Q1 2024 F5 Inc Earnings Call

Good afternoon, and welcome to the F. Five Inc. First quarter fiscal 'twenty 'twenty four financial results conference call.

At this time all participants are in a listen only mode. A brief question and ask a question will call. The formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.

If anyone has any objections. Please disconnect at this time I will now turn the call over to Mr. Dan do long Ma'am, you may begin Hello, and welcome I'm Suzanne Dulong <unk>.

Suzanne DuLong: Vice President of Investor Relations.

Suzanne DuLong: So I'll go to Neil <unk>, President and CEO, and Frank Pelzer, Executive Vice President and CFO will be making prepared remarks on today's call. Other members would be a 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 Dot com, where an archived version.

Suzanne DuLong: Today's audio will be available through April 28th 'twenty 'twenty four the slide deck accompanying today's discussion if you will 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 87766068534201612.

Suzanne DuLong: 7415, and use meeting I D 137435 to one the telephonic replay will be available through midnight Pacific time January 30th 'twenty 'twenty four for additional information or follow up questions. Please reach out to me directly I stopped due long at a five dot com our discussion today will contain forward looking.

Suzanne DuLong: 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 summarize factors that may affect our results in the press release announcing our financial results in detail in our SEC filings. In addition.

Suzanne DuLong: 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. Please note that all five has no duty to update any information presented in this call with that I will turn the call over to first of all.

Suzanne DuLong: Thank you Suzanne and Hello, everyone. Thank you for joining us.

Speaker Change: In my remarks today, I will speak to our Q1 highlights as well as our expectations for Q2.

Speaker Change: Frank will then review the details of our Q1 results and provide some additional color about our outlook Q1 was our third consecutive quarter of stability with the quarter and individual deals playing out largely as expected. We are not yet hearing that customers' budgets are increasing but the more predictable spending patterns or income.

Speaker Change: Our team delivered another solid quarter with consistent performance across our geographic theaters, we had a strong performance from our service provider vertical which correlates to unusually strong perpetual license software revenue in the quarter. This is likely less indicative of service provider trends overall and more.

Speaker Change: A reflection number five position in some key projects, we delivered Q1 revenue above the high end of our guidance range. In addition, our continued operating discipline enabled us to deliver non-GAAP operating margins of 35.5%. This is up more than 900 basis points from the year ago period as it was.

Speaker Change: Both of these factors and the modest tax benefit. We also delivered non-GAAP earnings per share growth of 39% with EPS of $3 43 per share well above the high end of our guidance range. Our customers are still watching their budgets closely as we look ahead, we are encouraged by several factors including better.

Speaker Change: Predictability from customers improving systems demand and the fact that some customers are making decisions that investments need to happen now we are cautiously optimistic that these factors signal an easing of the extreme customer spending caution that characterized last year and in fact, we are seeing stronger underlying demand.

Speaker Change: And because of the backlog headwind, we faced in FY 'twenty four despite improving demand signals. We expect our Q2 revenue will be down low single digits from Q2 of last year.

Frank will discuss our outlook in greater detail in a few minutes as Linda was five years ago. Nearly every large enterprise organization expected that they would move their application environments from on premises to the public cloud or SaaS. They also expected that doing so will dramatically simplify their operations and reduce costs instead so there.

Speaker Change: These customers are grappling with a more intricate and costly set of challenges than ever before in our most recent state of application strategy research, 88% of our customers report. They are currently operating applications across on premises and cloud environments. The same research found that 38% of organizations are hosting their application.

Speaker Change: Vacations in six different types of environments, the expanding number of applications across distributed environments demand specific expertise and tools for each environment, which adds cost and operational complexity at the same time. This expanded landscape provides cyber criminals with more potential targets amplifying secured.

Speaker Change: Any concerns. This complexity is further intensified by the rapid growth in the number of applications. The growth trajectory that is poised to accelerate significantly with the widespread adoption and proliferation of AI. We firmly believe that F. Five is strategically positioned to support our customers as they navigate these escalating challenges.

Across a rapidly evolving landscape, our innovation and product portfolio evolution over the last several years has been aimed at addressing exactly these challenges before I pass the call to Frank I will speak to some customer highlights from the quarter RFID Big IP families source traditional applications either on premises co located or in cloud environments.

Francis J. Pelzer: <unk> Big IP data plane performance automation capabilities and seamless integration into public cloud environments continues to differentiate it from competitors, our commitment to innovation and to providing customer flexibility through a range of consumption models also has enabled us to continue to gain share in the traditional ADC space.

Francis J. Pelzer: <unk> Big IP capabilities drove a significant win in Q1 with a north American service provider. The customer is now deploying F. Five cloud native software at scale and it's five G architecture over the last five years, we have invested to modernize big IP and to deliver industry, leading container native functions to scale and secure five G cloud.

Francis J. Pelzer: Infrastructures. These investments made this when possible modern F. Five big IP software is now powering the growth from this providers consumer five G handset demand and securing its overall fixed wireless access offerings are fastest growing five G service in North America.

Francis J. Pelzer: Turning to our five nginx, which serves modern container native and micro services based applications and API. We continue to see large enterprises adopt engine extra that cloud and kubernetes based applications as those applications scale, we are seeing our nginx opportunity scale as well. In addition customers are also leveraging nginx for App layer secured.

Francis J. Pelzer: D for containers in Q1, an APAC based auto manufacturer selected nginx, plus without protect to power and protect its next generation connected car data and service offering beyond the standard car related maintenance information the customer is empowering a range of vehicle related services from traffic management and statistics too.

Francis J. Pelzer: Fleet management and automated insurance claims the customer envisions, providing rich data enabled services, including traffic data to government agencies for road maintenance and enabling automated insurance claim filing using telemetered and location data the customer selected nginx for this ambitious project because of its unique ability to <unk>.

Francis J. Pelzer: <unk> WAF for containers on AWS as well as its ability to support specific requirements that could not be met I native cloud services.

Francis J. Pelzer: F. Five distributed cloud services is a portfolio of SaaS and managed services, which we have built from a combination of organic and inorganic efforts. The platform will have its second birthday, shortly and continues to gain traction with customers as a result of its flexibility and strong capabilities. We are intercepting two exciting growth categories with distributor.

Francis J. Pelzer: Cloud web App, and API protection, our Wap and the emerging opportunity in secure multi cloud networking in fact, we have seen explosive growth in the number of attacks blocked by distributed clouds Wap capabilities with a number of blocked attacks growing more than 100% in Q1 from Q4 in one walk.

Francis J. Pelzer: Win from the quarter, a large U S based financial institution selected F. Five distributed cloud services to solve its challenge of application security and hybrid cloud the customer leveraged our flexible consumption program, adding a P E discovery and protection to manage the many fintech aggregator applications that access the financial <unk>.

Francis J. Pelzer: Through a P is a phy distributed cloud services is also gaining traction in API security in just the last 12 months, we have observed a substantial increase in the volume of API attacks, 95% of customers surveyed for our state of application strategy report say they have deployed an API gateway. This is a significant increase.

Francis J. Pelzer: <unk> from 2019, when only 35% had deployed one in fact, 92% of the total attacks mitigated by distributed cloud in Q1 were targeted towards a P. Ice that is up from 73% in Q4.

Francis J. Pelzer: As an example of an API security win in Q1, following multiple service impacting outages a service provider in our APAC region selected distributed cloud to replace their prior API security vendor distributed clouds, multi cloud networking capabilities are making it possible for the customer to switch between public clouds when necessary while it provides.

Francis J. Pelzer: <unk> visibility and reporting via a single pane of glass F. I distributed cloud services is also gaining traction in secure multi cloud networking use cases in another example from Q1, a global provider of traditional and digital learning resources deployed distributed cloud services. The customer was looking for consistent application.

Francis J. Pelzer: Level security multi cloud scalability and networking distributed cloud enabled them to simplify their infrastructure strengthen management of their multi cloud architecture and improve application security.

Francis J. Pelzer: They also deployed multiple F five customer edge software instances in their cloud infrastructure and in their on premises data center, enabling them to meet an aggressive cloud migration schedule.

Speaker Change: I will spend just a few minutes talking about the opportunity, we see emerging with AI applications.

Hey, I will accelerate the growth in the number of applications and a P. Is we are seeing the start of this already in the form of AI models, and new AI driven services, becoming available from startups and established tech companies alike. We expect that as enterprises ramp adoption of AI over the next one to two years that adoption will bring with it a floor.

Speaker Change: A lot of new enterprise applications that leverage those AI models N V. A P is of the new AI driven services. These AI powered applications differ from typical applications in several important ways.

Speaker Change: First they are a P. A driven both in terms of leveraging the a P is a third party AI models and services and also in terms of exposing their own capabilities as a P is for downstream use Foss API security for these AI powered apps is critical customers tell us that API security is the top security service.

In use are planned for used to protect the integrity of AI and machine learning models customers also tell us that he is driving demand for a comprehensive API security solution inclusive of Ddos protection Bot detection and data masking and leak protection.

Speaker Change: Second AI powered applications tend to be comprised of many different components and data sources, which are distributed across hybrid and multi cloud environments.

Speaker Change: Five is an AI enabler effectively optimizing managing and securing AI applications and the API is that connect them demands a blend of specialized expertise and capabilities that align seamlessly with our solutions portfolio. We are the application and API expert with a deep understanding of the <unk>.

Speaker Change: Needs of demanding applications built over decades, this expertise and the capabilities of our Phy distributed cloud services is a powerful combination, particularly as customers begin to deploy real life AI use cases.

Speaker Change: During Q1, we secured a win that highlights the synergies of our product families and showcases how F. Five supports and enables AI driven use cases.

Speaker Change: In EMEA based service provider selected the combination of that five distributed cloud services and big IP to secure and deliver a first of its kind AI as a service suffering from their b to b customers after comparing at fives capabilities to alternatives the customer determined only a five can meet the secure.

Eddie and scalability requirements needed to deliver that offering in a cost efficient way.

Speaker Change: This real life use cases offer of you. So how we are enabling customers to secure deliver and optimize their applications in a P is and how we simplify the challenges of operating in a complex hybrid multi cloud world.

Speaker Change: Now I will turn the call to Frank Frank.

Thank you Francois and good afternoon, everyone I will review, our Q1 results before I elaborate on our Q2 outlook. We delivered Q1 revenue of $693 million, reflecting sales that were down 1% year over year with the mix of 56% Global services and 44% product revenue Global service.

Francis J. Pelzer: <unk> revenue of 387 million grew a strong 7% due to continued high maintenance renewals as well as the continued benefit from price increases we introduced in FY 'twenty to product revenue totaled 306 million down 10% year over year systems revenue of 135 million declined.

Francis J. Pelzer: 22% year over year, reflecting a lower level of backlog related shipments than we had in the year ago period software revenue grew 2% over the year ago period to $170 million as Francois noted Q1 was unusually strong perpetual software license quarter with several service providers opting to leverage cap.

Next versus Opex models are perpetual software revenue was $46 million in Q1, representing 19% growth year over year, and 27% of Q1 software revenue.

Francis J. Pelzer: We believe providing consumption model flexibility to our customers is a strategic advantage over competitors, who were strict customer choice.

Francis J. Pelzer: The result can be quarters like this one where we have unusual growth in perpetual software revenue. We do not believe that Q1 software revenue mix is indicative of changing customer preferences.

Francis J. Pelzer: Whether it is a function of preferences of specific customers in the quarter.

Francis J. Pelzer: Our subscription based revenue declined 3% year over year to $125 million, representing 73% of Q1's total software revenue new subscriptions and renewals book performed to plan in the quarter revenue from recurring sources contributed 73% of Q1's revenue up from 68% a year ago. This.

Francis J. Pelzer: Is down slightly from recent levels as a result of the perpetual license revenue contribution in the quarter recurring revenue includes subscription base revenue as well as the maintenance portion of our services revenue on a regional basis revenue from Americas was down 6% year over year, representing 54% of total revenue EMEA grew fee.

Francis J. Pelzer: 5%, representing 28% of revenue and APAC grew 8% representing 18% of revenue looking at our major verticals. During Q1 enterprise represented 64% of product bookings service providers represented 17% and government customers represented 19%, including 4% from U S.

Francis J. Pelzer: S. Federal our Q1 operating results were strong reflecting our continued operating discipline GAAP gross margin was 80.3% non-GAAP gross margin was 83.1% an improvement of 264 basis points from Q1 of FY2023 GAAP operating expenses were 392.

Francis J. Pelzer: $2 million non-GAAP operating expenses were $330 million or.

Francis J. Pelzer: Our GAAP operating margin was 23.8% our non-GAAP operating margin was 35.5% an improvement of more than 900 basis points from Q1 of FY2023 our GAAP effective tax rate for the quarter was 20.7% our non-GAAP effective tax rate was 19.9%. This is below our initial.

Operator: Good afternoon, and welcome to the F5, Inc. First Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode.

Operator: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this 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.

Francis J. Pelzer: Expectations for the year as a result of I R. S guidance issued during the quarter relating to foreign tax credits. Our GAAP net income for the quarter was 138 million or $2.32 per share. Our non-GAAP net income was 205 million or $3.43 per share well above the top end of our guidance range.

Francis J. Pelzer: This is a result of the revenue beat continued operating discipline with nine cents as a result of the Q1 tax benefit I will now turn to cash flow and the balance sheet, which also remained very strong.

Suzanne DuLong: Hello and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relief. Francois Locoh-Denue, F5's President and CEO, and Frank Pelzer, F5's Executive Vice President and CFO, will be making prepared remarks on today's. 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, or an archived version of today's audio will be available through April 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 discussion. To access the replay of today's webcast by phone, dial 877-660-6853 or 201-612-7415 and use meeting ID 13743521.

We generated $165 million in cash flow from operations in Q1.

Francis J. Pelzer: Capital expenditures for the quarter were $9 million DSO for the quarter was 67 days due to the backend linearity of invoicing in the quarter cash and investments totaled approximately 832 million at quarter end deferred revenue increased 4% year over year to 1.83 billion our share repurchases reflect our ongoing.

Francis J. Pelzer: Commitment to returning cash to shareholders, we repurchased $150 million worth of F. Five shares in Q1 at an average price of $163 per share.

Francis J. Pelzer: Finally, we ended the quarter with approximately 6440 employees.

Suzanne DuLong: The telephonic replay will be available through midnight Pacific time, January 30th, 2024, for additional information or follow-up. Please reach out to me directly at s.dulong at f5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by them. 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-GAAP 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. With that, I will turn the call over to Fessler.

Francis J. Pelzer: Francois outlined our Q2 outlook at the start of the call I'll recap that with some additional color.

Francis J. Pelzer: We expect Q2 revenue in the range of $675 million to $695 million.

Francis J. Pelzer: We expect gross margins in the range of 82% to 83%, we estimate Q2 operating expenses of $347 million to $359 million.

Francis J. Pelzer: This is a step up from Q1, reflecting our seasonal sequential uptick related to the reset in payroll taxes.

This year and also reflects marketing expenses related to our global App world customer events, which will take place in Q2 in San Jose and in other locations across the globe. We are targeting Q2, non-GAAP EPS in the range of $2 79 to $2.91 per share.

Francis J. Pelzer: We expect Q2 share based compensation expense of approximately $56 million to $58 million at this point in the fiscal year, we are not revising our revenue our operating margin targets for FY 'twenty four we continue to expect to achieve our FY 'twenty for operating margin target range of 33% to 34%, which accounts for the normal seasonal step up in operating.

Franois Locoh: Thank you, Suzanne. And hello, everyone. Thank you for joining us. In my remarks today, I will speak to our Q1 highlights as well as our expectations for Q2. Frank will then review the details of our Q1 results and provide some additional color about our outcome. Q1 was our third consecutive quarter of stability, with the quarter and individual deals playing out largely as expected. We are not yet hearing that customers' budgets are increasing, but the more predictable spending patterns are encouraging. Our team delivered another solid quarter with consistent performance across our geographic theaters.

Francis J. Pelzer: <unk> expenses from Q1 to Q2, we now expect our FY 'twenty four tax rate will be in the range of 21% to 22% down slightly from our prior range of 21% to 23%.

Francis J. Pelzer: Given the new outlook in our annual tax rate, we now expect FY 'twenty four non-GAAP EPS will grow between 6% to 8%. This is up from the 5% to 7% range. We provided last quarter I will now turn the call back over to Francois Francois.

Franois Locoh: We had a strong performance from our service provider vertical, which correlates to unusually strong perpetual license software revenue in the quarter. This is likely less indicative of service provider trends overall and more of a reflection of F5's position on some key projects. We delivered Q1 revenue above the high end of our guidance range. In addition, our continued operating discipline enabled us to deliver non-gap operating margins of 35.5%.

Thank you Frank.

Francois: In conclusion, I will reiterate that F. Five is the only company capable of securing delivering and optimizing any application any API regardless of its location be it in the data center 81 of the public clouds SaaS or at the network edge amidst a complex web of environmental solutions.

F five empowers customers to establish and maintain a consistent security posture across all of their applications enhancing security streamlining operations and reducing costs. Moreover, we are unifying our solutions to provide customers with unprecedented levels of visibility manageability.

Franois Locoh: This is up more than 900 basis points from the year-ago period. As a result of these factors and the modest tax benefit, we also delivered non-gap earnings per share growth of 39%, with EPS of $3.43 per share, well above the high end of our guidance range. Our customers are still watching their budgets closely.

Francois: <unk> and automation before we go to questions I will elaborate on the strategy and products session. We are hosting next Thursday, we are going to use this event to discuss the hybrid multi cloud challenges faced by large organizations worldwide, including the implications of AI on applications a P eyes and security we also will.

Franois Locoh: As we look ahead, we are encouraged by several factors, including better predictability from customers, improving system demand, and the fact that some customers are making decisions that investments need to happen now. We are cautiously optimistic that these factors will signal an easing of the extreme customer spending caution that characterized last year. And in fact, we are seeing stronger underlying demand. But because of the backlog headwind we face in FY24, despite improving demand signals, we expect our Q2 revenue will be down low single digits from Q2 of last year. Frank will discuss our outlook in greater detail in a few minutes. As little as five years ago, nearly every large enterprise organization expected that they would move their application environments from on-premises to the public cloud or SaaS. They also expected that doing so would dramatically simplify their operations and reduce costs.

Francois: <unk>, an overview of our product families. The market opportunities, we see for them and how our portfolio transformation benefits, our customers and differentiate us at five we look forward to seeing several of you live in San Jose and more of you virtually.

Speaker Change: Operator, please open the call to questions.

Thank you we will now be conducting a question and answer session.

I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the archaean one moment. Please while we poll for questions.

Franois Locoh: Instead, today's customers are grappling with a more intricate and costly set of challenges than ever before. In our most recent state of application strategy research, 88% of our customers report they are currently operating applications across on-premises and cloud environments. The same research found that 38% of organizations are hosting their applications in six different types of environments. The expanding number of applications across distributed environments demands specific expertise and tools for each environment, which adds costs and operational complexity. At the same time, this expanded landscape provides cyber criminals with more potential targets, amplifying security concerns.

Speaker Change: Thank you. Our first question is from Cemig Chatterji with J P. Morgan. Please proceed.

Samik X. Chatterjee: With your question.

Samik X. Chatterjee: Hi, Thanks for the question guys. This is Joe Cardoso on for Sonic and just one question for me.

Joe Cardoso: Highlighted encouraging signs of stabilizing demand trends can you maybe just talk to the year over year revenue trends that you are a long excluding the backlog headwinds from a year ago and then perhaps can you just provide a bit more granularity around that comment like what are you seeing specifically under the hood from a customer or a product portfolio perspective, and whether you're seeing any.

Franois Locoh: This complexity is further intensified by the rapid growth in the number of applications, a growth trajectory that is poised to accelerate significantly with the widespread adoption and proliferation of AI. We firmly believe that F5 is strategically positioned to support our customers as they navigate these escalating challenges across a rapidly evolving landscape. Our innovation and product portfolio evolution over the last several years have been aimed at addressing exactly these challenges. Before I pass the call to Frank, I will speak to some customer highlights from the quarter. Our F5 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 continue to differentiate it from competitors.

He is changing right.

Speaker Change: Any areas trending better than others. Thanks for the question.

Speaker Change: Well thanks, Joe.

Speaker Change: Alright, let me start with the first part of your question.

Speaker Change: Okay.

Speaker Change: At the beginning of the fiscal year that even though we were guiding revenue down flat to down for the two 3% down for the fiscal year.

Speaker Change: That if you excluded the backlog insight that would amount to about mid single digit growth.

Speaker Change: In terms of the demand that we are seeing certainly.

Speaker Change: Certainly in terms of demand if I compare what we saw in the first half of 2023 versus the demand that we are we saw in Q1 and what we expect to see in our Q2 half on half first half 'twenty three the first have to wait for the man is meaningfully up relative to last year.

Franois Locoh: Our commitment to innovation and to providing customer flexibility through a range of consumption models has also enabled us to continue to gain share in the traditional ADC space. Big IP's capabilities drove a significant win in Q1 with a North American service provider. The customer is now deploying F5 cloud-native software at scale in its 5G architecture. Over the last five years, we have invested in modernizing Big IP and delivering industry-leading container-native functions to scale and secure 5G cloud infrastructures. These investments made this win possible. Modern F5 Big IP software is now powering the growth of this provider's consumer 5G handset demand and securing its overall fixed wireless access offerings, the fastest growing 5G service in North America. Turning to F5 NGINX, which serves modern container-native and microservices-based applications and APIs.

Speaker Change: Now that is I would say generally broad based across.

Speaker Change: All major theaters.

Speaker Change: And it's also across most industry verticals.

Speaker Change: Talk to you some vertical.

Speaker Change: Are performing better than others, but generally broadly we've seen that across all industry verticals in terms of the product trends.

Speaker Change: You know I would say that the trends are similar across the portfolio and not different than what we described in October.

With continued.

Speaker Change: Great progress on our core franchise Big IP continued progress on nginx and modern applications and continued strong adoption of our distributed cloud services.

Franois Locoh: We continue to see large enterprises adopt NGINX for their cloud and Kubernetes-based applications. At those scales, we are seeing our NGINX Opportunity Scale as well. In addition, customers are also leveraging NGINX for app layer security for containers. In Q1, an APAC-based auto manufacturer selected NGINX Plus with AppProtect to power and protect its next-generation connected car data and service offering.

Speaker Change: Yeah.

Speaker Change: No I appreciate the color Francois thanks.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question is from Tim long with Barclays. Please proceed with your question.

Timothy Patrick Long: Thank you.

Timothy Patrick Long: Two questions if I could first.

Franois Locoh: Beyond the standard car-related maintenance information, the customer is empowering a range of vehicle-related services, from traffic management and statistics to fleet management and automated insurance claims. The customer envisions providing rich, data-enabled services, including traffic data to government agencies for road maintenance and enabling automated insurance claim filing using telemetry and location data. The customer selected NGINX for this ambitious project because of its unique ability to implement WAFs for containers on AWS, as well as its ability to support specific requirements that could not be met by native cloud services.

Timothy Patrick Long: To be Frank or Francois if you could just talk a little bit about the.

Timothy Patrick Long: The subscription number in the quarter I guess, the perpetual is really strong.

Timothy Patrick Long: But could you talk a little bit about particularly the sequential downtick in subscription is this related to.

Timothy Patrick Long: True forwards or.

Timothy Patrick Long: Any kind of cannibalization or anything else in there.

Timothy Patrick Long: You could go a little deeper on.

Timothy Patrick Long: DS.

Software subscription weakness and then the follow up for Francois. Thank you mentioned.

Timothy Patrick Long: Something about competitive wins in more in the system than traditional ADC area. Obviously, there is some disruption at one of your major competitors can you just give a little color on how things are going competitively and how when rates are and how much room do you think.

Franois Locoh: F5 Distributed Cloud Services is a portfolio of SaaS and managed services which we have built from a combination of organic and inorganic efforts. This platform will have its second birthday shortly and continues to gain traction with customers as a result of its flexibility and strong capabilities. We are experiencing two exciting growth categories with distributed cloud, web app and API protection, or WAP, and the emerging opportunity in secure multi-cloud networking.

Timothy Patrick Long: There is to take share in that more traditional ADC area. Thank you.

Yes, absolutely Ted let me take the first part and let Francois I'll take the second part so with subscriptions again as I mentioned in the prepared remarks, largely performed to our expectations on a sequential basis. If we were purely ratable, obviously that would be concerning but since we obviously have got.

Speaker Change: Some 606 termination description in there that will hit in different ways.

Speaker Change: Time.

Franois Locoh: In fact, we have seen explosive growth in the number of attacks blocked by distributed cloud's WAP capabilities, with the number of blocked attacks growing more than 100% in Q1 from Q4. In one WAP win this quarter, a large U.S.-based financial institution selected F5 Distributed Cloud Services to solve its challenge of application security in the hybrid cloud. The customer leveraged our flexible consumption program, adding API discovery and protection to manage the many fintech aggregator applications that access their financial data through APIs. F5 Distributed Cloud Services is also gaining traction in API security. In just the last 12 months, we have observed a substantial increase in the volume of API attacks.

Speaker Change: We had more renewals frankly.

Speaker Change: Q4 than we did in Q1 and so that's just the natural progression on a sequential.

Speaker Change: Gross side, there, but we're not concerned at all about it this is <unk>.

Speaker Change: Really.

Speaker Change: Our renewals and the new performed to our expectations.

No change for our outlook for the year based off of that but I'll, let John So I'll talk a little bit on the competitive side.

John: Tim on the on the competitive side, we shall we are.

Pretty strong competitive position and I think our position of strength is in fact growing.

John: And I would say we are seeing actually increased inbound interest from both customers and partners.

Speaker Change: Into a five and I think that's largely due to two big factors.

Speaker Change: One factor is frankly, we have not one but three competitors.

Franois Locoh: 95% of customers surveyed for our State of Application Strategy report say they have deployed an API gateway, a significant increase from 2019 when only 35% had deployed one. In fact, 92% of the total attacks mitigated by distributed cloud in Q1 were targeted at APIs. That is up from 73% in Q4. As an example of an API security win in Q1, following multiple service-affecting outages, a service provider in our APAC region selected Distributed Cloud to replace their prior API security vendor. Distributed Cloud's multi-cloud networking capabilities are making it possible for the customer to switch between public clouds when necessary, while providing visibility and reporting via a single pane of glass.

That have gone through a change of control event in the last.

Speaker Change: 12 to 18 months, one one was primarily a hardware software competitor one's been a software competitor and one in a SaaS competitor and all three have had kind of changed our customer playbook as a result.

Speaker Change: And we're seeing inbound customer interests from from that that contract with.

Speaker Change: Our approach and frankly the investments we've made over the last several years.

Speaker Change: Where we have just at this point in time, where some some competitors are getting weaker.

Speaker Change: Introducing a very exciting set of proposition R series that have very strong adoption in the market, we're introducing next generation hardware and software.

Speaker Change: That creates an exciting roadmap for competitors, sorry for customers and so the contracting.

Speaker Change: Investments in Roadmaps between players is really a strengthening I had.

Speaker Change: Sorry, and we're seeing a lot of accounts, where historically we had been blocked.

Franois Locoh: F5 Distributed Cloud Services is also gaining traction in secure multi-cloud networking use. In another example from Q1, a global provider of traditional and digital learning resources deployed distributed cloud services. The customer was looking for consistent application-level security, multi-cloud scalability, and networking. The distributed cloud enabled them to simplify their infrastructure, strengthen management of their multi-cloud architecture, and improve application security. They also deployed multiple S5 Customer Edge software instances in their cloud infrastructure and in their on-premises data center, enabling them to meet an aggressive cloud migration schedule. I will spend just a few minutes talking about the opportunities we see emerging with AI applications. AI will accelerate the growth of the number of applications and APIs. We are seeing the start of this already in the form of AI models and new AI-driven services becoming available from startups and established tech companies alike. We expect that as enterprises ramp adoption of AI over the next one to two years, that adoption will bring with it a flood of new enterprise applications that leverage those AI models and the APIs of the new AI-driven services. These AI-powered applications differ from typical applications in several important ways.

Speaker Change: Locked out of these accounts that we have been able to track.

Speaker Change: The last.

Speaker Change: A couple of quarters and we expect that to continue in fact, just this week, we had a customer here that is one of the largest companies in America. One of the Fortune 100, we have not been able to create an.

Speaker Change: That account and we are now.

Speaker Change: Migrating pretty much the entire application of states from a competitor to <unk> five and the approach with these customers is we are lending them.

Speaker Change: Generally on on our Big IP platform, but then we're able to land and expand.

Speaker Change: In cross selling some of the other value propositions in the portfolio once they discover the full portfolio of their five when they start working with us. So we think that that.

Speaker Change: That trend is going to continue and we feel very good about competitive position over the next two to three quarters and we're starting to see.

Speaker Change: Our growing pipeline that reflects that that stronger position.

Speaker Change: Okay. Thank you guys.

Thank you. Our next question is from Amit <unk> with Evercore ISI. Please proceed with your question.

Amit: Thanks for taking my question I have two as well I guess first off on the software performance I'd Love to just understand if you still think for the fiscal year are flat to up modestly the right way to think about it and if there's any change in how you think about sort of the what happens to the perpetual market or the managed service as a subscription as you go from here just an update on how.

Speaker Change: Do you think about software stocking up the rest of the year in any of those three buckets that changes your perspective right now.

Franois Locoh: First, they are API-driven, both in terms of leveraging the APIs of third-party AI models and services and also in terms of exposing their own capabilities as APIs for downstream use. Thus, API security for these AI-powered apps is critical. Customers tell us that API security is the top security service in use or planned for use to protect the integrity of AI and machine learning models. Customers also tell us that AI is driving demand for a comprehensive API security solution inclusive of DDoS protection, bot detection, and data masking and leak protection. Second, AI-powered applications tend to be comprised of many different components and data sources, which are distributed across hybrid and multi-cloud environments. F5 is an AI enabler.

Let me start with that one.

No is the answer.

One quarter doesn't make a trend we're obviously encouraged by what we saw in software in Q1.

Speaker Change: More to come on Q2 and beyond but at this point, we're not changing the outlook on that.

Speaker Change: Modest growth view for software.

Speaker Change: And largely again subscription and.

Speaker Change: Perpetual service. It was it was a big quarter for perpetual this quarter. It may not be the same next quarter in that regard. This is really about some specific customer preferences and the service.

Speaker Change: Provider market and they could have easily have gone.

Speaker Change: Enjoy subscription model and we would have seen that that dynamic reverses.

Speaker Change: No no real change in our outlook for software right now for FY 'twenty four.

Speaker Change: Got it and then I guess last time around.

Speaker Change: But there might be a 400 basis point headwind from this managed services transition you have to undertake across 24 and 25 I was wondering if there was a better sense of when do you think those headwinds would happen if its this year next year.

Franois Locoh: Effectively optimizing, managing, and securing AI applications and the APIs that connect them demands a blend of specialized expertise and capabilities that align seamlessly with our solutions portfolio. We are the application and API experts with a deep understanding of the needs of demanding applications built over decades. This expertise and the capabilities of F5 distributed cloud services are a powerful combination, particularly as customers begin to deploy real-life AI use cases. During Q1, we secured a win that highlights the synergies of our product families and showcases how F5 supports and enables AI-driven use cases. An EMEA-based service provider selected the combination of F5 distributed cloud services and BIG-IP to secure and deliver a first-of-its-kind AI-as-a-service offering for their B2B customers. After comparing F5's capabilities to alternatives, the customer determined that only F5 could meet the security and scalability requirements needed to deliver their offering in a cost-efficient manner. These real-life use cases offer a glimpse of how we are enabling customers to secure, deliver, and optimize their applications and APIs, and how we simplify the challenges of operating in a complex, hybrid, multi-cloud world. Now, I will turn the call over to Franck. Thank you, Francois. And good afternoon, everyone.

Speaker Change: And then Frank on the operating margin side, you had quite a bit of outperformance in the December quarter, which is really notable.

Speaker Change: And I realize you don't want to change the long term target, but I'm wondering was there anything one off that enabled this upside in December or not thank you.

Francis J. Pelzer: Sure Matt so.

Francis J. Pelzer: Look I, we changed the outlook on EPS for the year up 1% really driven by tax in the quarter itself with Opex.

There were a few expenses that probably got pushed into either Q2 or beyond.

Francis J. Pelzer: But seasonally Q1 is relatively strong Q2 goes down because of the tax resets. It's also going down this year in particular, because we're having our marketing that we take those expenses in the quarter.

Francis J. Pelzer: In Q2 versus previous years, where it may have been in Q3 and Q4, we actually didn't do one and FY2023 enjoys a comparative point, that's new expense this year on a year over year basis, but.

The seasonality of where we really hit that.

Francis J. Pelzer: Tax reset happens in Q2, and we build our way back up from there.

Francis J. Pelzer: So that's that's that in terms of.

Francis J. Pelzer: Some of the migration of our silver line.

Francis J. Pelzer: And as expected. It is very early theres, not really a lot more to say about it as we said generally we're going to see more.

Francis J. Pelzer: We'll probably see a balanced amount of customer accounts, but more of the <unk> come across that will come across.

Francis J. Pelzer: I will review our Q1 results before I elaborate on our Q2 outlook. We delivered Q1 revenue of $693 million, reflecting sales that were down 1% year-over-year, with a mix of 56% global services and 44% product revenue. Global services revenue of $387 million grew 7% due to continued high maintenance renewals, as well as the continued benefit from price increases we introduced in FY22. Product revenue totaled $306 million, down 10% year-over-year.

Francis J. Pelzer: In FY 'twenty five just given some of the feature parity that we're still working on that's going to take some time and the bigger customers or the long tail of the ones to migrate so.

Francis J. Pelzer: It's just going as planned right now, but we're obviously one quarter and eight quarter transition.

Francis J. Pelzer: Okay.

Speaker Change: Perfect. Thank you.

Speaker Change: Thank you. Our next question is from meta Marshall with Morgan Stanley. Please proceed with your question.

Meta A. Marshall: Great. Thanks, Frank.

Meta A. Marshall: Francois you noted that you weren't yet seen kind of customer budgets change, but getting into more predictable.

Francis J. Pelzer: Systems revenue of $135 million declined 22% year-over-year, reflecting a lower level of backlog-related shipments than we had in the year-ago period. However, software revenue grew 2% over the year-ago period to $170 million. As Francois noted, Q1 was an unusually strong perpetual software license quarter, with several service providers opting to leverage CapEx versus OpEx models. Our perpetual software revenue was $46 million in Q1, representing 19% growth year-over-year and 27% of Q1 software revenue. We believe providing consumption model flexibility to our customers is a strategic advantage over competitors who restrict customer choice.

Meta A. Marshall: Spending patterns, just what are you seeing in terms of RFP activity understanding and people are still kind of doing evaluations, but are you starting to kind of see a pick up in valuations that they're doing in any particular categories in which you're seeing that pick up in activity.

Meta A. Marshall: And then second just on the service provider piece.

Meta A. Marshall: It sounds as if that's really just.

Meta A. Marshall: Alex and decision, but anything that you're you're just given how constrained service provider spending has been over the last year.

Meta A. Marshall: Anything that you're seeing in terms of them being more active in the market or any specifics around that vertical would be helpful. Thanks.

Okay.

Meta A. Marshall: Themes.

Speaker Change: So let me start with the environment.

Themes: We have seen that IP.

Speaker Change: Relative to if I compare it to where we were kind of 90 912 months ago.

Speaker Change: We feel that the environment is more stable and more predictable in the sense that the budget that are in place and the projects that our customers have told us. They are moving forward to when we get to the end of the selection process at the end of an RFP process.

Francis J. Pelzer: The result can be quarters like this one, where we have unusual growth and perpetual software revenue. We do not believe that Q1's software revenue mix is indicative of changing customer preference. Rather, it is a function of preferences of specific customers in the court. Our subscription-based revenue declined 3% year-over-year to $125 million, representing 73% of Q1's total software revenue.

We very rarely get into a surprise, where our project is cancelled or an extra approval comes in and deals get delayed or pushed out so that has subsided largely and therefore, we see more predictability with customers that said.

Speaker Change: I'd say, there we havent seen yet a notable increase in in.

Budgets I think for the most part for the calendar year, our customers don't have.

Speaker Change: Just kind of budget fully in place yet so we'll start to learn more about that.

Francis J. Pelzer: New subscriptions and renewals both performed to plan in the quarter. Revenue from recurring sources contributed 73% of Q1's revenue, up from 68% a year ago. This is down slightly from recent levels as a result of the perpetual license revenue contribution in the quarter. 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 54% of total revenue.

Quarter goes on here.

Speaker Change: But what we are seeing that is encouraging is when you look at our pipeline over the next four quarters we.

We are seeing.

Speaker Change: An uptick in the pipeline.

And potentially more tech refresh kind of activities. So that's an encouraging sign for them.

Speaker Change: For what's ahead in terms of service providers.

Speaker Change: I would say generally we're still seeing service providers continue to sweat their assets as much as they can and therefore are suppressed.

Speaker Change: Capex spend as much as they can.

Speaker Change: There are some exceptions to that.

Speaker Change: Including I mentioned in my prepared remarks, a significant win with a north American service provider.

Speaker Change: And our five G architecture and so this is.

Francis J. Pelzer: EMEA grew 5%, representing 28% of revenue, and APAC grew 8%, representing 18% of revenue. Looking at our major verticals, during Q1, Enterprise represented 64% of product bookings, service providers represented 17%, and government customers represented 19%, including 4% from U.S. Federal. Our Q1 operating results were strong, reflecting our continued operating discipline. Gap's gross margin was 80.3%. Non-gap gross margin was 83.1%, an improvement of 264 basis points from Q1 of FY23. Gap operating expenses were $392 million.

Speaker Change: Work that we have been doing with them now for several years.

Speaker Change: We have been able to be part of their core five G architecture and this is a spend for the next phase of scaling of the famous <unk> services, which is really driven by consumer demand for <unk> as well as fixed wireless access which is a fast fast growing service.

Speaker Change: And so they are.

A couple of carriers in America and outside that are moving forward with <unk>.

Speaker Change: And our.

Speaker Change: Our investing.

Speaker Change: In their architecture and scaling their architecture and what part of that and that's what we're seeing we're seeing success that may that I should also say is.

Speaker Change: The result, and the benefits from investments, we started making over four years ago and so.

Speaker Change: Over the last four years, we have invested hundreds of millions of dollars in our big IP franchise really to future proof the big IP franchise for the next decade.

Speaker Change: And really by bringing to the big IP franchise benefit that customers would have seen either in the public cloud or in cloud native architectures.

Speaker Change: And those five G architectures in the case of service provider.

Francis J. Pelzer: Non-gap operating expenses were $330 million. Our GAAP operating margin was 23.8%. Our non-GAAP operating margin was 35.5%, an improvement of more than 900 basis points from Q1 of FY23. Our GAAP effective tax rate for the quarter was 20.7%. Our non-GAAP effective tax rate was 19.9%.

Speaker Change: Our container native and cloud native and we weren't really first out the gate to bring a lot of finance functions into.

Speaker Change: Our cloud native architecture, and these investments that we've made into our big IQ platform are really starting to.

Speaker Change: Benefit in terms of customer wins, where customers are now starting to reinvest for the future. We're seeing that in the service provider, but I think that's also going to play out in the enterprise as enterprises start to adopt the next generation of Big IP.

Speaker Change: Great. Thanks, so much.

Okay.

Francis J. Pelzer: This is 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 $138 million, or $2.32 per share. Our non-gap in net income was $205 million, or $3.43 per share, well above the top end of our guidance range. This is a result of the Revenue Beat continued operating discipline with nine cents as a result of the Q1 tax benefit. I will now turn to cash flow and the balance sheet, which also remain very strong. We generated $165 million in cash flow from operations in Q1. Capital expenditures for the quarter were $9 million.

Thank you. Our next question is from James Fish with Piper Sandler. Please proceed with your question.

James E. Fish: Hey, guys. Thanks for the question here just building off of some of the prior ones. Frank can you just help us with how much of the recurring software product was tied to that SaaS drawdown or the headwinds that we've talked about with <unk>.

James E. Fish: Moving us more towards the distributed cloud services over time versus the term license or roughly.

James E. Fish: There that staff they are sits today.

James E. Fish: Early feedback from some of these customers.

James E. Fish: This transition Francois.

James E. Fish: So youre.

James E. Fish: Not going to update Q1, obviously, we talked about doing that on an annual basis, but where we were at the end of Q4 was roughly $200 million.

Francis J. Pelzer: DSO for the quarter was 67 days due to the back-end linearity of invoicing in the quarter. Cash and investments totaled approximately $832 million at quarter end. Deferred revenue increased 4% year-over-year to $1.83 billion. Our share repurchases reflect our ongoing commitment to returning cash to shareholders. We repurchased $150 million worth of F5 shares in Q1 at an average price of $163 per share. Finally, we ended the quarter with approximately 6,440 employees. Francois outlined our Q2 outlook at the start of the call, and I'll recap it with some additional color.

James E. Fish: There are associated with.

James E. Fish: That business of $135 million of that was going to be recurring we are going to be growing not really on the back of distributed cloud and $65 million of that was split between $30 million of product that we were retiring and do not expect to have a future and $35 million or so was from silver line that.

James E. Fish: We would migrate.

James E. Fish: Some portion of that would hopefully migrate over the next couple of years.

James E. Fish: Not going to update where we are at the end of Q1 in regards to that we will give an update for that at the end of the year, but I'll, let Francois answer the second part of your question was the second part.

James E. Fish: Sorry.

Francois: Jim could you repeat the second part.

Yeah I was just looking for the early feedback from some of those customers that were part of that $65 million at essentially as being additive life.

Francois: Those conversations are looking like at this point.

Speaker Change: Okay great.

Speaker Change: Jim look those we as <unk> said, we are early days.

Speaker Change: In this process, we said, it's going to happen over the next couple of years.

Francis J. Pelzer: We expect Q2 revenue in the range of $675 to $695 million. We expect gross margins in the range of 82 to 83 percent. We estimate Q2 operating expenses of $347 to $359 million.

Speaker Change: So I think it's very early to draw some.

Speaker Change: Some kind of long term conclusions however, we.

Speaker Change: We have migrated some customers.

Speaker Change: From Civil line to distributed cloud services and for those customers, who have completed the migration it has gone very well.

Francis J. Pelzer: This is a step up from Q1, reflecting our seasonal sequential uptick related to the reset and payroll tax. This year, it also reflects marketing expenses related to our Global App World customer events which will take place in Q2 in San Jose and in other locations across the globe. We are targeting Q2 non-GAAP EPS in the range of $2.79 to $2.91 per share. Additionally, we expect Q2 share-based compensation expense of approximately $56 to $58 million.

Speaker Change: Generally they are very happy with the with the outcome. So we are pleased with the early results.

Of these migrations, but more to come as we get more into it.

Speaker Change: Got it I know you don't want to give too much ahead of that you have been sitting here in a few weeks, but are you guys seeing much contribution from there.

Speaker Change: Or how should we think about when this contribution could really picked up for you guys and accelerate product great. Thanks, guys.

Francis J. Pelzer: At this point in the fiscal year, we are not revising our revenue or operating margin targets for FY24. We continue to expect to achieve our FY24 operating margin target range of 33 to 34 percent, which accounts for the normal seasonal step-up in operating expenses from Q1 to Q2. We now expect our FY24 tax rate to be in the range of 21 to 22 percent, down slightly from our prior range of 21 to 23 percent.

Speaker Change: Thank you Jim So our view on AI. So we have started seeing this quarter.

Speaker Change: Kind of the first.

Speaker Change: Emerging AI use cases.

Speaker Change: Sure.

Speaker Change: AI workloads that either it needed to be traffic man hours to load balance or required. Some some security. It's early days, because we think enterprise adoption and deployment of <unk>.

Speaker Change: AI workloads is going to really start happening more.

Francis J. Pelzer: Given the new outlook and our annual tax rate, we now expect FY24 non-GAAP EPS to grow between 6 to 8 percent. This is up from the 5 to 7 percent range we provided last quarter. I will now turn the call back over to Francois.

Speaker Change: We think in 12 to 24 months, we think a lot of enterprises right now or are testing.

AI models, and experimenting and getting through the learning curve, but they are not at this stage of of deploying in production.

Speaker Change: We think it's kind of 12 to 24 months away, even though we're starting to see the first couple of use cases that being said.

Franois Locoh: In conclusion, I will reiterate that F5 is the only company capable of securing, delivering, and optimizing any application, any API, regardless of its location, be it in the data center, any one of the public clouds, a SaaS, or at the network edge. Amidst a complex web of environments and solutions, F5 empowers customers to establish and maintain a consistent security posture across all of their applications, enhancing security, streamlining operations, and reducing costs. Moreover, we are unifying our solutions to provide customers with unprecedented levels of visibility, manageability, and automation. Before we go to questions, I will elaborate on the strategy and product session we are hosting next Thursday. We are going to use this event to discuss the hybrid multi-cloud challenges faced by large organizations worldwide, including the implications of AI on applications, APIs, and security. We will also provide an overview of our product families, the market opportunities we see for them, and how our portfolio transformation benefits our customers and differentiates F5. We look forward to seeing several of you live in San Jose and more of you virtually.

Speaker Change: From what we are seeing today, we feel very good that if five is going to be an enabler of AI adoption in AI deployment.

Speaker Change: And we feel this way for two reasons the first is <unk>.

Speaker Change: AI workload or.

Heavy consumers of API and API has played a big role in the architecture of AI workloads because they.

They need to ingest.

Data and information services from other other AI models and also expose their own capabilities to other AI models, our data sources and because of that there's a lot of API traffic.

AI workloads, and therefore, API security is going to be a substantial opportunity for AI and we're very well positioned for that with the investments that we've made across the portfolio including in distributed.

Distributed cloud services and then the second reason is that we're seeing AI workloads, becoming quite distributed.

Speaker Change: Because some of the compute needs to be at the edge, but the data.

Speaker Change: And the data sources can be in more central locations are in public clouds or at the edge. So the fact that these workloads are distributed plays very well to the value proposition the core value proposition of a five.

Operator: Operator, please open the call to questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Speaker Change: Being the company that can serve any application or any API anywhere in any environment and we are quite unique in being in that position, but we think with AI.

Speaker Change: That is going to play to our strength.

Okay.

Speaker Change: Thank you. Our next question is from Michael <unk> with Goldman Sachs. Please proceed with your question.

Hey, good afternoon. Thank you for the question I just have two.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we poll for questions. Thank you. Our first question is from Samik Chatterjee with J.P. Morgan. Please proceed with your question. Hi. Thanks for the question, guys. This is Joe Cardoso on behalf of Samik.

Michael: First on global services, very strong growth in the quarter or 7%.

Michael: You talk about what <unk>.

They have gone better than expected are you still expecting.

Michael: Global services revenue to grow low single digits for the full year.

Speaker Change: And then second I was just I was just wondering if you could provide a little bit more color on the recurring revenue figure in the quarter, whether you could talk about.

Joe Cardoso: Just one question for me. You highlighted encouraging signs of stabilizing demand trends. Can you maybe just talk about the year-over-year revenue trends that you're seeing, excluding the backlog headwinds from a year ago? And then, perhaps, can you just provide a bit more granularity around that comment?

Speaker Change: The year over year increase or the sequential increase kind of key factors.

Impacting the change in recurring revenue. Thank you very much.

Sure Michael So.

Franois Locoh: Like, what are you seeing specifically under the hood from a customer or product portfolio perspective? And whether you're seeing any areas trending better than others? Thanks for the question. Well, thanks, Joe.

Speaker Change: Let me, let me I'll take both the let me start with your first question on Global services. It was it was quite strong for the quarter.

There are a couple of factors.

Speaker Change: We're still seeing high maintenance attach, particularly for some of our older platforms. We're starting to see some of that decline a little bit which gives us some thoughts that over.

Franois Locoh: Let me start with the first part of your question. We shared at the beginning of the fiscal year that even though we were guiding revenue down, flat to down, 3% down for the fiscal year, that if you excluded the backlog effect, that would amount to about mid-single-digit growth. In terms of the demand that we are seeing, certainly in terms of demand, compare what we saw in the first half of 2023 versus the demand that we saw in Q1 and what we expect to see in our Q2, half on half, first half of 2023 to first half of 2024, demand is meaningfully up relative to last year. Now that is, I would say, generally broad-based across all major theaters, and it's also across most industry vertical

Speaker Change: Over time, we're going to see some of the refresh happened, but it's too early to call like which quarter in particular that that starts to take place.

Speaker Change: And it is still as I mentioned in the prepared remarks, we had a price increase that impacted our global services revenue as well in July of 'twenty, two we captured.

Speaker Change: Some of that a good portion of that in Q1 of 'twenty three but there was some more that came forward in Q1 24 that ended up lifting that that as well.

Speaker Change: We have not changed our outlook for the full year on low single digit.

Speaker Change: And there's a possibility we'd do better than that but I wouldn't change.

Franois Locoh: We talked to some verticals that are performing better than others, but generally, broadly, we've seen that across all industry verticals. In terms of the product trends, you know, I would say the trends are similar across the portfolio and not different than what we described in October with, you know, continued great progress on our core franchise, big IP, continued progress on NGINX and modern applications, and continued strong adoption of our distributed cloud services. No, but I appreciate the color, Francois.

Speaker Change: We're not changing our model at this stage for the first quarter, we will see what happens over the next couple of quarters.

Speaker Change: There are some of those dynamics that could flop.

Speaker Change: That we've seen for the past five or six quarters on asset sweating to turn into a refresh cycle and so some of that.

Speaker Change: Swap out, but we will we will we will see as we continue to go throughout.

Speaker Change: And then in the recurring revenue piece.

Speaker Change: The total business some of that which is impacted by.

Speaker Change: The large service provider deals is on track to exactly what we were expecting and modeling and.

So we are feeling quite quite good about the business to come.

Joe Cardoso: Thanks. Thank you. Thank you. Our next question is from Tim Long with Barclays. Please proceed with your question. Thank you. I have two questions, if I could.

Speaker Change: Thanks.

Timothy Patrick Long: First, maybe Frank or Francois, if you could just talk a little bit about the subscription numbers in the quarter. I guess the perpetual is really strong, but could you talk a little bit about, you know, particularly the sequential downtick in subscriptions? Is this related to kind of true forwards or any kind of cannibalization or anything else in there?

Speaker Change: Thank you.

Speaker Change: Next question is from Alex Henderson with Needham <unk> Company. Please proceed with your question.

Alex Henderson: Great. Thanks.

Alex Henderson: I was hoping you could talk a little bit about.

Alex Henderson: The enterprise behavior patterns.

Alex Henderson: Around what has been termed the year of efficiency, which obviously had a negative impact on <unk>.

Francis J. Pelzer: You could go a little deeper on the software subscription weakness. Yes, and then the follow-up for Francois. I think you mentioned something about, you know, competitive wins in more in the systems and traditional ADC areas. Obviously, there's some disruption at one of your major competitors. Could you just give a little color on how things are going competitively and how, you know, win rates are and how much room you think there is to take share in that more traditional ADC area? Thank you. Yeah, absolutely, Tim. Let me take the first part, and we'll let Francois take the second part.

Alex Henderson: New application development as well as <unk>.

Alex Henderson: The impact it had on existing applications, which would then.

Alex Henderson: Shutdown downsized or cleaned up.

I've heard some indications that that is starting to.

Alex Henderson: Shifting to a re acceleration and I would think that that would play well to your application and particularly in <unk>.

Other product lines. So is that something that youre seeing or are you just too early to say that there's any re.

Alex Henderson: Re acceleration in for application growth.

Francis J. Pelzer: So with subscriptions, again, as I mentioned in the prepared remarks, largely performing to our expectations on a sequential basis, if we were purely routable, obviously, that would be concerning. But since we obviously have got, you know, some 606 term-based subscriptions in there that will hit at different points in time, we had more renewals, frankly, in Q4 than we did in Q1. And so that's just the natural progression on the sequential growth side there. But we're not concerned at all about it.

Alex Henderson:

Alex It's a great question, we parse it out I think what.

Alex Henderson: One thing we have seen perhaps accelerate in large enterprises really over the last 12 months is.

Alex Henderson: Consolidation and so really going through.

Alex Henderson: Their portfolio of applications and in enterprise and looking through that portfolio and looking at what apps so really.

Alex Henderson: Really mission critical which apps really need to continue to be in service in which apps need to be decommissioned or rationalized.

Francis J. Pelzer: This is really, you know, our renewals and the new ones performed to our expectations, and no change for our outlook for the year based on that. But I'll let Francois talk a little bit on the competitive side. Tim, on the competitive side, we feel we are in a pretty strong competitive position, and I think our position of strength is, in fact, growing. And I would say, you know, we are seeing increased inbound interest from both customers and partners into F5, and I think that's largely due to two big factors. One factor is, frankly, we have not one but three competitors that have gone through a change of control event in the last 12 to 18 months. One was primarily a hardware and software competitor, one's been a software competitor, and one's been a SaaS competitor, and all three have had to kind of change their customer playbook as a result, and we're seeing inbound customer interest from that.

Alex Henderson: And we have seen more enterprises pick the decisions of rationalizing some offset in some cases.

Alex Henderson: Reducing their their application portfolio to focus on the ones that are most meaningful.

Alex Henderson: At the same time, we haven't seen those apps that are important to enterprises application traffic on these apps continue to grow.

And they continue to modernize applications, meaning they can start with traditional applications and add modern components that are in the public cloud or in a private cloud.

Alex Henderson: And that leads to more and more of these multi cloud environment for application portfolio.

Alex Henderson: And that's where really we have positioned at five.

To be the ideal partner for large enterprises that have an application portfolio that is distributed across multiple environments private cloud public cloud on Prem and increasingly at the edge and we are starting and our engagement with customers. We're starting to see that play out. So for example.

Franois Locoh: In contrast, our approach, and frankly the investments we've made over the last several years, where we have just at this point in time when some competitors are getting weaker, we're introducing a very exciting set of propositions. You know that our series has had very strong adoption in the market. We're introducing next-generation hardware and software that creates an exciting roadmap for competitors, sorry, for customers. So the contrasting sort of investments and roadmaps between players is really strengthening our heads, our hands.

Alex Henderson: Today, two thirds of our nginx customers are also big IP customers. So.

Alex Henderson: Cross selling effect on the portfolio of taking a big IP customer that has a traditional application then goes in and wants to modernize that application or parts of their application portfolio.

Alex Henderson: Lending on Nginx is a motion that we have made it easier for customers, both technically and in our commercial.

Alex Henderson: Partial agreement, we mentioned in the call on Q4.

Alex Henderson: We had passed 500 distributors customers and two thirds of those customers of distributed cloud are also existing customers on big IP or nginx and so again. These are examples of customers that are distributing across multiple environments and they are leveraging more and more.

Franois Locoh: And we're seeing a lot of accounts where, historically, we have been blocked or locked out of these accounts that we have been able to crack in the last couple of quarters, and we expect that to continue. In fact, just this week, we had a customer here that is one of the largest companies in America, one of the Fortune 100. We have not been able to crack that account, and we are now migrating pretty much their entire application estate from a competitor to F5.

Alex Henderson: Multiple products in the portfolio to do so.

Alex Henderson: And then the second question was on the.

Alex Henderson: Upgrade cycle around the R series versus the older.

Franois Locoh: And the approach with these customers is we are lending them generally on our big IP platform, but then we're able to lend and expand and cross-sell into the other value propositions in the portfolio once they discover the full portfolio of F5 when they start working with us. So I think that trend is going to continue, and we feel very good about our competitive position in the next two to three quarters, and we're starting to see a growing pipeline that reflects that stronger position. Okay, thank you, guys. Thank you.

Alex Henderson: I series.

Alex Henderson: No I think 18, almost 24 months into.

Alex Henderson: That product launch.

Alex Henderson: Initially was hampered by an ability to do a lot of the use cases my assumption is that you have now completed all of the use cases that we're on the <unk> series and therefore should be seeing a meaningful upgrade cycle over the next 12 to 18 months to that platform.

Alex Henderson: Can you talk a little bit about what type of renewal cycle you expect there.

Speaker Change: Thank you.

Speaker Change: Well.

Speaker Change: I'd like to thank you well first of all we have.

Speaker Change: Really pleased with the adoption of our series in our customer base I mean, I mentioned earlier that we have.

Timothy Patrick Long: Our next question is from Amit Daryanani with Evercore ISI. Please proceed with your question. Thanks for answering my question. I have two as well.

Speaker Change: Put a lot of work towards.

Speaker Change: Bringing these cloud.

Cloud benefits like multi tenancy.

Speaker Change: To our customers and that's one of the reasons.

Amit Daryanani: You know, first off on the software performance, I'd love to just understand if you still think for the fiscal year flat to up modestly is the right way to think about it, and if there's any change in how you think about sort of the, you know, what happens to the perpetual market or the managed services or subscription as you go from here. Just an update on how you think about software stocking up for the rest of the year and any of those three buckets that change your perspective right now? Let me start with that one. No is the answer.

Speaker Change: Adoption of our series has gone very well.

Relative to where we were.

Speaker Change: A few quarters ago, Alex you are absolutely right. We have maybe now the majority of the use cases.

Speaker Change: With that we had on our prime platform <unk> are now covered by.

Speaker Change: By our series not all of them, we're still working through.

Some of them, but the majority are covered and I think this year. The majority of the appliances with ship will be our series. So they are.

Francis J. Pelzer: It's, you know, one quarter doesn't make a trend. We're obviously encouraged by what we saw in software in Q1. You know, more to come on Q2 and beyond. But at this point, we're not changing the outlook on that modest growth view for software. And, you know, largely, again, subscription and perpetual service. It was a big quarter for perpetual. This quarter, it may not be the same, you know, next quarter in that regard.

Speaker Change: I think they have passed already.

Speaker Change: 50% more than 50% of the appliance we're shipping right now.

Now our series.

Speaker Change: In terms of would we see a big refresh cycle or a big ramp.

Speaker Change: Related to our series in coming quarters.

I would say I wouldn't think about this the way we used to think about refresh cycles.

Francis J. Pelzer: This is really about some specific customer preferences in the service provider market, and they could easily have gone into a subscription model, and we would have, you know, seen that dynamic reverse. So there is no real change in our outlook for software right now for FY25.

Speaker Change: Eight years ago, when our business model was entirely appliance driven.

Speaker Change: But I do think.

Speaker Change: We are.

Seeing a pipeline.

Francis J. Pelzer: And then, you know, I guess last time around, you talked about there might be a four or five hundred basis point headwind from this managed services transition you've gone to take across 24 and 25. I was wondering if there was a better sense of when you think those headwinds would happen, if it's this year or next year. And then, Frans, on the operating margin side, you had quite a bit of outperformance in the December quarter, which is really notable. And I realize you don't want to change the long-term target, but I'm wondering if there was anything special that enabled this upside in December or not. Thank you. Sure.

Speaker Change: Tech refresh in the coming quarters that is stronger than what we had six to 12 months ago and that will go to our series largely.

Speaker Change: So the pipeline.

It is improving.

Speaker Change: The.

Speaker Change: <unk> turnover should should.

Speaker Change: Be amplified over the next two to three or four quarters sort of the REIT.

Speaker Change: Yes.

Speaker Change: Well.

Speaker Change: I just want to make sure Alex.

Speaker Change: I'm talking about the pipeline of Tech refresh, which is hardware, which is largely largely not sold on a subscription basis.

Francis J. Pelzer: So, look, we changed the outlook on EPS for the year up a percent really driven by tax. In the quarter itself, with OPEX, there were a few expenses that probably got pushed into either Q2 or beyond, but, you know, seasonally, Q1 is relatively strong. Q2 goes down because of the tax resets. It's also going down this year in particular because we're having our marketing event. We take those expenses in the quarter in Q2 versus previous years where they may have been in Q3 or Q4. We actually didn't do one in FY23, and so as a comparative point, that's a new expense this year on a year-over-year basis, but the seasonality of where we really hit that tax reset happens in Q2, and we build our way back up from there.

Speaker Change: But typically on a perpetual basis, but yes that pipeline is.

Speaker Change: Is increasing of course.

Speaker Change: We'll have to see is what is the conversion on that pipeline when we get to it over the past.

Speaker Change: I would say in 2023.

Speaker Change: Pipeline conversion.

Speaker Change: Of course, not as good as it had been in prior years, but we're hoping with more predictability.

Speaker Change: We would.

Speaker Change: That we would see a better pipeline conversion the other.

Speaker Change: Data point that we're seeing is that the rate of.

Increased aging at our customers.

Speaker Change: Aging of the platform.

Speaker Change: Its slowing down.

Francis J. Pelzer: So, that's that. In terms of some of the migration of our silver line, it's going as expected. It's very early, though.

Speaker Change: Which suggest that.

Speaker Change: Sweating of assets.

Speaker Change: Is that going down a little bit specifically with enterprise customers.

Francis J. Pelzer: There's not really a lot more to say about it. As we said, you know, generally, we're going to see more – we'll probably see a balanced amount of customer accounts, but more of the ARR will come across that will come across in FY25 just given, you know, some of the future parity that we're still working on that's going to take some time. And the bigger customers are the, you know, long tail of the ones to migrate. So, it's just going as planned right now, but we're obviously one quarter into an eight-quarter transition. Perfect, thank you.

Speaker Change: And so hopefully this will play out in coming quarters.

Understood. Thank you.

Thank you. Our next question is from Tal Leone with Bank of America. Please proceed with your question.

Tal Liani: Hey, guys.

Tal Liani:

Tal Liani: I have two questions more kind of longer term note in the quarter.

Tal Liani:

Tal Liani: <unk> is about 7% of total revenues give or take if I look at what you disclosed last last year.

Meta A. Marshall: Thank you. Our next question is from Meta Marshall with Morgan Stamps. Please proceed with your question.

Tal Liani: What needs to happen or what can you do in order to grow SaaS revenue substantially and I'm talking about what are you doing on front of educating the channels and things you need to do with the channels and go to market and things.

Meta A. Marshall: Francois, you noted that you weren't yet seeing kind of customer budgets change but getting to more predictable spending patterns. Just what are you seeing in terms of RFP activity, you know, understanding people are still kind of doing evaluations, but are you starting to kind of see a pickup in the kind of evaluations that they're doing and any particular categories in which you're seeing that pickup in activity? And then second, just on the service provider piece, It sounds as if that's really just an election decision, but anything that you're, given how constrained service provider spending has been over the last year, you know, just anything that you were seeing in terms of them being more active in the market or any specifics around that vertical would be helpful. Thanks, met. What we have seen might be.

Tal Liani: And the second question is related to that but kind of on the side.

Tal Liani: How much competition do you see from CDN companies like Akamai, and cloud flare or adding features and how much of a risk is it.

Tal Liani: Thanks.

Speaker Change: I think I'll start.

So.

Speaker Change: First of all let me make sure.

Speaker Change: Using the same terminology here, so SaaS and managed services represent Youre right about 7% of our revenues. We have said on October call that given the transition we were going through.

Franois Locoh: You know, relative to where we were kind of nine, 12 months ago, we feel that the environment is more stable and more predictable in the sense that the budgets that are in place and the projects that our customers have told us they're moving forward with. When we get to the end of a selection process or the end of an RFP process, we very rarely get into a surprise where, you know, a project is canceled or an extra approval comes in, So that has largely subsided, and therefore, we see more predictability with customers. That said, I would say there we haven't yet seen a notable increase in budgets. I think, you know, for the most part, for the calendar year, our customers don't have the kind of budget fully in place yet.

Speaker Change: Managed services that we expected our ALR in fast and managed services to be flat, although that basically over to FY 'twenty four 'twenty five but then beyond that.

Returning to growth.

Speaker Change: In terms of the things that.

Speaker Change: We can do to drive growth in this business.

Speaker Change: It's we're continuing to focus on areas that are market that are growing and where we will gain more customer adoption specifically.

The WAF market for all application security API security bought defense.

Speaker Change: Web application firewall Ddos this bundle of services.

Speaker Change: We're doing very well in the WAF market today with distributed cloud services, but theres plenty of opportunity for us to grow.

Speaker Change: And the multi cloud networking market, we're starting to see traction in more customers needing to.

Franois Locoh: So we'll start to learn more about that as the quarter goes on here. But what we are seeing that is encouraging is when you look at our pipeline over the next four quarters, we are seeing, you know, an uptick in the pipeline and potentially more tech refresh kind of activities. So that's an encouraging sign for, you know, for what's ahead. In terms of service providers, I would say, generally, we're still seeing service providers continue to sweat their assets as much as they can and therefore suppress, you know, Catholic spending as much as they can. There are some exceptions to that, you know, including, you know, I mentioned in my prepared remark, a significant win with a North American service provider in their 5G architecture.

Speaker Change: <unk> applications between clouds, and we have a perfect solution that is a SaaS based solution for that marketplace.

Speaker Change: So.

The ambition here is to really win in these two markets are not that alone should drive substantial growth over time.

Speaker Change: SaaS and managed services business and the approach to that is really lending the customers on an initial service and then expanding.

Speaker Change: Over time too.

Speaker Change: Other services.

Speaker Change: In terms of competition with CDN players.

Speaker Change: Yes in this market.

Speaker Change: We will compete more and more with those players they have been frankly in the market for longer than we have and they have more maturity.

Franois Locoh: And so this is, you know, work that we have been doing with them for several years now, and we have been able to be part of their core 5G architecture. And this is spending for the next phase of scaling other 5G services, which is really driven by consumer demand for 5G, as well as fixed wireless access, which is a fast, fast growing service. And so there are, you know, a couple of carriers in America and outside that are moving forward with 5G.

Speaker Change: Today in this market than we have so we are in the SaaS part of the business we are.

Speaker Change: This is really a net new opportunity for us and we are we are an attacker in this market.

Speaker Change: I think the two.

Speaker Change: <unk> strengths, we bring to this competition is number one.

Meta A. Marshall: And our competitors are investing in their architecture and scaling their architecture, and we're part of that, and that's where we're seeing success. That meta, I should also say, is the result and the benefit from investments we started making over four years ago. And so, over the last four years, we have invested hundreds of millions of dollars in our big IP franchise, really to future-proof the big IP franchise for the next decade, and really by bringing benefits that customers would have seen either in the public cloud or in cloud-native architectures. And those 5G architectures, in the case of Service Provider, are container-native and cloud-native, and we were really first at the gate to bring a We're seeing that in the service provider market, but I think that's also going to play out in the enterprise as enterprises start to adopt the next generation of big IP. Great, thanks so much.

Architecture that we have is a more recent architecture and it's entirely defined in software and so it is not limited by the limitation of hardware in any given pumps.

And so it's more universal and more flesh.

Speaker Change: <unk> flexible than fire architectures.

Speaker Change: Number two we bring.

Speaker Change: Ill.

20000 customers that we have that have used their five hardware software deployable hardware software products in the past and often want to continue to use those products and add fast to support other.

Speaker Change: Applications and ideally you want to be able to manage the whole thing from a single pane of glass and that is something that <unk> is going to be able to do that our competitors are not able to do.

Speaker Change: In addition to all the sort of product capabilities. We're also I think you've touched on it but we're also.

Spending a lot of time on our go to market educating our channel partners. We are very pleased that a lot of the.

James E. Fish: Thank you. Our next question is from James Fish with Piper Sandler. Please proceed with your question. Hey guys.

Speaker Change: The deals we are winning in SaaS actually.

Over the last.

Speaker Change: No.

Speaker Change: I think over the last 12 12 months.

James E. Fish: Thanks for the question here. Just building on some of the prior ones, Frank, can you just help us with how much of the recurring software product was tied to that SaaS drawdown or the headwinds that we've talked about with moving this more towards the distributed cloud services over time versus, you know, the term license or roughly where that SaaS ARR sits today? And what's the early feedback then from some of these customers on this transition, Francois? So, yeah, Fish, not going to update in Q1.

Speaker Change: Close to 50% of the deals we have won in SaaS.

Partner initiated opportunities and so we are very pleased with the early contribution of our partners to this growth.

But there's more to do we've been on the road show over the last.

Speaker Change: Several months educating all of our partners on the value proposition and we're seeing more and more traction with them. So a lot more work to do on the on the go to market because it's early days, but we're happy with their initial contribution to the success.

Francis J. Pelzer: Obviously, we talked about doing that on an annual basis. But, you know, where we were at the end of Q4 was roughly $200 million of ARR associated with that business, and $135 million of that was going to be recurring.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Final question will be from Sebastian <unk> with William Blair. Please proceed with your question.

Francis J. Pelzer: We were going to be growing that really on the back of the distributed cloud. And, you know, $65 million of that was split between $30 million of product that we were retiring and did not expect to have a future, and $35 million or so was from SilverLine that would migrate.

Great. Thanks for squeezing me in here.

Sebastian: Can you maybe comment on how much of your software growth outlook here in fiscal year 'twenty four is underpinned by the App growth that you've been talking about driving expansions versus your ability to cross sell some of your existing customers to either additional security or to distribute to cloud services.

Francis J. Pelzer: Some portion of that would hopefully migrate over the next couple of years, but we are not going to update where we are at the end of Q1. And in regards to that, we will give an update on that at the end of the year. But I'll let Francois answer the second part of your question. What was the second part? Oh, sorry. Sorry.

And then as a second question just following up on the CDN commentary what are the types of customers that have been the early adopters of that CDN module and distributed cloud.

Franois Locoh: Jim, can you repeat the second part? Yeah, I was just looking for early feedback from some of those customers that were part of that $65 million that essentially is being, you know, ended up life, what those conversations are looking like at this point. Okay, great. No, Jim, look, we are, as Frank said, in the early days in this process, Jim, and we said it's going to happen over the next couple of years. So I think it's very early to draw any kind of long-term conclusions. However, we have migrated some customers from Silverline to S5 Distributed Cloud Services. And for those customers who have completed the migration, it has gone very well, and, generally, they are very happy with the outcome.

Speaker Change: Okay. Let me, let me start with the second part.

Speaker Change: Of the question so.

Speaker Change: <unk>.

CBF module distributed cloud as you know.

Fairly recently I think we launched it.

Speaker Change: About a quarter ago, we find if I recall.

Speaker Change: And we've had adoption. So this is Ben.

Ben: I was mentioning earlier, a land and expand motion. So the customers who have adopted that our customers that typically did not start with FY for CDN, but typically they started with a five for a security solution and it may have been web application firewall. It may have been.

James E. Fish: So we are pleased with the early results of these migrations, but more to come as we get more into it. I know you don't want to give too much ahead of the event here in a few weeks, but are you guys seeing much contribution from AI, or how should we think about when this contribution could really pick up for you guys and accelerate product growth? Thanks, guys. Thank you, Jim.

Ddos protection.

Ben: In some cases, they may have been load balancing on distributed cloud, but then having landed on our platform wanted to simplify.

Ben: The architecture, and then adopted CDN as an additional module within service providers do that and we've seen.

Ben: Enterprises do that across a number of verticals.

Ben: So the first part of your question around our software growth for the for the year.

Ben: <unk>.

Franois Locoh: So our view on AI, so we have started seeing this quarter kind of the first emerging AI use cases of, you know, AI workloads that either needed to be, you know, traffic managed or load balanced or required some security. It's early days because we think enterprise adoption and deployment of AI workloads is, you know, is going to really start happening more. We think in, you know, 12 to 24 months, we think a lot of enterprises right now are testing some AI models and experimenting and getting through the learning curve, but they're not at a stage of deploying them in production. So we think it's kind of 12 to 24 months away, even though we're starting to see the first couple of use cases. That being said, from what we are seeing today, we feel very good that F5 is going to be an enabler of AI adoption and AI deployment. And we feel this way for two reasons.

Ben: Okay, it's really about having a strong.

Ben: Newell performance on a renewal basis, so we have pretty good visibility on our on our renewals.

Ben: In the first quarter, frankly, and even most of last year, even in a tough environment last year renewals performed largely as we expected. So we continue to expect to see strong performance on our renewals.

Two forward and some expansion and then.

Ben: New software subscription.

Ben: Our.

Ben: Our premise here is that the environment Hasnt changed too much from last year, we have a lot of predictability.

Ben: But we.

Ben: We are not expecting a lot of these large transformational projects.

Ben: To really be a big contributor too.

To our new software subscriptions in the year.

Franois Locoh: The first is AI workloads are, you know, heavy consumers of APIs. And so APIs play a big role in the architecture of AI workloads because they need to ingest data and information or services from other AI models and also expose their own capabilities to other AI models or data sources. And because of that, there's a lot of API traffic in AI workloads. And therefore, API security is going to be a substantial opportunity for AI. And we are very well positioned for that, with the investments that we've made across the portfolio, including in F5 distributed cloud services. And then the second reason is that we're seeing AI workloads becoming quite distributed, because some of the compute needs to be at the edge, but the data and the data sources could be, you know, in more central locations or in public clouds or at the edge.

Got it thank you Francois.

Francois: Thank you.

Speaker Change: Thank you there are no further questions at this time this does conclude our conference today.

Speaker Change: Disconnect your lines at this time, thank you for your participation.

Speaker Change: Goodbye.

Franois Locoh: So the fact that these workloads are distributed plays very well to the value proposition, the core value proposition of F5. Being, you know, a company that can serve any application or any API, anywhere in any environment, and we're quite unique in being in that position. So we think with AI, that is going to play to our strengths. Thank you.

Mike Ng: Our next question is from Michael Ng with Goldman Sachs. Please proceed with your question. Hey, good afternoon. Thank you for the question. I just have two.

Mike Ng: First, on global services, you know, very strong growth in the quarter, 7%. Could you talk about what may have gone better than expected? Are you still expecting global services revenue to grow low single digits for the full year? And then second, I was just wondering if you could provide a little bit more color on the recurring revenue figure for the quarter, whether you could talk about, you know, the year-over-year increase or the sequential increase, kind of key factors impacting the change in recurring revenue. Thank you very much. Sure, Michael.

Francis J. Pelzer: I'll take both, but let me start with your first question on global services. It was quite strong for the quarter. There were a couple of factors. We are still seeing high maintenance costs, particularly for some of our older platforms. We're starting to see some of that decline a little bit, which gives us some thoughts that, over time, we're going to see some of the refresh happen. But it's too early to call which quarter in particular that will start to take place.

Francis J. Pelzer: And it's still, as I mentioned in the previous remarks, we had our price increase that impacted our global services revenue as well in July of 2022. We captured some of that, a good portion of that in Q1 of 23, but there was some more that came forward in Q1 of 24 that ended up lifting that as well. We have not changed our outlook for the full year at low single digits. There's a possibility we do better than that, but I wouldn't change it. We're not changing our model at this stage for this first quarter.

Francis J. Pelzer: Because there are some of those dynamics that could flop that we've seen for the past five or six quarters on asset sweating to turn into a refresh cycle. And so some of that could shift out. But we will see as we continue to go throughout. And then in the recurring revenue piece of the total business, some of that was just impacted by the large service provider deals. It is on track to exactly what we were expecting in modeling. And so we are feeling quite good about the business to come through. Frank, Thank you.

Francis J. Pelzer: Our next question is from Alex Henderson with Needham & Company. Please proceed with your question.

Alex Henderson: Um, something you could talk a little bit about, uh... the enterprise behavior patterns around what has been termed the year of efficiency, which obviously had a negative impact on new application development as well as the impact it had on existing applications, which were then shut down, downsized, or cleaned up. Some indications that that's starting. Shift to a re-acceleration, and I would think that that would play well with your application and particularly with Genyx and another product. So is that something that you're seeing, or are you just too early to say that there's any re-agreement? Re-acceleration of application, I'm Alex. It's a great question. Let me pass it out.

Franois Locoh: I think what we have seen perhaps accelerate in large enterprises, you know, really over the last 12 months is consolidation, and so, you know, really going through their portfolio of applications in an enterprise and looking through that portfolio and looking at what apps are really, you know, mission critical, which apps really need to continue to be in service, and which apps need to be decommissioned or rationalized. And we have seen more enterprises make the decisions of rationalizing some apps and, in some cases, reducing their application portfolio to focus on the ones that are most meaningful. At the same time, we have seen those apps that are important to enterprises; application traffic on these apps continues to grow, and they continue to modernize applications, meaning, you know, they can start with traditional applications and add modern components that are in a public cloud or in a private cloud.

Franois Locoh: And that leads to more and more of these multi-cloud environments for application portfolios. And that's where, you know, really we have positioned F5 to be the ideal partner for large enterprises that have an application portfolio that is distributed across multiple environments, private cloud, public cloud, on-prem, and increasingly at the edge. And we are starting, in our engagement with customers, to see that play out. So, for example, you know, today, two-thirds of our NGINX customers are also big IP customers. So, you know, the cross-selling effect on the portfolio of taking a big IP customer that has a traditional application that then goes and wants to modernize that application or parts of their application portfolio, lending on NGINX is a move that we have made easier for customers, both technically and in our commercial agreements.

Franois Locoh: We mentioned in the call in Q4 that, you know, we had past 500 distributed cloud customers, and two-thirds of those customers of distributed cloud are also existing F5 customers on big IP or NGINX. And so, again, these are examples of customers that are distributing apps across multiple environments, and they are leveraging more and more multiple products in the F5 portfolio to do so. And then the second question was on the... Upgrade Cycle Around, the R-series versus the older I-series. We've been Now I think it is 18, almost 24 months.

Franois Locoh: That product launch initially was hampered by an inability to do a lot of the use cases. My assumption is that you have now completed all of the use cases that were on the i-Series and therefore should be seeing a meaningful upgrade cycle over the next 12 to 18 months on that platform. Can you talk a little bit about what type of renewal cycle you expect? Alex, thank you.

Franois Locoh: First of all, we are really pleased with the adoption of R-Series in our customer base. I mean, I mentioned earlier that we have put a lot of work towards bringing these cloud benefits like multi-tenancy to our customers, and that's one of the reasons the adoption of R-Series has gone very well. Relative to where we were... You know, a few quarters ago, Alex, you're absolutely right. We have maybe now the majority of the use cases with, you know, that we had on our prior platform, I-Series, are now covered by R-Series. Not all of them.

Franois Locoh: We're still, you know, working through some of them, but the majority are covered. And, you know, I think that this year the majority of the appliances we ship will be R-Series. They are, I think they have already passed, you know, 50 percent. More than 50 percent of the appliances we're shipping are now R-Series.

Franois Locoh: You know, in terms of whether we see a big refresh cycle or a big ramp related to R-Series in the coming quarters? I would say, you know, I wouldn't think about this the way we used to think about refresh cycles, you know, seven, eight years ago when our business model was entirely appliance driven. But I do think we are, you know, we are seeing a pipeline of tech refresh in the coming quarters that is stronger than, you know, what we had six or 12 months ago, and that will go into our series launch. So the pipeline six is improving, and the Subscription turnover should be amplified. 2, 3, 4 quarter. Thanks.

Franois Locoh: Well, I just want to make sure, Alex, I'm talking about the pipeline of tech refresh, which is hardware which is largely, you know, largely not sold on a subscription basis but rather, typically on a perpetual basis. But yes, that pipeline is increasing. Of course, you know, what we'll have to see is what the conversion on that pipeline is when we get to it. Over the past, I would say in 2023, pipeline conversion was, of course, not as good as it had been in prior years.

Franois Locoh: But we're, you know, we're hoping with more predictability, we would see a better pipeline conversion. The other data point that we're seeing is that the rate of increased aging at our customers, aging of the platform, is slowing down, which suggests that, you know, the sweating of assets is tempering down a little bit, specifically with enterprise customers. And so hopefully, this will play out in the coming quarters.

Tal Liani: Our next question is from Tal Liani with Bank of America. Please proceed with your question. Thanks guys, um questions more of a kind of, SASS is about 7% of... What needs to happen, or what... in order to grow, doing on front, www.youtube.com.uk how much for all. Akamai and Klaus Lerach. Thank you, Tal.

Tal Liani: I think I'll start here. So Tal, first of all, let me make sure we're using the same terminology here. So SaaS and managed services represent, you're right, about 7% of our revenues. We said on our October call that given the transition we were going through in our managed services, we expected our ARR in SaaS and managed services to be flat for basically FY24, FY25. But then, beyond that, you know, returning to growth.

Franois Locoh: In terms of the things that we can do to drive growth in this business, so, we're continuing to focus on areas that are in the market that are growing and where we will gain more customer adoption, specifically, you know, the WAP market for all application security, API security, bot defense, you know, web application firewall, DDoS, this bundle of services. We're doing very well in the WAP market today with distributed cloud services, but there's plenty of opportunity for us to grow. And in the multi-cloud networking market, we're starting to see traction and more customers needing to connect applications between clouds, and we have a perfect solution that is a SaaS-based solution for that marketplace.

Franois Locoh: So, I think the, you know, the ambition here is to really win in these two markets, and that alone should drive substantial growth over time in the SaaS and managed services business, and the approach to that is really lending customers an initial service and then expanding over time to other services. In terms of competition with CDN players, um, Yes, in this market, you know, we will compete more and more with those players. They have been, frankly, in the market for longer than we have. And they have more maturity in this market than we do. So we are in the SaaS part of the business; we are, we are; this is really a great new opportunity for us. And we are We are an attacker in this market. You know, I think the two big strengths we bring to this competition are, number one, the architecture that we have is a more recent architecture, and it's entirely defined in software. And so it's not limited by the limitations of hardware in any given pops.

Franois Locoh: And so it's more universal and more flexible than prior architectures. Number two, we have some 20,000 customers that we have that have used F5 hardware, software, deployable hardware, and software products in the past and often want to continue to use those products and add SaaS to support other applications. And, ideally, you want to be able to manage the whole thing from a single pane of glass.

Franois Locoh: And that is something that F5 is going to be able to do that our competitors are not able to do. In addition to all the sort of product capabilities, we're also, I think you touched on it, Tal, spending a lot of time on go-to-market, educating our channel partners. We are very pleased that a lot of the, you know, the deals we're winning in SaaS actually, over the last, you know, I think over the last 12 months, close to 50% of the deals we have won in SaaS have been partner-initiated opportunities. And so we are very pleased with the early contribution of our partners to this growth. But there's more to do.

Franois Locoh: We've been on the roadshow over the last, you know, several months, educating all of our partners on the value proposition, and we're seeing more and more traction with them. So a lot more work to do on the go-to-market, because it's early days, but we're happy with their initial contribution to this success. Thank you.

Operator: Please proceed with your question. Great, thanks for squeezing me in here. Can you maybe comment on how much of your software growth outlook here at Fisker24 is underpinned by the app growth that you've been talking about driving expansions versus your ability to cross-sell some of your existing customers to either additional security or to distributed cloud services? And then, as a second question, just following up on the CDN commentary, what are the types of customers that have been the early adopters of that CDN module in the distributed cloud? Let me start with the second part of the question. So the CDN module distributed cloud, as you know, is fairly recent. I think we launched it about a quarter ago, if I recall correctly.

Franois Locoh: And we've had adoption. So this has been, you know, I was mentioning earlier, a learn and expand motion. So the customers who have adopted that are customers that typically did not start with F5 for CDN, but typically they started with F5 for a security solution. And it may have been a web application firewall, it may have been DDoS protection, or in some cases, it may have been load balancing on distributed clouds.

Franois Locoh: But then, having landed on our platform, I wanted to simplify their architecture and then adopt CDN as an additional module. We've seen service providers do that, and we've seen enterprises do that across a number of verticals.

Franois Locoh: To the first part of your question, around our software growth for the year. Okay, it's really about having a strong renewal performance on our renewal basis. So we have pretty good visibility on our renewals. In the first quarter, frankly, and even most of last year, even in a tough environment last year, renewals performed largely as we expected.

Franois Locoh: So we continue to expect, you know, strong performance on our renewals and, you know, and true forward and some expansion. And then in the new, you know, software subscriptions, our premise here is that the environment hasn't changed too much from last year. We have a lot of predictability, but we are not expecting a lot of these large transformational projects to really be a big contributor to our new software subscriptions this year.

Franois Locoh: Thank you, Francois. Thank you, thank you. There are no further questions at this time. This does conclude our conference today. You may disconnect your lines at this time. Thank you for your participation. Goodbye.