Yeah. Thank you Tim.
So let me just clarify first on the the the two two results in what drove the strike specifically, while both in in in hardware and software.
The access portion so the the part of our portfolio that is directly linked to work from home enabled it.
Did play a role and we we saw an increase in that in that business, but it is a small part of our business.
And so it it really wasn't a material part to the overall result, so if you look at what really drove the results.
It is the usual drivers of hours try to Jim transformation, which is specifically in software. It's the work we've done on automated automation and orchestration that allows us to get into a lot of these new modern application environments, both with our big I.P. software and increase.
<unk> with Enginetics, it's the work with dawn on a new commercial models and we're seeing the adoption of subscriptions by our customers very rapidly as a form of consumption. You you saw it in that about 73% of our software revenue. This quarter was subscriptions. So you see a huge acceleration there.
And it's continued a strong security attach weights on software both on prime and even further in the cloud.
And so if you look to the combination of those those factors that's really what's driving the the certainly the growth in the software business.
I think really specifically to the cloud.
We continue to see very strong growth in our cloud business.
Driven by you know people take picking our software and implementing it into the major a cloud providers driven by you know strongest security security attached rate in the public cloud than <unk> and we're starting to see also good early signs from our partnership with it W.S.
With the work that we've been doing with them at the front end of the business. So all of those all of those contributed.
To the growth, but I I do want us to trust that.
You know on like all those who would've seen a huge you know bump, perhaps what kind of at one time bump related to work from home part of the portfolio. This is a small part of our portfolio for us. So it wasn't the real driver for the quota.
Okay very helpful. Thank you.
Your next question comes from 70 battery with credit.
Kind of thank you.
First impressive quarter and performance during the challenging times I, just want to double click into the systems revenue decline of 11% again this quarter and you obviously saw a noticeable upticking software revenue even without shape just given the work from home dynamics. We are seeing do you see customers that moving faster in this direction or are they gonna <unk>.
More software then system than a more permanent way just given the economic backdrop and at the health care and yeah, I think of all the different implications are dealing with at these times do you see this new moved to Virtualizing everything and no more set tennis Morris kind of the typical deal a contract type during a start seeing.
Are often going forward and with the pendulum to hesston's ever really swing back from here.
It'd be great.
Sammy high.
I I think the answer is in short yes, we are.
<unk>, we're seeing both I should say.
We have some customers who support large applications, including applications that support collaboration and work from home.
That have that infrastructure in their data center and those customers actually you need more hardware to support these applications and so I think we're going to continue to see that that being said I think as a result of this crisis.
The drivers that have moved people to go more to software are are going to continue to be there and possibly accelerate your pardon me said before that I think our customers are more mature in being able to build a private clouds in their implementation of their infrastructure into public cloud.
And also you know as as the ecosystem mature as more and more a building. These modern application environment. All of these things are drivers for software at first approach and in our customers I would feel but the last 12 months, we have seen more and more of them adopt a software forest policy and in some cases, a cloud forest policy.
I think we're gonna see both of them kind of accelerate the other thing that I think will accelerate the the shift to consumption of these technologies on a subscription basis.
And we're seeing that in our one year a subscription agreement at three years subscription agreements, but more and more of our customers want to move to this model.
That is a an olympics based models for them. So all around I think you'll see an acceleration, but if if you pull way back from that <unk>, what's going to happen I think sunny just beyond the the software hardware shift is.
You know more and more our customers are going to rely on applications to deliver and and create value. You know you you perhaps of hurt us to talk about what we call the error of application capital.
And that is the belief that for most of our customers. The most valuable assets. They can process is actually their applications.
And that's been even tour in in this crisis and so I think you're going to see the growth of applications continued to accelerate and the value that is created and transacting deducted from applications will accelerate which means things like application security an application delivery will be.
Even you know even more important and and frankly that was part of the belief system that led to acquisition of shape.
And then should X. a year ago.
God. It. Thank you and then just on your software segment, you've already answered some questions regarding software performance and the public clouds and your A.W. partnership, but in the actual court or D.C.M.U. contributing sales from rackets and just because they have to launch their actual service very recently I just want to know if there was any kind of.
Through and software specifically to to Japan.
I study. So you know we announced racket 10, I think it was a three quarters ago as a as a customer you're right that did launched this quarter and we are part of the you know the infrastructure. They are on a on a subscription agreement with us so as as they launch an x. and the services.
There'll be opportunities for us to to extend with them.
But I wouldn't I wouldn't common specifically on on on their numbers in a given quarter.
Got it and then I've one last question on services last quarter Yugo eight per cent this quarter, you're going 5% and maybe can you just give us some guidance on how we should be thinking about the same pieces. The question for Frank on how we should be thinking about your services segment throughout kind of like the dynamics, we're saying today, just because there has been quite a bit of.
Variance and not growth rate.
Yes, I understand salmon and obviously eight per cent was you know very strong quarter that we noted last quarter, we said that it wouldn't be a little closer to what we saw in shoe for for you to and that would have implied something around 327 million, we saw a little bit of push in some of the professor.
No services projects, which is why we ended up where we did.
In terms of growth rate for next quarter.
On on the absolute color basis, you know I would expect something close to what we did in in two two but it could have some fluctuations of you know two or 3 million and either either direction.
Got it thank you very much.
Because I mean.
Your next question comes from the Rod Hall with Goldman Sachs. Your line is open.
You know her guy I think so the question I wanted to see if you could maybe comment on <unk> quarter or just to help us understand how normal that was and I have a couple of follow up to that.
Mm.
<unk> the.
Loony already was just basically what we would have expected you know in a normal quarter, we basically where trending normally up until the I would say the for the first week of March and then you know us to started to get more severe in U.S.
In Europe.
We frankly had a period of time and a couple of this box, where we didn't know what to expect for the the rest of March but what we saw it happen is you know some some things started to get pushed out but we also see saw some things get accelerated by through customers. So in in the N. <unk> ended up being what we would've thought it would be at the beginning.
The quota.
Okay, Frank and I I wanted to see could you comment on just going back to Thames question on work from home, what what did accelerated the end of the quarter I would've thought it was were from home stuff, but it sounds like that wasn't that material or it could you just put those two things together for us So we kind of understand what happened there.
Well, we had a couple of things that accelerated <unk> in the end of the the end of the quarter and compensated for the things that got pushed out one was the the part of our portfolio that directly address work from home or <unk> remote access or two.
Applications from from end users.
And the second part was some customers who <unk> in anticipation of potential supply chain issues accelerated orders on a on a couple of projects.
So those are the two factors that were accelerated and compensated for other things I've got pushed out.
Great. Okay. Thank you appreciate it.
Your next question comes from I liked Henderson meet ASCII line is open.
Great. Thank you very much so.
You guys had been in the process of moving center of gravity of your business away from.
Data centres spend two application spend and it's pretty clear given the application.
Just that had a pretty pronounced impact in the quarter. I was wondering if you could talk a little bit about penetration into Cooper now these environments.
Understand it 67% plus of.
<unk>.
These are in fact genex to what extent that has tied together into pulling a additional five products in both the security space.
Particularly while off which is often.
Deployed in that context and as well.
In terms of pulling a the traditional at five products, which historically have not been as well represented in that sector.
And finally, if you could just dress it to to what extent.
That.
Your position into.
The C.I.C.D. process for companies that are.
Moving in that direction. Thanks.
I like thank you actually I'll start with the last part of your question and come back to the beginning so.
In terms of being part of C.I.C.D. environment.
Alex we've done a lot of work starting now two years ago on our big I.P. software to basically and has the form factors and create automation templates that allowed us to to fit very well indoors environments and one of the factors that's driving the growth in.
They got the software right now specifically is our ability to fit into these more automated environments and we'd have more customers that are getting mature as part of the digital transformation trying to get more velocity that are deploying us in those kinds of environments.
It to the other part of your question, which is.
As it relates to our fit with Cooper notice as you know entered X. is widely deployed in improving lettuce environment.
In a lot of use cases as your next is deployed as a linguist controller to these environment.
Big I.P. also has capabilities to be deployed as a linguist controller. So we have both capabilities today and we are seeing actually this quarter I would say was what we saw isn't acceleration of this better together capability that we've talked about between five and engine X. where.
In some of these modern application environments, where and your next is a great fit we're starting to see develops engineers kind of look up security. That's an important element of what they do more and more and we've been able to win a couple of deals were engine X. was used for example, as an A.P.I. <unk>.
And F. five security why was brought it on top to create an overall A.P.I. security solution and so we think we're going to see more and more of those types of deals.
With the controller that we announced in in January because the controller really is the easy button that allows our customers to deployed.
Multiple modules and scale instances of engine next fairly rapidly and with a lot up without a lot of complexity and the controller also enables us to bring together. The the original engine next use cases with the AD on F. five Woks for example, with <unk>.
We're putting on that I controller, so all all of it together.
What we're seeing is you know f. five fitting both in these modern and traditional environments and bring those two bringing those two words together.
So to the extent kubernetes.
10% of applications today, do something an excessive 50 per cent that <unk>.
Along with it.
We we should see accelerated growth as a result of that yeah, both both because of our role in in a in front of Cuban notice clusters, and all sorts eventually I'll roll inside of Cuban is clusters, which we are we'll talk more about some new product initiatives would help for that.
I think very much.
Your next question comes from met a Marshal with family line is open.
Great. Thank you you.
<unk> strain for their capital structure, and it's like like when the castle you guys weren't generating but just wonder you know with the destruction kind of in the private markets and just kind of your <unk> comment around evolution of the security environment. You know how does that change your thoughts on on acquisitions or or and the name and then maybe.
Second question, just a little bit more nitty, but you know how much should we consider professional services as a portion of services revenue and just you know ability to actually kind of recognizing that revenue or you know ability of professional services to be recognized what kind of inability to travel right now like.
How does it matter when I start with the second question Franklin alternate or friends, while to to addressing them and in question. So ons professional services, we have the capability of providing those services remotely for the large majority of our customers. There are some federal where we do need to actually be in person and we have gotten that permit.
And then employees feel comfortable we are allowing that budgets is by far the exception as opposed to the rule. It's professional services as a hole in relation to our services are very small percentage of our total services bucket. Most of our services revenue are associated with maintenance type relationships, but.
But we we have been able to provide a lot of those services remotely.
Admitted to your question around how we think about in a.
I I <unk> I want to pull back up here and.
And <unk> my perspective.
Oh it over the last 12 months, we spent a $1.8 billion in aggregate in the acquisition of shape an engineer.
Which as I said before were driven by the belief that applications would become even more valuable assets to our customers in that application delivery across modern traditional environments would continue to grow and application security is is we believed the the security issue of the of the next.
Decade, So we feel very very good about the strategic position that we have now when you combine the assets from my five engine next in shape and.
So when we look at the you know the the the near future. Our focus really is on value creation from N. genetics in shape. We think there's a lot of growth to come from what we've done there and operating leverage to come from what we've done.
Our focus is on creating value with that also on continuing to rebuild our cash position and maintaining a very strong operating model and so that's that's where we're focus in the in the short term made a in not on for the remedy for the time being.
Got it makes sense.
Your next question comes from Paul Silverstein with Kellan. Your line is open.
Thanksgiving Oh, it was only gonna ask one question, but I wouldn't break the trend.
<unk> no first off.
Right. That's it was around $15 million, assuming all bits rubbing the software.
Organic growth would've been something on the order, 4.3% some strip about through customs points to the group.
Yeah, you're about a million too high it was just over 14 and call but in that ballpark.
And the public school software.
<unk>, Yeah, I think so.
<unk> overall software growth was 96% and if you exclude shape it would've been around 65%.
Well understood or certainly.
<unk> <unk> going back to Mr. But I just want to make sure are fully understand.
With respect to be accelerated purchases <unk>, so that those were not meaningful to the overall equation and so we will not present I mean, it should not <unk>.
The next 234 quarters down the road is in terms of stealing from the future.
Yes that is correct.
Alright third.
I believe just said it up you I don't know if you're speaking loosely but when you were talking about the linear drivers.
Quarter, you mentioned <unk> relationship I don't know if you meant specifically about and factors generating revenue, where you're meant to say that.
The early.
Into actions are going nicely with rubbed down the road, which which is good and if it's generating revenue can you give us any sense right a trusted tool to rule it'd be meaningful but can you give us any color in it.
Paul It's the Lotto, it's too early to be meaningful so it's more revenue down the road, what what we are seeing today.
It's too you know too great areas of progress one is a considerable progress on joint development of combining solutions.
Two is we are now getting quite a lot of leaves from U.W.S. So if you have to recall in the past we would meet at the customer front part of the reason we did this agreement is because we we know a lot of our customers would like to leverage it W. us.
A lot of cases it up U.S. is in conversations that F. five was not a part of and you know as a result of disagreement it W.S. is now pulling in pulling a five into these conversations and providing a lot of leads to us that we didn't have that ability to before.
But those are those are great leading indicators, but revenue was further down the road.
Warm of course report Mark was a little bit larger <unk>, if I looked at the numbers correctly.
A reasonable basis and both this quarter and in the past December quarter for the first terminal while it looked like all three minutes regions.
Were roughly in the same growth in the mid single digitize double digit growth.
<unk>, we'd seen the numbers <unk> growing or declining knocked consistent with each other.
And then on the from a vertical standpoint, I think telecom with down and I know, it's always been a very won't be business will do it on a quarterly basis, but the thought arises the telecom services as one of the more resilient areas given what's going on with your ongoing pandemic crisis in should continue to be resilient.
Aptitude been pickup in due course.
And so you can and I recognize it's not all of your talk on their way to foreigners not all that Paul could rub now, but in your <unk>. Your blood is there as well as on the question about the regions, what you're saying.
Oh.
I think you're you're correct about the all all three regions.
Being in the same zone of you know maybe mid single digit growth as it relates to.
<unk>.
<unk>, what I would point to you there.
Paul is that.
Where where you would expect you know the work from home situation to really create potentially upside to spend into telco space is really in the wire line area.
Has more exposure to the wireless side of the equation and so our.
You know our performance in Intelco is driven more by.
Seeing the early so we're starting to hobbies.
Early five g. wins and as as the spend on five g. accelerates and the capacity upgrades come from from five G., we should see the the benefit of that other five but what we have a lot less correlation to wire line telcos then.
Your friend swallowed original what your Super original perspective.
Packed with news all converging with the same growth rates are you seeing seeing the same prince throughout the world are there any meaningful differences from region region.
Or.
So it's a couple of.
Areas of softness.
Paul So in China, and North Asia in particular set up that for us is.
China and Korea, we saw some softness there. We also saw some softness in Latin America.
The rest of the World Strange I wouldn't say across the board.
So that's that's that's kind of the differences that we've seen the this quarter.
I appreciate a personal thing.
[noise]. Your next question comes from and that Dan with <unk>.
Huh.
Thanks, a lot of taking my questions I guess two for me you know for self the 96% growth in the software side of things at 65 person on the organic bases, obviously, it's fairly impressive I'm sure. It will be a big sticking by for investors to understand how much of the sustainable horses not as we go forward.
<unk> in fights on how much of this should be sustainable as we go forward and how she wouldn't think about the two in quarter with regard to the software segments.
So I met the.
First of all I I, just want to be very clear because I think it's a recurring theme here.
I don't believe 80 or these strength has to do with some kind of one time, you know pull in related to cope with 19, because I said before.
What we saw in cold blood on the the impact of our business was basically <unk> mutual fund things got pulled and some things got pushed out and that's where we're at so the fundamental drivers that that led to the growth in the software business or basically the the things that I've been talking about round automation orchestra.
<unk> getting into the small enough environments, including Cuban lettuce environments.
The continued growth of security use cases are a celebration is a cloud a subscription business.
The engine next contribution all of those things or these are long term drivers <unk>, they're going to continue to be there quarter after quarter.
No I would say.
We if you look at two three and a two four of this year. So the next two quarters.
Last year, we had 90% growth in software in each of those quarters.
So if you compare if she will a year on year is much tougher in Q3 that it was in into two for the year on year ago with comparison.
Without being fed the drivers I think the drivers are going to continue to be there and if you recall.
We also said that the growth itself or in any given quarter because it was not yet a very large number could be lumpy and so in Q1 of 2020 I think we did we did 50 per cent growth in software. There was a worry I think of the time that our software go with with the celebrating and we said no you you'll see.
That we should have stronger growth in software into two and and we did have stronger growth in to to then we didn't you. One. So that's just try to give you a full picture of of how to look at our software growth quote on quote.
Nope I really appreciate that and then just has a follow up when I think about the 65% of sales that you guys are talking about as recording businesses today I'll.
Think about this how much of this is maintained his forces subscription <unk> other things and that's 65 per cent number a good rule of thumb for your profits as well.
Thank you.
Or so I think probably give you enough components to break most of that down but you know out of the the services peace that's still a healthy chunk of over that recurring revenue, but we also talked about a subscription as a percent up software being seven over 73% in the quarter I'm, taking those two factor.
As into account you get to over 65% of our total revenue being recurring.
In terms of the the profitability you know we've got obviously very strong gross margins are cross the portfolio and then what we do with the operating expenses you know beyond that is really in conjunction with the entirety of the portfolio not just any one particular area and so are.
Are gross margins are quite high in our services revenue as you can see and then in in our software revenue, it's quite high as well, where we take a little bit of a lump sum of the managed services as well as some of the hardware, but overall, you know still close 85% and gross margins.
[noise]. Your last question comes from sending Chattered he with J.P. Morgan Your line is open.
Hi, guys. Thank you. This is <unk>. Thanks fitting in just two quick questions. Here. One is I just was curious to see if there's any correlation relative to that deals that you guys highlighted that were pushed and pushed out are brought and and pushed out and then relative to your gross margin and I understand this Mike.
Nit picky, but came in towards the low end of your guide I. Just I was wondering if there was any incremental pressure that you guys saw their relative to 90 days ago and you guys gave the original back. Thank you.
[noise] Yeah can you just on the first part of your question on the you said the correlation on deals the push pushed in and out what could you just expand on what you mean by that.
Yeah sure. So you guys have highlighted that during the quarter and you saw some deals be brought in and some deals pushed out relative to the covert 19 that that you guys man see an impact on the coverage.
So I was just wondering if there was any correlation relative to the different deals that you saw get pushed out and then brought into the quarter. If there's any correlation between eating like how did you guys see hardware deals get pushed out [noise].
Oh, okay.
No. The answer is no the the ones that were.
Full then I think the two factors were.
Customers that worried about supply chain and really wanted to put their some some to shore up some critical infrastructure very quickly or some things related to remote access an enabling work from home on the deals that were pushed out it was either customers that physically because they have to work from.
From home they were not able to process these deals or or customers, who had other immediate priorities in the case or the and then they can just killed you know kill the postponed a project to go attend to other other areas, but there wasn't.
They both at a correlation in terms of hardware software well frankly, even by by segment. It was more of a case by case by customer and in terms of the gross margin question. We're on the low end because of a shape more than anything else.
Okay. Thank you guys.
Thank you.
[noise], ladies and gentlemen, we have reached the end of the amount of time for the question and answer session. This <unk> conference call you may now disconnect.
[noise].
Yeah.
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