Q1 2021 F5 Networks Inc Earnings Call
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Good afternoon, and welcome to the F. Five networks first quarter fiscal 2021 financial results Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone and also today's conference is being recorded if anyone has any objections. Please disconnect at this time.
I'll now turn the call over to MS. Suzanne Dulong, Ma'am you may begin.
Hello, and welcome and <unk>.
And Andrew long and size Vice President of Investor Relations from <unk>.
And the continue and vice President and CEO and Frank Pelzer.
The executive Vice President and CFO will be making prepared remarks on today's call.
Other members of the F. Five executive team are also on hand to answer questions during the Q&A session.
A copy of today's press release is available on our website at <unk> Dot Com, where an archived version of today's call will be available through April 27 2021.
Today's live discussion is supported by slides, which are viewable on the webcast and will be posted to our IR site at the conclusion of today's discussion.
The replay of today's call will be available through midnight Pacific time January 27th by dialing 805, 858, and 367 or four one and 661 4642.
He's meeting I D 6055 to $5 nine.
For additional information or follow up questions. Please reach out to me directly and as Scott and do loans at <unk> Dot com.
Our discussion today will contain forward looking statements, which include words, such as believe anticipate expect and 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 in our SEC filings.
Please note that <unk> has no duty to update any information presented in this call.
And with that I'll turn the call over to Francois.
Thank you and Suzanne and good afternoon, everyone. Thank you for joining us today.
Our fourth quarter results show, the strong momentum and our business.
We delivered Q1 non-GAAP revenue of $646 million.
Representing revenue growth of 10%.
We also delivered 70, but the non-GAAP software revenue growth system, it's north of 5% and global services growth of 1%.
Several quarters into the pandemic.
Several things are becoming clearer from the macro perspective.
First the realities of the pandemic has accelerated our customers' digital transformation and.
The business and consumer dependency on applications.
Of the same time consumers' expectations about their application experience have increased significantly.
As the result of higher volumes and higher consumer expectations are customers of ramping their investments and their applications and the infrastructure needed to securely deliver them.
In addition, and <unk>.
<unk> is a significant advantage worth five and the current environment.
Customers want a trusted and operationalized partner they know the can counsel.
These macro drivers play to our strength and.
Including our strategy to invest over the last several years and pursuit of our adaptive applications vision.
Our continued investments and big IP from multi cloud deployments.
And the deliberate and early investment and both nginx and shape.
And are enabling us to rapidly grow our application security and delivery footprint and modern application environments.
I will speak more to our business gross flavor of the momentum and <unk>.
Coding from customer highlights from the quarter after Paul reviews, our fourth quarter financial results and our outlook for Q2.
And Frank.
Thank you Francois and good afternoon, everyone as we previewed in our preliminary results announcement and is transfer of just highlighted we delivered a very strong Q1.
On a GAAP basis, Q1 revenue was $625 million first quarter non-GAAP revenue of $626 million was up 10% year over year and well above the high end of our initial $595 million to $615 million guidance range. Please.
Please note as I review of our revenue mix I will be referring to non-GAAP revenue measures.
So this will be the last quarter, we speak about non-GAAP revenue as we lap the acquisition of shape going forward the add back of the shape purchase accounting write down is de Minimis.
Q1 product revenue of $289 million was up 23% year over year and accounted for approximately 46% of total revenue.
This is the strongest product revenue growth, we have delivered since Q2 of fiscal year 2011, nearly a decade ago.
As Francois noted customers accelerating the digital transformation efforts drove growth and both our software and system sales.
Software revenue was 111 million growing 70% compared to the year ago period, which did not include contribution from shape, excluding shapes contribution and Q1 of 'twenty. One software revenue grew approximately 35% year over year.
Our mix shift continued this quarter with software representing 38% of product revenue in Q1 up from 28% and the year ago quarter cut.
Customers' preference for flexible subscription models continued to fuel our subscription revenue momentum and.
And Q1, we again drove record subscription volume with subscriptions represented 77% of software revenue and the quarter.
Services revenue of $337 million grew 1% year over year and represented 54% of revenue.
Revenue from recurring sources, which includes term subscriptions as a service and utility based revenue as well as the maintenance portion of our services revenue totaled 66% of revenue and the quarter.
This is up from 63% and the year ago period.
The prudent comes largely as a result of the strong subscription software momentum I mentioned previously.
Systems revenue of $179 million was up 5% compared to last year Francois will speak to the drivers of the strong performance in more detail.
On a regional basis in Q1 of Americas delivered 14% revenue growth year over year, representing 55% of total revenue EMEA.
EMEA delivered 4% growth, representing 26 percentage of revenue, while APAC grew 7% and accounted for 19% of revenue.
Looking at our bookings by vertical enterprise customers represented 67% of product bookings and service providers accounted for 14% and government customers represented 18% of product bookings, including 6% from U S. Federal.
Let me now share our Q1 operating results.
GAAP gross margin and Q1 was 81, 6% non-GAAP gross margin was 84, 4%.
GAAP operating expenses were $392 million non-GAAP operating expenses were 322 million.
Our GAAP operating margin for Q1 was 18, 9% and our non-GAAP operating margin was 33%.
Our GAAP effective tax rate for the quarter was 25, 1% and our non-GAAP effective tax rate was 21, 7%.
GAAP net income for the quarter was $88 million or $1 41 per share.
Non-GAAP net income was $161 million and $2 and 59 per share.
I'll now turn to the balance sheet.
We generated $137 million and cash flow from operations in Q1 cash and investments totaled approximately $1 5 billion at quarter end.
We did not make any share repurchases in Q1, we remain committed to repurchasing of $1 billion and shares over the next two years, including $500 million via an accelerated share repurchase program and fiscal year 2021.
DSO was 50 days and capital expenditures for the quarter with $5 million.
Deferred revenue increased 10% year over year to $1 4 billion.
We ended the quarter with approximately 6160 employees up approximately 50% from Q4.
Now, let me share our guidance for our fiscal second quarter, unless otherwise stated. Please note that my guidance comments reference non-GAAP metrics.
Also with the Voltaire and deal recently closed our Q2 outlook incorporates the addition of their financials to our guidance expectations.
Near term, we expect customers will continue to invest to support application growth and the modernization of their application infrastructures.
We also anticipate continued focus on and investment and application security.
With this in mind, we are targeting Q2 fiscal year 2021 revenue in the range of $625 million to $645 million, reflecting year over year growth of approximately eight 5% at the midpoint of our range.
While we do not give quarterly guidance on product revenue mix and do you anticipate continued near term strength and systems with Q2 growth likely similar to Q1.
We would also remind you that our prior year Q2 software revenue growth was exceptionally strong at 96%.
This difficult comparison is likely to be reflected in our Q2, 'twenty one software growth rate being below our horizon, two target of 35% to 40%.
This is consistent with our commentary about the potential for quarterly variability and software growth rates as we continue to scale our software business.
We expect Q2 dollars 21 gross margins of 84 to 84, and 5% and we estimate the operating expenses of $340 million to $352 million.
As we discussed last quarter, we generally see a seasonal increase in the operating expenses and Q2.
We expect our Q2 operating margin to decline from Q1, and then to increase and the back half of the year to achieve our FY 'twenty, one non-GAAP operating margin target of 31% to 32%.
I will remind you once more that our Q2 'twenty one outlook also incorporates the addition of altera into our operating model.
We anticipate our effective tax rate for Q2 will be and the range of 21% and 22%.
Our Q2 earnings target is $2 32 to $2 and 44 per share.
We expect Q2 share based compensation expense of approximately $62 million to $64 million.
And for capital deployment as I mentioned previously we intend to repurchase 500 million shares via an accelerated share repurchase and fiscal 2021.
With that I will turn the call back over to Francois Francois.
Thank you for several quarters into the pandemic. It is growing clearer, but COVID-19 has accelerated digital transformation and both business and consumer dependency on applications.
As a result, our customers are accelerating the digital transformation investment.
Incumbency is also an advantage for us in the current environment and together these trends are enabling us to drive strong growth.
Underneath the macro drivers and consistent with our discussion of our November analyst and Investor meeting there are three F. Five specific growth drivers fueling our demand.
One ongoing software and subscription momentum.
Growing demand for application security and three resiliency and system space demand, leading to moderating systems revenue decline.
As we noted in November with.
And with multiple growth drivers that we also have multiple paths to achieve our horizon two revenue growth targets.
More specifically, we do not need everything to go exactly right to achieve our goals.
And Q1, we had a lot go right and customer demand drove growth across all three of the drivers.
I will speak to each in turn.
First we continue to see demand for software and subscription consumption across our application security and delivery solutions.
I will focus first on our big IP and engine ex solutions.
Customers look the big IP to refresh core business applications for capacity additions and to simplify traditional application delivery and cloud environment.
And one example, during Q1 of large financial institutions struggled from months to turn up a mission critical application in the cloud environment.
This was despite the best efforts of the cloud provider and we're working with.
Frustrated and it turned to a five.
And on the one day, we help them get the App up and running in the cloud with multiple big IP virtual edition.
The use case highlights the customer benefits, we have driven of the results of our investments to modernize the IP, making it easier and more efficient to use in cloud environments.
Let me turn to nginx.
At the time of the Nginx acquisition, we deliberately invested and new products accelerating time to market.
Specifically, we have built a joint F. Five nginx controller and rapid reported FY security for the engine ex platform.
This quarter edge of ex delivered its largest quarter ever with broad based strength across geographies.
The strength was driven in large part by robust nginx controller traction as.
And as well and integrated security and generics of protect.
During Q1, we also secured of wind from Big IP controller, and Gannett, plus and engine ex architect with a longtime F five federal government customer.
While upgrading its current big IP infrastructure. This customer also selected engine ex to help prepare from migrating network infrastructure from physical to virtual while building our capabilities to support containerization.
And <unk> is leading the way and a number of modern application use cases, including cloud native load balancing and scaling it the eye.
And delivering kubernetes application and production.
As applications continued to get more distributed we expect the investments we are making to deliver API gateway API management and service mesh capabilities will drive additional nginx momentum.
It should come as no surprise the customer demand for application security is also growing.
And with the ongoing pandemic fueling ever increasing consumer use of digital channels.
The threat landscape is growing significantly.
With application based attacks growing both the number and sophistication and customers are looking to a file for help.
The combination of our organic investment and the addition of shape has created and enhanced F. Five application security portfolio.
If you map of our solution set against the top application security threats.
And it's clear that we are very well positioned to help our customers address the most frequent incident and the most damaging breaches.
We continue to see increased interest in adding F. Five enterprise grade web application firewall protection to modern application.
During Q1, the major car manufacturer selected nginx without protect when they needed of cloud independent portable scalable solution that included a container friendly web application firewall.
We also are seeing growing traction for SSL orchestration.
And could decrypt use case is the strategic differentiator for EFI.
And while it tends not to be of big revenue driver on its own database of strategic control points and enterprise customers security stack, which gives us the ability to pull of the big IP security and shape.
Let me speak also to the traction we are seeing with shape and in particular, our ship silver line combination.
Last quarter, we highlighted the benefit of making shapes industry, leading anti fraud solution available to a much larger customer base.
There are several lines of managed services platform.
Several lines ship defense delivers advanced bot protection to prevent large scale fraud.
Ship AI fraud engine are safe is a cloud of fraud prevention services.
As a combined solution, our silver lines shake defence and space solutions enable sparsely resource the organization to deploy true industry leading capabilities.
Combining shapes and Thai baht, and anti fraud capabilities with several lines and managed services also makes it easy to quickly deploy ship capability, which is especially useful when customers are in price.
There are two interesting use cases that have emerged.
First shaped civil and defense is being used by several U S States.
Comeback ramp and fraud related to unemployment benefits.
The combination of Sky high demand and limited security of fraud capabilities created an ideal environment from foster or conduct and sophisticated attacks against unemployment sites as well as other unprotected state and to make.
With the shape silhouette and the <unk> solution.
We can go in and offer real data about what is happening unveiling the true scale of the threat.
Once enabled.
Shapes sophisticated AI and machine learning capabilities identify and block the fraudsters.
Reddit unions also are emerging as an ideal use case for shape silver lining defense.
With new web and mobile banking capabilities coming online and larger transfer limits being introduced credit unions can present and easy target from sophisticated attackers.
Pressure to provide the same services the big banks is exposing them and the lack of cyber security and fraud capability.
Shaped civil and defense provides an affordable turnkey easy to deploy managed security and fraud solution of <unk>.
Evidenced by the five credit Union win our sales team delivered in Q1 2021.
We are as excited as ever about the use cases shape has opened for us.
Moving forward, we see additional potential to leverage shape analytics engine to build new analytics offerings that enable us to go beyond applications security to drive revenue enhancement for customers.
Finally, let us talk about systems and the drivers for the growth we saw in Q1.
First I will note that our systems business is also benefiting from the macro trends I mentioned previously, namely Covid driving increased application use and accelerating investments in digital transformation.
Q1 strength and systems was broadbased, the cross geography and industry.
We identified three primary factors behind our strong system performance.
First as we have discussed previously we have seen growing demand for systems based security use cases.
Second.
Over the last several years customers have gained clarity of their cloud strategies and now expect to operating a hybrid multi cloud world for some time to come.
As the result, they are more willing to purchase systems to support capacity need driven by accelerating digital transformation.
We believe both of the drivers are sustainable.
Q1 also benefited from some COVID-19 suppressed systems catch up.
Customers, who have put of system purchases for several quarters simply can no longer defer growing capacity demand.
For a very small subset of our customers that had not refreshed and a long time, a long planned April and of software development milestone of one of our legacy system.
Contributed to their desire to act sooner rather than later.
For clarity I would.
The end of software development is very different and end of support and the.
This case the April milestone for sales to amount of software development and beat that has been well publicized for years, providing customers a low planning runway.
We estimate the catch up demand drove approximately $10 million and system sales in Q1.
We see this as a trend that systems growth driver, but we do expect that to carry over into Q2.
And finally.
And while I did not call it out of the growth driver.
Standard reach and low has also expanded our strategic position with customers.
This has enhanced our ability to connect with key level of persona and also means we are more often considered for opportunities that span our application security and delivery portfolio.
The <unk> traditional and modern application and both hardware and software form factors.
As an example in Q1 and one of the United States, leading healthcare providers selected big IP hardware and software security and the nginx.
Keep the critical care applications running nonstop, while beginning to migrate from next generation apps of their care provides us the.
This project reemerged as the priority for the customer after being deferred last February so the customer can divert all necessary resources. Despite the COVID-19.
And closings.
We are encouraged by our momentum and believe we are seeing clear signs that our organic investments and our value creation methodology from both nginx and shape are paying off for customers and investors alike.
We were very pleased to announce that our acquisition of Alterra actual yesterday and the team has already begun the hard work of integration.
Initial customer feedback about the combination of F five and both there and has been very positive.
Customers are excited about the potential of <unk> edge to the auto to eliminate the pain the field from today's close edge platforms.
Our edge to the auto will be the FERC as platform built for enterprises and service providers.
It will be and open edge platform that will allow every server to run an eight and server virtual or otherwise and.
<unk> of public clouds.
We are very excited to have the Voltaire team as part of F. Five and are looking forward to sharing our progress with you going forward.
I'll wrap up today's prepared remarks by thanking the entire F <unk> as well as our customers and our partners.
With that operator, we will now open the call for Q&A.
And as a reminder to ask a question and you will need to press star one on your telephone to withdraw your question press the pound or hash key.
The standby and where we compile the Q&A roster.
Your first question comes from Sami Badri from Credit Suisse. Please go ahead.
Great. Thank you and congratulations on the solid quarter and highlighting some of these major trends and drivers that we're seeing and your business.
So Francois I wanted to go back to almost about a year ago. When the pandemic first started and you called out all of these you called up pros and cons of the pandemic pump deals being pushed out some deals being reaccelerate the back some of.
Of the catch up.
And that you saw from <unk> and the catch up with our potential pull forward sorry for everyone to predict the type of demand and fiscal <unk> 'twenty 'twenty one.
Are you basically seeing all of the deals our pundit about a year ago or through 2020 are all essentially coming back of force at least with the 2021.
Thanks for the question.
The short answer is no.
The.
On the <unk>.
And what we call the catch up demand there of some customers that I would say there is there are a subset of small subset of customers, who have waited and waited and waited on adding capacity and <unk>.
Part because of the uncertainty related of Covid or the absence of resources of the ability to physically do it.
Who are now doing those both refresh.
But it isn't it.
And it should go back to the deals that were pushed out.
And at the beginning of the pandemic there were some software deals will be called and software transformation deals that were pushed out.
And we're starting to see things come back.
But not yet and.
The big way, so I think Thats still thats still ahead of us.
Got it got it and my other question has to do with systems revenue and I know we had the analyst day relatively recently you did guide of of the differently the systems versus what you're guiding today and reported.
The <unk> and then guiding to fiscal <unk> with the 5% growth now based on some of the underlying industry drivers that you highlighted and some of the customers and have identified F. Five gear as like the.
Go to gear for security measures.
Does your overall analyst day guidance boost or negative growth of the system.
Some of your 2021 and the fourth Horizon III does that kind of now go away and we're looking at a little bit of of different trajectory.
While Savi I think we've got.
Go back and look at the drivers of some of our hardware business.
I think if you look at where we're at today family. There are two kind of macro of things.
The benefiting the company and general generally there's more spending on applications infrastructure.
And we have positioned ourselves to benefit from that and I think thats the long term.
Long term effect is also the effect of the company is strategically better positioned.
Because of the combination of hardware and software and cloud solutions and security solutions that we have and that allows us to have more strategic conversations of our customers and being seen as the.
As the future proof partner for the strategic plan and all of that benefits all of our business, including our systems business.
If you look at the drivers specifically to our systems business.
There are two drivers, but I think our long term and one day is more of a turns and driver.
So if you look specifically on the long term, we've talked about at analyst day that our mix of security had grown and that was helping our systems business and.
This quarter, we saw again.
And there are stronger growth and security them in the overall demand.
The so that helped the systems business.
The second factor in the.
And our systems business is that generally we have some customers.
Who are true recall, we've talked about that two or three years ago customers, who basically and have said they were either going all in on the cloud or they were.
Essentially pausing.
And there the systems business to reconsider their architecture for public cloud deployment and I think of lot of customers were seeing have kind of graduated from that and now have a clear strategy around the cloud.
The maturity of our knowing that they're going to operate and hybrid cloud environments for a long time to come and.
And the very comfortable moving forward with hardware as part of their long term architecture.
And so we're seeing some of customers that have decided not to buy it and more hardware until the current back and not of refreshing or adding capacity to the sort of systems.
And I'm talking both of those two aspects of our longer term savvy, there is one trends and driver.
<unk>.
A subset of our customers that really had to make of refresh because of this and the software development. We think that was about $10 million and the quarter. We think that kind of carries on in Q2, but that's the that's a really short term demand. So when you when you take all of that into account funding.
We're not changing our horizon two.
Guidance.
But yes, there is the possibility that are of hardware business will do better.
In horizon, two than what we saw it at and we certainly think that for FY 'twenty, one is likely to be better than the than what we had and overall horizon and the guidance.
Got it got it. Thank you congrats again on the quarter and the dynamics and <unk>.
Pass it over the next question.
Thank you Sarah.
Your next question comes from Alex Henderson from Needham.
The room.
I was hoping you could talk a little bit about the.
What you think the impact might of been from the solo impact and.
To what extent the year.
All of our software.
And the mature cloud capabilities.
The.
So we're seeing an acceleration and demand if you've heard from any of your CIO CTO CFO.
CEO contacts and board context, whether companies are increasing their spend on it or specifically security.
And as a result.
And to what extent, you think that will translate to the <unk> demand.
Alex you're asking of they're increasing the spend on cloud and security as a result of of what.
The solar wind tech.
Okay.
And not necessarily directly Alex there is a there is of course heightened awareness.
All of it.
And generally by by Cisco and security organizations.
Our secure.
Security.
Trends have been pretty strong over the last several quarters.
The the aspects that have accelerated security for us.
Relate more to a more customers moving to software and attaching more security use cases as they move to software the same happening when the move to the public cloud.
The attaching more security and the public cloud environment, and then with the addition of shape.
What we have seen.
But frankly since the pandemic started but we're still seeing today is.
As more and more businesses go to digital channels.
That also attract more fraud and so are offered for anti fraud are seeing very strong demand.
And I mentioned, a couple of use cases and in my prepared remarks.
But that is across the board.
Large and small companies.
There is more online fraud, and we're very well positioned to protect against that.
And if I could follow up so clearly you guys are seeing and increased correlation between your appliance sales and the software sales.
You're suggesting and that's from hybrid cloud, but hybrid cloud has been in place for quite a while.
It also possible with the launch of the Beacon product and the integration.
<unk> of and <unk> back into the appliances.
Accelerate and expand your ability to tie together the enterprise.
<unk>.
Pending for campus and data center with the cloud integration and therefore pulling both as a result.
Alex Yes. There is there is definitely an element of the overall portfolio.
Creating stronger demand for F. Five.
We can it's still early.
Early days, but certainly with nginx.
There is a significant factor and we're seeing it here.
The the Halo effect.
<unk> of our participation and modern application.
We are what's happening Alex.
A lot of times, we think about traditional and modern applications in kind of a separate silos, but the reality for large enterprises is they do a lot of application modernization that is they will have a traditional application that is typically supported by big IP and.
And as the modernized that application they don't re factor it.
But they add modern components of that application and these new modern component typically micro services.
And nginx is ideally suited to support these modern components and so we're seeing that the combination of nginx and big IP did a a full solution set for the modernization.
These modernization initiatives, the customer time, and it's pooling and Gen X and big IP.
Together, so there is definitely an effect of the portfolio and the synergies coming together.
And driving growth.
Great. Thank you very much I appreciate the answer.
Your next question comes from the line of Tim Long from Barclays. Please go ahead.
Thank you two quick ones, if I could first.
Could you guys talk a little bit about the organic software revenue growth line, Frank and understanding that the tough compare.
But maybe just talk a little bit about how we how we should look at that line and the future of we're going to see it being a little bit less lumpy, particularly as.
We have seen deferred revenue really really grow pretty strongly so is that something you expect to normalize around a higher number.
And as as we get through some of the tougher compares and then second.
And I think at your analyst day or somewhere around there you talked about the $100 million cloud revenue number could you just give us a little little color and the quarter, whether it's qualitative or quantitative around how the cloud specific software businesses did four five thank you.
Yes, Tim It's Frank let me start with the first party in Ontario with loans block the <unk>.
Second in terms of.
Of the organic growth in the quarter, we've talked about 35% and in the and the second quarter, we've talked about that the likely lower theyre not 35% to 40% range that we give.
Given you for horizon, two and.
And just off the tough comp coming up at 96% and Q2 of 2020 and.
And as the business continues to scale and as we get more of it from.
Recurring subscriptions and we do expect to have some more normalization of that and not necessarily see that same slows.
As we've talked about.
From the beginning of the only.
Discuss software revenue gosh, almost three years ago now.
And we said that it will be lumpy for the time as we continue the buildup scale and the model, but overall, we are not changing and all of our horizon two outlook of.
Our compounded annual growth rate of 35% to 40%.
Of our unit and anything on the cloud.
Yes from a cloud side, so Tim we have very strong demand in the cloud the <unk>.
Growth and public cloud was actually stronger than the organic software growth rate that you saw and that has been the case for the last number of quarters.
And just generally.
Turning to the demand of software, yes, we will see fill from variability, but the overall demand drivers for software are very strong and of our point to a couple.
<unk>.
We had of all high all time high.
A number of multiyear subsidy of subscription agreements in the quarter.
A lot of the subscription agreements include.
Multiple software solutions from the five <unk>.
<unk> Nginx and.
<unk> had the best quarter ever.
And we're really seeing as customers start to really deploy these modern applications.
And your next growing very fast.
We also made from investment periods, you know and nginx, a year ago, and the controller and the opt.
Security and we're seeing the effect of those in terms of growing the size of deals that we have and the addressable deals that we can bring to the table and.
So when you factor that cloud the number of subscription agreements and generics.
And some new catalysts that haven't played out yet we have some catalyst around the true forward and our subscription.
Some new use cases for shape that are coming.
So we feel very good about our software for horizon.
Okay. Thank you.
Thank you Tim.
Your next question comes from Paul Silverstein from Cowen. Please go ahead.
Appreciate it before asking the questions I was hoping I could ask for and.
Clarify of true pedestrian issues one.
Right.
And if my math right that should roughly <unk> modem and the quarter from your comment about organic.
And total growth for software.
Paul actually was higher than that.
And so it's.
And we don't give the exact number but it's higher than that day of some slight growth over what we experienced in Q4.
Alright.
And suspected and portable app.
And that's why you made the statement of multiple times that the best.
Record into the next quarter, which means the clearly know what the specific and generics revenue was.
A number of youre willing to share with us.
And Jeff.
No we haven't.
And broken out.
And generics lately, but.
And you saw the number of job Paul that we showed at our analyst and Investor day around the doubling of revenue of nginx and the growth and deal size and essentially this trend is continuing.
While accelerating.
Yes.
But.
Okay.
Im not sure we want credit for it but we don't want to get with the visuals, but I'll move along and we after the real question.
Of operating leverage and.
<unk> been very clear that you guys will drive operating leverage this year next year and beyond.
It's true it's as simple as you guys are planning to grow opex slower than revenue, which obviously that's the map, but the question really is within your control in terms of variance and revenue growth upward down relative to your horizon through fiscal 'twenty, one 'twenty two outlook.
Are you planning to adjust the opex accordingly, or will you wait.
<unk>, whose revenue lead or opex.
Dr. Paul.
So what we what we've talked about is the.
<unk>, 31% to 32% and that's what we're targeting if we find opportunities for investment to continue to drive that revenue growth, we will make those investments.
And said that we are committed to the early ones of 32%.
FY 'twenty, one and the overall horizon.
Two outlook that we gave you as well as the long term model and so that's the way we are managing the business.
We are.
Very excited to see the 10% growth this quarter and the eight 5% off of.
The next quarter implied in the midpoint of our guidance range and those are both obviously above.
The horizon, two outlook and the factors.
That go into the rule of 40, we ended up at 43 of this quarter and so we're really happy with our continued progress but.
That rule of 40 of the North Star that we continue to strive for within the business.
Alright Trust your comments and <unk> comments that visibility today is better.
And then it was 90 days ago 365 days ago. So let me ask either open the questions.
What is visible today versus previous periods of an improved or is it just.
It remains solid.
And I'm, assuming the main visibility and the pipeline and sales opportunities is the primary factor here forward looking metrics correct Yep.
Visibility continues to grow and the strong for us fall and we're excited.
And about the outlook that we've given you.
Alright, I've got two non appreciate it.
Your next question comes from the line of meta Marshall from Morgan Stanley. Please go ahead.
Nida Marshall Your line is open.
The target.
And then frankly of circling around some of the other questions that were asked but.
And even though you had a couple of quarters ago that and people were kind of heads down and net COVID-19 and that they.
They were volumes and the projects and before and they continue the biophysical additions of they are buying virtual of a continued inc.
And you spoke Grandma's house people kind of having a little bit.
In a more of a framework of what their hybrid architecture look like.
I guess I'm, just trying to get a sense of is there.
A contingent of customers, who are just kind of heads down and just trying to address.
And the problems with their current architecture, and the Mcafee kind of lifting systems revenue for now and then and just maybe some of the puts and takes on the <unk>.
<unk> net and the service provider revenue interest understanding from the that is project based practice, maybe tracking a little bit under and.
Traditional and kind of percentage of revenue would be helpful. Thanks.
Hi, Amit let me, let me start with the service provider.
Our bookings then.
And our demand and service provider.
We're up year on year.
And we continue to see strong demand in the.
<unk> solution.
We're seeing.
Start of some capacity increases related to <unk>, but.
We think the.
The bigger kind of demand and the <unk>, probably still six to 12 months away.
But generally the trends and our service provider business, that's kind of a continued stable.
As it relates to.
And customers in the enterprise and what are some of them of scale.
Not moving forward with some projects.
Yes that is still the case.
And what we're seeing is.
Our incumbency and a number of customers and the fact that were operationalized, whether were operationalized and hardware and software.
It's actually a significant advantage because we still see a lot of customers that continue to do incremental things and we'll come back to bigger transformational project later.
And.
Yes in some ways because with a number of customers.
The hardware is still the majority of our business of that does favor.
Hardware business and a way more than a software business.
Great. Thanks.
Your next question comes from the line of Rod Hall from Goldman Sachs. Please go ahead.
Question and I wanted to see if you guys could give us some indication of what youre thinking for services growth and Q2.
And then I have a follow up on the.
Yeah, we don't split it out specifically rod I think it's going to be and those low single digits. My guess is it's higher than the 1% that you saw this quarter, but I'm not expecting it to be in the mid single digits.
So like tier, 3% franked something like that.
But some of them, Okay and then.
I wanted to come back and just clarify what you guys said in response to Paul on the organic software, maybe I guess the.
And more direct question and what was the what the Voltaire of contribution would be and Q2 can you give us any idea on that.
At the.
And the minimus.
We talked about last time.
Lots of Maryland for the full year, when we discuss the announced the acquisition and so it's going to be the mono sort of it's not a number that we're going to split out.
Okay and then finally, just another clarification does $10 million that you guys talked about and in Q1, and then I think Brexit for Francois you said it carries into <unk>.
Q2, but it wasn't clear are you, saying $10 million again in Q2 or I would assume some number of less than that but can you clarify what that what that number should look like and Q2 roughly for us yes.
Yes.
It was about five points.
And the quarter.
And it may be something similar to that there is obviously of declining revenue stream between.
Q1, and Q2 for systems on the product side and so.
Right.
It's hard to say exactly but it's probably a little less than 10, but I wouldn't say it's dramatically whatsoever.
And then Frank that flow to zero. After Q2 right. So just the Q1 Q2 phenomenon you think.
I don't not giving any guidance beyond that but the.
And the date that we had given out was April of 'twenty, one two or three years ago and so it could stretch beyond that from some customers. This is.
Generation.
Two or three generation of all of the product and so on.
Don't know exactly when.
And again I'll go through that upgrade cycle, but our gas and as it's done mostly by next quarter.
Okay, great. Thanks.
Thanks, very much I appreciate it.
Your next question comes from James Fish from Piper Sandler. Please go ahead.
Hey, guys. Thanks of the question.
A little bit of.
On the guide and the results here.
You said it wasn't budget plus a few weeks ago and talked about.
Deferral and increased App infrastructure and box, Matt I guess could you and any way breakout how much of it was project deferral from product quarters coming into the quarter here versus kind of increased activity and pipe around the operating infrastructure investment versus frankly share gains.
Hi, James.
Look I think the major drivers here are.
Are more around increased investments in application and infrastructure driven by an acceleration of digital transformation.
And.
Digital channels for all companies that is floating through application infrastructure and capacity additions I think that that's I would say and kind of factor number one I think our improved strategic position with customers and the fact that they are more comfortable moving forward with a hardware approach it with a five knowing that.
We are also of our partner for software that will now also the partner from modern application that we're also of our partner for public cloud deployments.
And they don't see a five of the.
As a single threaded.
Of course, if you will thats just the hardware partner that is also.
Providing an opportunity for <unk>.
The opportunities to move forward, even and hardware I would see those are the two.
The major major factors the.
The catch up is just from some customers that have just.
Try to wait wait outs, if you will the pandemic to do some refresh.
Some of them are moving forward, but I would say that and.
Less of a factor than the first group.
The press helpful Francois.
Last one from me and going off of <unk> question.
Obviously, it was announced a couple of years ago, just making sure we should think about it.
$10 million for fiscal Q2 or could it be more and really my question is are there other systems over the next 12 to 18 months that are on a similar path that we should be reminded of.
Yes for fiscal Q2, James you should think of it of $10 million or less.
And then so we think it will be less and what it was the quarter of Frankfurt, but.
Exactly where.
Component of it.
And to your point around the other systems, but who are the moving of some situation.
The reason to any similar effect and the next 18 months.
Thank you congrats guys.
And thanks again.
Your next question comes from Jason Ader from William Blair. Please go ahead.
Yes.
And thank you.
Guys I was just curious do you would you say it's.
It's possible that the growth outlook for your <unk> ADC business is actually hit an inflection point.
Well, yes, I mean, I think as we discussed earlier.
Whilst we are not change.
Changing.
And.
Our overall view for horizon two.
And overall growth of 7% to 8%.
And if you look at the recent trends.
It's possible that we're going to see.
On our systems business.
A better trend and what we anticipated.
And our horizon two guidance.
Now I will I will remind you that when we laid out our horizon two guidance and the drivers of growth four of five but of driving the 7% to 8% growth.
There were three substantial drivers. The first one is continued momentum in software and software subscriptions.
And we are continuing I mean, we posted 70% growth year on year of this quarter.
And we're going to continue to see very strong growth and software because the flywheel of.
Of subscriptions that we've put in motion now two and a half years ago is really.
Really working well for us as the motion and for our customers the second driver.
Is demand for application security and we're seeing that also being very strong boosted.
Boosted by the addition of shape and the use cases that I've talked about and then the third driver was the moderation in our.
Systems' decline and we had said at the time it would moderate from double digit to high to mid single digit the client now we felt when we put the guidance together that not all three of these things have to go hard to go perfectly for us to achieve the 7% to 8%.
And so we have multiple paths of getting there.
And right now in the first quarter essentially.
The all three of pretty much growing very well so if that continues.
The possibility, we do better than what we thought and right now specifically in and hardware.
The trends of pretty strong.
And what was the can you remind us what was the kind of organic growth.
Excluding the three acquisitions, where were you what were you telling us front and what that could.
And would grow and horizon two.
The growth for Horizon, two was 35% to 40% for all software.
And the only component of that.
Pre pre Voltaire of course that was the organic was just one quarter of shake which was the quarter. We just had the first quarter everything else is organic.
Okay. So I guess, what I was asking is the.
The non engine ex kind of ADC.
Yes.
That was going to be flat to slightly up I mean the.
The outlook for that the more of something like mid single digit growth going forward.
Yes, we don't we don't break that out the.
And third we're going to it wasn't going to be flat it was going to grow much faster than that but we don't we don't breakout specifically the software growth percentage percentage of big IP virtual and generics.
And frankly increasingly as I showed earlier those solutions are actually viewed in the same subscription agreement to support customers that are that have traditional and modern applications that need the scale.
And so they have become increasingly synergistic and kind.
Kind of driving growth for one another.
But the the software gross number that we share including Big IP Nginx.
<unk>.
As part of our security portfolio.
Okay. Thank you.
Thank you.
Your next question comes from Nick <unk> from JP Morgan. Please go ahead.
Yes.
Hi, Thanks for taking my question and squeezing me and Hugh I.
I guess the fronts from what.
Hi, Hugh Grant and for you.
The comments you are and it does not.
More like what you're seeing is.
The need.
And if systems and services to kind of fired on all of those but given where you put in the first half.
The seven Greenfields and horizon, two revenue growth target.
Okay.
The suite and so I just wanted to come from.
And then if I could.
And we think about sustainability of that high and then.
And the kind of 7% to 8% growth rate into the next year, given the momentum that you're seeing and the business and I have a follow up.
And the accounting.
To be clear.
We're not changing our guidance the horizon two of 7% to 8%, but that remains our view on horizon two.
And if we're thinking specifically about FY 'twenty one.
If you look clearly and the first half.
And our expectation if you look at the midpoint of guidance for Q2, as we will exceed the 7% to 8% just on the basis of the first half and <unk>.
Frankly, if the the trends that we're seeing right now work to continue.
The possibility, we could exceed that as well for FY 'twenty, one, but we're not.
Share of guidance for FY 'twenty, one if you are asking about the underlying drivers.
That I see in the business for growth I think the drivers we're seeing from both software and security of very strong and very sustainable and and.
Hardware.
Some of the drivers we're seeing that I've talked to are actually sustainable there is a change there that we're seeing and how customers are approaching the <unk>.
Placement of.
The traditional applications and these hybrid cloud environment.
And the place that they're giving F five and their go forward plans and the strategic position, we occupy and now I think that is the favorable there are couple of things that I think of transient.
And that are not.
And so how much of that will play out in terms of FY 'twenty, two and beyond it and it's really too early to say that now.
Okay, and then quick thanks for that and a quick follow up here for Frank Frank and you Downgrading of board of 25 million Opex increased from one of <unk> can you clarify how much of that is from cordero.
And that spread it out specifically, but I would say it's and the.
And sort of single single digit.
Millions so.
I would say mid single digit millions would be probably more accurate.
But the.
That's something that we're not going to expenses sort of split out going forward.
And to de Minimis in terms of the sales number.
Okay. Thank you thanks for the questions yes. Thank you.
The semi.
We will take our last question today from Amit <unk> from Evercore.
Thanks, a lot for lifting the squeezing me in guys.
Maybe just missed system side of it and that's been discussed a bit but given as of the you talked about which is not all the stuff that was held up last year is back yet.
I would imagine that perhaps the share gain narrative that hasnt been talked about could be somewhat powerful as well.
The vcs scenario, where the <unk> business actually accelerate in the back half of the year.
And <unk> as well, although caveat to that statement.
I didn't catch the last part of your question. The first part is could we get the systems business accelerate what was the second part yes.
And think about all of the stuff that was held up lots of the slots to come back into the funnel blocked the share gain potential you could have in terms of just speaking of a little bit more share.
And I would imagine the switches, the which would accelerate as we go through fiscal 'twenty, one and so I'm curious what would be the caveat so the reservations from that dynamic.
Well, it's a good question look I.
The way I would think about the is.
If you look at the kind of long term trends four of five.
And where we're going to be as a company on the long term and.
We have said for the long term.
With the acquisition of Altera, and now we expect to grow double digits and the long term.
That's going to be driven by software software subscription and SaaS, we don't expect our hardware business to be a growth business.
Going into the future.
So that's that's our view of things.
And there is nothing that has happened and the last.
Three months that would make us fundamentally changed.
And that view of the long term.
Now.
In the short term.
Will it accelerate.
Beyond what we're seeing and the second half of 'twenty and 'twenty one.
That's unlikely.
But we're not going to rule it out.
And what we're given the dynamics that we're seeing with our customers today.
Got it and if I could just clarify this.
Modest of the deceleration that you're talking about in the software business in March which was the December the is that just a reflection of the compares are very difficult in the March quarter or is there something else you'd call out of that driving that modest detail again.
That's what that's where when you called out and that start day, one and thats with the much harder comps.
And so we had and that in Q1.
And it is.
The harder.
Because it was the remainder of <unk>.
The last two to I think our growth rate was $95 to 96% year on year. So you have a harder comp, but the underlying diner.
The dynamics and drivers for software demand are very strong across nginx and shape as.
Absorption agreements and the momentum we're seeing there.
And general Securities. So that we are very confident that it's going to continue to pick up.
Perfect. That's it for me thank you very much.
Thank you.
Okay.
And that concludes our call today. Thank you for joining you may now disconnect.
Moving on.
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