Q4 2023 F5 Inc Earnings Call

Good afternoon, and welcome to the F. Five Inc. Fourth quarter fiscal 2023 financial results conference call.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Also today's conference is being recorded if anyone has any objections. Please disconnect at this time I'll now turn the call over to MS. Suzanne Dulong, Ma'am you may begin.

Hello, and welcome I'm, Suzanne Dulong, Vice President of Investor Relations Francois logo to new <unk>, President and CEO and Frank Pelzer <unk>.

As executive Vice President and CFO will be making prepared remarks on today's call.

Other members of the F. Five executive team are also on hand to answer questions during the Q&A session.

A copy of today's press release is available on our website at <unk> Dot Com, where an archived version of today's audio will be available through January 28 2024.

Slide deck accompanying today's discussion is viewable on the webcast and will be posted to our IR site at the conclusion of our call.

To access the replay of today's webcast by phone dial 8776606853, or 20161 to 7415 and use meeting I D 137, and 4176 to the.

The telephonic replay will be available through midnight Pacific time October 21st 2023.

For additional information or follow up questions. Please reach out to me directly and I stopped due long at a five dot com.

Our discussion today will contain forward looking statements, which includes 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. We've summarize factors that may affect our results in the press release announcing our financial results.

And in detail in our SEC filings.

In addition, we will reference non-GAAP metrics during todays discussion. Please see our full GAAP to non-GAAP reconciliation in today's press release and in the appendix of our earnings slide deck.

Note that <unk> has no duty to update any information presented in this call with that I will turn the call over to fossil.

Thank you Suzanne and Hello, everyone. Thank you for joining us in my remarks today, I will speak to our Q4 and FY2023 highlights as well as our expectations for FY 'twenty for Frank will then review the details of our Q4 and FY2023 results and provide some additional color about our outlook.

We delivered a solid Q4 in an environment that showed some additional signs of stabilization, we saw strength from our enterprise vertical, including technology and financial services customers offset by softness from service providers.

The result was Q4 revenue near the high end of our guidance range.

Continued operating discipline helped us deliver earnings per share well above the high end of our range. Our global services team delivered a robust 9% revenue growth driven by strong maintenance renewals and reflecting the benefit of price increases announced last year.

In addition software revenue grew 11% aided by 27% growth in subscription software software revenue from a new rules, which have performed well all year ticked up in Q4 over Q3, and while new subscriptions remained down year over year, we saw some improvement compared to the first half.

Strength in global services, and software offset a systems decline of 25%, which reflects a lower level of backlog related shipments than we had for the first three quarters of the year.

Stepping back and looking at fiscal year 2020, Threep, we adjusted to the environmental challenges, we faced resolving supply chain pressures and largely returning to normalized deliberate times.

We took decisive actions to adjust our operating model to the realities of the demand environment driving meaningful improvement to our operating margins and delivering 15% EPS growth.

We also returned 58% of our annual free cash flow to shareholders via share repurchases.

Highlights from FY2023 include.

First subscription renewals performed largely to plan for the year.

In today's tough I to spend environment. This is a strong signal that customers are getting the value and return they expect from our software solutions.

Second <unk> distributed cloud services SaaS offerings are gaining traction with both new and existing customers in.

In fact, 29% of distributed cloud SaaS customers are new to our five in total we now have more than 500 customers for our SaaS services on distributed cloud an increase of more than 200% since Q4 of last year.

Third we are having very good success displacing a traditional ADC competitor in both software and hardware form factors.

And finally, we delivered meaningful operating improvements driving our non-GAAP operating margin up 130 basis points from FY 'twenty two.

As we look ahead, we enter FY 'twenty four in an environment that seems to be stabilizing in.

In fact from a demand perspective, we saw encouraging early signs with enterprise customers in Q4, though it is too soon to say if what we are seeing is a durable trend.

As we contemplate our outlook for FY 'twenty four we consider a number of factors.

At the macro level, we expect continued application and API growth fueled by automation efforts and your use cases, including January they I.

We also expect customer spending caution persist into FY 'twenty four but he is stable.

And finally, we believe the tension between application and API growth and customers' ability to sweat assets will reach a tipping point, causing them to reinvest in their application infrastructure likely beginning sometime in FY 'twenty four.

At the F. Five level. We also consider first we have an approximately $180 million revenue headwind from FY2023s backlog fulfillment primarily in systems.

Second we expect flat to modest total software revenue growth in FY 'twenty four as a result of a number of dynamics, including continued subscription renewal strength and studied distributed cloud SaaS revenue growth.

These positive trends will be offset by a series of transactions, we are executing in our SaaS and managed services offerings.

And third we expect our global services revenue will return to low single digit growth as we lap price increases.

As a result of these factors, we expect our FY 'twenty full revenue will be flat to down low single digits from FY2023.

Joseph of the 6% headwind related to FY2023 backlog shipments.

We also expect to return to mid single digit revenue growth in FY 'twenty five.

We achieved the low or high end of our revenue range. We are committed to driving continued strong profitability and we will continue to manage our operating model with discipline, we expect to deliver FY 'twenty four non-GAAP operating margin in a range of 33% to 34%.

We are also targeting FY 'twenty, four non-GAAP EPS growth of 5% to 7% reflecting growth of at least 10% on a tax neutral basis compared to FY2023.

Our growth opportunity is fundamentally linked to the continued growth of applications and API and the need to secure the liver and optimize those apps and a P ice.

As far as the only company that can deliver secure and optimize any app any P I anywhere.

Security and delivery solutions offer a custom fit for each app N. A P. I modern apps and a P is required different solutions than legacy apps, we have the right solutions for both.

In addition to delivering the right tools for the right operate P. I R combination of deployable software and hardware and software and managed service offerings means we are the only vendor that can serve every up and API across all environments in a datacenter public cloud and at the edge. We are the only company who can do this today.

And going forward further integration and convergence of our solutions will make it much easier for our customers to secure and deliver their apps across all infrastructure environments.

The power of our converged portfolio is resonating with customers, who are able to deploy the solutions. They need today with the knowledge that F. Five will be with them on every step of their multi cloud journey.

Before I pass the call to Frank I will speak to some customer highlights from each of our product families.

Most of my Big IP family serves traditional applications either on premises co located or in cloud environments Big Ip's data plane performance automation capabilities and seamless integration into public cloud environments continues to differentiate the platform.

And we continue to win against competitors from a hardware perspective, the value proposition with our next generation platforms is resonating with customers without R series, and bellows platforms, representing more than 80% of Q4 systems bookings.

In one example of a big IP win from Q4, we displaced a competitor at a north American health care customer.

The opportunity arose as a result of the incumbent providers inability to handle a mission critical upgrade to the customers' physician portal the customer selected five big IP based on its advanced application delivery capabilities secure access management.

<unk> shipped with their health care records platform and confidence in our roadmap.

In addition to providing the mission critical functionality the customer needed urgently. We were placed all of the competitors use cases with the customer simplifying their application environment and future proofing their data centers.

That's probably the nginx delivered a very strong Q4 nginx serves modern container native and micro services based applications and API. We continue to see large enterprises adopt nginx for their cloud and kubernetes workloads and as those applications scale, we are seeing our nginx opportunity.

Gail as well in.

In addition customers are also leveraging nginx for up layer security for containers.

As an example in Q4 when the E Commerce Division of a global technology customer needed to comply with new data security standards. They selected nginx I protect to implement Apple layer of security to the containers processing consumers' credit card data.

We have invested both organically and inorganically to build RFID distributed cloud services.

Portfolio of SaaS and managed services.

Apart from the offering transitions I mentioned, we are really excited about the future for distributed cloud. We are intercepting two exciting emerging growth categories whereabouts, and API protection or Wap and secure multi cloud networking or secure M. C. N that will drive future growth for distributed cloud services.

In one Wap win for the quarter, we are helping an EMEA based banking customer evolved from its traditional WAF security posture to a more comprehensive Wap solution that encompasses web application firewall as well as API protection bought defense and layer seven Ddos.

Protection.

This customer approached us when they came under attack by a malicious for an actor that their existing wife could not handle.

It gets multiple competitors, we successfully demonstrated the superiority of our wap offering, including our ability to protect major payment companies a P is.

Early traction for our secure multi cloud networking offerings includes a Q4 win with a large retailer in Latin America that also offers a range of financial services to its customers.

As part of its digital transformation efforts the customer needed a solution to enable them to grow and manage their expanding body of cloud native applications.

They also plan to migrate their large existing footprint of virtual machines and on premises appliances to the cloud after a thorough proof of concept the customer selected our secure multi cloud networking solution because of our ability to use the customer edge to make the move 100% transparent to both internal users.

And consumers.

We are also seeing cross portfolio traction with customers, who are operating in hybrid environments choosing to deploy <unk> across multiple form factors.

A win that highlights the synergies of our product families. During Q4, we secured a win with an APAC based financial services provider the customer launched a multifaceted Modernisation project designed to add and consolidate applications and enable scalability to handle exponential traffic growth.

They also needed help stopping a barrage of constant automated attacks.

In a competitive bid.

Our combination of big IP and F. Five distributed cloud Bot defense one out.

The combination enables the customer to manage unpredictable traffic growth customized services for each application and enhance their security posture with our email based AI engine.

These real life use cases offer a view so how we are enabling customers to secure deliver optimize and manage their applications in a P is and how we simplify the challenges of operating in a complex hybrid multi cloud world.

Now I will turn the call to Frank Frank.

Thank you Francois and good afternoon, everyone I will review, our Q4 and FY2023 results before I elaborate on the outlook Francois shared.

We delivered Q4 revenue of $707 million, reflecting 1% growth year over year with a mix of 54% global services and 46% product revenue.

Global services revenue of $382 million grew a strong 9% due to continued high maintenance renewals as well as the price increases we introduced last year.

Product revenue totaled $325 million down 7% year on year.

Systems revenue of $134 million declined 25% year over year, reflecting a lower level of backlog related shipments than we had in prior quarters and demand that showed some signs of stabilization, albeit at lower levels than we have seen historically.

In contrast software revenue grew 11% over the year ago period to a new high of $191 million subscription.

Subscription based revenue grew 27% year over year to 166 million another record high representing 87% of Q4s total software revenue.

Perpetual software license sales of $25 million represented 13% of Q4 software revenue revenue from recurring sources contributed 76% of Q4's revenue. Another all time high recurring revenue includes subscription based revenue as well as the maintenance portion of our services revenue.

On a regional basis revenue from the Americas was down 6% year over year, representing 57% of total revenue EMEA.

EMEA grew 16% representing 26% of revenue in APAC grew 4% representing 17% of revenue.

Looking at our major verticals during Q4 enterprise customers represented 72% of product bookings service providers represented 9% and government customers represented 19%, including 7% from U S. Federal.

Our Q4 operating results were strong, reflecting operating discipline and a full quarter benefit from the cost reductions announced in April.

GAAP gross margin was 81% non-GAAP gross margin was 82, 7% an improvement of 125 basis points from Q4 of FY 'twenty to gap.

GAAP operating expenses were 394 million noncash operating expenses were $345 million.

Q4, non-GAAP operating expenses as a percent of revenue was below 49% resuming pre 2019 acquisition levels. Our GAAP operating margin was 24, 3%. Our non-GAAP operating margin was 33, 9% representing an improvement of more than 600 basis points from Q4 of F.

22, our GAAP effective tax rate for the quarter was 13% our non-GAAP effective tax rate was 14% below our initial expectations for the year as a result of IRS guidance issued during the quarter relating to foreign tax credits, our GAAP net income for the quarter was $152 million or $2.

<unk> 55 per share our non-GAAP net income was $209 million or $3.50 per share well above the top end of our guidance range of $3 15 to $3 27 per share.

This reflects the combined impact of our gross margin improvements and operating expense discipline as well as the Q4 tax benefit.

I will now turn to cash flow and the balance sheet, which also remained very strong.

We generated $190 million in cash flow from operations in Q4, driven by our improved profitability.

Capital expenditures for the quarter were $15 million DSO.

DSO for the quarter was 58 days cash and investments totaled approximately 808 million at quarter end.

<unk> revenue increased 5% year over year to 1.78 billion.

We repurchased $60 million worth of shares in Q4 for the year, we used 58% of our approximately $600 million of free cash flow for share repurchases I note that in each of the past three years, we have met or exceeded our share repurchase commitments. Finally, we ended the quarter with approximately 6500 employee.

Yes.

I will now recap our FY2023 results.

For the year revenue grew 4% to $2 8 billion.

Global services revenue grew 7% to 1.5 billion, representing 53% of total revenue for the year.

Product revenue grew 1% to $1 3 billion, representing 47% of total revenue for.

For the second year in a row software represented roughly 50% of product revenue software revenue was flat compared to last year at 664 million. This was down from our initial expectation of 15% to 20% growth as a result of customers delaying large transformational projects as Francois noted software renewals performed largely as planned.

We delivered $671 million and systems revenue during the year, representing 3% growth.

I would now like to provide some additional information regarding software revenue.

We've said, we intended to provide additional software revenue details as the SaaS business scale.

As we said last October we had several SaaS and managed service transitions plant. We started these transitions in FY2023 and they will continue through FY 'twenty, four and FY 'twenty five leading to some short term revenue variability that is not necessarily indicative of potential future performance, we believe that providing visibility to our SaaS and managed.

Service revenue and to their transitions that are underway provides greater clarity on both our FY 'twenty four revenue expectations and our expectation of returning to mid single digit revenue growth in FY 'twenty five.

Today, I will speak to the three components of our FY2023 software revenue.

The first term subscriptions, the second SaaS and managed services and the third perpetual licenses.

We intend to continue to report the SaaS and managed service portion of our revenue on an annual basis going forward.

In FY2023 revenue from term based subscriptions comprised a big IP and nginx subscriptions contributed $353 million to software revenue up 9% year over year.

Under ASC 606 sales of term based subscriptions are recognized largely upfront software revenue. The remainder is deferred and recognized as service revenue over the term of the subscription.

The majority of our term based subscriptions are contracted for three years.

Term subscriptions include both new renewal and true Ford or expansion revenue for both annual and multiyear subscriptions of deployable software.

New revenue includes new customers as well as new use cases or offering sold to existing customers in FY2023 renewal and true Ford our expansion revenue experienced healthy year over year growth offsetting the weakness in new term subscription software projects.

Renewals performing largely to plan in FY2023 is encouraging for several reasons first given the current levels of customer spending scrutiny strong renewals are a signal that customers are getting the value they demand.

Our renewals motion is still relatively new and it's great to see confirmation that it is working as intended.

The second component of our software revenue SaaS and managed services contributed $203 million in revenue in FY 'twenty, three up 2% year over year.

SaaS and managed service is comprised of our F. Five distributed cloud SaaS offerings.

Revenue from managed services, including our legacy F. Five silver line offering and our anti bot and anti fraud offerings as well as revenue from legacy SaaS offerings SaaS.

SaaS and managed service sales are recognized Ratably as product revenue over the term of the subscription at the end of FY 'twenty, three our SaaS and managed services.

Was 198 million down approximately 2% year over year.

There were four primary contributors to this performance first we are seeing solid early momentum from our F. Five distributed cloud service SaaS offerings.

Second in FY2023 our most advanced anti bot and anti fraud managed service solutions underperformed relative to our plan as a result of customer spending caution and budget scrutiny.

Third in FY 'twenty, three we began migrating customers from our legacy Silver line managed service offerings to our F. Five distributed cloud SaaS offering and fourth we began executing the planned retirement of legacy SaaS offerings from companies we acquired.

Both the silver line customer migrations and the retirement of legacy SaaS offerings resulted in planned revenue churn.

Operator: Good afternoon, and welcome to the F5 Inc. 4th quarter fiscal 2023 financial results conference call. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time.

The third component of our software revenue is perpetual licenses, which contributed $108 million in software revenue down year over year. After unusually strong FY 'twenty two.

In FY 'twenty, 371% of our revenue was recurring up from 69% in FY 'twenty two.

Suzanne Dulong: I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Several years ago, we began breaking out our security related revenue annually.

Suzanne Dulong: Hello and welcome. I am Suzanne DuLong, F5 vice president of investor relations.

Suzanne Dulong: Francois Locoh to new F5's president and CEO and Frank Peltzer, F5's executive vice president and CFO, will be making prepared remarks on today's call. Other members of the F5 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 f5.com, where an archive version of today's audio will be available through January 28th, 2024. The slide deck accompanying today's discussion is viewable on the webcast and will be posted to our IR site at the conclusion of our call.

This year, our total security revenue, which includes Standalone security attached security and security related to maintenance revenue was approximately $1 1 billion or 40% of total revenue.

Our stand alone security product revenue grew 5% to approximately $475 million we.

We are seeing good traction with the lower in anti bot offering delivered through distributed cloud services as well as from security on Nginx.

Our FY2023 security revenue growth was affected by customer spending caution, including stall transformational projects and the underperformance of advanced anti bot anti fraud solutions as I mentioned previously.

Suzanne Dulong: To access the replay of today's webcast by phone, dial 877-660-6853 or 201612-7415 and use meeting ID 1374-1762. The telephonic replay will be available through midnight Pacific time October 25th, 2023. For additional information or follow-up questions, please reach out to me directly at s.duelong at f5.com.

During the year, we overcame supply chain challenges and successfully returned our lead times to normal levels.

As a result, our FY2023 product backlog return to pre supply chain challenge levels, and we closed the year with approximately $53 million in product backlog.

I will now turn to our FY2023 operating performance.

Suzanne Dulong: 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. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-gap metrics during today's discussion. Please see our full gap to non-gap reconciliation in today's press release and in the appendix of our earnings slide deck. Please note that f5 has no duty to update any information presented in this call.

GAAP gross margin in FY 'twenty, three with 78, 9% non.

non-GAAP gross margin was 81.5% down 110 basis points from FY 'twenty two as a result of higher supply chain costs in FY2023.

Our GAAP operating margin for FY 'twenty, three was 16, 8% and our non-GAAP operating margin was 32% up 130 basis points from FY 'twenty two as a result of our previously announced cost reductions.

Our GAAP effective tax rate for the year was 18, 7% our non-GAAP effective tax rate for the year was 18, 3%.

Francois Locoh: With that, I will turn the call over to François. Thank you, Suzanne, and hello everyone. Thank you for joining us.

Our FY2023 annual tax rate was lower than expected primarily due to IRS guidance issued during the fourth quarter related to foreign tax credits GAAP net income for FY 'twenty, three was $395 million or $6 55 per share.

Francois Locoh: In my remarks today, I will speak to our Q4 and FY23 highlights as well as our expectations for FY24. François then review the details of our Q4 and FY23 results and provide some additional color about our outlook. We delivered a solid Q4 in an environment that showed some additional signs of stabilization. We saw strength from our enterprise vertical, including technology and financial services customers, offset by softness from service providers. The result was Q4 revenue near the high end of our guidance range.

non-GAAP net income was 705 million or $11 70 per share representing growth of 14.8% over FY 'twenty two.

Francois outlined our annual and longer term outlook at the start of the call I'll recap that with some additional color I will also provide our outlook for Q1.

With the exception of revenue my guidance comments reference non-GAAP metrics.

Francois Locoh: Our continued operating discipline helped us deliver earnings per share well above the high end of our range. Our global services team delivered robust 9% revenue growth driven by strong maintenance renewals and reflecting the benefit of price increases announced last year. In addition, software revenue grew 11% added by 27% growth in subscription software. Software revenue from renewals, which have performed well all year, picked up in Q4 over Q3. And while new subscriptions remain down year over year, we saw some improvement compared to the first half. Strength in global services and software offset a systems decline of 25% which reflect a lower level of backlog related shipments than we had for the first three quarters of the year.

In our FY 'twenty four outlook, we've made the following assumptions.

We expect customer spending caution will continue into FY 'twenty for that we also expect customers will begin to reinvest at some point in the year.

We expect our global services revenue will return to low single digit growth as we lap price increases.

We have approximately $180 million revenue headwind in systems from FY2023s backlog fulfillment.

We expect to continue to take share in the traditional ADC space with big IP in both hardware and software form factors.

Within our software revenue, we expect continued strength from our term subscription renewals and continued growth from our F. Five distributed cloud SaaS offerings.

Francois Locoh: Stepping back and looking at fiscal year 2023, we adjusted to the environmental challenges we faced resolving supply chain pressures and largely returning to normalize delivery times. We took decisive actions to adjust our operating model to the realities of the demand environment, driving meaningful improvements to our operating margins and delivering 15% EPS growth. We also returned 58% of our annual free cash flow to shareholders via share repurchases. Highlights from FY23 include first subscription renewals performed largely to plan for the year.

As I discussed previously.

We will have some planned revenue churn as we work through the SaaS and managed service transitions I discussed.

We expect these transitions will be largely complete in FY 'twenty five.

In FY 'twenty, three and then a or are associated with the transitions is approximately $65 million a little more than half of which is associated with the offerings. We intend to transition onto distributed cloud over the next two years. The net of these assumptions combined with the current demand levels leads us to expect FY 'twenty for revenue in the range of flat.

Got to down low single digits from FY2023.

Francois Locoh: In today's tough IT spend environment, this is a strong signal that customers are getting the value and we turn the expect from our software solutions. Second, F5 distributed cloud services fast offerings are getting traction with both new and existing customers. In fact, 29% of distributed cloud staff customers are new to F5. In total, we now have more than 500 customers for our staff services on distributed cloud and increase of more than 200% since Q4 of last year. Third, we are having very good success displacing a traditional ADC competitor in both software and hardware form factors. And finally, we delivered meaningful operating improvements, driving our non-gap operating margin up 130 basis points from FY22.

Excluding the $180 million or 6% headwind from our FY2023 backlog reduction our guidance range would reflect low to mid single digit revenue growth in FY 'twenty for weather.

Whether we achieve the bottom or top end of this range largely depends on when customers will resume more normal levels of spending we expect some continued quarter to quarter variability as a result of upfront revenue recognition related to our term subscription offerings rigor.

Regardless of our revenue performance, we remain committed to driving strong profitability from an operating perspective, we expect gross margin will improve in fiscal year 'twenty four to the range of 82% to 83%. This is primarily the result of supply chain related cost pressures working their way out of our model.

We expect our continued operating expense discipline will result in FY 'twenty four non-GAAP operating margin in the range of 33% to 34% for the year.

Francois Locoh: As we look ahead, we enter FY24 in an environment that seems to be stabilizing. In fact, from a demand perspective, we saw encouraging early signs with enterprise customers in Q4, but it is too soon to say if what we are seeing is a durable trend. As we contemplate our outlook for FY24, we consider a number of factors. At the macro level, we expect continued application and API growth fueled by automation efforts and new use cases, including generative AI.

On a percent of revenue basis. This would put our operating expenses roughly in line with 2018 levels at roughly 49% of revenue.

We expect our FY 'twenty four effective tax rate will be 21% to 23%.

In FY 'twenty, four we expect to deliver 5% to 7% non-GAAP earnings growth, which translates to at least 10% year over year growth on a tax neutral basis. Finally, we expect to use at least 50% of our annual free cash flow for share repurchases.

Francois Locoh: We also expect customer spending caution persists into FY24, but is stable. And finally, we believe the tension between application and API growth and customer's ability to sweat assets will reach a tipping point, causing them to reinvest in their application infrastructure, likely beginning sometime in FY24.

Insistent with the approach we have discussed previously.

As of the end of FY 'twenty, three we had $922 million remaining on our previously announced authorized share repurchase program.

We also want to take the opportunity to speak to our expectations beyond FY 'twenty four as we believe it will help signal how we intend to run the business longer term.

Francois Locoh: At the F5 level, we also consider. First, we have an approximately $180 million revenue headwind from FY23's backlog fulfillment, primarily in systems. Second, we expect flat to modest total software revenue growth in FY24 as a result of a number of dynamics, including continued subscription renewal strengths and steady distributed cloud fast revenue growth. Dispositive trends will be offset by a series of transitions we are executing in our staff and manage services offerings.

As Francois noted, we expect mid single digit revenue growth in FY 'twenty five.

Francois Locoh: And third, we expect our global services revenue will return to low single-digit growth as we lap price increase. As a result of these factors, we expect our FY-24 revenue will be flat to down low single digits from FY-23, inclusive of the 6% headwind related to FY-23 backlog shipments.

We expect to drive additional gross margin improvements and to deliver gross margins between 83 and 84%.

We expect to grow our operating expenses slower than revenue, resulting in operating margin of at least 35%. We will continue to prioritize profitability adjusting our operating model if needed to enable us to deliver at least 10% compounded annual non-GAAP EPS growth. Finally, we intend to continue to use at least 50.

Percentage of our annual free cash flow towards share repurchases.

I'll conclude with our expectations for Q1 of FY 'twenty four.

We expect Q1 revenue in the range of $675 million to $695 million.

We expect gross margins in the range of 82% to 83% we.

We estimate Q1 operating expenses of $332 million to $344 million.

Francois Locoh: We also expect to return to mid-single digit revenue growth in FY-25. Whether we achieve the lower high end of our revenue range, we are committed to driving continued strong profitability and we will continue to manage our operating model with discipline. We expect to deliver FY-24 non-gap operating margin in a range of 33 to 34%. We are also targeting FY-24 non-gap EPS growth of 5 to 7%, reflecting growth of at least 10% on a tax neutral basis compared to FY-23.

We are targeting Q1, non-GAAP EPS in the range of $2 97 to $3.09 per share.

We expect Q1 share based compensation expense of approximately $58 million to $60 million I will now turn the call back over to Francois on swap.

Thank you Frank.

Before we open the call to questions I want to address our view on F fives AI opportunity at.

At the highest level, we believe customers use of AI will accelerate the growth of applications and API and the corresponding need to deploy manage and secure them, which is what we do best we also believe AI inference the process of using a train model to make predictions on never seen before data will become <unk>.

Francois Locoh: Our growth opportunity is fundamentally linked to the continued growth of applications and APIs and the need to secure, deliver, and optimize those apps and APIs. FY is the only company that can deliver, secure, and optimize any app and API anywhere. Our security and delivery solutions offer a custom fit for each app and API. Modern apps and APIs require different solutions than legacy apps. We have the right solutions for both. In addition to delivering the right tools for the right app or API, our combination of deployable software and hardware and fast and managed service offerings means we are the only vendor that can serve every app and API across all environments in a data center, public cloud, and at the edge.

Freezing Lee distributed organizations will need to support it anywhere from datacenters to manufacturing floors to public clouds.

We believe every application and API will soon require influence just us they require security and traffic management with our rich history of delivering innovative ml based security solutions, including bought defense protection against denial of service attacks and anti fraud and our role in the flow of application traffic we are uniquely.

We positioned to secure AI workloads wherever they reside and to empower our customers to run AI wherever they need it.

Francois Locoh: We are the only companies who can do this today. And going forward, further integration and convergence of our solutions will make it much easier for our customers to secure and deliver their apps across all infrastructure environments. The power of our conversion portfolio is resonating with customers who are able to deploy the solutions they need today, with the knowledge that FY will be with them on every step of their multi-cloud journey.

In conclusion, we are leveraging our incumbency and our position in the flow of 40% of the world Internet traffic to deliver hybrid multi cloud solutions that dramatically simplify application and API deployment security and management for our customers. We are also significantly reducing our <unk>.

<unk> total cost of ownership, we are uniting and automating all of our customers absent a P is across their data centers cloud and edge environment.

Francois Locoh: Before I pass the call to Frank, I will speak to some customer highlights from each of our product families. Our FY big IP family serves traditional applications either on-premises, co-located, or in cloud environments. Big IP's data plain performance, automation capabilities, and seamless integration into public cloud environments continues to differentiate the platform. And we continue to win against competitors. From a hardware perspective, the value proposition with our next generation platforms is resonating with customers, with our R series and vellus platforms representing more than 80% of Q4 system's bookings.

We are encouraged both by the early signs of stability, we saw in the second half of 'twenty three.

And with the residents are converging portfolio is having with customers.

We have an install base of 20000 customers all of whom have an acute and significant multi cloud challenge.

Other than that five there is no one company that can address this challenge.

Without five distributed cloud services, we have created a platform to drive fast growth in the future.

In closing I will reiterate the three pillars of our long term operating model, which will enable us to drive double digit earnings on a compound annual growth rate.

Francois Locoh: In one example of a big IP win from Q4, we displaced a competitor at a North American healthcare customer. The opportunity arose as a result of the incumbent providers' inability to handle a mission-critical upgrade to the customer's position portal. The customer selected FY big IP, based on its advanced application delivery capabilities, secure access management, our partnership with their healthcare records platform, and confidence in our roadmap. In addition to providing the mission-critical functionality the customer needed urgently, we replaced all of the competitor's use cases with the customer, simplifying their application environment, and future-proofing their data centers.

Number one delivering sustained mid single digit revenue growth supported by our differentiated positioning in attractive end markets, along with our durable high margin global services business.

Number two driving non-GAAP operating margin expansion, which we will achieve through gross margin improvement and operating discipline.

And number three returning cash to shareholders via share repurchases using at least 50% of our annual free cash flow.

Operator, please open the call to questions.

Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad.

Francois Locoh: S5NGNX delivered a very strong Q4. NGNX serves modern container-native and micro services based applications and APIs. We continue to see large enterprises adopt NGNX for their cloud and Kubernetes workloads, and as those applications scale, we are seeing our NGNX opportunity scale as well. In addition, customers are also leveraging NGNX for app layer security for containers. As an example, in Q4, when the e-commerce division of a global technology customer needed to comply with new data security standards, they selected NGNX App Protect to implement app layer security to the containers, processing consumers credit card data.

Information tunnel indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.

Our first question comes from the line of Amit <unk> with Evercore. Please proceed with your question.

Good afternoon. Thanks for taking my question I guess front, so maybe to start with you talked about software growth being flat to up modestly but that included some of the headwinds around the business transition you're taking place on the managed services side I I didn't appreciate this but is the headwind from this transition 65 million or is it half that number and maybe just flush out how much.

Francois Locoh: We have invested both organically and inorganically to build RF5 distributed cloud services, a portfolio of SaaS and managed services. Apart from the offering transitions I mentioned, we are really excited about the future for distributed cloud. We are intercepting two exciting emerging growth categories, Web App and API protection or WAP and secure multi-cloud networking or secure MCN that will drive future growth for distributed cloud services. In one WAP win for the Q4, we are helping an EME-based banking customer evolve from its traditional WAP security posture to a more comprehensive WAP solution that encompasses Web application firewall as well as API protection, bot defense, and layer 7 DDoS protection.

That isn't what other transitions that you're doing.

Hi, Amit.

So in total so we talked about roughly $200 million faster and better choices in that $200 million, that's about $65 million of our revenue stream.

That essentially are going to go away now, but more than half of that.

Is revenue streams coming from our legacy managed services platform Silver line that we are retiree, but we intend to migrate those customers over to distributed cloud. So we would expect.

A portion if not a significant portion of that.

Of that revenue stream to go on to distributed cloud over time the other.

Francois Locoh: This customer approached us when they came under attack by a malicious foreign actor that their existing WAP could not handle. Against multiple competitors, we successfully demonstrated the superiority of our WAP offering, including our ability to protect major payment companies, APIs.

A little less than half of that $65 million or offerings that we are retiring completely that you know when when we looked at our portfolio and looked at the offerings. We wanted to rationalize that we felt were underperforming we decided to retire these offerings completely too.

Francois Locoh: Early traction for our secure multi-cloud networking offerings include a Q4 win with a large retailer in Latin America that also offers a range of financial services to its customers. As part of its digital transformation efforts, the customer needed a solution to enable them to grow and manage their expanding body of cloud native applications. They also planned to migrate their large existing footprint of virtual machines and on premises appliances to the cloud. After a thorough proof of concept, the customers selected our secure multi-cloud networking solution because of our ability to use the customer edge to make the move 100% transparent to both internal users and consumers.

Focus on the products that are going forward and successful rationalize our cost and improve our efficiency.

Got it that's really helpful to get understand the split on the 65 million and then you know I think for US when you in your.

In your comments, you sort of talked about you're seeing encouraging signs from enterprise customers in September quarter can you just perhaps talk about what are the signs is it just the assets are running at high utilization in concert with them anymore and is there any certain geopolitical where you're starting to see these initial positive signs if you've made from customer demand.

I mean, I wouldn't say that.

Particular, geography, where we are.

Sure.

It's really different than others I would say North America has been probably more solid and stable and our Asia and European markets.

Francois Locoh: We are also seeing cross portfolio traction with customers who are operating in hybrid environments choosing to deploy F5 across multiple form factors. In a win that highlights the synergies of our product families during Q4, we secured a win with an APAC-based financial services provider. The customer launched a multi-faceted modernization project designed to add and consolidate applications and enable scalability to handle exponential traffic growth. They also needed help stopping a barrage of constant automated attacks.

If we look at vertical in terms of where we're seeing stabilization I think in the enterprise market, where we're seeing more stabilization there.

Service provider market has been soft.

That's for a number of factors service providers continue to sweat assets.

And we really would lessen their prioritization the forged a five G transition is a little slower.

Francois Locoh: In a competitive bid, our combination of big IP and F5 distributed cloud bot defense won out. The combination enables the customer to manage unpredictable traffic growth, customized services for each application, and enhance their security posture with our ML-based AI engine. These real-life use cases offer a view to how we are enabling customers to secure, deliver, optimize and manage their applications and APIs, and how we simplify the challenges of operating in a complex hybrid, multi-cloud word.

Then it just abated so service providers in general have been soft and what were kind of expecting that to continue.

What we were encouraged by.

Especially in the second half of the year, but specifically in Q4 is in the enterprise space specifically.

We saw some customers that had been sweating their assets.

And got to kind of at the end of that cycle that started.

Demanding hardware again ordering hard work and so we did see a rebound in hardware orders in the fourth fiscal quarter.

Coming from a we think some customers having sweating their assets, but also you know it took a long time for us to ship equipment to a number of our customers in 2023 and in Q4, we saw some of these customers that finally had received their their hardware and had been able to deploy that.

Frank Peltzer: Now, I will turn the call to Frank. Frank? Thank you, Francois, and good afternoon everyone. I will review our Q4 and FY23 results before I elaborate on the Outlook Francois shared. We delivered Q4 revenue of 707 million, reflecting 1% growth year-to-year with a mix of 54% global services and 46% product revenue. Global services revenue of 382 million grew a strong 9% due to continued high maintenance renewals as well as the price increases we introduced last year.

To start ordering again.

So we were encouraged by those trends.

Got it thank you very much.

Okay.

Our next question comes from the line of Alex Henderson with Needham. Please proceed with your question.

Alright, thanks, so much.

Frank Peltzer: Product revenue totaled 325 million down 7% year-on-year. Systems revenue of 134 million declined 25% year-to-year, reflecting a lower level of back-water-related shipments than we had in prior quarters, and demand that showed some signs of stabilization, albeit at lower levels than we have seen historically. In contrast, software revenue grew 11% over the year-go period to a new high of 191 million. Subscription-based revenue grew 27% year-year to 166 million, another record high, representing 87% of Q4's total software revenue.

Looking back at your <unk>.

Prior longer term expectations.

I think you had talked about.

Growth rate in software.

<unk>.

In excess of 20%.

And high to mid single declines in systems can you give us an update.

What do you think those percentages might look like.

Term once you get through.

Uh huh.

The wobble in.

FY 'twenty four.

Yeah, So Alex.

Where do they would talk so I don't want to talk about what's beyond FY 'twenty five I'm going to talk about FY 'twenty four 'twenty five.

Frank Peltzer: Perpetual software license sales of 25 million represented 13% of Q4 software revenue. Revenue from recurring sources contributed 76% of Q4's revenue, another all-time high. Recurring revenue includes subscription-based revenue as well as the maintenance portion of our services revenue. On a regional basis, revenue from America's was down 6% year-to-year representing 57% of total revenue. Amia grew 16% representing 26% of revenue, an APAC grew 4% representing 17% of revenue. Looking at our major verticals, during Q4 enterprise customers represented 72% of product bookings, service providers represented 9% and government customers represented 19% including 7% from U.S, federal.

It'll be on FY 'twenty five I think our view of our end markets haven't really changed and so you know in the future of that opportunity.

A return to 20% plus growth in software is there based on the end market that we are targeting but let's talk about FY 'twenty four.

445, so FY 'twenty four we've talked about our growth in software being flat.

Flat to modest Ah and that if you take the three components of software that we just talked about.

We expect.

Frank.

Central base of the business to be roughly flattish we have.

Similar view on the SaaS and managed services part of the business based on the transition we're going through and.

Frank Peltzer: Our Q4 operating results were strong, reflecting operating discipline and a full quarter benefit from the cost reductions announced in April. Gap gross margin was 80.1%, non-gap gross margin was 82.7%, and improvement of 125 basis points from Q4 of FY22. Gap operating expenses were 394 million, non-gap operating expenses were 345 million. Q4 non-gap operating expenses as a percent of revenue was below 49%, resuming pre-2019 acquisition levels. Our Gap operating margin was 24.3%, our non-gap operating margin was 33.9%, representing an improvement of more than 600 basis points from Q4 of FY20.

Potentially.

Total subscription part of the business is where potentially we would see some modest growth going into 2025.

From a revenue perspective, we don't necessarily expect growth from perpetual all the stuff the managed services business.

Those are the transition, but what we're going through but we have strong visibility into all the renewals and expansion in our subscription business are the expansions.

Our very strong from what we're seeing and we expect that to continue and be amplified in 2025. So in 2025, we would expect software growth to return to double digit really powered by our subscription business.

Let's see if I can follow up on you talked about your backlog having been normalized but.

Frank Peltzer: II. Our gap effect to tax rate for the quarter was 13%. Our non-gap effect to tax rate was 14% below our initial expectations for the year as a result of IRS guidance issued during the quarter relating to foreign tax credits. Our gap net income for the quarter was $152 million or $2.55 per share. Our non-gap net income was $209 million or $3.50 per share well above the top end of our guidance range of $3.15 to $3.27 per share. This reflects the combined impact of our gross margin improvements and operating expense discipline as well as the Q4 tax benefit.

<unk> also had orders out for components that were driven off of the.

Tight supply environment when do you expect.

The full normalization of the component costs.

In your cost of goods sold is that.

<unk> already achieved or is that going to be something that's going to feather in over the next year, maybe year and a half.

Alex It's Frank assumed largely most of that has been achieved there. There is still some of the purchase price variances that are coming through.

FY 'twenty four by FY 'twenty, five we expect that to be fully out in a normalized level.

Frank Peltzer: I will now turn to cash flow and the balance sheet which also remain very strong. We generated $190 million in cash flow from operations in Q4 driven by our improved profitability. Capital expenditures for the quarter were $15 million. DSO for the quarter was 58 days. Cash and investments total to approximately $808 million at quarter end. Deferred revenue increased 5% year of year to $1.78 billion. We repurchased $60 million with the shares in Q4.

Can you give some sense of what the 24 variance would be.

Alex I think it's probably in the range of 25% to 50 basis points, where we'll see improvement just based off of that in comparison to your expectations for gross margins in FY 'twenty five great. Thank you so much.

Our next question comes from the line of Simic Chan.

Cheddar Cheddar jetty with J P. Morgan. Please proceed with your question Hi.

Frank Peltzer: For the year, we used 58% of our approximately $600 million of free cash flow for share repurchases. I note that in each of the past three years we have met or exceeded our share repurchased commitments. Finally, we ended the quarter with approximately $6,500 employees.

Thanks for taking my question I guess front, so just relative to your fiscal 'twenty five outlook for mid single digit I'm. Just curious if you've changed your view about what the long term because you're between systems demand looks like particularly as you mentioned you've seen orders pick up a bit and maybe you can also talk about when.

Frank Peltzer: I will now recap our FY23 results. For the year, revenue grew 4% to $2.8 billion. Global services revenue grew 7% to $1.5 billion, representing 53% of total revenue for the year. Product revenue grew 1% to $1.3 billion representing 47% of total revenue. For the second year in a row, software represented roughly 50% of product revenue. Software revenue was flat compared to last year at $664 million. This was down from our initial expectation of 15% to 20% growth as a result of customer's delay in large transformational projects. As Francois noted, software renewals performed largely as planned. We delivered $671 million in systems revenue during the year representing 3% growth.

You talked about AI demand do you expect how do you expect it to play out between systems relative to sort of software within your portfolio and I have a quick follow up thank you.

Yeah.

Hum.

Dean.

So.

Over over a long period of time I think we you know we think that the hardware business.

It would be more of a low single low single digit decliner over time however.

That is the statement you know.

That is based on.

But first a normalization of the hardware business and we're not there today.

Frank Peltzer: I would now like to provide some additional information regarding software revenue. We've said we intended to provide additional software revenue details as the SaaS business scale. As we said last October, we had several SaaS and Managed Service Transitions planned. We started these transitions in FY23 and they will continue through FY24 and FY25, leading to some short-term revenue variability that is not necessarily indicative of potential future performance. We believe that providing visibility to our SaaS and Managed Service revenue and to the transitions that are underway provides greater clarity on both our FY24 revenue expectations and our expectation of returning to mid-single-digit revenue growth in FY25.

As you know the the demand was much softer in 2023.

And so we actually expect our hardware business to rebound in 2024 and.

And we saw some signs of that already in this in this fourth quarter.

And.

I'm, giving you more of a long term trend kind of beyond 2025, but you know I think at least for 'twenty 'twenty four we expect a rebound in the hardware business in terms of where AI will play in our business. So the way to think about it.

So Nick is.

We.

The portfolio that we're putting together.

Frank Peltzer: Today, I will speak to three components of our FY23 software revenue. The first term subscriptions, the second SaaS and Managed Services, and the third perpetual licenses. We intend to continue to report the SaaS and Managed Service portion of our revenue on an annual basis going forward. In FY23, revenue from term-based subscriptions comprised of big IP and NGNX subscriptions contributed 353 million to software revenue, up 9% year of year. Under ASC 606, sales of term-based subscriptions are recognized largely up front as software revenue.

Which is hardware software and fast.

We expect.

That will enable our customers to secure and deliver their API and their applications in any environment.

Workloads are going to be modern applications.

Some of which may run on Prem, but we think a lot of them will run in software environment and so it's likely that supporting AI workloads will accrue more to our software.

Overtime and in addition to that we think we have a very unique position in.

In that with our distributed cloud capabilities, we are able to run influences.

Frank Peltzer: The remainder is deferred and recognized as service revenue over the term of the subscription. The majority of our term-based subscriptions are contracted for three years. Term-subscriptions include both new, renewal and true-forward or expansion revenue for both annual and multi-year subscriptions of deployable software. New revenue includes new customers as well as new use cases or offering sold to existing customers. In FY23, renewal and true-forward or expansion revenue experienced healthy year-vee or growth offsetting the weakness in new term-subscriptions software projects.

Really in any cloud environment and beyond so we could run in for instance in any public cloud you can run it at the edge, we can run it in our own cloud.

And increasingly we're hearing from customers that they will want to run these influences on on manufacturing floors or.

Retail branches for retail customers or in vehicles for something far edge use cases, and we have the ability to run it secure and deliver these influences in any environment.

Frank Peltzer: Renewals performing largely to plan in FY23 is encouraging for several reasons. First, given the current levels of customer spending scrutiny, strong renewals are a signal that customers are getting the value they demand. Second, our renewal's motion is still relatively new and is great to see confirmation that it is working as intended. The second component of our software revenue, SaaS and Manage Services, contributed 203 million in revenue in FY23 up 2% year-of-year.

Whether it's in the cloud or in any one of these storage environments and that makes us very unique in its position for running in for instance in the future all of that of course will accrue to our software business.

Got it all.

All upfront. So you mentioned the green shoots you're seeing in terms of enterprise spending and the recovery. There I think one of the pushback that we've seen from investors on that front has largely been the expectation that there might be a pickup here in the back end of the year just from a budget flush perspective from the enterprises and you might sort of feel pulled back again as we enter into <unk>.

Frank Peltzer: SaaS and Manage Services is comprised of our F5 distributed cloud SaaS offerings. Revenue for Manage Services including our Legacy F5 Silverline offering and our Antibot and Antifraud offerings as well as revenue from Legacy SaaS offerings. SaaS and Manage Service Sales are recognized radically as product revenue over the term of the subscription. At the end of FY23, our SaaS and Manage Services ARR was 198 million down approximately 2% year-of-year. There were four primary contributors to this performance.

Jude and more sort of budget cuts any insight that you are already getting from your customers about how budgets look for next year or in relation to whether this sort of pickup has anything to do with the more temporary flush of budgets before they got it. Thank you.

I think your stomach I don't think it was related to budget flush for the euro.

The comments, we made in resumption will really thinks.

We observed in the quarter that ended in September for Us.

Frank Peltzer: First, we are seeing solid early momentum from our F5 distributed cloud service SaaS offerings. Second, in FY23, our most advanced Antibot and Antifraud managed service solutions underperformed relative to our plan as a result of customer spending caution and budget scrutiny. Third, in FY23, we began migrating customers from our Legacy Silverline Manage Service offerings to our F5 distributed cloud SaaS offering. And fourth, we began executing the planned retirement of Legacy SaaS offerings from companies we acquired.

When we look at next year no. We do not have visibility into exactly what budgets our customers will have in FY 'twenty four.

We do have a strong pipeline entering the fiscal year.

On hardware.

And you know that it will come down to what are their close rates on the on that pipeline.

In Q4, the close rates that we saw when our pipeline entering the quarter were better than in the prior three quarters of the year.

That's also part of why we talked about stabilization.

Frank Peltzer: Both the Silverline customer migrations and the retirement of Legacy SaaS offerings resulted in planned revenue churn. The third component of our software revenue is perpetual licenses which contributed 108 million in software revenue down your year after a unusually strong FY22. In FY23, 71 percent of our revenue was recurring up from 69 percent in FY22.

And green shoots in Q4 is because what we saw in the close rate. So what we're going into the fiscal year with a stronger hardware pipeline.

Recent data points are on close rates that are positive but of course, we are cautious because there's still a lot of uncertainty out there.

You know around the macro as you noted.

We continue to see customers.

In certain occasions, delaying delaying deals or you know having continued budget scrutiny and more approvals we are seeing that phenomenon continue.

Frank Peltzer: Several years ago, we began breaking out our security-related revenue annually. This year, our total security revenue, which includes standalone security, attached security, and security related to maintenance revenue, was approximately 1.1 billion or 40 percent of total revenue. Ltd. Our standalone security product revenue grew 5% to approximately 475 million. We are seeing good traction with the lower-in antibody offering delivered through distributed cloud services as well as from security on engine X. Our FY23 security revenue growth was affected by customer spending caution including stall transformational projects and the underperformance of advanced antibody, anti-fraud solutions as I mentioned previously.

So overall, we're still we're still cautious going into the year.

Okay.

Thanks for taking my questions.

Our next question comes from the line of meta Marshall with Morgan Stanley. Please proceed with your question.

Great. Thanks, maybe building on Pemex question, Let's start you know as you look at your pipeline is your view that a lot of this is okay. We've sweated assets as much as we can or the utilization of the appliances is too high or are we starting to see kind of growth.

The cloud projects again, just trying to get a sense of as you look at your pipeline is it.

Frank Peltzer: During the year we overcame supply chain challenges and successfully returned our lead times to normal levels. As a result our FY23 product backlog returned to pre-supply chain challenge levels and we closed the year with approximately 53 million in product backlog.

Kind of traditional applications are expanding our use cases, and then maybe as a second question.

And you mentioned kind of having a place that is AI and inference cases grow.

That going to require product as they shouldn't have any kind of a suite of products today or.

Frank Peltzer: I will now turn to our FY23 operating performance. Gap gross margin in FY23 was 78.9%. Non-gap gross margin was 81.5% down 110 basis points from FY22 as a result of higher supply chain cost in FY23. Our gap operating margin for FY23 was 16.8% and our non-gap operating margin was 30.2% up 130 basis points from FY22 as a result of our previously announced cost reductions. Our gap effective tax rate for the year was 18.7%.

Just kind of tailoring to kind of have AI ready installation. Thanks.

Thank you made out the.

So let me start with the first question.

And my comments on pipeline there.

They were more related to what we're seeing in the.

On the hardware side of things, where you know we had a number of customers that eight number one I've been sweating their assets and they're getting sometimes that utilization levels, where we know that at some point in 'twenty four they will have to do something.

Frank Peltzer: Our non-gap effective tax rate for the year was 18.3%. Our FY23 annual tax rate was lower than expected primarily due to IRS guidance issued during the fourth quarter related to foreign tax credits. Gap net income for FY23 was $395 million or $6.55 per share. Non-gap net income was $705 million or $11.70 per share representing growth of 14.8% over FY22.

Or number two customers, who have placed orders in FY 'twenty two have not been able to receive equipment for these orders who now have and have started to deploy that capacity and are starting to be ready to order again, so that that is accruing to a stronger hardware pipeline in terms of.

Big you know kind of multi cloud software what we've called this transformational software projects.

We are not yet seeing a.

Potential resumption of these kinds of projects with it that's what I was saying earlier is customers are still very cautious on undertaking big projects like that and where we're not seeing a different pattern.

Frank Peltzer: Francois outlined our annual and longer term outlook at the start of the call. I will recap it with some additional color. I will also provide our outlook for Q1. With the exception of revenue, my guidance comments reference non-gap metrics. In our FY24 outlook, we've made the following assumptions. We expect customer spending caution will continue into FY24, though we also expect customers will begin to reinvest at some point in the year. We expect our global services revenue will return to low single-digit growth as we lap price increases.

Going into the year on those aspects.

As it relates to AI and whether it will be quite product taxation.

We have essentially so on on the aspect of being able to run influences in any environment. We have these capabilities in distributed cloud.

I think we need to ensure that we hard in these capabilities and there's a strong go to market effort to be made around that to make customers aware of that.

Frank Peltzer: We have approximately $180 million revenue headwind in systems from FY23's backlog fulfillment. We expect to continue to take share in the traditional ADC space with big IP in both hardware and software form factors. Within our software revenue, we expect continued strength from our term subscription renewals and continued growth from our F5 distributed cloud staffs offerings. As I discussed previously, we will have some planned revenue turn as we work through the SaaS and managed service transitions I discussed.

In the future they start deploying workloads.

Relates to being able to secure and deliver AI workloads those capabilities exist today, and we are ready to go.

With that already.

Just wanted to add.

Last year, we talked about in our outlook.

Particularly in software that.

We were a little less than 50% of our outlook at the time was coming from.

The renewals in the <unk> portion of our term subscription agreements and that's.

Frank Peltzer: We expect these transitions will be largely complete in FY25. In FY23, Indian ARR associated with the transitions is approximately 65 million, a little more than half of which is associated with the offerings we intend to transition onto distributed cloud over the next two years. The net of these assumptions combined with the current demand levels leads us to expect FY24 revenue in the range of flat to down low single digits from FY23.

Our SaaS based of revenue.

And that's a little more than half was going to come from new this year as we take a look at that same formula and we look out over 60% of what we expect in that flat to modest software growth is coming from.

Both the renewables pieces of the SaaS and managed service business.

Plus renewals, which reports of our term subscription business. So we tried to take into account. The fact that we don't see these transformational projects on that on the horizon as we as we thought about the guidance.

Frank Peltzer: E.g., excluding the $180 million or 6% headwind from our FY23 backlog reduction, our guidance range would reflect low to mid-single-digit revenue growth in FY24. Whether we achieve the bottom or top end of this range largely depends on when customers will resume more normal levels of spending. We expect some continued quarter to quarter variability as a result of upfront revenue recognition related to our term subscription offerings. Regardless of our revenue performance, we remain committed to driving strong profitability.

Great. Thank you.

Okay.

Our next question comes from the line of Michael Yang with Goldman Sachs. Please proceed with your question.

Hey, good afternoon. Thank you for the question and for all the comments on the outlook I just had two both on software.

First I was just wondering if you could talk a little bit about your visibility into the term business.

Frank Peltzer: From an operating perspective, we expect gross margin will improve in fiscal year 24 to the range of 82 to 83%. This is primarily the result of supply chain-related cost pressures working their way out of a model. We expect our continued operating expense system will result in FY24 non-gap operating margin in the range of 33 to 34% for the year. On a percent of revenue basis, this would put our operating expenses roughly in line with 2018 levels at roughly 49% of revenue.

That term as something.

Something that would help drive the double digit software revenue growth in fiscal 'twenty five as well as.

Potential growth in fiscal 'twenty four.

And then second I was just wondering if you could talk a little bit more about this migration from silver line to D. C. S.

It sounds like it's a multiyear headwind.

That contributed to the weakness in a R. R in fiscal 'twenty three.

But it also seems to be a headwind in fiscal 'twenty, four and Cisco fiscal 'twenty five so.

Frank Peltzer: We expect our FY24 effective tax rate will be 21 to 23%. In FY24, we expect to deliver 5 to 7% non-gap earnings growth, which translates to at least 10% year-to-year growth on a tax neutral basis. Finally, we expect to use at least 50% of our annual free cash flow for sharey purchases consistent with the approach we have discussed previously. As of the end of FY23, we had 922 million remaining on our previously announced authorized sharey purchase program.

Maybe you could just talk about that and how that transition is rolling off and you know over over how many years. Thank you.

Sure Michael I'll start on the first question and I'll, let Francois jump in on the second one the silver line side.

So on the first on the term subscription, particularly the.

A true forged and the expansions that we have seen.

The second terms coming on and and we had probably about seven or eight quarters now a run rate.

And are getting much more comfortable with the early signs that we're massive expansions continue and so getting very very strong utilization.

Frank Peltzer: We also want to take the opportunity to speak to our expectations beyond FY24 as we believe it will help signal how we intend to run the business longer term. As Francois noted, we expect mid-single digit revenue growth in FY25. We expect to drive additional gross margin improvements and to deliver gross margins between 83 and 84%. We expect to grow our operating expenses slower than revenue resulting in an operating margin of at least 35%.

From that base of deployed.

Flexible consumption programs.

Specifically covers right now like IP and the nginx.

Portfolio within our business as I mentioned in the prepared remarks, and that's giving US a lot of comfort both in FY 'twenty four and more importantly in FY 'twenty five.

Frank Peltzer: We will continue to prioritize profitability adjusting our operating model if needed to enable us to deliver at least 10% compounded annual non-gap EPS growth. Finally, we intend to continue to use at least 50% of our annual free cash flow towards sharey purchases.

25, we've got.

A bigger pool of expansion revenue than we do in FY 'twenty four and 'twenty four is growing on top of 23. So all of these continue to compile upon themselves.

As I just mentioned to me that that you know.

More than 60% of the outlook that we've got within our software revenue is coming.

Frank Peltzer: I'll conclude with our expectations for Q1 of FY24. We expect Q1 revenue in the range of 675 to 695 million. We expect gross margins in the range of 82 to 83%. We estimate Q1 operating expenses of 332 to 344 million. We are targeting Q1 non-gap EPS in the range of $2.97 to $3.9 per share. We expect Q1 share-based compensation expense of approximately 58 to 60 million.

From that cohort that we feel pretty good about seeing which is the term renewals as well as through <unk>, plus SaaS and managed service renewal piece that we've got in the revenue stream. So both of those we feel very confident about and its probably the highest visibility that we've got within the revenue stream.

Thank you Frank and to your second question, Michael on SaaS and managed services.

If we talk about.

FY 'twenty two FY2023 you saw that the a are there was a flat to slightly down there. There are two reasons for that one is yes. The the transitions we talked about started in 'twenty three and there was about call it roughly $12 million of.

Francois Locoh: I will now turn the call back over to Francois. Francois, thank you, Frank.

Francois Locoh: Before we open the call to questions, I want to address our view on F5's AI opportunity. At the highest level, we believe customers use of AI will accelerate the growth of applications and APIs and the corresponding need to deploy, manage, and secure them, which is what we do best. We also believe AI inference.

Our that we transitioned out of the out of the business in 2023.

The other reason is at the high end of the business we.

Francois Locoh: The process of using a trained model to make predictions on never seen before data will become increasingly distributed. Organizations will need to support it anywhere from data centers to manufacturing floors to public clouds. We believe every application and API will soon require inference just as they require security and traffic management. With our rich history of delivering innovative ML-based security solutions, including bot defense, protection against denial of service attacks, and anti-fraud in our role in the flow of application traffic, we are uniquely positioned to secure AI workloads wherever they reside and to empower our customers to run AI wherever they need it.

We saw quite a bit of softness, especially in the second half of the year.

Customers had significant budget scrutiny and.

And unless there were under immediate attack.

To really implement a more sophisticated solution.

We think over time that that will change, but specifically this year with the macro pressures in budgets Courtney we.

We saw a lot of softness there both in you.

New bookings and some churn in some cases.

So that that is the FY 'twenty to FY2023.

Going into 2024.

You asked about you know is this transition is a multiyear transition yes, we expect that the $65 million of revenue stream that we are transitioning will work themselves out over the next couple of years over FY 'twenty, four and FY 'twenty five.

Francois Locoh: Inclusion, we are leveraging our incomeancy and our position in the flow of 40% of the world's internet traffic to deliver hybrid multi-cloud solutions that dramatically simplify application and API deployment, security, and management for our customers. We are also significantly reducing our customers' total cost of ownership. We are uniting and automating all of our customers' apps and APIs across their data centers, cloud, and edge environments. We are encouraged both by the early signs of stability we saw in the second half of 23, and with the resonance our converging portfolio is having with customers. We have an install base of 20,000 customers all of whom have an acute and significant multi-cloud challenge.

They are a headwind to total growth.

However, we are quite excited.

Excited by what's happening with.

The SaaS portion of our offerings, specifically stifled distributed cloud, we have launched a wap offerings the security offering.

About 18 months ago, we are seeing extraordinary traction on that as I said earlier, we've won over 500 customers in that period, all of whom are enterprise customers.

And we are seeing very rapid traction on that we're also seeing rapid traction on the multi cloud networking market.

Francois Locoh: Other than F5, there is no one company that can address this challenge. With F5 distributed cloud services, we have created a platform to drive fast growth in the future.

Where we bring both networking and security capabilities and we're quite differentiated so anybody in the market.

So that has grown faster than we expect that portion of the business to continue to grow fast and over time.

Francois Locoh: In closing, I will reiterate the three pillars of our long-term operating model, which will enable us to drive double-digit earnings on a compound annual growth rate. Number one, delivery sustained mid-single-digit revenue growth supported by our differentiated positioning in attractive end markets along with our durable, high-margin global services business. Number two, driving non-gap operating margin expansion, which we will achieve through gross margin improvement and operating discipline. And number three, returning cash to shareholders via share repurchases using at least 50% of our annual free cash flow.

A majority of this SaaS and managed services portfolio.

Thank you Frank Thank you Francois very helpful.

Okay.

Our next question comes from the line of Tim Long with Barclays. Please proceed with your question.

Thank you.

Two if I could as well first.

Francois you talked about replacing a competitor with the ADC, both hardware and software.

Domain could you dig into that a little bit more is that something that you think there's kind of some one off so do you think there's a sustainable.

Operator: Operator, please open the call to questions. Thank you. Ladies and gentlemen, at this time we'll be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tunnel indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing this star key.

<unk> moved there and how is that happening.

And then second just on the you know the changes in the transitions in software.

It sounds like you know move into distributed cloud services makes a lot of sense.

Having looked at some of those businesses and kind of moving on from them does that change your view of kind of synergies across product offerings or is it a sign that maybe those businesses didn't have the same synergy and that's why you are not.

Amit Daryanani: Our first question comes from the line of Doryani with Evacore. Please proceed with your question. Good afternoon. Thanks for thinking about my question. I guess, Franco, maybe to start with, you talked about far-fetched growth being flat, adding up modestly, but that included some of the headwinds around the business transition you're taking place on the managed services side. I didn't appreciate this, but is the headwind from this transition 65 million or is it half that number and maybe just flush out how much that is and what are the transitions that you're doing?

Youre not going forward with them.

I'm thinking maybe let me start with the second part.

No it's not about synergies. So there there are two aspects of that in terms of the transition we're talking about the $65 million of transition one is a legacy platform.

That we have that on.

On which we have built managed services offering we have now built with FY distributed cloud much more modern platform with an architecture that's differentiated.

Francois Locoh: Hi, I'm it. So in total, so we talked about roughly $200 million fast and managed services. In that $200 million, there's about $65 million of revenue stream that essentially are going to go away. Now, about more than half of that is revenue streams coming from a legacy manager of this platform, Silverline, that we are retiring, but we intend to migrate the customers over to distributed cloud. So we would expect a significant portion of that of that revenue stream to go on to distributed cloud over time.

And that's getting rapid traction and we want to transition our customers to this modern platform.

And that was always the plan that was always the plan to do that however, we have to first of all build a platform and build all the security capabilities on our platform to be able to start. This transition. So we're very excited that we were able to do all this work on the Voltaire our platform over the last couple of years and we're able to start this transition in 'twenty two.

Francois Locoh: The other a little less than half of that 65 million are offerings that we are retiring completely, that when we looked at our portfolio and looked at the offerings we wanted to rationalize that we felt were underperforming, we decided to retire these offerings completely to focus on the products that are going forward and successful, rationalize our cost and improve our efficiency.

Three the second part of the revenue stream that is being retired.

It's not about synergies, it's new offerings that we have launched recently.

That we hoped would do well in the market, but given.

Given that the macro environment.

And what we've seen as the early traction on these offerings. We made some decisions as you know in April to rationalize our portfolio and focus on the most.

Attractive investment and we decided to not go forward with it.

These products.

So that's that's the second part of your question on the.

Francois Locoh: God, that is really helpful to get understandled on that 65 million. You know, I think, Francis, in your comments, you sort of talked about, you see encouraging signs from enterprise customers in September quarter. Can you just perhaps talk about what are these signs? Is it just the assets are running at high utilization? You can't swap them anymore? And is there any certain geopolitical where you start to see these initial positive signs that you made from customer demand?

I should say that the last thing I would say about that is in terms of the synergies between elements of the portfolio. No. We are actually very encouraged on what we're seeing we're.

We're seeing actually a number of customers.

Who already have big IP adopt distributed cloud Oh, so forth set of applications.

<unk> Big IP on Prem or in the cloud so hardware or software and then they want to have software as a service for other applications in their state and they really want to have the consistency of a security engine security policies across all these environments and we're able to do that with big IP as well as our SaaS and managed services.

Francois Locoh: I mean, there, I wouldn't say there's a particular geography where we are, where that's really different than others. I would say, North America has been probably more solid and stable than our Asia and European markets. If we look at verticals in terms of where we're seeing stabilization, I think the enterprise market, we're seeing more stabilization. The service provider market has been soft. That's for a number of factors, service providers continue to sweat assets and be really ruthless in their prioritization.

<unk> also had a very strong quarter.

In Q4, and that was driven in part by the security capabilities that we bought it from big IP onto engine and that same security stack is now in use in distributed cloud.

So the synergies, especially in terms of security across our portfolio are playing out and we expect that they will accelerate actually over the next couple of yours.

We do more and more a convergence between the fast and deployable products now for the first part of your question.

Francois Locoh: The 4G to 5G transition is a little slower than anticipated. So service providers in general have been soft and we're kind of expecting that to continue. What we were encouraged by, especially in the second half of the year, but specifically in Q4 is in the enterprise space specifically, we saw some customers that had been sweating their assets and got to kind of the internet cycle and started demanding hardware again or ordering hardware again.

In terms of the ADC competitors.

Look I'm sure. It's a we have over the last four years.

Francois Locoh: And so we did see a rebound in hardware orders in the fourth fiscal quarter. Coming from A, we think some customers having sweated their assets, but also, you know, it took a long time for us to ship equipment to a number of our customers in 2023. And in Q4, we saw some of these customers that finally had received their hardware and had been able to deploy that to start ordering again. So we were encouraged by those trends.

We made a decision to continue to invest in the future of the ADC franchise, and specifically building. The next generation hardware form factors for our ADC franchise and the next generation software form.

Factors that together bring to on Prem deployments the benefit of the cloud such as you know.

Amit Daryanani: Got it. Thank you very much.

Multi tenancy rapid upgrade seamless upgrades and make it way easier for customers to operationalize Adcs are and have a better total cost of ownership.

Those investments are paying out in the market in terms of us gaining share and being able to displace our traditional competitors in.

Even in situations, where there are incumbents.

And take share from them and we think that.

The other one off our expectation is that will you know.

Alexander Henderson: Our next question comes from the line of Alex Henderson with Needham. Please proceed with your question. Great. Thanks so much. Looking back at your prior longer-term expectations, I think you had talked about growth rate and software in excess of 20% and high to mid-single declines and systems. Can you give us an update on what you think those percentages might look like longer-term once you get through the wobble in FY24?

And you know we're pretty excited because this year, we're introducing the next generation software platform on Big IP that we think is even more differentiated than what we've had in the market. So I expect that that will continue and it's it's.

Oh for the investment we've made over the last four years.

Okay. Thank you.

Our next question comes from the line of Ryan Macdonald with Guggenheim. Please proceed with your question.

Great. Thanks for taking the questions Francois.

Some of the changes youre, making to your software portfolio. It seems like in a way you're simplifying or even converging some of your solutions.

As we think about the roadmap for distributor crowd in particular, what can you do to accelerate adoption and make sure you capture the potential voluntary churn that you've talked about or even how should we think about the priorities around distributed cloud next year.

Francois Locoh: Yeah, so Alex, so today we're talking- so I don't want to talk about what's beyond FY25. I'm going to talk about FY24 and 25. You know, beyond FY25, I think our view of our end markets haven't really changed. And so, you know, in the future, that opportunity to return to 20% plus growth in software. There is there based on the end markets that we are targeting.

Francois Locoh: But let's talk about FY24 and FY25. So FY24, we talked about growth in software being, you know, flat modest. And if you think the three components of software that we've just talked about, we expect, you know, for the perpetual base of the business to be roughly flatish. We have a similar view on the SaaS and Manage Services part of the business based on the transitions we're going through. And potentially, you know, in the terms of subscriptions part of the business is where potentially we would see some modest growth.

Thank you.

The.

Look our hum.

Our goal is to make it.

Ridiculously easy for our customers to secure and deliver their application and distributed cloud is getting a lot of traction because it does that for our customers. So when you look at the priorities next year.

Of course, it's scaling the platform so it's available in more markets and more environment.

And continue to add services to the platform. We have the two I would say first two sets of services, our Wap and multi cloud networking, we have a backlog of other services that we want to add to the platform that our customers will want to add we've recently added C. D N a.

Francois Locoh: Going into 2025, from a revenue perspective, we don't necessarily expect growth from perpetual or the SaaS and Manage Services business because of the transitions that we're going through. But we have strong visibility into the renewal and expansion in our terms of subscription business. The expansions are very strong from what we're seeing and we expect that to continue and be amplified in 2025. So in 2025, we would expect, you know, software growth to return to double digit, really powered by our terms of subscription business.

Abilities on the platform.

After the equity higher of light like a few months back and we're starting to get customers adopting our CDN because it's convenient for them to attach that to load balancing and security in some cases for the first priorities are scaling the platform and adding services.

Francois Locoh: I see.

As far as go to market and frankly, the priority is going into customers that are already have five customers that have our hardware or software, but want a solution to make it easier to Frank to use at five two fronts, a bunch of applications for which they don't want to manage the lifecycle of of deploying.

Frank Peltzer: Just to make a follow-up, you talked about your backlog having been normalized, but you've also had orders out for components that were driven off of the type supply environment. When do you expect the full normalization of the component costs in your cost of goods sold? Is that already achieved? Or is that going to be something that's going to feather in over the next year, maybe a year and a half? Alex, it's frank.

Products are and if you look at the 500 customers will sort that out and distributed cloud today over two thirds of them are actually existing big IP customers. So about a third of them are net new customers that have never bought anything from that five and two thirds of them are existing big IP customers and and we think actually.

With both net new and with existing customers there was a lot of growth and.

Frank Peltzer: So largely most of that has been achieved that there is still some of the purchase price variants that are coming through in FY 24. By FY 25, we expect that to be fully out in a normalized level.

That's where the focus is and the focus is going to continue to meet with large enterprise customers, whereas five has a strong presence.

I appreciate that and if I could sneak one more in maybe for Frank certainly appreciate the continued focus on operating margins and EPS growth, but can you help us think through how we should think about cash flow margins in fiscal 'twenty. Four I know you typically don't guide cash flow, but should we think of cash flow growing in line with operating income ex some of the Tam.

Frank Peltzer: Can you give some assess of what the 24 variants would be? Alex, I think it's probably in the range of 25 to 50 basis points where we'll see improvement just based off of that in comparison to expectations for gross margins in FY 25. Great.

Amit Daryanani: Thank you so much.

Headwinds you had in fiscal 'twenty, three and he even directional thoughts would be helpful.

Yes.

Samik Chatterjee: Our next question comes from the line of Semic, Chadder Jody with JP Morgan. Please proceed with your question. Hi, thanks for taking my question. I guess Fransa just created your fiscal 25 outlook for mid-single digit. I'm just curious if you've changed your view about what the long term trajectory in systems demand looks like, particularly as you mentioned, you've seen orders. Just pick up a bit and maybe you can also talk about when you talked about AI demand. Do you expect how do you expect you to play out between systems related to sort of software within your portfolio and have a quick follow up? Thank you. Semic, thank you.

As you described I think that's roughly correct.

Cash flow is one of the harder things for us to predict but those dynamics and it should mirror a bit that net income growth with a with some exceptions to the truth.

Tax.

<unk> some of the restructuring expense, we had last year that we don't have this year than a real.

Cash, but split out for non-GAAP purposes, So there's a few ins and outs, but it should be roughly roughly close to that.

Great I appreciate it.

Our next question comes from the line of James Fish with Piper Sandler. Please proceed with your question.

Hey, guys. Thanks for sneaking me in I'll, just make it simple here you know you guys talked about in the prepared remarks.

About subscription renewals performing well.

Francois Locoh: So over over a long period of time, I think we, you know, we think the hardware business would be more of a, you know, most single, low single digit decline or over time. However, that is a statement, you know, that is based on the normalization of the hardware business. And we're not there today, right? There's been, as you know, the demand was much softer in 2023. And so we actually expect our hardware business to rebound in 2024.

Any more color into specifically what products are seeing those better renewals, but the cross sell that you're seeing or any qualitative or quantitative color around net retention rates understanding.

Francois Locoh: And we saw some signs of that already in this in this fourth quarter. And, you know, I'm giving you more of a long term trend kind of beyond 2025, but you know, I think at least for 2024, we expect to rebound in the hardware business.

You you have this headwind around specifically the SaaS and that is P business.

About 65 million.

How should we think about that net retention rate within the term business or the aggregate overall when when you kind of exclude even the impact of about passengers.

Sure.

And our friends, who wants to add anything that would be great. So you know within our term subscription business, which generally are big IP.

Software as well as nginx and that's the expansion rates that we've seen.

It's not the easiest task in the world as you convert that term into an AOR type of business.

Francois Locoh: In terms of where AI will play in our business. So the way to think about it, Semic is we, the portfolio that we're putting together, which is hardware, software, and SaaS, we expect, you know, that that will enable our customers to secure and deliver their API and their applications and any environment. AI workloads are great to the modern applications, some of which may run on prem, but we think a lot of them will run in software environments.

Cause of all the moving parts, but when we when we tried to do that and try to convert and look at.

What would you know a an expansion rate D oar and net revenue retention rate.

It's north of what you would think of as the industry norm of 120%. Let me just put it put it that way and that combination of where it is plus our our SaaS and managed services net revenue retention rate is still north of that 120%. So that combination is.

What gives us a lot of visibility and firmness and our expectation of those pieces of the business that will continue to do well.

Francois Locoh: And so it's likely that supporting AI workloads will accrue more to our software business over time. And in addition to that, we think we have a very unique position in that with our distributed cloud capabilities, we are able to run inferences really in any cloud environment and beyond. So we can run inferences in any public cloud, we can run it at the edge, we can run it in our own cloud. And increasingly, we're hearing from customers that they will want to run these inferences on manufacturing floors or on retail branches for retail customers or in vehicles for some far edge use cases.

Francois Locoh: And we have the ability to run and secure and deliver these inferences in any environment, you know, whether it's an account or in any one of these far edge environments, and that makes that five very unique in its position for running AI inferences in the future. All of that, of course, will accrue to our software business.

Makes sense and just on the go to market side any changes in terms of incentives or approach as we turned the page into this next fiscal year and as we have no transitions now within the overall software transition.

Okay.

The incentive plans between the two years are largely the same fish there was always going to be a couple of tweaks here and there as we're looking and seeing what was successful the year before and not but nothing major.

Thanks, guys.

Our last question comes from the line of Simon Leopold with Raymond James. Please proceed with your question.

Great. Thanks for taking the question I, just wanted to get a better sense of.

Where the systems business is stabilizing in that I I assume the September quarter did not have but if any backlog draw down in it and so other than maybe some seasonal movement I'm just trying to get a sense of is sort of this.

Francois Locoh: Car, Car. For follow up, Francois, you mentioned the green shoots you're seeing in terms of enterprise suspending and the recovery there. I think one of the pushbacks we've seen from investors on that front has largely been the expectation that there might be a pickup here in the back end of the year just from a budget flush perspective from the enterprises and you might sort of see a pullback again as we enter into next year and more sort of budget cuts.

$120 million to $130 million per quarter level sort of the new normal for systems and then just quickly on on how the software is trending with the silver line exit.

That manifests itself.

Francois Locoh: Any insight that you're already getting from your customers about how budgets look for next year or in relation to whether this sort of pickup is anything to do with the more temporary flush of budgets before the year in. Thank you. Thank you, Samik. I don't think it was related to a budget flush for the other year because the comments we made in resumption were really things we observed in the quarter that ended in September for us.

<unk> throughout the year or is that something that shows up in a particular quarter. Thanks for that.

So I'll start from the first one and then Francois I don't know if you want to take the second but in terms of what.

What we what we have said I think in both prepared remarks, and some of the answers we did but we do believe that we hit a trough in FY2023 in terms of systems bookings and what we're waiting that to the the term demand now the offset or the balance of that is that there was FY 'twenty two bookings that they were delivered.

Francois Locoh: When we look at next year, no, we do not have visibility into exactly what budgets our customers will have in FY 24. We do have a strong pipeline entering the fiscal year on hardware and now it will come down to what are the close rates on that pipeline. In Q4, the close rates that we saw on our pipeline entering the quarter were better than in the prior three quarters of the year.

In FY 'twenty, three and so the shipments that they actually received which is the revenue that we recognized that came in in FY 'twenty, three and starting to be utilized now as that utilization.

Starting to increase and more capacity was needed we starting to see that come through.

And in Q4, which was our best systems bookings quarter of the year. It looks like on a revenue basis that wasn't necessarily the case, but from a demand perspective or a bookings perspective that was the case.

Francois Locoh: That's also part of why we talked about stabilisation and green shoots in Q4 is because what we saw in the close rates. So we're going into the fiscal year with a stronger hardware pipeline, recent data points on close rates that are positive, but of course we are cautious because there's still a lot of uncertainty out there. Around the macro, as you noted, we continue to see customers in certain occasions delaying deals or having continued budget scrutiny and more approvals. We are seeing that phenomenon continue. And so overall, we're still cautious going into the year.

We'll still continue to be fluctuation theres, probably been a leveling or even improvement that we've seen in the enterprise side.

Amit Daryanani: Thank you.

On the S. P. As Francois mentioned service providers have been hesitant and we expect that to continue on in Q1 in particular.

Amit Daryanani: Thanks for taking my questions.

Got a federal government that isn't necessarily functional right now and we'll see what that means as an impact to bookings for systems.

And in Q1, and we're trying to take that into account as we looked at the guidance and the expectations. We do expect as we've talked about many times in the past there is that four to six quarter law and the dynamics that I just talked.

<unk> talked about explains why sometimes that takes four to six quarters, particularly in our supply chain. We're seeing the environment. So we do expect at some point or in the year that we will pick up in bookings from that Q4 level and.

Meta Marshall: Our next question comes from the line of Meta Martial with Morgan Stanley. Please proceed with your question. Great. Thanks. Maybe building on to the next question this start.

Francois Locoh: As you look at your pipeline, is your view that a lot of this is, okay, we've flooded assets as much as we can, or the utilization of the appliances is too high, or are we starting to see growth in multi-cloud projects again, just trying to get a sense of, as you look at your pipeline, is it traditional applications or expanding use cases. And then maybe as a second question, you mentioned having a place as AI and inference cases grow. Is that going to require productization of any kind of suite of products today, or just kind of tailoring to kind of have AI-ready solution? Thanks. Thank you, Meta.

Returned back to.

To a higher level I can't see normalized level, because it's tough to know when exactly that will take place but.

Our outlook and our expectation is not that we're going to do $180 million less systems bookings are assessed systems revenue or bookings will improve but the revenue will be down from last year because of that $180 million of pet.

And then to the second part of your question.

In terms of filling line no, it's not going to be all in one quarter.

It's going to bleed off over the next couple of years kind of every quarter.

And it's gonna be time with you know when when customers are at.

At a point, where they have to renew them migrate their their subscription that there will be a decision point.

Francois Locoh: The, so let me start with the first question. And my comments on pipeline, they're more related to what we're seeing in the, on the hardware side of things, where, you know, we had a number of customers that eight, number one, have been swathing their assets, and they're getting sometimes to utilization levels, where we know that at some point in 24, they will have to do something. Reng, or number two customers who have placed orders in FY22 have not been able to receive equipment for these orders, who now have and have started to deploy that capacity and are starting to be ready to order again. So that is accruing to a stronger hardware pipeline.

And so youre going to see it I think over the next six to eight quarters.

Thank you.

Yeah.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

Francois Locoh: In terms of big, you know, kind of multi-cloud software, what we call the transformational software projects. We are not yet seeing a substantial resumption of these kinds of projects, that's what I was saying earlier is customers are still very cautious on undertaking, you know, big projects like that and we're not seeing a different pattern going into the year on those aspects. As it relates to AI and whether it will require productization, we have essentially, so on the aspect of being able to run inferences in any environments, we have these capabilities in distributed cloud.

Francois Locoh: I think we need to ensure that we harden these capabilities and there's a strong go-to-market effort to be made around that to make customers aware of that in the future as they start deploying AI workloads. As it relates to being able to secure and deliver AI workloads, both capabilities exist today and we are ready to go with that already.

Francois Locoh: Minta just wanted to add that last year we talked about in our outlook, particularly in software that we were a little less than 50 percent of our outlook at the time was coming from the renewals and the true-fords portion of our terms and description agreements and our SaaS based revenue and that a little more than half was going to come from new this year as we take a look at that same formula and we look out over 60 percent of what we expect in that flat to modest software growth is coming from both the renewals pieces of the SaaS and managed service business plus the renewals and true-fords of our terms and description business. So we try to take into account the fact that we don't see these transformational projects on the horizon as we thought about the guidance. Great, thank you.

Michael Yang: Our next question comes on the line of Michael Yang with Goldman Sachs. Please proceed with your question. Okay, good afternoon. Thank you for the question and for all the comments on the outlook. I just had two both on software. First, I was just wondering if you could talk a little bit about your visibility into the term business. You called out term as something that would help drive the double digit software revenue growth in fiscal 25 as well as potential growth in fiscal 24.

Michael Yang: And then second, I was just wondering if you could talk a little bit more about this migration from Silver Line to DCS. It sounds like it's a multi-earheadwind, you know, something that contributed to the weakness in ARR and fiscal 23. But it also seems to be a headwind in fiscal 24 and fiscal 25. So maybe you could just talk about that and how that transition is rolling off and over how many years. Thank you.

Frank Peltzer: Stuart Michael, I'm sort of the first question that Francois jump in on the second on the silver line side. So on the first, on the term subscription, particularly the true forwards and the expansions that we have seen with the second terms coming on. And we've had probably about seven or eight quarters now of run rate and are getting much more comfortable with the early signs that, you know, we're massive expansions continue.

Frank Peltzer: And so getting very, very strong utilization from the, from that base of deployed flexible consumption programs in this specifically covers right now, big IP and the interex portfolio within our business, as I mentioned in the prepared remarks. And that's giving us a lot of comfort both in FY 24 and more importantly, in FY 25. FY 25, we've got a, you know, a bigger pool of expansion revenue than we do in FY 24 and 24 is growing on top of 23.

Frank Peltzer: So all of these continue to compile upon themselves. As I just mentioned to me, that, you know, more than 60% of the outlook that we've got within our software revenues coming, you know, from that cohort that we feel pretty good about seeing, which is the term renewals as well as through forwards, plus the Sassamian service renewal keys that we've got in the revenue stream. So both of those, you know, we feel very confident about, and it's probably the highest visibility that we've got within the revenue stream. Thank you, Frank.

Francois Locoh: And to your second question, Michael, I'm fast and managed services. So if we talk about, you know, FY 22 to FY 23, you saw that the AR there was a flat to slightly down. There, there are two reasons for that. One is, yes, the, the transitions we talked about started in 23 and there was about, call it roughly, you know, 12 million dollars of AR that we've transitioned out of the, out of the business in 2023.

Francois Locoh: This, the other reason is at the high end of the, the bought business, we saw quite a bit of softness especially in the second half of the year, as customers had significant budget scrutiny and, you know, where we're reluctant unless there were under immediate attack to really implement our most sophisticated solutions. We think over time that that will change, but specifically this year with the macro pressures in budget scrutiny, we saw a lot of softness there both in, you know, new bookings and in some churn in some cases.

Francois Locoh: So that, that is the FY 22 to FY 23 view from going into 2024, you ask about, you know, is this transition, is a multi-year transition? Yes, we expect that the, the 65 million dollars of revenue stream that we are transitioning will work themselves out over the next couple years. So, over FY 24 and FY 25, they are headwind to total growth. However, we are quite excited by what's happening with the SaaS portion of our offerings, specifically SaaS on the FI distributed cloud.

Francois Locoh: We have launched a WAP offering, the security offering, you know, about 18 months ago, we are seeing an extraordinary traction on that as I said earlier, we've won over 500 customers in that period, all of whom are enterprise customers. And we are seeing very rapid traction on that. We're also seeing rapid traction on the multi-cloud networking market, where we bring both networking and security capabilities and we're quite differentiated to anybody in the market.

Francois Locoh: So that has grown fast and we expect that portion of the business to continue to grow fast and over time become a majority of this SaaS and managed services portfolio. Thank you, Frank. Thank you, Francois, very helpful.

Tim Long: Our next question comes on the line of Tim Long with Barclays. Please proceed with your question. Thank you. I think you talked about replacing a competitor in the ADC, both hardware and software domain. Can you dig into that a little bit more? Is that something that you think was kind of so one-off, but do you think there's this sustainable move there and how that's happening? And then second, just on the changes and the transitions in software, it sounds like moving to distributed cluster, which makes a lot of sense.

Tim Long: Having looked at some of those businesses and kind of moving on from them, does that change your view of kind of synergies across product offerings or is it a sign that maybe those businesses didn't have the same synergy and that's why you're not going forward with them. Thank you. Thanks, Tim.

Francois Locoh: Maybe let me start with the second part. No, it's not about synergies. So there are two aspects of that, Tim, in terms of the transitions. We're talking about the $65 million transition. One is a legacy platform on which we have built managed services offerings. We have now built a with FI distributed cloud, a much more modern platform with an architecture that's differentiated and that's getting rapid traction and we want to transition our customers to this modern platform.

Francois Locoh: And that was always the plan. That was always the plan to do that. However, we had to, first of all, build a platform and build all the security capabilities on the platform to be able to start this transition. So we're very excited that we were able to do all this work on the Voltaire platform over the last couple of years and we're able to start this transition in 2023.

Francois Locoh: The second part of the revenue stream that is being retired is not about synergies. It's new offerings that we had launched recently that we hope to do well in the market, but given the macro environment and what we've seen as the early traction on these offerings. We made some decisions that you know in April to rationalize our portfolio and focus on the most attractive investments and we decided to not go forward with these products.

Francois Locoh: So that's the second part of your question. I should say that the last thing I would say about that is in terms of the synergies between elements of the portfolio. No, we are actually very encouraged on what we're seeing. We're seeing actually a number of customers who already have big IP adopt distributed cloud. So for a set of applications, they have big IP on-prem or in the cloud so hardware or software.

Francois Locoh: And then they want to have software as a service for other applications in their state. And they really want to have the consistency of security engines, security policies across all these environments. And we're able to do that with big IP as well as our SaaS and managed services. Engine X also had a very strong quota in Q4 and that was driven in part by the security capabilities that we reported from big IP onto engine X.

Francois Locoh: And that same security stack is now in use in the distributed cloud. So the synergies especially in terms of security across the portfolio are playing out and we expect that they will accelerate actually over the next couple of years as we do more and more convergence between the fast and deployable products.

Francois Locoh: Now for the first part of your question, in terms of the ADC competitor. We have over the last four years. You know, we made a decision to continue to invest in the future of the ADC franchise and specifically building the next generation hardware form factors for RIDC franchise and the next generation software form factors that together bring to on-prem deployments the benefit of the cloud such as, you know, multi-tenancy, rapid upgrades, hitless upgrades and make it way easier for customers to operationalize ADCs and have a better total cost of ownership.

Francois Locoh: Those investments are paying out in the market in terms of us getting share and being able to displace our traditional competitors in, you know, even in situations where there are incumbents and picture from them. And we think that, you know, that's not a one of our expectation is that will, you know, continue and, you know, we're pretty excited because this year we're introducing the next generation software platform on big IP that we think is also even more differentiated than what we've had in the market. So I expect that that will continue and it's for the investment we've made over the last four years.

Francois Locoh: Okay. Thank you.

Ray Mcdonough: Our next question comes from the line of Ray McDonough with Guggenheim. Please be sure with your question. Great. Thanks for taking the questions. François, given some of the changes you're making to your software portfolio, it seems like in a way you're simplifying or even converging some of your solutions. So as we think about the roadmap for distributed cloud in particular, what can you do to accelerate adoption and make sure you capture the potential voluntary churn that you've talked about, or even how should we think about the priorities around distributed cloud next year?

Francois Locoh: Thank you. The look, our goal is to make it ridiculously easy for our customers to secure and deliver their applications. And distributed cloud is getting a lot of traction because it does that for our customers. So when you look at the priorities next year, of course, it's scaling the platform so it's available in, you know, more market in more environments and continue to add services to the platform. We have the two, I would say first two sets of services, WAP and multi cloud networking.

Francois Locoh: We have a backlog of other services that we want to add to the platform that our customers will want to add. We recently added CDN capabilities on the platform. You know, after the act we hire of light like a few months back and we're starting to get customers adopting our CDN because it's convenient for them to attach that to low balancing and security in some cases. So the first priorities are, you know, scaling the platform and adding services.

Francois Locoh: As far as go to market, frankly, the priority is going into customers that are already a five customers that have our hardware or software. But want a solution to make it easier to front, to use a five to front a bunch of applications for which they don't want to manage the lifecycle of deployable products. And if you look at the 500 customers or so that are on distributed cloud today, over two thirds of them are actually existing big IP customers.

Francois Locoh: So about about a third of them are net new customers that have never bought anything from a five and two thirds of them are existing big IP customers. And we think actually with both net new and with existing customers, there is a lot of growth and that's where the focus is. And the focus is going to continue to be with large enterprise customers, whereas five has a strong price.

Frank Peltzer: I appreciate that.

Frank Peltzer: If I could speak one more in, maybe for Frank, certainly appreciate the continued focus on operating margins and EPS growth. But can you help us think through how we should think about cashflow margins in fiscal 24? I know you typically don't guide cashflow, but should we think of cashflow growing in line with operating income, X sum of the tax headlands you had in fiscal 23? Any even directional thoughts would be helpful.

Frank Peltzer: As you described, I think that's roughly correct. Cashflow is one of the harder things for us to predict, but those dynamics, it should mirror a bit of that net income growth with some exceptions to the true tax impacts. Some of the restructuring expense we had last year that we don't have this year that are real cash, but split out for non-gap purposes. So there's a few ends and outs, but it should be roughly, roughly close to that.

Frank Peltzer: Great. Appreciate it.

James Fish: Our next question comes from the line of James Fish with Pike Per Sandler. Please proceed with your question. Hey guys, thanks for speaking, man.

James Fish: I'll just make it simple here. You know, you guys talked about and prepared marks about subscription renewals performing well. Any more color into specifically what products are seeing those better renewals, but the cross fell that you're seeing or any qualitative or quantitative color around net retention rates, understanding. You have this headwind around specifically the Safinamis P business. About 65 million, you know, how should we think about that net retention rate within the term business or the aggregate overall when you kind of exclude even the impact of that fast piece. Thanks.

Frank Peltzer: Sure. Fish, why don't I start in a differential once to add anything? That would be great. So, you know, within our term subscription business, it's generally our big IP software as well as in genetics, and that's the expansion rates that we have seen. It's not the easiest thing to ask in the world to convert that term into an ARR type of business because of all the moving parts, but when we've, when we try to do that and try to convert and look at.

Frank Peltzer: What would, you know, an expansion rate be or in that revenue retention rate? It's, it's north of what you would think of as the industry norm of 120%. Let me just put it, put it that way. And that combination of where it is plus our our Safinamis service net revenue retention rate is still north of that 120%. So, that combination, you know, is what gives us a lot of visibility and firmness and our expectation of those pieces of the business that will continue to do well.

Frank Peltzer: Makes sense. And just on the go to market side, any changes in terms of incentive or approach as we turn the page into this next fiscal year and as we have, you know, transitions now within the overall software transition. The incentive plans between the two years are largely the same fish. There's always going to be a couple of tweaks here and there is we're looking and seeing what was successful here before and not but nothing. Thank you.

James Fish: Thanks, guys.

Simon Leopold: Our last question comes from the line of Simon Leopold with Raymond James. Please proceed with your question. Great. Thanks for taking the question.

Frank Peltzer: I just want to get a better sense of where the system's business is stabilizing in that I assume the September quarter did not have much if any backlog draw down in it. And so other than maybe some seasonal movement, I'm just trying to get a sense of is sort of this, you know, 120 to 130 million per quarter level sort of the new normal for systems and then just quickly on on how the software is trending with the silver line exit.

Frank Peltzer: Does that manifest itself gradually throughout the year or is that something that shows up in a particular quarter? Thanks for that. So I'll start for the first one and then Francois. I don't know if you want to take the second. But in terms of what we what we have said, I think in both repair March and some of the answers, we did, but we do believe that we hit a trough in FY23 in terms of systems bookings and you know what we're equating that to the term demand.

Frank Peltzer: Now the offset or the balance of that is that there was FY22 bookings that they were delivered in in FY23. And so the shipments that they actually received, which is the revenue that we recognized, that came in in FY23 and started to be utilized. Now as that utilization started to increase and more capacity was needed, we started to see that come through in Q4, which was our best systems bookings quarter of the year.

Frank Peltzer: It looks like on a revenue basis that wasn't necessarily the case, but from a demand perspective, our bookings perspective, that was the case. There will still continue to be fluctuation. There's probably a bit of leveling or even improvement that we've seen in the enterprise side. On the SP, as Francois mentioned, service providers have been hesitant and we expect that to continue on. And in Q1 in particular, you know, we've got a federal government that isn't necessarily functional right now.

Frank Peltzer: And we'll see what that means is an impact to, you know, bookings for systems in Q1. And we're trying to take that into account as we, you know, looked at the guides and the expectations. We do expect, as we've talked about in many times in the past, there is that four to six quarter law. And the dynamics that I just talked about explains why sometimes that takes four to six quarters, particularly in a supply chain.

Frank Peltzer: So we do expect at some point during the year that we will pick up in bookings from that Q4 level and return back to a higher level. I can't say normalize level because it's tough to know when exactly that will take place. But our outlook and our expectation is not that we are going to do 180 million less in systems bookings. Our systems revenue, our bookings will improve, but the revenue will be down from last year because of that 180 million.

Frank Peltzer: And to the second part of your question, in terms of civil line, no, it's not going to be all in one quarter. You know, it's going to bleed off over the next couple of years, kind of every quarter. And it's going to be time with, you know, when customers are at a point where they have to renew or migrate their subscription, that there will be a decision point.

Frank Peltzer: And so you're going to see it, I think, over the next 68 quarters.

Operator: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.

Operator: You may disconnect your lines at this time and have a wonderful day.