John Eldridge - Director, IR Andy Reinland - EVP & CFO Manny Rivelo - President & CEO Karl Triebes - EVP Product Development & CTO

Jim Suva - Citigroup Pierre Ferragu - Bernstein Ryan Hutchinson - Guggenheim Securities Brian White - Cantor Fitzgerald Alex Kurtz - Sterne, Agee & Leach Erik Suppiger - JMP Securities Tal Liani - Bank of America Merrill Lynch Jayson Noland - Robert W. Baird Tim Long - BMO Capital Markets Simon Leopold - Raymond James & Associates

Welcome to the F5 Networks Fourth Quarter and Fiscal 2015 Financial Results Conference Call. [Operator Instructions]. Also, today's conference is being recorded. If anyone has any objections please disconnect at this time. I'll now turn the call over to the John Eldridge, Director of Investor Relations. Sir, you may begin.

Thank you Katie. Welcome to our conference call for the fourth quarter and FY '15. Manny Rivelo, President and CEO and Andy Reinland, Executive VP and CFO will be the speakers on today's call. Other members of the executive team, including John DiLullo, our new EVP of Worldwide Sales are also on hand to answer questions following their prepared remarks. If you have any follow-up questions after the call, please direct them to me at 206-272-6571. A copy of today's press release is a viable on our website, at F5.com. In addition, you can access an archived version of today's live webcast from the events calendar page of our website through January 20. From 4:30 PM today until 5 PM Pacific time, October 29 you can also listen to a telephone replay at 800-876-6785 or 402-220-5331. During today's call, our discussion 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. Factors that may affect our results are summarized in our quarterly release, described in our detail on our SEC filings. Please note that F5 has no duty to update any information presented on this call. Before we begin the call, I want to remind you we're holding our 2015 analyst investor meeting at the New York Hilton Midtown on Thursday, November 12. If you plan to attend the meeting, you can register online from the link on our IR events calendar page entry for November 12. Now, I will turn the call over to Andy Reinland.

Thank you, John. As I normally do on our Q4 call, I will first discuss our results for the fourth quarter and the fiscal year ended September 30. Then I will provide guidance for the current quarter and finally outline our general planning assumptions and expectations for FY '16. We ended FY '15 with an annual revenue run rate of $2 billion and record earnings per share. Revenue of $501.3 million was up 8% compared to Q4 2014 and within our guided range of $500 million to $510 million. GAAP EPS was $1.36 per share, above our guidance of $1.26 to $1.29 per share. Non-GAAP EPS of $1.84 also exceeded our guidance of $1.72 to $1.75 per share. Q4 product revenue of $257.7 million, up 4% from Q3 and 1% from the fourth quarter of last year, represented 51% of revenue. Service revenue of $243.6 million increased 4% sequentially, 16% year over year and accounted for 49% of revenue. On a regional basis, the Americas grew 7% year over year and represented 58% of revenue, with the strongest growth in the U.S. while a difficult macro environment slowed sales in Latin America and Canada. EMEA grew 11% year over year and accounted for 23% of overall revenue. APAC which accounted for 15% of revenue increased 12% year over year and Japan, at 4% of revenue was down 6% from a year ago. Enterprise customers represented 65% of total Q4 sales. Service providers or 17% and government sales were 17% including 9% from U.S. federal. During the quarter we had three greater than 10% distributors. Westcon which accounted for 17.2% of total revenue; Ingram Micro which accounted for 15.6%; and Avnet, at 14.3%. Continuing down the income statement, GAAP gross margin in Q4 was 83.1%. Non-GAAP gross margin was 84.4%. GAAP operating expenses of $269 million were the low end of our $267 million to $276 million guided range. Non-GAAP operating expenses were $230.4 million. Our GAAP operating margin in Q4 was 29.4% and non-GAAP operating margin was 38.4%. Our GAAP effective tax rate for the quarter was 35.1% and our non-GAAP effective tax rate was 32.8%. Turning to the balance sheet, in Q4, we generated $183 million in cash flow from operations which contributed to cash and investments totaling $1.17 billion at year end. DSO was 50 days. Inventory at the end of the quarter was $33.7 million. Deferred revenue increased 23% year-over-year to $783.3 million. In Q4, we repurchased approximately 1.18 million shares of our common stock, at an average price of $126.99 per share, for a total of $150 million. Approximately $474 million remains authorized under the current share repurchase program. During the quarter, we closed our test facility in Tomsk, Russia, eliminating approximately 65 positions. These will be reinvested in other locations over the first half of FY '16. Across the rest of the company, we added a very strong 135 net employees. For the full year, revenue for FY '15 was $1.92 billion, up 11% from FY '14. Product revenue of $991.5 million was up 6% from the prior year and accounted for 52% of total revenue. Service revenue of $928.3 million grew 17% during the year and represented 48% of the total. GAAP net income for FY '15 was $365 million or $5.03 per share. And non-GAAP net income was $480.3 million or $6.62 per share. And for all of FY '15, cash flow from operations totaled $685 million. Moving on to our guidance for Q1 and our FY '16 outlook. As we enter FY '16, the growth of IP traffic and connected devices, the proliferation of applications and virtualized data centers in the cloud and the increase in the number and types of security threats all challenged the fast, secure and reliable delivery of applications to increasingly mobile users. Over the past several years, the pace of innovation at F5 has accelerated to deliver products and services that enable customers to meet these challenges, by leveraging the cloud, SDN, NFV and other emerging technologies that are shaping the industry. As a result of these efforts, our absolute focus on the application, continuing technology leadership of our full proxy architecture and our disciplined business model, I am confident that we will see a return to year-over-year product revenue growth and continued solid EPS growth in the coming year. During the past two quarters, F5 has had several key management transitions, consisting of both new leadership and realignment of certain internal responsibilities. These moves have already resulted in positive changes to our organizational structure, product road map and sales motions that are designed to reaccelerate and drive product revenue growth in the current fiscal year and beyond. As we enter our FY '16, we're anticipating seasonal softness we typically experience in Q1. We also continue to be cautious due to budget uncertainty, driven by foreign currency fluctuations and lingering macro issues. With this in mind, for the first quarter of FY '16, we're targeting revenue in the range of $480 million to $490 million. We expect GAAP gross margins at or around 82.5%, including approximately $4 million of stock-based compensation expense and $2.7 million in amortization of purchased intangible assets. Non-GAAP gross margins are anticipated at or around 84%. We estimate GAAP operating expense of $268 million to $277 million, including approximately $35 million of stock-based compensation expense and $0.7 million in amortization of purchased intangible assets. We anticipate a GAAP effective tax rate of 37.5% for the quarter and a non-GAAP effective tax rate of 34.5%. Our Q1 GAAP earnings target is $1.13 to $1.16 per share. Our non-GAAP earnings target is $1.58 to $1.61 per share. We believe we will generate cash flow from operations in excess of $195 million and we plan to increase our headcount by up to 100 employees during the quarter. Looking out to the fiscal year ahead, our general planning assumptions and expectations for the year are as follows, from the base of Q1, we anticipate sequential revenue growth throughout the year, with a strong second half of the fiscal year. We anticipate the non-GAAP gross margins will remain in the 83.5% to 84.5% range. We expect non-GAAP operating margins in the mid-30%s range for the first half of the year and increasing through the second half. Stock-based compensation is anticipated to be in the range of $160 million to $170 million for the year. Capital expenditures are expected to range from $15 million to $20 million per quarter for ongoing infrastructure investments and facilities expansions. And finally, assuming the R&D tax credit is not extended during FY '16, we expect our effective tax rate to average approximately 37% to 38% on a GAAP basis and 34% to 35% on a non-GAAP basis for the year. As John mentioned, our analyst investor meeting will be November 12 in New York. We hope you can join us as our executive team presents the company strategy and go-to-market plans for F5. With that, I will turn the call over to Manny Rivelo.

Thank you, Andy. I would like to thank everybody for joining F5's 2015 Q4 earnings conference call. Overall, I am pleased with the performance this fiscal year. We closed FY '15 with a number of key milestones. Revenues of $1.9 billion with solid financial performance and record non-GAAP earnings per share of $6.62. We continued to outpace our competition with our hybrid application services strategy. Year to date, we've increased our virtual ADC market share by 13 points and the overall ADC market share by 3 points, for total share of 49% as of the latest industry reports. And for the ninth year in a row, we were named the leader in the 2015 Gartner Magic Quadrant for ADCs. We continued to diversify with more than one-third of our revenue coming from software sales, driven largely by the demand for security and the uptake of our good-better-best licensing and continued strength with our Virtual Edition sales. Approximately 41% of total product sales in FY '15 included one or more security products. This represents a 22% year-over-year growth, driven in large part by our wins in government, financial service and service providers. Demonstrating the power of our programmable platform, we exceeded 223,000 members in our DevCentral user community representing a 22% year-over-year growth. And lastly, we're approaching 4,200 global employees. It took us 15 years to reach $1 billion in sales. A mere four years later in Q4, we exited the year at $501 million in sales, putting us at a $2 billion run rate. As you heard from Andy, we had a solid fourth quarter, meeting our revenue guidance and achieving record profitability. From a regional perspective, U.S. enterprise had a good quarter. However overall Americas bookings were behind our internal expectations. We attribute this to the market volatility and the currency fluctuations in Latin America and Canada and some delays in project driven service provider transactions. In EMEA, we saw bookings in line with our internal expectations. Bookings in our Asia-Pac region exceeded our targets and showed strong year-over-year growth, while Japan sales was down year over year, but in line with our internal projections. In the core of our ADC market, we enjoyed a good quarter. In August, we released the Traffic Management Operating System, TMOS version 12.0. This is a meaningful major release that allows customers to more easily transition workloads to the cloud and incorporate technologies like HTTP 2.0, while maintaining the same visibility security and control of traditional infrastructures. Our programmable accessible architecture and growing ecosystem of technology partners make our Application Services an ideal fit for emerging IT trends, such as software-defined networking, network function virtualization and the cloud. We see many emerging opportunities for new projects, enabled by our hybrid application services. A recent F5 global survey of over 3,000 customers showed that 81% plan to run applications and hybrid or private public cloud environment. We see this trend reflected in our Virtual Edition sales which were up 57% for the full fiscal year. In Q4, we launched the F5 Ready program to verify F5 Virtual Edition compatibility with a growing list of public cloud service providers. This includes Amazon Web Services, BlueLock, British Telecom, Cisco Intercloud, Datacom, Dimension Data, Microsoft Azure, Rackspace, SingleHop, [indiscernible] and VMware vCloud Air. The F5 Ready program makes it possible for our customers to run their applications and Application Services in the cloud environment of their choice. We still continue to see opportunities in Cisco ACE replacement. We also see opportunities and selling additional F5 modules to new ACE replacement customers. For example in Q4, we won a competitive $1 million ACE replacement order at a Fortune 100 company, chiefly due to our [indiscernible] and SDN. Hybrid deployments are driving secured requirements for our customers' cloud adoption. Nearly half, 48% of the customers we surveyed cited consistent policies and auditability with on-premise as an important security factor for their cloud adoption. We see these trends reflected in our wins. In Q4, a global consulting firm replaced Juniper with F5 remote access and single sign-on of solutions across their cloud and on-premise applications. Because of our strategic point of controls in many customers' networks, more and more of our accounts are implementing F5 hybrid security services to combat the increasing volume and sophistication of high-profile cyber security breaches. In April, we launched a new Silverline web application firewall, a WAF as a service and although it's early days, we're seeing solid interest from our customers and sale organization for our cloud-based offerings, tripling our Silverline customer base this past year. This past quarter, based on our growing Silverline and Versafe customer demand, we opened a second security operation center in Poland. The team of highly specialized F5 security researchers and analysts in Warsaw will complement our existing facility here in Seattle. Monitoring and investigating global multi-layer attacks, the center will maintain up-to-date information on the latest malware, zero day and phishing attacks. In the service provider industry, a recent survey shows that on a daily basis, an average Tier 1 operator experiences roughly 10 to 15 DDoS attacks and 2000 application attacks which can result in leaked customer data, intercepted or blocked calls, roaming fraud, as well as deterioration of network and service performance. These trends have increasingly driven growth of our security offerings within our service provider business. In particular, we're enjoying rapid expansion in our U.S. carrier segment where our Gi LAN and anti-DDoS service capabilities, as well as our firewall and application protection capabilities are helping us to secure competitive multi-million dollar repeat wins. As the demand for high-bandwidth low-latency networks only increases, our NFV TCP optimization and advanced traffic steering solutions are helping our service provider customers significantly increase the efficiency and ensure their peak network performance. We signed several multi-million dollar agreements in the past quarter that further evidence our carrier-grade capabilities. In addition, we have increased our NFV partner ecosystem. In Q4, we announced a partnership with HP, Nuage and Telstra to demonstrate a proof of concept for a multi-vendor open NFV solution. Certified by the European Telecommunications Standards Institute, ETSI, this proof of concept demonstrates to service providers how NFV can reduce TCO, while increasing service agility and network elasticity. Our service business continues to produce, with 17% year-over-year revenue growth for the full fiscal year. New and renewed service maintenance contracts drove deferred revenue growth to $783 million, this quarter up 23% year over year, providing a solid foundation for continued service growth. Our services trend also underscores how our world-class high-value customer support drives product revenue growth. For example, in Q4, a U.S. bank leveraged our professional services for a technology refresh project, were seen to expand their use of our application modules to include an application security module and a DNS solution in a multi-million dollar deal. Our base of SDN, cloud application providers, service provider and convert system technology partners is as strong as ever. I want to expand on one particular security partnership that we formed in Q4. We added FireEye, an industry leader in network security, to our help customers defend against today's advanced cyber-attacks. F5 and FireEye will offer customer network segmentation and policy management, protocol conformance, DDoS mitigation, SSL inspection, advanced threat protection, intrusion prevention, threat intelligence, forensics and analytics. Although we're just launching our partnership, our joint security offerings have already resulted in a multi-million dollar sale to a U.S. health product company. Let me spent a moment now on our leadership team. I'm pleased to report that the sales team transition under John DiLullo has been smooth. John's global sales and channel experience and deep industry relationships, combined with new FY '16 initiatives will enable F5 sales evolution and drive accelerated product revenue growth. Secondly, I have asked Julian Eames to expand his responsibilities and centralize our support functions in global services, manufacturing, IT, program management and facilities under his leadership, as our new Chief Operations Officer. To reiterate my earlier comments I believe our growth drivers for FY '16 will be driven by our big IP releases, security-specific offers, sales and channel productivity gains, cloud and Silverline sales acceleration and a favorable product refresh cycle anticipated in the back end of this fiscal year. As far as the Q1 outlook is concerned Andy indicated that we expect revenues in the $480 million to $490 million range. We're taking measured view of our Q1 business in light of several macroeconomic uncertainties and the historical impact of seasonality on our Q1 order linearity. As Andy also mentioned, we expect to deliver sequential quarter over quarter growth through the rest of FY '16 and we will continue to invest in activities that further extend our leadership position or help us to capture incremental opportunities as they arise. As the market evolves, so too does F5. By having the application as our focus, we have been able to grow and flex to new customer demands. Kicking off our new fiscal year this month, we have a clear sense of purpose. Expanding our core offerings in AEC to the cloud, extending into strategic markets of security, F5 as-a-service via Silverline and the service provider and driving a world-class customer experience from our global services organization. As I stated at the beginning of my commentary, I'm excited about the opportunities presented by our hybrid application services strategy. Our customers are moving beyond hybrid architectures and our focus on software application services clearly positioning us to capture new workloads and new markets. The leadership team and I are looking for to sharing these plans with you at our annual investor meeting on November 12 in New York City. In closing, I would like to thank the entire F5 team, our partners and customers, for their support last quarter. We look forward to a great Q1. I will now open the call up for Q&A.

[Operator Instructions]. And our first question is from the line of Jim Suva with Citi. Your line is open now, sir.

My question is on the statement that you put out in the press release about the planned production rollout and the new sales initiatives, that the combined effect would be gradual and weighted toward the back half of the year. Can you help us understand a little bit about -- does that mean the rollouts of the new products are the back half of the year or the rolling out and then companies have an opportunity to test them in the first half of the year and then the actual financial benefit comes in the second half of the year?

There might be two questions in there. From a product perspective, we have approximately two major software releases a year. We just had one that came out in August. We see that being material throughout the course of this year. We'll have a second software release that comes out here near the second half of the year. We also, I referred to Product Refresh which is basically our hardware product refresh. We made a commitment to refresh that approximately every three years and we're at that turning point. We see that happening toward the later part of this year, also, more in the Q3, later Q4 timeframe. From a sales initiative perspective, what I will comment on and John, if you want to add to that afterwards, is really as we continue to expand into the new markets, whether it be security or service provider, we're continuing to specialize our sales organizations in those areas. Some of the initiatives are how we continue to specialize our sales teams, as well as our channel organization, to better capture the emerging opportunities there

Our next question is from the line of Pierre Ferragu of Bernstein. Your line is open now, sir.

There is really two concerns I would say, in terms of your revenue momentum. One is hyper growth of cloud hurting you and the second one is the idea that you might have benefited a lot from weaker competitive environment and that you been growing faster than the market and that maybe now, it's going to be tougher for you to grow. My two questions would be on the cloud, when you see your plans moving to the cloud, is that a net benefit to you and are you very clearly seeing that? Or does that mean that people, your clients are buying less on premises and there's a large amount of cannibalization? And the second one, on the competitive landscape, you mentioned that you are gaining still a good traction on the footprint of Cisco, do you see anything changing that would justify a slower growth going forward in your competitive landscape, be it on the net scale side of things? Are they getting more aggressive or you see the end of your opportunity to take share from Cisco coming in? Thank you.

Let me start, this is Manny, I'll start with the cloud turn it over to Karl and then maybe we will come back to talk about the competitive environment. So on the cloud the key point is, when we talk to our customers they're looking for hybrid architectures. What that basically means is solutions that are both enabled on prem and off prem and when they go off-prem, to also be multi-cloud, not single cloud providers. We see that as a massive opportunity for us, to be able to create a solution set across the environment that will allow application service portability out there. That's a major driver for us. Above and beyond that, we're also making sure our solution is in all the major cloud instances, so we're easy to find from a customer perspective. I don't know if you want to add anything, Karl?

I'll add to that. One good data point here, by the way, this is Karl speaking, is that our software versions of our products are the fastest-growing part of our business right now. And that's what we're using to support effectively this hybrid cloud focus. There's a number of areas that we address holistically with this. One of the key ones, like Manny mentioned, is the ability to have this portability between clouds and the data center. And consistent policies. And with consistent policies, what they mean by that is both security as well as access policies. As part of our latest release and core to our products is the ability to provide this federated access, so that we can find in both public and private as well as traditional data centers, including SaaS-based applications, as well. The other components are things like customers want to be able to have capacity augmentation with the cloud. To be able to do that of course, you need to have these consistent policies and we provide that. Security services is a key area. They need to have auditability and the ability to have that consistency between what they are doing on prem and off prem and provide consistent services and all that. So there's a number of things that we do there. If you look at our latest release, in fact, we added a lot of other key features that made us operate much better in some of the biggest public clouds, like Azure and AWS. We've been there for quite a while. There's definitely an opportunity and we're innovating quickly, working towards that, because that's where our customers are taking us.

To answer the second question on the competitive environment, if you look at the history of F5 we've had a lot of competitors over the years. We assume we're going to continue to see competitors popping up over the years. Although we have been winning market share this past year at a significant rate and we've been winning our fair share of Cisco ACE accounts, we think there's still room for improvement there. We'll be working hard, we have programs in place, we have technology refresh cycles. We have integration with our partner ecosystems on cloud. SDN as an example to ensure that we continue to gain market share in the market. But we do have a healthy market share right now, approximately 50% of the market and we been growing aggressively as I stated, our virtual instances and is Karl pointed out, one of our fast-growing parts of our business.

Our next question is from the line of Ryan Hutchinson of Guggenheim. Your line is open now, sir.

You just asked the question that I had around cloud service provider, but just to follow-up on that, can help us understand the dynamics as it relates to the market share, specifically with AWS and whether or not you think you are a share donor at the expense of some of those opportunities and how should we think about that moving forward? And then as a clarification around guidance, I have a question on whether or not the sequential growth will be for both product and service or any color around that and planning assumptions would be helpful as we think about the full year.

Why don't you start with the guidance question Andy?

Ryan, you know us. We don't guide product and services separately, but our number one goal is to drive product revenue and that is our focus and we know that pulls the services along with it. Our initiatives and focus are all pointed towards product revenue growth.

You asked to question about AWS and do we see that as a net opportunity. That is absolutely the case. We've been running there for quite some time we're enhancing our communities and we're seeing substantial growth in our business there. We see that as a growth opportunity and expansion opportunity. Like I said earlier, the number-one thing customers talk about who are moving to public clouds is this notion of being able to not be locked that they have portability and they can move and we help enable that with our application services.

Just to add something, we're seeing lots of use cases that are multi-cloud environments which are customers that not only have their own data centers have workloads that are running potentially in AWS but also in rack space or Azure and they're using all that infrastructure, if you will, to run their application environments and giving choice to their customers usually in lines of business or where they want to deploy those services. Part of the reason why we wanted to make it easy for customers to understand that we're in those markets and that's why we have launched the F5 Ready program, because those are cloud buyers that we certified our solutions and are making it easy to deploy our application services in.

Our next question is from the line of Brian White of Drexel Hamilton. Your line is open now, sir.

I'm wondering if you give us a little more color what's happening in America, because it sounds like the U.S. is still very strong but outside the U.S. is weakness. Are you seeing weakness in any other geographies as we go forward? Maybe some color on the macro environment? Thanks.

As Manny mentioned and I mentioned as well, Latin America is an area, foreign currency fluctuations there really affecting budgets and people's comfort level with committing funds. Canada, we saw weakness there. There are pockets in Europe, Eastern Europe, southern. When I commented on lingering issues, those areas haven't improved and we've seen that for a long period of time. The growth rates there just are not as strong as we'd like them to be. Some areas of APAC similar to that.

When we think of the partnership here with FireEye, it's going to be material in FY '16 or is it more of a FY '17 story?

It should be a FY '16 and going on hopefully to FY '17. We just formed it. It's hot off the press, here, if you will. It's 30 days or so ago. We're seeing great traction in the field from a go-to-market momentum. Our sales organization -- we just had our America's QVR earlier this week and it came out repeatedly from the sales leadership of good traction in the field and good engagement. We anticipate it will be material in FY '16 and carry forward from a solutions perspective. We have very complementary set of technologies in the two companies with different little overlap, as a result of that, that creates a very fluid and natural sales motion, since our sales organizations can provide a better solution together and there's no real conflict on where the revenue will come from.

Our next question is from the line of Alex Kurtz of Sterne Agee. Your line is open now, sir.

Andy, on the deferred revenue, it looked like it was pretty strong in the quarter. Any color there on what drove that year-over-year sequentially? Is there any kind of changing in how the software is charged or is there some kind of mix issue that is helping the deferred line in how we should think about that going forward?

There is no real change in terms of sales motion or how we go about giving the renewals there that really drive the deferred revenue. We're being much more aggressive going after multi-year deals and so we have seen our long-term element of the deferred revenue grow. I think it was approaching 27%. Or 23%, sorry. A lot of the customers want to lock in their pricing for multiple years. We're taking advantage of that and pushing to those agreements. We're also pushing very hard for premium-plus type services and have been having success with that. We see that as key strategically for us, because we know if they buy premium-plus services that relationship is just that much stronger and it does lead to more hardware sales. We put a big focus on that.

Our next question comes is the line of Erik Suppiger of JMP. Your line is open now, sir.

First off, I'm just curious, you talked about SDN. Are you seeing more opportunity to work with Cisco's ACI or more opportunity with VMware's NSX solutions at this point?

We're seeing both. We're seeing good momentum with both. There's lots of proof of concepts. It's still fairly early from a deployment perspective from we can tell. We do have deployment instances out there that we're working actively, but it depends on who the buyer is, is we're seeing from an SDN perspective. It's a traditional networking buyer we're seeing fall sometimes a little more favorably in the Cisco camp. If it's an application buyer looking for segmentation, it falls squarely in the VMware camp. We're seeing interest in both and in some accounts, we're seeing interest in actually both, also. Meaning that a certain customer may have both Cisco solution and an NSX solution from VMware. Do you want to add, Karl?

I will add, OpenStack is actually where we're seeing a lot of interest and momentum especially with the service providers, when looking at NFV, actually as well as enterprise. That's I think the third leg of that SDN stool, is that we're making good progress with both VMware and Cisco, but OpenStack is definitely top of mind for many companies or service providers out there right now. And obviously, we're supporting that very aggressively, as well.

Do you see more business with OpenStack than either Cisco or NSX?

It's all pretty early days right now. A lot of this is still proof of concept, so it's very nascent with the customers, but it's hard to say at this point.

Okay. Second question, Office 365 is performing relatively well these days. Do you have much of an opportunity to play on that market, as well?

Absolutely. This is Karl again. If you look at things like being able to provide federated access to the applications, that's one of our major use cases for Office 365. In fact, we're an Office 365 shop here at F5. And Microsoft has been a major partner of ours for many years, as part of that. We have major use cases around, but also other types of security as well as optimization for them. We're obviously part of the Azure cloud.

We've actually integrated our solution and our programmability. The iApps for Office 365 to Karl's point to make it easy for customers to deploy single sign-on of those services. So it's a planned opportunity for our customer base and for us.

Our next question is from the line of Tal Liani of Bank of America. Your line is open now, sir.

I have some kind of a high-level question which is, your growth rate -- government growth was very strong this quarter. 39% and change. If I remove the government segment from your revenues and I recalculate the growth for the entire company, product and services included, your growth rate peaked at 20% in Q2 and Q3 of last year and since then, every quarter it's coming down. It's gone down to 5.4% over this quarter and 6.4% the previous quarter. What is causing this massive deceleration in the growth rate, in an environment that should have been good for you, given the competitive landscape and your product portfolio, et cetera? Why don't we see higher growth rates or at least flat growth rates instead of such a deceleration? Thanks. And that's again, ex-government.

Let me add a couple of things. Part of it, I think, is we're seeing some of the macro as we talked about, that's impacted us in certain geographies around the world. And that's been significant. The second thing we have seen is some of the lumpiness in service provider business which in certain quarters has been very solid, but this last quarter was down, relative to other quarters. It hasn't been one specific thing. It's actually been a series of things throughout the years that has continued to create that deceleration. But there's no question that there is also some pause in the market, as these network transitions begin to occur. Whether it be SDN and how SDN plays out in the enterprise, how cloud also plays out in the enterprise from a hybrid perspective and then the service provider arena, how things like NFV play out and whether -- how quickly they move in those arenas. Some of this is just caution on the customers, as they redesign their new architectures. But we're not seeing any significant loss as we look at our win-loss data on an ongoing basis. So we think as we continue to further our technology solutions there, as the market continues to harden and adopt those new architectures, that we should see favorable second half of FY '16.

Does this increase your appetite to do some M&A and expand the addressable market or is it just a question of continued execution focused on the same things? I'm thinking in the three years down the road, how do you want to see the company?

The answer is yes to both of those. We always are looking at M&A from the perspective looking at logical adjacencies, but it's got to be adjacencies that fit to our core footprint. We're pretty well grounded on focusing on being application centric and application fluent, providing either user services on the user side of the proxy and/or application services on the application kind of the proxy. As we can introduce M&A to enhance that portfolio, as well as the road map, we will do that throughout the course of this coming year and future years. It's something that we're aggressively looking at and will continue to look at. But it's got to be core to the business we do, we're not looking for an adjacency that doesn't give us the synergies that we have with our distribution, meaning the direct sales organization in our channels.

Our next question is from the line of Jayson Noland of Baird. Your line is open now, sir.

I wanted to ask on the Q1 guide and the statement around factoring a measure of continued uncertainty. Are you seeing less pipeline now relative to last year or is this simply a function of being more conservative on close rates?

I think it's the latter. When you look at total pipeline, affecting how that ebbs and flows, that can be deceiving. When we're looking at the factored pipeline, we feel good about the business. And that factored into how we give guidance. But the latter, the issues that we highlighted with foreign currency impacting deal decisions and timing of deals, some of the macro stuff that Manny alluded to, where we saw some service provider deals slip, those kinds of things just make us want to be cautious, in particular in our Q1.

It's the same thing. We have really good fidelity via sales force of the pipeline. We've always had that discipline and it's something that John's carrying throughout the organization. We see that to be healthy, to be perfectly honest you. We have good visibility of projects that are out there. Some of them are longer term projects, but definitely have good visibility to that, meaning the service provider tends be longer-term projects. It's just about being a little more conservative on the close rates, based on the uncertainties that we see, macro as well as currency fluctuations.

And a follow-up on service provider. Is that America specific and any additional color you can provide, is that Tier 1? What type of use case? Has visibility changed their specifically?

Visibility has not changed, we still see good momentum across the four solution sets we provide out there. It just tends to be a much more project-oriented-driven. So we had a couple of large deals but over the course of Q2, Q3, those are being absorbed by some of the service providers. We anticipate additional repeat business, because they tend to be healthy and happy customers.

Our next question is from the line of Tim Long of BMO Capital.

I wanted to go back to the product growth. It's been decelerating a little bit, seeing some challenges there. I'm pretty sure you include software sales in that line and obviously those have been growing as you mentioned a few times, with some detraction on the products. Could you talk to us a little bit about the hardware component of that line? How much is that decelerating? What is driving that? Is that just saturation of the market? Is that just pure cannibalization by the software element? Is it just going to be negative forever or is there something else going on the hardware component of the product sales? Thanks.

Part of it's just the product cycle that we see. We continue to see from our customers this concept of what we call hybrid application services architecture which is a combination of both hardware and software. We don't see hardware sales deteriorating, by any means. They're not accelerating in the traditional enterprise use cases that we see out there. Where you need higher network agility which could be either in the software defined architecture inside a private data center or where you are bursting or moving applications to the cloud, those tend to be software additions. We're seeing that increase, but a lot of that software that's increasing are new workloads. They're not the traditional workloads that we provided services for, such as the traditional Office applications or Exchange applications or Oracle ERP systems. They tend to be now applications that are in lines of businesses. Karl, is there anything you want to add to that?

I was going to add, we're not seeing any deceleration in the hardware. For example we're getting a lot of push right now on 100-gig interfaces and those are coming here soon for us, but we've definitely see a shift the last couple of quarters in terms of customers really wanting to adopt these much higher bandwidth interfaces which means they need the bigger higher-performance hardware to support those. It's not something that works well moving to a cloud type environment for those customers. And then also, as Manny mentioned earlier in his script, we're working aggressively on the appliance refresh which again later next year or later this year, excuse me, we expect to start seeing -- rolling those platforms out. And those bring again significant new performance and capabilities including things like 2 to 3X performance improvements, 100-gig interfaces, 40-gig and everything down the line, being able to support our FPGA-based architecture right down to the lowest cost platform. We'll be bringing out a lot of new things with those platforms and we expect a good demand when they do show up.

We're also, one last point there, is we're also doing performance improvement on our Virtual Edition. So it's not just the hardware that you see greater performance across the suite of products, you will see us continue to provide industry-leading performance.

I should mention, we did a demo of a 40-gig VE with our partner Intel at Intel IDF here earlier this year. And we expect to be able to achieve much higher performance levels going into next year. It was just a demo, but it just shows where we're able to take our software.

And our last question is from the line of Simon Leopold of Raymond James. Your line is open now.

Two things I wanted to ask about. One was, you were kind enough to offer commentary about operating margin trends through FY '16. It sounds like very similar to the pattern you've seen in the past, mid-30s in the first of year, high 30s in the second half. I'm wondering if you could talk about the increasing mix of software content and more of the software orientation to the business, why we shouldn't be seeing more year-over-year improvement in the operating margins? That's the first thing I wanted to ask. The second one is service provider business, I appreciate is lumpy and certainly service provider spending is difficult, but it's been a little while since you talked about the opportunities around diameter and routing and wireless. I would just like to see if we could get an update of where you see that opportunity in the coming number of quarters. Thank you.

Andy, do you want to take the operating margin trends?

As you highlighted for the last three years, we have basically laid out that because of the seasonality of our business and our desire to keep investing and not slow down the momentum we have in the first half, we targeted mid-30s growing in the latter half and you're absolutely right. Some of the things we've been able to do over the last year that we looked at, we introduced Silverline. That came at a cost of some of the margin, we put that into the gross margin, so building out the socks that we build out and we were able to do that and maintain our gross margin. As we have long stated, our strategy is to leverage the gross margin to invest in the business where we think it will help drive revenue. If we go back two years ago, we said we wanted to make investment in consulting which we did. Now we were able to do that and maintain margin and we see those consultants driving business for us. That's how we have executed and it's working for us and we want to continue that. And as always with our disciplined management approach, we will watch it and adjust as we need to. That's how we want to see it lay out.

To answer the second part of the service provider business, there are four primary solutions we provide the service provider market. One is Gi LAN services, we're seeing nice growth on that. Commented on that. Second is security which we saw strong momentum throughout the course of the year, with specifically U.S. carriers and the third is NFV which is although early, proof of concept. The fourth one is actually Traffix from a solution perspective. On that one, we're seeing relatively modest revenue, to be honest. And in the overall scheme of things on what we anticipate, as that traffic grows, diameter signaling over the course of the next couple of years here, as 4G continues to be deployed and hopefully 5G in the future and we're, of course, where we've deployed that technology, we're seeing great project rollouts and happy customers. So we anticipate future business.

I'll just add a couple of points to that real quick. Also, on big IP, we handle a significant amount of signaling traffic, so we help scale sip and diameter and other aspects of the control plane natively with it. And again as Manny mentioned, our security services, we're seeing good adoption at major Tier 1 carriers throughout the world, including MSOs. It just takes time for them to install, integrate and then expand their infrastructure with those and so we're still on that side of the curve right now. But definitely good feedback, definitely have these things in full production to move forward.

Thank you again for joining us on today's call. We hope to see many of you at our analyst day on November 12 in New York, at the New York Hilton Midtown. Until then, you have a good week. Talk to you later.

Thank you and that concludes today's conference. Thank you for participating. You may now all disconnect.