Q3 2021 F5 Networks Inc Earnings Call
Because 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 F. <unk> has no duty to update any information presented in.
Yeah.
With that I will turn the call over to Francois.
Thank you Suzanne and Hello, everyone. Thank you for joining us today I am pleased to share with you our very strong Q3 results.
Broad based strength across the business drove 11% revenue growth in the quarter marking on.
This growth sequential quarter of double digit revenue growth.
We delivered 34% software growth, 13% systems growth and 4% global services growth in Q3.
Our Pas business is benefiting from digital acceleration and application growth as well as heightened.
And demand for application security.
Customers traditional apps are generating more revenue and more engagement than ever before.
On the third time customers also are accelerating adoption of modern application architectures like kubernetes for new applications.
With our expanded.
The application security and delivery portfolio, we are uniquely positioned to solve our customers' most significant modern and traditional application challenges on prem and Mccloud and.
Across multiple clouds.
I will speak more about our business drivers and customer highlights from the quarter.
After Frank reviews, our Q3 results and Q4 outlook.
And <unk>.
Thank you Francois and good afternoon, everyone.
And transfer I, just outlined our team delivered another very strong quarter.
Third quarter revenue of $652 million was up 11% year over year.
Above the top end of our guidance range.
Please note as I review, our revenue mix I will be referring to non-GAAP revenue measures for the year ago period.
Q3 product revenue of $310 million is up 21% year over year, representing a significant acceleration from.
And the percent and the same period last year.
Product revenue accounted for approximately 48% of total revenue.
Up from 44% and the year ago period.
We continue to advance our transition to a more software driven model.
Q3 software revenue grew 34.
And $3 million to $129 million, representing 42% on product revenue up from 38% and the year ago period.
Today, we offer customers annual and multiyear subscriptions as well as a growing base of SaaS consumption models.
Customers' preference for these flexible models and.
<unk> and growth and the subscription based portion of our revenue.
In fact, since Q3 and 2018, we've driven subscription software revenue growth at a 3 year compounded annual growth rate of 119%.
And Q3 'twenty 1.
Subscription based revenue represented 70.
As drive that of total software revenue up from 73% and the year ago period.
Customer adoption of our multiyear subscription continues to grow providing much needed flexibility for our customers and future revenue visibility for us.
These multiyear subscriptions are generally 3 year term subscriptions.
$8 and can be for big IP or engine X or a combination of both.
And with customers increasingly looking to <unk> to support both traditional and modern applications are multiyear subscriptions are more frequently including both big IP and Nginx in fact, and Q3 index was part of overhead.
Friction of our multiyear subscription deals.
We see continued strong systems man based on broad based increases and application usage continued growth of system based security use cases, and <unk> service provider use cases and.
And Q3 systems revenue of 180 million.
<unk> is up 13% compared to last year when systems were down 12%.
Rounding out our revenue picture, we see continued strength from our global services with revenue of $342 million and Q3 up 4% compared to last year and representing 52% of total revenue.
Revenue from recurring sources, which includes term subscriptions, our debt service and utility base revenue as well as the maintenance portion of our services revenue totaled 66% of revenue in the quarter.
On a regional basis in Q3, Americas delivered 10% revenue growth year over year, representing 50.
10% of total revenue EMEA.
<unk> delivered 19% growth, representing 26 percentage of revenue and APAC delivered 3% growth accounting for 18% of revenue.
The strength and Q3 expand customer verticals as well enterprise customers represented 69% of product bookings and the quarter.
And <unk> subsurface providers represented 15% and government customers represented 17%, including 4% from U S federal within the government vertical.
I'll now share our Q3 operating results.
GAAP gross margin in Q3 was 81, 4% non.
Non-GAAP gross.
It was 84, 1% GAAP.
GAAP operating expenses were $434 million non-GAAP operating expenses were $349 million.
Our GAAP operating margin in Q3 was 14, 8% and our non-GAAP operating margin was 35%.
Our GAAP.
My objective tax rate for the quarter was 4.9%.
Our non-GAAP effective tax rate was 14%.
Our non-GAAP tax rate is lower than anticipated as a result of and election, we made with.
With our FY 'twenty U S income tax return filed and Q3.
The election related to certain research.
GAAP experimentation costs for tax purposes, only and had the effect of reducing our non-GAAP effective tax rate in Q3, GAAP net income for the quarter was $90 million or $1.46 per share.
Non-GAAP net income was $169 million or $2 and 76 per.
And the year.
I will now turn to the balance sheet.
We generated $182 million and cash flow from operations and Q3.
Cash and investments totaled approximately $863 million at quarter and you will.
You'll recall in Q2, we initiated a $500 million accelerated share repurchase.
Per share growth. During Q2, we retired approximately $400 million worth of shares and Q3. We retired the remaining approximately $100 million worth of shares reflecting roughly 449000 shares purchased during the quarter.
The average price paid per share for the full $500 million.
Price was $199 and <unk>.
DSO was 53 days and capital expenditures for the quarter were $9 million day.
<unk> revenue increased 13% year on year to 1.4 billion from $1.8 billion.
Finally, we ended the quarter with approximately 6.
Graham 380 employees up approximately 2000 and from Q2.
Now, let me share our guidance for the fiscal fourth quarter.
Unless otherwise stated please note that my guidance comments reference non-GAAP metrics.
Near term, we expect customers will continue to invest and support in both traditional.
Modern application growth and the modernization of their application infrastructures.
We also anticipate continued focus on and investment and application security.
Thus far our supply chain team has navigated industry wide supply chain challenges well.
With all signs pointing to continued challenge.
And this for at least several quarters to come we will continue to closely monitored and situation.
With that as a context, we are targeting Q4 fiscal 2021 revenue and the range of $660 million to $680 million, implying roughly 9% growth at the midpoint.
We continue to expect FY 'twenty.
And 1 software revenue growth at or around 35% and feel very good about our software momentum as we closed FY 'twenty, 1 and head and to the back half of our horizon 2 timeframe.
We expect Q4 'twenty, 1 gross margins of 84 to 84, 5% and we estimate operating.
Operating expenses of $346 million to $358 million.
We also expect to achieve our fiscal year 2021, non-GAAP operating margin target of 31 and 32%.
We anticipate our effective tax rate for the year to be approximately 19%.
Q4 earnings target is $2.68.
To $2.80 per share.
We expect Q4 share based compensation expense of approximately 62% and $64 million with that I will turn the call back over and defense Mark Francois.
Thank you Frank our very strong third quarter.
Our charts demonstrate the powerful alignment of our expanded solutions portfolio and our customers' most important application needs.
Across the board our customers are massively accelerating digital transformation to keep up with current demand and forecasted growth and to meet consumers' expectations for application.
Quarterly performance and availability.
But it is not just keeping up with application growth that is a challenge.
Customers are managing this robust growth across multiple infrastructures with applications in both traditional monolithic 3 tier architectures.
And.
Patients will be and modern cloud native and competitive based architectures.
<unk> is uniquely suited to solve customer's traditional and modern application challenges.
Our flexible programmable big IP portfolio, secures and delivers traditional applications, whether and the systems.
And our software based form factor on premises and and the cloud.
Meanwhile, our nginx portfolio provides high performance application security and delivery for micro services in kubernetes and container based environments.
And with our shape security portfolio.
We also bring industry, leading fraud and bought protection against automated attacks.
So, let's talk about 5 sustainable customer trends, resulting from accelerating digital transformation and driving robust demand across our portfolio.
Number 1 and.
Enterprise customers developers.
And Dev ops teams are using nginx to insert security earlier in the application lifecycle.
And <unk> without protect delivers robust application security for micro services with the flexibility and agility developers demand.
And just 1 example, during Q3 with security.
Secured and nginx win with and information services company.
That services high security customers and financial Fintech medical insurance and the U S Federal government.
The customer selected nginx, plus without protect for its ability to deliver layer 7 WAF protection reverse.
Proxy and load balancing and a single unified solution.
Try and number 2 heightened security concerns and high profile ransomware attacks are escalating demand for top notch application security and fraud and abuse mitigation.
With pronounced application growth and.
And we're expanding threat landscape, including high profile ransomware and credential stuffing attacks, we see growing demand for application security and cloud environments and rising demand for fraud and Bot defense.
And and example of the strong customer interest and are shaped solution.
During.
And then third a.
A big brand athletic shoe manufacturer selected shape to take on a sneaker bought that was relentlessly attacking its retail site attempting to siphoned off shoes for resale.
Through and exhaustive proof of concept shape proved far more effective than a competitor.
The court identifying and stopping the bottleneck.
Try and number 3 <unk>.
Customers are leveraging F 5 for kubernetes containers and cloud native architectures.
Our growth and modern applications continues to accelerate driven by nginx kubernetes and cloud native deployments.
We are seeing.
There are several top use cases emerge for nginx, including API Gateway Kubernetes, ingress controller, and Genex, a protect and software based more balancing.
Customers modernization efforts and the availability of Nginx controller and enterprise level App security with Nginx and protect continued to drive.
Seeing larger nginx deal sizes.
During Q3, a large health insurance provider and the United States selected <unk> to help their teams manage their modern apps.
They deployed recently introduced the Nginx instance, manager to track configure and manage their businesses.
5 <unk> open source and nginx plus instances.
They also deployed nginx as an ingress controller to manage secure communications between services that are both external and internal to the kubernetes cluster.
In addition, they are using and generics to monitor pogs running and a public.
And providers manage kubernetes service and adjusted load balancing and rules based on product availability.
Trend number for <unk>.
Customers are scaling their existing hardware based infrastructure to handle accelerating application growth driving continued strength for big IP.
<unk>.
Last quarter I spoke about the fact that some of our big IP systems demand was being driven by cloud based and SaaS providers.
With global leaders are turning to our 5 so help them scale their existing application infrastructures and.
And support of continued.
Rapid adoption and growth of their digital products and services.
And Q3 this trend continued with a global SaaS based cloud service provider refreshing and expanding their existing big IP infrastructure to efficiently and securely scale with rising demand.
Renewed and finally trend number 5.
Customers are leveraging big IP for transformation, including cloud migration and automation initiatives.
The demand, we're seeing for big IP systems and software is about more than just capacity additions come.
Customers also are choosing big IP to drive transformation.
When customers move traditional applications to the cloud they are lifting and shifting whereas 5 choosing not to incur the time cost and risk of refractory and their applications.
And just 1 example in Q3 and.
And APAC, we want a deal with a large credit issuer with a 2 year plan to exit.
And our own data centers and migrate all non mission critical applications to the cloud.
And they chose a combination of big IP and Nginx software with a multiyear subscription consumption model to ensure flexibility throughout the process.
And another example of FY <unk> role and App modernization.
Exit Derek and multinational computer technology company is embarking on a large scale project to build their own private cloud, including repatriating cloud workloads to save cost and drive efficiency.
And selected Big IP hardware and software as well as <unk> to execute the project.
While several.
And in men's and I have just described also apply to our service provider customers.
Service providers also faced unique challenges as a result of <unk> to <unk> migration and growing <unk> traffic demands.
We see Gi land use cases, gaining momentum globally at <unk> devices are enabled.
On the <unk> momentum growing 4.5 and 2 ways.
First for capacity augmentation supporting <unk> Rollouts.
Second with virtual network function and cloud native network function based architectures, gaining traction to replace legacy infrastructures.
And 1.
Multiple service provider win from Q3, and 1 of the largest mobile providers and India turned to a 5 to scale its margin network and preparation for its <unk> deployment.
Before I wrap up our prepared remarks, I will comment briefly on our Voltaire acquisition.
The trends, we are seeing across the business.
<unk> bode well for the opportunity we see ahead with our <unk> platform.
We continue to make good progress with our integration efforts and expect to have more to share about initial use cases and launch timing in the fall.
As I mentioned last quarter, we initiated a pilot program concentrating on specific.
All cases and focused on bringing F 5 security to the edge.
Our goal is to leverage both terrorists organic momentum and early customer interest.
Amongst service providers, the excitement and early interest related to Voltaire on continues to open doors not previously opened to a 5.
<unk> used a combination of application growth, our expanded solutions platform and our vision for the future of adaptive apps is resonating with customers and is well aligned with industry trends.
And we expect demand for application security will continue to grow as application demand growth and customer scale and modernize their applications.
We believe that we are exceptionally well placed with the right perspective and tool sets to solve our customers' most pressing application security challenges.
Our opportunity and application security is even more exciting with the ongoing integration of F 5 and Volterra, which will bring enterprise grade F..5 application security.
And and easily deployable SaaS model and will.
I'll wrap up today's prepared remarks by thanking the entire F 15, as well as our customers and partners.
With that operator, we will now open the call to Q&A.
Thank you as a reminder to ask a question on you will need to press star.
To the airline your telephone to withdraw your question balance sheet.
Your first question comes from the lineup Tim long from Barclays. Your line is now open.
Okay.
2 questions if I could guys first.
And I'm curious if you could just update us on kind of how the cloud vertical.
And <unk> going for you guys, particularly.
On the software side, but also curious if you continue to see some good hardware traction there as well.
And then second.
Just wanted to follow up on the subscription software business can you talk a little bit about kind of what youre seeing with <unk>.
True ups and.
As consumption.
<unk> continue to see accelerated usage for the offerings and if so what does that mean economically and what does that mean as you look into newer contracts, where you might be seeing higher consumption levels than you would have anticipated previously thank you.
Eitan.
And because of the question.
We will take the first part and and Frank will take the second part.
So, let's just talk about the cloud vertical.
Generally and we continued to grow rapidly in public filings.
Given by.
Increased software.
The intention of our big IP system, and also rapidly growing consumption of nginx and public cloud environments.
And with scale.
<unk> net is specifically.
Deployments into production.
And the third factor there and some.
The security.
Consolidated and the public cloud continues to growth. So that's just.
And how well, we're doing and public cloud.
If you step back I think behind your question.
And I just wanted to go back to.
If you look back to where we were 3 years ago or 4 years ago, when I joined up 5.
And that's around the perfection of our fiber on public cloud I will describe the bear thesis at the time is the following.
And we were told.
And that traditional applications on premise will not grow and would only decline.
We were told that.
And the traditional.
Applications that would survive would be would all move to the cloud and would be re factored and therefore would not have.
Our role and these applications.
And finally, we're told that all new applications.
And applications would be bolt on cloud native and contaminated and that <unk> would not have a role and these applications and all of that led to.
<unk> scepticism about the rollover 5 and applications and the future.
If you look at where we're at today.
Number 1 traditional apps are growing their revenue generating apps and.
The COVID-19 and the consumption of everything digital.
Growing rapidly has.
<unk> led to traditional apps that are revenue generating growing rapidly and that goes on so big IP.
Number 2 the apps that are.
Not all of the apps, the traditional apps and moving to the public cloud a large number of them are not moving but those that are moving it's largely.
<unk> and shift and that benefits us tremendously because we are.
Absolutely attached to these apps in the public cloud and Thats, why our business and the public cloud is growing and number 3 as it relates to modern apps, we have a significant and growing role and modern applications with.
And with engine X, which is an enabler and become.
Ill enabler of scaling these modern application and we have a role with them Big IP and so you look at the picture today, and it's very different than the picture.
And at least at the bare thesis had 4 years ago, and if you look at where our customers are to date and they find themselves in a situation where they have traditional.
And and maps on premise is on private clouds that are growing and they are building. These new modern apps and they are on a 20 year March to manage the right balance.
Between those environments.
And between modernizing traditional apps building and scaling and modern applications and there is now a very.
Powerful alignment between the portfolio of solutions that we have put together with big IP Nginx, and our security portfolio and the challenges that our customers have to resolve.
To grow and modernize their applications and that's kind of manifesting and our results.
Both and what we're doing and the public cloud and what.
<unk> on Prem.
From you on adjusted second quarter September.
In terms of the 3 reports on that.
Yes.
Average.
Growth in year, 2 and year 3 we are ahead of where our internal firewalls.
And so on the low double digits.
And we see and.
We are doing is 2 and your split.
Realization that we're seeing and the contracts in year 1 is actually.
And the last quarter and all of this gives us increased conviction.
And our software as we head into FY 'twenty.
Okay. Thank.
And.
Thank you and your next question, perhaps on the lineups and make Katharine deep from JP, Morgan and our lifestyle brand.
Hey, guys. Thanks for the question.
And a couple of fronts.
I'm sorry, if I can start just on the <unk>.
And again Q1.
And 1 of the questions.
Thank you Scott quite often from investors and we got a lot of those this quarter was even.
You saw a good acceleration and software revenue sequentially and the third quarter or is it a similar acceleration that's implied into the fourth quarter, and then kind of into next year or so how much of that is just the momentum of the.
And kind of existing business relative to.
And on the crude.
Cooper Awards as well as subscription renew was that's kind of influence and guide if you could talk about kind of the con.
Vincent and delivering that sequential improvement is it going on into next year. Thank you and.
Follow up.
Thank you that makes so.
Let me start on software, yes, we are we are.
As <unk> said, our conviction in our growth and software continues to increase and continues to get stronger.
For a couple of reasons. The first is we are indeed, seeing very strong utilization of our multiyear.
Year subscription agreement.
Getting better visibility into expansion and true forwards.
And so far what we're seeing on expansion through forwards and even on renewals, but the performance of these aspects of our software business is well ahead of our own internal targets.
So that that is an important part of our confidence.
But the second part.
On our confidence and but we also have some catalysts and our software business that are starting to play out and we thought they would and perhaps even better.
If you look at nginx.
The momentum of adoption of nginx is accelerating in part because.
And we have a larger set of products and modules on nginx from the investments, we made a year and a half ago, So the controller and protect.
On the the security piece on Nginx moving into API gateways those are.
Growing the addressable market for nginx and some of these catalysts haven't even.
And played out and will play into 2022.
We see growing demand for security, including shape.
And a lot of that is consumed and software.
And Big IP is also growing and software as I said in public cloud and private cloud environment. So if you if you combine all of these.
And for that.
That we see a <unk> opportunity, that's and software in 2022 for the <unk> cores.
Those are all catalysts that will continue to drive the growth that we expect to see and software.
Got it and if I can just follow up.
And maybe this is low for Frank.
With data for when you.
We gave initial guidance for this year you were expecting more of a top line growth of 7 to 8 and operating margin of 31 to 32 clearly top line growth has exceeded your initial expectations, but when I look at the operating margin you drift towards the lower end of the range here. So how should I think about that.
It wasn't like reinvesting some of the incremental growth that you got or was it more of the headwinds because of the supply chain constraints, just trying to think through why not more leverage on the operating margin and revenue exceeded expectation.
Sure.
And sneak a.
A couple of a couple of factors and I will note.
And that's.
1 is obviously with the revenue outperformance, we've got natural commission expenses and other things.
Go towards.
Higher expenses and.
And would otherwise modeled at the beginning of the year.
We also obviously absorbed.
And altera into this model, where we said we are not.
And to change our operating plan that we were going to absorb those expenses and that's exactly what we did.
And then just other gives and takes.
And that put us I think more on the midpoint of that 31% to 32% range.
Range not at the low and from our expectation.
Okay. Thank you.
So taking the questions.
Sure.
Thank you. Your next question on comes from the line up Rod on a go.
And that's access to your line's now open.
Yeah, Hi, guys, Thanks, and good question.
I wanted to just go back to the software revenue.
And I'm, assuming that your guide is built for close to.
35% growth this year, if I, just simplistically put 35% and I get that.
D cell low growth actually in Q4 non.
And at roundabout $145 million and revenue and they get.
Quarter on quarter growth seasonal growth a little bit lower so I'm, just curious does that and that makes.
You guys are you expecting it.
Slowdown of growth or the 35 to low I mean can you just kind of help us.
And that all up and I have a follow up.
Hi, Rod.
We're not as you know we are not guiding hardware and software separately.
And then second quarter, we've said that.
We would drive about 35% software growth for.
For the year, we feel confident that we're going to we're going to do that.
And more importantly, I always look at this.
The overall trend for our software business.
On for Horizon.
And 2 we said the trend and our software growth will be 35% to 40% and we still feel that thats what the.
And the range is going to be for for growth for FY 'twenty, 1 and FY 'twenty 2.
Yes.
And I would ask that.
Got it.
Yeah, absolutely I think the only thing.
And I would add is the same methodology that we use and giving guidance for the <unk>.
Since we've been talking about our software business and.
And the back half of the year when that was looking like a pretty good uplift when we were talking last quarter.
I think we bridge that quite well.
Well this quarter and.
Moving ourselves, obviously plenty of room on the 35% for the full year and so when we take a look we take a look at the components that we know are coming in.
On the SaaS businesses, the true forwards and the pipeline activity of what we see.
Okay, and then break and I had 1 for you too on deferred revenue.
I was just looking at your long term deferred increments versus your short term and I.
I see a pretty good size and long term deferred revenue increase and June over margin.
And I'm just curious can you can you talk to us about the duration of the dip.
Deferred revenue and.
You know what.
What specifically is driving the big increase and a long term part of it. Thanks.
Sure, Yes, absolutely right.
It seems like we keep saying this but we had yet another record number of multi year subscription agreements.
And that bring and deferred revenue.
Revenue into that and have that long term bucket also.
Very strong.
Safe quarter as well as other things that have got multiyear contracts I believe the average duration on most of those as.
2 and half to 3 years and so that's what we're that's what we're seeing.
Growth.
And the long term deferred revenue.
Great. Okay. Thanks, a lot I appreciate it guys.
Thank you Rod.
Thank you. Your next question comes from the line of gains piece from Piper Sandler. Your line is now open hey.
Hey, guys great quarter.
And just not to go back to the topic.
On the subscription side first I guess, how should we think about kind of next year's true up and renewal opportunity understanding the fiscal 19 based on bigger than the fiscal 18 base, but we are having some of these true ups come in <unk>.
Fiscal year, I guess can you kind of help us bridge to.
Transitions here of.
And how we should think about this true up and renewal activity.
Happening and it sounds like we should think about it as kind of this 110.120 kind of net retention rate. If that's the right way to think about it.
That's the right way to think about it and there is also an additional component with 606.
And the reason why.
And that lapping is important and what you see in.
And 19 as opposed to the previous quarters and why I have said for.
And for the past, probably 6 or 7 quarters that and.
And the back half of FY 'twenty, 2 is going to be interesting and when things start.
And with more consistent and our revenue growth.
But once you.
Actually sign those near term subscription agreements.
The whole new revenue recognition and component associated with that.
And so the <unk> are interesting, but that becomes the new baseline and which are the new deal is signed and then and those 3 year agreements.
And then 63% of that comes to product and the quarter that it is assigned and the balance of that is ratably deferred into the services revenue bucket over the course of that 3 years and then the true forwards obviously have got.
And additive component to the product revenue and we're still on your 3 about that lapping here is actually when we see.
And do more pickup and the product revenue on the software side.
Mix makes sense, Frank and then.
It does look like your bookings or billings were up very nicely here at 25% not a metric we typically talk about with you guys, but as the software piece is it becoming a bigger and bigger piece of debt does make some sense and talk to.
First are you guys planning on introducing any new metrics here as we think about fiscal 'twenty, 2 and <unk> metric or talking more to billings and then secondly on the billing strength. This quarter was it more on the product side or was it just really strong maintenance attached Tvs.
Virtual big IP and nginx licenses. Thanks.
And I'll speak to the metrics question and let Francois take take the back half we continue to evaluate.
And additional disclosures of metrics I can't make any promises and when thats going to come.
We continue to think about what's going to be the most relevant for the users of our financial statements.
And then.
Jim on the second part and were then.
Where the traction is coming from.
There are 2 areas that I would point to you that's driving this increase and.
Subscription revenue 1 is security.
And we.
We had a very strong quarter with shape.
And in certain verticals.
Retail financial services.
Vertical online gaming where.
We are the customers.
Heightened sense of the threat environment and awareness.
And as a attack vectors.
And we're able to mitigate a lot of automated attacks, but not just mitigate bot attacks, but also more increasingly profiled our traffic more intelligently leveraging ship AI technology, which results and improve customer experience and so it's making us really sticky.
Ricky.
In these environments and it is vertical the second thing and security is.
We're seeing.
Bed setup steel and.
And Dev ops team increasingly wanting to deploy security earlier in the lifecycle of an application and.
And that points to the security.
Abilities, and I find that reported on nginx, and so only thing Nginx security.
Driving growth and our security portfolio and seen some book shape and nginx are driving subscription based revenues.
Youre seeing that increase there then the second area I would point to is just more general adoption.
And keep you bought and applications.
1 other things that we are seeing over the last 6 months and I think it's accelerated this quarter is kubernetes is going into production.
A lot of customers have done.
Development and testing and micro services.
Dinner based application and they are.
And of looking to scale these applications and a lot of cases.
They're running into trouble and nginx has all the capabilities to help them scale their kubernetes clusters.
And it's driving an acceleration and then generics adoption. In addition to the fact that nginx.
And now has multiple products controller, API gateway et cetera. So when you when you look at these factors its accelerating adoption and <unk> 1 of the.
The most.
Obvious manifestations of this is we have very strong momentum with nginx non.
Mark.
And.
Just any customer body and are.
<unk> 9000 customers the penetration of <unk> is growing and very strong and fact, just this quarter.
If you look at.
Frank said, we had a record number of multi year subscription agreements and.
And nginx was part of more than half of those multi year subscription agreements for the first time so.
Top for both to the growth, we're seeing with nginx and.
And shape, but it also points to what I said earlier around the powerful alignment of our portfolio to the hybrid challenges that our customers face.
Thanks, guys.
Okay.
Thank you. Your next question comes from the line.
And I thought my Shanghai, <unk> Morgan Stanley and your line is open.
Great. Thanks.
A couple of questions.
Just a couple of time theater record corn and I appreciate security.
Last quarter, you mentioned the third day.
And some delays and proof of concept. So just wanted to get a sense of.
And some of that strength of proof of concepts and resuming as that kind of the security breaches that we'd seen that have driven some of that strength and then maybe just a second question and maybe for Frank is kind of the SaaS application and our cloud customer vertical and it's something that we.
I know that are on.
And more than 10% of the business at this point or just any anything that would give us a sense of the size of that customer base at this point. Thanks.
For me and I'll, let me start with shape.
So last quarter, we did mention we had some.
Asia Confounds set so we're taking a long time.
And that was exacerbated by the fact that customers are not.
In the office and.
So pulling off these proof of concept and reducing the length of the sales cycle was low.
Difficult, we still have that issue.
And I would say.
And for customers that are not under and you kind of immediate significant pain.
And can take their time to make their decision that is still a factor and we hope that that factor succeeds in the coming quarters, but it's still there on the other hand, we also have a number of customers who are either.
Poof are under attack.
And need and immediate.
<unk> solution and oftentimes the solutions they have in place are not effective and offer a sophisticated attacks.
Or they have.
A heightened sense that they are on borrowed time and need to put in place the most effective mitigation possible.
And for those sets of customers. The sales cycle is pretty rapid and this quarter, we had more of these customers.
And come to US I would say there is also a maturing of the go to market with teams being able to identify the verticals where this is most mostly the case.
And.
Focused their efforts so that's <unk>.
Why the traction on shape is accelerating and then on your second part meet on the cloud vertical.
We don't break it down.
On sort of on a quarterly basis in terms of quantifying exactly how much that is but.
And I would say when we look at.
F..5 is growing the fastest at the moment if you take all companies that are on.
Either or in technology or in e-commerce, or whose products are digital services. So it.
And as 1 with all the cloud providers and the SaaS providers.
If you put all of these and the bucket.
This is the area of the business.
And that is growing the fastest at the moment and it's important to Hawaii.
All digital services are growing rapidly and the consumption of these services are growing rapidly and.
And that's driving growth for us.
Across our entire portfolio of shape and generics and big IP are all benefiting from that and I would I would note that I'd say its.
It's an interesting trend because again, if you go back 4 years ago.
You would have thought that the tech companies.
Perhaps the most aggressive at moving to the cloud adopting cloud native and container enabled architectures would not be.
On the customers that would stay on.
Big IP appliances.
And where you would've expected profit size momentum.
It would be less and the future.
It's the <unk>.
Complete opposite now where our momentum in that.
On a vertical is very strong.
Great. Thank you.
Thank you. Your next question that's a line of Alex Henderson from Needham. Your line is now open.
Thank.
And keep pretty clearly true.
And you guys are really play on the transition to the cloud with each quarters.
I wanted to get into a couple of items share. The first 1 is.
Conversion rate even Gen X Gen.
<unk> plus is pretty clear that.
Since you're.
Our acquisition and <unk> that the percentage of.
On the market share percentage of <unk> has definitely gone up I understand it's up and the 67% plus range now from like 60% and.
On voice share has gone from over 20%.
Low teens.
And so clearly demonstrating.
Demonstrating that it is becoming the de facto standard but can you talk about the conversion rate and <unk> and <unk>, plus and how that impacts.
On your business on this.
Second piece of that same question.
And if you've got a 5% increase and your subscription rate and the quarter and.
Software.
I think the standard kind of rule of thumb is around 2.2 times impact on the rate of growth.
As you convert.
From perpetual to software subscriptions and so.
If it's up 5% does that mean and understated your growth and.
The true underlying.
Underlying growth rate by roughly 10% to 12%.
Thanks.
And Alex I'll take the first part and the phone call.
The second part.
On.
In terms of conversion of Nginx Nginx plus.
And so.
I.
As you noted the Alex and Youre getting a lot of traction and now the most deployed web server.
In the world with multiple $500 million websites using the technology.
And so yes.
And important motion with Nginx is a convergence where nginx plus we have suddenly gotten better about that.
In 2 ways number 1 is big.
And because there is a broader set of product that can be offered either as part of nginx plus or in conjunction with nginx plus.
And the security capabilities, the API gateway and Mel a controller that makes it much easier to deploy and manage these and.
Sensors there.
And there are more reasons for customers using open source to want to.
And have access to the commercial.
Capability and.
And then the second part is what we have found out.
Number of large enterprises customers are not aware of how many open source instances they have how many versions.
Virgin thing on it.
And or are they.
Underestimated by sometimes a factor of 10 X number of Nginx open source and incentives we have and so we've been able to bring to them a new technology, we call it and engineer instant manager that allows them to discover the.
Open source.
Incentives that they have.
And oftentimes prompt them to look at our portfolio and ensure that it has the right.
Support and oftentimes into engine exports to have either access to better features and better versions. So that's that's kind of the.
The what we're seeing in terms of.
Better.
Better conversion rates on an engineer, but I would say we're also getting.
Greenfield deployments with folks who did not have.
Nginx open source and their portfolio.
Because as I said before we are scaling these kubernetes clusters and scaling container based applications.
Challenge for many customers.
And what they find is nginx is inc.
As a platform that consolidates a lot of functionality into 1 platform and so they don't have to deal with 5 to 7 different vendors for different capabilities.
So all of that is why we're seeing that traction.
And then for the second part of your question I would love.
And how to work for all of our software day. It does actually for the SaaS ratable piece of our software base, but with the with the adoption of 606 for our term subscription based models that.
That 1 evens out a bit closer to the perpetual and.
And and subscription.
Revenue recognition and so that as.
Your math does work as that SaaS portion of our revenue continues to grow and the Ratably recognized portion, but it's not completely apples to apples for all of our average.
And if I could just 1 last quick question so.
Clearly is.
And that dominant player and Kubernetes code is infrastructure.
Could you talk a little bit about your ability to hook into Hashi Corp, and to what extent you're tight integration with cash Corp is driving.
Your adoption rates, clearly, they're setting up to come public and as they do.
Covid.
And the infrastructure ICD pipelining and.
And obviously there is a role of Kubernetes goes to center stage and you're obviously a critical piece of debt.
Yes, Alex had Kara.
Sure.
And you have somehow.
We have we and flips from a number of our products into.
So does that mean.
Leo.
And we do have.
<unk> strong.
The customers looking for our integrations that are built into there and so for example, and there's a few innovations from big IP and console.
That enable deployment and provisioning and big IP resources through share hashish console.
Frank.
As well as other integrations that we have.
And I would tell you that patchy and but 1 example of a broad set of automation and orchestration capabilities that we've enabled across our portfolio.
And with Nginx and the big IP can be.
<unk>.
And provisioned and configured.
And as that is declared and API and our customers use that through Hashi day is that through things like ethical terraform.
And as well and the number of other automation technologies.
And.
Excuse me our next question comes from the line.
And Joe from MTM partner Your line is now open.
Thank you for taking my question.
And I guess I had a.
Hello, a question on your subscription revenue.
A.
Number that you had.
And I think with them.
And subscription.
Give us a sense of how much of that revenue was then.
Term revenue.
In terms of that.
Yes.
And it was 78 percentage this quarter, 73% and a year ago quarter.
And we don't split out those components at this point.
And I do appreciate the question.
Okay.
If I could maybe ask.
Kind of figuring out in terms of the opportunity ahead and software growth.
73, and you help us understand in terms of.
The true ups.
On land and expand.
And your business can you give us on or ship and data point.
Quantifiable available.
And that kind of show you landing and expanding on your.
On a core customers and adopted.
We have a set of solutions for the Internet index, plus along with debt by traditional software solution.
And just kind of.
And the spending how much of a true up.
Are you enjoying.
And as you get more of shape and and broker evolution going forward as well.
Well I don't know if I will get to.
What I think you want which is on average of.
The 2 OXXO expansion that we're seeing and renewal with our customers.
On.
But let me just give you a few data points. So first of all.
Our.
Our subscription offers really started in earnest in 2019, and so we are and the very early stages of going through these.
Certainly the renewal of the multi year subscriptions.
And that expired and gone to 3 years in terms of the.
And.
The ones that have gone through 1 year and so we've already had a chance to be true up.
We are generally seeing expansion and consumption.
That is very healthy.
So we're very happy about that 1 other thing for HUD debt, we have worked on and.
And I think now we're getting to.
<unk>.
Very good position and the first year or that it used to take a long time for customers to get to full 100% utilization of what they had committed to.
I think the first.
So the deals we did north of 20 months for customers to get to that.
We have.
And really brought that down to now customers.
And in roughly 5 months or so get some 400% utilization of their subscription and so on and beyond then the extent so we're getting.
Very healthy.
And consumption and as a result, very healthy true ups renewals.
So it's early days, but I can tell you we have had some some renewals where we were close to 3 X. What they had committed to the and the first multiyear subscription of course, not all of them are that way and it's just to give you a range of what.
What we see there so those are some other things that give us.
And good better visibility into next year and good confidence and continued growth.
Thank you so much.
Sure.
Thank you and your next question comes from the line of Amit <unk> from Evercore Your line and Alabama.
Perfect. Thanks, a lot.
My question.
I have 2 as well.
First off I was just wondering if could just possibly a sustained growth and what youre seeing so far it seems to be much better than the horizon do all along and target.
And remind us what is driving the growth and should be we think what this means for horizon to growth for the systems business.
Yes.
And I guess.
And the what's driving the systems growth.
I think look there are a few macro factors in the finfet.
I think the.
And it spending environment right now is fairly healthy.
And the results so.
On the consumption of digital services.
Consumers and that in turn is fueling growth and application growth and demand for application.
I would say that is kind of the biggest macro factor because what we see is a lot of our customers.
When they are refreshing.
And what are their appliances. They don't go just where we price to go for refresh and capacity expansion and sometimes its capacity expansion and transformation because we want to move on a private cloud environment and that's driven by day.
And just more traffic and more usage of even the traditional <unk>.
Obligations.
And there.
See as I said earlier growth with digital and SaaS and service providers.
And then the growth comes from.
Sometimes their services the demand for their services, whether its collaboration platforms on e-commerce platforms or even sat providers the demand for those services are growing rapidly.
Jason and we have built into their infrastructure and so that drives demand for our hardware our system.
Into their infrastructure and I would say.
Generally.
There is also a fundamental change in stance Ahmed from <unk>.
Go back to 3.4 years ago.
I would regularly hear from customer.
4 years ago.
We don't want to buy more hardware, because we're going to move everything to the cloud we're going to be out of our data centers.
We've got to figure out architecture and.
At the time, we said there was a pause because people were thinking their architecture.
And there is not a single CIO that has told me this and.
Customer of months.
Every 1 of them and I think a lot of people have learned from the implementations and public cloud, sometimes low cost and time associated with factoring.
Applications and generally I think people are more comfortable that they're going to be on a hybrid environment.
For a very very long time to promise.
And if not forever and so they're comfortable growing there on <unk>.
And presence with hardware, where it makes sense.
And leveraging the public cloud for other initiatives and I think that that payload.
Environment is very different than it was 4 years ago, and then the last factor of that.
The last half.
And impact on our systems business is security.
And I said earlier that we had very strong growth and SaaS security with shape subscription security with nginx, but we also have very healthy double digit growth and hardware security.
And thats because the.
All of these absolute to be needs to be secured and customers are aware of the risks so they're moving forward with application security.
Got that.
That's really helpful and just maybe ask you to clarify a little bit more for me I.
I think a lot of folks tend to think that if the software business growth 35% system.
Is that decline and it's a bit of either our math, sometimes with people.
Is it fair to figure on what you just outlined with hybrid and the reality that you could have systems growth and software growth be more durable overtime versus mark.
Yes.
Potentially.
On.
And possible scenario I would I would separate so when you look at our software business.
You've got nginx and shape and I don't think theres any relationship between the growth of that part of our software portfolio and the low.
And hardware when you look at Big IP.
<unk> per se.
This is where we have seen any facts, we continue to see.
Some customers that we would've expected to move to a software form factor right now that are <unk>.
Delaying are reconsidering and crop because of Covid.
And in part because of the.
And the immediate demand that they see.
Their application.
So thats, where there is a I would say there is some level of given debt.
On hardware and software, but overall the software transition for us is absolutely accretive.
To the to the business.
And right now the drivers that we are.
On the in our.
And our hardware business.
We feel there are a couple of 1 off that we talked about last time.
Around our USD.
Certain product, but I would say the majority of the drivers we're seeing right now are pretty sustainable.
Perfect.
Thank you and congrats on a nice quarter.
Thank you.
Thank you due to time constraints, we will take our last question today from Simon Leopold Raymond James Your line is now open.
Great. Thank you for taking the question I wanted to see if we could talk a little bit from a market.
Vertical perspective in particular.
Federal was low for you guys. This quarter at 4% of revenue and we're coming into what's normally youre strong seasonal federal quarter. So I wanted to understand whether there is something different in the current cycle in terms of your federal business.
Or whether we.
We should expect federal and will be strong and your September quarter, and then on on enterprises, if theres a way you could maybe characterize where we are in terms of kind.
Kind of a post pandemic recovery is there some aspect to the current business that we maybe could characterize just catch up spend.
Compared to the.
Weaker spending we saw a year ago due to the pandemic. Thank you.
Yeah.
<unk>.
Simon and thank you for the questions.
Yeah.
So the.
Let me start with the fed the fed question.
So on and know that there is anything there is nothing particular.
This quarter.
In terms of our bookings there were there were in the range of what was typically expected in a quarter like this for the fed.
We do we do expect a strong seasonal quarter and the fed and our.
Fourth fiscal quarter.
And.
And we continue to be well placed to win some business. There. There is as you know a lot of them.
Additional focus on security and in that vertical and.
We are well placed to win and protect against some of the threats that we're seeing on.
For our governor.
Customers and.
And so.
And I think that's where our focus is with the fed and that will that will continue.
As it relates to your question on the.
Enterprise.
And remind me the <unk>.
And is are we going to see the same drivers.
<unk>.
Well I guess, what I'm trying to get at is is there some element of the growth Youre seeing now that goes away that is more about the cycle.
Opposed to the longer term secular trend and I'm trying to really discern between the 2 so you've got a relatively easy comparison with we get data center spending.
Government a year ago and.
So at some point and maybe a year that Peters out. So there is a cyclical aspect and a secular aspect of your business I'm trying to discern the 2.
Okay.
And it's a great question and I think Tim.
Specifically in our.
And our hardware business I think there are elements of both.
And you were asking me, which 1 is the 80.20.
And I.
And I don't know that I have a good answer for you I would say, yes, there is.
Some of the aspects that are.
I would say cyclical.
Ending and the spending environment right now is healthy.
I think there is a little bit of catch up demand from.
And our Ts F.
2019, and FY 'twenty.
And where people were kind of very cautious and the early parts of the pandemic.
And I think those those.
2 are somewhat cyclical.
I think the aspects that are more durable or.
It seems like what we're seeing and the in the tech sector, where there I think the demand for digital services is just going to continue to growth and I don't see that stopping anytime soon.
And I think generally.
Demand for traditional applications and hybrid infrastructure is also we're going to continue to be solid and I think that's a durable piece and then the last.
Element, that's durable and security and.
And I said, we have a healthy double digit growth and hardware security and I think.
Demand for security is going to.
Continue for the foreseeable future so.
Both elements are part of what we're seeing right now.
And I think we'll.
Time will tell I think.
And more quarters.
Yes.
How much of.
Each is contributing.
Thank you.
Thank you and this concludes today's conference call. Thank you for participating you may now disconnect.
And.
Okay.
And then.
And.
And Josh.
Okay.
And.
Yes.
And then.
And.
[music].