Q3 2019 Earnings Call
Good news and welcome to the Ffive networks third quarter fiscal 2019 financial results Conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there'll be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If he would like to withdraw your question press the pound key.
Also today's conference is being recorded if anyone has any objections. Please disconnect at this time.
I would now like to turn the call over to Ms. Suzanne belong Ma'am you may begin.
Hello, and welcome I'm, Suzanne do long, that's vice Vice President of Investor Relations.
So I look at the new stuff, Vice President and CEO , and Frank Pelczar Fives, Executive Vice President and CFO will be making prepared remarks on today's call.
Other members of the five executive team are also on hand to answer questions during the Q and a portion of the call.
A copy of todays press release is available on our website at <unk> Dot com or an archived version of todays call also will be available through October 24th 2019.
The replay of today's discussion will be available through midnight Pacific time Tomorrow July 25th by dialing 895, Athree six seven work for one [laughter] two one for six for two.
For additional information or follow up questions. Please reach out to me directly at S. Dot do long at a five dot com.
Our discussion today will contain forward looking statements, which includes words such as believe anticipate expect and target. These forward looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements factors that may affect our results are summarized in the press release announcing our financial results and described in detail in a resi SEC filings.
Please note that I find has no duty to update any information presented on this call.
With that I will turn the call over to Francois.
Thank you Susan and good afternoon, everyone. Thank you for joining us today.
I'll talk briefly to our business drivers before handing over to Frank to review the quarter's results in detail.
We continue to aggressively execute our strategy of transitioning a five to a software driven model.
Wow efforts to Reprioritize, our development resources.
Through the introduction of new flexible consumption models and most recently the acquisition and integration of Enginetics customers are seeing a new a five.
We believe the steps we have taken including very deliberate go to market changes are accelerating our transition to a software driven business, while driving overall product revenue growth as a result, it is no longer accurate to do a five who the Netherlands over traditional AIDC player.
In Q3, we delivered 4% total revenue growth and 3% product revenue growth with 79% organic software growth.
If we include the partial quarter of Enginetics, our software growth was 91%.
Our exceptional for growth in the quarter is being driven by security use cases, including web application firewall and bought defense and mitigation.
The quarter also included a few multimillion dollar you delayed deals.
So for growth was partially offset by our systems business, which was down 11%.
Our services business delivered 4% revenue growth in the quarter. It continues to produce football gross margins with consistently strong attach rate.
I will speak more to our business dynamics and the engineers integration later in my remarks.
Overall, the team is executing very well against our long term strategy.
We believe with the culmination of Enginetics, we are exceedingly well position to capitalize on continued application growth.
And a rapidly evolving application services landscape.
Frank.
Thank you Francois and good afternoon, everyone. As Francois noted, we delivered another quarter of strong revenue and EPS growth.
As you know we closed the acquisition up in generics on May eight and our Q3 results include Enginetics from that point through quarter end.
As a reminder, our guidance for Q3 revenue and earnings was a prior to the close of the Enginetics acquisition and Accordingly did not include any impact related to engine axes results.
For this quarter only during my remarks, I will breakout engine Nexus contribution to several Q3 performance metrics.
Going forward engine Nexus contribution will be fully integrated into our results and guidance.
Third quarter revenue of 563 million was up approximately 4% year over year.
And your next contributed 5.1 million in the period.
Excluding engine Nexus contribution we delivered revenue of 558 million near the top end of our guided range of 550 to 560 million.
GAAP EPS was one dollar and 43 cents per share and non-GAAP EPS was $2.52 per share.
Excluding the impact of Enginetics non-GAAP EPS would have been $2.57 per share at the top end of our guidance range.
Q3 product revenue of 249 million was up 4% year over year and accounted for approximately 44% of total revenue.
Enginetics contributed 4 million to product revenue in the quarter, all of which was subscription software revenue.
As friends, Rob mentioned software grew 91% year over year and represented approximately 27% of product revenue.
Up from Q2, when it was approximately 19% of product revenue.
Excluding enginetics software revenue grew 79% year over year and represented 26% of product revenue.
In the quarter, we had very strong uptake on our software solutions sold as L.A.'s annual subscriptions.
Under the modified retrospective approach to AMC six so six we are required to compare our results under six so six to what they would have been under six or five during the first year of adoption.
In the quarter the implementation of six so six resulted in 29 million more in recognized revenue compared to what it would have been under six or five.
Excluding any impact of Enginetics.
I would like to remind everyone of one point about our business.
In the year ago quarter, almost all of our revenue was being driven by perpetual licenses or other consumption models that are not impacted by the adoption of six so six.
At AMC, six or six been applied to our Q3 2018 quarter you would've seen a de minimis difference in revenue.
Therefore, it the adoption of six so six had little impact on our revenue growth in the quarter.
[laughter] systems revenue of 181 million made up approximately 73% of product revenue and was down 11% year over year.
Services revenue of 314 million grew 4% year over year and represented approximately 56% of total revenue.
Enginetics contributed $1.1 million in services revenue in the quarter.
On a regional basis in Q3, Americas revenue declined 1% year over year and represented 53% of total revenue.
EMEA was up 2% year over year and accounted for 24% of overall revenue.
Asia Pac was very strong in the quarter with revenue growth of 22% year over year, representing 23% of total revenue.
Looking at our bookings by vertical enterprise customers represented 60% of product bookings and service providers accounted for 20%.
Our government business was very strong represented 19% of product bookings, including 8% from us federal.
In Q3, we had three greater than 10% distributors Ingram micro which accounted for 18% of total revenue.
Tech data, which accounted for 11% and Westcon, which accounted for 10%.
Let's now turn to operating results.
GAAP gross margin in Q3 was 83.9%.
non-GAAP gross margin was 85.4% inline with our expectations.
GAAP operating expenses were $370 million.
non-GAAP operating expenses were $295 million.
non-GAAP operating expenses, excluding Enginetics, we're on the higher end of our expectations as a result of higher sales commissions related to software sales.
Our GAAP operating margin in Q3 was 18.2% and our non-GAAP operating margin was 33.1%.
Excluding enginetics non-GAAP operating margin was 34.2%, which was in line with our expectations.
Our GAAP effective tax rate for the quarter was 20.1%.
Our non-GAAP effective tax rate was 20.7%.
Turning to the balance sheet.
In Q3, we generated $150 million in cash flow from operations down from recent levels, mainly due to the strength in subscription sales, including L.A.'s, where revenue precedes the collection of cash.
Cash and investments totaled 1.15 billion at quarter end.
Dsos at the end of the quarter was 51 days.
Capital expenditures for the quarter were $33 million up sequentially as we approach the final phases of building out our new facility in downtown Seattle, and our new facility in Hyderabad.
Deferred revenue increased 14% year over year to $1.17 billion.
A little less than half of the increase over the prior year quarter relates to the adoption of six so six.
We ended the quarter with approximately 5195 employees.
Up 400 people from Q2, reflecting the addition of the Enginetics and our continued hiring in growth areas, including sales and research and development.
In Q3, we did not repurchase any of our common stock opting instead to rebuild our cash balance following the Enginetics acquisition.
We continue to view cash as a strategic asset for our future growth.
Though our primary focus with cash generation is augmenting our strong balance sheet, we may opt to repurchase shares during any open trading window.
Now, let me share our guidance for fiscal Q4 of 2019.
Unless otherwise stated please note that my guidance comments reference non-GAAP operating metrics include our Internet business.
We continue to make strong progress transitioning our business to a software driven model.
We remain confident in our position in the market and expect our growth will be driven by the growth of applications and increasing demand for our multi cloud application services.
We also expect continued strong demand for our software solutions, including subscription any L.A. offerings.
With this in mind, we are targeting Q4 19 revenue in the range of $577 million to $587 million.
We note for Q4, we expect engine next to contribute less than $8 million in revenue, which includes the impact of purchase accounting write down of deferred revenue.
We do not expect to provide engine next specific guidance after this quarter.
We expect gross margins of approximately 85.5% to 86%.
We estimate operating expenses of 301, two $313 million.
We anticipate our effective tax rate for Q4 will remain in the 21% to 22% range.
As previously provided for the full fiscal year.
Our Q4 earnings target is $2 and 53 to $2.56 per share.
In the quarter, we expect share based compensation expense of approximately $43 million.
And 4.6 million in amortization of purchase intangible assets.
We expect Q4 capex of $25 million to $35 million as we complete the build out of our new corporate headquarters.
With that I will turn the call back over to Francois Francois.
Thank you Frank.
I'll spend just a few minutes on the trends, we're seeing in the business as well as the engine ex integration before moving to acuity.
That's five today is very different than the five of even 24 months ago.
A year ago in March we laid out our strategy for transitioning five to a software driven model.
Since then the team has been executing on that strategy and making deliberate changes that have substantially we shipped at five and our growth opportunities.
What do I mean by that.
In the last 24 months, we have number one executed a wholesale reprioritization of our resources aligning the business with our growth priorities.
Number two we introduced new consumption models like subscription EMEA outlays that make it easier for customers to purchase and deploy five application services.
Software.
Number three.
We have doubled down on security, including investments in wealth and bought mitigation.
And number four we have also brought new solutions to market solutions like cloud edition and Central management orchestration Npis, all of which have opened up new opportunities for us.
As a result, it is no longer accurate to view of five through the narrow lens of a traditional AIDC player.
Our efforts to expand our reach and broaden our role have accelerated our software transition and it is becoming evident in our performance.
And this is true even before we factor in future software growth catalysts, including Enginetics and at five cloud services.
Today, five is a leader in an emerging and rapidly expanding multi cloud application services space.
Space that has arguably been underserved, which is why we are generating the kind of software growth we are.
The multi cloud application services opportunity differs from the traditional AIDC opportunity in three fundamental ways.
First multi cloud application services offer customers a much broader range of application services beyond load balancing and traffic management to include security analytics, Epi management application performance management and Servicemesh.
Second multi cloud application services reach beyond the data center to public cloud into containers. They are more broad versatile an agile and as a result, they can support a much larger universe of applications.
And third.
Multi cloud application services are easier for customers to deploy to consume and manage.
It is clear that customers do a five as a multi cloud application services player.
For instance, we continue to see security use cases, driving software growth and accounting for a higher share of our overall product business.
In particular, we continue to drive strong traction with our web application firewall anti bot and machine generated traffic monitoring and blocking capabilities.
During Q3 for instance, we secured our largest global web application firewall deployment, yet with an international financial institution.
This customer had been using multiple last platforms to protect its application and selected at five as the enterprise wide WAFS solution. After a thorough evaluation of a number of competitors.
Customers are also increasingly choosing a five for our advanced capabilities in automation orchestration and central management.
We help them simplify and increasingly complex combination of environments and sprawling deployments.
During Q3, we secured a win with a government customer that selected big Q to manage a large and growing number of big IP deployments. The customer also expects to deploy our application security manager to manage web application firewall policies.
We also continue to see customers, who are migrating to cloud environments demanding the same level of application security and agility as they have in their datacenters.
This was the case with the US enterprise customer that selected our cloud division during the quarter.
The customer expects to transition individual applications to cloud environments overtime, which made a cloud additions per our consumption and deployment model an ideal solution.
Finally, our new subscription consumption models continue to facilitate software growth across our customer base with both enterprise and service provider customers leveraging friction free at five services procurement and deployment as an example, one of the L. is closed in the quarter was we have a large next generation mobile carrier in APAC.
Fives, Fiveg ready NFC solutions will address the needs of those customers growing fourg mobile broadband consumer services.
We will enable connectivity and security for voice over LTE I am as services and enterprise LTE services.
Our solution reduces both capital and operating expenses, while increasing service agility with faster build test and deployment cycles.
We also simplified the network with software based network functions and the ability to dynamically manage and orchestrate services.
This enables the customer to tailor innovative services to subscriber preference and usage.
A word on our systems business and how it fits into our multi cloud application services opportunity.
We believe our systems business is seeing the effects of two factors.
The first relates to the actions that we have taken to make it easier for our customers to consume five a software.
Reducing friction with new consumption models, and Sherri easier provisioning of software simply licensing management and models and generally reducing operating complexity.
The second is that our customers are better able to operationalize and manage a virtualized infrastructure environment and as a result, a number of them are implementing software for us to policies.
As a result of these two factors we are seeing an accelerated shift in our product mix towards software.
Before we move to today, let me talk to our combination with engineers.
With the Enginetics acquisition completed on May eight the teams have come together, well and we are executing our integration and value creation plan at a rapid pace.
I will highlight progress on two key work streams in particular for this audience.
One go to market and to product integration.
First on go to market.
And your next a sales team has worked hard to maintain the momentum of Enginetics current offerings and since close has been operating as an overlay to the field sales team all of whom have been trained on enginetics.
Our ability to bridge the gap between net ops and Devops is resonating with customers and we are already seeing the power of our combined sales efforts.
We estimate that the joint five Enginetics and five initiated sales efforts have increased the engine next is net new Q4 pipeline by roughly 20%.
As an example.
During Q3, we secured a joint five an engine next win within the APAC based international telecommunications provider.
The customer needed a security solution for its private cloud distributed over 10 major city points of presence.
The selected five software based WAF to protect traffic ingress points.
Deselected Enginetics for micro service security, including protection for Apiay gateways cloud governance and reverse boxes.
The combined five engineer solution resolved scaling issues with central controls and provided a consistent approach to security posture is across the business, while underpinning faster application delivery.
Briefly on F five engine X product integration.
As planned the F. Five cloud native product development team has been combined with the Enginetics team reporting to gas Robertson.
The teams have come together, well and have made very strong progress on engineering and product integration.
As a first priority. The teams are moving quickly to converge enginetics as controller and fives cloud native application services platform.
In fact, we expect the first release of a converged at five engine ex offering within the next six months, we expect the converged at five engine ex controller won't be an accelerator for our engineering business.
Expanding both the addressable market and potential deal size by spanning a broader set of use cases across Dev ops and super Nettops customer persona.
Overall, we are more enthusiastic than ever about the opportunities we are pursuing as a combined five engine next Steven.
Near term, we are addressing a critical challenge for customers by bridging the net ops Dev ops divide.
The combined five Enginetics provides the management and ease of use features that traditional infrastructure buyers, including network buyers expect.
Enabling five to cover the full spectrum of application and modernization needs.
Going forward, we believe applications will be increasingly disaggregated into smaller components containerized and distributed across multi cloud environment.
Angiomax is true software ideal for these container base to Dev ops environment, which means unparalleled agility and lower cost for our customers.
We are confident that at five and Enginetics with our combined solutions and application expertise bring significant advantages through these cloud native and containerized environments.
In summary, we are very pleased with the progress we are making overall and we are confident we can continue to drive software momentum.
One of the things we find most encouraging is that the software growth we have delivered thus far.
It's largely from solutions that have been in the market for over a year, including our big IP virtual and cloud edition.
As we look ahead, we see even more growth coming from new offerings, including our recently introduced SaaS platform five thought services and our combined five enginetics offerings.
In closing today, my thanks to our partners, our customers and our shareholders.
Hi, Thanks, two for the entire five team and especially for those working to ensure the combined five enginetics is as successful as we believe it can be.
With that operator, we will now open the call to Q1.
Thank you at this time I would like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad, we'll pause for just a moment to compile the Q and a roster.
Your first question comes from the line of Alex Kurtz from Keybanc capital markets. Your line is open.
Yeah, Thanks, guys for taking the question.
Just on the the impact from software, which is really great to see France why in the quarter.
Any dynamics around how customers are consuming it and that these comments are excluding engine X for a second but just.
What it means for deal size what is it what does it mean for.
How the revenues being recognized in the quarter and and how we should think about that relative to systems business.
Hey, Alex I'll take the first part and perhaps Frank can comment on the.
The revenue recognition portion.
So the way that.
Our customers are consuming our software is both by our perpetual licenses.
And also by.
Ladies which are typically three year subscription agreements and also one year subscriptions.
The part of the business in software that has the fastest growth is in fact, the subscription portion of the business.
Because it gives our customers want more flexibility.
In terms of their own their own cost models.
And also the ability to consume the features as they go so we're seeing a lot of traction with these with these consumption models and we're seeing the range of deals to your point around deal size ranges from small kind of one year subscription that are typically multiple tens of jay's all the way to multimillion dollar a three year enterprise license agreements.
And Alex with the adoption of six or six this year the revenue recognition associated with a lot of subscription deals look exactly like what we would have had as perpetual deal in previous years, and so instead of Ratably recognizing.
You split out the value components, and and recognize that proportion of the revenue, which frankly modeled after our perpetual so on a year over year comparison, it's very very closely.
Okay. Thank you.
You know Alex.
Your next question comes from the line of Paul Silverstein from Cowen Your line is open.
Our first a couple if I may 1st off my math must be wrong, but on the software revenue on coming out to $6 million to $7 million in the first fiscal Q3.
65 million, if we exclude and janette and generics from what you said versus 45 million a year ago.
That will work out of 42% year over year growth north of 79% organic and 91% intermodal can you just help me out on the numbers as I'm sure you all that it was 19% of product revenue a year ago and 27% in the current quarter, 26% X engine.
Yes, So I think your number Paul for this year is correct to the number for last year is not it's much lower I think it's.
Something close to 30 $435 million.
As you all know through June $39 million product revenue last year and were going to score.
Yes about 239.
19% of 239 is 45 million.
Nike more centers.
Yes, 19% that I referenced was last quarter, not a year ago quarter. My apologies what was that in the year ago quarter.
I think it was.
I'm doing this off memory, but I think it is about 14%.
Okay, all right I'll come back to you after the call on that.
Secondly related to software engineers in particular, I think theres a view out there among most investors that engine next displaces existing a five platforms in Europe on Silverline back when previous acquisition, you're working hard and if I recall for the past two plus years can you just clarify whether engine ex totally displace what you've done with respect to cloud platforms, whether augmenting and then I've got a quick question on Vmware Abhi.
Helpful. Thanks for the question on.
Enginetics no it does not displace.
Either are.
Perpetual software virtual edition offerings.
Or silverline, so silverline is essentially a manage.
Security services platform for customers that want to consume whilst and deal costs and other security services.
With associated 24 by seven support and.
And leveraging our infrastructure.
To scrub the traffic can provide managed services to them.
Enginetics is a great platform for Dev ops since environment, essentially injecting application services in the code of application logic.
Any place to very different market than the market. We have played in to date, either with several line or with our virtual editions.
All right Frank before I ask the obvious question.
What what percent of your total revenues now recur.
I would say, it's north of 70%, including the services piece.
Do you know what it was a year ago.
I'd have to get back to you on that one Paul I don't have that off the top of my head. If you could that would be appreciated now for the RV question. So I'll be was talking earlier game before got acquired.
And just kind of quarter by viewing we're obviously that wins resources incumbency customer base. All things are needless to say I know it hasn't been a long time, but what are you seeing in terms of their success or lack thereof currently versus whatever degree of success that were having previously in competition against you.
Hi, Paul So I know this one has gathered quite a bit of interest after the Vmware acquisition. So.
Now lets take the time to answer your question thoroughly and put a few facts on the table.
So as the is essentially a software load balancer with the value proposition around nice analytics at a nice.
And where that value prop plays is in use cases, where a customer would value the julianna analytics over having a truly lightweights truly scalable solution.
And I will tell you that this is actually a very small fraction of the market and let me be specific about that.
Historically, we have seen them in less than 2% of our deals.
Even when we've seen them when the large majority of these deals.
Even in the light has all the accounts that they had claimed to be light has accounts for them.
We've looked at them and as five still for the most part has 95% or more of the wallet share of MDC in these accounts.
And then again going back to some of these lighthouse accounts weve seen a number of customers that are coming back to us five.
Our format because of lack of scale lack of features a difficulty in getting the stuff operationalized.
So thats, where historically things have been and I just wanted to make sure the facts were clear on that.
Now VM, where is a great company, we have a lot of respect for them, we do partner with them.
And.
Of course, there are going to provide.
Larger distribution.
Ravi, but where I think this is going to play out is that the Vmware Aveed proposition I think will will appeal to customers, who have gone all in on NSX and value deep integration between NSX in a software load balancer more than the value.
A true multi cloud architecture, and a broad range of application services, but again I think that's a that's going to be a fairly limited.
Portion of the of the market.
So let me get to how we're going to how we're going to compete with in this space.
The first piece around list, the Julie and analytics, frankly were neutralizing that with our controller, which as you heard in my prepared remarks.
It's going to be released within the next six and listen to the combined.
Enginetics and five controller, which is a combination of the engine ex controller. That's that's in the market and the work that $500 in our cloud application services platform as a lot of excitement about this this combined platform, but beyond just.
That.
When we.
When we looked at the market.
And ended up buying Enginetics. We've always said this was an offensive play on the architectures of the future.
And so what we did is we looked at all the players in the virtual AIDC space.
And we moved very quickly on what we believe was the most attractive assets in that space.
And we chose Enginetics because number one they had the smallest footprint which enables.
Then to be inserted in microservices environments. There are natural fit for this cloud native microservices environments number two they have proven scalability. There are the platform that everybody built on and the largest public clouds around the world are built on Enginetics.
And number three they are a true platform that enables a broad range of application services, including things like PPI Gateway security App server, they're not a virtual appliance.
With the seller constraints and limitations and so for all these reasons engine X is a natural choice for Dev ops and application development teams.
And that's why we chose Enginetics and we're very excited with what the combination of five an engine X is going to do in the market.
I appreciate the response thank you.
Your next question comes from the line of Sam Sammy Battery from Credit Suisse. Your line is open.
Thank you. So I just had a quick question first on some of your cash right and where your cash balance is going to be by about mid year 2020 or like at least the next fiscal year basically two to three quarters from where we are today I just want to understand maybe what the corporate plan was what you're going to do with this cash balance are you going to consider more M&A are you going to potentially reinstate your cash buyback. When you consider some other factor is just to give us a bit of an idea of what you're going to do it this quickly escalating cash balance.
Hi, Sammy.
Look I think you can look at it. This way we are for now were placing a significant emphasis and focus on.
Augmenting our balance sheet and rebuilding our cash balance.
But we're going to continue to look at.
Opportunities in the marketplace, whether it's potential M&A or.
You know if the opportunity presents itself potentially more buybacks.
All of these options are on the table, but in the very short term there is more emphasis on rebuilding our cash balance.
Got it thank you.
And then my next question has a lot to do with given the formation of some of the new offerings at five in engine extra and come together and go to market with.
Would it would it be safe to assume that systems revenues, specifically or at least the growth rate or I guess you'd say the decline could accelerate in probably six months out from today given that the fair majority of the new offerings coming to market are more software based versus hardware and this is also probably a bit more correlated with the I.T. backdrop that you are trying to see.
Start to see some metrics start to decelerate in a broader macro I T world could you potentially see further deceleration of growth in the system side, and then naturally see some acceleration further on the software side.
I don't necessarily.
Think that the factors you mentioned semi would lead to further deceleration on the on the hardware side.
Because there are also other sort of compensating factors.
When you look in 2020.
I think we should probably see a bit more from service provider around sort of capacity upgrades that are more naturally.
Hardware driven.
We also have some evolution of our own platforms hardware platforms that would contribute to that so.
I think.
There there are factors on both side of that equation, we've taken all of that into account when we have.
Given our guidance for horizon one around.
Mid single digit growth.
I think we're still comfortable with that.
With that guidance now in in that guidance semi what are our thought was that hardware would decline.
Sort of low single digit to flat and software would grow in the 35% to 40% range I think given what we've seen over the last six months I think it's fair to say that perhaps software is going to grow a little faster and hardware is going to decline also a little faster than what we thought.
But its at this point, it's hard to give you a hard answer on the exact numbers for each but overall, we still think the balance of revenue growth is going to be what we thought.
Got it.
Thank you and then my last question has to do with the APAC deal regarding the carrier and just to give US an idea can you give us an idea mix on software versus hardware in terms of what this carrier bought.
From you guys. Just so we have like maybe some kind of illustration on what future carrier deals that look like.
So it's a good example of a carrier that is moving too.
NFC and in anticipation of the Fiveg rollout and in this case they bought they bought software essentially.
It was a it was a 100% software easily with a number of virtual functions.
Included in the in the deal.
Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
Yes, hi, guys. Thanks for the question I guess I wanted to go back to the.
This question of systems and systems decline in and ask you what you think your.
Market share position.
Looks like for the quarter like do you think you maintain share do you think you lost share.
And then what would you expect to happen in the future like the next few quarters do you think that within the systems business for ATP is you'll be able to maintain share and just kind of track market performance or would you expect to kind of outperformed the market though.
Well, Ron I think if you look at.
Look first of all I think looking at the just the 80 seems markets is a fairly narrow lens to look at when it comes to five now as I said in my prepared remark I think we're really becoming more of a multi cloud application services player and I think thats a broader opportunity.
Now that being said, if you're going to look at the lens of the PC market.
Overall hardware and software I definitely think we are gaining share.
Specifically in the hardware space is how we gain share this quarter I can't tell I can answer that and we won't know until market share reports come out in April .
In a couple of quarters.
But what I can tell you is there are things that we have done but our deliberate actions for my five that are transitioning some of our hardware business to to software and this includes things we've done in our software.
Offers to make them much easier to consume and remove all of the friction that exists in our customers adopting these solutions.
It also revolves around the commercial offerings and the way, we structured and change our contracting structure.
And it also revolves around the things we've done on go to market and the incentives with the.
Put in our field teams.
To proactively help customers, who want to transition to software transition to software faster and so those actions are driven by us of course, there are effects that has to do with the market.
Around customers themselves wanted to implement software first boss for policies.
And also wanting to have this multi cloud portability, which has made easier with software.
But so when you look at these two factors that's what I think is driving the decline in systems, but some of which is driven by us.
And the last the last winter.
And on this overall business, we have not been losing if thats kind of where you are what you are getting too we have not been losing hardware deals.
If this is your your question, we're actually continue to be very very happy with the win rate on our hardware deals.
Yes, no by the angle of my question was more you guys had been gaining share in hardware and I wondered if you thought you would sustain that or whether you thought maybe you would match.
Kind of the hardware market more great.
Our guide that was kind of where I'm coming from and I also wanted to ask for its lumpy given the high software growth in the quarter.
Can you give us any idea what you think.
Pop where growth either for the market or even better yet you looks like over the next year I mean, it do you.
Are you thinking that you can maintain its kind of ballpark in terms of growth or is this a one off or what sort of growth do you think.
I think it is likely as we look out.
You know I think.
Well if you if you look at the analyst reports on ADCC software growth excluding by the way my comments here exclude 80, C. as a service.
Which is largely the native cloud offerings I'll come back to that in a moment, but if you exclude them the analyst report.
So far have pointed to I'm going to say, 20% ish growth rate in the AIDC software market.
And so if you look at that.
We definitely believe that we are gaining significant share in the AIDC.
Software market, even though.
Our software growth isn't just driven by AIDC. It's also it also has a strong component of security.
Which is.
Which has very strong software gross.
So that's kind of when you look at things.
Today.
To your question around can we maintain the software growth in the coming quarters.
Okay.
That are that have been played out yet specifically enginetics.
And also a five cloud services, which is more of a.
Sort of back half of 2020 contributor and certainly a contributor in horizon two.
So I think those are growth catalysts that are yet to get to materialize for us.
But overall when you when you combine that and what's happening with hardware I still think what we've shared with you for horizon. One is about for overall aggregate revenue growth for horizon one.
It's correct.
Okay, great. Thank you for AFFO per share.
Yes, Thank you Rob.
Your next question comes from line of Jeff Kvaal from Nomura. Your line is open.
Thank you, yes, I have two questions I think first Francois for you.
No we've had tremendous success in software this this quarter.
Does put you on a much higher trajectory when it comes to that piece of the business, but it doesn't seem as though your overall corporate growth rates have picked up despite the software explore.
And I guess I would've expected there to be a little bit of an uptick in the overall corporate growth rate. If you are expanding into standalone security et cetera et cetera. So I was wondering if you could offer some thoughts about that and then Frank on your side you know the.
Yes, the Opex number that you are offering us for the September quarter is.
Little higher than we had modeled and you know there is it.
Integration of an acquisition, so I get that but I'm. Just wondering if you could help us understand where the opex is and where it might go over the course of the fiscal year to the extent you can thank you.
Jeff. Thank you I'll I'll take the first part on.
Look I think this is.
If you look at our overall revenue growth. This is playing out so far pretty much in line with what we have shared our aim and what we have said when we made the Enginetics acquisition.
In terms of overall aggregate.
Revenue growth.
And I think we shared that in our horizon two we expected this to pick up.
And that's still our view.
But for for Horizon one.
I think when you look at the dynamics combined have transitioned we have to go through as a company.
Starting from a large base of hardware and transitioning to a majority software business.
That's that's how it's playing out and.
I think the growth rate reflects that for the time being.
And Jeff in terms of non-GAAP operating margin for the rest of our fiscal year actually the coming quarter that we have is the restaurant fiscal year and so.
We're not providing any guidance at this point for up by 20, but as we talked about in the acquisition of engine X. we expected.
That our non-GAAP operating margin and horizon, one was going to be in the range of 33% to 35%. This is absolutely in that range.
And we did that with the anticipation of the expenses that we are going to come on through the Enginetics acquisition. So that's that's exactly what we're seeing.
Okay Alright, thank you both.
Your next question comes from a line of Sameer Chatterji from JP Morgan Your line is open.
Hi, Thanks for taking the question from so I just wanted to start start off with a more broader question on what are you seeing in terms of spending trends from enterprise customers I think.
Last quarter, particularly the few companies that I've mentioned.
Given the uncertain macro there was some kind of softness and signing large deals.
What are you seeing on the ground are you seeing kind of any hesitation in finding those are large truck builds at this point.
Hi, Saliq I would.
Maybe give you a couple of pointers overall I think the microenvironment is.
Less.
Healthy than it was a year ago.
It's not.
I wouldn't I wouldn't characterize it as being.
Kind of difficult, but it is it is not as healthy as it was a year ago.
Where we're seeing.
Specific areas of softness I would say the UK and Germany.
In for Us in Europe .
Specifically, the UK where uncertainty persists.
And we have seen a number of deals that are being delayed or canceled altogether.
And.
I would also say specifically in hardware, we continue to see more scrutiny applied to hardware deals.
Of course, especially in companies that have software first policies and so that probably elongates the deal cycle, specifically for hardware deals.
Got it.
Thank God can just quickly follow up with a question on the software side, you had very strong sequential growth in the software revenues and you mentioned most a lot of that was driven by the security products. You also launched new SaaS offerings setting I believe in March can you just kind of help us understand if BC commercial growth how much contribution was there from the new SAS offerings or if it's immaterial now how much time do you think it speaks to ramp those up so that they become material to your kind of outlook.
Yes, I think so we are yes, you're right we launched five cloud services, our SaaS platform in March.
And introduced our first service on the platform.
Which is DNS.
As a service and we're now.
In the process of launching our next set of service global several more balancing actually is next and it's going to go.
Gee pretty soon followed by.
WAPA service et cetera.
So we are where we are is we're very early days.
And we basically just have the first service, but even on the first service we already have the first paying customers on the on the platform.
And we haven't actually large number of customers in trial and we expect that the pickup will accelerate as we introduced a new service like GSK will be and what in terms of so this obviously did not contribute to the quarter, we don't expect it to be.
Not really material certainly not in the in the next three quarters.
SaaS businesses however.
Take a bit of time to ramp, but certainly going into.
Slide 21, and 22, when we get into our horizon, two we would expect.
Our five cloud services platform to be a meaningful contributor.
To overall business and certainly to our software growth.
Got it thank you.
Your next question comes from the line of James Faucette from Morgan Stanley . Your line is open.
Great. This is meta Marshall for James.
Maybe first question.
Understanding that that 33% to 35% APAC first kind of within the horizon one.
You had noted I'm just also.
Okay I have noted a change to the go to market and I just want to get a sense of how much of this is just layering in enginetics versus how much of this is kind of you know is our cost to kind of the change in go to market approach and then maybe the second question just if you will.
If we can get a sense of what is the impact of that purchase accounting on engine acts for kind of your forecast of just you mentioned that an 8 million dollar contribution in the corner what would that have been without kind of the purchase that Jeff and our purchase accounting adjustment. Thanks.
I need a I'll I'll take the first part and Frank will take the second part on the 33% to 35%.
Operating profit.
Guidance for Horizon, one leader this is mainly.
Due to investments in our software platforms largely enginetics.
And the investments we have to do their some of their cyber cloud services, but.
It's mainly enginetics.
And it's not really about the go to market were to change in the go to market models, even though.
We have increased the size of our go to market teams with the addition of Enginetics.
This this is more about the platforms than a fundamental change in our go to market.
I mean in in relation to the 8 million that was a discussion about the contribution the engine X next quarter.
Without a purchase counting my assumption is that would be just approximately 10 million, maybe slightly more than 10 million next quarter.
Got it great. Thanks, guys.
Your next question comes from line of Simon Leopold from Raymond James.
Your line is open.
Great. Thanks for taking the question I wanted to maybe come at the Opex question, a little bit differently.
I want to reflect in the June quarter, excluding the acquisition you had forecast I believe 275 to 200.
87 million.
Which would imply.
Something like 60 ish million coming from from the acquisition.
If you could maybe unpack.
What what occurred in the June quarter, and then help us understand what's maybe one timeish, what's sort of ongoing from from the acquisition because obviously, you're you're forecasting significantly lower operating expenses in September . So I just want to make sure I understand the moving parts the components to operating expenses.
Sure Simon So all that 60 million I think where you're getting that figure is when we talk about.
The largest contribution from engineering, but also some of our non-GAAP or things that we had to split out and that reconciliation can be found in the press release, and so I'd point, you to that but some of the.
Bigger items, where there was a portion of.
The Enginetics acquisition.
Where it was part of the consideration but accounting.
It makes us take that as an expense in the quarter and it was effectively a hold back our results for key employees that was part of the deal negotiation and so.
That was a.
A large portion of that there were some facility exit charges.
And then the rest of the rest of what we would discuss would be the inflow of the new engine ex employees and so all of that was anticipated as part of our of our guidance and our guidance going forward.
And so the incremental expenses from Endo next by itself in terms of what it's doing to to operating expenses is in kind of a 25 to 30 million range per quarter.
It's it's a products I think it's actually Simon.
A little bit less than that but it's.
It's not a number that were splitting out for all practical purposes Weve already combine some of the teams together and that's not the way we're tracking the business.
Okay, and maybe just a pivot in terms of the the cash position I understand I understand this is.
I think the first quarter in more than 10 years that that have five has not bought back stock so sort of a significant break in the pattern. What what is the cash level that you you feel is necessary to run the business because it seems as if you've certainly got adequate cash to do everything you you'd like him could still buy back stock. So I guess I'm trying to really even if you're not ready to give us a number if you can maybe explain your philosophy.
Sure Simon I mean for a long time, we've had plenty of cash to run the business and have chosen to do share repurchase as opposed to other things that you can do with cash including.
Inorganic expansion and so we are we are adding back up that flexibility to continue to use our cash for multiple purposes.
And we will be strategic with it I can't say that there is ultimately one level of where the cash balance has to be before go back in the market and repurchase shares that could be this quarter.
Could you maybe just follow that with your thought on instituting a dividend.
Yeah, we don't have any anticipation at this point of instituting a dividend.
We think that that's actually not a great tax efficient way of redistributing cash to our shareholder base and we'd be much more opt to do share repurchases.
As that vehicle to redistribute cash.
Great. Thanks for taking the questions.
Thank you ladies and gentlemen. This concludes today's conference call you may now disconnect.