Q3 2024 F5 Inc Earnings Call

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Operator: Good afternoon, and welcome to the F5 Inc. 3rd Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode.

Operator: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Speaker Change: Good afternoon and welcome to the F5, Inc. 3rd 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.

Speaker Change: As a reminder, this conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Suzanne DuLong: Hello and welcome. I am Suzanne DuLong, F5's Vice President of Investor Relations. Francois Lopaudonneux, FI's President and CEO, and Frank Pelzer, FI'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. A copy of today's press release is available on our website at F5.com, or an archived version of today's audio will be available through October 28, 2024.

Suzanne DuLong: Hello and welcome. I am Suzanne DuLong, FI's Vice President of Investor Relations. Francois Locoh Deneu, FI's President and CEO , and Frank Pelzer, FI's Executive Vice President and CFO , will be making prepared remarks on today's call.

Suzanne DuLong: We will post the slide deck accompanying today's webcast on 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 1374-7602. The telephonic replay will be available through midnight Pacific time, July 30th, 2024.

Speaker Change: Other members of the F5 executive team are also here to answer questions during the Q&A session.

Speaker Change: A copy of today's press release is available on our website at F5.com or an archived version of today's audio will be available through October 28, 2024. We will post the slide deck accompanying today's webcast to our IR site at the conclusion of our call.

Speaker Change: To access the replay of today's webcast by phone, dial 877-660-6853 or 201-612-7415 and use meeting ID 1374-7602.

Speaker Change: The telephonic replay will be available through midnight Pacific time, July 30th, 2024.

Suzanne DuLong: For additional information or follow-up questions, please reach out to me directly at s.dulongatf5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements.

s.dulong: For additional information or follow-up questions, please reach out to me directly at s.dulongatf5.com.

s.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.

Suzanne DuLong: We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filing. In addition, we will reference non-GAAP metrics during today's discussion. Please see our full gap 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. Thank you, Suzanne. And hello everyone.

s.dulong: We have summarized factors that may affect our results in the press release, announcing our financial results, and in detail in our SEC filings.

s.dulong: In addition, we will reference non-GAP metrics during today's discussion. Please see our full GAP to Non-GAP Reconciliation in today's press release and in the appendix of our earnings slide deck.

s.dulong: 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.

Francois: Thank you, Suzanne, and hello, everyone. Thank you for joining us today.

Francois Locoh: Thank you for joining us today. I will speak to our Q3 highlights as well as our expectations for Q4. Frank will then review the details of our Q3 results and provide additional color on our Outlook. We delivered Q3 revenue of $695 million, which is at the top end of our revenue guidance range. We also delivered non-GAP EPS of $3.36.

Francois: I will speak to our Q3 highlights as well as our expectations for Q4.

Francois: Frank will then review the details of our Q3 results and provide additional color on our Outlook.

Frank: We delivered Q3 revenue of $695 million, which is at the top end of our revenue guidance range.

Frank: We also delivered non-GAP EPS of $3.36.

Francois Locoh: This is well above the top end of our guidance as a result of our continued operating discipline, as well as some tax favorability in the quarter. Total software revenue grew 3% year over year and 13% sequentially. Our continued strong software renewals provide an indicator of both customer satisfaction and our momentum overall. In a positive shift from last quarter, during Q3, new software revenue also contributed to software growth in the quarter. Global services grew 3% in Q3. The combination of software and global services growth largely offset systems revenue, which was $130 million, down 16% year over year.

Frank: This is well above the top end of our guidance as a result of our continued operating discipline as well as some tax favorability in the quarter.

Frank: Total software revenue grew 3% year-over-year and 13% sequentially.

Frank: Our continued strong software renewals provide an indicator of both customer satisfaction and our momentum overall.

Frank: In a positive shift from last quarter, during Q3, new software revenue also contributed to software growth in the quarter. Global services grew 3% in Q3.

Frank: The combination of software and global services growth largely offset systems revenue, which was $130 million, down 16% year over year.

Francois Locoh: During Q3, we started to see some areas of improving demand after a prolonged period of budget scrutiny, evidenced by improving pipeline and close rates. As a result, our team drove strong bookings growth in Q3, including an uptick in new business. Factoring in these signals, we expect Q4 revenue in the range of $720 million to $740 million, which puts us on track to deliver toward the top end of our FY24 revenue guidance. Our outlook is informed by three considerations. One is our growing pipeline.

Frank: During Q3, we started to see some areas of improving demand after a prolonged period of budget scrutiny, evidenced by improving pipeline and close rates.

Frank: As a result, our team drove strong bookings growth in Q3, including an uptick in new business.

Frank: Factoring in these signals, we expect Q4 revenue in the range of $720 to $740 million, which puts us on track to deliver toward the top end of our FY24 revenue guidance.

Francois Locoh: Two, our visibility into software renewals, and three, the continued strong expansion trends from custom. We expect FY24 revenue of approximately $2.8 billion, roughly flat with FY23.

Frank: Our outlook is informed by three considerations.

Frank: One, our growing pipeline, two, our visibility into software renewals, and three, the continued strong expansion trends from customers.

Frank: We expect FY24 revenue of approximately $2.8 billion, roughly flat with FY23. This is despite the roughly $180 million systems backlog headwind we have had to overcome this year.

Francois Locoh: This is despite the roughly $180 million systems backlog headwind we have had to overcome this year. Given the strong performance from software thus far this year and the good visibility we have into Q4, we now expect mid-to-high single-digit software revenue growth for the year. This is up from our prior characterization of flat-to-modest growth.

Frank: Given the strong performance from software thus far this year and the good visibility we have in 2Q4, we now expect mid to high single-digit software revenue growth for the year. This is up from our prior characterization of flat to modest growth.

Frank: We also expect continued operating discipline, combined with the tax favorability we saw in Q3, will enable us to achieve FY24 non-GAAP EPS growth of approximately 12%. This is up from our prior range of 7 to 9% growth.

Francois Locoh: We also expect continued operating discipline, combined with the tax favorability we saw in Q3, will enable us to achieve FY24 non-GAAP EPS growth of approximately 12%. This is up from our prior range of 7% to 9% growth. Before Franck discusses our results and outlook in greater detail, I will recap how F5 is solving our customers' hybrid multi-cloud challenges, what we call the ball of fire, by highlighting some notable customer wins from the quarter.

Speaker Change: Before Franck discusses our results and outlook in greater detail, I will recap how F5 is solving our customers hybrid multi-cloud challenges, what we call the ball of fire, by highlighting some notable customer wins from the quarter.

Francois Locoh: The current state of application security and delivery for large enterprises has our customers' IT teams in crisis. They are battling increasing complexity, costs, and risks simultaneously, and AI-driven applications are only making these challenges more pronounced.

Speaker Change: The current state of application security and delivery for large enterprises has our customers' IT teams in crisis.

Speaker Change: They are battling increasing complexity, costs, and risks simultaneously. And AI-driven applications are only making these challenges more pronounced.

Francois Locoh: Only F5 can truly support the demands of today's hybrid multi-cloud application infrastructure. We are the only solution provider that secures, delivers, and optimizes any app or any API anywhere. We are highly differentiated in addressing customers' pain points in several ways. First, app security.

Speaker Change: Only F5 can truly support the demands of today's hybrid multi-cloud application infrastructures.

Speaker Change: We are the only solution provider that secures, delivers, and optimizes any app or any API anywhere. We are highly differentiated in addressing customers' pain points in several ways.

Francois Locoh: F5 delivers the most effective and comprehensive app and API security platform in the industry. We enable our customers to consolidate point products targeting specific threats onto a single integrated platform with a suite of best-in-class capabilities and no efficacy trade-offs.

Speaker Change: First, app security. F5 delivers the most effective and comprehensive app and API security platform in the industry.

Speaker Change: We enable our customers to consolidate point products targeting specific threats onto a single integrated platform with a suite of best-in-class capabilities and no efficacy trade-offs.

Francois Locoh: F5 enables the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require. Only F5 has a solution footprint that extends across public clouds, to the edge, and customers' on-premises environments. Our solutions simplify connecting disparate infrastructure environments and the applications deployed in and across them. In short, we are on a mission to make hybrid multi-cloud ridiculously easy. And third, standardization and automation.

Speaker Change: Second

Speaker Change: Simplification

Speaker Change: F5 enables the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require.

Speaker Change: Only F5 has a solution footprint that extends across public clouds.

Speaker Change: to the Edge and customers' on-premises environments. Our solutions simplify connecting disparate infrastructure environments and the applications deployed in and across them. In short, we are on a mission to make hybrid multi-cloud ridiculously easy.

Francois Locoh: F5 delivers more cost-effective and scalable IT operations. We streamline 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.

Speaker Change: and third...

Speaker Change: Standardization and automation. S5 delivers more cost-effective and scalable IT operations.

Speaker Change: We streamline customers' operations with consistent policies.

Speaker Change: 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.

Francois Locoh: These three points of strong differentiation combined with the well-established role F5 plays embedded in the flow of application traffic enables us to extinguish the ball of fire for our customers in ways our competitors cannot. Let me review a few customer wins from Q3 that illustrate how F5 is differentiated and how our capabilities are delivering value for our customers. The first two customer examples I will speak to highlight our application and API security capabilities. During Q3, a U.S.-based security products and services company launched an effort to modernize its IT infrastructure.

Speaker Change: These three points of strong differentiation combined with the well-established role F5 plays embedded in the flow of application traffic enables us to extinguish the ball of fire for our customers in ways our competitors cannot.

Speaker Change: Let me review a few customer wins from Q3 that illustrate how F5 is differentiated and how our capabilities are delivering value for our customers.

Speaker Change: The first two customer examples I will speak to highlight our application and API security capabilities.

Speaker Change: During Q3, a U.S.-based security products and services company launched an effort to modernize its IT infrastructure.

Francois Locoh: Specifically, the customer was looking to expand beyond hardware to a hybrid cloud and SaaS-based IT and security infrastructure. The customer was an existing BIG-IP customer and selected F5 Distributed Cloud Services to complement its BIG-IP estate, creating a scalable, self-managed cloud and SaaS-based solution. F5's portfolio of hardware, software, and SaaS deployment options delivers standardized application and API security across their multi-cloud and hybrid environments, enabling them to modernize at their own pace. Also, during the quarter, a channel partner brought in F5 when a U.S. state government experienced a DDoS attack that brought down its server.

Speaker Change: Specifically, the customer was looking to expand beyond hardware to a hybrid cloud and SaaS-based IT and security infrastructure.

Speaker Change: The customer was an existing BIG-IP customer and selected F5 Distributed Cloud Services to complement its BIG-IP estate.

Speaker Change: creating a scalable, self-managed cloud and SaaS-based solution.

Speaker Change: F5's portfolio of hardware, software, and SaaS deployment options delivers standardized application and API security across their multi-cloud and hybrid environments, enabling them to modernize at their own pace.

Speaker Change: Also during the quarter, a channel partner brought in F5 when a U.S. state government experienced a DDoS attack that brought down its servers.

Francois Locoh: We quickly completed a successful emergency mitigation and deployed a suite of F5 solutions using our distributed cloud service. When the threat actor changed tactics and launched application layer attacks, F5's operations team quickly activated WAF and bot defense and stopped them. As a result of F5's performance under pressure, the customer is moving additional services to F5, including their DNS and other web and application properties. Before I move on to our next point of differentiation, I will take a minute to highlight that our continued innovation and industry-leading security performance is winning accolades from industry experts as well as customers.

Speaker Change: We quickly completed a successful emergency mitigation and deployed a suite of F5 solutions via distributed cloud services.

Speaker Change: When the threat actor changed tactics and launched application layer attacks, F5's operations team quickly activated WAF and bot defense and stopped them.

Speaker Change: As a result of F5's performance under pressure, the customer is moving additional services to F5, including their DNS and other web and application properties.

Speaker Change: Before I move on to our next point of differentiation, I will take a minute to highlight that our continued innovation and industry-leading security performance is winning accolades from industry experts as well as customers.

Francois Locoh: During the quarter, F5 was recognized as an application security leader by several independent parties. First, F5 was rated as a leader in both security efficacy and operational efficiency in SecureIQ Labs' 2024 Cloud WAP Cyber Risk Validation Report. F5 Distributed Cloud WAP earned a Secure by Design rating, passing the WAP Vulnerability Assessment with a perfect score.

Speaker Change: During the quarter, F5 was recognized as an application security leader by several independent parties.

Speaker Change: First...

Speaker Change: S5 is rated as a leader in both security efficacy and operational efficiency in SecureIQ Labs' 2024 CloudWAP Cyber Risk Validation Report.

Speaker Change: F5 Distributed Cloud WAP earns Secure IQ Lab's Secure by Design rating, passing the WAP Vulnerability Assessment with a perfect score.

Francois Locoh: In addition, Enterprise Management Associates singled out F5 as a visionary in API security for its Distributed Cloud Web App and API Protection, or WAP, capabilities. In its Vendor Vision 2024 report, F5 is lauded for its holistic approach to API and application security, eliminating the need for customers to pay for and manage disparate API security solutions. And finally, Copengo Cole recognized F5 as a leader in the web application firewall market, spotlighting F5 as a forerunner that is setting the bar for excellence in cybersecurity defense.

Speaker Change: In addition, Enterprise Management Associates singled out F5 as a visionary in API security for our distributed cloud web app and API protection, or WAP, capabilities.

Speaker Change: In its Vendor Vision 2024 report, F5 is lauded for its holistic approach to API and application security, eliminating the need for customers to pay for and manage disparate API security solutions.

Speaker Change: And finally, Kuping Okol recognized F5 as a leader in web application firewall market, spotlighting F5 as a forerunner that is setting the bar for excellence in cybersecurity defenses.

Francois Locoh: The next two customer wins I will highlight exemplify how F5 is enabling the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require. They both also happen to be examples of our continued momentum against competitors. During the quarter, a U.S.-based technology company that delivers a web and video collaboration platform selected F5 to replace its incumbent ADC provider. The customer will use BIG-IP, including WAF and DNS capabilities, to consolidate and standardize their infrastructure across their on-premises and third-party data centers. F5 was selected because of our software and hardware deployment options, the efficacy of our advanced DWAF, and our flexible commercial models. I will note that this was also a land and expand win.

Speaker Change: The next two customer wins I will highlight exemplify how F5 is enabling the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require. They both also happen to be examples of our continued momentum against competitors.

Speaker Change: During the quarter, a U.S.-based technology company that delivers a web and video collaboration platform selected F5 to replace its incumbent ADC provider.

Speaker Change: The customer will use BIG-IP, including WAF and DNS capabilities, to consolidate and standardize their infrastructure across their on-premises and third-party data centers.

Speaker Change: F5 was selected because of our software and hardware deployment options, the efficacy of our advanced WAF, and our flexible commercial models. I will note that this also was a land and expand win. In 2020, we displaced a competitor for DDoS protection.

Francois Locoh: In 2020, we displaced a competitor for DDoS protection. In another example from the quarter, a large APAC-based travel agency selected F5 Distributed Cloud to enable it to address multiple challenges simultaneously. Initially, the customer was looking to streamline app delivery through a single abstract layer. In the process of proving its capabilities for this use case, F5 Distributed Cloud outperformed the incumbent security provider. As a result, the customer consolidated on F5, enabling them to stage application migration to new data centers while minimizing disruption and risk. In addition, Distributed Cloud's SaaS console and comprehensive observability features drastically reduced operational overhead for the customer.

Speaker Change: In another example from the quarter, the large APAC-based travel agency selected F5 Distributed Cloud to enable it to address multiple challenges simultaneously.

Speaker Change: Initially, the customer was looking to streamline app delivery through a single abstract layer. In the process of proving its capabilities for this use case, F5 Distributed Cloud outperformed the incumbent security provider.

Speaker Change: As a result, the customer consolidated on F5, enabling them to stage application migration to new data centers while minimizing disruption and risk.

Speaker Change: In addition, Distributed Cloud's SaaS console and comprehensive observability features drastically reduced operational overhead for the customer.

Francois Locoh: The final two customer wins I will speak to highlight how we streamline customers' operations with consistent policies, comprehensive automation, and rich analytics. During Q3, our team secured a large land and expansion deal that was 18 months in the making. The customer is a global retail and investment bank with an extensive branch network. Banking regulations require them to separate segments of their IT environment. To accomplish this, they are building a new virtualized network to run in parallel to their existing environment. They selected BIG-IP software to augment their existing BIG-IP footprint. They also upgraded to NGINX Plus from NGINX Open Source.

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

Speaker Change: During Q3, our team secured a large land and expand deal that was 18 months in the making.

Speaker Change: The customer is a global retail and investment bank with an extensive branch network.

Speaker Change: Banking regulations require them to separate segments of their IT environment. To accomplish this,

Speaker Change: They are building a new virtualized network to run in parallel to their existing environment.

Speaker Change: They selected BIG-IP software to augment their existing BIG-IP footprint. They also upgraded to NGINX Plus from NGINX Open Source.

Francois Locoh: The BIG-IP's automation capabilities enable them to implement automation best practices across the board, saving time and reducing the potential for human error. They are now able to operationalize multiple BIG-IPs in just 20 to 30 minutes versus the days, or in some cases, even weeks, required previously. In addition, NGINX Plus delivers reliable and secure access to their Kubernetes applications and enables a consistent security posture across all of their application environments.

Speaker Change: Big IP's automation capabilities enable them to implement automation best practices across the board, saving time and reducing the potential for human error. They are now able to operationalize multiple Big IPs in just 20 to 30 minutes.

Speaker Change: versus the days, or in some cases, even weeks required previously. In addition, NGINX Plus delivers reliable and secure access to their Kubernetes applications and enables a consistent security posture across all of their application environments.

Francois Locoh: The final example from the quarter I will highlight is with a global automotive company. This customer is an existing BIG-IP customer who is renewing and expanding their BIG-IP subscription for the second time. The customer is leveraging BIG-IP's automation capabilities to enable self-service application delivery and security services in seconds compared to the weeks or months it took previously. Big IP has significantly accelerated this customer's time to market for both internal and external customers. The value of Big IP's automation capabilities is so significant to them that their consumption has doubled with each renewal.

Speaker Change: The final example from the quarter I will highlight is with a global automotive company.

Speaker Change: This customer is an existing BIG-IP customer who is renewing and expanding their BIG-IP subscription for the second time. The customer is leveraging BIG-IP's automation capabilities to enable self-service application delivery and security services in seconds.

Speaker Change: compared to the weeks or months it took previously.

Speaker Change: Big IP has significantly accelerated this customer's time to market for both internal and external customers. The value of Big IP's automation capabilities is so significant to them that their consumption has doubled with each renewal.

Francois Locoh: Before I pass the call to Franck, I will close with some brief commentary about how we are enabling AI, shaping the AI revolution, and working with customers to ensure they are AI ready. During Q3, we continued to engage with several of our major customers, focusing on their AI initiatives and collaborating to address their critical AI-related challenges. Two pivotal trends emerged from these interactions.

Speaker Change: Before I pass the call to Franck, I will close with some brief commentary about how we are enabling AI, shaping the AI revolution, and working with customers to ensure they are AI ready.

Speaker Change: During Q3, we continue to engage with several of our major customers, focusing on their AI initiatives and collaborating to address their critical AI-related challenges.

Francois Locoh: First, the largest organizations that are building AI factories are starting to recognize that high-performance networking and security are non-negotiable for both model training and inference. Second, organizations that are using foundational AI models for inference use APIs extensively. This use case also demands top-tier performance and robust security. In both scenarios, whether constructing AI factories for model training or executing inference, F5's leading ADC platform and our distinctive capabilities in application security and delivery will have an important role to play.

Franck: Two pivotal trends have emerged from these interactions. First, the largest organizations which are building AI factories are starting to recognize that high-performance networking and security are non-negotiable for both model training and inference.

Franck: Second, organizations that are using foundational AI models for inference use APIs extensively.

Franck: This use case also demands top-tier performance and robust security.

Franck: In both scenarios, whether constructing AI factories for model training or executing inference, F5's leading ADC platform and our distinctive capabilities in application security and delivery will have an important role to play.

Francois Locoh: We are seeing and winning early AI use cases. As an example, a global automotive company selected F5BIG-IP to rapidly and securely transfer data from data storage systems to large-scale clusters, significantly accelerating their model training process. For retrieval-augmented generation use cases like this, our solutions are optimizing the performance of AI models as they access and incorporate external data sources in real time.

Franck: We are seeing and winning early AI use cases.

Franck: As an example, a global automotive company selected F5BIG-IP to rapidly and securely transfer data from data storage systems to large-scale clusters, significantly accelerating their model training process.

Franck: For retrieval-augmented generation use cases like this, our solutions are optimizing the performance of AI models as they access and incorporate external data sources in real-time.

Francois Locoh: Separately from this customer, our entire product family is being utilized by other customers to load balance and protect AI-related API traffic. In the AI era, all communication is happening via APIs, which are increasingly distributed, running on-premises, in private clouds, and across multiple public clouds. F5's Distributed Cloud Services is an ideal solution for organizations needing consistent management and security for their distributed AI APIs.

Speaker Change: Separate from this customer, our entire product family is being utilized by other customers.

Speaker Change: to load balance and protect AI-related API traffic.

Speaker Change: In the AI era, all communication is happening via APIs, which are increasingly distributed.

Speaker Change: running on-premises, in private clouds, and across multiple public clouds.

Speaker Change: F5 Distributed Cloud Services is an ideal solution for organizations needing consistent management and security for their distributed AI APIs.

Francois Locoh: Leveraging our long-standing partnerships with semiconductor leaders, we are also strategically positioned to advance these relationships in the AI era. Our approach remains technology-agnostic, focusing on solving real-world, practical AI challenges for customers. Realistically, we expect we are probably one to two years out from enterprises deploying AI in production at scale. Importantly, though, F5 is not just adapting to the AI revolution; we are actively shaping it, providing the critical infrastructure that enables our customers to harness the full potential of AI safely and efficiently. Now I will turn the call to Franck. Franck?

Speaker Change: Leveraging our long-standing partnerships with semiconductor leaders, we also are strategically positioned to advance these relationships in the AI era.

Speaker Change: Our approach remains technology-agnostic, focusing on solving real-world, practical AI challenges for customers.

Speaker Change: Realistically, we expect we are probably one to two years out from enterprises deploying AI in production at scale.

Speaker Change: Importantly though, F5 is not just adapting to the AI revolution, we are actively shaping it, providing the critical infrastructure that enables our customers to harness the full potential of AI safely and efficiently.

Francis J. Pelzer: Thank you, Francois, and good afternoon, everyone. I will review our Q3 results before I elaborate on our Q4 outlook. We delivered Q3 revenue of $695 million, with a mix of 56% global services revenue and 44% product revenue. Global services revenue of $387 million grew 3% in line with our expectations, which reflected lapping the benefit of prior price increases. Product revenue totaled $308 million, down 6% year-over-year due to a lower level of backlog-related system shipments than a year-ago quarter. However, systems revenue of $130 million demonstrates a slowing decline of 16% year-over-year.

Speaker Change: Now, I will turn the call to Franck. Franck?

Franck: Thank you, Francois, and good afternoon, everyone. I will review our Q3 results before I elaborate on our Q4 outlook. We delivered Q3 revenue of $695 million with a mix of 56% global services and 44% product revenue.

Francis J. Pelzer: Software revenue totaled $179 million, representing 3% year-over-year growth and 13% sequential growth. Subscription-based revenue contributed $155 million, or 87% of total software revenue, representing 2% growth year-over-year and 10% sequential growth. Subscription renewals were strong in Q3 with continued solid expansion in our multi-year agreements. An exception to this trend is our bought defense point solution, where the majority of customers are renewing, but some are opting for less sophisticated, lower cost options.

Franck: Global services revenue of $387 million grew 3% in line with our expectations, which reflected lapping the benefit of prior price increases.

Franck: Product revenue totaled $308 million, down 6% year-over-year due to a lower level of backlog-related systems shipments than a year-ago quarter. Systems revenue of $130 million demonstrates a slowing decline of 16% year-over-year.

Franck: Software revenue totaled $179 million, representing 3% year-over-year growth and 13% sequential growth. Subscription-based revenue contributed $155 million, or 87% of total software revenue, representing 2% growth year-over-year and 10% sequential growth.

Franck: Subscription renewals were made strong in Q3 with continued solid expansion in our multi-year agreements. An exception to this trend is our bought defense point solution where the majority of customers are renewing but some are opting for less sophisticated lower cost options.

Francis J. Pelzer: Rounding out our software revenue, Perpetual Software contributed $24 million. Revenue from recurring sources contributed 77% of Q3's revenue, up from 75% a year ago. Recurring revenue includes the subscription-based revenue, as well as the maintenance portion of our global services revenue. On a regional basis, revenue from Americas was down 4% year over year, representing 55% of total revenue.

Franck: Rounding out our software revenue, Perpetual Software contributed $24 million.

Franck: Revenue from recurring sources contributed 77% of Q3's revenue up from 75% a year ago. Recurring revenue includes the subscription-based revenue as well as the maintenance portion of our global services revenue.

Franck: On a regional basis, revenue from Americas was down 4% year-over-year, representing 55% of total revenue. EMEA delivered a strong quarter with 5% growth, representing 27% of revenue.

Francis J. Pelzer: Amiya delivered a strong quarter with 5% growth representing 27% of revenue, while APAC declined 1% representing 18% of revenue. Looking at our major verticals, Enterprise customers delivered another strong performance, representing 67% of product bookings in the quarter. Government customers also performed well, representing 21% of product bookings, including 7% from U.S. Federal. Finally, service providers represented 12% of Q3 product bookings. Our Q3 operating results were strong, reflecting our continued operating discipline. Gap gross margin was 80.4%, and non-gap gross margin was 83.1%, an improvement of approximately 65 basis points from Q3 and FY20. Our GAAP operating expenses were $396 million. Our non-GAAP operating expenses were $346 million.

Franck: APAC declined 1% representing 18% of revenue.

Franck: Looking at our major verticals, enterprise customers delivered another strong performance representing 67% of product bookings in the quarter. Government customers also performed well, representing 21% of product bookings, including 7% from U.S. Federal.

Franck: Finally, service providers represented 12% of Q3 product bookings.

Franck: Our Q3 operating results were strong, reflecting our continued operating discipline.

Speaker Change: Gap gross margin was 80.4%, non-gap gross margin was 83.1%, an improvement of approximately 65 basis points from Q3 and FY23.

Speaker Change: Our GAAP operating expenses were $396 million. Our non-GAAP operating expenses were $346 million.

Francis J. Pelzer: Our gap operating margin was 23.4%. Our non-gap operating margin was 33.4%, reflecting an improvement of approximately 20 basis points from Q3 of FY20. Our GAAP-affected tax rate for the quarter was 16%. Our non-GAAP effective tax rate was 17.5 percent.

Speaker Change: Our gap operating margin was 23.4%, our non-gap operating margin was 33.4%, reflecting an improvement of approximately 20 basis points from Q3 of FY23.

Speaker Change: Our GAAP effective tax rate for the quarter was 16%. Our non-GAAP effective tax rate was 17.5%.

Francis J. Pelzer: Similar to Q3 of last year, the lower-than-expected tax rate reflects a nonrecurring benefit associated with filing our annual federal income tax return during the quarter. Our adjusted net income for the quarter was $144 million, or $2.44 per share. Our non-GAAP net income was $199 million, or $3.36 per share. I will now turn to cash flow and the balance sheet, which also remain very strong. We generated $159 million in cash flow from operations in Q3. DSO for the quarter was 54 days, in line with 51 days in QT. Cash and investments totaled approximately $943 million at quarter end.

Speaker Change: Similar to Q3 of last year, the lower-than-expected tax rate reflects a non-recurring benefit associated with filing our annual federal income tax return during the quarter.

Speaker Change: Our GAP-Net income for the quarter was $144 million, or $2.44 per share.

Speaker Change: Our non-GAAP net income was $199 million or $3.36 per share.

Speaker Change: I will now turn to cash flow and the balance sheet, which also remain very strong.

Speaker Change: We generated $159 million in cash flow from operations in Q3.

Speaker Change: CapEx was $6 million.

Speaker Change: DSO for the quarter was 54 days in line with 51 days in Q2.

Speaker Change: Cash and Investments totaled approximately $943 million at quarter end.

Francis J. Pelzer: Deferred revenue was $1.77 billion, down 1% from the year-ago period. The change is due to a higher weighting of our sales to term-based subscriptions and a corresponding lower allocation of bookings to deferred revenue. In addition, we are lapping price increases on maintenance. We have also implemented some strategic go-to-market decisions, including no longer incentivizing customers toward multi-year maintenance agreements. Our share repurchases reflected our ongoing commitment to returning cash to shareholders. We repurchased $150 million worth of F5 shares in Q3 at an average price of $172 per share.

Speaker Change: Deferred revenue was $1.77 billion, down 1% from the year-ago period. The change is due to a higher weighting of our sales to term-based subscriptions and a corresponding lower allocation of bookings to deferred revenue.

Speaker Change: In addition, we are lapping price increases on maintenance renewals. We also have implemented some strategic go-to-market decisions, including no longer incentivizing customers towards multi-year maintenance agreements.

Speaker Change: Our share repurchases reflected our ongoing commitment to returning cash to shareholders. We repurchased $150 million worth of F5 shares in Q3 at an average price of $172 per share.

Speaker Change: Year-to-date, we have used approximately 77% of our free cash flow toward share repurchases, far in excess of our commitment to direct at least 50% of free cash flow toward share repurchases.

Speaker Change: Finally, we ended the quarter with approximately 6,500 employees.

Francis J. Pelzer: Year-to-date, we have used approximately 77% of our free cash flow towards share repurchase, far in excess of our commitment to direct at least 50% of free cash flow towards share repurchase. Finally, we ended the quarter with approximately 6,500 employees. I will now speak to our outlook for Q4. We expect Q4 revenue in the range of $720 to $740 million on the strength of our software renewals and a slight uptick in new business momentum. We expect non-GAAP gross margins of approximately 83%. We estimate Q4 non-GAAP operating expenses of $350 to $362 million.

Speaker Change: I will now speak to our outlook for Q4. We expect Q4 revenue in the range of $720 to $740 million on the strength of our software renewals and a slight uptick in new business momentum.

Speaker Change: We expect non-GAAP gross margins of approximately 83%. We estimate Q4 non-GAAP operating expenses of $350 to $362 million. We are targeting Q4 non-GAAP EPS in the range of $3.38 to $3.50 per share.

Francis J. Pelzer: We are targeting Q4 non-GAAP EPS in the range of $3.38 to $3.50 per share. We expect Q4 share-based compensation of expense of approximately 54 to 56 million. Our Q4 guidance implies some positive updates to our prior outlook for FY24. We expect approximately $2.8 billion in revenue for the year. Embedded in this is the expectation for mid- to high-single-digit software revenue growth, up from the flat-to-modest growth expectation we had at the start of the year. We now expect our FY24 non-gap effective tax rate will be in the range of 19.5% to 20%, down from our prior range of 20% to 22%.

Speaker Change: We expect Q4 share-based compensation of expense of approximately $54 to $56 million.

Speaker Change: Our Q4 guidance implies some positive updates to our prior outlook for FY24.

Speaker Change: We expect approximately $2.8 billion in revenue for the year. Embedded in this is the expectation for mid to high single-digit software revenue growth up from the flat to modest growth expectation we had at the start of the year.

Speaker Change: We now expect our FY24 non-GAAP effective tax rate will be in the range of 19.5% to 20% down from our prior range of 20% to 22%.

Francis J. Pelzer: With the combination of revenue growth, continued operational discipline, and a tax rate that is improving compared to our prior expectations, we now expect FY24 non-GAAP EPS growth of approximately 12%. This is up from our prior expectations of 7-9%. We are not revising our gross or operating margin targets for FY24 and continue to expect non-GAAP gross margins in the range of 82 to 83 percent, which would reflect an improvement of 50 to 150 basis points from FY23. We also continue to expect non-GAAP operating margins in the range of 33 to 34 percent, which would reflect an improvement of 280 to 380 basis points from FY23.

Speaker Change: With the combination of revenue growth, continued operational discipline, and a tax rate that is improving compared to our prior expectations, we now expect FY24 non-GAAP EPS growth of approximately 12%.

Speaker Change: This is up from our prior expectations of 7-9% growth.

Speaker Change: 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 percent, which would reflect an improvement of 50 to 150 basis points from FY23.

Speaker Change: We also continue to expect non-GAAP operating margin in the range of 33 to 34 percent, which would reflect an improvement of 280 to 380 basis points from FY23.

Francis J. Pelzer: Before I pass the call back to Francois, I wanted to share some personal news. I have made the decision to retire from F5. I joined F5 in 2018 to help the team navigate a massive transition from a hardware-led company to one that is more software-led. Delivering our Q4 guidance will make FY24 the third consecutive year where software revenue is the majority of our product revenue, signaling that we have, in fact, successfully completed that transition.

Speaker Change: Before I pass the call back to Francois, I wanted to share some personal news. I made the decision to retire from F5. I joined F5 in 2018 to help the team navigate a massive transition from a hardware-led company to one that was more software-led.

Francois: Delivering our Q4 guidance will make FY24 the third consecutive year where software revenue is the majority of our product revenue signaling that we have in fact successfully completed that transition.

Francis J. Pelzer: I plan to remain with the team at CFO through the filing of our FY24-10K, likely in mid-November. Cooper Werner, who is currently our SVP of Finance, is slated to take over as CFO upon my departure. Many of you know Cooper well.

Francois: I plan to remain with the team at CFO through the filing of our FY24-10K, likely in mid-November.

Francis J. Pelzer: He has been with F5 for 23 years, during which he has consistently taken on new responsibilities as F5 has grown and changed. He has been SVP of Finance for the last 12 years, managing our FP&A Real Estate Procurement and Trade Organization. His extensive financial expertise and institutional knowledge have been pivotal in guiding our business model as we have executed our software transformation. Cooper is a strong and engaging leader, and we expect him to be a great addition to the executive leadership team. I will continue to work with the team between now and November to ensure a smooth transition. With that, I'll pass the call back to Francois. Francois?

Speaker Change: Cooper Werner, who is currently our SVP of Finance, is slated to take over as CFO upon my departure. Many of you know Cooper well. He has been with F5 for 23 years, during which he has consistently taken on new responsibilities as F5 has grown and changed.

Speaker Change: He has been SVP of Finance for the last 12 years, managing our FP&A, real estate procurement, and trade organizations.

Speaker Change: His extensive financial expertise and institutional knowledge have been pivotal in guiding our business model as we have executed our software transformation.

Speaker Change: Cooper is a strong and engaging leader and we expect him to be a great addition to the executive leadership team. I will continue to work with the team between now and November to ensure a smooth transition. With that, I'll pass the call back to Francois. Francois?

Francois Locoh: Thank you, Frank. I truly cannot thank you enough for your partnership and counsel over the last six years. You have been an integral part of our executive leadership team with an immeasurable impact on F5. Your deep knowledge of software and SaaS-driven businesses was instrumental to F5's successful transition to a software-driven company. You have been a tireless advocate for F5, our business, and our employees, and an extraordinary partner and friend. I know it's not goodbye at this point, but I really want to thank you here and now.

Francois: Thank you, Frank. I truly cannot thank you enough for your partnership and counsel over the last six years.

Francois: You have been an integral part of our executive leadership team with an immeasurable impact on F5. Your deep knowledge of software and SaaS-led businesses was instrumental to F5's successful transition to a software-led company.

Speaker Change: You have been a tireless advocate for F5, our business, and our employees, and an extraordinary partner and friend.

Speaker Change: I know it's not goodbye at this point, but I really want to thank you here and now. I will also echo your comments about Cooper. I have worked very closely with Cooper in my tenure at F5 and have enormous confidence in his ability to succeed you in the CFO role.

Francois Locoh: I will also echo your comments about Cooper. I have worked very closely with Cooper in my tenure at F5 and have enormous confidence in his ability to succeed you in the CFO role. In conclusion, I will reiterate that F5 is uniquely positioned to help our customers as they move forward in a hybrid and multi-cloud reality that brings with it unprecedented operational complexity, considerable cost, and escalating security risks. As large enterprises across the globe are modernizing their IT infrastructures and driving IT cost optimization, they are also developing comprehensive AI strategies for their businesses.

Speaker Change: In conclusion, I will reiterate that F5 is uniquely positioned to help our customers as they move forward in a hybrid and multi-cloud reality that brings with it untenable operational complexity, considerable cost, and escalating security risks.

Speaker Change: As large enterprises across the globe are modernizing their IT infrastructures and driving IT cost optimization, they also are developing comprehensive AI strategies for their businesses.

Francois Locoh: F5 is proving itself an invaluable partner in this modernization process and in enabling our customers to ready their IT infrastructure to leverage AI at scale. F5 is optimizing application security, delivery, management, and performance across hybrid multi-cloud environments with enhanced automation and meaningful operational efficiency.

Speaker Change: F5 is proving itself an invaluable partner in this modernization process.

Speaker Change: and in enabling our customers to ready their IT infrastructure to leverage AI at scale. F5 is optimizing application security, delivery, management, and performance across hybrid multi-cloud environments with enhanced automation and meaningful operational efficiencies.

Operator: Going forward, and especially as we enter the era of AI-driven applications, we believe customers will require a hybrid SaaS platform that covers all of their app security and delivery needs, regardless of form factor. This is the world we have invested in, and as customers gain more confidence in their IT budgets and priorities, we believe we are well positioned to capture our share of their spend. Operator, please open the call to questions.

Speaker Change: Going forward, and especially as we enter the era of AI-driven applications, we believe customers will require a hybrid SaaS platform that covers all of their app security and delivery needs.

Speaker Change: regardless of form factor.

Speaker Change: This is the world we have invested for, and as customers gain more confidence in their IT budgets and priorities, we believe we are well positioned to capture our share of their spend. Operator, please open the call to questions.

Operator: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue.

Speaker Change: Thank you. We'll now be conducting a question and answer session.

Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad.

Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Tim Long with Barclays. Please proceed with your question. Thank you. Congratulations and best of luck, Frank and Cooper. Congratulations on the new role coming up. Wanted to touch on the software side, Frank or Francois.

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

Timothy Patrick Long: Thank you. Congratulations and best of luck, Frank and Cooper. Congrats to you on the new role coming.

Timothy Patrick Long: I know you don't give a lot of, you know, all the specifics, but just looking at maybe the sequential growth seems a little surprisingly strong in the quarter there. Is there any way you can parse out for us kind of what drove the, you know, you said strong new business? Any way you can quantify that? And then, as far as the renewals are concerned, are these, you know, stronger true forwards? Is there better dollar retention?

Timothy Patrick Long: I wanted to touch on the software side, Frank or Francois, I know you don't give a lot of, you know, all the specifics, but...

Timothy Patrick Long: Just looking at maybe the sequential growth seems a little surprisingly strong in the quarter there.

Speaker Change: Is there any way you can parse out for us kind of what drove the, you know, you said strong new business, any way you can quantify that?

Speaker Change: And then as far as the...

Speaker Change: Renewals. Are these, you know, stronger true forwards? Is there better dollar retention? How do we, at a high level, think about, you know, the two aspects of what's looking better in software currently? And then add a hardware follow-up.

Francois Locoh: How do we at a high level think about, you know, the two aspects of what's looking better in software currently? And then add a hardware follow-up. Sure, Tim. So, thanks so much for the kind wishes and thanks so much for the question. I think Cooper is going to do a great job in the role.

Speaker Change: Sure, Tim. So thanks so much for the kind wishes and thanks so much for the question. Yes, Cooper is going to do a great job in the role.

Francois Locoh: On software in particular, as you know, we will update some of the ARR-type metrics at the end of Q4, so I don't want to get too much into that. But I would say that, when we take a look at NRR, it is still world-class across the business. The subscription renewals in particular continue to be quite strong, with some expansion. We obviously talked about, you know, a little bit of a challenge in the bot business, which is helping us somewhat with that number.

Speaker Change: On the software in particular...

Speaker Change: As you know, we will update some of the ARR type metrics at the end of Q4, so I don't want to get too much into that, but I would say that...

Speaker Change: When we take a look at NRR, it still is world-class across the business.

Speaker Change: The subscription renewals in particular continue to be quite strong with some expansion.

Speaker Change: We obviously talked about, you know, a little bit of a challenge in the bot business, which is helping us somewhat in that number. But what really was strong was the new business activity, which we see in the pipeline, and in some cases we see it in hardware, and it converts into a software deal through the course of the negotiations. But, you know, more broadly, it was the guidance that we had given was really based off not necessarily expecting a lot of new business activity. And in the quarter, you obviously saw that we ended up at the top end of our guidance. So you can sort of extrapolate that into, you know, a lift in new business activity.

Francois Locoh: But what really was strong was the new business activity which we see in the pipeline. In some cases, we see it in hardware, and it converts into a software deal through the course of the negotiations. But, you know, more broadly, the guidance that we had given was really based on not necessarily expecting a lot of new business activity. And in the quarter, you obviously saw that we ended up at the top end of our guidance. So you can sort of extrapolate that into, you know, a lift in new business activity. Okay, great.

Francois Locoh: And then just quickly on hardware, I know it's still a challenge, but it does seem like other pockets of networking are starting to see a bottom. How do you feel about, you know, where we are at these levels, given that most of the backlog, you know, comparison is hopefully behind you? Hi, David. It's Francois.

Speaker Change: Okay, great. And then just quickly on hardware, I know it's still a challenge, but it does seem like other pockets of networking is starting to see a bottom. How do you feel about, you know, where we are at these levels, given that most of the backlog, you know, comparison is hopefully behind you?

Francois Locoh: Look, I think we have seen hardware stabilize over the last several quarters as customers have digested inventory. And over the last several quarters, we have seen a number of customers still sweating their assets in the current microenvironment, but we're starting to see that change. And so for this year, we are about at the levels we think we're going to be this year. But going into next year, our view is that the demand signals on hardware are pretty good.

Francois: Hi team, it's Francois.

Timothy Patrick Long: Look, I think we have seen hardware stabilize over the last several quarters.

Speaker Change: As customers have digested inventory and over the last several quarters we have seen a number of customers still sweating their assets in the current microenvironment, but we're starting to see that.

Timothy Patrick Long: And so, you know, for this year, we are about at the levels, you know, we think we're going to be this year. But going into next year,

Timothy Patrick Long: Our view is that their demand signals on hardware are pretty good.

Francois Locoh: And so our expectations are that hardware next year will certainly not decline but possibly could be up relative to this year. And it's driven by a few use cases, Tim. Number one is we have a strong pipeline of tech refresh activity. And this is largely from customers that have digested their inventory or customers that were sweating assets and no longer can do that at this point.

Timothy Patrick Long: And so our expectations is that hardware next year will certainly not decline, but possibly could be up relative to this year.

Timothy Patrick Long: And it's driven by a few use cases, Tim. Number one is...

Timothy Patrick Long: We have a strong pipeline.

Timothy Patrick Long: of Tech Refresh activity, and this is largely from customers that have digested their inventory

Timothy Patrick Long: or customers that were sweating assets and no longer can do that at this point. And we're starting to see that the close rates on this pipeline are going to be pretty strong.

Francois Locoh: And we're starting to see that the close rates on this pipeline are going to be pretty strong, specifically in the service provider space, where they have sweated assets very aggressively. We're now starting to see large programs come up again for CapEx in hardware, in service providers. And also, we're starting to see AI as a catalyst on the horizon for hardware. So specifically for the few large enterprises or service providers that are building large AI factories, one of the big issues in building these large GPU clusters is obviously the cost of training these models.

Timothy Patrick Long: Specifically, in the service provider space, where they have swatted assets very aggressively.

Timothy Patrick Long: We're now starting to see large programs come up again for CAPEX in hardware in service provider.

Timothy Patrick Long: And also, we're starting to see AI as a catalyst on the horizon for hardware. So specifically for, you know, the few large enterprises or service providers.

Timothy Patrick Long: that are building large AI factories. You know, one of the big issues in building these large GPU clusters, obviously, is the cost of training these models.

Francois Locoh: And our technology, specifically our high capacity, high performance traffic management technology, big IP, is perfectly suited to improve the efficiency of these large AI factories and thereby reduce their cost. So we have already won a couple of opportunities in this area. We think it's going to take time to develop, but we're starting to see that as well as a potential positive catalyst for FY 2025. Okay, thank you. I appreciate it.

Speaker Change: And our technology, specifically our high-capacity, high-performance traffic management technology, Big IP, is perfectly suited to improve the efficiencies of these large AI factories and thereby reduce the cost of them.

Speaker Change: So, you know, we have already won a couple of opportunities in this area. We think it's going to take time to develop, but we're starting to see that as well as a potential positive catalyst for FY 2025.

Speaker Change: Okay, thank you. Appreciate it.

Timothy Patrick Long: Thank you, Tim.

Timothy Patrick Long: Thank you, Tim. Thank you. Our next question is from Meta Marshall with Morgan Stanley. Please proceed with your question. Great, thanks. Maybe to start following up on Tim's question, just in some of that better pipeline, you know, is that distributed cloud? Is that NGINX?

Timothy Patrick Long: Thank you. Our next question is from Meta Marshall with Morgan Stanley . Please proceed with your question.

Meta A. Marshall: Great, thanks. Maybe to start following up on Tim's question, just in some of that better pipeline, you know, is that distributed cloud? Is that NGINX?

Meta A. Marshall: You know, clearly you're kind of talking about some of the systems upside, but just if there were any more kind of disclosures around what the makeup of that better pipeline is. And then, maybe, as a second question, you noted better expansion as well. Is that coming from kind of new products or customers expanding their product portfolio within F5 or higher volume? I mean, all the comments I just made were specific to hardware, where, in fact, we have seen a, you know, stronger pipeline of tech refresh. But generally, our pipeline has been strong, and that applies, of course, as well to NGINX and distributed cloud. Where does this come from?

Meta A. Marshall: You know, clearly you're kind of talking about some of the systems upside, but just if any more kind of disclosures around what kind of the the makeup of that better pipeline is. And then maybe as a second question,

Speaker Change: You noted better expansion as well. Is that coming from new products or customers expanding in their product portfolio within F5 or higher volumes? Thanks.

Speaker Change: The comments I just made were specific to hardware, where in fact we have seen a stronger pipeline of tech refresh. But generally, our pipeline has been strong, and that applies, of course, as well to NGINX and distributed cloud. Where does this come from?

Francois Locoh: Meta is, you know, we've talked about the ball of fire, and you've heard this term, but generally, our enterprise customers are really in a crisis because to be able to deliver the digital experiences that they have to deliver, they have to operate in these hybrid and multi-cloud environments, and the complexity of these environments is escalating. So to give you an example, if you go back a year ago, we had about 20% of our customers that operated in more than six infrastructure environments, and that has doubled in the last year to now 40% of our customers operating in these environments. And that creates, you know, risks because of inconsistent security policies between this cloud and that cloud and this on-premises environment. This drives up operational costs.

Speaker Change: Meta is, you know, we've talked about the ball of fire and you've heard this term, but generally.

Speaker Change: Our enterprise customers are really in a crisis because to be able to deliver the digital experiences that they have to deliver.

Speaker Change: They have to operate in these hybrid and multi-cloud environments, and the complexity of these environments is escalating. So, to give you an example...

Speaker Change: If you go back a year ago, we had about 20% of our customers that operated in more than six infrastructure environments. And that has doubled in the last year to now 40% of our customers operating in these environments. And that creates...

Speaker Change: risks because of inconsistent security policies between this cloud and that cloud in this on-prem environment. It drives up operational costs.

Francois Locoh: It forces them to use multiple vendors where they could use fewer vendors or consolidate on one. And all of this constitutes this daunting complexity that we are on a mission to simplify. And so it's really the portfolio that we have put together with NGINX Distributed Cloud and Big IP that creates effectively a single platform that can extinguish this ball of fire and really simplify hybrid and multi-cloud environments for our customers. In my prepared remarks, I also mentioned a couple of examples of that.

Speaker Change: It forces them to use multiple vendors where they could they could use less vendors or consolidate on one.

Speaker Change: and all of these constitute this daunting complexity.

Speaker Change: that we are on a mission to simplify. And so it's really the portfolio that we have put together.

Speaker Change: with NGINX, Distributed Cloud, and Big IP that creates effectively a single platform that can extinguish this ball of fire and really simplify hybrid and multi-cloud environments for our customers.

Francois Locoh: We had a big security company that was using Big IP and used Distributed Cloud to augment their footprint and standardize their security across multiple environments, leveraging the portfolio of S5. So the pipeline that we're seeing across these product lines is really an effect of hybrid and multi-cloud complexity being very present for our customers and us having multiple products to really address that complexity and simplify the operations of our customers. Thank you. Our next question is from James Fish with Piper Sandler.

Speaker Change: In my prepared remarks also, I mentioned a couple of examples of that. We had a big security company that was using big IT and used distributed cloud to augment their footprint and standardize.

Speaker Change: their security across multiple environments, leveraging the portfolio of S5. So the pipeline that we're seeing across these product lines is really an effect of hybrid and multicloud complexity, you know, being very present for our customers and us having multiple products.

Speaker Change: to really address that complexity and simplify the operations of our customers.

Speaker Change: Great, thank you.

James Edward Fish: Please proceed with your question. Hey guys, thanks for the questions here and congrats to you, Frank, on retirement and Cooper on the promotion. Looking forward to working with you more, Cooper. Um, maybe not to pick on something you guys mentioned here, but on the bot manager side, you know, SHAPE has been kind of problematic over the last year or so based on what you guys have said.

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

James Edward Fish: Hey guys, thanks for the questions here and congrats to you Frank and retirement Cooper on the promotion looking forward to working with you more Cooper Maybe not to pick on something you guys mentioned here, but on the bot manager side

James Edward Fish: You know, SHAPE has been kind of problematic over the last year or so based on what you guys have said.

Francois Locoh: I guess, what are you guys doing to try to change the trajectory of bot manager, and how are you thinking about any potential security bundles between bot manager's WAF and API security pieces, especially given you talked about, you know, customers looking at lower cost alternatives? Thank you, Jim. I'll take that one.

Speaker Change: I guess, what are you guys doing to try to change the trajectory of Bot Manager and how are you thinking about any potential security bundles between Bot Manager WAF and API security pieces, especially given you talked about, you know, customers looking at lower cost alternatives?

Francois Locoh: What we're seeing in bots, so in the bot management solution, that is a high-end managed service, and it is a point solution. This is where, you know, Frank was sharing that we have been challenged in this area because it is a point solution and it is at the high end of the managed service scale, and we're seeing, you know, the majority of customers actually see enormous value in the solution and are renewing their subscription, but some customers not only want a lower-end solution but also want to have a platform and have bots as part of a platform bundle. And so, And so we now have bots as part of F5 Distributed Cloud, our SaaS solution, and we are now commercializing them as part of that bundle.

Speaker Change: Thank you, Jim. I'll take that one.

Speaker Change: What we're seeing in bots, so in the bot management solution, that is a high-end managed service.

Speaker Change: And it is a point solution.

Speaker Change: This is where, you know, Francois was sharing that we have been challenged on this area because it is a point solution.

Speaker Change: And this is at the high end of the Meta Marshall scale.

Speaker Change: And we're seeing, you know, the majority of customers actually see enormous value in the solution and are renewing their subscription. But some customers not only want a lower-end solution, but also want to have a platform and have bought as part of a platform bundle.

Speaker Change: And so, you know, our...

Speaker Change: Our plan has been to migrate and take that technology, take the most sophisticated bot technology that is on the market that we now have, and integrate that technology onto our F5 distributed cloud platform.

Speaker Change: And so we now have Bot as part of S5 Distributed Cloud, our SaaS solution, and we are now commercializing Bot as part of that bundle. In fact...

Francois Locoh: In fact, and we're getting quite a bit of traction on that. In fact, if you look at our WAP as a service customers, so those are customers that would buy a bundle that includes WAF, bot, API security, and DDoS, you know, any combination of these four services. The number of WAP as a service customers that we have doubled over the last year, but those are WAP customers on our platform using the bundle.

Speaker Change: And we're getting quite a bit of traction on that. In fact, if you look at our WAP as a service customers, so those are customers that would buy a bundle that includes

Speaker Change: WAAF

Speaker Change: bot, API security, and DDoS, you know, any one combination of these four services.

Speaker Change: The number of WAP as-a-Service customers that we have has doubled over the last year, but those are WAP customers on our platform using the bundle.

Francois Locoh: So it's really a transition, Jim, from a point solution at the high end to a solution that's part of a platform and part of a bundle, which is where I think our customers want to go.

Speaker Change: So, it's really a transition, Jim, from a point solution at the high end to a solution that's part of a platform and part of a bundle, which is where I think our customers want to go.

James Edward Fish: And Frank, for you, one of the questions I'm getting here after hours is around, you know, you guys talked about raising fiscal Q4 kind of outlook. Last quarter, you guys kind of gave some color around fiscal 25. So, you know, growth rates go up this year. Should we continue to expect the dollar numbers that you outlined last time as kind of a good proxy for fiscal 25 at this point? Or are you still feeling confident in those growth rates on higher numbers? Thanks, guys.

Jim: Got it. And Frank, for you, one of the questions I'm getting here after hours is...

Speaker Change: around, you know, you guys talked about raising fiscal Q4 kind of outlook.

Speaker Change: Last quarter, you guys kind of gave some color around fiscal 25. So, you know, growth rate goes up this year. Should we continue to expect the dollar numbers that you outlined last time as kind of a good proxy for fiscal 25 at this point? Or are you still feeling confident in those growth rates on higher numbers? Thanks, guys.

Francis J. Pelzer: Yeah, absolutely. I appreciate the question, Jim. So, look, we'll have more to say in October about FY25. We're not updating anything as of now for FY25. My starting point would still be, go back to what I said in October of, you know, mid-single-digit growth off of a flat to low-single-digit growth rate for FY24, and you'll probably triangulate around to the number

Speaker Change: Yeah, absolutely. I appreciate the question, Jim.

Speaker Change: We'll have more to say in October about FY25. We're not updating anything as of now for FY25.

Speaker Change: My starting point would still be, go back to what I said in October of, you know, mid-single-digit growth off of a flat to low-single-digit FY24, and you'll probably triangulate around to the number where we are. We are still in the process of our FY25 planning process.

Francis J. Pelzer: We are still in the process of our FY25 planning process. What we absolutely will do is deliver a 35% operating margin off of that revenue number, and that is largely based on, you know, the confidence that we've got in the subscription renewals and how they are playing out. The one thing that I'd probably add is, if you take a look, because I just want to make sure there's no confusion as we look ahead into next year versus maybe what happened in this quarter, we do expect more of that growth to come in the back half of FY25 because of just where we see the subscription renewals and the larger ones really happening in the back half of this year.

Speaker Change: What we absolutely will do is deliver a 35% operating margin off of that revenue number. And that is largely based off of, you know, the confidence that we've got in the subscription renewals and how they are playing out.

Francis J. Pelzer: And so I would expect the first half to be relatively flat, maybe slightly up, depending on what happens with some of the new business activity and if that momentum continues, but more of that growth is going to come in the back half of FY25 off what we did in FY24.

James Edward Fish: So I just want to give you directionally that's the way we're thinking about this. Helpful. Congratulations again on your retirement. Thanks so much.

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

Michael Ng: First, on software, I was wondering if you could comment on how the potential headwinds related to the retirement of the legacy SaaS businesses and migration of Silverline to DCS have gone relative to expectations. I was just wondering if you could update us. I think previously you had said an up to $65 million headwind there. And then, second, in your prepared remarks, you talked about no longer incentivizing customers toward multi-year maintenance. I was wondering if you could just provide a little bit of additional color on why there's such a good market change there. Thank you very much.

Francis J. Pelzer: Yes, I'll start with the question on the transition in the SaaS business. Great. Thanks, Francois. Thanks, Frank. Sure, Mike.

Speaker Change: Legacy in the $200 million E. R that we shared in October.

Speaker Change: Some of this is products that we have retired and other is.

Speaker Change: Services that we intend to migrate to our distributed cloud platform.

Speaker Change: Those migrations have started we are early in the curve. We did say it would be a two year journey and so we are early in the process, but the migration, starting and largely going to going to plan, what we're seeing in that.

Speaker Change: Business is.

Speaker Change: On the I mentioned.

Speaker Change: You mentioned earlier on the at the high end of the Bot manager business, where we are seeing there some churn because we're seeing a lot of customers are renewing but some customers not renewing wanting to move to lower end solution a platform based solutions.

Speaker Change: But on the flip side in our SaaS platform on distributed cloud.

Speaker Change: We are seeing strong growth strong new customer adoption.

Speaker Change: And that's driven by the bundle of offerings that we have in the platform.

Speaker Change: <unk> Wap earlier.

Speaker Change: There's an incredible offering but he's also that traction is also driven by API security. So securing API is becoming a really big challenge for enterprises, you'll hear more about this in quarters and years to come because AI is going to make the importance of API security even greater.

Speaker Change: But we're seeing significant traction in this area.

Speaker Change: In part because we have built the most comprehensive API security solution that goes from code scanning to comprehensive discovery of API, all the way to protecting these API and so it's eliminating weeks on end of manual testing and analysis in a solution that automates all of that.

Speaker Change: And so the traction we're seeing is year on year the number of API customers. If you ex security customers that we have has tripled.

Speaker Change: Since last year.

Speaker Change: The dynamics in the in the SaaS and managed services business and Michael on the on the maintenance question. This is the maintenance associated with our perpetual.

Michael: Hardware and software and.

Michael: As most people know our global service organization is world class.

Michael: They do an amazing job in all of the customer relationships.

And they reach.

Michael: That has led to significant very high attach rates throughout.

Speaker Change: Those products for a long period of time, frankly on some of those products and so what.

Speaker Change: What we have seen over time is that generally the discounts that we offer for those services upfront overtime, we try to recoup some of that discount rate.

Speaker Change: As each renewal cycle goes through and what we found is that with our Super high attach rate the quality of the service that we delivered.

Speaker Change: The fact that we are a very cash generative company, we don't really need three years of cash upfront to lock in those customers. The service does is itself the product does itself and so we didn't need to continue to incentivize.

Speaker Change: Through higher discounts.

Speaker Change: Multiyear maintenance agreements and have strategically moved away from that so.

Speaker Change: That was really the comment in relation to that just the deferred revenue associated with our services business.

Speaker Change: Great. Thanks, Francois Thanks, Frank.

Speaker Change: Okay.

Mike: Sure Mike.

Speaker Change: Thank you. Our next question is from Alex Henderson with Needham <unk> Company. Please proceed with your question great. Thanks.

Francois Locoh: Thank you. Thank you. Our next question is from Alex Henderson with Needham and Company. Please proceed with your question. Great, thanks.

Alexander Henderson: First off, let me say congratulations to the two people involved in these changes. Frank, it's great working with you, and I certainly look forward to working more with Cooper, who's been fabulous over the years. First and foremost, is there any change in, you know, the sales staffing levels? Have you been seeing any increases? Unknown Executive, Sam Kass, James Fish, Simon Leopold, Amit Daryanani, Joseph Cardoso, Cooper. Some pretty good people out of F5 on the sales front. Is that accurate or inaccurate?

First of all let me say congrats.

Speaker Change: Congratulations to two two people involved in these changes Frank it's great working with you and.

Speaker Change: I certainly look forward to.

Speaker Change: Working more with Cooper, who has been fabulous over the years.

Alexander Henderson: So my question.

Alexander Henderson: First and foremost is there any change in.

Speaker Change: The sales staffing levels have you been seeing any increase in poaching by competitors.

Speaker Change: There has been some chatter around.

Speaker Change: Couple of your competitors who've had some management changes.

Speaker Change: They've pulled some.

Speaker Change: Some pretty good people out of five on the sales front is that accurate or inaccurate and then the second question to the environment.

Francois Locoh: And then the second question, more to the environment. As we look at the year of efficiency to take Zuck [inaudible] show, you know, there is stability in the application arena where applications are starting to re-accelerate broadly. Is that a metric that we can use to, you know, get at least a directional qualification on F5's outlook? For instance, if we see strong sales or application growth at the cloud companies, is that a read-through for you guys? Hi Alex, let me take your two questions.

Speaker Change: As we look at the.

Speaker Change: The year of efficiency to take sucks comment.

Speaker Change: Comment.

Speaker Change: And extended out multi years.

Speaker Change: <unk> is really the right frame timeframe that appears to have run its course and does it look like it's starting to.

Speaker Change: Joe.

Speaker Change: Stability in the application arena.

Joe: Where applications are starting to reaccelerate broadly.

Joe: A metric that we can use to.

Joe: Get at least a directional qualification on.

Speaker Change: $5 outlook.

Speaker Change: For instance, if we see strong sales of our application growth.

Speaker Change: <unk> companies is that a read through to you guys.

Speaker Change: Hey, Alex Let me, let me take your two questions.

Francois Locoh: Let me start with your question on our sales side and at the starting level. So, at the highest level, I will tell you that our attrition in sales is well below industry norms and has been that way for a while, in part because of the culture we nurture at F5 and the very strong leadership team that we have in the sales organization. We have an extraordinary sales team at F5. I am very proud of the sales team we have, the relationship that we have with large enterprise customers across our sales organizations, and the way that this organization is serving our customers.

Speaker Change: Let me start with the your question on hours.

Speaker Change: And so the sales on the final signed in staffing level. So.

Speaker Change: Highest level I'll tell you.

Speaker Change: Our attrition in sales is well below industry norms and has been that way for a while.

Speaker Change: In part because of the culture with north shore and a five and a very strong leadership.

Speaker Change: Jim that we Havent missed sales organization, we have an extraordinary sales team on it.

Speaker Change: I am very proud of the sales team we have the relationships that we have with large enterprise customers across our sales organization.

Speaker Change: And the way that this organization is serving our customers I'm actually proud that competitors are trying to poach.

Francois Locoh: I'm actually proud that competitors are trying to poach a person here or there, but it takes way more than a couple of hires to recreate the enterprise go-to-market model that we have built over 20 plus years, not just with our own field teams but also with our several thousand channel partners that get up every day to go promote F5 and build relationships with customers. So I feel very, very confident about our go-to-market organization and very confident about our competitiveness in continuing to hire and retain the best salespeople on the market. Then, as well as your second question about how to think about, you know, the outlook for F5. Yes, it is a big positive.

Speaker Change: Person here or there.

Speaker Change: But it takes way more than a couple of hires to recreate the enterprise go to market model that we have built over 20 plus years, not just with our own field teams, but also with our several thousand channel partners.

Speaker Change: That get up every day and to go promoted five and build relationship with customers. So I feel very very confident about our go to market organization and very confident about our competitiveness in continuing to hire and retain the best salespeople on the market.

Speaker Change: Then.

Speaker Change: As it relates to your second question around how to think about.

Francois Locoh: The dynamics you mentioned around where customers are at in their application rationalization is a big positive for F5 because our business is driven by, you know, the number of applications, the complexity of applications, and also where the distribution of applications is. And so increasingly, what we are seeing, Alex, is that customers have to place their applications in multiple infrastructure environments. I mentioned a stat earlier about 40% of organizations operating in more than six infrastructure environments. That creates flexibility for customers. But on the other hand, it creates massive complexity.

Speaker Change: The outlook for a five.

Speaker Change: Yes. It is it is a big positive the dynamics, you mentioned around where our customers are out.

Speaker Change: Their application rationalization.

Speaker Change: Is a big positive for four or five.

Speaker Change: Our business is driven by.

Speaker Change: The number of applications the complexity of applications.

Alexander Henderson: And also where the distribution of obligations and so increasingly what we are seeing Alex is that.

Alexander Henderson: Customers have to place their application in multiple infrastructure environments, I mentioned, a stat earlier about 40% of organizations operating in more than fixed infrastructure environment that creates.

Francois Locoh: And we have built the only platform in the industry that can truly secure and deliver and optimize any of these applications or APIs, regardless of where they're at. We truly are the only infrastructure-agnostic player in the market for app security and delivery. And so this distribution of applications, which will accelerate with AI, is a big, big positive for us. And it will accelerate with AI because, as you know, AI has the issue of data gravity. Models want to be close to where the data is, and inference needs to run where it is going to run.

Alexander Henderson: Flexibility for customers, but on the other hand, it creates massive complexity and we have built the only platform in the industry that can truly secure and deliver an optimized any of these applications, though API, regardless of whether we truly are the only infrastructure agnostic player.

Alexander Henderson: In the market in that security and delivery and distribution of application, which will accelerate with AI.

Francois Locoh: And so we're also seeing more distribution of apps and app components with AI. Again, that plays to the SIS capability in solving this ball of fire problem. Great. Thank you for the clarification. Thank you. Our next question is from Simon Leopold with Raymond James.

Speaker Change: <unk> is a big.

Speaker Change: A big positive for us.

Speaker Change: And it will accelerate with AI because as you know I have the issue of data gravity models want to be close to where the data is in.

Speaker Change: <unk> needs to run where inference is going to run and so we're seeing also more distribution of apps and app components with AI again that place too.

Speaker Change: The FX capability in in solving this ball of fire problem.

Speaker Change: Great. Thanks.

Speaker Change: The clarity.

Speaker Change: Thank you. Our next question is from Simon Leopold with Raymond James. Please proceed with your question.

Simon Matthew Leopold: Please proceed with your question. Thanks for taking the question. First, Frank and Cooper, congratulations on the job switch. Best of luck to both of you.

Simon Matthew Leopold: Thanks for taking my question first Frank and.

Speaker Change: Super Congratulations on the job switching.

Speaker Change: Best of luck to both of you.

Francois Locoh: First of all, this might be a tricky question for you to answer, but one of the anecdotes we've picked up is regarding Broadcom's price adjustments on VMware, and the thought was that this was affecting your business because it was perhaps shifting budgets for your customers. Now, clearly, you put up a very strong software number this quarter, and I'm wondering if this is either despite what's happening with VMware pricing, or if there's some other explanation, and maybe this number would be even better if not for that.

Speaker Change: First of all this might be a tricky question for you to answer but one of the anecdotes we picked up is regarding broadcom.

Speaker Change: Price adjustments on Vmware.

Speaker Change: And.

Speaker Change: Thought was that this was affecting your business because it was perhaps shifting budgets for your customers now clearly you put up a very strong software number this quarter and I'm wondering if this is either despite what's happening with the Vmware pricing or if there's some other.

Speaker Change: Asian, and maybe this number would be even better if not for that.

Speaker Change #100: I mean I.

Simon Matthew Leopold: I mean, anecdotally, I think you are right in the sense that, you know, I have heard anecdotally from a couple of customers who, in the short term, in terms of coping with these price increases, they have had to pull back on their budget. However, I have not seen that as a very significant trend across a large base of customers. And I also think it's a fairly short-term reaction to what's going on with, you know. I think that will settle out a little differently down the road. So that's. Perhaps the only validation that I have for the anecdote you just raised.

Speaker Change #101: Anecdotally I.

Speaker Change #102: I think you're right in the sense that.

Speaker Change #104: I have heard again anecdotally.

Speaker Change #103: From a couple of customers where in the short term in terms of coping with these price increases they have had to pull budget.

Speaker Change #103: Into the Vmware Broadcom situation I have not seen that as a very significant trends across a large base of customers.

Speaker Change #103: And I also think it's a fairly short term reaction to what's going on with.

That will settle settle out a little differently.

Speaker Change #103: Down the road so that's.

Speaker Change #103: Perhaps the only.

The only validation that I have for the for the anecdote you just raised.

Francois Locoh: And just as a follow-up, in terms of the way you're envisioning your opportunities with enterprise adoption of AI, would you expect that your opportunities would be correlated to essentially traditional server sales? And I'm presuming that in the GPU clusters, NVIDIA basically has its own internal load balancing. So that's not your use case. I just wanted to clarify that. Thank you. So, the... If you pull back, Simon, in terms of AI, the big trends that are emerging, the big issues are number one, cost, and number two, security, or safety and security. So, let me talk to each of them for a moment.

Speaker Change #105: Great and then just as a follow up in terms of the way you're envisioning your opportunities with enterprise adoption of AI would you expect that your opportunity would be correlated to essentially traditional server sales and I'm presuming that really in the GPU clusters.

Speaker Change #106: In bidding is basically has its own internal load balancing so that's not your use case I just wanted to clarify that thank you.

Speaker Change #106: So.

Speaker Change #106:

Speaker Change #106: If you pull way up Simon in terms of the big trends that are emerging the big issues are number one cost and number two security safety and security. So let me talk to each for a moment.

Francois Locoh: The cost issue is first with the companies, the few digital innovators that are building large AI factories, and they're investing massive amounts in these GPU clusters. But there is a challenge around the utilization of these GPUs. And so our high-capacity data ingestion..., our high-capacity load-balancing solutions are a perfect fit to increase the efficiency of these AI factories or load-balance traffic between multiple AI clusters, thereby reducing the cost per query, if you will, of these infrastructures.

Simon Matthew Leopold: The cost issue its first with the companies there are few digital innovators.

Simon Matthew Leopold: Building log AI factories, and they are investing massive amounts in these GPU clusters.

Simon Matthew Leopold: But there is a challenge around the utilization of these gpus and so our high capacity.

Simon Matthew Leopold: Data ingestion.

Capability of high capacity load balancing.

Simon Matthew Leopold: Solutions are a perfect fit to increase the efficiency of Dci factories or load balancing traffic between multiple AI clusters, thereby reducing the cost per query. If you will of these infrastructures and so there we see.

Francois Locoh: And so there we see an immediate opportunity with existing products for the companies that are building these kinds of factories. Where I think the opportunity shifts in the long term is for all enterprises who will deploy AI in their environment and who will want to run inference in their environment. A big issue is going to be how you secure these AI models, and we believe that APIs are absolutely key. Securing APIs is the key to securing data and securing AI workloads.

Speaker Change #107: The immediate opportunity with existing products.

Speaker Change #107: For the companies that are building these kinds of factories, where I think the opportunity shifts in the long term is for all enterprises, who will deploy.

Speaker Change #107: AI in their environment, and who will want to run in France in their environment.

Speaker Change #108: Big issue is going to be how do you secure.

Speaker Change #109: These AI models and and we believe that <unk> are absolutely key securing API is the key to securing data in securing.

Speaker Change #110: Workloads and for that reason, we have placed significant investment in API security and I mentioned earlier that we are already seeing year on year, a tripling of the number of API security customers that we have that have not been driven by AI, yet, but we expect there to be a substantial catalyst on that solution going forward.

Francois Locoh: And for that reason, we have placed a significant investment in API security. And I mentioned earlier that we are already seeing, year on year, a tripling of the number of API security customers that we have. That has not been driven by AI yet, but we expect AI to be a substantial catalyst for that solution going forward. Thank you.

Speaker Change #111: Okay. Thank you.

Thank you we'll take our final question from Sebastian <unk> with William Blair. Please proceed with your question.

Sebastien Cyrus Naji: We'll take our final question from Sebastien Naji with William Blair. Please proceed with your question. Great. Thanks for taking my question. I just wanted to first echo the congratulations to both you, Frank, and Cooper as well.

Sebastian: Great. Thanks for taking my question I just wanted to first echo the congratulations to both of you Frank Cooper as well.

Francois Locoh: My first question is really around the mix shift between software and hardware. It just seems like over the last few years, that mix shift to software has been maybe a little bit slower than expected, with many customers preferring to stick to their hardware form factors. I'm just wondering, as we enter a new upgrade cycle here in fiscal year 25, could something change?

Sebastien Cyrus Naji: My first question is really around the mix shift between software and hardware. It just seems like over the last few years.

Speaker Change #114: That mix shift to software has been maybe a little bit slower than expected with many customers, preferring to stick to their hardware form factors.

Speaker Change #114: Wondering as we enter a new upgrade cycle here in fiscal year 'twenty five could could something change could we see a more rapid shift to more software solutions. This time around.

Francois Locoh: Could we see a more rapid shift to more software solutions this time around? [inaudible] I think we talked about the dynamics of hardware and software and what we see as the catalyst for hardware next year. But I should say, we don't have a preference. We've been very clear about that over the last several years that part of the value that our customers see in F5 relative to other players is that we don't force them to adopt, you know, one delivery model or the other. We are advisors, and we, you know, help them make the right choices, but we don't force them.

Speaker Change #114:

Speaker Change #115: I think we've talked about the dynamics the dynamics of hardware and software and what we see as catalysts for hardware.

Speaker Change #116: Next year.

Speaker Change #117: But I should say, we don't preference we've been very clear about that over the last several years that part of the value that our customers see in our five relative to other players.

Speaker Change #117: Is that we don't force them to adopt.

One the delivery model or the other we are advisors and we.

Speaker Change #117: Help them make the right choices, but we don't force them and I think especially relative to SaaS players who come into large enterprises are asking them to change the way. They do business to go adult power solution, we're completely different in the sense that we meet our customers why they are and if that is starting with hardware and modernizing with software or hybrid hardware.

Francois Locoh: And I think, you know, especially relative to SaaS players who come into large enterprises and are asking them to change the way they do business to go adopt our solution, we're completely different in the sense that we meet our customers where they are. And if that is starting with hardware and modernizing with software or a hybrid hardware and software solution, or it's leveraging hardware or software in their environment, and then SaaS for a certain number of applications, we meet our customers where they are, and we provide them with flexibility and choice that is unparalleled in the industry.

Speaker Change #117: Our software solution or it's leveraging hardware or software in their environment, and then fast for a certain number of applications.

Speaker Change #117: We meet our customers, where they are at and we provide them flexibility and choice that is unparalleled in the industry and that differentiates us from.

Francois Locoh: And that differentiates us from either the traditional ADC vendors that historically only had hardware software appliances, or the pure, you know, SaaS infrastructure players that do not have hardware and software consumption models and therefore want to force customers to do something different. And that doesn't work for large enterprises either.

Speaker Change #117: Neither the traditional ADC vendors that have historically only have hardware software players or the pure SaaS infrastructure players that do not have a.

Speaker Change #117: Hardware software consumption models, and therefore want to force customers to do something different and that doesn't work for large enterprises need them. So we that is really how we go to market and in terms of how will that manifest itself in terms of hardware and software and next year.

Francois Locoh: So that is, you know, really how we go to market. And in terms of, you know, how will that manifest itself in terms of hardware and software next year? And, you know, we will see.

Francois Locoh: We've got good catalysts on hardware. We think our software is going to continue to grow. We did say that we expected to return to double-digit growth in software next year. We still, you know, feel that way.

Speaker Change #117:

Speaker Change #117: We will see we got good catalyst on hardware, we think our software is going to continue to grow we did say that we expected.

So returned to double digit growth in software and next year, we still.

Speaker Change #117: Feel that way and so that's where that's where we are overall in the mix of these solutions, but the most important for our customers is the combination of both and meeting them, where they are to modernize their environments and solve that problem.

Francois Locoh: And so that's where we are overall in the mix of these solutions. But the most important thing for our customers is the combination of both and meeting them where they are to modernize their environment and solve their problems. Got it, that's helpful. Maybe as a quick follow-up, when you're successfully cross-selling, you know, F5 customers to some of the distributed cloud security solutions, are you typically displacing another vendor? Or is there a lot of greenfield opportunity for things like API security, where maybe they're not, you know, you don't have a dedicated solution for that yet? [inaudible] So, it's both. It's a combination of both.

Got it that's helpful. Maybe as a quick follow up.

Speaker Change #118: When Youre successfully cross selling <unk> customers to some of the distributed cloud security solutions are you typically displacing another vendor or is there a lot of greenfield opportunity for things like API security, where maybe they are not we don't have a dedicated solution for that yet.

Speaker Change #118: So.

Francois Locoh: You know, we shared earlier in the year that about two-thirds of our distributed cloud customers are big IP customers or existing F5 customers, and about one-third are net new customers to F5. They have never had a relationship with F5. So, we're also acquiring new logos with distributed cloud. However, as it relates to the customers with whom we are cross-selling... Sometimes it is customers who had to go to a pure SaaS player before S5 had a SaaS solution and so, therefore, had to increase their complexity because they would use S5 on-premises, and they would either use a public cloud player for some applications or a CDN or Edge player for applications, thereby creating complexity and multiplicity of vendors.

Speaker Change #119: So it's both it's a combination of both.

Speaker Change #120: We've shown I think earlier in the year that about two thirds of our distributed cloud customers, our big IP customers or existing customers and about one third are net new customers to find they had never had a relationship with that five. So we're also acquiring new logos with distributed cloud however, as it relates to the customers.

Speaker Change #119: With whom we are cross selling.

Speaker Change #119: Sometimes it is customers who had had to go to a pure SaaS player before F. Five had a fast solution and so therefore had had to increase their complexity because they would use that five on prem and they would either use a public cloud player for some applications or a CDN or edge player for application.

Speaker Change #119: Thereby creating complexity a multiplicity of vendors and now that we have distributed cloud and we've built some integration there.

Francois Locoh: And now that we have S5 distributed cloud and we've built some integrations, they are coming back to us saying, actually, I can have a single vendor for all of my application delivery and security. I can have consistent security across all my environments. That is way simpler for me, and therefore, that's a better solution for me. So, yes, at times, this is displacing SaaS players that have gone into the environment. And sometimes it is Greenfield. It's a set of applications that they were perhaps not yet protecting and for which the distributed cloud comes with our full application security bundle and solves a big problem of security and complexity for them.

Speaker Change #119: Coming back to us, saying actually I can have a single vendor for all of my application delivery and security I can have consistent security across all my environment that it's way simpler for me and therefore, that's a better solution for me. So yes at times this is displacing.

Speaker Change #119: <unk> It was essentially a that had gone into the environment and sometimes it is greenfield. It's a set of applications that they were perhaps not yet protecting.

Speaker Change #119: And for which distributed cloud comes with.

Speaker Change #119: Our full application security bundle.

Speaker Change #121: <unk> solves a big problem of security and complexity for them.

Speaker Change #119: Great. Thank you.

Sebastien Cyrus Naji: Great, thank you. This concludes today's call. You may now disconnect. Thank you for your participation. Goodbye.

Speaker Change #119: Okay.

Speaker Change #122: This concludes today's call you may now disconnect. Thank you for your participation.

Speaker Change #119: Goodbye.