Good afternoon, and welcome to the F5 Networks Second Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] If you have any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Hello and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. François Locoh-Donou, F5's President and CEO; and Frank Pelzer, F5's Executive Vice President and CFO will be making prepared remarks on today's call. Other members of the F5 executive team are also 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 A copy of today's press release is available on our website at F5.com, where an archived version of the call will be available through July 27, 2020. The replay of today's discussion also will be available through midnight Pacific tomorrow, April 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 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 our SEC filings. Please note that F5 has no duty to update any information presented in this call. With that, I will turn the call over to François. François Locoh-Donou: Thank you, Suzanne, and good afternoon, everyone. Thank you for joining us today. For all of us, this has been an extraordinary few months. COVID-19 has altered just about everything about our daily lives. My deepest sympathizes go to those that have been personally affected by the disease, an already enormous number that sadly grows each day. At F5, our culture prioritizes the humaneness of us all. Like most companies, our first priority in a crisis is ensuring the health and safety of our employees, their families and our communities. For most of March and April, our entire global team has been working remotely. Beyond health and safety, though, we have taken a human-first approach to this crisis. For us, that means supporting our customers and each other however we can. Over the last weeks, I have witnessed small and large acts of F5ers' generosity, perseverance and creativity around the world. They have supported our customers through crisis, they have donated to communities most in need, and they have lent helping hands to colleagues who are struggling. These acts of humanity are what make me so proud to be an F5er. Frank and I will speak in greater detail about COVID-19's impact on our business during our remarks today. Overall, we delivered a very strong second fiscal quarter. Our 7% total revenue growth was driven by customer demand for reliable application access and performance and consistent application security. Our analysis shows COVID-19 had a net neutral impact on business in the quarter. For the first two and a half months of Q2, we experienced minimal disruption outside of Asia. Beginning in March, we experienced accelerated activity in our access and control solutions. We worked with customers too quickly and in some cases, massively sale access and capacity to deal with increasing numbers of remote workers. We also saw some evidence of certain customers accelerating purchases of F5 solutions to strengthen their critical application infrastructures. These tailwinds were offset by some project push-outs as customers prioritize acute COVID-19 priorities. Strong customer demand for software subscriptions and security use cases fueled our 96% overall software growth. Consistent with last quarter, our Systems business was down 11%, while our Services business grew 5%. Even considering the macro environment, our customer engagement remains very high. I will speak to our COVID-19-related actions in more detail and other customer highlights in the quarter, after Frank reviews the quarter's financial results and our Q3 outlook. Frank?

Thank you, François, and good afternoon, everyone. As François noted, we delivered a very strong Q2. You will note, we are reporting non-GAAP revenue this quarter. Non-GAAP revenue excludes the impact of the purchase accounting write-down on Shape's assumed deferred revenue. For transparency, we are committed to providing both GAAP and non-GAAP revenue during the period when purchase accounting will have an impact on Shape related revenue. On a GAAP basis, Q2 revenue was $583.4 million. Second quarter non-GAAP revenue of $585.6 million was up approximately 7% year-over-year and at the midpoint of our $580 million to $590 million guidance range. GAAP net income for the quarter was $61.4 million or $1 per share. Non-GAAP net income was $135.9 million or $2.23 per share. This was above the top end of our guidance range due to our strong revenue performance as well as our disciplined operating expense management in the quarter. Please note, as I review our revenue mix, I will be referring to non-GAAP revenue measures. Q2 product revenue of $262 million was up 10% year-over-year and accounted for approximately a 45% of total revenue. As François mentioned, software revenue grew 96% year-over-year. Software represented approximately 35% of product revenue in Q2, up from approximately 19% in the year-ago quarter. Excluding the partial quarter contribution from Shape, software grew 65% in Q2. We continue to see strong uptake in our software solutions, sold as subscriptions, including long-term subscriptions. Services revenue of $324 million grew 5% year-over-year and represented approximately 55% of revenue. Recurring revenue, which includes the maintenance portion of our services revenue and subscription revenue, totaled 65% of revenue in the quarter. Systems revenue of $171 million was down 11% year-over-year as customers continue to transition to software-based solutions. Systems accounted for approximately 65% of product revenue and 29% of total revenue in the quarter. On a regional basis, in Q2, we saw strength across our global theaters. Americas delivered 7% revenue growth year-over-year, representing 56% of total revenue. EMEA grew 8% and accounted for 25% of revenue, while APAC grew 9% and accounted for 19% of revenue. Looking at our bookings by vertical, enterprise customers represented 69% of product bookings and service providers accounted for 15%. Government customers represented 16% of product bookings, including 7% from US federal. Let us now discuss our Q2 operating results. GAAP gross margin in Q2 was 83%. Non-GAAP gross margin was 85%. GAAP operating expenses were $399 million. Non-GAAP operating expenses were $327 million. Q2's operating expenses reflect our normal seasonality as well as approximately $4 million in COVID-19-related costs. This includes a $2 million increase to our global good funding for COVID-19 relief efforts and approximately $2 million related to events canceled as a result of COVID-19. Our GAAP operating margin in Q2 was 14.3%, and our non-GAAP operating margin was 29.1%. Our GAAP effective tax rate for the quarter was 26.5% and our non-GAAP effective tax rate was 20.2%. Turning to the balance sheet. In Q2, we generated $182 million in cash flow from operations. Cash and investments totaled approximately $1 billion at quarter end. As a reminder, we added $400 million in term loan debt as part of the Shape acquisition, which closed in the quarter. During Q2, we repurchased approximately 50 million of F5 shares for 442,000 shares at an average price of $113.18. We have an estimated $1.3 billion remaining on our share repurchase authorization. DSO was 52 days, and capital expenditures for the quarter were $13 million. Deferred revenue increased 10% year-over-year to $1.3 billion, driven by an increase in maintenance contracts as well as acquired Shape deferred revenue. We ended the quarter with approximately 5,825 employees, up approximately 525 employees from Q1, including 380 associates added from Shape. Now, let me share our guidance for fiscal Q3 of 2020. Unless otherwise stated, please note that my guidance comments reference non-GAAP metrics. Over the last three years, we have taken steps to significantly strengthen our business and financial model. We believe our actions have built meaningful resiliency into F5's business. For example, recurring revenue as a percent of total revenue has increased from 52% in FY 2017 to 65% in the latest quarter. Likewise, software subscription as a percentage of software revenue has increased from 22% in FY 2017 to over 73% in Q2 of 2020. Our Q3 outlook factors in the expected impact of global uncertainty related to COVID-19 as we understand it to date. As we speak to you today, we have not seen a meaningful impact on bookings or in our supply chain. Visibility is understandably less clear beyond the current quarter. As a result, we are withdrawing the fiscal year 2020 outlook we provided in December of 2019 when we announced our Shape acquisition. In the near-term, we expect customers will continue to evaluate their ability to support their employees and consumers in prolonged social distancing scenarios. We expect to benefit from being the trusted and operationalized partner of the largest enterprises around the world. We also expect customers will scrutinize investment priorities, which could lead to longer purchasing cycles or deferred projects. As a result, we are targeting Q3 2020 non-GAAP revenue in the range of $555 million to $585 million. We expect gross margins at/or around 85%. We estimate operating expenses of $320 million to $332 million in Q3, reflecting a full quarter of Shape-related expenses. We anticipate our effective tax rate for Q3 will remain in the 21% to 22% range. Our Q3 earnings target is $1.91 to $2.13 per share. In the quarter, we expect share based compensation expense of approximately $52 million to $53 million. Let me speak briefly to our capital allocation philosophy. With the current environment and interest rates declining, we have reprioritized building our cash position ahead of paying down the $400 million term loan A associated with the Shape acquisition. Consistent with what we have said previously, we also retain the option of repurchasing shares opportunistically in any open trading window. With that, I will turn the call back over to François. François? François Locoh-Donou: Thank you, Frank. I mentioned previously that we have embraced a human-first approach to the COVID-19 crisis. I will speak to what that means in terms of our response for our employees, our communities, and our customers. First, for our employees. We implemented work-from-home for our Asia Pac teams in January and reached a global-wide work-from-home state by mid-March. We also implemented progressively more stringent work-related travel restrictions as the quarter progress and canceled or postponed large in-person events. Our human-first approach also means that we embrace and encourage flexibility. We want to ensure that F5ers have the time and space to deal with emergencies, but simply the new realities of working from home. Most importantly, today, we are making a pledge to our employees that there will be no layoffs at F5 in fiscal year 2020. In this time of adversity and difficulty, we want to remove any worry our employees may have about their jobs or providing for their families. We believe having this certainty will enable us to better focus on our customers and their needs. We are confident that, though there may be macro uncertainty around the second half of our fiscal year, we have built a resilient business that will allow us to weather that uncertainty without making substantial changes to our workforce. Turning to our community response. As I have shared in my last two annual shareholder letters, F5 recently has taken a stronger stance in our communities because we believe we have a role to play. As a result, our COVID-19 response includes actions to help our communities globally. Our global good program, established in 2018, includes paid time-off for employees to volunteer and charitable donation matching as well as opportunities for employees to participate in localized philanthropic campaigns and community impact grants. In response to COVID-19 related needs, we increased our global good funding by $2 million, dedicating a total of $2.5 million to be allocated three ways: first, targeting localized response, supporting the communities where we live and work. Second, through employee directed giving good employment including Tech for Good COVID-19 response grants. We are also leveraging our resources to support healthcare, nonprofit and educational organizations. These organizations are taking heroic steps to keep us all safe during this global crisis, and we want to help them with any security and technology challenges so they can stay focused on doing their essential work. For instance, on March 17, the same-day as the United States first shelter in place was announced in San Francisco, we launched a program designed to help organizations handle exponentially increased website traffic demands. We are providing one year free NGINX Plus where needed. Today, more than 20 healthcare, educational and non-profits are taking advantage of this assistance. Since then we have made additional services available for free to assist healthcare, education and other non-profits, including remote access and security solutions as well as 5,000 free service hours. Our human-first approach also includes doing what it takes to ensure our customers can protect their employees while continuing to serve their customers. I am very proud of the way the F5 team has confronted and concurred new and impossible to foresee challenges, often under extreme circumstances. For most of our customers, COVID-19-related remote application access quickly became a priority. In fact, by mid-March, we were experiencing a 400% increase in access-related support calls. Customers needed to quickly and securely scale remote access capabilities, and that fiber is were there to help. With thousands of employees suddenly working from home, we enabled one of the largest banking and investment institutions in the United States to scale its VPN access from 400,000 to 500,000 remote users. This ensured uninterrupted secure financial services to customers around the world. We also upgraded the traffic management solutions at a major multi-hospital health system in the U.S. both six hospitals and 10 specialty centers can continue providing exceptional care to patients. In another example, we helped a multinational mass media conglomerate, increased network capacity within one day, so that 100,000 additional employees could work from home in the U.S. and London. Understanding the urgent need to continue supporting consumers with their prescriptions and health insurance claims, a Fortune 10 Retail Healthcare Corporation added 160, 000 remote workers to its network in under 24 hours. And these are just a handful of the access and remote work-related challenges, our teams moved mountains to solve for customers in Q2. We continue to see strong demand coming from key growth areas, including subscriptions, security and NGINX. Our 96% software growth points to solid sales execution and continued customer adoption of our BIG-IP software for application delivery and security. During Q2, we saw continued rapid acceptance of our subscription-based offerings, both for one and three-year terms. As customers look to accelerate automation efforts, the flexibility of our subscription models enables them to take full advantage of their F5 investment. A quarter into its launch, we also are seeing promising early wins for NGINX Controller 3.0. Controller's application-centric design incorporates a self-service model, configuration API, application reporting and analytics and built-in security capabilities. These features appeal to new NGINX customers as well as current NGINX customers looking to scale. We are beginning to see real traction with our F5 and NGINX better together vision. In fact, we secured an NGINX win with F5 security in the quarter at an existing F5 customers, a leading oil and gas company in the Middle East. The customer has been working to consolidate its critical applications across all its operating companies into its main data center. With literally hundreds of applications, the customer was facing massive challenges, and one of the biggest was API management. Security was also a key concern, given the industry and the increased risk of attacks. They opted to deploy NGINX for API management with F5's advanced WAF for API security. As you know, the Shape acquisition closed in late January. Shape is already contributing and expanding the competitions we are having with customers. It has been roughly three months since we closed the acquisition, and our teams have hit the ground running. Integration is going very well. As we did with NGINX, we immediately augmented the Shape engineering efforts with F5 cybersecurity engineers to accelerate delivery of Shape's next-generation products. Near-term, we are leveraging our BIG-IP and civil line managed services presence to demonstrate Shape's capabilities to F5 customers and reduce the friction of implementing Shape solutions. F5 sellers have already identified dozens of Shape opportunities in F5 accounts, including securing our first joint win with a large Canadian banking customer. The customer was an existing F5's BIG-IP customer and began experiencing account takeover attacks on their web application. With the customer's permission, we turned Shape on in full mitigation mode and block a major attack that amounted to 90% of their total traffic. We believe there is significant opportunity for Shape's current and next-generation solutions within F5 accounts and with new logos. Longer term, 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. As we work through this COVID-19 crisis, we expect customers will shift their concern from application access to application security. Attackers prey on curiosity. The desire for information about COVID-19 or stimulus checks, combined with the increased use of personal and home devices offers ample opportunities for bad actors. Post-crisis we expect customers will increasingly look toward cloud-based and MSP-based solutions for better user experience, lower cost and better security as they look to accelerate their digital transformations. We are confident that the investments we have made to evolve F5 have positioned us well for the shift ahead. We are creating an application services platform that will help customers accelerate their digital transformations and fundamentally change the way application services are delivered and secured. For many enterprises today, application services live in operational silos with multiple vendors often managed by different teams. It is an inefficient process that makes managing user experience a complex and often manual task. When applications were static with infrequent changes and updates, this approach can survive, but that era has long passed. Today's world is dynamic with new applications based on micro services. The manual siloed approach creates too much friction and application delivery and security become real hindrances to digital transformation efforts. We have built the broadest portfolio of application services to enable our customers to eliminate silos. Through our organic efforts and the acquisition of NGINX, we have expanded the breadth of our application delivery services to address the needs of both traditional and modern applications. Likewise, through the work of our teams and the acquisition of Shape, we have consolidated powerful application security services into our portfolio, including DDOS, WAF, API security, and anti-bot protection. Our customers increasingly choose us to cover a suite of application services, because they care most about the user experience, about the application, not the infrastructure that underpins it. And we see that trend accelerating as we move increasingly to software deployed services. In closing, as Frank noted, when he discussed our Q3 outlook, COVID-19 has brought with a degree of uncertainty. While we may not be able to control the duration of the pandemic or our customers' short-term investment priorities, we are confident that we have built a resilient F5 that can withstand short-term uncertainty and emerge stronger. Over the last several years, we have transformed F5. We have built a strong base of recurring revenues. We have strengthened our position in key verticals globally, including government, financial services and technology. We have a great balance sheet and exceptionally strong operating model. We have future-proofed F5 with organic and inorganic investments to establish our position in modern environments and our leadership in application security. What is more, we are trusted and operationalized in the critical infrastructures of the largest enterprises around the world. Because of all of this, we are confident we will weather the storm. We have good near-term visibility and are confident that longer term, the investments we have made position us well. In short, we remain committed to our multi-cloud mission to enable and secure every app anywhere. We are confident our vision, our investments and our innovation are well-aligned with both near and longer term customer demand. My sincere thanks to the entire F5 team and our partners for their perseverance and can-do attitude and for driving a great quarter despite adversity. Through this crisis, the team has been tested and proven resourceful and customer obsessed. I feel very confident we will continue to rise to the challenge of whatever may come next. With that, operator, we will now open the call to Q&A.

[Operator Instructions] Your first question comes from James Fish with Piper Sandler. Your line is open.

Hey, François and Frank, first off, just congrats on an incredible quarter given the market conditions and I also hope everything is well with your families and the F5 team. I'll start it off with -- you guys look to be one of the few infrastructure companies to likely guide even a quarter out. I guess, Frank, why do you feel the need to do so? And what makes you confident it was not just a large pull-in of demand and specifically the software demand into fiscal Q2?

George, thanks so much for your question, and thanks so much for the well wishes. We obviously wish the same for you and your family. We actually -- in looking the prepared remarks that I and François stated, we have not seen the impact yet on our demand in any meaningful way. And it was a balance of gives and takes for what happened at the end of the quarter. So, we felt that it was prudent and took the SEC guidance on what -- to please give investors your best view at the time, and this is our best view at a time. Now, I would note that the revenue range is three times what we normally do, and we think that takes into account the uncertainty, but we thought that this was the prudent thing to do for our investors. François Locoh-Donou: And James, just to add to that, on the second part of your question on why we are confident, it's not just a pull. We looked carefully at what we were able to close this quarter, and we try to assess the impact of COVID-19 on our numbers. And when we look at what's happened, we actually did see some deal get pushed out into the following quarter. Now a number of these deals have now closed in April. But we did see some deals get pushed out as a result of COVID-19, either because people couldn't physically get the deals done or because they just shifted to other immediate priorities. And conversely, we also saw some things that were pulled in by some customers. And so when you balance those things out, we actually landed where we expected to land. And so if you look at our second quarter, we feel that COVID-19 essentially had no real impact when you balance the puts and the takes.

Got it. That makes a ton of sense, guys. I just want to dive into the enterprise vertical as my follow-up. How should I think about the vertical exposures within that understanding? Usually, it's a large financial services exposure. But just wanting to understand across the board, especially in some troubled areas like energy, retail and travel or hospitality-related? François Locoh-Donou: So, Jim, the as you know, the largest vertical for F5 are financial services, government, telco, and technology to a large extent. And so these verticals are -- at least at the moment, at least one step we moved from the immediate effect of the crisis relative to other verticals. And we've seen that in our enterprise business. If you look at the verticals that are most impacted, at least most directly impacted to date, by the crisis, which would be the ones you mentioned, so retail, transportation, travel and entertainment, hospitality industries. Those verticals taken altogether represent less than 10% of our enterprise business. So, our exposure there is limited.

Got it. Thanks. And congrats again, guys and best wishes. François Locoh-Donou: Thanks a lot, Jim.

Your next question comes from Tim Long with Barclays. Your line is open.

Thank you. Two quick ones, if I could. First, when you think about the kind of the access control security, some of the pieces of business that really accelerated in the second half of March. Could you just give us a little color on how you view the sustainability of that? Is this kind of a bubble or will there be some more follow-on to that type of business where it could represent a real market share more within that piece of the market? And then, secondly, can you talk a little bit about cloud business and how you did maybe with some of the larger hyperscales or the cloud vertical, however, you're comfortable talking about that? If you can give us a sense on how that vertical is shaping up? Thank you. François Locoh-Donou: Yes. Thank you, Tim. Tim, let me just clarify first on the Q2 results and what drove the strength specifically -- well, both in hardware and software. The access portion, so the part of our portfolio that is directly linked to work-from-home enablement did play a role, and we saw an increase in that business. But it is a small part of our business and so it really wasn't a material part to the overall results. So, if you look at what really drove the results, it is the usual drivers of our strategy and transformation, which is specifically in software, it's the work we've done on automating -- automation and orchestration that allows us to get into a lot of these new modern application environments, both with our BIG-IP software and increasingly with NGINX. It's the work we've done on new commercial models and we're seeing the adoption of subscriptions by our customers very rapidly as the form of consumption. You saw, Tim that about 73% of our software revenue this quarter was subscriptions. So, you see a huge acceleration there. And its continued strong security attach rates on software, both on-prem and even further in the cloud. And so if you look at the combination of those factors, that's really what's driving the -- certainly, the growth in the software business. As it relates specifically to the cloud, we continue to see very strong growth in our cloud business drive by people taking our software and implementing it into the major could providers, driven by stronger security attach rate in the public cloud than on-prem, and we're starting to see also good early signs from our partnership with AWS with the work that we've been doing with them at the front end of the business. So, all of those contributed to the growth. But I do want to stress that, unlike others who would have seen a huge bump, perhaps kind of a one-time bump related to work-from-home part of the portfolio, this is a small part of our portfolio for us, so it wasn't the real driver for the quarter.

Okay. Very helpful. Thank you.

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

Got it. Thank you. First, impressive quarter and performance during the challenging times. I just want to double-click into the systems revenue decline of 11% again this quarter, and you obviously saw a noticeable uptick in software revenue even without Shape? Just given the work-from-home dynamics we are seeing, do you see customers moving faster in this direction where they're going to consume more software than systems in a more permanent way, just given the economic backdrop and the health care, and I think of all the different implications we're dealing with at these times. Do you see this new move to virtualizing everything and no more systems more as, kind of, the typical deal or contract-type you're going to start seeing more often going forward? And would the pendulum to systems would ever swing back from here? That'd be great. François Locoh-Donou: Sami, hi. Look, I think the answer is, in short, yes. We are -- we're seeing both. I should say, we have some customers who support large applications, including applications that support collaboration and work-from-home, that -- have that infrastructure in the data center, and those customers actually need more hardware to support these applications, and so I think we're going to continue to see that. That being said, I think as a result of this crisis, the drivers that have moved people to go more to software are going to continue to be there impossibly accelerate. You've heard me say before that I think our customers are more mature in being able to build out a private cloud in their implementations of their infrastructure into public cloud. And also, as the ecosystem matures, more and more building this modern application environment, all of these things are driving for a software-first approach. And in our customer's, I would say, over the last 12 months we have seen more and more of them adopt a software-first policy and in some cases, a cloud-first policy. I think we're going to see both of them accelerate. The other thing that I think will accelerate is the shift to consumption of these technologies on a subscription basis. And we're seeing that in our one-year subscription agreement and three-year subscription agreements that more and more of our customers want to move to this model, that is an OpEx-based model for them. So, all around, I think you'll see an acceleration. But if you pull way back from that, what's going to happen, I think, Sami, just beyond the software, hardware shift is, year, more and more our customers are going to rely on applications to deliver and create value. You perhaps have heard us talk about what we call the era of application capital and that is the belief that for most of our customers, the most valuable assets they can possess is actually their applications. And that's been even truer in this crisis. And so I think you're going to see the growth of applications continue to accelerate and the value that is created and transacted from applications will accelerate, which means things like application security and application delivery will become even more important. And frankly, that was part of the believe system that led to our acquisition of Shape and NGINX a year ago.

Got it. Thank you. And then just on your software segment, you've already answered some questions regarding software performance and the public clouds and your AWS partnership. But in the actual quarter, do you see any contributing sales from Rakuten, just because they did launch their actual service very recently, I just want to know if there was any kind of sell-through and software specifically to Japan? François Locoh-Donou: Sami, so you know we announced Rakuten, I think it was a three quarters ago as a customer, you're right, it did launch this quarter and we are part of the infrastructure. They are on a subscription agreement with us. So, as they launch and expand the services, there'll be opportunities for us to expand with them. But I wouldn't comment specifically on the -- on their numbers in a given quarter.

Got it. And then I have one last question. On Services, last quarter you grew 8%. This quarter you are growing 5% and maybe could you just give us some guidance on how you should be thinking about this, maybe this is a question for Frank on how you should be thinking about your Services segment throughout kind of like the dynamics we're seeing today just because there has been quite a bit of variance in that growth rate?

Yes. I understand, Sami, and obviously 8% was a very strong quarter that we noted last quarter. We said that it would be a little closer to what we saw in Q4 for Q2 and that would have implied something around $327 million. We saw a little bit of push a in some of the professional services projects, which is why we ended up where we did in terms of a growth rate for next quarter on an absolute dollar basis, I would expect something close to what we did in Q2, but it could have some fluctuations of $2 million or $3 million in either direction.

Got it. Thank you very much.

Thank you, Sami.

Your next question comes from Rod Hall with Goldman Sachs. Your line is open.

Hi, guys, Thanks for the question. I wanted to see if you could maybe comment on linearity in the quarter just to help us understand how normal that was? And then I have a couple of follow-ups to that. François Locoh-Donou: Rod, well, linearity was just basically what we would have expected in a normal quarter. We basically were trending normally up until the I would say the first week of March. And then, you know, as things started to get more severe in U.S. and Europe. And we frankly had a period of time in a couple of his marks where we didn't know what to expect for the rest of March. But what we saw happen is some things started to get pushed out, but we also see -- saw some things get accelerated by a few customers. So in the end, linearity ended up being what we would have thought it would be at the beginning of the quarter.

Okay Frank. And I wanted to see, could you comment on -- just going back to Tim's question on work from home. What did accelerate at the end of the quarter? I would have thought it was work-from-home stuff, but it sounds like that wasn't that material or could you just put those two things together for us, so we kind of understand what happened there? François Locoh-Donou: Well, we had a couple of things that accelerated at the end of the quarter and compensated for the things that got pushed out. One was the part of our portfolio that directly addressed work from home or remote access to applications from end users. And the second part was some customers who -- in anticipation of potential supply chain issues, accelerated orders on a couple of projects. So, those were the two factors that were accelerated and compensated for other things that got pushed out.

Great. Okay. Thank you. Appreciate it.

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

Great. Thank you very much. So, you guys have been in the process of moving the center of gravity of your business away from data center spend to applications spend and it's pretty clear given the application growth that that had a pretty pronounced impact in the quarter. I was wondering if you could talk a little bit about the penetration in the Kubernetes environment as I understand it, 67% plus of -- and the ADCs deployed in Kubernetes are in fact NGINX. And to what extent that has tied together into pulling additional F5 products in both the security space particularly WAF, which is often deployed in that context and as well in terms of pulling the traditional F5 products which historically have not been as well represented in that sector. And finally, if you could, just address it, to what extent you're seeing that help pull your position into the CI/CD process or of companies that are moving in that direction. Thanks.

Alex, thank you. Actually, I'll start with the last part of your question and come back to the beginning. So, in terms of being part of CI/CD environment, Alex, we've done a lot of work starting now two years ago on our BIG-IP software to basically enhance the form factors and create automation templates that allowed us to fit very well in those environments. And one of the factors that's driving the growth in BIG-IP software right now specifically, is our ability to fit into these more automated environments, and we have more customers that are getting mature as part of the digital transformation and trying to get more velocity that are deploying us in those kinds of environments. And to the other part of your question, which is, as it relates to our fit with Kubernetes, as you know, NGINX is widely deployed in Kubernetes environment. In a lot of use cases NGINX is deployed as an Ingress controller to these environments. BIG-IP also has capability to be deployed as an Ingress controller, so we have both capabilities today. And we are seeing -- actually this quarter, I would say, was what we saw is an acceleration of this better together capability that we've talked about between F5 and NGINX, where in some of these modern application environments, where NGINX is a great fit, we're starting to see DevOps engineers kind of look at security as an important element of what they do more and more. And we've been able to win a couple of deals where NGNIX was used, for example, as an API gateway and F5 security WAF was brought in on top to create an overall API security solution. And so we think we're going to see more and more of those types of deals with the controller that we announced in January. So, the controller really is the easy button that allows our customers to deploy multiple modules and scale instances of NGNIX fairly rapidly and with a lot of -- without a lot of complexity. And the controller also enables us to bring together the original NGNIX use cases with the add on F5 WAF for example that we've -- we're putting under that controller. So, all of it together, what we see is, you know, F5 fitting both in these modern and traditional environments and bringing those two worlds together.

So to the extent that Kubernetes goes from what 10% of applications today to something in excess of 50% that should pull your growth along with it.

We should see accelerated growth as a result of that, yes, both because of our role in front of Kubernetes clusters, and also eventually our role inside of Kubernetes clusters, which we are -- we'll talk more about some new product initiatives we have for that.

Great. Thank you very much.

Your next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Great. Thank you. What is the strength of your capital structure and flexibility from the cash flow you guys were generating, but just wonder with the disruption in the private markets, and just your comments around the evolution of the security environment, how does that change your thoughts on acquisitions, or M&A? And then maybe second question, just a little bit more nitty, but how much should we consider professional services as a portion of services revenue, and just ability to actually recognize them that revenue, or ability to professional services to be recognized what's inability that trouble right now? Thanks.

Meta, I'll start with second question, it's Frank, and then I'll turn it François to address the M&A question. So, on the professional services, we have the capability of providing those services remotely for the large majority of our customers. There are some federal where we do need to actually be in person, and we've gotten that permission and if the employees feel comfortable, we are allowing that, but it's by far the exception as opposed to the rule. It's professional services as a whole in relation to our services a very small percentage of our total services bucket, most of our services revenue are associated with maintenance type relationships. But we have been able to provide a lot of those services remotely. François Locoh-Donou: And Meta to your question around how we think about M&A. I want to pull back up here, and the share my perspective, over the last 12 months, we spent $1.8 billion in aggregate in the acquisition of Shape and NGINX, which as I said before, were driven by the belief that applications would become even more valuable assets to our customers in that application delivery across modern and traditional environments would continue to grow. And application security is, we believe, the security issue of the next decade. And so we feel very, very good about the strategic position that we have now when you combine the assets from F5, NGINX and Shape. And so when we look at the near future, our focus really is on value creation from NGINX and Shape. We think there's a lot of growth to come from what we've done there and operating leverage to come from what we've done. Our focus is on creating value with that, also on continuing to rebuild our cash position and maintaining a very strong operating model. And so that's where we're focused in the short-term data and not on further M&A for the time being.

Got It. Thanks guys.

Your next question comes from Paul Silverstein with Cowen. Your line is open.

Guys, good evening. I was only going to ask one question, but I want to break the trend. Serious now. First off, Frank, if I did the math right, that shape was around $15 million, assuming all of its revenue is software and organic growth would have been something on the order of 4.3%, so Shape was about 3 percentage points of the growth?

Yes, you're about $1.2 million high. It was just over $14 million, Paul, but in that ballpark.

And that's obviously on software?

Yes, software. François Locoh-Donou: But Paul, overall software growth was 96%. And if you exclude Shape, it would have been around 65%.

Understood. All right. Secondly, I apologize going back to this, but I just want to make sure I fully understand. With respect to the accelerated purchases, François, did you say that those were not meaningful to the overall equation? And so it will not present -- I mean it should not present a meaningful issue in the next two, three, four quarters down the road in terms of stealing from the future? François Locoh-Donou: Yes, that is correct.

All right. Third, I believe you said AWS, and I don't know if you were speaking loosely, but when you were talking about the linear drivers for the quarter, you mentioned AWS, the relationship. I don't know if you meant specifically that, in fact, is generating revenue or you meant to say that, I think you said the early funded actions are going nicely with the revenue down the road. Which is it? And if it's generating revenue, can you give us any sense -- I trust it's too early to be meaningful, but can you give us any color on that? François Locoh-Donou: Paul, it's the latter. It's too early to be meaningful. So, it's more revenue down the road. What we are seeing today is two great areas of progress. One is considerable progress on joint development of combined solutions. And two is we are now getting quite a lot of leads from AWS. So if you recall in the past, we would meet at the customer front. Part of the reason we did this agreement is because we know a lot of our customers would like to leverage AWS. But in a lot of cases, AWS is in conversations that F5 was not a part of. And as a result of this agreement, AWS is now pulling in -- pulling F5 into these conversations and providing a lot of leads to us that we didn't have visibility to before. But those are great leading indicators, but revenue is further down the road.

One last question, if I might, but it's a little bit larger. If I looked at the numbers correctly, on a regional basis, in both this quarter and in the past December quarter. For the first time in a while, it looked like all three major regions were roughly in the same growth in that mid-single-digit to high single-digit growth, in prior periods we'd seen the numbers all over the place different regions, growing or declining not consistent with each other. And then on the -- from a vertical standpoint, I think telecom was down and I know it's always been a very lumpy business with that on a quarterly basis, but the thought arises that telecom services is one of the more resilient areas, given what's going on with the ongoing pandemic crisis and should continue to be resilient, perhaps even pick up in due course, any insight you can -- and I recognize this is not all of your telecom narrowly defined is not all that bucket of revenue, but any insight you can provide us there as well as well as on the question about the regions what you're saying. Thank you. François Locoh-Donou: Paul, I think you're correct about the -- all three regions, being in the same zone of mid-single-digit growth. As it relates to telecoms, what I would point to you there, Paul, is that where you would expect the work from home situation to really create potentially upside to spend in the telco space is really in the wireline area, F5 has more exposure to the wireless side of the equation. And so our performance in telco is driven more by what we'll see in the early, so we're spending to have these early 5G wins. And as, as the spend on 5G accelerates and the capacity upgrades come from 5G, we should see the benefit of that at F5. But we have a lot less correlation to wireline telco spend.

And François, in the regional, what you're seeing from a regional perspective? The fact that it's all converging with the same growth rates, are you seeing the same trends throughout the world? Are there any meaningful differences from region to region? François Locoh-Donou: There are also a couple of areas of softness and -- also in China, in North Asia, in particular, so that for us is -- sort of, China and Korea, we saw some softness there. We also saw some softness in Latin America. The rest of the world had strength, I would say, across the board. So that's kind of the differences that we've seen this quarter.

I appreciate it. I'll pass it on. Thank you.

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

Thanks for taking my questions. I guess two for me. First off the 96% growth on the software side, I think is at 65% on an organic basis, obviously it's fairly impressive. I'm sure it's going to be a big sticking point for investors to understand how much of this is sustainable versus not as you go forward. So, any insights on how much of this should be sustainable as we go forward and how should one think about the June quarter with regard to the software segment? François Locoh-Donou: So, I -- Amit, the -- first of all, I just want to be very clear, because I think it's a recurring theme here. And I don't believe any of these trends has to do with some kind of one-time pull in related to COVID-19. Because as I said before, what we saw in COVID on the impact of our business was basically net neutral. Some things got pulled in, some things got pushed out and that's where we're at. So, the fundamental drivers that that led to the growth in the -- in our software business are basically the things that I've been talking about around automation, orchestration, getting into these modern app environments, including Kubernetes environments. The continued growth of security use cases. Our acceleration into the cloud, our subscription business, the NGINX contribution, all of those things are -- these are long-term drivers. They're going to continue to be there quarter after quarter. Now, I would say, we -- if you'll look at Q3 and Q4 of this year, so the next two quarters. Last year we had 90% growth in software in each of those quarters. And so, if you -- the compare if you will year-on -ear is much tougher in Q3 than it was in Q2, or the year-on-year growth comparison. But that being said, but drivers -- I think the drivers are going to continue to be there, and if you recall, we also said that the growth in software in any given quarter because there was not yet a very large number could be lumpy. And so, in Q1 of 2020, I think we did, we did 50% growth in software. There was a worry I think at the time that our software goes were decelerating, and we said no, you'll see that we should have stronger growth in software into Q2. And we did have stronger growth in Q2 than we did in Q1. So that's just a trying to give you a full picture of how to look at our software growth quarter-on-quarter.

Really appreciate that. And then just as a follow-up, when I think about the 65% of sales that you guys are talking about as reoccurring businesses today is it really to think about this how much of this is maintenance versus subscription versus other things? And is that 65% number, a good rule of thumb for your profits as well as that's recurring? Thank you.

So, I think we've probably given you enough components to break most of that down, but out of the services piece that's still a healthy chunk of all of that recurring revenue, but we also talked about subscription as a percentage of software being -- over 73% in the quarter and taking those two factors into account, you get to over 65% of our total revenue being recurring. In terms of the profitability, we've got obviously very strong gross margins across the portfolio. And then what we do with the operating expenses beyond that is, is really in conjunction with the entirety of the portfolio, not just any one particular area. And so our gross margins are quite high in our services revenue, as you can see. And then in our software revenue, it's quite high as well, where we take a little bit of a lump in some of the managed services, as well as some of the hardware. But overall, still close to 85% in gross margins.

Your last question comes from Samik Chatterjee with JPMorgan. Your line is open.

Hi, guys. Thank you. This is Joe Cardoso on for Samik Chatterjee. Thanks for fitting me in. Just two quick questions here. One is, I just was curious to see if there was any correlation relative to the deals that you guys highlighted that were pushed in and pushed out, or brought in and push out? And then relative to your gross margin, and I understand this might be a little nitpicky, but came in towards the low end of your guide. I just was wondering if there was any incremental pressure that you guys saw there relative to 90 days ago when you guys gave the original guide. Thank you. François Locoh-Donou: Yes. Can you just -- on the first part of your question on the -- you said the correlation on deals that are pushed in and out. What -- could you just expand on what you mean by that?

Yes, sure. So, you guys highlighted that during the quarter, you saw some deals be brought in and some deals pushed out relative to the COVID-19 net-net, you guys didn't see an impact much on the COVID. So, I was just wondering if there was any correlation relative to the different deals that you saw get pushed out and then brought into the quarter, if there's any correlation between them, e.g., like how did you guys see hardware deals get pushed out? François Locoh-Donou: Okay. No, the answer is no. The ones that were pulled in, I think the two factors were customers that worried about supply chain and really wanted to put their -- to shore up some critical infrastructure very quickly or some things related to remote access and enabling work from home. On the deals that were pushed out, it was either customers that physically -- because they have to work from home, they were not able to process these deals. Or customers who had other immediate priorities in the case of the pandemic and just killed or postponed a project to go attend to other areas. But there wasn't -- there wasn't a correlation in terms of hardware, software, or frankly, even by segment. It was more of a case-by-case by customer.

And in terms of the gross margin question, we are on the low end because of Shape more than anything else.

Okay. Thank you, guys. François Locoh-Donou: Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for the question-and-answer session. This concludes today's conference call. You may now disconnect.