Q2 2024 F5 Inc Earnings Call

Operator: Good afternoon, and welcome to the F5 Inc. second quarter fiscal 2024 financial results conference call. At this time, all participants are in a listen-only mode. 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.

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

At this time all participants are in a listen only mode.

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.

Also today's conference is being recorded if anyone has any objections. Please disconnect at this time I'll now turn the call over to MS. Suzanne Dulong, Ma'am, you may begin Hello, and welcome I'm, Suzanne Dulong, <unk>, Vice President of Investor Relations first of all I'll go to new <unk>, President and CEO.

Operator: Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin. Hello and welcome.

Suzanne DuLong: I am Suzanne DuLong, F5's Vice President of Investor Relations. 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 call. Other members of the F5 executive team are also here to answer questions during the Q&A session.

Suzanne DuLong: And Frank Pelzer, Asides executive Vice President and CFO will be making prepared remarks on today's call.

Suzanne DuLong: Other members of <unk> executive team are also here to answer questions during the Q&A session.

Suzanne DuLong: A copy of today's press release is available on our website at F5.com, or an archived version of today's audio will be available through July 28, 2024. We will post the slide deck accompanying today's webcast to our IR site at the conclusion of our call. To access the replay of today's webcast by phone, dial 877-660-6853 or 201-612-7415 and use meeting ID 1374-5541. The telephonic replay will be available through midnight Pacific time, April 30th, 2024. For additional information or follow-up questions, please reach out to me directly at s.dulongatf5.com.

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 Dot Com, where an archived version of today's audio will be available through July 28 2024.

Suzanne DuLong: We will post a slide deck accompanying today's webcast to our IR site at the conclusion of our call to access the replay of today's webcast by phone dial 8776606853 or.

Suzanne DuLong: <unk> 20161 to 7415 and use meeting I D 13745541.

Suzanne DuLong: The telephonic replay will be available through midnight Pacific time April 30th 'twenty 'twenty four.

Speaker Change: For additional information or follow up questions. Please reach out to me directly at S. Dot do long F five dot com.

Speaker Change: Our discussion today will contain forward looking statements, which includes words such as believe anticipate expect and target. These forward looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release.

Suzanne DuLong: Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today's discussion.

Speaker Change: <unk> announcing our financial results and in detail in our SEC filings.

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

Suzanne DuLong: Please see our full GAAP to non-GAAP reconciliation in today's press release and in the appendix of our earnings slide. Please note that F5 has no duty to update any information presented in this call. With that, I will turn the call over to Francois.

Speaker Change: Please note that <unk> five has no duty to update any information presented in this call.

Speaker Change: With that I will turn the call over to Francois.

Francois Locoh: Thank you, Suzanne, and hello, everyone. Thank you for joining us. In my remarks today, I will speak to our Q2 highlights as well as our expectations for Q3 and FY24. Franck will then review the details of our Q2 results and provide additional color on our outlook. Overall, customers remain cautious as a result of lingering macroeconomic concerns and what currently looks like generally flat IT budgets for calendar 2024. Against this backdrop, we delivered a solid Q2, with revenue near the midpoint of our guidance range.

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

Francois: In my remarks today, I will speak to our Q2 highlights as well as our expectations for Q3 and FY 'twenty four.

Francois: <unk> will then review the details of our Q2 results and provide additional color on our outlook overall customers remained cautious as a result of lingering macroeconomic concerns and what currently looks like generally flopped I T budgets for calendar 'twenty 'twenty four.

Francois: Against this backdrop, we delivered a solid Q2 with revenue near the midpoint of our guidance range.

Francois Locoh: Our software subscription renewals continued to perform well, driving 20% total software revenue growth compared to a year ago, including 28% subscription revenue growth. We also delivered non-gap earnings per share growth of 15%, with EPS of $2.91 per share at the high end of our guidance range.

Speaker Change: So far as subscription renewals continued to perform well driving 20% total software revenue growth compared to a year ago, including 28% subscription revenue growth.

We also delivered non-GAAP earnings per share growth of 15% with EPS of $2 91 per share at the high end of our guidance range.

Francois Locoh: As we look into our second half, we remain on track to deliver on our FY24 revenue outlook. We expect continued strong performance from our software subscription renewals, and our renewals base provides good visibility into the back half of FY24. We also remain committed to continued operating discipline, and we are raising our FY24 non-GAP EPS outlook to a range of 7 to 9% growth from our prior range of 6 to 8% growth.

Speaker Change: As we look into our second half we remain on track to deliver on our FY 'twenty full revenue outlook. We expect continued strong performance from our software subscription renewals and our renewals based provides good visibility into the back half of FY 'twenty four.

Speaker Change: We also remain committed to continued operating discipline and we are raising our FY 'twenty four non-GAAP EPS outlook to a range of 7% to 9% growth from our prior range of 6% to 8% growth.

Francois Locoh: Frank will discuss our outlook in greater detail in a few minutes, but before he does that, I will spend a few minutes speaking to the hybrid multi-cloud ball of fire our customers' IT teams are living in, explaining F5's differentiation in addressing this ball of fire, and highlighting some notable customer wins from Q2. The current state of application security and delivery for large enterprises has IT teams in crisis. The increasing complexity and the associated costs and risks they are battling are not incremental. It is untenable, and it is growing even more so by the day.

Speaker Change: We'll discuss our outlook in greater detail in a few minutes.

Speaker Change: Before he does that I will spend a few minutes speaking to the hybrid multi cloud ball of fire. Our customers 80 teams are living in explaining our fives differentiation in addressing this ball of fire and highlighting some notable customer wins from Q2.

Speaker Change: The current state of application security and delivery for large enterprises has a T teams in crisis, the increasing complexity and the associated cost and risk. They are bundling is not incremental it is untenable and it is growing even more so by the day Joseph two years ago customer bills.

Francois Locoh: Just a few years ago, customers believed that by now, their applications would be consolidated in the public cloud. Instead, today, they are grappling with a more complex and costly set of challenges than ever before. 88% of our customers report they are currently operating applications across a combination of on-premises and cloud environments. On average, organizations are operating across four and a half different types of environments. Most organizations have hundreds of applications, each with a set of associated APIs, distributed across these multiple environments.

Speaker Change: <unk> that by now their applications would be consolidated in the public cloud instead today. They are grappling with a more complex and costly set of challenges than ever before.

Speaker Change: 88% of our customers report. They are currently operating applications across a combination of on premises and cloud environments on average organizations are operating across four and a half different types of environments. Most organizations have hundreds of applications.

With a set of associated P is distributed across these multiple environments and because modern applications have decomposed monolithic applications into smaller components. Those components are more fragmented and distributed as a result, a P eyes and data also are more distributed the result of this.

Francois Locoh: And because modern applications have decomposed monolithic applications into smaller components, those components are more fragmented and distributed. As a result, APIs and data are also more distributed. The result of this expansion and distribution is amplified security risks across a larger attack surface area. These challenges will be further intensified by the inevitable widespread adoption and proliferation of AI. This complexity is preventing organizations from operating at the speed their businesses demand, manual path Inconsistent Security Controls, operational silos, lack of available talent. Escalating cloud costs and inefficient traffic routing are slowing them down. We have affectionately named this set of escalating challenges the Ball of Fire.

Speaker Change: <unk> and distribution is amplified security risks across a larger attack surface area.

Speaker Change: These challenges will be further intensified by the inevitable widespread adoption and proliferation of AI.

Speaker Change: This complexity is preventing organizations from operating of the speed of their businesses demand.

Speaker Change: Manual tasks inconsistent security controls operational silos lack of available talent.

Speaker Change: Escalating cloud cost and inefficient traffic routing or slowing them down.

Speaker Change: We have affectionately named this set of escalating challenges the ball of fire. During Q2, we spoke with more than 1600 customers and partners about the ball a fire at our global App World events. These events gave us the opportunity to explain how our distributed App security and delivery platform can meet.

Francois Locoh: During Q2, we spoke with more than 1,600 customers and partners about the Ball of Fire at our Global App World events. These events gave us the opportunity to explain how our distributed app security and delivery platform can mitigate customers' Ball of Fire challenges. We have significantly expanded and evolved our solutions portfolio over the last several years. Today, only F5 can truly support the demands of today's hybrid multi-cloud application infrastructure. More specifically, we are the only solution provider that secures, delivers, and optimizes any app, any API, anywhere. F5 is highly differentiated in addressing customers' pain points in this ball of fire in several ways. First, app security.

Speaker Change: To get customers ball of fire challenges.

Speaker Change: We have significantly expanded and evolved our solutions portfolio over the last several years.

Speaker Change: They only have five can truly support the demands of today's hybrid multi cloud application infrastructures.

Speaker Change: More specifically, we are the only solution provider that secures the livers and optimizes any app any API anywhere F. Five is highly differentiated in addressing customers' pain points in this ball of fire in several ways.

Speaker Change: First up security.

Francois Locoh: F5 offers the most effective and comprehensive app and API security platform in the industry. While several providers offer point products for specific thread vectors, F5 has built an integrated and comprehensive suite of best-in-class capabilities, all delivered through a single platform. Why does this matter to our customers? Because they can consolidate solutions addressing all of their app security needs with a single platform and without making trade-offs on efficacy.

Speaker Change: Five offers the most effective and comprehensive App and API security platform in the industry, while several providers offer point products for specific threat vectors F. Five has built an integrated and comprehensive suite of best in class capabilities, all delivered through a single platform.

Speaker Change: Why does this matter to our customers because our customers can consolidate solutions addressing all of their app security needs with a single platform and without making trade offs on efficacy.

Speaker Change: Second simplification.

Speaker Change: We make hybrid multi cloud ridiculously easy only a five has a solution footprint that extends to all environments in the ball of fire, including public clouds.

Francois Locoh: We make hybrid multi-cloud ridiculously easy. Only F5 has a solution footprint that extends to all environments in the ball of fire, including public clouds, at the edge, and customers' on-premises environments. F5 radically simplifies the work of connecting these disparate infrastructure environments, as well as the applications deployed in and across them. Why do customers care about this?

Speaker Change: Ads and customers on Prem environments F. Five radically simplifies the work of connecting these disparate infrastructure environments as well as the applications deployed in and across them.

Speaker Change: Why do customers care about this because we enable the hybrid multi cloud flexibility their businesses demand with the simplicity the I T operations require.

Speaker Change: And third standardization and automation.

Francois Locoh: Because we enable the hybrid multi-cloud flexibility their businesses demand with the simplicity their IT operations require. F5 uniquely streamlines customers' operations with consistent policies, comprehensive automation, and rich analytics. This enables customers to consolidate vendors and tool sets, rationalize operational silos, and automate lifecycle management of their on-premises deployments. The result is far less toil for NetOps, SecOps, and DevOps teams. But why does this matter to customers?

Speaker Change: Five uniquely streamlines customers operations with consistent policies comprehensive automation and rich analytics. This enables customers to consolidate vendors and tool sets rationalized operational silos and automate lifecycle management of their on premises deployments. The result is far less toiled for now.

Speaker Change: Net ops setups and Dev ops teams why does this matter to customers because it results in more cost effective and scalable a T operations.

It is the combination of these three points of strong differentiation along with the role that F. Five plays embedded in the floor of application traffic.

That create F five's unique position and enable us to extinguish the ball of fire for our customers.

Speaker Change: We empower our customers to run the speed their businesses demand let.

Francois Locoh: Because it results in more cost-effective and scalable IT operations. It is the combination of these three points of strong differentiation, along with the role that F5 plays embedded in the flow of application traffic, that creates F5's unique position and enables us to extinguish the ball of fire for our customers. We empower our customers to run at the speed their businesses demand. Let me offer a few customer examples from Q2 to illustrate how these capabilities are manifesting today in our customers' real-world use cases. The first two customer examples I will speak to highlight our application security capabilities. The first example is an API security use case.

Speaker Change: Let me offer a few customer examples from Q2 to illustrate how these capabilities are manifesting today in our customers' real world use cases.

Speaker Change: The first two customer examples I will speak to highlight our application security capabilities. The first example is an API security use case last quarter, we spoke to the substantial increase we are seeing in the volume of API targeted attacks customers tell us API security is one of their most.

Speaker Change: Second concerns and with good reason.

Speaker Change: A P is represents a critical avenue for attack.

Speaker Change: Potentially exposing backend systems and data.

Speaker Change: We foresaw this API crisis coming and last year launched a comprehensive and AI ready API security solution available via F. Five distributed cloud services.

Speaker Change: Our differentiation stems from our ability to go beyond a P. E discovery through traffic analysis. In addition, we performed continuous monitoring code scanning API testing analysis threat surface mapping and enforcement.

Francois Locoh: Last quarter, we spoke about the substantial increase we are seeing in the volume of API-targeted attacks. Customers tell us API security is one of their most significant concerns, and with good reason. APIs represent a critical avenue for a task, potentially exposing back-end systems and data. We foresaw this API crisis coming and last year launched a comprehensive and AI-ready API security solution available via F5 Distributed Cloud Services. Our differentiation stems from our ability to go beyond API discovery through traffic analysis. In addition, we perform continuous monitoring, code scanning, API testing analysis, threat surface mapping, and enforcement.

Speaker Change: We do all of this in a holistic easy to deploy solution that provides complete visibility architectural flexibility and management through a single pane of glass.

During Q2, a large multinational networking and telecommunications company needed a solution to mitigate an explosive rise in API and web application attacks on its digital wallet solution.

Speaker Change: This solution supports more than 400 million wallets across 24 countries processing over 2.8 billion transactions worth more than $40 billion every month.

Speaker Change: To protect their consumers' financial transactions on a global scale. This use case demanded the highest level of App and API security efficacy with no trade offs on performance. The customer is standardizing on F. Five distributed cloud services application and API security as the basis for its new <unk>.

Francois Locoh: We do all of this in a holistic, easy-to-deploy solution that provides complete visibility, architectural flexibility, and management through a single pane of glass. For example, during Q2, a large multinational networking and telecommunications company needed a solution to mitigate an explosive rise in API and web application attacks on its digital wallet solution. This solution supports more than 400 million wallets across 24 countries, processing over 2.8 billion transactions worth more than $40 billion every

Speaker Change: Industry network, and API security globally, ensuring coverage for new markets worldwide with heightened security for financial transactions.

Speaker Change: The second App Security example is a bot mitigation use case in Q2, a multinational beverage company leveraged our distributed cloud services platform for advanced Bot mitigation during a proof of concept F. Five solution discovered 99% of the customers traffic was coming from bots and it.

Speaker Change: Blocked millions of federal and defense as a result, the customer deployed F five across its branded marketing and consumer facing sites.

Francois Locoh: To protect their consumers' financial transactions on a global scale, this use case demanded the highest level of app and API security efficacy with no trade-offs on performance. The customer is standardizing on F5's distributed cloud services application and API security as the basis for its new industry network and API security globally, ensuring coverage for new markets worldwide with heightened security for financial transactions. The second app security example is a bot mitigation use case.

Speaker Change: And thus far has saved nearly $3 million in fraud.

Speaker Change: Employment is also an example of the success of our land and expand strategy as the customer previously deployed our five for load balancing and WAF.

Speaker Change: The next customer win I will highlight exemplifies how F. Five he's able to simplify connecting disparate infrastructures, making hybrid multi cloud ridiculous really easy for our customers.

Speaker Change: And energy company in our APAC region selected a combination of big IP <unk> hardware and distributed cloud services to improve application security and scalability, while also driving operational efficiency and reducing costs.

Francois Locoh: In Q2, a multinational beverage company leveraged our distributed cloud services platform for advanced bot mitigation. During a proof of concept, F5's solution discovered 99% of the customer's traffic was coming from bots, and it blocked millions of fraudulent attempts. As a result, the customer deployed F5 across its branded marketing and consumer-facing sites and, thus far, has saved near $3 million in fraud. This deployment is also an example of the success of our Lend and Expend strategy, as the customer previously deployed F5 for load balancing and WAF.

Speaker Change: Following the acquisitions of several companies the customers wanted a new shared infrastructure that United their disparate on premises operating environments and position them to move to the cloud.

Speaker Change: Ultimately this customer opted to consolidate multiple vendors onto our five leveraging our hardware and SaaS offerings.

Speaker Change: The final two customer wins I will highlight demonstrate how we streamline customers operations with consistent policies comprehensive automation and rich analytics.

Speaker Change: During Q2, and American auto insurance provider selected F. Five distributed cloud services to increase their business velocity through automation the customer faced the ball of fire the evolution of their multi cloud infrastructure led to tool fragmentation inefficient modern application deployment.

Francois Locoh: The next customer win I will highlight exemplifies how F5 is able to simplify connecting disparate infrastructures, making hybrid multi-cloud ridiculously easy for our customers. An energy company in our APAC region selected a combination of Big IP Velos hardware and distributed cloud services to improve application security and scalability, while also driving operational efficiency and reducing costs.

Speaker Change: Inconsistent security and the lack of Manageability and visibility the customer evaluated several point solutions. In addition to a fives platform approach, we demonstrated our ability to improve velocity through automation, while also providing consistent and more effective app security and faster response times the Cup.

Francois Locoh: Following the acquisitions of several companies, this customer wanted a new shared infrastructure that united their disparate on-premises operating environments and positioned them to move to the cloud. Ultimately, this customer opted to consolidate multiple vendors onto F5, leveraging our hardware and SaaS offerings. The final two customer wins I will highlight demonstrate how we streamline customers' operations with consistent policies, comprehensive automation, and rich analytics. During Q2, an American auto insurance provider selected F5 distributed cloud services to increase its business velocity through automation. The customer faced the ball of fire.

Speaker Change: Or ultimately consolidated onto a five replacing their existing Wap provider with distributed cloud services in a more.

Speaker Change: Other example from Q2, a multinational bank and financial services company expanded their F five big IP footprint.

Leveraging both software instances in public clouds, and hardware and traditional data centers F. Five is enabling a fully automated self service ADC and security solution for all of their load balancing and firewall needs. As a result, the customers speed of provisioning new application services has gone from weeks to.

Speaker Change: <unk> and F. Five has captured a two X increase in spend over the last five years.

Before I pass the call to Frank I will close with some brief commentary about how we are innovating to target and capture emerging AI opportunities. There is no question that AI will accelerate the growth in the number of applications and Apis. It will also exacerbate the ball of fire.

Francois Locoh: The evolution of their multi-cloud infrastructure led to tool fragmentation, inefficient modern application deployment, inconsistent security, and a lack of manageability and visibility. The customer evaluated several point solutions in addition to F5's platform approach. We demonstrated our ability to improve velocity through automation, while also providing consistent and more effective app security and faster response times. The customer ultimately consolidated onto F5, replacing their existing WAP provider with distributed cloud services. In another example from Q2, a multinational bank and financial services company expanded their F5 Big IP footprint.

Francis J. Pelzer: Last quarter, we spoke about at five as an AI enabler and discuss some early use cases, where customers are deploying a five in support of AI initiatives. In addition to innovating and evolving our portfolio to ensure we are optimizing for AI. We also are engaging customers in architectural discussions about the AI.

Francis J. Pelzer: Readiness of their environments.

Francis J. Pelzer: We already are working with customers on three specific AI related challenges.

Francis J. Pelzer: The first is API security because API security is AI security as a P. Ice proliferate for example through the adoption and deployment of AI services for Inferencing. There is a critical need for a solution that automatically discovers and secures those endpoints as.

Francois Locoh: Leveraging both software instances in public clouds and hardware in traditional data centers, F5 is enabling a fully automated self-service ADC and security solution for all of their load balancing and firewall needs. As a result, the customer's speed of provisioning new application services has gone from weeks to minutes, and F5 has captured a 2x increase in spend over the last five years.

Francis J. Pelzer: As I mentioned earlier <unk> has the most comprehensive AI ready API security solution available today.

F five distributed cloud services.

Francis J. Pelzer: The second AI related challenge is secure multi cloud networking.

Francis J. Pelzer: With increasingly distributed applications and Apis customers need high throughput connectivity across on premises cloud and edge for AI inference distributed cloud services is unmatched in its capabilities to connect secure and manage distributed apps and if he is across hybrid and multi cloud environments.

Francois Locoh: Before I pass the call to Frank, I will close with some brief commentary about how we are innovating to target and capture emerging AI opportunities. There is no question that AI will accelerate the growth of the number of applications and APIs. But it will also exacerbate the ball of fire.

Francis J. Pelzer: Woody I related challenge is high speed data ingestion.

Francis J. Pelzer: And use cases, where customers want to ingest data for multibillion parameter AI models, they need high performance load balancing and no. One is better at high throughput load balancing then F. Five we expect that enterprises broadly ramping AI adoption over the next one to two years will bring a host of additional.

Francois Locoh: Last quarter, we spoke about F5 as an AI enabler and discussed some early use cases where customers are deploying F5 in support of AI initiatives. In addition to innovating and evolving our portfolio to ensure we are optimizing for AI, we are engaging customers in architectural discussions about the AI readiness of their environment. We are already working with customers on three specific AI-related challenges. The first is API security, because API security is like AI security.

<unk> AI fueled use cases for our five solutions our platform approach, our continuing innovation and our role in the line of traffic of millions of applications that will ultimately leverage AI puts us in a unique position to partner with customers as they work to solve both current and future AI.

Francis J. Pelzer: Challenges now I will turn the call to Frank Frank.

Thank you Francois and good afternoon, everyone I will review, our Q2 results before I elaborate on our Q3 and FY 'twenty for outlook.

We delivered Q2 revenue of $681 million, reflecting sales that were down 3% year over year with a mix of 56% global services and 44% product revenue.

Francois Locoh: As APIs proliferate, for example, through the adoption and deployment of AI services for inferencing, there is a critical need for a solution that automatically discovers and secures those endpoints. As I mentioned earlier, F5 has the most comprehensive AI-ready API security solution available today via F5 distributed cloud services. The second AI-related challenge is secure multi-cloud networking. With increasingly distributed applications and APIs, customers need high-throughput connectivity across on-premises, cloud, and edge for AI infrastructure.

Francis J. Pelzer: Global services revenue of $381 million grew 5% inline with our expectations, which reflect our lapping the benefit of prior price increases.

Francis J. Pelzer: <unk> revenue totaled 300 million down 12% year over year, reflecting a lower level of backlog related systems shipments than the year ago quarter sit.

Francis J. Pelzer: Systems revenue of $142 million declined 32% year over year.

Francis J. Pelzer: Total software revenue grew 20% over the year ago period to $159 million subscription base revenue contributed $140 million or 88% of the total software revenue representing growth of 28% from last year.

Francois Locoh: Distributed cloud services is unmatched in its capabilities to connect, secure, and manage distributed apps and APIs across hybrid and multi-cloud environments. The third AI-related challenge is high-speed data ingestion. In use cases where customers want to ingest data for multi-billion parameter AI models, they need high-performance load balancing, and no one is better at high-throughput load balancing than F5. We expect that enterprises broadly ramping AI adoption over the next one to two years will bring a host of additional AI-fueled use cases for F5 solutions.

Francis J. Pelzer: Within subscriptions renewals were strong.

Francis J. Pelzer: As expected demand for new subscriptions were flat year over year, given customers current spending caution on new projects rounding out our software revenue perpetual software contributed $18 million revenue from recurring sources contributed 75% of Q2's revenue up from 65% a year ago recurring.

Francis J. Pelzer: The new include subscription base revenue as well as the maintenance portion of our global services revenue on.

Francis J. Pelzer: On a regional basis revenue from Americas grew 1% year over year, representing 57% of total revenue.

Francis J. Pelzer: EMEA declined 6%, representing 26% of revenue in APAC declined, 9%, representing 17% of revenue.

Francis J. Pelzer: Looking at our major verticals, we saw relative strength from enterprises with enterprise customers, representing 69% of product bookings in the quarter government customers performed well, representing 19% of product bookings, including 7% from U S. Federal.

Francois Locoh: Our platform approach, our continuing innovation, and our role in the line of traffic of millions of applications that will ultimately leverage AI puts us in a unique position to partner with customers as they work to solve both current and future AI challenges. Now, I will turn the call to Franck. Franck?

Francis J. Pelzer: Finally, following a strong Q1 service providers represented 13% of Q2 product bookings.

Francis J. Pelzer: Our Q2 operating results reflect the usual seasonal patterns as well as our continued operating discipline.

Francis J. Pelzer: Thank you, Francois, and good afternoon, everyone. I will review our Q2 results before I elaborate on our Q3 and FY24 outlooks. We delivered Q2 revenue of $681 million, reflecting sales that were down 3% year-over-year with a mix of 56% global services revenue and 44% product revenue. Global services revenue of $381 million grew 5% in line with our expectations, which reflect our lapping the benefit of prior price increases. Product revenue totaled $300 million, down 12% year-over-year, reflecting a lower level of backlog-related system shipments than the year-ago quarter. Systems revenue of $142 million declined 32% year-over-year.

Francis J. Pelzer: GAAP gross margin was 79.3% non-GAAP gross margin was 82.1% an improvement of approximately 170 basis points from Q2 of FY2023 as.

Francis J. Pelzer: As expected our operating expenses ticked up in Q2, given payroll tax resets as of January 1st as well as cost associated with our global App World events. Our GAAP operating expenses were $400 million, our non-GAAP operating expenses were $349 million, our GAAP operating margin was 20.5.

Francis J. Pelzer: Percent, our non-GAAP operating margin was 39%, reflecting an improvement of approximately 370 basis points from Q2 of FY2023 our GAAP effective tax rate for the quarter was 18.4% our non-GAAP effective tax rate was 20% our GAAP net income for the quarter was $119 million or.

Francis J. Pelzer: $2 per share our non-GAAP net income was $173 million up approximately 13% from Q2 of FY2023 our non-GAAP EPS was $2 91 per share up approximately 15% from Q2 of last year.

Francis J. Pelzer: Total software revenue grew 20% over the year-ago period to $159 million. Subscription-based revenue contributed $140 million, or 88% of total software revenue, representing growth of 28% from last year. Within subscriptions, renewals were strong. However, as expected, demand for new subscriptions was flat year-over-year, given customers' current spending caution on new projects.

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

Francis J. Pelzer: We generated $222 million in cash flow from operations in Q2 up 57% from $141 million in the year ago period. The significant increase is largely the result of an increase in cash received from customers and the timing of collections compared to billings.

Francis J. Pelzer: Capex was $9 million.

Francis J. Pelzer: Rounding out our software revenue, Perpetual Software contributed $18 million. Revenue from recurring sources contributed 75% of Q2's revenue, up from 65% a year ago. Recurring revenue includes subscription-based revenue as well as the maintenance portion of our global services revenue. On a regional basis, revenue from the Americas grew 1% year-over-year, representing 57% of total revenue. Amia declined 6%, representing 26% of revenue, and APAC declined 9%, representing 17% of revenue.

Francis J. Pelzer: DSO for the quarter was 51 days down from IRA unusually high 67 days in Q1, and reflecting our improved product availability and a return to normalized shipping linearity, which supported strong cash collections cash.

Francis J. Pelzer: Cash and investments totaled approximately 910 million at quarter end.

Francis J. Pelzer: Deferred revenue was 1.81 billion up 1% from Q2 of FY2023.

Francis J. Pelzer: Our share repurchases reflect our ongoing commitment to returning cash to shareholders, we repurchased $100 million worth of F. Five shares in Q2 at an average price of $184 per share.

Francis J. Pelzer: Year to date, we have used approximately 68% of our free cash flow towards share repurchases.

Finally, we ended the quarter with approximately 6450 employees.

Francis J. Pelzer: Looking at our major verticals, we saw relative strength from enterprises, with enterprise customers representing 69% of product bookings in the quarter. Government customers performed well, representing 19% of product bookings, including 7% from U.S. Federal. Finally, following a strong Q1, service providers represented 13% of Q2 product bookings. Our Q2 operating results reflect the usual seasonal patterns as well as our continued operating discipline. Gap gross margin was 79.3%, and non-gap gross margin was 82.1%, an improvement of approximately 170 basis points from Q2 of FY23.

Speaker Change: I will now speak to our outlook for Q3, and our updated view on our FY 'twenty for outlook.

Speaker Change: First I will speak to Q3, we expect Q3 revenue in the range of $675 million to $695 million, we expect non-GAAP gross margins in the range of 82% to 83% we.

Speaker Change: We estimate Q3, non-GAAP operating expenses of $340 million to $352 million.

Speaker Change: We are targeting Q3, non-GAAP EPS in the range of $2 89 to $3.01 per share.

Speaker Change: We expect Q3 share based compensation expense of approximately $55 million to $57 million.

Speaker Change: I will now turn to our FY 'twenty four outlook, we have good visibility to and competence in our subscription renewals and our second half. This visibility leads us to expect our second half of FY 'twenty four will be stronger than our first half, reflecting the cyclicality associated with the timing and cadence of our subscription renewals our outlook does not assume.

Francis J. Pelzer: As expected, our operating expenses ticked up in Q2, given payroll tax resets as of January 1st, as well as costs associated with our global App World event. Our GAAP operating expenses were $400 million, and our non-GAAP operating expenses were $349 million.

Speaker Change: <unk> a significant improvement in the macro environment as Francois mentioned, we expect FY 'twenty for revenue growth that is flat to down 2% from FY 'twenty. Three this outlook is consistent with our prior FY 'twenty for revenue outlook, albeit with more specificity on the range. Given we are halfway through the year, we are not revising our gross are off.

Francis J. Pelzer: Our GAAP Operating Margin was 20.5%. Our non-GAAP Operating Margin was 30.9%, reflecting an improvement of approximately 370 basis points from Q2 of FY23. Our GAAP Effective Tax Rate for the quarter was 18.4%. Our non-GAAP Effective Tax Rate was 20%.

Speaker Change: Operating margin targets for FY 'twenty, four and continue to expect non-GAAP gross margins in the range of 82% to 83%, we expect non-GAAP operating margin in the range of 33% to 34%.

Speaker Change: We now expect our FY 'twenty four tax rate will be in the range of 20% to 22% a slightly wider range than our prior estimate of 21% to 22%.

Francis J. Pelzer: Our GAAP Net Income for the quarter was $119 million, or $2 per share. Our non-GAAP net income was $173 million, up approximately 13% from Q2 of FY23. Our non-GAAP EPS was $2.91 per share, up approximately 15% from Q2 of last year. I will now turn to cash flow and the balance sheet, which also remain very strong. We generated $222 million in cash flow from operations in Q2, up 57% from $141 million in the year-ago period. This significant increase is largely the result of an increase in cash received from customers and the timing of collections compared to billing.

Speaker Change: Finally, we are raising our non-GAAP EPS growth expectations, we now expect FY 'twenty four non-GAAP EPS growth between seven and 9%. This is up from 6% to 8% range. We provided last quarter I will now turn the call back to Francois Francois.

Thank you Frank.

Francois: In conclusion F. Five predicted the hybrid multi cloud ball of fire crisis, our customers now face.

For the last several years, we have been innovating and evolving to create the industry's first distributed application security and delivery platform.

Francois: Today, we are the only provider capable of securing delivering and optimizing any application any FDA regardless of its location beats.

Francis J. Pelzer: CapEx was $9 million. DSO for the quarter was 51 days, down from our unusually high 67 days in Q1, and reflecting our improved product availability and a return to normalized shipping linearity, which supported strong cash collections. Cash and Investments totaled approximately $910 million at quarter end.

Francois: Beats in a datacenter.

Francois: Any one of the public clouds SaaS.

Francois: Or at the network edge.

Francois: Today's hybrid and multi cloud reality brings with it untenable operational complexity considerable cost and escalating security risks.

Francois: Broad based enterprise adoption of AI will only compound these challenges.

Francis J. Pelzer: Deferred revenue was $1.81 billion, up 1% from Q2 of FY23. Our share repurchases reflect our ongoing commitment to returning cash to shareholders. We repurchased $100 million worth of F5 shares in Q2 at an average price of $184 per share. Year-to-date, we have used approximately 68% of our free cash flow toward share repurchases. Finally, we ended the quarter with approximately 6,450 employees. I will now speak to our Outlook for Q3 and our updated view on our FY24 Outlook. First, I will speak to Q3.

Francois: At five three points of differentiation.

Francois: Best of breed App security, our ability to simplify connecting disparate infrastructures and our ability to streamline operations through standardization and automation.

Francois: F five apart from the alternatives.

When combined with the role we play in the line of application traffic.

Francois: These differentiators position us to extinguish the ball of fire for our customers empowering them to run at the speed their businesses demand.

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

Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Francis J. Pelzer: We expect Q3 revenue in the range of $675 to $695 million. We expect non-GAAP gross margins in the range of 82 to 83 percent. We estimate Q3 non-GAAP operating expenses of $340 to $352 million. We are targeting Q3 non-GAAP EPS in the range of $2.89 to $3.01 per share. We expect Q3 share-based compensation expense of approximately $55 to $57 million.

Speaker Change: Formation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from Mccann.

Speaker Change: Vince using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: One moment, please while we poll for question.

Speaker Change: Our first question comes from Tim Long with Barclays. Please proceed with your question.

Timothy Patrick Long: Thank you maybe two if I could first.

Tim Long: <unk>.

Timothy Patrick Long: Praful I think the last few quarters, you talked about kind of competitive landscape and some disruption at <unk>.

Timothy Patrick Long: Some of your competitors could you just give us an update.

Francis J. Pelzer: I will now turn to our FY24 outlook. We have good visibility to and confidence in our subscription renewals in our second half. This visibility leads us to expect our second half of FY24 to be stronger than our first half, reflecting the cyclicality associated with the timing and cadence of our subscription renewals. Our outlook does not assume a significant improvement in the macro environment.

Timothy Patrick Long: On that kind of win rate or what you're seeing and then <unk>.

Timothy Patrick Long: And I did want to dig into that AI commentary with load balancing a little bit more is it for EFI gonna be specifically for enterprise use cases or will you guys play in some of these other.

Timothy Patrick Long: Larger data centers that are seeing a lot of capex activity.

Timothy Patrick Long: Currently and maybe timing of that enterprise if you could thank you.

Speaker Change: Thank you Tim.

Speaker Change: So maybe let me start with your second question and then I'll come back to the competitive landscape.

But Tim on AI.

Speaker Change: The use case that I referred to when I talked about.

Francis J. Pelzer: As Francois mentioned, we expect FY24 revenue growth that is flat to down 2% from FY23. This outlook is consistent with our prior FY24 revenue outlook, albeit with more specificity on the range given we are halfway through the year. We are not revising our gross or operating margin targets for FY24 and continue to expect non-gap gross margins in the range of 82 to 83%. We expect non-gap operating margins in the range of 33 to 34%.

Speaker Change: High capacity and load balancing for data ingestion I think we're going to see that use case primarily in enterprises.

Speaker Change: Specifically enterprises that are running their own lodge language model.

Speaker Change: At scale.

Speaker Change: And who have a need to ingest significant amount of data whether that data comes from their own on premise environments or from the cloud.

Speaker Change: But.

Speaker Change: The need to ingest the data in.

Speaker Change: Send the data to various environments is creating the need for high capacity and load balancing and we're starting to see.

Speaker Change: More of a digital innovators. So those large enterprises that have invested heavily in digital transformation and maybe ahead of others that are starting to deploy large language models in production have this kind of neat.

Francis J. Pelzer: We now expect our FY24 tax rate will be in the range of 20-22%, a slightly wider range than our prior estimate of 21-22%. Finally, we are raising our non-GAAP EPS growth expectations. We now expect FY24 non-GAAP EPS growth between 7 and 9 percent. This is up from the 6 to 8 percent range we provided last quarter. I will now turn the call back to Francois.

Speaker Change: This is not.

Speaker Change: Inside of the Hyperscale infrastructure, Alright, that's why you're asking that is an enterprise need burst specific type of enterprise and that is as you know very early days.

Speaker Change: We are also.

Speaker Change: On AI beyond high capacity load balancing we are also seeing a couple of other types of use cases.

Francois Locoh: In conclusion, F5 predicted the hybrid, multi-cloud, ball of fire crisis our customers now face. For the last several years, we have been innovating and evolving to create the industry's first distributed application security and delivery platform. Today, we are the only provider capable of securing, delivering, and optimizing any application, any API, regardless of its location, be it in a data center, any one of the public clouds, a SaaS, or at the Network Edge. Today's hybrid and multi-cloud reality brings with it unprecedented operational complexity, considerable cost, and escalating security risks. Broad-based enterprise adoption of AI will only compound these challenges.

Speaker Change: Specifically, the fact that yeah. It workloads are going to be distributed and have a heavy reliance on API means that API security.

Speaker Change: Emerging as a really important capability to support AI workloads.

Speaker Change: We're starting to see a couple of use cases in that area and then the third is the ability to network applications together.

Speaker Change: Across multiple clouds.

Speaker Change: Is really key.

Speaker Change: Because customers have their data in different environments. They want to learn that they want to run models in certain environment and access data in other environments and that requires connecting networking applications or workloads together and we've got a capability to do that with distributed cloud. So this is what we're seeing emerging youth.

Operator: F5's three points of differentiation, best-of-breed app security, our ability to simplify connecting disparate infrastructures, and our ability to streamline operations through standardization and automation, set F5 apart from the alternatives. When combined with the role we play in the line of application traffic, these differentiators position us to extinguish the ball of fire for our customers, empowering them to run at the speed their businesses demand. Operator, please open the call to questions.

Speaker Change: Cases in AI, it's early days, but we're pretty.

Speaker Change: Encouraged by what we've seen over the last three to six months.

Speaker Change: So your first question about the competitive landscape.

Speaker Change: We I did in fact referred to a couple of our competitors that have changed their models.

Speaker Change: I think the first one more on the traditional ADC space.

Speaker Change: We continue to see very good traction.

Speaker Change: In that area I would say the momentum relative to last year.

Speaker Change: <unk> accelerated.

Speaker Change: And so things in that that area is going to plan.

Speaker Change: And we have several examples essentially.

Speaker Change: Consolidating onto a five multiple capabilities, including capabilities that could have come from that from a competitor or replacing a competitor altogether in some of the largest enterprises.

Operator: 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 that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Speaker Change: Both in North America and around the World.

Speaker Change: And then in the area of SaaS, we continued to make good traction with X gene.

Speaker Change: Including displacing some competitors.

Speaker Change: And really the approach that we've taken with the.

Speaker Change: Z I mean, five distributed cloud services.

Operator: One moment, please, while we poll for questions. Our first question comes from Tim Long with Barclays. Please proceed with your question. Thank you.

We have taken with our five distributed cloud is really recognizing that in the areas of application security customers really ideally want all of the capabilities in one platform and so we have built API security Ddos protection Web application firewall Bot defense all of that into a single platform.

Timothy Patrick Long: Thank you. Maybe two, if I could.

Francois Locoh: First... Francois, I think, you know, in the last few quarters, you talked about the kind of competitive landscape and some disruption at some of your competitors. Could you just give us an update on that kind of win rate or what you're seeing? And then, second, I did want to dig into that AI commentary with load balancing a little bit more. Is it, for F5, going to be specifically for enterprise use cases, or will you guys play in some of these other larger data centers that are seeing a lot of CapEx activity currently and maybe timing of that deployment, if you could? Thank you.

Speaker Change: And that is quite appealing to customers and allowing us to come in and.

Speaker Change: Pick out some some competitors that perhaps have not invested to the degree we have.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you Tim.

Speaker Change: Our next question comes from stomach chatter G with J P. Morgan. Please proceed with your question.

Speaker Change: Oh, hi, Thank you. Thanks for taking my questions I guess for the first one from self Frank do you have some strong momentum here on the software subscription revenue.

G: After one quarter or just how should I think about sustainability of that.

G: Momentum going forward and maybe the Siem one sort of disappointed to see the revenue on the software side moderate this much quarter over quarter, but it also seems like that's the lowest we've seen it drag. So is there any potentially sort of more downside does that perpetual revenue number but any thoughts on both of those aspects and the outlook there would be helpful.

Francois Locoh: Thank you, Tim. So maybe I'll start with your second question, and then I'll come back to the competitive landscape. But Tim, on AI, the use case that I referred to when I talked about, you know, high capacity load balancing for data ingestion, I think we're going to see that use case primarily in enterprises, but specifically enterprises that are running their own large language models at scale and who have a need to ingest a significant amount of data, whether that data comes from their own on-premise environments or from the cloud.

Speaker Change: And I have a follow up thank you.

Speaker Change: Yes, why don't I start with that too.

Speaker Change: This is one of those areas that will fluctuate quarter to quarter obviously.

Speaker Change: With last quarter, we had several large perpetual deals that.

Speaker Change: Gave us in quarter revenue and lifted that software number up.

Speaker Change: We were not surprised the way, it's playing out internally in our model to dip back down.

Francois Locoh: But the need to ingest this data and send the data to various environments is creating the need for high capacity load balancing. And we're starting to see, you know, more digital innovators. So those large enterprises that have invested heavily in digital transformation and are maybe ahead of others that are starting to deploy large language models in production have this kind of need. But this is not inside of a hyperscale infrastructure, if that's what you're asking. That is an enterprise need for a specific type of enterprise. And that is, you know, as you know, in the very early days.

Speaker Change: In Q Q2, and would expect other results obviously with the software guidance that we've given.

Speaker Change: For the back half of the year that subscription revenue at 88% of total software revenue.

Speaker Change: It was an all time high for us.

<unk> going to fluctuate, but I would expect that it's going to be.

Speaker Change: Higher as a percentage than obviously, what we saw in Q1.

Speaker Change: Okay. Okay.

Speaker Change: In France.

Speaker Change: I appreciate all your comments about sort of how you're helping enterprises with their.

Speaker Change: Sort of particular investments, but I think on the investor side at least not shown as much on the industry side, but there's a lot of debate about mid enterprises spend towards use cases is that.

Francois Locoh: On AI, beyond high capacity load balancing, we are also seeing a couple of other types of use cases. Specifically, the fact that AI workloads are going to be distributed and have a heavy reliance on APIs means that API security is emerging as a really important capability to support AI workloads. And then the third is the ability to network applications together across multiple clouds, which is really key in AI because customers have their data in different environments. They want to learn; they want to run models in certain environments and access data in other environments.

Speaker Change: More of them spending on frame or does that don't know public cloud any insights you are getting from the early use cases on that and how sort of where they choose to spend.

Speaker Change: To get sort of how that utilize the <unk> portfolio.

Speaker Change: Yes, I think what we're seeing.

Speaker Change: Seeing as that's going to be.

Speaker Change: By nature, AI implementations are going to be multi cloud.

Speaker Change: And the reason for that is.

Speaker Change: The customers wanted to do training in certain environments. They wanted to influence in other environments for a number of verticals.

Speaker Change: Want to do inference at the edge.

Francois Locoh: And that requires connecting and networking applications or workloads together. And we've got a capability to do that with the distributed cloud. So this is what we're seeing emerging as use cases in AI.

Speaker Change: <unk>.

And and also their data is in a lot of different locations.

Speaker Change: In addition, these AI models need to access other services, including all the models. So by definition, what we're starting to see is customers the implementation or hybrid and multi cloud.

Francois Locoh: To your first question about the competitive landscape, and I did, in fact, refer to a couple of our competitors that have changed their models. I think the first one, you know, more in the traditional ADC space, we continue to see very good traction. In that area, I would say the momentum relative to last year has accelerated. And so things in that area are going well, and we have, you know, several examples of essentially consolidating onto F5 multiple capabilities, including capabilities that could have come from a competitor or replacing a competitor altogether in some of the largest enterprises, both in North America and around the world.

And that's.

Speaker Change: Why we have talked about what we call the ball of fire, which is really the fact that customers increasingly we have close to 90% of our customers are now in hybrid and multi cloud environment.

Speaker Change: And we think close to 40% of our customers are using six or more.

Speaker Change: Cloud environments.

Speaker Change: And we think that that will accelerate as they start implementing and deploying AI and <unk>.

Speaker Change: That creates a ton of complexity for them completely to secure applications complexity to network. These applications together complexity to deal with disparate tools and different <unk>.

Francois Locoh: And then in the area of SAS, we continue to make good traction with XE, including displacement of some competitors. And really, the approach that we've taken with, when I say XE, I mean F5 Distributed Cloud Services, the approach we have taken with F5 Distributed Cloud is really recognizing that in the areas of application security, customers really ideally want all of the capabilities in one platform. And so we have built API security, DDoS protection, web application firewall, bot defense, all of that into a single platform. And that's quite appealing to customers and allows us to come in and take out some competitors that perhaps have not invested to the degree we have.

Speaker Change: Vendors for application services, and we have really consolidated all of that into a single platform that automates.

Speaker Change: Networking application and securing applications together across cloud environments. We think that's a value proposition that's going to play well in AI now we also think that enterprises.

Speaker Change: Really deploying AI.

Speaker Change: At scale, we're still I think one to two years away from seeing that the early use cases that we've seen from.

Speaker Change: Large enterprises that are ahead of everybody else and are really starting to.

Speaker Change: To deploy but I think he won't go mainstream until several quarters from now.

Speaker Change: Thank you thanks for taking my questions.

Speaker Change: Thank you our next.

Speaker Change: Our next question comes from Alex Henderson with Needham <unk> Co. Please proceed with your question.

Alexander Henderson: Alright. Thanks.

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

Operator: Our next question comes from Samik Chatterjee with JP Morgan. Please proceed with your question.

Alexander Henderson: The implication.

Alexander Henderson: The reacceleration and application growth.

In the context.

Samik Chatterjee: You have some strong momentum here on the software subscription revenue quarter over quarter. But just how should I think about the sustainability of that momentum going forward? And maybe the same one sort of a bit disappointed to see the perpetual revenue on the software side moderate this much quarter over quarter, but it also seems like that's the lowest we've seen it track. So is there any potentially sort of more downside to that perpetual revenue number? But any thoughts on both of those aspects and the outlook there would be helpful to have a follow-up. Thank you.

Alexander Henderson: Most of the cloud companies and we don't have Amazon, yet, but other ones such as Microsoft Azure has already seen seeing a reacceleration after several years.

The so called efficiency movement.

Alexander Henderson: Decelerating that growth rate does now it looks like it's starting to Reaccelerate and I was wondering.

Alexander Henderson: If you could talk about whether hashi acquisition has any impact on you positively or negatively.

Alexander Henderson: What youre doing to take advantage of those two dynamics.

Alexander Henderson: Within the.

Francis J. Pelzer: Yeah, Samik, why don't I start with that? So, you know, this is one of those areas that will fluctuate quarter to quarter. Obviously, you know, with last quarter, we had several large perpetual deals that gave us in-quarter revenue and lifted that software number. We were not surprised. This is the way it's playing out internally in our model to dip that back down into Q2 and, you know, would expect other results, obviously, with the software guidance that we've given for the back half of the year.

Alexander Henderson: The distribution of our channels. Thanks.

Alexander Henderson:

Alexander Henderson: <unk>.

Alexander Henderson: Alex Thank you.

Alexander Henderson: So on the potential acceleration.

Alexander Henderson: If confirmed of of applications.

Alexander Henderson: We think it has.

Alexander Henderson: Potentially to two implications, but first one is.

Alexander Henderson: More customers deploying more applications in hybrid and multi cloud environments that I've just talked about the implications of that which for US are we think are net positive because it creates more and more requirements for security and networking across clouds.

Francis J. Pelzer: Subscription revenue at 88% of total software revenue was an all-time high for us. It's going to fluctuate, but I would expect that it's going to be, you know, higher as a percentage than obviously what we saw in Q1.

Alexander Henderson: And then the second potential.

Potential implication is.

Alexander Henderson: More automation.

Alexander Henderson: Seeing as customers.

Alexander Henderson: We accelerate the number of workloads that they're dealing with the need to automate.

Alexander Henderson: Application changes.

Francois Locoh: And Francois, I appreciate all your comments about sort of how you're helping enterprises with their AI, sort of particularly investments, but I think on the investor side, at least, not sure as much on the industry side, but there's a lot of debate about when enterprises do spend towards AI use cases, are more of them spending on-premises, or is that on a public cloud?

Alexander Henderson: You know inch provisioning of new application services etcetera grows.

Alexander Henderson: And that requires software that enables that automation.

Alexander Henderson: And we of course have solutions that play into that.

Speaker Change: That said, we don't compete directly with how she corp.

Speaker Change: And so we're more complementary to what they do so we don't think there is really.

Speaker Change: Either negative or positive impact to the through the acquisition, we think for four or five and thats going to be largely net neutral, but we will of course continue working with the with how she corp. In a number of customers and markets.

Francois Locoh: Yes, I think what we're seeing is that, by nature, AI implementations are going to be multicloud. And the reason for that is, you know, customers want to do training in certain environments, they want to do inference in other environments, for a number of verticals, they want to do inference at the edge, and also their data is in a lot of different locations.

Speaker Change: And the distribution.

Speaker Change: Part of the question.

Speaker Change: The advantage of those dynamics to drive channel.

Speaker Change: Well there is not really an impact into how we would.

Speaker Change: Change our approach to distribution of what we would do into the into the channel we would the dynamics in terms of how we meet in the market and work with how she will I think continue.

Francois Locoh: In addition, these AI models need to access other services, including other models. So, you know, by definition, what we're starting to see is customers' AI implementation, or hybrid and multi-cloud. And that's, you know, why we have talked about what we call the ball of fire, which is really the fact that customers are increasingly we have, you know, close to 90% of our customers are now in hybrid and multi-cloud environments. And we think close to 40% of our customers are using six or more cloud environments.

Speaker Change: Unchanged for the most part so we as far as we're concerned.

Speaker Change: I don't know what decisions IBM they make around.

What they want to change in the go to market for Hershey, but as far as we're concerned that the customers see us as colorful military often want us to work together and we'll continue to do that in the market.

Francois Locoh: And we think that will accelerate as they start implementing and deploying AI. And that creates a ton of complexity for them, complexity to secure applications, complexity to network these applications together, and complexity to deal with disparate tools and different, you know, vendors for application services. And we have really consolidated all of that into a single platform that automates networking applications and securing applications together across the cloud environment. We think that's a value proposition that's going to play well in AI.

Speaker Change: Alright, I'll take it offline. Thanks.

Speaker Change: Thank you Alex.

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

Great. Thanks.

Meta A. Marshall: I just wanted to probe a little bit into kind of your talk about flat I T bad debts, or just macro cautiousness from customers.

Meta A. Marshall: You know theres a number of things there's a strengthening dollar there is prioritization of AI investments I'm, just I guess I'm, just trying to get a sense of that.

Meta A. Marshall: Backrow caution is any of that driven by FX or just kind of budget prioritization or is it just kind of wallets across the board are being more cautious and then maybe as a follow up to that.

Meta A. Marshall: Are you seeing more advancement.

Francois Locoh: Now, we also think that enterprises are really deploying AI at scale. We're still, I think, one to two years away from seeing that. The early use cases that we've seen are from large enterprises that are ahead of everybody else and are really starting to deploy AI, but I think it won't go mainstream until several quarters from now.

Meta A. Marshall: Of deals, where there is kind of multi cloud or kind of security elements to it versus core ADC sales or just kind of how are you seeing that.

Meta A. Marshall: And kind of what the overall book of business is.

Meta A. Marshall: Yeah.

Speaker Change: Thank you Amanda.

Speaker Change: So on a budget.

I should say first of all the macro environment has remained stable.

Samik Chatterjee: Thank you. Thanks for taking my questions.

Speaker Change: We haven't seen a fundamental change.

Operator: Our next question comes from Alex Henderson with Needham & Co. Please proceed with your question. Great, thanks.

Speaker Change: From last year in terms of customers.

Sure.

Speaker Change: Sort of appetite to spend what has changed I think we shared it last quarter is the sort of unpredictability that we were seeing a year ago around deal delays and cancellations and last minute push outs.

Alexander Henderson: Great, thanks. So I was hoping you could talk a little bit about the implications of a reacceleration in application growth in the context of most cloud companies. We don't have Amazon yet, but other ones, such as Microsoft Azure, are already seeing a reacceleration after several years of the so-called efficiency movement. Deceleration that growth rate does now look like it's starting to reaccelerate. And I was wondering... If you could talk about whether the Hashi acquisition has had any impact on you, positively or negatively, and what you're doing to take advantage of those two dynamics within the distribution of our channels. Thanks.

Speaker Change: That has largely abated, but overall customers remain cautious. This was also for a number of customers.

Speaker Change: First quarter of the calendar year, so they're just gotten their budgets I think we saw probably a little more caution on capex specifically on hardware.

Speaker Change: Given the current macro micro environment.

Speaker Change: We don't necessarily think it's related to FX and as far as we can see it's there's not really a.

Speaker Change: In effect.

Speaker Change: Customers prioritizing AI in general for the vast majority of enterprises.

Francois Locoh: Alex, thank you. So, on the potential risk acceleration, if confirmed in application, we think it has, you know, potentially two implications. The first one is more customers deploying more applications in hybrid and multi-cloud environments. And I've just talked about the implications of that, which for us, we think are net positive because it creates more requirements for security and networking across clouds. And then the second potential implication is more automation. We're seeing that as customers, you know, we accelerate the number of workloads that they're dealing with. The need to automate, you know, application changes, you know, each provisioning of new application services, etc., grows.

Speaker Change: Because they're not there yet in terms of putting big budgets on on AI today.

Speaker Change: This provider space I think we continue to see customers sweating assets with one or two exceptions, but for the most part trying to sweat assets as long as possible.

Speaker Change:

Speaker Change: And then to your second question.

Speaker Change: Which one.

Speaker Change: I need to be reminded.

Speaker Change: I'm just yeah, just whether it was in the form of kind of like.

Speaker Change: A D C versus other portions of the portfolio.

Speaker Change: Yes, so we are.

Speaker Change: I think it's a combination because it made a lot of the what we're seeing more opportunities with existing customers that are both ADC and.

Speaker Change: Other portions of the portfolio, especially in this multi year subscription agreements.

Francois Locoh: And, you know, that requires software that enables that automation. And we, of course, have solutions that fit into that. That said, we don't compete directly with HashiCorp. And so, you know, we're more complementary to what they do. So, we don't think there is really either a negative or positive impact on the acquisition. We think for F5, that's going to be, you know, largely net neutral. But we will, of course, continue working with HashiCorp in a number of customers and markets.

Speaker Change: That continued to do very well and our vehicle that customers love because it gives them the flexibility.

Speaker Change: But I would say we are seeing more.

Speaker Change: Deals on the other side of the portfolio specifically at security.

Speaker Change: Increasing in application security, we're seeing API security in particular emerge as a strong use case more and more customers are recognizing that.

Speaker Change: We don't have a real handle on there on.

Speaker Change: On where theyre api's or how many are production how many are visible how many or not and how do they discovered this API and how do they protect them. So we're seeing more traction.

Francois Locoh: And the distribution part of the question, taking advantage of those dynamics to drive the channel?

Speaker Change: In API security in particular, and then increasingly customers trying to network. These clouds together.

Francois Locoh: Well, there is not really an impact on how we would change our approach to distribution or what we would do in the channel. The dynamics in terms of how we meet in the market and work with Hashi will, I think, continue, for the most part, unchanged, certainly as far as we're concerned. You know, I don't know what decisions IBM may make around what they want to change in the go-to-market strategy for Hashi. But as far as we're concerned, I think customers see us as complementary and often want us to work together, and we'll continue to do that in the market, and I'll take it offline.

Speaker Change: Network their applications across clouds, and trying to find automation to do that.

Speaker Change: That's that's opportunities with our distributed cloud solutions.

Speaker Change: Great. Thank you.

Speaker Change: Yeah.

Speaker Change: Our next question comes from.

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

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

Speaker Change: Two.

Michael: First just a follow up to the earlier question around.

Michael: Software I was just wondering if you could talk about the components of subscription software between term based and SaaS.

Michael: How did those perform.

Alexander Henderson: All right, I'll take it offline. Thanks.

Michael: And then second on on services.

Operator: Our next question comes from Meta Marshall with Morgan Stanley. Please proceed with your question. Okay.

Michael: Appreciate we're lapping some of the price increases that I think were first implemented in.

It was July of 2022 could you just remind me if there are opportunities to periodically increased pricing on on services, what does that timeline been historically.

Meta A. Marshall: Just macro-cautiousness from customers. You know, there's a number of things.

Francois Locoh: There's a strengthening dollar. There's prioritization of AI investments. I guess I'm just trying to get a sense of macro caution. Is any of that driven by FX or just kind of budget prioritization, or is it just kind of wallets across the board being more cautious? And then maybe as a follow-up to that, you know, are you seeing more deals where there is kind of a multi-cloud or kind of security elements to it versus core ADC sales, or just kind of how are you seeing that in kind of what the overall book of business is?

Michael: And is this 5% growth a good way to think about services growth going forward. Thank you.

Speaker Change: Yes, Michael why don't I take that.

Speaker Change: Look on the.

Speaker Change: Sort of components of the subscription business in terms of.

Speaker Change: SaaS and that's that.

Michael: That when they are versus the term base, we talk about that annually, but it's not something we talk about quarterly.

Michael: But the components of this business, we're really excited about what we're seeing for the distributed cloud adoption.

Michael: Particularly the value proposition around Wap and specifically API security that Francois just mentioned as well as our multi cloud cloud networking. So those are those are great. We do see AI.

Francois Locoh: Thank you, Meta. So on a budget.

Francois Locoh: I should say, first of all, the micro environment meta has remained stable. So I, we haven't seen a fundamental change from last year in terms of customers, You know, sort of appetite to spend. What has changed? I think we shared that last quarter, the sort of unpredictability that we were seeing a year ago around deal delays and cancellations and last-minute push-outs has largely abated. But overall, customers remain cautious. This was also, for a number of customers, the first quarter of the calendar year, so they'd just got their budgets.

Michael: Having a big boost and application demand over the coming years, but it's not something that we expected a ton of revenue in FY 'twenty four from.

We are still seeing the high end of the market being a bit challenged but those are the underlying aspects of what we're seeing in the SaaS business as well as the.

Michael: Strong renewals that were continuing to experience in our multiyear flexible consumption programs and so those are the dynamics, but we don't split the components out except for the end of the year.

Francois Locoh: I think we saw probably a little more caution on CAPEX, specifically on hardware, given the current macro environment. We don't necessarily think it's related to FX, and as far as we can see, there's not really an effect of, you know, customers prioritizing AI in general for the vast majority of enterprises because they're not there yet in terms of putting big budgets on AI today. In the service provider space, I think we continue to see customers sweating assets with one or two exceptions, but for the most part, trying to sweat assets as long as possible. And then to your second question.

Michael: In terms of the services side.

Michael: The last time, we raised prices was in July of 'twenty. Two it's one of those things that we continue to evaluate on what's the best strategic use of price increases for our customers.

Speaker Change: And I don't have anything new to report there but.

Speaker Change: More to come.

Speaker Change: In the coming quarters.

Speaker Change: It's probably been six quarters since that you are seeing the lapping effect of that services revenue starting to come down that was due to price increasing last year largely.

Speaker Change: As well as some of the sweating the assets and so.

Speaker Change: 7% is what we saw in Q1, 5% in Q2, and we do expect that to trail down in Q3, and Q4 as we lap even more of those annual increases from last year.

Meta A. Marshall: Just, yeah, just whether it's taking the form of kind of on the like, yeah, 80.

Great. Thank you for the color Frank.

Speaker Change: Yes.

Speaker Change: Our next question comes from Amit <unk> with Evercore ISI. Please proceed with your question.

Francois Locoh: Yeah, so we are I think it's a combination because, Meta, a lot of the existing customers that are both ADC and other portions of the portfolio, especially in these multi-year subscription agreements that continue to do very well and are a vehicle that customers love because it gives them this flexibility. But I would say we are seeing more deals on the other side of the portfolio, specifically in security, you know, increasing in application security.

Speaker Change: Yep.

I have two as well I guess, Frank maybe just start with you you know I think in the past you've talked about software growth for the full year being flat to I believe up modestly and he was the statement.

Amit: Given the performance you saw this quarter, which I think it was much better than expected on software. How do you think the back half of the year stacks up on the software side.

Francis J. Pelzer: Sure. So look we had a strong software growth number in Q2.

Francis J. Pelzer: It was it was in our expectation range.

Francois Locoh: We're seeing API security in particular emerge as a strong use case. More and more customers are recognizing that they don't have a real handle on their APIs, on where their APIs are, how many are in production, how many are visible, how many are not, and how do they discover these APIs and how do they protect them? So we're seeing more traction in API security, in particular, and then increasingly customers trying to network these clouds together, network their applications across clouds, and trying to find automation to do that. And that's an opportunity with our distributed cloud solution.

And <unk>.

Francis J. Pelzer: Largely software to date in the first half has been head of our software expectation, but having said that.

Francis J. Pelzer: We would we did not change our outlook from flat to modest growth, but I think we'd be disappointed if we werent.

Francis J. Pelzer: At the higher end of that or better by the end of the year given the strong first half performance that we saw obviously were hitting the second half where the comparable numbers are a little more difficult having said that we're really excited particularly in Q4 about the subscription base of renewals that we're seeing on our flexible consumption programs and.

Francis J. Pelzer: So have strong visibility into that.

Speaker Change: Got it perfect. Thank you for that and then if I can.

Speaker Change: Follow up on this all customers having to deal with a ball of fire light, where you kind of characterize that dynamic.

Operator: Our next question comes from Michael Ng with Goldman Sachs. Please proceed with your question.

Speaker Change: So love to understand what does that mean as you saw that ball of fire problem free customers. What does that mean five signed a long term growth rate as you think about that.

Michael Ng: Hey, good afternoon. Thanks for the question. I just have two.

Michael Ng: First, just as a follow-up to the earlier question about software, I was just wondering if you could talk about the components of the subscription software between TurnBase and SAS. How did those perform? And then second, on services, I can appreciate we're lapping some of the price increases that I think were first implemented in. This is July of 2022. Could you just remind me if there are opportunities to periodically increase pricing on services? You know, what has that timeline been historically? And is this 5% growth a good way to think about services growth going forward? Thank you.

Speaker Change: Quickly do you think there's anyone out there who do you think of your competition when it comes to solving that ball of fire from end to end basis across you know load balancing and security.

Speaker Change: <unk>.

Speaker Change: Well thank you.

There are multiple dimensions to solving the ball of fire and.

Speaker Change: We don't think we really have competition that can address it as exhaustively as we are addressing it.

Speaker Change: So the first aspect is.

Speaker Change: The completeness of the application services that are required to solve it which very few if any company really has because it goes from all of the application delivery services like load balancing.

Francis J. Pelzer: Yeah, Michael, why don't I take a look at the sort of components of the subscription business in terms of SaaS and ARR. That one, ARR versus term-based, we talk about that annually, but it's not something we talk about quarterly. But the components of those businesses, you know, we're really excited about what we're seeing for distributed cloud adoption, particularly the value proposition around WAP and specifically API security that Francois just mentioned, as well as our multi-cloud networking. So those are great.

Speaker Change: Uh huh.

Speaker Change: Uh huh.

Speaker Change: Authentication.

Speaker Change: But also web application firewall all of the security services API security Ddos.

Speaker Change: Multi cloud networking all of these capabilities you have to have to solve the ball part of the complexity for our customers is that they have had in the past to rely on multiple different vendors to be able to solve the ball of fire. So that's one aspect is the ability to bring it all together.

Speaker Change: The the second.

Speaker Change: Aspect is.

Speaker Change: Really the ability to make multi cloud ridiculously easy.

Michael Ng: We do see AI having a big boost in application demand over the coming years, but it's not something that we expected to bring in, you know, a ton of revenue in FY24. We are still seeing the high end of the bot market being a bit challenged, but, you know, those are the underlying aspects of what we're seeing in the SaaS business, as well as, you know, strong renewals that we're continuing to experience in our multi-year flexible consumption programs.

Speaker Change: Which to be able to do that if you're a pure play SaaS vendor.

Speaker Change: Youre not able to do that because you know you you only offer your services and your points of presence and <unk> is unique in the sense that we can offer all the services not not just in the cloud, but in any public cloud or any on premise location and we can look at these services anywhere where a workload that is so what.

Speaker Change: Taking advantage of our heritage as a non prime vendor and our new capabilities in the cloud to offer these services ubiquitously to customers and really there is no other vendor in our space that brings all of that together so in that way, we're pretty unique and so when you take examples of that Youre asking what does it look like.

Michael Ng: And so those are the dynamics, but we don't split the components out except for the end of the year. In terms of the services side, you're right; the last time we raised prices was in July 22. It's one of those things that we continue to evaluate as to what's the best strategic use of price increases for our customers. And I don't have anything new to report there, but, you know, more to come in the coming quarters.

Speaker Change: You know this quarter for example, we had a large bank in the U S that was connecting applications to multiple clouds to assure on premise and in Oracle and we were essentially the only ones that can automate these connections for them and help them make multi cloud ridiculously easy their application and we want.

Michael Ng: It's probably been, you know, six quarters, and so you're seeing the lapping effect of that services revenue starting to come down, which was due to price increases last year largely, as well as some of the sweating of the assets. And so 7% is what we saw in Q1, 5% in Q2, and we do expect that to trail down in Q3 and Q4 as we clock up even more of those annual increases from last year. Thank you for the call, Frank.

Speaker Change: The customer we have.

Speaker Change: Similar bank customers in Europe, who had the front end of their application in Azure at the backend of their application on Prem we brought a.

Speaker Change: The connectivity to these these components of these applications together and automated all of it for them to go to deploy and we want the customer. So we have these capabilities that are unique to the combination of on Prem and cloud brought together.

Francis J. Pelzer: Great. Thank you for the call, Frank.

Speaker Change: And in that sense, we don't really think we have competition.

Operator: Our next question comes from Amit Daryanani with Evercore ISI. Please proceed with your question.

Speaker Change: Our next question comes from James Fish with Piper Sandler. Please proceed with your question.

Amit Jawaharlaz Daryanani: I have two as well. I guess, Frank, let me just start with you. You know, in the past, you've talked about software growth for the full year being flat to, I believe, up modestly. I think it was a statement. Given the performance you just saw this quarter, which I think was much better than expected on the software side, how do you think the back half of the year stacks up on the software side?

James Edward Fish: Hey, guys.

James Edward Fish: Francois I think we'd get the product strategy here. So my question is more directly that Frank so talking about stronger renewals on the subscription side in the second half frankly is there any way to quantify the magnitude or what is giving you confidence in those second half numbers, especially after this quarter came in a little bit wider than what we're used to seeing a five report.

Francis J. Pelzer: Sure. So, you know, look, we had a strong software growth number in Q2. It was in our expectation range. And, you know, largely, software to date in the first half has been ahead of our software expectations. But having said that, we did not change our outlook from flat to modest growth. But I think we'd be disappointed if we weren't at the higher end of that or better by the end of the year, given the strong first half performance that we saw.

James Edward Fish: <unk> and implies a sizeable fiscal Q4 ramp to roughly.

James Edward Fish: $40 million ish kind of sequential ramp here in fiscal Q4, and Additionally have you seen any changes in subscription durations. Thanks guys.

Francis J. Pelzer: Sure absolutely Jim So I appreciate the question and when we take a look at the results of this quarter in relation to our expectations were.

Speaker Change: Where we saw a softer performance was in the system side not the software side of the business and that.

Francis J. Pelzer: Obviously, we're hitting a second half where the comparable numbers are a little more difficult. Having said that, we're really excited, particularly in Q4, about the subscription base of renewals that we're seeing on our flexible consumption programs. And so we have strong visibility into that.

Jim: When we take a look at the back half of the year, that's really where we saw the strength of the pipeline in there.

Jim: That area as well as for the renewals that we have and the outlook and.

Jim: Those renewals specifically are coming in they're in both quarters. They are stronger than what we have seen in Q2, but they just ramp up because of the nature of when the deals were done three years ago in <unk>.

Amit Jawaharlaz Daryanani: Perfect. Thank you for that.

Francois Locoh: And then, if I just follow up on this, customers have to deal with a ball of fire, like the way you kind of characterize that dynamic. I'd sort of love to understand what that means as you solve that ball of fire problem for your customers. What does that mean for F5's long-term growth rate as you think about that? And crucially, do you think there's anyone out there who you think is your competition when it comes to solving that ball of fire from an end-to-end basis across, you know, load balancing and security? Thank you. Well, thank you.

Jim: Q4, and if you take a look back.

Jim: Three years ago between Q3, and Q4, I think youll see a similar dynamic in the software growth.

Jim: That we expect and so that that is really that $40 million swing that youre referring to.

Jim: Between those two quarters.

Jim: So that's that's really.

The visibility.

Jim: Strength that we've seen in the renewals that true forwards.

Jim: And.

Jim: The second or the in terms of what's what's available to renew in Q4.

Jim: Anything on the duration side of what Youre seeing.

Jim: The duration side really has not changed.

Francois Locoh: Well, thank you. There are multiple dimensions to solving the ball of fire. And we don't think we really have competition that can address it as exhaustively as we are addressing it. So the first aspect is, you know, the completeness of the application services that are required to solve it, which very few, if any company really has, because it goes from all of the application delivery services, like load balancing, you know, authentication, but also web application firewall, all of the security services, API security, DDoS, you know, multi-cloud networking, all of these capabilities you have to have to solve the ball of fire.

Jim: These are.

Jim: And not not universally but almost always three year deals.

Speaker Change: Thanks Frank.

Yep.

Raymond Michael McDonough: Our next question comes from Ray Mcdonald with Guggenheim Partners. Please proceed with your question.

Raymond Michael McDonough: Thanks, maybe just start Frank as we think about cash flow dynamics going forward with term renewals and the opportunity in the back half as you just discussed and as renewals generally become a larger portion of the mix combined with the product availability you mentioned earlier in the call should we expect cash flow margins to continue to trend up from here as well.

Francois Locoh: Part of the complexity for customers is that, in the past, they have had to rely on multiple different vendors to be able to solve the ball of fire. So that's one aspect of the ability to bring them all together. The second, you know, aspect is really the ability to make multi-cloud ridiculously easy, which to be able to do that, if you're a pure play SaaS vendor, you're not able to do that.

Francis J. Pelzer: It's a great question. So the biggest dynamic of the cash flow changes between the quarters right now continue to be maintenance.

It just outweighs some of the subscription revenues that we've seen and so.

Francis J. Pelzer: The dynamics that you're implying absolutely are happening just on a smaller base of the overall cash flow.

Francois Locoh: Because, you know, you only offer your services at your point of presence. So in that way, we're pretty unique. And so when you take examples of that, you're asking, what does it look like? You know, this quarter, for example, we had a large bank in the U.S. that was connecting applications to multiple clouds, to Azure, on premise, and in Oracle. And we won the customer. So we have these capabilities that are unique to the combination of on-premises and cloud brought together. And in that sense, we don't really think we have competition.

Francis J. Pelzer: That is coming out of that deferred revenue bucket, which is still largely maintenance related and so.

Francis J. Pelzer: I think obviously, we had a very large accounts receivable balance going into Q2, you saw us collect.

Francis J. Pelzer: And we're to a normalized level so.

Francis J. Pelzer: I think from where we had our cash flow from ops in Q2 likely we're going to come down in Q3, and then my expectation would be back up in Q4, but that's our that's the dynamics of the SaaS business is is as youre, describing its not just a major portion of what's driving.

Operator: Our next question comes from James Fish with Piper Sandler. Please proceed with your question.

James Edward Fish: Thank you, guys. Bye. Bye. Francois, I think we have the product strategy here. So, my question is more directed at Frank. So, talking about stronger renewals on the subscription side in the second half, Frank, is there any way to quantify this magnitude or what is giving the confidence in those second half numbers, especially after this quarter came in a little bit lighter than we're used to seeing F5 report and implies a sizable fiscal Q4 ramp to roughly, you know, $40 million-ish kind of sequential ramp here in fiscal Q4. And additionally, have you seen any changes in subscription durations? Thanks, guys.

Francis J. Pelzer: The change in deferred right now in some of our cash flow from ops.

Speaker Change: Great maybe just a question for Francois.

Francois: <unk> talked a lot about bringing hybrid multi cloud environments kind of together and simplifying the management of that and I'm. Just wondering when we take a step back you announced the distributed cloud console at App World I believe what's been the reaction within your conversations with customers are you seeing interest that's resulting in cross selling at or even better renew.

Francois: Our expansion rates, even if it's not direct just as a result of maybe the offering being out there and customers being more comfortable with the roadmap any thoughts there would be helpful.

Francis J. Pelzer: Sure, absolutely, Jim. So I appreciate the question. And, you know, when we take a look at the results of this quarter in relation to our expectations, where we saw a softer performance was on the system side, not the software side of the business. And that, you know, when we take a look at the back half of the year, that's really where we saw the strength of the pipeline in that area as well as for the renewals that we have in the outlook.

Francois: Yeah, so the reaction.

Our App world on distributed cloud has been very positive.

And most cuts so let me just give you some numbers there right. So.

Francois: We shared in.

October that we had over 500 customers on distributed cloud.

Francois: The number has grown since then and we will share that number in.

Francis J. Pelzer: And those renewals specifically are coming, and they're in both quarters. They are stronger than what we have seen in Q2, but they just ramp up because of the nature of when the deals were done 3 years ago in Q4. And if you take a look back 3 years ago, between Q3 and Q4, I think you'll see a similar dynamic in the software growth that we expect. And so that is really that $40 million swing that you're referring to between those 2 quarters. So that's really the visibility. It's the strength that we've seen in the renewals. It's the true forward sense and, you know, the second or the end terms of what's available to renew in Q4.

We said we would share it annually. So we'll share it again in October but over two thirds of the customers on distributed cloud.

Or existing five customers that were typically big IP customers that choose distributed cloud as a complement to a hardware or software on premise implementation.

Francois: And in part because of our ability to bring in the future bring both the hardware software on Prem and the SaaS services through a single pane of glass and the other third is the other one third of customers or net new customers to five.

James Edward Fish: Anything on the duration side of what you're seeing? The duration side really has not changed.

Francois: And what we're seeing is a number of customers have gone into hybrid and multi cloud environments either by accident.

Francis J. Pelzer: The duration side really has not changed, you know; these are, and not universally, but almost always three-year deals.

Francois: Or by acquisition.

Operator: Our next question comes from Ray McDonough with Guggenheim Partners. Please proceed with your question.

Francois: And have not really had the opportunity to do this right and we're working with customers.

Raymond Michael McDonough: Thanks. Maybe to start, Frank, as we think about cash flow dynamics going forward with term renewals and the opportunity in the back half, as you just discussed, and as renewals generally become a larger portion of the mix, combined with the product availability you mentioned earlier in the call, should we expect cash flow margins to continue to trend up from here as well?

There are now solutions like distributed cloud that helped you to multi cloud right and multi cloud right means having a consistent set of security policies.

Francois: Across the board being to be able to automate the provisioning of application services across the board being able to automate the network of these applications together.

Francois: And customers are pretty excited about the ability to do that because it takes away very significant headache from them headache around their operation headache around the manual toil that a lot of their resources.

Francis J. Pelzer: Ray, it's a great question. So, the biggest dynamic of the cash flow changes between the quarters right now continues to be maintenance that just outweighs, you know, some of the subscription revenues that we've seen. And so, the dynamics that you're implying absolutely are happening just on a smaller scale of the overall, you know, cash flow that is coming out of that deferred revenue bucket, which is still largely maintenance related. And so, I think, you know, obviously, we had a very large accounts receivable balance going into Q2, you saw us collect, and we're at a normalized level.

Francois: Our <unk> spending.

I think around the risks that they have of not running consistent application security policies across clouds.

Francois: So very positive reception overall and growing awareness amongst our customer base of the capabilities of distributed cloud.

Francois: How 'bout pretty excited for the future.

Speaker Change: Great. Thanks for taking the questions.

Speaker Change: Thank you.

Due to timing our last question will be from Sebastian Nash with William Blair. Please proceed with your question.

Sebastien Cyrus Naji: Great. Thanks for taking the questions.

Francis J. Pelzer: So, I think, you know, from where we had our cash flow from Operations in Q2, likely, we're going to come down in Q3, and then my expectation is it will be back up in Q4. But that's the dynamics of the SaaS business, as you're describing, it's not just a major portion, though, of what's driving the change in deferred right now and some of our cash flow from Operations. Great, maybe just...

Sebastien Cyrus Naji: Afternoon, two for me.

Sebastien Cyrus Naji: First one just following up on the competition question from the beginning and those instances, where you are displacing one of those ADC competitors going through disruption. How do you typically land is it more heavily weighted towards like appliances or software or SaaS.

And then my second question is just around cyber and AI as we think about the ability for malicious actors to leverage AI in their own attacks. How do you think about being able to address some of these new types of AI attacks or in other words do you need new techniques and solutions or can you use the existing systems that are broader scales and which of the solutions.

Raymond Michael McDonough: Great, maybe just a question for Francois. You know, we've talked a lot about bringing hybrid multi-cloud environments kind of together and simplifying the management of that, and, you know, I'm just wondering when we take a step back. You announced the distributed cloud console at AppWorld, I believe. What's been the reaction in your conversations with customers? Are you seeing interest that's resulting in cross-selling or even better renewal or expansion rates, even if it's not direct, just as a result of maybe the offering being out there and customers being more comfortable with the roadmap? Any thoughts there would be helpful.

Sebastien Cyrus Naji: <unk> five are particularly well positioned for those types of attacks.

Speaker Change: Well thank you.

Speaker Change: Let me start with the.

Speaker Change: Yeah.

Speaker Change: The question on <unk>.

And the type of attacks. So we are already using AI today.

Speaker Change: Two blocks significant attach.

Speaker Change: <unk>, including automated attacks on a number of applications.

This quarter alone we blocked several billion API attacks.

Francois Locoh: Um, yeah, so the reaction to our world on the distributed cloud has been very positive. So let me just give you some numbers there, Ray.

Speaker Change: Our distributed cloud capability and a lot of that uses AI and automation machine learning specifically.

Speaker Change: In AI to block these attacks.

Francois Locoh: So, we shared in October that we had over 500 customers on Distributed Cloud. The number has grown since then, and we will share that number. We said we would share it annually, so we'll share it again in October. But over two-thirds of the customers on Distributed Cloud were existing F5 customers that were typically big IP customers that chose Distributed Cloud as a complement to a hardware or software on-prem implementation and in part because of our ability to bring, in the future, both the hardware and software on-prem and the SaaS services to a single pane of glass. And the other third, the other one-third of customers, are net new customers to F5.

Speaker Change: We think that.

Speaker Change: Our factories will continue to be to get more sophisticated they're already using generative AI for all kinds of attack.

Speaker Change: Vectors and we're investing 12.

Speaker Change: Well of course stay ahead of criminals in our Port solutions, we probably have the most sophisticated fraud solution on the market leveraging AI to block against all kinds of automated attacks and we're now also investing in January of AI to actually make it easier for our customers to interact with our.

Speaker Change: <unk> and respond faster to changes in our in our <unk>.

Victor This is a rapidly developing developing field, but we will continue to invest in our security solutions on that.

Speaker Change: The second part on the competition and you asked one were displacing competitors in ADC is it more hardware software oriented it actually is both.

Francois Locoh: And what we're seeing is a number of customers have gone into hybrid and multi-cloud environments, either by accident or by acquisition, and have not really had the opportunity to do this right. And we're working with customers to say there are now solutions, like Distributed Cloud, that help you do multi-cloud right. And multi-cloud right means having a consistent set of security policies across the board, being able to automate the provisioning of application services across the board, and being able to automate the networking of these applications together.

Speaker Change: We.

Speaker Change: I wouldn't have a percentage for you, but it is we're displacing customers that have taken a hardware implementation of a competitor and replacing the entire estate without hardware.

Speaker Change: As you know.

Speaker Change: We invested over four years ago in a new generation of our hardware that brings a lot of the benefits of the cloud to one friend implementations.

Speaker Change: Others have not necessarily made these investments and so we bring benefits to our customers in terms of multi tenancy.

Francois Locoh: And customers are pretty excited about the ability to do that because it takes away a very significant headache from them, a headache around their operations, a headache around the manual toil that a lot of their resources are spending, a headache around the risk that they have of not running consistent application security policies across clouds. So very positive reception overall, and growing awareness amongst our customer base of the capabilities of Distributed Cloud have us pretty excited for the future. Great, thanks for taking the time to answer my question.

Speaker Change: Automation et cetera that others don't have so that is a very clear difference in hardware and software are similarly, we have invested two to have a software footprint that is easy to consume in public clouds, and that's creating a good difference relative to competitors and some of these deals of both hardware and software in this.

Speaker Change: And some of these agreements for customers that are in hybrid multi cloud environment.

Speaker Change: Great. Thank you.

Raymond Michael McDonough: Great, thanks for taking the questions.

Speaker Change: Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

Operator: Due to timing, our last question will be from Sebastien Naji with William Blair. Please proceed with your question. Great.

Sebastien Cyrus Naji: Great. Thanks for taking the questions. Good afternoon. Two for me.

Speaker Change: Goodbye.

Speaker Change: Okay.

Sebastien Cyrus Naji: The first one, just following up on the competition question from the beginning. In those instances where you are displacing one of those ADC competitors going through a disruption, how do you typically land? Is it more heavily weighted towards appliances or software or SaaS? And then my second question is just around cyber and AI. As we think about the ability for malicious actors to leverage AI in their own attacks, how do you think about being able to address some of these new types of AI attacks?

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Speaker Change: Hum.

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Speaker Change: Yeah.

Sebastien Cyrus Naji: Or in other words, do you need new techniques and solutions, or can you use the existing systems at a broader scale? And which of the solutions within F5 is particularly well positioned for those types of attacks?

Speaker Change: Yeah.

Francois Locoh: Well, thank you. The, the, let me start with the question on AI and the type of attacks. So we are already using AI today to block significant attacks, including automated attacks on a number of applications. You know, this quarter alone, we blocked several billion API attacks with our distributed cloud capability. And a lot of that uses AI and automation, machine learning specifically, in AI to block these attacks. We think that, you know, attackers will continue to get more sophisticated.

Speaker Change: Yeah.

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Speaker Change: [music].

Hmm.

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Speaker Change: Uh huh.

Speaker Change: [music].

Speaker Change: Hmm.

Speaker Change: [music].

Francois Locoh: They're already using generative AI for all kinds of attack vectors, and we're investing to, of course, stay ahead of criminals in our bot solution. We probably have the most sophisticated bot solution on the market, leveraging AI to block all kinds of automated attacks. And we're now also, you know, investing in generative AI to actually make it easier for our customers to interact with our solutions and respond faster to changes in attack vectors.

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Francois Locoh: This is a rapidly developing field, but we'll continue to invest in our security solutions for that. The second part of the competition, and you asked when we were displacing competitors in ADC, is it more hardware or software oriented? It actually is both.

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Francois Locoh: We, you know, I wouldn't have a percentage for you, but it is, you know, we're displacing customers that have taken a hardware implementation of a competitor and replaced the entire estate with our hardware. As you know, we invested over four years ago in a new generation of our hardware that brings a lot of the benefits of the cloud to on-premises implementations. Others have not necessarily made these investments, and so we bring benefits to our customers in terms of, you know, multi-tenancy automation, et cetera, that others don't have.

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Okay.

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Hum.

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Francois Locoh: So that is a very clear difference in hardware. And in software, similarly, we have invested in having a software footprint that is easy to consume in public clouds, and that's creating a good difference relative to competitors. And some of these deals are both hardware and software in these, you know, in some of these agreements for customers that are in hybrid multi-cloud environments.

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Hum.

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Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: Uh huh.

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Operator: Goodbye. [inaudible]

Yeah.

Speaker Change: Okay.