Good afternoon, and welcome to the F5 Networks First Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [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 Ms. Suzanne DuLong. Madam, you may begin.

Hello and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. François Locoh-Donou, F5's Vice President and CEO, and Frank Pelzer, F5's Executive Vice President and CFO will be making prepared remarks on today's call. Other members of the F5 executive team are also on hand to answer questions during the Q&A portion of today's call. A copy of today's press release is available on our Web site at F5.com, where an archived version of the call will be available through April 26, 2020. The replay of today's discussion also will be available through midnight Pacific tomorrow, January 28 by dialing 800-585-8367 or 416-621-4642. For additional information or follow-up questions, please reach out to me directly at s.dulong@F5.com. Our discussion today will contain forward-looking statements, which include words such as beliefs, 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 our SEC filings. Please note that F5 has no duty to update any information presented in this call. With that, I'll turn the call over to François. François Locoh-Donou: Thank you, Suzanne, and good afternoon everyone. Thank you for joining us today. I will talk briefly to our business drivers before handing over to Frank to review the quarter's results in detail. We have been investing to evolve our business to better meet our customer's changing application demands. Today we are delivering our world-class application services across a wider range of deployment and consumption models. As a result, customers are increasingly deploying F5 in multi-cloud environments, driving a shift in our revenue mix towards software. Customer demand for consistent application security and reliable application performance drove 5% total revenue growth in our first quarter. Strong customer demand for security use cases, including WAF and SSLO [ph], as well as ongoing ELA traction fueled our 50% software growth. We are very pleased with our continued software traction. We continue to expect 60% to 70% software growth for 2020, including contribution from Shape Security, which closed on Friday last week. Our software growth was partially offset by our systems business, which was down 11% as customers increasingly look to consume F5 Solutions as software. Our services business was very strong in the quarter, delivering 8% revenue growth. Services is benefiting from our robust software sales over the last several quarters, including the second full quarter of NGINX-related sales. Overall, we continue to execute well against our long-term strategy and are pleased by the pace of our continued transition to a software-driven business. I will speak more to our business dynamics and customer wins after Frank reviews the quarter's financial results and our Q2 outlook. Frank?

Thank you, François, and good afternoon everyone. As François noted, we delivered another quarter of strong revenue growth. First quarter revenue of $569.3 million was up approximately 5% year-over-year and near the top-end of our guided range of $560 million to $570 million. GAAP net income for the quarter was $98.5 million or $1.62 per share. Non-GAAP net income was $155.4 million or $2.55 per share. This was well above the top-end of our guidance range due to our strong revenue performance as well as disciplined operating expense management in the quarter. Q1 product revenue of $235 million was flat year-over-year and accounted for approximately 41% of total revenue. As François mentioned, software revenue grew 50% year-over-year. Software represented approximately 28% of product revenue in Q1, up from approximately 19% in the year ago quarter. We continue to experience strong uptake on our software solution sold as annual subscriptions, including as ELAs. In fact, contribution from ELAs increased again year-over-year. Systems revenue of $170 million was down 11% year-over-year as customers continue to transition to software-based solutions. Systems accounted for approximately 72% of product revenue in the quarter. Services revenue of $335 million grew 8% year-over-year, and represented approximately 59% of total revenue. There were three primary contributors to services revenue strong performance in the quarter. The primary factor is improvements to the tools and processes our team uses to identify and secure renewals. In addition, we continue to enjoy healthy services attached in renewal rates to software sold as perpetual or as subscriptions, including NGINX-related sales, and we have also seen a step-up in consulting services demand associated with growing software sales. ,: Let's now discuss Q1 operating results. GAAP gross margin in Q1 was at 84.4%. Non-GAAP gross margin was 86%. GAAP operating expenses were $358 million. Non-GAAP operating expenses were $297 million. Non-GAAP operating expenses were at the lower-end of our guidance range for several reasons, including disciplined expense management, and sales commissions back in line with historical levels, down from the highs of the second-half of 2019. In addition, there were some timing differences for expenses expected between Q1 and Q2. Our GAAP operating margin in Q1 was 21.5%, and our non-GAAP operating margin was 33.8%. Our GAAP effective tax rate for the quarter was 22.8%. Our non-GAAP effective tax rate was 21.4%. Turning to the balance sheet, in Q1, we generated $144 million in cash flow from operations. This is down from last year for several reasons, including lower year-over-year operating margins, commission payments from strong Q4 bookings, M&A related expenses, and restructuring. Cash and investments totaled approximately $1.5 billion at quarter end. DSO of 56 days and capital expenditures for the quarter were $22 million. Deferred revenue increased 8% year-over-year to $1.2 billion. The growth rate is down from 2019 levels, because we had lapped our 606 adoption, which as we consistently called out was accounting for roughly half our deferred revenue growth over the last year. We ended the quarter with approximately 5,305 employees, down approximately 20 from Q4 as a result of ongoing efforts to better align spend with strategic imperatives. We continue to view cash as a strategic asset for our future growth. Our near-term priority will be paying down the $400 million term loan A related to the Shape acquisition funding. We will look to balance that with rebuilding our cash position for strategic purposes. We also may opt to repurchase shares during any open trading window. Now, let me share our guidance for fiscal Q2 of 2020. Unless otherwise stated, please note that my guidance comments reference non-GAAP operating metrics. In addition, with the Shape Security acquisition closed on January 24, our guidance is inclusive of Shape. 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 increasing demand for our multi-cloud application services will continue to drive revenue growth. We also expect continued strong demand for our software solutions. In fact, in Q2, we anticipate software growth will reaccelerate above Q1's 50% growth, even before any contribution from Shape. As we noted when we announced the Shape acquisition, Shape has a subscription revenue software model with a significant deferred revenue balance. Purchase accounting will impact Shape-related recognized revenue on a GAAP basis, principally over the next four quarters. Therefore, for that period, we will provide non-GAAP revenue guidance, which excludes the impact of the purchase accounting write-down. We believe non-GAAP revenue will provide a better reflection of our ongoing business results. We will report revenue on both a GAAP and a non-GAAP basis during this timeframe. With this in mind, we are targeting Q2 '20 non-GAAP revenue in the range of $580 million to $590 million. In addition, we expect services Q2 '20 annual revenue growth more in line with Q4 of '19. We expect gross margins in the range of 85% to 85.5%. We estimate operating expenses of $325 million to $337 million in Q2, reflecting the addition of Shape, and the opportunity we have to invest in scale of that business. We anticipate our effective tax rate for Q2 will remain in the 21% to 22% range. Our Q2 earnings target is $2.14 to $2.17 per share. In the quarter, we expect share-based compensation expense of approximately $52 million to $53 million. With that, I will turn the call back over to François. François? François Locoh-Donou: Thank you, Frank. I am going to begin today with a spotlight on NGINX before highlighting some of the broader trends and customer wins in the quarter. First, today we announced an important milestone for the combine F5 and NGINX, the availability of Controller 3.0. Controller is our orchestration and analytics solution for NGINX. It simplifies how enterprises manage, monitor, and automate large scale NGINX deployments. Prior to the acquisition of NGINX, F5 was working on a cloud-native virtual ADC offering that featured an application-centric design. We expected the solution appropriately named cloud-native would set a new benchmark for how modern developer teams can deliver new apps to markets faster. Immediately after the close of the NGINX acquisition in May 2019, we merged the F5 team working on our cloud-native project with the NGINX controller development team. Today, as we begin only our third quarter as a combined team, we are very excited to release the converged F5-NGINX solution, NGINX Controller 3.0. This controller brings together the best of NGINX Controller 1.0 and 2.0, and adds the application-centric design and enterprise features pioneered by F5. For context on why this new approach is so important, we first need to emphasize the fundamental shift in the way our customers manage and deliver applications. Originally, there was a divide between the application teams that develop the code and the operations team that release and manage the finished application. DevOps evolved to bridge this divide, and many organizations embraced DevOps practices to deploy applications faster. As a result, organizations embraced software like NGINX Open Source and NGINX Plus to empower developers with control over their own infrastructure. Although this improved developer productivity, it also created Shadow IT. Many of these developers worked outside of IT, outside of the compliance and enterprise security requirements designed to protect applications and data. That is why we believe Controller 3.0 and its application-centric approach is highly differentiated. The application-centric design introduces a new self service portal, configuration API, application reporting and analytics, and built-in security capabilities. These combined app-centric capabilities empower developers from a centralized solution that maintains control and compliance for security and operations teams. Controller 3.0 shifts the center of gravity from the instance of infrastructure supporting the app, so the application itself. With role based access spanning AppDev, DevOps, SecOps, and NetOps, it enables deployment of a consistent set of multi-cloud application services across the application lifecycle. This enables different users to manage the tasks relevant to their role. In summary, we expect the availability of Controller 3.0 will be an accelerator for our NGINX business for three reasons. First, it expands the addressable market for NGINX to include adjacent app services in security and service mesh; second, it increases the average deal size by making large scale NGINX deployments easier to orchestrate; and third, it introduces new commercial capabilities that are attractive to NGINX's large open source base. Early feedback has been positive with customers noting that Controller 3.0 expands the number of use cases and deployments of NGINX particularly for Kubernetes Ingress and API Management. In addition to delivering the Controller 3.0 release, NGINX had its strongest quarter yet in Q1 with the team hitting all of its significant integration and value creation milestones. When we look at the future of F5, we're more confident now than ever before that NGINX will be a meaningful software growth driver. We continue to see evidence that NGINX is expanding our overall footprint and allowing us to serve new applications. This includes enabling application services consumption in native container environments. As an example, during Q1, we secured an NGINX Plus and NGINX Controller win with a new customer, a large Australian mining company, the customer was looking to modernize a legacy business process at its mine sites where a single failure could result in up to $4 million in productivity losses. By using NGINX for the API and Kubernetes in their applications, they now are able to collect and deliver over 30 different metrics. As a result, they're better able to ensure the speedy and reliable delivery of raw materials to their destinations. We're also seeing an uptick for NGINX inclusion in ELAs both in concert with F5 Solutions and on a standalone basis. During Q1, we closed our first 100% NGINX ELA with a large streaming services provider. NGINX Plus is enabling seamless capacity and service offering increases without disrupting critical revenue producing applications. The ELA construct was meaningful in this case, because the customer is able to deploy additional NGINX Plus instances as subscribers increase. In fact, when the actual number of subscribers surpassed forecasts out of the gate, the ELA provided the customer with the flexibility to immediately scale services with demand. Beyond NGINX, we continue to gain traction in software across the other growth drivers we have consistently highlighted, including ELA's service provider use cases, security use cases and deployments across multi-cloud environments. I will highlight customer examples of each of these in Q1. In fact, the first example highlights an ELA win with a large U.K. based telecommunications provider transitioning from hardware to software. In this case, the customers ADC infrastructure based on F5 hardware was nearing end-of-life. The need to refresh provided the customer with the opportunity to rethink the design and build a flexible virtualized environment aligned to its future business needs. Despite a competitor touting analytics and commercial flexibility, F5 was able to demonstrate best-in-class software based security and ADC capabilities. In addition, our analytics and reporting outperformed the competition and reduced the customers' operational costs. Looking at a security use case win in the quarter, during Q1, we secured a combined systems and software win with a German Health System company, F5 is providing Application Security Solutions including Advanced WAF to secure a platform that allows doctors, hospitals and health insurance companies consolidated access to patient records. Of note, we were the only provider able to meet the customers' security requirements of delivering a highly secure and scalable infrastructure that met stringent government standards. In an example of F5 Solutions deployed in multi-cloud environments, we secured a win with one of the U.K's most trusted financial brands, a large U.K. based mortgage provider. As part of their digital transformation program, they chose to deploy big IP virtual additions across two public clouds. This provided the growth capability to support an ever increasing number of online banking customers and enabled consistent application services and security across the cloud and data center. Before we move to Q&A, let me say how very enthusiastic we are to begin our integration work with our colleagues from Shape Security. To recap briefly, we believe the combination of F5 and Shape changes the game in application security. Shape is the leader in anti-fraud and abuse protection, solving a mission critical problem for large enterprises. Together with F5's world-class portfolio of application services, Shape and F5 will deliver the most comprehensive Application Security portfolio available. Beyond accelerating our growth momentum and more than doubling our addressable security market, Shape's machine learning and AI powered capabilities also will scale and extend F5's broad portfolio of application services. With Shape, we will expand our ability to optimize and protect customers' applications in an increasingly complex multi-cloud world. With the Shape transaction closing last week, the teams already have begun the integration process led by members of our Chief Strategy Officer, Tom Fountain's team under our value creation program. This is the same team that executed the very successful integration of NGINX and we're confident they will do the same with Shape leveraging lessons learned during the NGINX process. We're very pleased that Derek Smith, Shape's CEO will continue to lead the team as part of F5. In closing, digital transformation has changed the competitive stakes for nearly every business on the planet. Beyond delivering a compelling, reliable user experience, customers need partners and solutions that allow them to do more and move faster. At F5, we envision a future where all businesses can deploy new applications, or make changes to existing applications in minutes, not days. We're transforming F5 to make that vision a reality for our customers to enable, support, and secure every application across any environment with a consistent set of enterprise grade services; my sincere thanks to the entire F5 team for driving another great quarter, my thanks also to our partners, our customers and our shareholders for joining us on our journey. I'll remind you that our Analyst and Investor Day is scheduled for March 3rd in New York. We look forward to seeing many of you there. With that, Operator, we will now open the call to Q&A.

[Operator Instructions] Our first question comes from Tim Long with Barclays. Your line is open.

Thank you. Two questions, if I could. First, Frank, I think you talked about last time the cloud-related businesses, which are still in early phase were a meaningful portion of the total software revenues, could you just give us an update on how the cloud vertical did for you, and did you see some sequential growth there, and if not, were there ELA impacts or some other impacts? And then secondly, the services strength, it sounds like the year-over-year growth rate will tick back a little bit next quarter, but could you just talk looking out the next several quarters or year, should that line start to become under a little bit more pressure as the weight of the system revenue declines hits the longer term model? Thank you. François Locoh-Donou: Hey, Tim, it's François. I'll take the first question and then Frank will comment on the services question. On cloud revenues, Tim, we said last [technical difficulty] theyrepresented a meaningful portion of our total software revenues, and that portion continues to grow without cloud. Our business is growing even faster than our overall software business, and that's driven by a couple of things. One is, we have made our core solutions much easier to deploy in cloud environments with integrations with essentially all the large public cloud providers. We have added some automation and orchestration capabilities to enable our customers to include our solutions in automation environment, and then in their CICD development pipelines, much easier than that in the past. And third, I think we're continuing to see just significant growth in the marketplaces of the large public cloud providers, where our solutions are also available for purchase on a utility basis. So, when you look at the consumption models that we've enabled by both the technology and the commercial models that we've enabled, they've significantly reduced or eliminated any friction associated with using F5 in public clouds. Our ELAs are a good example of that, where customers buy an agreement for three years, and then they can deploy licenses in any environment, including in public clouds and port licenses from one public cloud to the other or one public cloud to back to on-prem. So, all of that leads to a growth in our cloud software revenue, which I think we said in the last quarter or in the six months of 2019 when we had growth in our software business of 90% for Q3 and Q4, that our cloud business had grown even faster than that, and it continues to be on a very strong growth trend.

And Tim, in relation to the services revenue, obviously, we were really pleased with having 8% year-over-year growth in Q1. That was obviously above what we had guided to the last time we talked about the service revenue components, which was all the way back at AIM [ph] of 2018, when we talked about mid-to-low growth during the Horizon One timeframe. So, this is great performance to see. What we're seeing actually is also an increase in the attach rates across all the cohorts of age contracts, and so, it's not really from our perspective, any decline in hardware that is impacting over a longer period of time, the decrease in the services revenue business, what it actually is more of the mix of things that come through as subscription, where that subscription looks more like a SaaS subscription, and a lot of that revenue gets recognized, almost all that revenue gets recognized in the product side and not the services side, and so, we continue to see strong growth in the services revenue, probably even above where we thought when we thought about this in March of 2018, but over a longer period of time, we do see those services revenues coming down in terms of growth rates, but that's really more of a mix issue than anything to do with a systems versus a software sale.

Okay, thank you.

Your next question comes from James Fish with Piper Sandler. Your line is open.

Hey, guys, thanks for the question here. If I can squeeze into as well, you know, enterprise still grew about 5% this quarter, yet the industry not everyone is seeing that kind of strength. I guess can you guys just go into what's going on in enterprise specifically that is showing that resiliency? Thanks. François Locoh-Donou: Hi, James, thanks for the question. Generally on the enterprise, we continue to see spending patterns that are -- we are going to call them relatively healthy in [technical difficulty] healthy as they were in 2018, but we haven't seen a change overall from the spending patterns that we saw in 2019. So, we seem to continue on that trend. There are some changes or variations by geography, and as you know, we pointed several times that we were seeing soft test in Europe and in the U.K. and DACH in particular, and I think we continue to see that today, but overall, the spending patterns are healthy. When you look, by the way, it's your context is that of other perhaps providers in infrastructure of data centers. What we're seeing more and more, James is the spending with us is tied to applications, and the growth of applications not tied to data center infrastructure per se. So, perhaps over time, you'll see more and more of that difference, but the spending patterns I relate to is what we see with our customers application projects.

Got it, and just a follow-up on that, I mean, it was a slight miss on what we were all expecting on products for the quarter, were there any pause in orders ahead of the combined NGINX Plus F5 Controller, and why do you expect unattached software to accelerate next quarter? François Locoh-Donou: Jim, that's two separate questions. I will start with the first one on product revenue growth. Product revenue growth was flat, and indeed it could have been a little better than that. What we saw in Q1, I think there were really a couple of factors in Q1; one is, there was some lumpiness in some large deals that we expected. In Q1, we also did a relatively important realignment of our North America sales organization, in part to prepare to better focus on certain verticals, and to also evolve the alignment of our teams, given the evolution that's going on in our portfolio with the new SaaS solution, NGINX coming in, Shape coming in, and I think that realignment caused a bit of a short-term pause on momentum. It's also for the better, and we'll see the benefits of that for the rest of the year. So, I think those were two of the factors specifically on product revenue growth. Your second question about why we expect strong revenue growth in Q2 for software specifically, I think this issue of large deal lumpiness does apply also to large software deals, and we have a very robust pipeline of software deals going into Q2, and so, we're pretty confident that we'll see a very strong growth in Q2.

Thanks, guys. François Locoh-Donou: Thank you, Jim.

Your next question comes from Sami Badri with Credit Suisse. Your line is open.

Hi, thank you. I wanted to touch up on the percentage of enterprise wins that are tied more to security use cases versus more of the legacy business, or I guess you would say more ADC like product sales. So, just trying to understand has the security for your customers shifted even further to the forefront of their decision-making, or would you say it's very comparable to how it was over the last year or so? Just trying to understand, has there been a big shift forward in terms of points of security use cases? François Locoh-Donou: Hi, Sami. Even though we don't -- today we don't break out our security revenues specifically. We continue to see strong growth in our security business, and I said before, we see more growth in our security business than the rest of the portfolio. And so, the answer to your question is, yes, we continue to see more and more of our deals driven by security use cases. In a lot of cases, these deals also pull other application services that you would classify more as application delivery services, but increasingly in a meaningful portion of our business, security is the use case that actually pulls the deal together. The second factor that kind of accelerates that trend, if you will, is that in multi-cloud environments, we are seeing double the security attach rate to our solutions that we are seeing on-prem, and so, given that more and more, our business is becoming multi-cloud in terms of the deployment, we are seeing an increase of our security business, and all of that by the way, we expect to see that accelerate with Shape, and the synergies that we expect to drive between the Shape portfolio and the F5 portfolio.

Got it, thank you. And then, I kind of just want to touch back onto the services growth rate that you saw in the quarter, obviously 8% is a positive surprise for most people looking at your model. And you identified three factors for what's driving that, one of them was new tools. So, given that this just played out in this quarter, should we expect similar high single-digit growth, or even in the same ballpark of growth and services for the rest of the year as these three factors continue to drive the business forward and continue to drive more services renewals, or should we expect like a moderation on the growth rate?

Jamie, I think we gave some fairly specific guidance for Q2 in particular, that probably gets you to a number that Tim was getting to, which is slightly down from where we printed Q1, but still very healthy in terms of the growth rate for Q2. As we look out over the course of the year, that services growth rate may start to modulate down particularly as we get more and more traction with some of the pure SaaS type revenue models that we discussed, but I think it's safe to say that the overall services growth rate is going to be higher than probably what we thought about at the end of our Horizon One guidance when we talked about this in March of 2018.

Got it. Thank you.

Your next question comes from Samik Chatterjee with J.P. Morgan. Your line is open.

Hi, thanks for taking the question. François, if I can just start off with the more longer term question, I mean, you've been making investments both organic as well as in organic since you kind of took over and have been aligning the company to growth areas. Now, as you think about the transformation, can you kind of help us think about which innings you're in, given that Frank's commented to prioritizing debt pay down seem to indicate you're kind of done with most of the heavy lifting in terms of the transformation that you envisioned? François Locoh-Donou: Thank you, Samik. Well, let me start with what's driving this transformation. So, I think we have a belief, so if you look at, us versus other players in the industry, we have a very strategic position, and that we are in line of the traffic between application and users for a very, very large number of applications. And with the acquisition of NGINX, we extended our reach very significantly, and we're not part of the flow for real hundred million applications. Our belief is simply driven by the fact that the number and complexities of applications in the future is going to increase and increase exponentially from where we are, given everybody this whole transformations, and as a result, we have an opportunity to extend that strategic position to more applications, and also intensify more applications, more application services for these applications, and that's really what we have been doing with this transformation, our priorities to do it organically, but when in the selective scenarios where we see an opportunity to accelerate that unification, for within a window of time, we have decided to do that inorganically, and you've seen two instances of that. Where we are in this translation, I would say, we are in the early innings, because we think we are actually in the very early innings of the digital transformation of our customers. So, I expect that the growth opportunity for F5 as we succeed in unifying these application services for this new multi-cloud environment is well ahead of us, and is very significant

Got it. And if I can quickly follow-up for Frank, Frank how should we think about the trajectory for OpEx beyond 2Q's level? I think you said $325 to $337, so, on beyond that how should we be thinking about the trajectory?

Yes. Samik, we just go back to what I said, pre the Shape acquisition, in terms of Q2 is always our seasonal low point in the OpEx cycle, and we intend to tick up in Q3 and Q4. In terms of operating margin expansion, we still feel very comfortable with the guidance that we put out for the year of 30 to 32 for the year, and so, directionally, I think Q2 will be the low point and then we're going to back up from there in Q3 and Q4.

Okay, thank you. Thanks for clarifying.

Your next question comes from Paul Silverstein with Cowen. Your line is open. Paul Silverstein your line is open. Your next question comes from Rod Hall with Goldman Sachs. Your line is open.

Yes. Hi, guys. I just wanted to ask a couple things on the Shape acquisition. You guys call out these non-GAAP adjustments to revenue, and I wanted to just come back to those -- I'm not sure I fully understand that. So, maybe if you could go back into a little bit more detail on exactly what that is? And then I wanted to -- also on Shape, just ask -- and maybe you said this earlier, but what was the contribution, or what is the contribution of Shape to the guidance? It seems like -- I think you guys have said there was an IRR of $70 million growing at 50%, and kind of if I do some rough math on that, I get to $5 million as maybe revenue contribution, maybe it's less than that, maybe more, but I'm just trying to get some idea of what's in the guidance from Shape? Thanks.

Sure, Rod. So, we are not specifically actually breaking out guidance for Shape. The reason why we did that with NGINX is because NGINX actually closed after we had given guidance, and so, when we reported NGINX, we tried to be specific on what was the relationship of our recognized revenue versus what we have guided to, and then the contribution from NGINX, but with Shape we've got it with it, and we're not breaking that out at this time. In terms of what we said and what François talked about when we actually announced the Shape acquisition and the non-GAAP revenue, with a SaaS based business model, and you see this quite frequently, in software, SaaS land where companies acquire with -- companies with a very large deferred revenue balance, given the way revenue comes into those SaaS models, where there's a significant write-down in that revenue as part of purchase accounting. And so, to try to give the users of our financial statements a better sense for what the long-term growth rate is going to be as opposed to a muted revenue, we're going to be reporting both GAAP and non-GAAP revenue to give better compatibility in years to come.

And, Frank, just one other thing to clarify, you guys said that services would grow at about the same rate, so I guess like 6%, and that including Shape looks to me like it drops out about $260 million of product revenue in the guided quarter, I mean is that a correct way to look at that?

That number isn't exactly what is familiar to me, but I think it's not so far off. I think the rate we had probably for Q4 last time was I think 6 to 6.5.

Yes, 6.3.

Yes [Multiple speakers]…

So, you're thinking almost exactly that growth rate?

Yes.

Okay.

There is no services revenue for Shape.

Right, okay, yeah, thank you, Frank. That's helpful too. Thanks.

Yes.

Your next question comes from the Fahad Najam with Cowen. Your line is open.

Thank you for taking my question. I'm trying to also understand the software revenue transfer. In terms of your software revenue, can you help us understand how much of it is recurring and how much is ELA?

So, we really have to split that out in the past.

In terms of -- is it reasonable to assume that majority of your software revenue is still coming from ELAs?

No, it's not. When we take a look, I think I think we talked about a few quarters ago, the pure percentage of recurring revenue of our total revenue was 60% plus, and we continue to build, and that's exactly what we saw in Q1.

Okay. And then if I may ask one more question on regarding to Shape Security, if we assume that almost all of Shape Security is security revenue, would you be breaking out your security revenue as a standalone now that Shape is closed?

We don't anticipate doing that at this time, Fahad, but we're talking about several different KPI metrics for AIM in March and TBD on what we decide there.

All right, thank you for my questions.

Sure. Thanks, Fahad.

Your next question comes from Amit Daryanani with Evercore. Your line is open.

Hi, thank you for taking the question. This is Lexi on for Amit. So, I guess what we're wondering about is when we're looking at the 60% to 70% growth in software moving forward, how much of that is organic versus M&A-driven? And then on the organic side, what are the top two or three contributors to that growth? François Locoh-Donou: Well, let me start with, as you know, we're not breaking out Shape and NGINX versus the F5 business prior to Shape and NGINX, but let me give you some indicators. Last year, the F5 software grew about 60% year-on-year. There was a very small contribution of NGINX in the second-half of the year to that growth. We guided after the NGINX acquisition to growth in software in our Horizon One which includes 2020, that was 35% to 40%. As you can see, we're well above that. We were at 60% for the full-year last year, 90% in the second-half, and we're at 50% this quarter. So, this just gives you a sense that the growth in -- I am going to call it F5 traditional software prior to even NGINX and Shape is very significant, and that's driven by a few things. It's driven by the work that we've done on making our software easier to consume in private clouds and automated environments is driven by the work that we've done in putting our software in public clouds, and it's driven by the work we've done in enabling new consumption models, ELA, subscriptions, utilities, et cetera in all environment. And that's -- the F5 was done, but it's also as a primary driver coming from our customer's desire to move from sort of hardware first postures to software first postures and seeing that change in our customers, both in enterprise and in the service provider world as service providers start more and more virtualizing their infrastructure, but there are very strong demand drivers from our customers to move to a software consumption of F5. When you look at 2020, we do expect strong contribution from NGINX and from Shape to achieve or exceed our 60% to 70% guidance.

Lexi, the only thing I'd add is that we did say during the prepared remarks that even without Shape, we did expect Q2 software growth to be above the 50% level that we experienced in Q1.

Great, thank you very much.

Thank you.

Your next question comes from Alex Henderson with Needham. Your line is open.

Great, thank you very much. I was hoping if you could talk a little bit about the NGINX acquisition relative to the selling process and the new products that you're introducing here. So as I understand it, the value of NGINX is predominantly in selling to application coders and DevOps people that generally focused on an application specific project and have had little success selling the controller because that's generally sold back to NetOps and IT administration. Conversely, your historical footprint that F5 has predominantly been selling into the NetOps and IT stuff but you didn't have really good access to the coding community, DevOps community. As you've introduced this 3.0 and are now bringing that back through the F5 distribution architecture, are you going to then integrate that into Beacon and then have the full-value of the controls from the Big IP through the NGINX Controller to centrally manage the people who are in the DevOps, the DevOps/Coder community, does that bring power back to the NetOps people in a way that they've been losing in the past? Can you talk a little bit about that dynamic? François Locoh-Donou: Yes, thank you, Alex. The short answer to all this is yes. But let me give you a bit of context. If you look at where NGINX had gotten traction in terms of revenue is really offering their data plane above the open source capabilities in the data plane offering additional features in the data plane, and as well as support and that's really how NGINX so far in the current model had monetized their technology. The Controller hold new dimension to that, to the DevOps community because number one, it makes it a lot easier to deploy and manage large scale implementations of NGINX data planes across a number of applications. And so, if you look at the folks who really to-date have been able to use NGINX, it's folks who are very sophisticated DevOps people and have the skills and expertise to integrate these deployments and manage them on their own. And so, with the Controller, it offers essentially an easy button that allows a much larger group of people that perhaps don't have the same sophistication to now use NGINX technology and use that technology on a large scale. So that's kind of the first driver, the Controller also integrates application centric design which really is targeted at more of the enterprise users including what we call Super-NetOps users in large enterprises. And so it does, it does gives an ability for the NetOps people to still have visibility of what goes on in the infrastructure under their applications and the DevOps people to have a self service model to deploy their applications faster and make changes for applications very quickly. So we at the time of the acquisitions, we said that F5 and NGINX together we're going to bridge the divide between NetOps and DevOps and the Controller holds really the manifestation of that strategy, and it's really the first offer in the markets that truly bridges the divide, and allow these two communities to work in concert serving the needs for speed of DevOps and serving the needs for visibility and compliance from the NetOps people. This Controller will indeed integrate in a technological Beacon, which will give visibility and analytics across all F5 environments, NGINX, Big IP, and other environments. So that's the convergence. We think this is a very important launch for our NGINX business because in addition to the capabilities around DevOps and bridging the divide, it also does increase the deal size for NGINX products because it makes large scale deployments easier and it offer new and exciting capabilities for a number of open source users that may want to move up a tier and use the Controller as a commercial technology.

Great, thank you very much. That's pretty clear.

Your next question comes from Simon Leopold with Raymond James. Your line is open.

Hi, this is Victor Chiu in for Simon Leopold. Can you just give us an update on where the Telcos stand regarding the shift to software implementations of ADC and kind of the outlook there? François Locoh-Donou: Hi, Simon. We're continuing to see an acceleration in Telcos starting to move to virtualization. We saw a couple of large deals again in that space this quarter with large service providers and this is driven by essentially readiness for 5G and also the desire for service providers to be able to move faster when they need to make changes to their infrastructure and overall be able to reduce their costs. What we're seeing for now is service providers kind of keeping their more hardware based infrastructure in place and starting kind of Greenfield software implementations for virtualization. Over the long time, I think these will converge, but for now those we see in the service providers that we work with, we see these as two separate environments for the time being. Overall the trend is accelerating.

It's helpful, thank you.

Your final question comes from Jeff Kvaal with Instinet. Your line is open. Jeff Kvaal, your line is open. Your final question comes from Meta Marshall with Morgan Stanley. Your line is open.

Look at there; I get the benefit from Jeff. Quick question on AWS partnership, just any update there that you could give? And then I assume because you revalidated the 32% to 33% operating margin target, but just on the mid to high single-digit dilution target and kind of breakeven on 24 months for Shape Security, have any of those expectations changed? That's it. Thanks.

Meta, I just want to be clear when we talked about 30% to 32% operating margin…

Sorry, 30% to 32%, yes, yes.

Just want to make sure that we're clear on the numbers, like go ahead, François, if you want to talk about AWS? François Locoh-Donou: Yes, Meta. So, we've made good progress on execution of our roadmap with AWS on the strategic collaboration agreement. We have been prioritizing the sort of highest impact opportunities. Both teams are now working very well in the field, we're seeing a number of new opportunities surface that we didn't have access to before, and if you recall in Q4, I said that that's what we expected in part because part of this agreement was that number of AWS solutions architects who face customers every day were going to be trained on F5 Solutions, and we expected them to bring opportunities back to F5, but perhaps we would not have seen before, and that's exactly what we have started to see. So, it's early days in the partnership, and we said that I think we expected it to really give us a meaningful result in the second-half of 2020, but from what we're seeing so far, we're pretty bullish about what we can accomplish together with AWS.

Great, thanks. François Locoh-Donou: Thank you, Meta.

Thank you for joining today's call. This concludes the call. You may now disconnect.