Q3 2020 F5 Networks Inc Earnings Call
Good afternoon, and welcome to the applies networks third quarter fiscal 2020 financial results Conference call.
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I'll turn the call over to Mr., Suzanne too long.
You may begin.
Hello, and welcome ice use Angela that's nice Vice President of Investor Relations Francois Locoh, Donou, Vice President and CEO and brain cancer Asides Executive Vice President and CFO will be making prepared remarks on today's call.
Other members of the five executive team are also on hand to answer questions. During the Q an extension.
A copy of today's press release is available on our website at <unk> five dotcom Werent archived version of today's call will be available through October 25th 2020.
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A replay of today's call will be available through midnight Pacific time July 20 by dialing 800, Heidi Fine Athree 6744166 to one for six four too.
Use meeting I'd 816635 too.
For additional information or follow up question. Please reach out to me directly as don't do long at a five dotcom.
Our discussion today will contain forward looking statements, which include words, such as believe anticipate expected 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 statements.
Factors that may affect our results are summarized in the press release announcing our financial results and described in detail and ours as he should filings.
Please note that outside had 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 the phone to review the quarter's results in detail.
Despite mcluhan certainty, we delivered strong third quarter results.
The company, we continue to think human forced approach.
This means working to support our customers at each other as we cope with young boys pandemic.
The resulting economic upheaval.
It also means supporting each other through the social unrest and full time over the in equitable treatment black members about communities.
Oh, that's five our commitment to the fight against racism foundational part of our culture.
We consider diversity and inclusion part of being in a fiber.
As a company.
Our exact team collaboration with a five appreciates blackness or Bob employed inclusion.
And our diversity and inclusion team or taking several steps to slight bias.
This includes continuing a mandatory I'm conscious buyers training for all employees.
But no multiples seems a bit programs will achieve change if we did not make it possible.
Everyday options or what we'll see we make a five a more diverse and includes a company.
I have pledged to all our employees I have every member of the five exact team.
But we will be accountable email words and E auctions.
As part of our F. Five global good efforts, we have previously committed to support stem education gross supporting women of color and underrepresented youth.
In Q3, our father employee <unk> when you step further.
Creating a phone and identifying partners to provide a resource for employees you get to support nonprofit working towards that basic human rights for people with color in the U.S.
Over $124000 was raised in just one month or your fibers, including the company match.
We firmly believe that our commitment to watch human first approach makes what we do love the business possible.
This quarter, despite a multitude of challenges globally, our team outperformed our non-GAAP revenue and earnings guidance.
Continued strong customer demand for software subscriptions and security use cases drove 4% total revenue growth and fuel our 43% software growth.
Oh systems business was down 12%.
Well our services business grew 5%.
In the going environment.
Incumbency is a significant advantage.
We are benefiting customers accelerate their digital transformation and turn to operationalize solutions to meet both immediate.
Long term business needs.
A default would you the quarter's financial results and our Q4 outlook.
I will talk to our business trends and Tesla highlights from the quarter.
I will also take time to date to introduce our vision for the future of applications.
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Thank you French law and good afternoon, everyone as France. One noted we delivered a very strong Q3.
Like last quarter, we are reporting non-GAAP revenue non-GAAP revenue excludes the impact of the purchase accounting write down on shapes assumed deferred revenue.
For transparency, we are committed to providing both GAAP and non-GAAP revenue during the period when purchase accounting will have an impact on shape related revenue.
On a GAAP basis Q3 revenue was 583 million.
Third quarter non-GAAP revenue of 586 million was up approximately 4% year over year and above the high end of our 555 to 585 million guidance range.
Please note as I review, our revenue mix I will be referring to non-GAAP revenue measures.
Q3 product revenue of 256 million was up 3% year over year and accounted for approximately 44% of some revenue.
Software revenue was 97 million growing 43% against a particularly tough comparison of 91% growth in the prior year period.
Software continues to grow as a percentage of product revenue, representing approximately 38% a product revenue in Q3 up from approximately 27% in the year ago quarter.
We also continue our momentum towards recurring revenue base with subscriptions of 73% a software revenue in the quarter.
Services revenue of 330 million grew 5% year over year and represented approximately 56% of revenue.
Revenue from recurring sources, which includes terms subscriptions as a service and utility based revenue as well as the maintenance portion of our services revenue totaled 66% of revenue in the quarter.
Systems revenue of 159 million was down 12% year over year.
On a regional basis in Q3, we saw strength in Americas, EMEA with America's delivering 11% revenue growth year over year, and representing 57% of total revenue.
EMEA delivered 6% growth representing 24% of revenue.
Against a challenging comparison in the year ago quarter, APEC was down 15% year over year and accounted for 19% of revenue.
Looking at our bookings by vertical enterprise customers represented 67% product bookings and service providers accounted for 15%.
Never meant customers represented 18% a product bookings, including 5% from U.S. federal.
Turning to our Q3 operating results.
GAAP gross margin in Q3 was 81.8%.
Non-GAAP gross margin was 84.4%.
GAAP operating expenses were 390 million.
Non-GAAP operating expenses were 327 million.
Our GAAP operating margin in Q3 was 15% and our non-GAAP operating margin was 28.6%.
Our GAAP effective tax rate for the quarter was 20.4% our non-GAAP effective tax rate was 20.2%.
GAAP net income for the quarter was 70 million or one dollar in 14 cents per share.
Non-GAAP net income was 134 million or $2, an 18 cents per share.
This was above the top end of our guidance range due to our strong revenue performance as well as disciplined operating expense management.
Turning to the balance sheet.
We generated 159 million in cash flow from operations.
Cash and investments totaled approximately 1.2 billion at quarter end.
Well, we have an estimated 1.3 billion remaining on our share repurchase authorization, we did not repurchase shares during the quarter opting instead to conserve cash given the uncertain macro environment.
Dsos was 47 days and capital expenditures for the quarter were 12 million.
Deferred revenue increased 9% year over year to 1.3 billion driven by an increase in maintenance contracts as well as the acquired shape deferred revenue.
We ended the quarter with approximately 6020 employees up approximately 195 from Q2.
Now, let me share our guidance for fiscal Q4 2020.
Unless otherwise stated please note that my guidance comments reference non-GAAP metrics.
Our Q4 outlook factors in the expected impact of continued global uncertainty related to covert 19, and broader economic trends as we understand them today.
Near term, we expect customers will prioritize investments that enabled them to serve the immediate needs of their customers and employees.
We expect to benefit from being a trusted and operationalized partner of the largest enterprises around the world.
We also expect customers will scrutinize investment priorities, which could lead to longer purchasing cycles are deferred projects.
With this in mind, we are targeting Q4, F. why 20 non-GAAP revenue in the range of 595 to 615 million.
We expect gross margins between 84 and 85%.
We estimate operating expenses of 326 to 338 million.
We anticipate our full year, that's why 20 effective tax rate will be in the range of 19 in the house to 20 than half percent.
This is lower than we previously estimated due to a nonrecurring impact to foreign tax credits, resulting from an election. We made in filing are fine 18, U.S. income tax return, which will impact our Q4 effective tax rate.
Our Q4 earnings target is $2 and $32.42 per share.
We expect Q4 share based compensation expense of approximately 52 to 53 million.
Let me speak briefly on our capital allocation philosophy.
With the current environment and interest rates declining we expect to continue to prioritize building our cash position over near term share repurchases and over paying down our term loan a associated with the shape acquisition.
However, consistent with what we have said previously we also retained the option of repurchasing shares Opportunistically and they open trading window.
With that I will turn the call back over different swap Francois.
Thank you folk.
I will begin by discussing some of our business dynamics and drivers.
As an organization, we remain nearly 100% work from home and we expect the majority of of fibers will work remotely for the rest of the calendar year 2020.
We are taking a phased and cautious approach to returning to our office is globally.
In certain geographies, we are allowing a very small percentage of employees to return to the office on a strictly voluntary basis.
We also recently lifted travel restrictions in some geographies, but we ask employees to consider carefully whether trouble is essential and to quarantine for two weeks following their trip.
We will revisit our approach regionally as circumstances and local advisory dictate.
Despite the continued work from home conditions.
[laughter] fiber was remain very engaged and productive.
My thanks to the entire at five team for their persistence ingenuity and resiliency in these unprecedented times.
Together, we delivered a very strong third quarter. Despite it also being the first quarter closed without a single face to face customer interaction.
Well, we're very pleased with our third quarter performance two quarters. In we also have more perspective on corporate 19 impact on our business.
Overall demand in our business is proving more resilient in the second half an hour initial pull school that expectations.
Relative to our people with expectations for the year.
I see evidence of three expected Corbett related headwinds.
First similar to last quarter, while we are seeing strength from overall enterprise, we continue to see caution from the most severely impacted verticals.
These include transportation entertainment, and leisure and retail, which combined represent less than 10% about bookings.
Second our I've young and India sales regions were acutely impacted by Qubic 19 related order delays in the last several weeks of the quarter.
Third well our sales team has kept up strong virtual engagement levels with customers.
Prolong life face to face engagement is causing some delays with new strategic projects.
These headwinds we're in large part offset by the advantages of our strong incumbency and our alignment with customers invested bodies, resulting in the overall resiliency, we have seen in our business.
We noted last quarter the customers playing it to accelerate their digital transformations because of corporate banking.
Our Q3 results are evidence that they are executing against that intent.
Large enterprise and service provider customers are increasing their digital engagement and boosting capacity insecurity on customer facing applications.
And on platforms that enable employee collaboration.
While some customers are moving ahead with large scale transformation projects, we see an increasing number of prioritizing speed and choosing to deploy solutions they have already operationalized.
I fives incumbency vault solutions portfolio and full hardware to software functionality are clearly an advantage in this environment.
With that five customers can deploy operationalized solutions with confidence knowing their application services can evolve in step with their application business needs. We also continue to see broad customer demand for subscription base consumption models across all geographies.
In fact in Q3 the team closed the largest number of subscription deals ever in a quarter.
In addition, a growing number of customers are leveraging our broad application service portfolio and our ability to serve both traditional and modern applications.
They are choosing a five to cover a suite of application services using a combination of traditional lift five enginetics and shapes solutions.
As an example, this quarter we won a hybrid cloud data center redesign with the department of health.
While avoiding the management complexity that comes with multiple vendors.
We delivered a detailed migration plan, combining highly scalable big IP access policy manager and advanced web application firewall global and local traffic managers, along with Enginetics controller and engine X plus.
We also secured a wind to deliver a comprehensive protection strategy for a major service provider.
Our solution includes five warehouse enginetics shape and civil I managed services.
From a use case perspective.
Application security continues to emerge as a significant customer need for both traditional and modern applications.
This is driving for kinds of opportunities for us.
First it is driving core five security deployments in both systems and software, including did all SSL orchestration and web application firewall.
In one example, during the quarter image your video conferencing and collaboration tool provider chose as five to provide global Das protection.
Second the need for application security is creating demand for the combination of five security on top of engineers.
The power of this combination was part of the rationale for acquiring Enginetics last year and we're very pleased with our early traction.
Last quarter, we mentioned an engineer it gateway win that we combined with a five watts.
This quarter, we secured a win with a multinational financial services Corporation using engineers, if you had gateway and a five app protect.
We are enabling them to scale to 10000 transactions per second while securing each individual epi so that third party Fintech partners.
Use cases like this one enabling best in class security on modern application architectures are gaining momentum and we believe will accelerate the appeal of enginetics to large enterprises.
The third kind of opportunity driven by application security needs the leads to strong customer interest in our shape portfolio.
Customers are looking to shapes, AI and machine learning enable defense capabilities to protect against a growing number of threats both bought and human.
For instance, this quarter, we secured a shape defense win with a media conglomerate.
We are protecting both the web and mobile deployments of their new over the top service against credential staffing and other plants.
Finally, we are seeing growing demand for application security as a managed service.
In fact, we have layered shape onto our civil line managed services platform.
The combination means we can provide customers the ability to protect not just the application.
But also how the application worse.
The shape Silverline combination is ideal for customers, who either do not want to own or don't have the expertise to manage the technology.
We believe application security is a meaningful opportunity for a five and expect the men to fuel growth for several years.
But we're not stopping there.
Hi, I'm going to spend the remainder of our prepared remarks outlining for you where we are taking a fives.
How we intend to leverage and combined the respective strengths and trajectory of traditional at five and generics in shape to create adaptive application and open new addressable market opportunity.
We see a future where an application like a living organisms will naturally adopt based on the environment.
It will grow shrink the fan and heal itself as needed.
The combination of application services telemetry and automation will enable it to become an adaptive application.
Ultimately adaptive applications will deliver increased revenue reduce cost and better protection for application owners.
We have been sharing this vision with our customers over the last several quarters and the feedback has been resoundingly positive.
Our vision strongly aligns with where enterprises see the greatest opportunities for their applications and the businesses.
Through our organic and inorganic investments, we are well on our way to delivering this vision for customers.
We are creating an application services platform that will help customers accelerate their digital transformation and fundamentally change. The we applications are delivered and secured.
I'll step back a bit.
To deliver engaging user experiences many things need to happen between the applications business logic and the user.
The application needs to scale as usage increases.
It needs to be protected from attacks.
And its availability must be maintained to meet end user expectations.
These are elements that are typically not in the functional requirements of the application and typically not addressed when the application was built.
Dev ops insight reliability engineering can help address these non functional requirements.
However, non functional requirements are becoming more complex as the number of micro services based applications in freeze.
Furthermore, business applications are increasingly distributed over a multi cloud environment.
They often have multiple generations of application architecture components in them, namely three to your web mobile microservices and even serverless.
This creates the need for application services, such as Ingress controller, Epi gateway load Balancer web application firewall et cetera.
Which needs to be injected in a standard way between the application business logic in the end user.
Application services help applications operate securely upscale.
And distributed application services enable fast and secure digital customer experiences.
Well ideally, we can seamlessly insert and integrate application services in the application path today it is not simple.
A typical at a price I T needs to stitch together multiple application services from multiple vendors to deliver an application to customers.
Our customer research showed that 59% of organizations, you 10 or more application services.
For most organizations each of these application services managed separately with its own management tools.
This results in silo teams and high operational complexity.
This fragmentation also creates inconsistent application security.
Well teams work to protect the different aspects of application behaviors. The user experience of the business service often is left on the protected.
Finally, the piecemeal approach limited visibility across the application delivery chain, making it impossible for enterprises to get a holistic view of the business impact.
We are creating a unified platform to solve these challenges for our customers.
We are delivering real value to customers simplifying operational complexity.
Providing business inside and protecting the user experience end to end.
We are also is uniquely positioned to deliver in your level of application insights and automation.
At five big IP instances, along with engineering software support more than 400 million application workloads across the globe.
We support application delivery with purpose built hardware in virtual machines in container software and a native cloud services.
Our solutions are truly multi cloud supporting applications in customers data centers in private clouds and in public clouds.
This means we are ideally positioned to help customers to collect a rich set of business tell me trees through these application services.
Information like application latency.
Type information and an online purchases or the location information for end users.
The business related tell them entry, we collect combined with our proven AI powered analytics engine from shape can help customers discover insights about their applications and business transactions.
Big IP and Enginetics application services translate these insights into application configuration policies to automate application delivery.
With the addition of shape, we are setting the bar higher and marching toward a multi purpose application analytics platform.
Such a platform supports application insights and automation and AI off as well as enable security and fraud protection and to when digital experience management and yeah enable business services.
For example, telemetered data about browser signature or customer credential can help identify that a request to a retail is what site is actually generated by a bought not human.
This kind of information can be used to help identify fraudulent transactions.
We are developing this comprehensive application analytics platform leveraging telemed treat from our rich set of application services and shapes.
Howard analytics.
Today, we offer the most comprehensive application services along the application path.
We scale and protect our customers mission critical business services.
Our application services support more than half of the world Enterprise application workloads.
For the future, we're doubling down on application telemetry and cloud analytics, we are leveraging machine learning and AI to help our customers to discover insights about their application business flows and user experiences.
As a result of the investments we have made over the last several years, we have the major components required to realize our vision.
We will accomplish this level of application insights and automation for multiple complimentary tool designed to address specific customer challenges.
The most recent of those tools the shape anti fraud engine or safe.
Safe is a cloud fraud prevention service.
We created and we find the initial version in a matter of weeks in response to fraud that first became visible in shapes analytics and Telemetered data.
Safe and ship recognized another analytics based shape solution are both upsale propositions. So.
Safe enable the higher level of fraud protection than other cloud security solutions, well recognize minimizes friction for legitimate application users and in doing so drives increased in top line revenue for customers.
We're always ship solutions target bogs safe targets human fraudsters.
Consider that a typical we deal is web traffic is 95% bought traffic.
Shape enterprise defense can block more of that bought traffic than other cloud security solutions typically more than 99%.
Once the bought traffic is identified and block. We then can zoom in and began to analyze the much smaller volumes of human traffic and so identify very subtle low volume fraudulent behavior.
Let me share a story about how safe works using a customer example.
In this case the customer is a 30 billion dollar market cap nationwide restaurant chain.
With corporate 19 more customers than ever before I begin ordering food online.
Bad actors were eager to take advantage of these new patterns.
In one month, the chain lost $600000 twin incredibly clever discounts Kim that used fake credit cards.
The front stores would use social media to advertise 70, or 80% discounts on yield if customers ordered and paid through them.
The faster than youth fee credit cards or other payments to place orders at the restaurant.
Food is prepared to picked up.
Only later does the restaurant discover that the payment method was invalid.
With face, we delivered a 90% plus reduction in fraudulent orders.
With safe and shape recognized as five deliberately complete set of application security capability. That's been a high volume bought attacks in the hundreds of millions per day, all the way down to ultra sophisticated fraud scheme that number in the tons per day.
We see our journey to creating adopted applications occurring and four x. each of which brings with it new growth opportunities for five.
With that two through four we are also expanding our addressable opportunity.
From a timing perspective, we are working multiple ads in parallel.
In Act one we took steps to expand our opportunity within traditional applications.
In this phase, we unlock new growth opportunities by adding automation and orchestration to our existing software solutions.
We made them lighter weight.
We made them easier to procure consume and deployed.
We made upgrades easier.
The majority of the software growth this year and last comes as a result of these actions and we believe there is additional growth ahead.
We continue to innovate on next generation Big IP software that will further differentiate and five in traditional applications.
The addition of engine X two costs into act two.
Opening a new addressable opportunity for a fight.
And your next enables us to serve moderate application environments and cloud native applications.
In fact half of engineers deployments or in the public cloud.
Enginetics also brought us modern application services, including Apiay Gateway and if yes management.
Kubernetes ingress control and micro services proxy.
Enginetics enables us to win against competing software vendors and cloud based services more customers into a specific architecture, putting infrastructure and development team at odds.
We took a different approach with a new version of Enginetics controller.
Castration and analytics platform.
We expect controller will bridge to divide between best teams building modern apps and the infrastructure team that need to secure steel and monitor them.
We believe.
To bring significant growth opportunity and complements our existing big IP footprint.
At three is all about application security.
Well the last decade was focused on network security, we believe the next opportunities application security.
We started this fact organically focused on traditional applications.
The addition of Enginetics gives us the opportunity to expand application security, it's a modern applications.
And the addition of shape adds significant capabilities to serve both traditional and modern application doubling our application security opportunity from 4 billion to $8 billion.
We are well on our way to establishing ourselves as the leading security player for our traditional application security solutions.
We are very early on in our efforts to apply best in class security to modern applications with a combination of at five and Enginetics.
And we are only beginning to top the potential of growth for shape.
[noise] in act for we will leverage analytics to drive automation and deliver business insights.
We will leverage our broad application services and shapes powerful analytics to deliver AI enabled security and fraud protection digital experience management application performance management, and AI ops and analytics enable business services.
Through our existing investments, we are well underway to delivering this vision for customers.
We are creating a differentiated application services platform that will enable adaptive applications.
Helping customers accelerate their digital transformations and fundamentally changing the way applications have delivered and secured.
Let me wrap up the prepared remarks on todays call by thanking the entire at five team again as well as our customers and partners.
We're more confident than ever that our vision, our investments and our innovation are well aligned with both near and longer term customer demand.
With that operator, we will now open the call procure winning.
That's a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press, the pound or hash key please standby, while we compile the Q and a roster.
Your first question comes from the line of Tim Long with Barclays. Your line is open.
Thank you Yeah, just two quick ones, if I could Frankfurt Francoise first could you just give her a little little color on how the performance was in the cloud or Hyperscale states for.
You guys, obviously have been increasing the service offerings. There. So could you give us a little flavor on how that's going on and then second I was hoping you could talk little bit about the telco business I think you announced a win with rackets and again I might have been your second one perhaps you could just talk a little bit about.
Your seat you see your solutions.
No shunning in Fiveg World, maybe maybe more so than than what we saw anvil and Fourg world for the telco vertical. Thank you.
I can tell it's all I'll start with the.
Issues in the public cloud.
[noise] generally we're seeing a continuation of the trends over the past few quarters, which is that our footprint in public cloud is accelerating and growing faster and I'll give you up a couple of components to that.
First of course, our partnership when they WH continues to increase the number of opportunities that we have in public cloud largely the then of course is making a number of opportunities invisible to walk up or not for a full that's helping and contributing to accelerate our growth in public cloud.
We're also seeing with engine, that's a large number of deployment Oh.
Half of the engineers deployment are in public cloud.
And so we're now seeing an opportunity.
In automotive applications in public cloud, but also applications where traditional application.
We factor.
Moving to the public style.
Thanks, very strong value proposition 60 pop in front of retracted application.
Especially when they're going multi cloud.
Five value proposition.
Multi cloud inside native tool is very compelling.
Generally.
Continued continued growth in.
And then went public cloud provider, Tim you mentioned hyperscalers as well.
I will tell you that we are on the infrastructure some of the Hyperscalers, providing a number of cup in passing applications such as collaborating collaboration.
Patients.
And so we've had an opportunity to.
The scale with these applications as well.
As it relates to telco and.
The evolution.
No we've had a very strong presence in the Fourg, specifically that GR line infrastructure mobile providers are and where we are about some transition into fiveg. We are seeing a substantial ramp up the number of fiveg opportunities.
That is a very strong oh entirely.
For.
It's a very strong upcoming catalysts.
For our software.
Because a lot of these fiveg opportunities take advantage of the waterfront on virtualization.
And.
Oh, and essentially but most of the opportunities now are somewhat driven.
We have now one.
Part of the design wins.
An input.
Vitamins.
Finally, cloud native and container native and we've been able to Whitney.
But you can see sort of called the combination of as five big IP and engineers.
Fitting in these cloud native environment. So.
Our excitement about the Oakland Fiveg is we're sitting here the kind of breadth of the five application services, playing an important role in these new architectures.
Okay. Thank you.
The.
Your next question comes from the line up James Fish with Piper Sandlin. Your line is open.
Hi, guys. Thanks for question.
Enginetics was picking up for US ahead of the quarter I was just wondering if a new integrated architecture are starting to lead towards more wins with that architecture or is that a refresh.
Or is it more be refresh in terms of purchasing more what is known through five and I guess also how are you thinking about leveraging and genetics and that five for moving it into the edge computing world.
[music].
I'll start with a focus on a go question.
Around what I'm going to make sure you're talking about what it one of the catalysts that are driving growth in the engineering business.
Oh, it's more about understanding francoise, if this new combined architecture of having enginetics five together.
He is leading towards more wins with customers or if its customers right now just spending to keep the lights on in buying what they knew before.
Okay. Thank you for a quick clarifying.
So the answer is absolutely got I mean, this quarter, we have a.
The higher separate numbers all three products.
One form diet five.
Largely driven by a combination so that's five big IP and ensure that value proposition coming together.
And I'll give you a couple of examples.
We appointed as five.
Securities by all to expedite and were announced all the number of.
Customers out there, Steve wanting to take advantage of security for what people agent.
Sure.
Last quarter, it's getting a lot of traction and helping accelerate the monetization.
A budget we're also see.
With a controller that we have introduced.
Traction around bearing T. I think we have exciting management solution.
We're able to I've thought through customer that already have a five psi solution. So examples of these multi product.
That is.
A large number of the towards subscription we we sold this quarter or a combination of five an engine exit got to sell them, both and kind of a story really reaching a world all the world that all together, giving more visibility to network operation.
Hello.
Wireless.
That is starting to play out in.
In our customer.
That's one of the drivers of our.
Your second question was around.
Lets computing so we today have I would call it and unlike outfit edge service called several lines.
Which volume we offer a managed web application firewall.
For the managed service.
Now all that shades.
I bought technology, but I'll talk about offering.
And so we are we're able to serve the needs of some customers up on.
Edge capability, we don't.
It had to go into it capex intensive way into the computing market ourselves, but our fundamental value proposition of the company JV is that we are essentially infrastructure as well so we.
Our solution can be deployed.
In public cloud on Prem.
In private cloud and in partnership with CDN providers. So we have a number of partnerships as well with with Citi and player.
I can use our AFS securities backed to protect obligations.
Yes.
Got it. Thank you for all that color and a ticket take care.
It does.
Your next question comes from the line of Sammy Baldry with Credit Suisse. Your line is open.
Hi, Thank you very much for the question and congrats on solid numbers for the quarter.
My question, mainly has to do with this new vision, you're laying out the adoptive application vision does this predominantly gonna be offered in the form of an E.L.A. for a very very flexible consumption agreement with your customers and where exactly that will be consumed it's gonna be multi cloud and it's gonna be predominantly offer to come.
Customer scaling applications and public clouds, here's give us more of an idea on how mechanically the numbers are going to work or your revenue sources are going to work. Once this kind of like really rolls out and begins more it begins to be more mainstream with your customer base.
Thank you.
Let's sell some of it is still to play out, but I think of the consumption example mentioned, it's all evolve.
We are either way I should say, we are already seeing elements about vision coming to play today, what we're seeing that with I just mentioned customers deploying a five an engineer.
Together and this quarter, what we see is in this environment customers want to kind of consolidated on that in order to offer a strong breadth of application services until there's a number of deals you've already won this quarter were essentially were taken up.
So a niche player in the these solutions to customers there, but I think looked at their future needs.
Kind of look of the vision, whereas five is going and the already paid for your for these applications. All this together a chain a digital experience.
And so we're starting to see that happened in real time or in the opportunities that we're winning today and laid on property.
A combination of hardware or software.
A combination of on Prem.
And public cloud.
The thing that will ultimately protecting a combination of traditional modern applications.
And we're now starting to see that would.
She is contributing to this vision.
With these integrations, we've already made with actually put our silverline offering and customers consuming data of the Minnesota. So you are we are early days is not the realization as time goes on this is going to get.
Much bigger through selling that for our stuff, we presented theme overtime the opportunity for a five get much larger but you're already seeing some of these consumption model and consolidation of application delivery application security.
Across multiple types of infrastructure, that's actually starting to play out right now.
Got it got it thank you for that color and kind of like taking why you just sat and just kind of frame and the way we should be looking at the forward looking business here is as adoptive applications continues to scale. We will expect service software engine acts a shape the kind of be attached to that but when we look at like some of the rig.
Quoted metrics that you guys have delivered on systems growth, specifically and these kind of double digit decline should we expect this trend essentially continue but systems continuously to to be declining, whereas the rest of the business is growing like should that relationship continue as adaptive applications continues to accelerate.
Oh, the broadly broadly the answer is yes, because the.
Oh.
Although our customers want.
The software for us.
Artemis.
And these software parts environment gives them the flexibility.
To to deploy ultimately this vision for productive application.
Well flexibility to insert.
You application services through to take the benefits of automation and orchestration ER and ultimately to leverage at the work we're doing an analytics. So all of these trends a point to you'll continue to see our systems business decline and you'll look at any to.
Our software.
And the.
Overall, you'll see the majority of business for the company will be software.
Got it got it and I'm sorry to ask a third when there's a lot in this earnings call tied to your telecom and service provider opportunities now you had significant traction with record can obviously its theme of Virtualizing network cores is now coming to the U.S. with condition being a very I want to say a first big data.
Her here that the prove itself and the infrastructure.
Should it kind of go no should should people be making the assumption that since you guys were very effective at insertions attract attendant to virtualize core abroad that you're advantages in your know how and how to do this certain use cases and functions and the U.S. cores should should we basically have some conviction and this idea or would you say that this is going.
To be completely different there's going to be in your bidding process et cetera, because the idea of virtualizing cores for telco business.
I guess, we can all agree it's pretty complicated stuff. So I'm just trying to get an idea on how big were if traction you know is gonna be.
One of the big drivers for our five going forward and telco ASP.
I think I think you should the way to think about.
And Weve Terrier.
To be different in that bear.
Their transition from Fourg to Fiveg you know.
No.
Or some will not.
Use that.
But overall, if you look at the Fiveg architecture, and where you kind of yet where people are going we feel very very good about the work we've done a special thought back five brings to the fact, the architecture are being sorted in a large.
Our current infrastructure, whether it's in the U.S. actually in Asia or in Europe.
And we have already some important but nine week beyond reconciling that so I think you should read from that but we have pretty good conviction.
Around the role that we're going to putting fiveg are subject to report.
Got it right. Thank you very much Francois.
Thank you Sandy.
Your next question comes from the line of Samek Chatterji with JP Morgan Your line is open.
Oh, hi, Thanks for taking my question, if I could just follow up full scale and Sami's question. He would've bode kind of division you laying out for that begins services I'm just curious how to think about kind of when you think.
That's correct or how much of that is organic versus inorganic and kind of some of the I accept lucky beauty and home with up that you need to kind of.
Outside of to bring those capabilities in house and I will follow.
Hi somebody.
Well, if you look at the analytics platform so when we.
Maybe acquisition of shape.
There were multiple reasons, we felt strongly this would equate combination what I find one was of course or the business.
Shape was in the anti fraud business.
Shared with you are we really think we've entered the era Oh application capital were more fall is going to be all applications and shape, it's tough to reignite secular trend and in fact, we already saw that a an acceleration this quarter with co pay that nothing I can tell us about later, but the the anti fraud business was one of the.
Big reason for the acquisition.
Second Big reason for the acquisition, what's wrong technology and it was.
Large amounts of money and time that shape how did that.
Moving at a high powered analytics platform and so the reason you see that here and not coal part of our vision already realizing if in fact because of the technology assets from shape, so, but the the M&A as it relates to that essentially have been done.
With the acquisition overall, we don't roll out.
As we as we must award that vision of adoptive application down the road, we might want to accelerate.
Inorganically, but in terms of letting specifically, we have a big head start a with the acquisition of shape.
Got it thank you and if I could just follow up the guidance that you should fall or fiscal fourth quarter alone is not rotary engine the revenue.
Last quarter alone. So does imply you have more visibility now just kind of again what did a good deal kind of good what are you seeing in relation to kind of Oh, gosh, what activity, particularly cadence for the portal odd B C and say good compressing obeyed relates to what do you saw last quarter, what is that driving be high visibility you.
So in the strike. So I think our approach was very similar to last quarter.
We obviously is that our quarterly business reviews with our sales team. We feel like you know the guidance that we've given as appropriate and because it was the first quarter that we were living in a post Soviet World I think we wanted to give a little bit more of a range, but I think we do feel a bit more comfortable going into Q4.
Sure.
With the visibility that we got on that activity that we can tighten that up by $10 million.
Okay. Thank you.
Ah.
Question comes from the line of Mehta Marshall with Morgan Stanley. Your line is open.
Great. Thanks, and he noted in answer to a previous question about multiproduct deals picking up but I'm just any commentary you could give on a pickup in las artist interest in L.A.'s. In this environment, you know maybe or there are people just wanting to know more what they're buying versus open.
End of deals a and then maybe second question any just update on the eight of U.S. partnership and any traction you've been able to make without fail or without in person down.
And so on the L.A.'s that demand continues to be very strong.
Uh huh.
I would say there there were kinda through a tale of two stories there.
One of its like 14. This colgate environment is that customers there are some strategic.
Transformation that customers are are pushing out.
Largely because they have to tend to more near term priorities. So that in a way you know there's something that's a large potential.
Is that could.
Could it happen this quarter that will happen more down the road, but at the same time, we did more yeah in terms of volumes on transactions with it more this quarter than we did.
Ever before and those yeah leads were often a combination of multiple at five Oh, So big SP plus such an X. I know we've started to see a shape as well so that's that's something.
That's what we're obviously and I didn't really through the.
Yes, it we're making very good progress.
We have we're getting a lot of visibility from.
The new opportunities.
We are kind of ahead of where we thought we would be at this point.
In the relationship and I think we'll see further acceleration in 2021 support.
Going to joint solution integration.
And also now watching with interest migration partners a foot celebrate the work we're doing for my version of a workload. So overall a good traction so far and expect or even more in 40 fund one from the joint operation.
Great. Thanks Congrats.
[laughter].
Your next question comes from the line of Alex Henderson with Needham Your line is open.
Thank you very much.
I was hoping you could talk a little bit about the timeline between the various phases. You described in your presentation clearly a you've already done phase one.
Positioned into phase two.
With kubernetes and application growth striving that a vector it's pretty clear that Fedex.
X number of years, that's going to be a very high rate of growth I was wondering if you could give us a little granularity around do you expect to gain share.
As a result of your high rate of penetration in kubernetes, an increasing kubernetes.
Deployment as a percent of new applications, and therefore gained share within the application market.
And then the second question.
As as you move into the phase three in phase for how do you see those ramping in.
The contribution to the software growth.
Rates.
Is that a [noise].
Stutter for a year or so and then get a real head of steam around it to get into the phase three or does that already happening and when does phase four kicking thank you.
Alright. Thank you let me let me takes you through the timelines so.
I think one which is really on a.
By.
Biting off delivery against a traditional application.
Of course is happening right now largely true, but what I would think IP platform and a lot of the works that we have done over the last two for your sustained moving through software force environment, a lot of innovations in our model a bomb to be successful in a more automated orchestrated software environments important.
Public cloud and I would say.
A lot of if you have seen in our offer today is really come from last one.
That's true which is a five.
And all that application really started with the acquisition of a generic and you're right I like about that penetration of Cooper that its environment.
We are we are accelerating enough, yes, we do intend to gain share a in the morning application base, because we worked out before.
And that is something that's starting to play out now and I think is going to play out for them. They are next several years I would say we're still in the early inning about eight.
You know being part of an application and be monetizing that part of it.
We're done with taking up a jury application security solution.
Five.
And putting that on a on engineers as an example, the new Enginetics controller, a new application services like gateway.
All these things are starting to Arsenal.
I have three is really around protecting both traditional and Montana.
We have thought about organically without five I'm talking about security ER business was part of our software growth.
But that is being accelerated would shape and we intend to or a shade capability across and find portfolio. So we've already important chip capabilities on silver line, which is our managed security service.
We'll have some capabilities with I think I'd be we'll have it with engineer. So three it's already contributing today, but you should expect infant computer you got more in the not in the future.
So I would say, our two or three or you know over the next couple of years will contribute meaningfully opt for instance in terms of the thinking in terms of material contribution to our financial performance I would say hot or is it really.
Beyond the next couple of years.
On the technology perspective, we already have a lot of component.
We are we start engaging with customers.
That's solutions.
President the most with them around leveraging analytics to get them the right right inside for their application a shape actually has already starting a started releasing a couple of solution.
Huh.
I think in terms of becoming material contributor to Oh, we think that's that's beyond the next couple of years.
If I could just follow up it's my understanding that you guys are the dominant.
[laughter] controller that Houston.
Kubernetes deployments today and.
Kubernetes increases.
Sharply as a percentage of new applications doesn't that my definition drive share gains.
Hi, Alex Cara.
Next we have a solution that is tailor made can be deployed and microservices her name environment, such as Cooper night.
Is the leading collection of web server in those environment.
Our modern customer facing digital experience.
So we think with engineers is that its presence and hundreds of millions.
Kind of consumer facing modern application, we have a good start for and then integrating some of those security capabilities any analytics capabilities that Fred talked about.
[noise] I knew I could get care on their somehow thanks guys.
Your next question comes from the line up Paul Silverstein with Cowen Your line is open.
Thanks I appreciate it.
First one for those hoping you tell us what was the <unk> contribution to revenue unrelated to that obviously what was the organic software revenue growth in the quarter I mean, I've got a quick follow.
Also it was a little less than 20 million and so without shape I think I never would have been 14%.
14% for organic revenue growth.
Correct.
Okay all right.
Just an observation questionable it's an observation.
First of all your project commentary.
What was different this go around the would you sort of shortly historically you've made the comment the observation that you wouldn't see meaningful fogey revenue until there was meaningful take up of five to services because what you did was later in the cycle dependent upon the taken within services in terms of number of users and then sensitive use and your.
Comments or <unk> on this call seemed to be very different in terms of seeing traction now I'm just trying to understand exactly what you're saying and before we respond. The other question would be your is here and in your commentary I just want to make sure I understood.
Are you, saying that it did not only do do hit harder only on but you haven't seen any improvement was it is it still in the doldrums are you seeing any signs of that are coming back a.
Relative to the impact to cover 90 pressure.
Well, let me start with again I think it's still you know the business there are still impacted.
In India, and then somebody specific I'm talking about India and are truly function to the Andean region.
You know either because so far slowdowns or the second waves and countries going back in to lock down or just Singapore, but generally not region. You know we have been impacted throughout fit for the last Ah you don't really 60 days that is kind of ongoing.
Oh five gene.
Oh, I think Mike I think if it's two things are in the but wondering if they said.
Once we would see Fiveg radio the point that we would start to see capacity upgrades in the core.
And I wouldn't say, it's a large instead, we haven't seen those yet I think theres still to come.
I do think at the very short term.
Carriers have.
Diverted from spend that would've gone wireless infrastructure into our lines what trends you know what from home issues that increase capacity.
Issues on fixed infrastructure, that's true for kind of carriers that combined wireless and wireline infrastructure.
But what I'm seeing as it relates to fiveg opportunities for I find is we're now seeing a rainfall in opportunity.
In Fiveg and we have already some design wins.
That give us confidence in the world, we're going to play so you know I wouldn't expect let's see.
Let's start to contribute to us.
Next year.
Lastly, you know when that wouldn't be able to put the pinpoint.
Much quarter, that's you know that service providers.
Comforting thing.
Currently, but I would expect that next year, we see those Oh contributed.
Hey prints were one quick follow up if I may once upon a time, if I was a 40% operating margin company I understand your old needed to make investments to reposition the company, but you're not doing a 28 and change any thoughts on if and when we see a healthy rebound in operating margin and you certainly.
And just the revenue growth is shown in general.
Sure I'll have more to talk about this Ah you know when we when we talk about our next quarter as well as you know when we reschedule.
The increase in patient, but I do you feel like we're closer to the bottom here and I think you'll see with the Q4 guidance. We've given a you know we're ramping back up from here and expect to see that continue.
Appreciate it thanks.
Oh.
Thanks, Paul.
This concludes the time, we have for today's session. Thank you for attending you may now disconnect.
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