Q4 2021 F5 Networks Inc Earnings Call
Good afternoon, and welcome to <unk> fourth quarter fiscal 2021 financial results conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation, there will be a question and answer session.
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I'll now turn the call over to MS. Suzanne Dulong, Ma'am you may begin.
Hello, and welcome I'm, Suzanne Dulong, Vice President of Investor Relations.
Francois logo didn't U S, president and CEO and Frank Pelzer.
Executive Vice President and CFO will be making prepared remarks on today's call.
Other members of the 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> Com, where an archived version of today's call will be available through January 25th 2022.
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.
To access the replay of todays call by phone dial 805, 858367, or 4166214642 and use meeting I D 6879935.
The telephonic replay of this call will be available through midnight Pacific time October 27th.
For additional information or follow up questions. Please reach out to me directly and that's don't do long and a five 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 our five has no duty to update any information presented in this call.
With that I will turn the call over to Francois.
Thank you Suzanne and Hello, everyone.
Thank you for joining us today.
Under pandemic conditions that have persisted for longer than anyone initially expected.
<unk> team delivered another very strong quarter closing out a robust year for us.
Customer demand for application security and delivery amid skyrocketing application growth and heightened application security awareness are driving strong demand for <unk> solutions.
This demand spend our portfolio and our original theaters in Q4, driving 11% revenue growth and our fourth consecutive quarter of double digit revenue growth.
We delivered 35% software growth, 12% system growth and 2% global services growth in the quarter.
With software revenue, representing 45% of product revenue in the quarter and 80% of our software coming from subscriptions. We continued to mark milestone after milestone in our rapid transformation to a more software led business.
I will speak more about our business drivers and customer highlights from the quarter. After Frank reviews, our Q4 and FY 'twenty, one results and our outlook for Q1 FY 'twenty two.
Frank.
Thank you Francois and good afternoon, everyone.
Ill review, our Q4 results before briefly recapping our fiscal year results as Francois just outlined our team delivered another very strong quarter.
Fourth quarter revenue of $682 million is up 11% year over year and 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.
Q4 product revenue of $340 million is up 21% year over year, representing a significant acceleration from 6% in the same period last year.
Q4 software revenue grew 35% to $152 million, representing 45% of product revenue up from 40% in the year ago period.
Systems revenue of $188 million is up 12% compared to Q4 last year when systems were down 8%.
Rounding out the revenue picture, we continue to see strength from our global services at $342 million in Q4 up 2% compared to last year and representing 50% of revenue.
Taking a closer look at our software revenue customers preference for subscription based consumption models as evidenced.
In Q4, 'twenty, one subscription based revenue represented 80% of total software revenue up from 76% in the year ago period subscription.
Subscription based revenue includes a ratably recognized as a service offerings and our solution sold as term based licenses.
Within subscriptions customer demand is driving substantial volume and value growth from our multiyear subscriptions the deal volume of our multi year subscriptions more than doubled year over year and is approaching 500 in total.
This consumption model offers flexibility for the customer and through the annual true Ford and normal renewal cycles.
<unk> us visibility to customers' utilization and consumption patterns.
In addition, we ended the year with more than 600, SaaS and managed service customers, reflecting growth of 50% year over year.
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 67% of revenue in the quarter.
On a regional basis in Q4, Americas delivered 11% revenue growth year over year, representing 59% of total revenue.
EMEA delivered 11% growth representing 24% of revenue in APAC delivered 9% growth accounting for 17% of revenue.
The strength in Q4 spend customer verticals as well.
Enterprise customers represented 69% of product bookings in the quarter service providers represented 13% and government customers represented 18%, including 8% from U S. Federal.
I will now share our Q4 operating results GAAP gross margin in Q4 was 81, 1% non-GAAP gross margin was 83, 7%.
GAAP operating expenses were $427 million non-GAAP operating expenses were $350 million or.
Our GAAP operating margin in Q4 was 18, 5% non-GAAP operating margin was 32, 4%.
Our GAAP effective tax rate for the quarter was 10, 3% or.
Our non-GAAP effective tax rate was 15%.
GAAP net income for the quarter was $111 million or $1 80 per share.
Non-GAAP net income was $185 million or $3.01 per share.
I will now turn to the balance sheet.
We generated $197 million in cash flow from operations in Q4 cash and investments totaled approximately one point O 4 billion at quarter end.
DSO was 45 days and capital expenditures for the quarter were $7 million.
Deferred revenue increased 17% year over year.
To 1.489 billion up from one point to seven 3 billion the growth in total deferred was largely driven by subscription and SaaS bookings growth and to a lesser extent deferred service maintenance.
Finally, we ended the quarter with approximately 6460 employees up approximately 80 from Q3.
This does not include approximately 90 employees added with the threat stack acquisition, which closed in our fiscal first quarter of 2022.
I will now briefly recap our full year 2021 results.
For the year revenue grew 10% to $2 6 billion.
Product revenue of 1.25 billion grew 21% from the prior year and accounted for 48% of total revenue up from 44% in the year ago period.
Within product revenue software grew 37% to $500 million a beat on our outlook for at or about 35% growth for the year systems revenue in FY 'twenty, one grew 12% to $748 million Global services grew 2% to 1.3 dollars 6 billion, representing 52% of total.
Revenue.
Looking more closely at our software revenue since fiscal 2018, we've grown our software revenue at a 49% compounded annual growth rate and our software subscription revenue at 115% compounded annual growth rate.
GAAP gross margin in FY 'twenty, one was 81, 1% non.
Non-GAAP gross margin was 83, 9%.
Our GAAP operating margin in FY 'twenty, one was 15, 1% and our non-GAAP operating margin was 31, 6%.
Our GAAP effective tax rate for the year was 14, 4%.
Our non-GAAP effective tax rate for the year was 17, 7%.
GAAP net income for FY, 'twenty, one was $331 million or $5 34 per share.
Non-GAAP net income was $671 million or $10 81 per share.
Application security is a big and growing reason customers turned to F. Five our application security offerings, including Ddos protection advanced vulnerability defense for web application firewall.
<unk> bought fraud and abuse protection are increasingly recognized as industry, leading as a result, we estimate our standalone security product revenue grew 26% in FY 'twenty, one to approximately $350 million, reflecting a 38% compounded annual growth rate since FY 18.
Including bundled security offerings, and an estimate for our services revenue associated with security. We estimate the total application security portion of our business grew to more than $900 million in FY 'twenty, one representing approximately 35% of total revenue.
Supply chain challenges have been well acknowledged across the industry over the last year.
Our supply chain team continues to do an impressive job managing global supply chain constraints and working through our supplier ecosystem to manage through challenging conditions.
At this point like many others, we are working with extended lead times in part as a result of supply chain constraints. We ended FY 'twenty, one with approximately 125 million in backlog the vast majority of which is system based.
Now, let me share our guidance for our first quarter as well as some color on our view for FY 'twenty two.
Unless otherwise stated please note that my guidance comments reference non-GAAP metrics.
Let me start with sharing our expectations for the first quarter of 2022.
We are targeting Q1 revenue in the range of $665 million to $685 million, implying roughly 8% growth at the midpoint.
We expect Q1 'twenty two gross margins of approximately 84%, we estimate operating expenses of $342 million to $354 million.
Our Q1 earnings target is $2 71 to $2 83 per share with a share count of approximately $62 million.
We expect Q1 share based compensation expense of approximately $64 million to $66 million.
Now, let me share some operating expectations for our 2022 fiscal year.
For the year, we expect revenue growth of 8% to 9%.
We expect software growth of between 35 and 40%.
We expect the range of software variability, we will see quarter to quarter will narrow relative to what we have experienced in the past.
This is due impart to what we expect will be a higher contribution from ratable revenue overtime and also in part due to increased scale of our software business overall.
We expect systems revenue growth will be flat to slightly up for the year.
And we continue to expect low single digit global services revenue growth.
I note that all of these revenue expectations are at or above our most recent horizon two outlook provided in January with the Voltaire acquisition announcement.
We anticipate continued pressures related to our global supply chain in the next several quarters.
We expect these pressures will result in some increased costs related to the expedite fees and sourcing of long lead time components in light of this dynamic we anticipate non-GAAP gross margins of approximately $83, 5% to 84% for the year and we will continue to closely monitor the situation as we have throughout the past year.
Yeah.
We continue to target operating on the rule of 40 basis, where the combination of our revenue growth and non-GAAP operating margins totaled 40.
The combination of our strong FY 'twenty, one revenue growth and our continued operating discipline enabled us to achieve the rule of 40 in four out of four quarters in FY 'twenty. One ahead of our initial horizon two targets.
We continue to target achieving the rule of 40 in FY 'twenty two.
Given our anticipated revenue growth and the ongoing benefits from our cost reduction initiatives that we discussed at our analyst and Investor meeting last year, we expect non-GAAP operating margin in the range of 32% to 33% for FY 'twenty two.
We expect our typical operating margin seasonality, which translates to operating margins stepping down in Q2 and improving in the back half of the year.
We anticipate our full fiscal year effect effective tax rate will be at around 21% with some fluctuations quarter to quarter.
This estimate does not account for any potential future federal tax changes.
We expect fiscal 2022 stock based compensation expense in the range of $250 million to $270 million and capital expenditures in the range of $40 million to $60 million.
Finally for the year, we expect share count to remain at approximately 62 million shares inclusive of the expected share repurchase of $500 million during FY 'twenty two as we previously discussed.
With that I will turn the call back to Francois Francois.
Thank you Frank.
Very strong fourth quarter results are the perfect Taft to our robust outperformance in FY 'twenty one.
In the last 18 months, our reliance on application, both those businesses and as consumers have escalated sharply and likely forever changed.
Our customers are massively accelerating digital transformation, so keep up with current demand and forecasted growth. They are doing this while also working to consistently meet consumers' high expectations for application performance and availability.
And while also ensuring their applications.
And the consumers' data are secure.
In my conversations with investors I am often asked what is potentially misunderstood about five let me address the key points here.
First <unk>.
Traditional on premise applications continued to grow counter to the prevailing expectations from two to three years ago.
In fact traditional apps are generating more traffic and more revenue than ever because every aspect of life and business relies on applications for our five this means big IP demand will continue to grow in both software and systems form factors.
Second.
Contrary to early cloud height, the vast majority of traditional applications are not being we factored.
They are either remaining on premise or they are moving to the cloud with a lift and shift motion in other words.
Five run applications are remaining a task to five as a result, big IP is growing both on premise and in public clouds.
Third modern container based applications continued to grow at a rapid pace and not only for new applications customers are bolting, new modern components onto traditional applications to improve the user experience in many cases.
Loud native application security and delivery simply are not robust enough to meet the applications needs for our five this means accelerating nginx demand, enabling app security and scale for modern applications, often as a complement to big IP.
And finally <unk>.
Given the volume of business and data that is now flowing through application and the increasingly distributed nature of applications application security has taken on new significance.
Where in the past network and infrastructure security was a focus for customers and vendors alike. We expect application security will be one of the hottest areas of investment over the next decade.
F. Five is one of the few players 100% focused on application security.
And we protect not just access to applications, but also how they are used as a result, we expect our role and reputation as a leading application security provider will accelerate to some of these points.
Five is differentiated and well positioned to benefit from significant emerging secular trends. There are some companies focused on applications. There also are some focused on application security.
Five is the only one that is at the epicenter of these two secular forces with a focused expertise and the technology assets to secure and deliver any application anywhere, let's grow our opportunity in real customer trends and use cases.
Quarter, I've talked about five sustainable customer trends, we expected to drive demand across our portfolio.
Let's revisit those trends with some customer examples from Q4.
Number one enterprise customers developers and Dev ops teams are using nginx to insert security earlier in the application lifecycle.
Nginx without protect delivers robust application security for micro services with the flexibility and agility developers demand in.
In one example, during Q4, we secured an nginx win with a global insurance group. They are migrating their consumer facing insurance services into a public cloud.
For risk mitigation and security reason, they required a scalable and container friendly solution. They also needed enterprise grade security capable of protecting their strategic high value apps and guaranteeing risk management compliance and they wanted all of this within a lightweight footprint that could drive automation.
Saving time and money nginx without protect was the natural choice.
Trend number two heightened security concerns at high profiled ransomware attacks are escalating demand for top notch application security and fraud and abuse mitigation.
With pronounced application growth and an ever expanding threat landscape, including high profile ransomware and potential stuffing attacks, we see growing demand for application security and cloud environments and rising demand for fraud and bought defense.
During Q4, the North American electric utility experienced the credential stuffing attack, resulting in substantial infrastructure failure more than 6 million customers had to reset their account passwords based on their experience of the big IP customer that you'd feel if you turn to our five for help shape was emergency.
On boarded identified high volumes of automated traffic and deployed highly effective mitigation measures to stop the attack trend.
Trend number three customers are leveraging F five for kubernetes containers and cloud native architectures.
Our growth in modern application continues to accelerate driven by nginx scuba knit us and cloud native deployment, we are seeing several top use cases emerge for nginx, including managing API opt.
Optimizing kubernetes traffic management and load balancing cloud native and hybrid cloud applications with customers modern applications experiencing significant and constant swings in user demand they need infrastructure that scales up automatically to meet user demands are down to save cloud costs.
During Q4, the Canadian online investment manager selected nginx to move their kubernetes based applications into production at scale. Initially they attempted to use a competitive solution, but it lacked performance and did not integrate well with our Hershey Corp counsel or with AWS auto scaling.
Nginx, plus delivered low latency and high uptime to improve user experience and integrated seamlessly with AWS auto scaling to spin down half of their instances during off peak traffic demand.
Trend number four customers are scaling their existing hardware based infrastructures to handle accelerating application growth driving continued strength for big IP systems. We are finding that customers are often looking to scale both their existing infrastructure and they are modern apps infrastructure simultaneously.
This is particularly true amongst tech and SaaS provider customers, who continued to experience rapid adoption and growth of their digital products and services in the latest of a growing list of examples during Q4, a high growth SaaS provider selected our five to help them scale, both the traditional apps on big IP.
And they are modern public cloud apps with nginx.
Deal was made sweeter by the fact that nginx displace the competitor that wasn't performing as promised.
Finally trend number five 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.
Customers also are choosing big IP to drive transformation, often combining it with nginx is particularly well suited for enterprises that operate both modern and traditional applications, which most do nginx integrations with big IP provide differentiation over competitor and cloud native offerings and we will extend this.
With integrations into volt Farah of the edge during.
During Q4, the big IP and Nginx combination was selected by one of the largest online betting companies in Asia Pacific the.
The customer who processes more than $1 billion annual transaction needed hybrid on premises data security as well as the ability to support modern app development and new engaging multimedia capabilities. They selected big IP and nginx as the foundation for their digital transformation.
Let me touch briefly on service providers and Alterra integration progress before concluding our prepared remarks, we had a good year with service providers in FY 'twenty, one while it's true that several of the trends I have just described also apply to our service provider customers. They also faced unique challenges as a result of fortunate to fiber migration.
And growing <unk> traffic demands, thus far our service provider demand has come largely from <unk> core network upgrades as they expand hardware capacity and upgrade existing infrastructure to handle <unk> traffic. We expect software use cases will begin to emerge as carriers Virtualized <unk>.
Looking forward our volt Tera platform is generating significant interest from service provider.
They view it as a way to insert their capabilities at the edge, thus, creating <unk> in a box offerings.
That offers a good transition to discussing progress on the integration of Altera Altera.
Alterra is a universal edge platform, which will enable us to insert critical application services at the edge and allow our customers to consume the services and the SaaS format. Our initial priorities on security offerings. We have one of the best if not the best application security software stacks in the industry, including a wet.
<unk> application firewall and Ddos protection API security and boss capabilities, we are taking that entire security stack and integrating it natively into the volcker our platform. Our first priority is a fast security offering that will address the shift towards modern web apps and API and we are on.
Track to deliver within our committed 12 to 18 months integration window. Our recent acquisition of threat stack a leader in cloud security and workload protection is designed to accelerate our SaaS security offerings with cloud endpoint, Telemetric and analytics for better detection and response.
Threat stock also augments, our telemetric and virtual security and technology expertise and I want to take this opportunity to once again welcome the entire threat vaccine to a five.
In closing, we are more confident than ever in our vision and in our ability to continue to execute the combination of application growth. Our expanded solutions platform are continuously evolving go to market strategy and our vision for the future of adaptive application is resonating with customers and puts us at the epic.
Center of several emerging strong secular trends I extend my heartfelt thanks to the entire EFI team for their steadfast focus and execution.
As a team we have accomplished more faster than anyone even us thought we could we've got more work ahead, but I am more confident than ever in our ability to achieve our goals my thanks to our customers and partners for being on our journey with us in providing guidance and support along the way.
With that operator, we will open the call to Q&A.
As a reminder to ask a question you will need to press star one on your telephone.
Gary a question best.
Your first question comes from Sami Badri with Credit Suisse. Your line is open.
Thank you for giving me a question and you've given us quite a bit to talk about on this conference call.
Want to shoot the first question over to Frank and I want to talk about the backlog and the backlog composition and you mentioned the majority of systems are systems based backlog, but I wanted to break down the customer mix of that backlog. If you could just tell us a little bit more about what's going on there.
Jamie I don't have a lot more to add I will say that.
<unk>.
At the end of.
The year effectively we just saw a continued increase in the backlog build more so than we could ship.
At the end of Q4.
Service provider customers fall into.
Of that realm.
Having said that it's.
That was the 125 that we referenced in almost all of it is it systems.
Got it got it and then Francois just kind of shifting over to you I want to talk about the U S. Federal segment, and how that made up about 8% of total revenue mix.
Are you expecting elevated levels of U S federal activity and the upcoming quarters, which would actually be almost.
Of the seasonal pattern of your model.
No. The short answer is no I think we're what we're seeing in the federal business just follows the regular seasonality that we've seen over the years and we don't expect a fundamental change to that pattern.
Got it thank you I'll hand, it over to another analyst.
Thank you Sammy.
Your next question comes from meta Marshall with Morgan Stanley.
Great. Thanks.
Couple of questions for me first.
Just.
You obviously gave us.
Couple of instances of shape security win having success when they were facing that threat or there was an entry point, where they really needed it but in the past there have been some delays on proof of concept activity and just wanted to get a sense of are you seeing a pick up there.
And then on the second point just on the about the kind of gross margin impact youre seeing from cost is that mostly expediting is there any ability to pass that on and just how we should think of.
The supply chain overhang for gross margin.
Thanks for the question, let me start on shape.
Yes, a couple of quarters ago. We did mentioned we were seeing the elongated times to close on these proof of concepts largely because customers were not.
In the office and getting those done.
We're taking a little longer.
We have seen that abate over the last.
Two months.
And so we're seeing a pickup in traction and momentum there.
And specifically I think in the E Commerce area. So we've got a number of key.
Customers, whose applications are revenue generating.
And they are constantly under these either account takeover attacks a border tax.
Causing disruption to their business.
And so they want to move pretty quickly.
On getting things are getting things done either as an insurance against future attacks or oftentimes when they're under our types of course things go very very quickly.
Because their business is disrupted so generally we are happy with the quarter, we just had with with the shape and in general I would say.
The other thing we're seeing with customers is.
But the.
The number of customers have been reevaluating their security posture as a result of some of the high profile breaches that.
Have been well publicized.
And that has resulted overall.
Strong.
For the fiscal year for us in security.
But especially in the second half where customers.
Reinvigorated the motion of attaching security to big IP and.
And we've also seen the momentum with with shape and security. So that's overall.
The picture, we're seeing in security as it relates to your second question on gross margins.
Yes, our gross margins have been impacted by the challenges on the supply chain.
Whether it is some increase in prices on some components or.
Yeah.
Some expedite fees to get our supply.
When we need it so the supply chain generally has been.
Quite a challenging environment.
And generally we have we have managed that pretty well with our team.
But it continues to be a challenging environment and so we're going to continue to monitor.
The developments there and.
And we will adjust over time, but we need to.
Great. Thank you.
Your next question comes from James Fish with Piper Sandler.
Hey, guys, you guys, Frank a little bit of a raise their effort running through all of those details.
But can you help us better understand the amount of recurring software that is term license versus SaaS. At this point is it would suggest fastest it's actually north of 10% of the overall product line today and within that term license piece, while clearly both go together and organic I guess, how specifically should we think about the growth rate of nginx as we exited this year.
Yes.
Thanks, so much for the comments and the questions.
We have not split out those two components, but what we what we like to see which we have continued to see is what it means to have that subscription piece.
That makes the number that we have to get for the coming year much less as a percent of the software revenue given those dynamics of the subscription base.
Split between what.
What I would say is the term subscription versus the SaaS subscription we have not split out that yet, but stay tuned where we're continuing to monitor and we'll let you know when that gets substantial.
And I'm, sorry, but I missed your second question.
Just how should we think about the growth nginx.
Today.
Yes, so nginx continues to grow incredibly well within within the base again this quarter, we saw from our multi year subscriptions nginx was in more than 50% of those.
<unk> is driving great use cases on both sides.
And on a customer basis, we continue to see strong growth on the overall customer base within nginx obtain nginx customers, So really really happy with the progress we've seen in <unk>.
Alright, and just quick homework piece for me.
Threat stack. So we think about that as a term license business or a SaaS business.
That's a SaaS business, but that's ratable.
Thank you guys.
Thank you Jim.
Your next question comes from Rod Hall with Goldman Sachs.
Great. Thanks for the question guys I wanted to just check on the guidance and see whether you guys could give us any idea what youre thinking on systems and software trajectory into.
In Q1, and then I've got a follow up to that thanks.
Hey, Rod.
As you know we don't we don't guide on a quarterly basis to a breakdown of hardware to software.
But I mean, the indicators that I would give you I mean, you saw the annual guidance for revenue of around 8% 9%.
For software.
We're guiding to 35% to 40% for the full year and hardware slight two two <unk>.
Lee up.
On software in particular, I mean, Frank mentioned, it, but I want to I want to stress that.
We guided to 35% to 40% last year for the full year, we finished the year at 37%.
But inside of the year, there were strong variability, especially in the in the first half and what we we still we still expect to land between 35 to 40, we do expect we will see less variability this year than we saw last year.
Because we have better visibility into a portion of our revenues that are coming from.
Business that is already contracted.
Also in part because of the scale of the business. So expect us to land on the Rins for the full fiscal year, we've always said that quarter to quarter, there could be some variability.
Above or below that range, but we expect that that variability will be less pronounced.
Okay. Thanks, and then I guess big picture I wanted to check the just your thinking on systems in 'twenty two.
When I look at 18, 19, and 20, all three years and systems are down 20 was down 10%.
And then you grew systems, 12% in 'twenty one.
And I recognize youre, saying flat to slightly down, but sort of I'm thinking flattish in 'twenty, two but what what gives you confidence that 'twenty one wasn't.
We've seen that across a lot of different infrastructure companies that we cover where they they've seen a lot of demand in 'twenty one.
People are extrapolating that into 'twenty, two but you.
Why is 'twenty, one not a more of an anomaly than it is.
A new normal for you I guess.
<unk>.
Yes.
From our perspective.
When we look at our revenue grew 12% in in 'twenty one.
And our demand was even stronger than that because we ended up with.
Claude.
Backlog at the end of the year.
So when we look at.
That demand in 2021.
Some of it actually we think is.
Wouldn't call it an anomaly, but we think some of it are transient factors.
We will go we think there was some element of catch up demand because demand was quite depressed.
12 months ago.
And they also may have been a couple of specific factors earlier in the year, when we announce our and of software development that from some customers.
Jumped on that refresh quickly.
So we think some of these are one off factors, but we also think that there are macro factors that are not transient.
And that will proceed and that specifically.
The traffic and usage of traditional application.
<unk> is growing and is going to continue to grow because these applications are generating more revenue more customer loyalty and more large companies depend on these applications.
So.
When you look at 2021, there is some element that's one off elements that or not.
When we look at that and project to the future.
All of that tells us that the demand for big IP.
As the franchise for both hardware and software if you take that combination.
We feel today that the demand for big IP in the future even beyond 2022 will be better.
Then what we would have said a year ago now what will be the mix between big IP hardware and software.
In the future is still.
No cough to predict because a lot of it depends on individual customer situations and when they are ready to migrate to software.
When they're not.
But if you take the combination of those two things, we certainly feel better about it today than we did 12 months ago and Thats because of factors, but are not an anomaly. Those are factors that are kind of secular forces that will continue on.
Great. Okay Francois I appreciate it thanks for the time.
Thank you Rob.
Your next question comes from Tim long with Barclays.
Thank you.
Two questions, if I could as well first.
Maybe you guys mentioned the true forwards could you just give us an update on kind of what you guys are seeing on on some of those larger term deals as it is.
As it goes to usage traffic growth.
Things like that I think they were running ahead. So any any color you can give us on true forage in and what that means for your visibility into next year.
And then second.
For the update on an overall security at the Analyst Day, you also gave us.
Looking to the cloud vertical so I'm just wondering if you could kind of update us on.
How that cloud vertical performed in fiscal 'twenty one.
And what you are expecting moving forward there. Thank you.
Yeah, absolutely Tim.
So on the.
On the <unk>, but we weren't specific I will say, though that the data that we saw this quarter.
It was actually better than what we saw in Q3.
I have a preference stopped by a small group of customers that have hit their second term and they're in their multi year subscription agreements with us.
But we saw a fairly healthy step up between that initial term in this in the second term and so that's all very quite positive.
And then in terms of the true Ford expansions within.
The terms for those customers, that's a growing customer base.
That was a bit higher than where we were last quarter I can't say that that's going to absolutely continue but we're very very optimistic by the progress that we've seen.
And the data that we've gotten so far to date.
So Tim on your on your second question.
Just to clarify when you said the cloud vertical so when we talked about our cloud revenue.
At.
Analyst day, we're talking about FY solutions being deployed in public cloud environment very specifically so in that in that number which at the time, we said was greater than $100 million. We do not include a lot of the business, we do with hyperscale or such providers cloud providers, where we are in their infrastructure and helping them deliver applications.
So that so but with that clarified.
Clarified.
Our cloud number continued to grow.
As you know, it's 100% software of course.
And it has grown faster than our overall software growth rate.
Continued this year and where we are seeing a lot of traction in the last 12 months is in what we call private offers on marketplaces and so essentially.
That that is consumed as a utility.
By large enterprises and it is increasingly the case that large enterprises have spend commitments with the major public cloud providers.
And we've done all the integration with technical and commercial that allow these enterprises to retire their spend commitment on at five.
And we've seen an acceleration of that trend.
It's yet another way that we are removing friction in the consumption of <unk> software.
In public cloud and we're getting the benefit of that.
In terms of growth.
The other.
Big area of growth in public cloud is nginx.
A number of the nginx deployments continue to happen.
In public cloud and cloud native environments.
And we are seeing.
In Nginx I think as I've shared before when you step back and you look at the success of the Big IP franchise over the last 20 years.
One of the things that we did well with that big IP consolidated a lot of functionality initially load balancing but then security authentication encryption.
On a single platform and that made things operationally much simpler for our customers and that that created the big IP franchise, and we're essentially seeing the emergence of the same playbook.
With nginx.
Both on Prem and in public cloud environments.
The four modern application.
The type of application security and delivery that we do in modern apps is it's not necessarily exactly the same there are things like ingress controllers people feel that they have to secure.
Danticat their API, so we offer API gateways, they need to encrypt their traffic inside the servicemaster, we offer that as well.
Of course, we offer security and protection, but when you take that suite of application security and delivery services. We are seeing that playbook Guo for nginx and that's also one of the factors of growth in public cloud.
For advice.
Okay. Thank you that's great.
Your next question comes from China.
<unk> with J P. Morgan.
Hey, Phil Thanks for taking my question I'm sorry.
I just wanted to ask you wouldn't be curious.
<unk> targets that you have a green in 25 years.
100, Egypt dynamic.
<unk> hundred 90, <unk> target for next year, that's about horizon two.
How are you thinking about kind of progress from Q does the tax rate.
Towards the green for any type of targets of double digit growth do you see this kind of setting up a base, where you get to those targets faster than you expected. The reason I'm asking is I guess with all the enterprise companies talking about strong demand, we often get the question from investors.
How much of this strength is really secular versus maybe even some parts cyclical and driven by investment cycle from the enterprise customers. So just trying to get kind.
Kind of how you're thinking about how this sets up for the out years and I have a follow up thank you.
Yes.
Thanks Mick.
<unk>.
Of course, there is quite a bit of time.
Between now and 2025.
But I think the way we look at it I think.
When you look back at where we were 12 months ago at Analyst day, and we've talked about our long term target of getting to double digit revenue growth.
We didn't put a year on it but we felt that we wanted to get to that long term target.
When I look at market, where we're at today.
But I would say that.
The things that we thought will help us out around growth in SaaS and security growth with nginx.
And a new value proposition.
That's going roughly per.
Plan, a part of the view that we had at the time.
What is going better.
Overall, the demand for big IP.
And I think in that going better there is an element of it that is.
That is more of a secular trend that will go on for several years.
And so that's kind of the mix now if you step back from it.
What we are seeing is three or four years ago.
There was a view of the world, Let's say all apps are going to go to a public cloud and that's kind of the future of the world.
Im sure Youre seeing from a number of industry data points, including cloud providers actually saying that themselves that the reality for large enterprises is.
For the last many decades, they have always been told that they just have to get to the next thing and everything is going to go to the next thing and the practical reality of that is it hasnt happened.
And there is a realization now that it's not about the next thing it's about managing a heterogeneous environment.
And being able to run applications in on Prem environment in public cloud increasingly at the edge in co location environment and enterprises are very comfortable that that's going to be the reality and the conversation.
<unk> shifted now.
Two how do I get to a single public cloud in the future, but more of an architectural conversation around okay I'm going to be in all these places what is the simplest way because that creates complexity for me what is the simplest way in which I can manage and run my applications across these hybrid.
Environment and those conversations like F. Five spent five years positioning ourselves for this environment and we're having a lot of joy, because we're able to support customers on prem in public clouds in private clouds in modern application increasingly at the edge and we feel that that's that's going to be.
A secular trend that's going to last for several years.
That's what we're positioning for Cemig and Thats, what why generally we feel good about.
The next few years.
First of all just a follow up there in terms of positioning the company you've talked about application security being one of the strongest growth areas that youre looking at.
I mean should we assume that most of the M&A that evaluate going forward is going to be focused on that segment. Thank you.
Well.
First of all we have.
As I think I've said before that.
Sure.
We did.
Acquisitions in quick succession.
Pretty substantial acquisition.
Shape nginx in both thereof.
No.
When we acquired Alterra, we felt that we needed to really focus on the completing integrations.
Shape, and nginx and Volterra in that period, and we're well on our way of doing that and I think that's going to we continue to be focused on that.
On those organic integration and extension and now threats back brings a very interesting new capability to our five and giving us visibility into these cloud environments and being able to observe the environments in which cloud workloads are running.
Which complements very nicely the rest of our security portfolio, which as you can see is 100% focused on application security.
And essentially building the broadest.
Portfolio in application security stack, so that's been the focus.
In terms of potential future M&A.
Over time, we'll continue to evaluate.
Building versus buying.
You've heard me say before with very disciplined about about that.
We start always with our preference is to build.
But it for time to market reasons, or there's an opportunity to do something that accelerates. Our vision. Then we look at that the focus of that will continue to be on fulfilling this vision for adaptive applications.
Which is essentially about the world of.
Running applications for large enterprises.
Still very manual.
Fraught with complexity and fraught with fidelity and we have a an architectural vision that we think is going to bring way more automation to this world.
Uh huh.
Way better uptime for applications.
<unk> strongest security.
Way better intelligence and insights about the performance of applications and that's what we will focus on bringing that vision to our customers, bringing it to reality and every single quarter.
Organically or Inorganically down the road, we are making that vision more and more of a reality.
I think elevating at five.
To more of a.
Our strategic.
Our partner.
Our customers' digital transformation.
Rather than appoint solution player.
Okay got it got it thank you.
Your next question comes from Alex Henderson with Needham.
Thank you very much.
I was hoping you could talk a little bit about.
Now that the fiscal years ended.
The transition between last year and this year in terms of market share for Ingenix looked like it looks to me like you've picked up substantial share over the course of the year can you talk about that a little bit.
My guess is youre up around 65% to 67% market share or is that is that accurate within kubernetes workloads.
Hi, Alex its Kara.
So we have we're very happy with what we're seeing in terms of the adoption of nginx now.
Mentioned, the nginx plays a variety of roles and.
And in an application for example, one thing that is commonly reported is the use of nginx as a web server.
And it is true that we have overtaken Apache nginx as is the number one leading web server.
There's other uses like reverse proxy nginx used as as an API gateway and API management capability Nginx Skus now increasingly as a workload protection came.
Capability and in those areas.
Yes.
Less reporting on shares.
And so at least the one the one that has.
Mary regularly been reported and we see consistent gains as the web server piece and we're very happy with the outcome there.
Okay, and could you talk a little bit about.
The degree to which you're able to identify the number of coders that are working with your <unk>.
Technology and to what extent.
There is a growth rate or a.
Rate of adoption among the coding community can you talk about your outreach there.
And to what extent.
Yes.
One of the key building blocks as we go forward.
Yes, so we've always had a very active community of engaged.
Individuals around five technologies, even if you go and you look at our capability in Big IP.
Given it was one of the most programmable.
<unk> solutions available in the market, we had a very active community of contributors who were sharing I rules based solutions.
And are actively contributing and continue to actively contribute to our developer community now that that community has grown even further as we extended our portfolio with nginx.
As you know just given nginx has an open it's an open core model and the Nginx open source attracts a wide variety of application developers that use that as a fundamental technology for their solution.
It's an additional expansion of the developer community around that and as we look ahead.
As we are expanding our portfolio and looking into building, what Francois I talked about with the Volterra offering.
We expect that to continue to be a very important part of our technology and our strategic direction is appealing to developers and providing them the tools they need to deliver excellent digital experiences.
So no quantification, though.
No quantification at this time.
Okay, and if I could slide one last one in.
Can you talk a little bit about competition between cloud player Akamai and the other players.
In that space.
Yes, it's not like so we are.
Well.
Art.
I would say we don't.
Compete very directly with.
With cloud player.
It's not.
Not the.
A significant overlap today.
I think that will grow more as we introduce.
Our Volta platform too wide distribution post the integration.
Because we will please weigh more.
<unk>.
With the SaaS security offerings for wide range of customers.
We do see Akamai, specifically would shape security.
<unk>.
Protecting customers against Bot attacks.
And.
Their approach is the bundled security with their CDN, especially for customers that are using their CDN.
We have.
So that's more about best in class efficacy for <unk>.
Enterprise customers that.
Ah.
A significant premium on.
Having world class efficacy.
Against Bot attacks, and we do very well with that.
Our customer segment, so we're starting to see more and more competition with these players.
Thank you.
As a disruptor with our universal edge platform.
That competition is going to grow, but we feel very good about the attributes of volte.
Voltaire right and when you combine these all these attributes that Voltaire upbringing has an edge universal platform and you put there.
Our best in class security stack that provides from shape from big IP.
I think you'll have a formidable offering for customers that want to consume security as a service at the edge I think thats going to be a best in class offerings.
Great. Thanks.
Thank you Alex.
Your next question comes from Paul Silverstein with Cowen.
Thank you for squeezing me in I'm going to assume in hope on my wife's one so I could ask my follow up questions.
But on a serious note first one Frank I'll apologize if you already answered these questions.
You all talked faster than I can listen that.
Big one off first off.
With respect to the operating margin rebound you all referenced in the past can you give us any insight on the glide path considering the significant supply chain challenges.
This along with everybody else in the industry and before he responds since it's on the same topic.
If I heard you correctly, but it's 9% of your revenue guidance you provided for fiscal 'twenty two.
What are the supply chain assumptions with respect to that growth rate, what assumptions, you're making underlying that and finally also related can you address.
Assume your visibility into that.
It's 9% visible in general has improved as an increasing number of customers have provided you with longer term forecasts.
I would also like to confirm that that is in fact, the case the display has been continuing to improve.
In fact customers are for volumes longer term forecast. Thanks, so much.
Yes, Paul So let me let me start with your second question I guess first so in terms of what we what we think about for our outlook on the 8% to 9% of the supply chain.
<unk> said in the prepared remarks.
It does not anticipate a materially better outlook in terms of our supply chain.
It will get components able for everything else and so we are assuming that.
We are looking at that 8%, 9% on.
What we believe we can ship and what we believe the demand will be for those products.
In terms of the specific operating margin expansion as you recall, we had a 32% to 34% range that we tightened up to 32% to 33% largely driven by the gross margin hits that we had been seeing and what we expect to see because of some of those supply chain constraints through FY 'twenty two.
And so we are increasing obviously the efficiencies that we're seeing in the business by lifting that up from where we ended at that.
31, 6% so at the midpoint, almost 100 basis points increase, but we're doing that on the backs of having higher cost on the gross margin side, so actually even some more efficiencies coming through the operating margin line.
On the visibility question, Frank just to be clear.
Apply chain improves does that translate to boom in 8% to 9%.
It could but I don't anticipate that from what we see right now Paul.
Again, we're early in Q1, so anything is possible but.
What we've seen obviously all of the things that we've been reading from the other.
Vendors collectively I don't think people are seeing a material.
Turning to see some improvement in the back half of FY 'twenty two calendar.
Which is our Q4, obviously, so it doesn't leave us a ton of room to catch up.
Understood and it Hasnt has visibility improved because of long term forecasting from customers.
The visibility.
The visibility on demand I think has improved I think the visibility on supply is not and so matching those two up with long lead times, it's hard to say that.
At shop within a reasonable period of time.
I appreciate the responses. Thanks, so much.
Due to time constraints, we'll be taking our last question from Farhad Chan with MCM partners.
Thank you for squeezing me in.
Just wanted a clarification your fiscal two fifth.
Fiscal 'twenty two.
Revenue guidance assumes $50 million of revenue contribution from <unk>.
And am I correct that that is almost all entirely software recurring in nature.
Yes, 15, just to be clear.
Okay.
So the question is if we exclude the <unk> acquisition.
Then you would hypothetically not.
Roughly 50% of your revenue coming from software.
Given the strength that youre seeing in systems. So one.
Do you kind.
Kind of like Undershooting your targets that you laid out at the analyst day is there like something that you see there is a slowdown in terms of organic software growth.
Just trying to understand how.
I think at the Analyst day, you had highlighted that you would expect to achieve roughly 50% of.
A few revenue greater than 50% of your revenue coming from software. So if fiscal 'twenty. One is kind of 47% if my math is right.
And you would expect significant acceleration in software in fiscal 'twenty. Two so just trying to understand what would change in software adoption going forward.
That hasn't yet happened in fiscal 'twenty one.
Yeah.
Okay to be clear.
We are in fact, hitting our targets that we laid out our aim. So we said 35% to 40% we did 37% this year and we guided to 35% to 40 next year.
Whether or not we exit next year at a mix between hardware and software that is 50% or more of software.
I think we will get there eventually because the trajectory on software is one of growth and we've said over time, we don't think hardware will be.
A an engine of growth.
But frankly, if we don't hit that target largely because our hardware has totally over performed we will be very happy with that.
And not just happy because of whats going on in the short term, but we're happy because what it what it translates to is that the.
Big IP franchise overall is doing better than we thought and B. All of these customers that are extending that time purchasing hardware and not making the transition to software. It creates a bigger installed base for us to migrate to software it down the road. So it actually is very good news over time, even for our software business.
Because we have a much bigger real estate.
No.
The what we're focused on of course is.
If you look at it in absolute dollars.
We will absolutely hit the target that we gave for software.
Revenue fell by five and in our horizon two in both absolute dollars translates to 50% mix. That's fine if they don't because because hardware has over performed.
We will be happy with that and it just is there.
Stating, what we said before we said our exit rate in 15.
That would be the equivalent of the 45% of what we just did in Q4 and so the trajectory is absolutely heading in that direction.
And stay tuned it's Q1.
Yes actually just.
Kind of a follow up on that so to your longer term targets.
Circa 25.
It seems like your business is actually projecting faster towards software given the strength in hardware.
I think I'm, just trying to make sure that I'm understanding it correctly, but maybe there is some fundamental improvement beyond.
Further what was laid out at the analyst day. It seems like the longer term targets are probably going to be.
<unk> better than what was paid out but again as you mentioned this early days, but just trying to understand the framework.
I just would point to the obvious but if we just did over 10% total growth in the first year of a horizon two and so your basis becomes that much bigger on which to build going forward and so we're we're incredibly excited about the trajectory of the business that we've been seeing we talked specifically about FY 'twenty two.
Guidance.
More to come on the long term target updates but.
Our focus is.
Ending horizon two.
At or above any of the expectations that we set.
Our analyst and Investor day, as well as what we updated.
After the boat's acquisition.
I appreciate the answer thank you.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yes.
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