Q4 2020 F5 Networks Inc Earnings Call

As we look ahead we are seeing very positive Trends in our software business and expect much stronger software growth in q1. I will speak to that in Greater detail when I discuss our q1 guidance.

Software continues to grow as a percent of product Revenue representing 40% a product Revenue in Q4 up from 31% in the year-ago quarter. We also continue to drive subscription Revenue momentum subscriptions represented 76% of software Revenue in the quarter compared to 66% in the year-ago quarter Services revenue of $536 million Ruth 3% year over year and represented 55% of Revenue.

Revenue from occurring sources. Would you like systems revenue of 168 million was down 8% compared to last year.

on a regional basis in

You for America's delivered 4% Revenue growth year-over-year representing 58% of total revenue.

Mia deliver 9% growth representing 24% of Revenue a pack was down 1% year-over-year and accounted for 18% of Revenue.

Looking at our booking Spike vertical we saw robust Enterprise activity in the quarter with Enterprise representing 70% of product bookings service providers accounting for 15% off and government customers represented 16% of product bookings, including 7% from US Federal.

Let me know share our queue for operating results, Jap gross. Margin in Q4 was eighty 1.8% Non-gaap gross margin was 84.4% wage job operating expenses with 404 million non-gaap operating expenses were $335 million. Our gaap operating margin in Q4 was 15% and our non-gaap operating margin was 30.1%

Our Gap effective tax rate for the quarter was 20.4% Our non-gaap effective tax rate was 19%

Job. Net income for the quarter was $70 million or $1.26 per share. Non-gaap. Net income was $150 million or $2.43 per share. I will now turn to the balance sheet. We generated $175 billion in cash flow from operations in Q4 cash and Investments totaled approximately 1.3 billion a quarter end.

We repurchased approximately 358000 shares of common stock in the quarter and an average price of $140 per share for a total of approximately fifty million dollars off. DSO was 43 days and capital expenditures for the quarter were twelve million.

Deferred revenue increased 6% year-over-year to 1.3 billion. We ended the quarter with approximately 6110 employees up approximately 690 employees from Q3.

Let me now turn to our full year 2020 results.

for the year Gap Revenue totaled 2.35 billion

Non-gaap, Revenue grew 5% to 2.36 billion.

Non-gaap product revenue of approximately 1 billion grew 5% from the prior year and accounted for 44% of total revenue within product Revenue software grew 52% while systems Revenue declined 10% subscriptions represented 71% of software Revenue in fiscal year 2020 compared to 55% in a year 2019 revenue from recurring sources totaled 65% of revenue for the year up from 60% in fiscal year 2019.

Services revenue of 1.32 billion group Huxley 5% during the year and represented 56% of total revenue.

Our non-gaap effective tax rate for the year was 20.2%

dot net income for FY. Twenty was 307 million or $5.01 per share. Non-gaap net income was $575 or $9.37 per share.

Now, let me share our guidance for the first quarter and some high-level modeling assumptions for physical 2021 unless otherwise stated please note that my guidance comment reference non-gaap metrics.

In our q1 and physical year outlooks, we have attempted to factor in the expected impact of continued Global uncertainty related to COVID-19 and the broader economic long as we understand them to date.

Let me start with sharing our expectations for the first quarter of 2021.

Near-term we expect customers will continue to prioritize Investments That enable them to serve the immediate needs of their customers and employees. We also anticipate continued focus on a an investment in application security. We expect to benefit from being a trusted and operationalized partner of the largest Enterprises around the world as they continue to drive Innovation and Agility with their application strategies to increase business value.

With this in mind, we are targeting q1 FY 21 non-gaap Revenue in the range of $595 to $650 million. We expect q151 gross margins of 84 and 1/2 to 85% And we estimate operating expenses of $324 to $336 million. We anticipate them effective tax rate for q1 will be in the $21 to 22% range.

Our q1 earnings Target is $2.26 to $2.38 per share. We expect q1 share-based compensation expense of approximately 56 to 58 million.

As for our Capital deployment we retain the option to repurchase shares opportunistically in any open trading window. Now, let me share some of our operating and expectations for the full fiscal year of 2021. We have made tremendous progress on our software transition and expect momentum to continue as the contribution from subscription software and said accounting for this progress in fiscal year 21, we expect to grow software revenue for the full year by more than 35% based on our strong q1 software. Line and increasing momentum from our software subscription offerings. We expect a software growth rate of at least 50% in q1.

We expect systems declines will moderate slightly compared to FY twenty likely declining High single digits for the year. We anticipate gross margins of approximately 55% for the year. We expect to achieve at least 31% Non-gaap operating margin for FY 21.

We

Also expect operating margins to move down from q1 to Q2 and then to increase in the second half of physical 21 following our typical seasonal pattern long. We anticipate our full physical year effective tax rate to be in the range of 21 to 22% with some fluctuations quarter-to-quarter. We expect the school year 21 stock-based compensation in the range of 230 to 240 million and capital expenditures in the range of forty to sixty million. We expect to update our longer-term Outlook at our analyst and investor meeting which we will conduct virtually on November 18th. Please remember to pre-register on our investor relations site with that. I will turn a call back over to Francois Francois.

Thank you for calling it has been more than 2 years since we unveiled our strategy to transform F5 in the process of extending our reach and expanding our role. We have built the broadest available application security and delivery portfolio and significantly expanded our addressable Market.

As a result the foundation of our business has grown stronger and we are on our way to becoming a predominantly software-driven company.

Going forward software growth will be more Diversified thanks to a broader and growing subscription and fast base of Revenue. We have a renewal took a wheel that is starting to turn with momentum and true forward Revenue opportunities on a sizable portion of our long-term subscription contract.

Demand for subscription-based consumption is growing across all geographies and verticals as far as mentioned 71% of our fiscal year two thousand and twenty software Revenue with subscription based up from 55% in 2019.

We expect continued suffering momentum in fiscal year two thousand twenty one and I will speak to our growth drivers intern.

First Corvette ID software much of the software growth. We have delivered. Thus far comes on the back of big ID. I have spoken previously about the existence of work. We have done to reduce friction in purchasing deploying and managing the IP software. We have focused on flexibility in our commercial models and on enhanced Automation and schedule management.

During Q4 customers chose big IP to refresh Core Business applications as well as for capacity additions in one instance a multinational Delivery Service Company chose big IP to handle both increased traffic to its consumer-facing site and to scale back-end processing.

Looking ahead. We expect continued growth from Big IP driven by customers need to support and scale mission-critical traditional applications in hybrid and multi-cloud environment.

Second growth driver is nginx.

nginx brings multiple growth factors through FY 21 and Beyond

in addition to continuing to expand engine X-Plus instances. We see increasing customer interest in nginx controller our modern app orchestration and analytics platform controller is complimentary big ID and bridges The Divide between Dev teams building modern apps and the infrastructure teams that need to secure scale and monitor them.

We are also opening new application security opportunities with nginx and a protect our web solution for modern applications nginx without protect in a Security Professionals and developers to introduce application security early in the development lifecycle making security part of the modern app stack.

In Q4, we secured an engine except when with a major video conferencing and collaboration platform.

Nginx already is a key technology for this customer enabling them to scale the platform to meet explosive COVID-19 demand.

With that explosive growth. However, also came increased security concerns.

Nginx is ability to scale rapidly with no impact on Service delivery was a key differentiator.

As well as our ability to meet a wide set of requirements in a cloud of Gnostic way, including load balancing cashing and security without protect.

Not only that this win expand our existing footprint with a customer. It also positions us to capture additional use cases including protecting login pages and preventing a credential stuffing would shape Solutions.

Use cases like this one enabling best-in-class Security on Modern application architectures or gaining momentum and we believe accelerate the appeal of nginx to large Enterprises that provides a good transition to a third Ghost Driver application Security application security is a large and growing Focus for customer and understandably. So in the current environment organizations are more Reliant than ever on applications to enable employee collaboration and customer engagement.

At the same time the attack surface and sophistication of attacks has increased dramatically.

During FY twenty web application firewalls remote access SSL orchestration and fraud protection LED customers security demands.

As an example during through for we secured a cloud win with a retailer with a significant presence big IP virtual additions out performed both cloud-native load balancing and web application firewall solution.

as a result

The customer double it's a five consumption in just the first year of its multi-year term subscription.

We expect the application security demands. We have seen this year persist and grow in f y 21.

as a result, we expect to expand our leadership in the space our ability to apply consistent and robust security across multi-cloud environments is fulfilling a significant and growing customer need

Within the context of application security. We also see shape as a significant software growth driver customers are looking to shapes Ai and machine learning enabled defense capabilities to protect against a growing number of threats both bot and human shape already has been a strong contributor and a great addition to the F5 portfolio in the roughly nine months. The shape team has been part of a five we have grown even more confident in the opportunity. It brings to F5 and our customers shapes intelligent fraud and bucco value proposition is resonating with customers across multiple vertical.

For instance in Q4 with secure a shape when with one of the world's largest social networking platforms to protect the platform and its uses from artificially generated foils caused by the Atlantic Behavior shapes ability to deliver a high degree of efficacy with high confidence and actionable intelligence or they key differentiator in this win.

Shape also is available by our civil line managed Services platform, which allows customers to benefit from shapes capabilities with no integration work.

We have secured several wins in a very short time frame thanks to this integration and the ease of implementation. It brings. In fact one recent integrated window fixed shape, which is already installed on the majority of the top 10 u.s. Banks and extends it to thousands of small and mid-sized Banks who are using several line for their manage security needs.

This is an example of one of the core premises of our accommodation would shape. We are taking shapes industry-leading anti-fraud Solutions and making them available to a much larger customer base at a time when customers are facing tremendous increases in both the volume and sophistication of attacks.

Our fourth cost driver is continued growth in Cloud deployments.

Our FY twenty Cloud business total more than $100 security. Use cases are playing an increased role as customers rely on at 5 to ensure robust and consistent application security.

Our club presence has been driven both by our organic investments in F iPad services and through our partnership with the cloud providers.

Strategic collaboration agreement with it'll us is just one example of a highly complementary cloud provider partnership in addition to a CO selling motion, which is generating leads for a v e w s n f v hopko innovated on programs and cloud-native Integrated Solutions.

Just last week. We introduced a joint solution combining Amazon cloudfront and F5 essential a perfect platform is a fast content-delivery Network or VPN service from AWS F5 essential a protect is our easy to deploy fast security solution to protecting web applications.

Integrating essential out protect and Amazon cloudfront securely delivered data videos application and apis to customers globally with low latency and high transfer speeds all within a developer-friendly environment. We are leveraging the power of AWS to provide customers with application cashing capabilities that Iraq has cost strengthen security and increase performance.

And we are doing this in a single solution which delivers higher long-term return on customers application investment and a better experience for their users.

This integration illustrates the power of our collaboration with AWS and we continue to explore how our two companies can come together to help customers deliver more valuable through the cloud applications.

I would be remiss if I did not also speak to the opportunity with the with service providers in general service provider RFD activity is up from last year and quote request page informal activities are much higher.

In addition following our Racket and when we are beginning to see more movement in solid customer plans on their 5G strategies.

At this point we are engaged in multiple activities including trials with several customers.

We have traditionally played a role as a preferred choice for GI Lan Solutions in Georgia networks, and we are well-positioned to continue to own that segment and grow into new 5G function. In fact, we have already secured multiple design wins in 5G architectures, and we expect deployments to begin ramping in the second half of two thousand twenty one month a few words on our systems business before we wrap up.

I don't know that we expect our system decline to slow in fiscal year 2021 compared to fiscal year 2020 likely declining in the high single-digits while there is a tendency to think that accelerated digital transformation means one hundred percent software deployment. It does not always our business whether software or systems decided to Applications, whether they are in the data center the public cloud or anything in between

We are.

Supporting mission-critical applications globally many of these applications are experiencing rapid growth because of remote working and Rising e-commerce demands long would this growth comes escalating application security concerns including application fraud F5 is there to help with whatever consumption model our customers prestige.

As we look ahead we see a significant opportunity to enable our customers to bring extraordinary digital experiences to life.

We are reducing our customers operational complexity improving their application performance securing all apps no matter where they live and unlocking valuable business Insight S5 has always been about solving our customers most important application challenges over the last two years. We have built the broadest available application Security package delivery portfolio for both traditional and modern applications.

Our understanding and appreciation of our customers rapidly evolving needs has also deepened over the last two years today customers face exploding application in the reality that the Baseline of user expectations from application has been redefined think of your own experience and how markedly it has changed the rich of your favorite app experience. It is reliable fast personalized and trusted. How long do you wait if the application is slow? What do you do when a upgrade the greater experience or worse yet? The app failed altogether switching brands has never been easier.

A large insurer an industry where competitive Advantage has not historically been rooted in applications told us that if they're home page does not load in under 3 seconds. They lose the customer.

A fast-paced digital world is just as fast to move elsewhere.

Digital transformation has reset expectations for the experience and application must deliver to be compelling to be competitive.

Our customers need at 5 to enable these rich experiences and we have a unique position from which to help them to do. So we see a world where our Chef is application portfolio adapt as needed where it oughta mates redundant processes for greater efficiencies, and it protects itself securing All Points of vulnerability page where it expands and contracts based on performance needs and we're by Mining and harnessing application data. It gets smarter more insightful becoming a self healing and evolving more quickly F-5 is uniquely positioned to deliver that Vision because of the portfolio and capabilities we have assembled. We are looking forward to speaking more about our vision for adaptive application and how we are making it a reality at our upcoming analyst and investor meetings.

in closing

We have made significant progress pivoting at 5 and changing the way customers see us. We have built the broadest available set of application security and delivery service and expanded our total addressable Market in the process. We are also successfully driving a more software-driven business and building a robust and growing but a recurring revenues. Let me wrap up our prepared remarks by thanking the entire FBI team again as well as our customers and partners. We are more confident than ever that our vision our investment and our Innovation or well aligned with both near and longer-term customer demand.

With that operator, we will now open the call to Q&A.

Thank you, as a reminder to ask a question. You will need to press start and one on your telephone to withdraw your question, please press the pound or haschke. Please standby week Thursday.

Your first question comes from the line of metal Marshall from Morgan Stanley. Your line is open. This is Eric on for me. Thanks for taking our question. Maybe just going back to the comments made on service writer side and and just on that vertical specifically. Have you seen any change to order behavior that maybe matches with some of the other equipment providers have no choice and no you notice some design wins for 5 G. But wondering if that like near term has had any impact just being mindful of the percentage of revenue from that segment a little bit lower than it has been tradition.

Eric the short answer is no we haven't seen a fundamental change Eric. The percentage of I already told you about of our bookings that comes from service providers is basically in the same range. It has been for the last two quarters. You know, we are we are seeing momentum in 5G activity, but in terms of when that will turn into kind of meaningful contribution to our order book, we think that's more of a second half of 2021, but we are seeing a continued Traction in security use cases with service providers and and specifically our position as a consolidator of multiple functions, which is kind of a unique position that I don't think you necessarily would see with some other equipment providers in the Telco. We have a unique position in consolidating a number of functions off.

CG not indeed off and DNS TCP optimization and increasingly our service providers virtualized their infrastructure our ability to consolidate all functions in a in a software bundle is very appealing to them. And so that's you know, that that's a a use case that is growing but overall the the business, you know that ends in the business has been the same over the last few quarters. So no no specific change got it. Thank you. That's very helpful. And then if I can sneak in one more just on kind of the stronger expectations on on the back yard where side moving forward, you know, what would you guys point to as the strongest reason? Maybe some customers are still choosing Hardware there any incremental drivers?

I think Eric the you know, we've always said that we have a number of geographies that have you know, that continue to grow in their consumption in in Hardware form factors. Also a number of verticals were Hardware form factors play an important role including you know, service providers, you know government even Financial Services wage, but I think the the difference today is our security has become a more important mix of our Hardware business than it was a couple of years ago and our Hardware security business is not declining and so when when you when you factor that in, you know that that leads to the club in hardware systems, that's that's a dating and that's largely because of the mix of of security that's in our Hardware business today.

Thank you. Sorry helpful.

Your next question comes from the line of James fish from Piper Sandburg. Your line is open. Hey, you guys can grab some great quarter a couple of questions here, you know, you're talking about the strength of application security. I guess how do you feel about the portfolio as a whole whether there are areas that you'd want to get at organically or inorganically and uh, any sense to me that customers are now using shape security.

Hi Jim. So, I generally we feel very good about our application security portfolio. We think we are one of the you know, one of the very very few players, you know, who who provide who can protect and applications but also protect how an application is used with a combination of a 5/16 disabilities and now shapes portfolio. So we feel very good about our competitiveness and differentiation in the space. And in fact, you know are successful business had been growing healthily but that has accelerated as well with with coded because the amount of online fraud and and attacks on digital channels off not just for retailers, but for all kinds of companies has continued to increase and in fact has increased dramatically in the last few months and that's providing significant Tailwinds for us.

So that's the that's where we're at on the app Security in general and Jim. We will probably say more about that at the analyst and investor meeting.

Turn off and you know end of last quarter you guys noticed some weakness in in sort of the APAC sales due to do the COVID-19 and and not being able to get in front of in front of customers. How did this change as I worked through the quarter?

I think an asia-pacific Jim. We're still we still have some geographies that are challenged with COVID-19 as as you've seen. There's been some second waves and and and some lockdowns. So there's some specific geographies where we we have been challenged the comment about some software projects that were put on hold. We I think that was throughout our queue for that was still the case, but we're starting to see that update and wage is very good about the pipeline. We now have for the first half of 2021. And in fact, we are you know, as you saw from the the prepared remarks they you know, we think our our software business in q1 of 2021 will grow faster than 50% year-on-year and for the full for the full year. We think you'll be greater than 35% year-on-year growth. So we phone number

that our software business really has

You know, we think we have turn and inflection point here. Our software business is on a broader-based of subscriptions and it's giving us some opportunity for a number of to forward opportunities on on renewal. We've got a much broader base that subscription than we did a year ago. And as you see the the software business now more than 40% of our product product Revenue. So we we we generally feel that what inflection point here where our software is going to continue to have very strong growth going into a 2021.

Makes sense. Thanks for the call our friends. Well, thank you Jim.

The next question that comes from the line of Ron Hall from Goldman Sachs for line is open.

Yeah. Hi guys. Thanks for the question. I wanted to start off you talked about Enterprise order momentum being good and I wondered if maybe you could dig a little bit more into that in terms of size of Enterprise. You see that more in large Enterprises or medium-sized, you know, can you give us some color there and just kind of how the order them in some looks from a vertical point of view too and then on the growth my boss second question is I I can calculate based on the parameters you gave growth. It's a little slower than 20, but I can also, you know, get up above 5% growth depending on off minor tweaks to that and I'm just curious. Where do you think it's more likely grow? It does accelerate in 21. And then what's what's your macro assumption there? Are you assuming macro improves or you off assuming the current environment persists? I mean just curious kind of what you guys think the demand environmental due on 2/21 in the context of that growth indication.

Hey Rod, there were a number of questions. So I'll make sure I I try. Yeah, sorry for thank you. If you need I'll start from the end you made it to repeat them just on the micro to start the Arad. I always some options that the environment does not get better than it is today. But we'll we'll also assume it doesn't get materially worse off. So, you know, we have been in this environment in the pandemic for the last three quarters and I think we've reported now three full quarters under this environment and it it's allowed us to think of what our customers are doing where their priorities are and you know, we've we've taken all of that into account into our 20 21 planning. So basically we we kind of life out of school now as to the beginning of your question on Enterprise spend what the the you know the verticals there are two yep.

That are important as you saw our Enterprise numbers were actually pretty strong. Um, and I think there are two things that are important their number one the the vertical that we are most exposed to as a company or Enterprise are really Financial Services technology and government and in these verticals the need for them or applications more applications security and more multi cloud deployments of applications have continued to be strong the the verticals where we have seen a lot of weaknesses which are more, you know, the Retail transportation the verticals that are directly affected by by covet. They represent less than 10% of our business for life. They are soft but the impact on our business has been limited and generally we have very little bit limited exposure to the small and medium businesses. So that's in terms of the mix of the birth.

That's the reason.

And I think the other reason where you know, you see strong Enterprise demand for us is our you know, I think there still is a perception out there that you know, 5,000 networking data center company and so, you know folks tend to look at our results and compare us to you know, campus switching routing type equipment. But the reality is, you know, I respect is more tied to the need for customers to protect their applications with security and the need for customers to deploy more and more applications globally and multi-cloud environment. And so we our business is closer to closely tied to the growth complexity and security of application than it is to kind of network Dynamics.

Hello. Yeah, the only other one was the quantification of the growth. If I add up kind of what you guys said I can get to kind of a minimum growth rate of maybe 4% But you know, probably a little higher than that depending on what you think Services grows, but I I'm curious whether you see wage growth, you know, you lean toward growth accelerating if the environment Remains the Same off of 20 or do you think grosses kind of Remains the Same or maybe it's a little worse just curious which direction you think growth is off in 21, if you know all other things held equal.

I think so. We're not we're not giving a full-year top-line guidance here. We will give a view of our Horizon to guide them in in three weeks at Aim. So I think you'll get a little more color there. I would just say that generally, you know, based upon what we've seen in in formula and 521 guidance. I think we feel good about what we could achieve influence 21.

Okay, great. Thanks Francois. Appreciate it. Next question comes from the line and Samuel from Credit Suisse.

Hi, thank you very much. The first question I have is related to the software strengthen the quarter and I know friends while you you made a couple of very granular examples in the drive or a cloud that was on the corner that really drove saw the results that are going to continue to be solid results. But when we think about the composition of product revenue and software revenues, are there any high concentrations on specific customer or is there any lumpy activity in the quarter? And then to take that a step further does the fiscal one Q twenty Twenty-One also factor in lumpiness or concentration that are driving these solid results wage, you know Sonny the answer is no and actually that is precisely why I say that we have reached an inflection point in our software. So to look at our you know software results a year ago. We had pretty strong growth if you remember in Q4 we had 91% growth, but that was you know in part driven by a couple of large transformational kind of deals wage.

the the results we have the

Order or really not so it's a broad base of adoption of our software in our software subscription, you know, you probably saw that in our results now more than three-quarters of our software revenues. So 76% of our software revenues this quarter came from subscriptions. And so we've got a broad-based and Adoption of Our Song subscription consumption models across all of our verticals not a specific customer or not a specific vertical and that's part of why we we have confidence in growth in our thoughts because we're seeing now a larger number of customers have reached that point where they're taking our software and it's giving us a broader base of renewal opportunities going into 2021. We're starting to see the flywheel that you would see in a subscription business where you know for a number of our multi-year subscription. We have a table

Forward opportunity at the end of a one-year subscription across the number of customers and that's going to start contributing to the growth in our software. So that's that's what I would say that lumpiness I would say though that we are also seeing a good pipeline of I would say these larger projects going into the 4th of 2021 some of the projects that had been delayed. We think we'll see some of them in the in the first half of the Year. Got it. Thank you for that. And then one question for Frank, I was hoping you could just help us think about the services growth rate. Fiscal one Q 21. Is there a way we should be thinking about is something similar to the last two quarters kind of guidance framework from any kind of real clarification on that would be great.

Yeah, I I'm not going to give a specific growth right number will have more to say as far as well said it aims. I think the trend towards lower single-digit growth. Oh is basically in FY twenty one. And so this is just consistent with the hardware software attach rates, but we've been seen consistent pricing. We've been seen an increase in attaching parts of the age contracts. And so we're we're really happy with the overall Services business.

Great. Thank you solid results. Thank you for feeding in my questions.

Yeah, thank you Sally.

Yeah question comes from the line of Alex Henderson from Needham your line is open thank you very much so we've heard a number of bars and other people in the industry talk about the emergency spending type orientation to be spending particularly around security particularly around out from home and security and the like what they've also said though is that some of the transition transitional programs things that were strategically important those programs have been delayed and pushed out somewhat as a result of the temporary focus on and we've got to make sure that everything's secure from work from home. Are you starting to see any real Clarity around some of those larger projects coming back in particularly around digital transformation to?

cloud

Orchestrated application deployments and and kubernetes adoption or alternatively is that still something that's a little further out in the head lights off.

Alex I think so the large kind of digital transformation project. First of all, I would Echo what you've said, we have seen a delay in some of these transformational project but we are also seeing people have tended to the immediate priorities and they're now coming back to these projects and starting to reignite so I I think that's why I think in in the first half of 2021 we should start to see some of these projects actually come to be to be to be realized and that's what I'm not there applies to, you know, generally kind of digital transformation movement to Cloud software first environments big automation projects, you know, those types of projects when when you speak specifically to kubernetes environment. I think what we're seeing there's a lot of kind of excitement around, you know, taking these kubernetes environments in Palm.

And at scale, I think we're still in the very early Innings of that. We've got a very good window into that with nginx, you know, as you know nginx is the you know, number one birth control over into cabinet kubernetes environments and and deployment and so we are we are seeing the men there and we're seeing an acceleration but we we still think we're in the very early Innings of those those types of containerized deployments. And then just one last question for me. Just going back to the 35% plus growth in software can be that between what portion of that is organic and what portion of that is inorganic.

Well, no, but the the I think we've given, you know information about the contributions of you know shape. I'm in Q3 and Q4. So you could you could use some of that information to kind of try and parse out. What's organic and inorganic remember that box was not part of a v in q1 of 2020, but pretty much from Q2 onwards. They were they were part of I-5 last year. So the 35% off Northlake, you know, we and that's kind of the minimum. We think we'll do we we think it's likely we would do better than that overall given the the driver's that I've spoken to them on nginx the acceleration that just mentioned that we're seeing there in this environment what we're seeing in the cloud Alex are I don't know if you pick that up in our script but wage.

The about a hundred million dollar Club business has now, uh, you know, exceeded a hundred million dollars. We've got the partnership with AWS which continues to go very well. We met last week a a product integration with AWS in it obvious cloudfront, which we think will be a catalyst and I talked about the the the broad base of subscriptions that will drive organic or next year. So overall, you know, I think the the software business is in acceleration phase and and we're happy with that.

Thank you very much.

Great quarter.

Your next question comes from the line of Tam long from Barclays your line is open.

Thank you you too quick ones. If I could first just just curious if you could talk a little bit about revenue synergies from from both it and shape. It sounds like shape had a pretty good quarter and there's a lot of traction for ingenix. But if you can kind of let us know where we are on on that that that Synergy serve basis and how much how much more room there is for for cross-selling there. And the second question is just want to get into a little bit of the kind of the the same IP moderating on on the hardware side. But but good traction on the software side. Could you talk a little bit about you know, I guess there's been there had been cannibalization. So I think we'll start hitting a point where it's a lot more driven by by new new or workloads on the big IP software side so that the the some of those two could be more positive than than Maybe.

It was when there was just some Hardware to suffer replacement. Thank you.

Ethan I think you the let me start on on shape that engine light and we'll see more about that at em in a few weeks but but took a few highlights for you in terms of the Synergy, um, what what we are seeing is that the deal sizes on both nginx, you know, so nginx has been part of life for eighteen months and shape has been part of a 5 4 4 9 months from what we are seeing for both is a substantial increase in the average deal size of the result of the the F550 Market capabilities. What engine is in good shape and also an acceleration of essentially new logo acquisition for for both organizations. So the combination of nginx go to market and if five is is yielding these these results and so the monetization and the platform is is better with the shape. We only have 9 a.m.

The runway but we're seeing exactly the same Trends now in terms of product synergies, you know, as you know, when nginx came as part of our five they were really early in the same position of the platform very powerful platform, but early in monetization we've now just released to new Solutions nginx controller and the app security called engineering protect which are early days but getting traction and will substantially also increase the the deal size within genetics. So new products coming to accelerate monetize Thursday, and then on shape we have moved extremely quickly to build integration between shape and big IP and shape and are Silverline offering. So for example, we now offer the the shape bhot defense technology as a manage security service on top of the wife and DDOS bundle that already existed in our Silverline managed to Thursday.

Your service and that has already accelerated the Silverline business in in the last quarter. So we're very

Excited about what's to come there and I will touch on that again in a few weeks now on to your question about big eighties.

Tim I think the the you know, what what we are seeing there is I think the hardware, you know, if you think about it the hardware load balancing business, we think that's going to continue to decline but increasingly our Hardware business is driven by either Standalone security Hardware off of security and ATC together and are stand-alone security Hardware business is is not declining but it's a big a mix of our total Hardware business and the result is you're seeing that that decline of Hardware which was you know, in the eleven twelve percent. We think next year is going to be in the high single-digit. So that's that's where we're at. And then to Europe on cannibalization. I think we will we will continue to see more customers that are ATC customers adopt the software first approached both on frame and in the cloud.

And that's why we're you know, we're continuing to forecast declines in overall Hardware.

Okay, thank you for next question comes from line from JP Morgan.

Hi, thanks for squeezing me in your frontal if I can just start with getting some color from you on the traction you seeing for shape you talked about the opportunities that you see if she can you just talk about whether you're seeing kind of this adoption happening just because there's more need for Security Solutions, or are you replacing any existing Solutions? And how do we get comfortable not seeing like a wave of consolidation insecurities. Once we get post kind of go with planning from the customers and have a follow-up. Thank you.

Hi, can you explain that last bit around concern of seeing a wave of consolidation? What I was trying to get to is we've had a lot of momentum home security Windows over also once we get post go with planning from the Enterprise's do we see in a more consolidation in the number of security vendors the most Enterprises work with ya? I think what we're seeing and what you'll continue to see semick. Is that most large so remember that if I really is most exposed to kind of large Enterprises and you know, both large Enterprises and service providers increasingly want to use a best of sweet approach. So our our approach that I'm is to offer a combination of application security technologies that allow their applications to stay online to stay secure and allow us to protect them.

And logic of these applications and that overall sweet for application security is not a component, you know, it's not a single slice of application security. It's essentially the Broadcast application security portfolio that you can have and so

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Hi friends. So make sorry about that line was dropped. And did you hear the first part of the answer?

Yes, so overawed Services. Yep. Yep. Yep. Yeah, so if I can just follow up maybe for Frank quickly because I know you're also up on the are here. Just I'm looking at the operating margins here Frank when the ship acquisition was announced with prior to that you were looking at about 33 to 35% operating margin. Now you're guiding to about 30,000 when I think about the Delta there is it primarily they'll shape or do you think there's going to be environments that had an impact on this and thank you for taking my questions sure. Absolutely. So yes shape accounted for the large majority of that and I think those shapes talked about 30 to 32% We ended up on the low end of that range to make an you know, our goal is to get back above 31% for a physical 21.

Thank you. Thank you so much and our final question comes from Wolf research.

Thank you. I guess I have a question for you from Salon One For You Frank Francois. I was wondering if you could sketch out a little bit for us. Now that your security portfolio is well integrated. Where do you find yourself having the most success in security? And where do you find some of your your your uh your rival to involve you run into the the scalar etcetera etcetera and then Frank for you. I'm wondering if you could help us a little bit understand. So the thinking behind the buyback and what we might expect in the in the coming year from that.

Yes, Jeff, so let me frame or we're having success in security. Number one is in application security. So, you know, we're not our focus is not on, you know, endpoint security or really network security per se our focus is on protecting applications and we're seeing that increasing the most sophisticated attacks go through application the sources of more breaches and incidents come from vulnerabilities in application and that's our focus and we have now put a pork together that is not a a single solution for application security. It's a suite of solutions for application security and there are very few age that really provide web application firewall DDOS remote access as well as bought and fraud protection and protecting not just how an application is access. Yep.

How the application is used and protecting against fraudulent behavior that and if you look at where we are having success without portfolio. It's in the large Enterprises. So financial services off as you can imagine a lot at stake in terms of securing these applications and the digital interactions with our customers, but the same in technology some of the large the largest off social media Platforms in the world are protecting protected by S5 and shape and we're seeing the same the same kind of success in in government in service provider. So that's the Articles where we get success and and the types of solutions were we get a lot of traction and then just on the buyback, you know, it's it's the same as it's been dead. It's it's certainly one of the uses of our strategic cash that we see the other two uses are potentially m&a as well as paying down our our Term Loan a month.

I took out to acquire shape. And so those are the three things that we're focused on you saw in the last quarter that we did another $15 a share repurchase and will continue to be opportunistic on that goal.

Okay, that sounds great. And we look forward to two more detail on on the security progress in a few weeks. Thank you.

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