Good afternoon and welcome to the F5, Inc. Third Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants' lines have been placed on mute to prevent any background noise. Following the presentation, we will conduct a question-and-answer session and instructions on how queue up will be provided at that time. As of note, today's conference call is being recorded. If anyone has any objections, please disconnect at this time. I would now like to turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Hello and welcome. I am Suzanne DuLong, F5's Vice President of Investor Relations. Francois 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 session. A copy of today's press release is available on our website at f5.com, where an archived version of today's audio will be available through October 24, 2022. Visuals accompanying posted to our IR site at the conclusion of the call. To access the replay of today's call by phone, dial (888) 674-7070 or (416) 764-8692 and use meeting ID 468081. The telephonic replay will be available through midnight Pacific Time, July 26, 2022. 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 to 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 Francois. Francois Locoh-Donou: Thank you, Suzanne, and hello, everyone. Thank you for joining us today. In Q3, we delivered above the midpoint of our revenue guidance and well above the top end of our non-GAAP EPS guidance. Software growth of 38% drove 4% revenue growth year-over-year, partially offsetting continued supply chain constraints for systems. Overall, we delivered 5% product revenue growth. While supply chain challenges continue to limit our ability to ship systems, our demand signals remain strong, and we remain ahead of our initial FY '22 demand plan. While we have not seen meaningful improvement in supply volumes in the last three months, we also have not seen further deterioration. In general, our suppliers' commitment held up better in Q3 than in previous two quarters. Based on what we see today, we continue to expect our ability to ship systems will improve during our second quarter of fiscal 2023 as a result of our efforts to design out the most constrained component and the additional capacity our key suppliers expect beginning in the last calendar quarter of 2022. We likewise continue to expect that fiscal Q1 2023 will be the low point in systems revenue. We continue to see our growth opportunity fundamentally tied to applications to the growing number of apps as well as increased usage and heightened business value. In Q3, we saw strong demand as customers added, scaled and secured their applications with demand for security and from our service provider vertical, fueling sales in the quarter. In fact, security concerns continue to drive the majority of our customer engagement with demand showing up in both software and hardware form factors and across multiple consumption models. In one example from Q3, an existing BIG-IP hardware customer and one of the world's largest banking and financial services organizations turned to F5 when a large 4G incident revealed other vendor solutions were insufficiently protecting against zero-day threats. As a strategic partner, F5 demonstrated that our advanced web application firewall provided immediate protection against current and future vulnerabilities. Also during Q3, a large global retailer turned to F5 after experiencing challenges with their existing bot defense provider over a head-to-head three-month proof of concept against their current solution. Our distributed cloud bought and risk solution demonstrated significantly higher efficacy, and the customer is now deploying F5 to protect their apps and their customers. We have said previously that our customers are increasingly operating both traditional and modern architectures and looking to F5 to unite their strategies and simplify their operations. In the latest example of this trend, during Q3, an American multinational financial services corporation selected a combination of BIG-IP and NGINX to secure and process their high volume of critical encrypted transactions globally. Last quarter, I also spotlighted our new SaaS offering, F5 distributed cloud services, which we launched in February. With this platform, we are delivering security, multi-cloud networking and edge-based computing solutions on a unified Software-as-a-Service platform. While it is still very interest, we're seeing good traction and customer interest. During Q3, a global company specializing in clinical services and customizable medical devices selected our web application firewall and API protection solution to ensure rapid deployment of their security policy at scale and to provide global delivery of services in a hybrid multi-region support model or via SaaS. Finally, service providers drove demand in the quarter as customers scale and secure 4G cores and begin to move 5G cores into production. In one win in the quarter, we expanded our carrier-grade firewall business with a North American service provider as they continue to grow both their 4G and 5G traffic. In another service provider win, we expanded our offerings with an APAC-based customer to include BIG-IP cloud-native network functions for its 5G mobile core. These recently introduced cloud-native functions are perfect for moving workloads from legacy NFV to a modern cloud-native architecture. Cloud-native functions enable service providers and large enterprises to realize the full benefit of the cloud, automating and simplifying their operations with a more secure, more scalable network. Before I turn the call to Frank to review our Q3 results and our Q4 outlook, I will comment on the macro environment. As I said previously, we saw strong demand in Q3 and we've got a strong Q4 pipeline. At the same time, we also observed more backend linearity in Q3, and our sales teams have noted instances where more approvals were required to close deals. While we are not seeing it today, we believe the combination of macro uncertainty and inflation will put pressure on customer budgets and eventually force customers to reprioritize investments. We will continue to closely monitor signals from our customers. And like others, we are assessing adjustments we would make in the event that the environment or our customers turn more cautious. We have built a stronger and more resilient by expanding our solutions portfolio and our consumption models. As a result of our business transformation, F5 is positioned to benefit both from software growth drivers, including BIG-IP, NGINX, and our F5 distributed cloud services SaaS offerings, and what we expect will be persistent demand for systems. As a result of our successful transformation efforts to date, we have a stronger business model that increases our confidence sustained revenue and earnings growth. Now I will turn the call to Frank. Frank?

Thank you, Francois, and good afternoon, everyone. I will review our Q3 results before discussing our Q4 outlook. We delivered third quarter revenue of $674 million, reflecting a 4% growth year-over-year with 5% product growth. Product revenue represented 48% of total revenue in the quarter, and software represented 55% of product revenue. This is the second quarter in a row where the majority of our product revenue has come from software. Q3 software revenue grew 38% to $179 million. Systems revenue of $148 million declined 18% year-over-year due to ongoing supply chain challenges and resulting shipment delays. Similar to Q2, we added systems backlog of tens of millions of dollars in Q3. Rounding out our revenue picture, global services delivered $348 million in Q3 revenue, up 2% from the prior year. Taking a closer look at our software revenue, subscription-based revenue contributed 82% of total software revenue in the quarter, a new high. Term-based subscriptions continue to represent over half of our subscription revenue with smaller but growing contributions from Software-as-a-Service and utility consumption models. Revenue from recurring sources, which includes term subscriptions, Software-as-a-Service and utility-based revenue as well as the maintenance portion of our services revenue totaled 72% of revenue in the quarter. This is another milestone for us and is up from 66% in the year ago period. On a regional basis, Americas delivered 5% revenue growth year-over-year, representing 57% of total revenue. EMEA declined 7%, representing 23% of revenue, and APAC grew 15%, representing 19% of revenue. I'll remind you that given current supply chain constraints, our geographic revenue distribution in a quarter is not fully indicative of demand for each given region. Enterprise customers represented 70% of product bookings in the quarter. Service providers represented 18% and government customers represented 12%, including 3% from U.S. Federal. I will now share our Q3 operating results. GAAP gross margin was 80.6%. Non-GAAP gross margin was above our guide at 83.2%. While we continue to experience increased component prices, expedite fees and other sourcing-related costs, our Q3 gross margin reflects some improvement in average selling price on systems in the quarter. We are not ready to say it's a trend, but we are encouraged about the overall direction. GAAP operating expenses were $436 million. Non-GAAP operating expenses were $367 million. This is lower than our guided range as a result of some investments we delayed in anticipation of potential macro headwinds that did not materialize in the quarter and lower international expenses related to the strengthening dollar. Our GAAP operating margin was 15.9%. Our non-GAAP operating margin was 28.8%. Our GAAP effective tax rate for the quarter was 18%. Our non-GAAP effective tax rate was 17.4%, largely driven by a nonrecurring benefit associated with the filing of our federal income tax return during the quarter. GAAP net income for the quarter was $83 million or $1.37 per share. Our better-than-guided gross and operating margin performance and lower tax rate contributed to non-GAAP net income of $155 million or $2.57 per share. I will now turn to cash flow and the balance sheet. We generated $71 million in cash flow from operations in Q3. This is net of more than $30 million of payments to partners related to securing component inventory to support future hardware builds and component expedite fees. Capital expenditures for the quarter were $9 million. DSO for the quarter was 61 days. Similar to last quarter, this is up from historical levels due to back-ended shipping linearity in the quarter resulting from ongoing supply chain challenges. Cash and investments totaled approximately $757 million at quarter end. During the quarter, we repurchased approximately $250 million worth of F5 shares or approximately 1.5 million shares at an average price of $171 per share. Deferred revenue increased 14% year-over-year to $1.64 billion, up from $1.60 billion in Q2, largely driven by subscriptions and SaaS bookings growth and, to a lesser extent, deferred service maintenance. Finally, we ended the quarter with approximately 6,900 employees. I will now share our outlook for the fourth quarter. Unless otherwise stated, please note that my guidance comments reference non-GAAP metrics. We expect Q4 revenue in the range of $680 million to $700 million. Our pipeline indicates Q4 demand that would put our software revenue growth towards the high end of our 35% to 40% target for the year. As Francois discussed, however, we are very cognizant of the broader, more cautious environment. And as a result, we see more risk at the top end of our software growth range than there was a quarter ago. Given the Q3 strength in global services, we now expect global services revenue to grow approximately 1.5% to 2% for the year. We expect Q4 gross margins in a range of 82% to 83%. We are seeing component costs continue to rise and expect that they will be higher still next year. As a result, we implemented an approximately 15% price increase in systems effective July 1. Given our backlog, we expect it will take some quarters for the price increase to manifest into sustainable gross margin improvements. We estimate Q4 operating expenses of $374 million to $386 million, which would put our FY '22 operating margin at approximately 29%, an improvement of 100 to 200 basis points from our prior outlook. Factoring in the tax rate benefit from Q3, we now expect FY '22 effective tax rate will be approximately 19%. Our Q4 earnings target is $2.45 to $2.57 per share. We expect Q4 share-based compensation $61 million to $63 million. Finally, as we announced in the earnings press release, our Board authorized an additional $1 billion for our share repurchase program. This new authorization is incremental to the $272 million remaining in the existing program. As we have over the last two years, we expect to continue to balance share repurchases with other strategic uses of cash. This concludes our prepared remarks today. Operator, would you please open the call to Q&A?

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Sami Badri of Credit Suisse. Please go ahead.

First thing, I wanted to just clarify was, I think there was a reference to the backlog increasing or at least adding more revenues to the backlog. Could you clarify if the backlog exiting fiscal 3Q is actually higher than where it was exiting fiscal 2Q '22? So that's my first question. The second question is there's a lot of interest in the investor base around the software growth trajectory of the business. And I know you guys discussed coming in at the higher end of the range at fiscal year '22, but could you characterize or give us indication on what fiscal year '23 is going to look like, just because the growth rates are rather significant?

Sami, I'll take the first question, and then I'll let Francois speak to second question. So yes, the backlog was higher and significantly higher in Q3 than it was in exiting Q2. We did not quantify that. We talked about that we would do that at the end of the fiscal year. So, we'll actually release the number as part of the October call and you'll see it in the K. Francois Locoh-Donou: And Sami, I'll take the second part of your question. So, obviously, this is not a time where we are guiding for fiscal 2023. Overall, if you look at our -- the performance of the business in software, we guided 35% to 40% of our investor meeting about almost two years ago now in November of 2020. And we have delivered that in the first year in 2021, and this year we are delivering closer to the top end of the range of that guidance. So we feel very, very good about the drivers of software growth in the business that we talked about, including modern applications, the strength we are seeing in security and the adoption of multi-year agreements with F5 driven by digital transformations and automation. And so we will talk more about software growth for 2023 in October. But when you look at 2023, frankly, the factors, I think some of the factors that will affect that, one, of course, like every other company is the macro environment and will that have an effect on our growth rate. Today, frankly, it's too early to say, because we haven't seen a fundamental change in the buying behaviors of our customers across the globe based on the macro at this point. And I think the other factors will be, we, through the pandemic Sami, and this is specific I would say to the BIG-IP part of our business. We have seen continued demand for hardware and we have seen a number of customers that had declared that they would move to software pretty quickly that have actually recommitted to hardware and stayed with hardware longer. So, we are seeing very, very strong resilience and strong demand in hardware, sometimes at the expense of customers that would've moved to software. So if that, kind of mix shift, if you will continue in 2023 that may affect our software growth rate some, but it wouldn't affect the top-line because it would be more of a mix shift factor, if we continue to see that shift in customer behavior.

Got it. Thank you for that color. And I just wanted to just follow up on specifically service providers because that came up a couple of times on this call. Could you just give us some more specifics to what exactly the inflection is at this point for why service provider customers are relying more heavily to see -- what specifically are they seeing in the F5 portfolio that's most helpful or the right solution for them? Could you give us specifics on -- a little bit more detail on what's going on, maybe even a type of service provider? Francois Locoh-Donou: I think, Sami, there are two dynamics that -- our service provider business is doing very well, and it's the result of kind of two series of investments that are intercepting, I think the market at the right time. On the software side, we have invested heavily in cloud-native functions that allow service providers who want to build 5G cores to evolve to these more cloud made environments and be able to do that with us. And we have now a number of design wins in this area that are starting to go into production. And this quarter, we had more of these going into production, and so it's turning into revenue. And our expectation is that, that will continue. But we feel well positioned for the cycle of kind of next-generation software deployments with service providers both in the core infrastructure and at the edge. The other dynamic that's going on with service providers is that they continue to increase capacity in their 4G environment for increasing traffic, specifically 5G traffic, and we -- I think, as we shared before, we have continued to make investments in our hardware platforms to prepare for this increased demand for capacity. And as a result, we've been able to get to some price performance points that are really meeting the demands of high-scale, high-capacity service provider deployments, especially in the GI land part of the network for things like carrier-grade firewalls. And that's driving strong demand and execution in the service provider vertical.

Your next question comes from James Fish of Piper Sandler. Please go ahead.

Wanted to go off the software question from before. Is there a way to think about how much the unattached software deal flow is either independent or dependent on some of the systems deal flow given you're already selling into some of the largest organizations out there? And also, you mentioned there, Francois, multiyear agreements just now. Is duration actually extending for software? Francois Locoh-Donou: I'll start with the latter part of that question, Jim. So no, I think the trends are pretty steady, Jim, on the multiyear agreement. Typically, there are three-year agreements, and we haven't seen a fundamental change in duration. In terms of the first part of your question, if you take our software business, Jim, obviously, the part of the business that's driven by kind of net new modern applications largely circle with NGINX is not attached to any dynamics around hardware, and our managed services and SaaS business distributed cloud services is not attached to any dynamics on the hardware business. With BIG-IP, what you're seeing is the majority of the -- I would say the majority of the software business have a -- is not attached to the dynamics in hardware. However, there are customers who are -- we still have a number of customers who are migrating from a sort of hardware-first environment to a software-first environment. And where we have seen changes, I would say, not specifically this quarter but over the last 18 months, is we have seen a number of customers who have declared that they would go to a software-first environment sooner. And we have seen a number of them constantly delay that and stay with a more hardware-first environment. And I'd say that's where you have an effect in -- specifically in that area of the BIG-IP business, where you're seeing very strong resilience on the hardware and -- but it's affected a little bit our software growth rates.

All right. And then maybe for Frank. I do want to unpack your guide a bit here, essentially the back of The Street for Q4. Is there a way to understand for how much during the year will be a net issue from the supply chain constraints versus that prior, I believe, $60 million to $90 million headwind versus the macro impact you're now including in guidance?

Jim, I think you'll probably be able to see that more specifically in Q4 when we talk about the backlog number. We've -- as a policy, if the backlog number is more than 10% of product revenue, then we will release the actual number, and that's fully our expectation right now. And so I think you'll be able to effectively pull out what was the difference in that change and make some assumptions on what that would have meant for the software revenue or the total revenue overall. So, if you can hold off for three months, I think you'll get your answer.

Your next question comes from Meta Marshall of Morgan Stanley. Please go ahead.

This is Meta. A couple of questions. Just on the supply chain piece, when you're expecting bone by kind of the second quarter of next year, does that mean that the redesign process is kind of complete at that point or that there is component availability you expect to take place at that point? And then maybe as a second follow-on question, just how is the rSeries transition from iSeries for breton versus expectations? Francois Locoh-Donou: Meta, so when we're talking about improvements in our shipments in the second fiscal quarter of 2023, Meta, that's driven by two factors. The first is what we expect to be better component availability from our suppliers based on commitments they've made to us. And generally, from what we see, they are on track with execution against these commitments on some of the most constrained components. So that's factor number one. Factor number two is we have also been doing some design work to design around or redesign around some of the most constrained components, And those design efforts should complete towards the tail end of the calendar year, which would allow us to ship with the new components in the second quarter -- or the second fiscal quarter of '23. So those are the two factors driving that, Meta. As of today, both of those factors are really on track. Now we're talking about things that are happening in the next six to nine months and then looking at the full second half of 2023. So, we -- I'll caveat that by saying, there's still a ton of execution to come and commitments to be delivered by our suppliers. But generally, we're on track. And I would say, we feel incrementally better about that than we did three months ago from what we've seen from our suppliers' commitments and our own load. As it relates to rSeries, we are very happy with the ramp of rSeries. It actually is right now the fastest-renting new platform than we've had. The rent is happening 2x faster than prior new platform introductions. And that's largely due to the benefits of the rSeries platform. So it's an investment we started a few years ago really to bring to our customers several of the elements of the cloud to their on-premises environment. So they're getting a lot of automation benefits from rSeries, the ability to run multiple software tenants on the same platforms. And so for those customers that really want to automate their environments, which is at the heart of a lot of the digital transformation, what they're getting from rSeries is not just the price-performance benefits that you get from a new hardware platform, but also a lot of the cloud-like benefits of automation and multi-tenancy into the platform. So that's a good ramp, and we are -- I think we're pretty excited about what rSeries is going to do for the business, not just this year, but for the next few years.

Your next question comes from Tim Long of Barclays. Please go ahead.

Just a few on the software business. First, any update on getting more consistent metrics here, RPO, ARR and the dollar retention? Love to get an update on when we could potentially see those numbers more specifically and then maybe related to it, we're not going to get them now. Frank, could you a little -- talk a little bit about kind of what you're seeing is a nice jump in software? New deals, first true-forwards, how do we look at that aspect of the software growth this quarter? And then maybe the last one is maybe for you, Francois. We're coming up on three years of -- three-year anniversary of some of the really large first-term deals. Could you talk to us a little bit about how you think those renegotiations or renewals would be working and how that can work into the model? Maybe just a little color on the first set of deals, It should be a pivotal time to renew those deals, I would think. And if so, are those deals like some of the other business where it's kind of been running above run rates, so those renewals could potentially be larger than the initial contracts? Thank you.

Sure, Tim. Thanks so much for the question. I'll start and then I'll turn it over to Francois. So in terms of the split out on the software metrics, as we talked about ongoing, we're just starting to hit the second term of where a lot of this business started to take off. And so we are still tracking those metrics internally. We're not ready to release them externally. Again, as I've said in the past, we want to make sure that they are used in the right way and they can be predictive for the future outlook of the business. And as we get more and more of these data points over the next coming quarters, we do expect it's going to be more of a when, not if, we do release these metrics, and so more to come on that in FY '23. I know you had another question for Francois, specifically on some of the renewals. Francois Locoh-Donou: Yes. Generally, Tim, on the renewals, the early indicators on the revenue expansion opportunity are really good on these -- on those large multiyear agreements. What we're seeing is continued growth in application usage, and that's a part of what's driving the expansion in some of these opportunities. So, it's early days, as you said, but it's going very well. I would say the other driver -- I would say, both of renewals and new multiyear agreements is security. We had a very strong quarter, again, in security. And what we're seeing is that the portfolio that we've put together that allows our customers to put security capabilities across their environment is really making a difference. So this quarter, we had a very strong quarter on security with BIG-IP and WAF. And in fact, WAF across all of our form factors and BIG-IP, and we had a very strong quarter with NGINX security. This was the second quarter in a row where we had over 100 wins of NGINX with security. We have very strong debut, if you will, for our distributor cloud services WAP offering, which is our SaaS offering on security. And we're bringing all of these security offering over time under a single SaaS console that will allow our customers to push the same policy to all of their environments for protecting their applications. So that, if you will, competitive differentiation, we're seeing the benefit of that both in terms of expansion of existing agreements as well as new agreements that are driven by our security software.

Okay. And Frank, if I could, just to follow up on the metrics. In the past, you've talked a little bit about the software growth in the subscription business is being driven by true-forwards and/or new deals in the pipeline. So could you just give us a little color of kind of mix of growth between true-forward contribution and kind of new deal contribution?

Yes. So we're not going to split that out in the quarter. I think both of them were quite healthy. When I take a look at where we have been in the past, the true-forward contribution was along our expectations for the growth in new business. That was also in line with our expectations, and it resulted in the 38% software growth, but I'm not going to give a specific split between the two for the call.

Your next question comes from Alex Henderson of Needham. Please go ahead.

So across the presentation, you've made a number of references to buying behavior, specifically said at one point that buying behavior patterns haven't changed. Another point, you said that there's some increase in the number of signatures required. And you've weighed into your guide the expectation of continued softness in the broader economy. But can you talk a little bit about where you are in terms of the pipeline of activity that you're chasing, whether the activity is more robust, less robust than you would expect for this time of year? And particularly whether the deal sizes are bigger, smaller, how the price increase might impact that longevity; and within the backlog, whether there's any concern around cancellations of orders? Francois Locoh-Donou: Alex, let me start with the last part of your question. So no, with the backlog, we have absolutely no concerns about cancellations of orders. And that's because we haven't seen any. There hasn't been any trend into cancellation. And also, our lead times, whilst elongated, are still at about four months. And relative to some of the other hardware networking players, our lead times are still less than a number of others. And in fact, we have seen some of our orders delayed because customers were willing to get their -- some networking gear that had 12 months of lead time before ordering from F5 that only has two to six months of lead times, depending on which platform you pick. So we're not worried about cancellations at all. Let me talk to the other dynamics. You mentioned sort of customer buying behavior, the implications of price increases. So if I take a picture right now, Alex, of where we're at, no, we haven't seen on a global level, I would say, with the exception of Europe specifically, I'll come back to that in a moment, we have not seen a fundamental change in and buying behavior. We have seen a little back-ended linearity this quarter. And yes, some deals that had a little more quickly in terms of the number of approvals. But when we looked at the overall demand signals in the quarter, they were very strong. And we didn't see a fundamental change in close rates, if you will, from our pipeline. That is, I would say, across the globe is true. In Europe specifically, we did see some continued softness and very back-ended linearity. And we think the macro is definitely affecting buying behavior in Europe already today. Now when you look forward around what we think we will see in coming months, let's start with our pipeline is strong for Q4, and it is about what we would expect to have as of today for our Q4 pipeline. We have a number of large deals, specifically in software. Q4 is always a quarter with some of the largest deals. And we have that pipeline of large deals to deliver against our guidance. That being said, what we are cautious about is, of course, we see the dynamics in the macro environment. And I think the combination of inflation in the U.S. and elsewhere and also outside the U.S., foreign exchange, which ends up making our deal more expensive to customers in Europe, Latin America and Asia, those increases in cost to customers will force them to make prioritization calls on their investment. And we think that, that may result in some deals being pushed out or a different prioritization of projects than what we are currently expecting. We haven't seen any sign of that to-date. But our view is that given that every other networking vendor out there has made increases in prices, including us, customers at some point, their budgets are not going up exponentially, and they'll have to make these prioritization calls. I think that's the macro effect that we think we are likely to see in the next few months.

Your next question comes from Samik Chatterjee of JPMorgan. Please go ahead.

Francois, I just wanted to start with -- you've talked about the privatization of spending from your customers or the cautious environment you're in, but it also sounds like you're already starting to prepare internally for that to some extent. I mean more curious about hearing how you're thinking about the levels you can pull or the changes or reprioritization in terms of F5 internally. Would you sort of increase more sales incentives on the software business or focus more on security? Like what are the levels you're thinking you can sort of drive towards as you -- if you do see the customer behavior changing because of the macro? And then just a quick follow-up, I mean since the 15% price increase on systems, what have been the order trends that you've seen? Francois Locoh-Donou: Samik, just the last part of your question about the 15% price increase, what was your question about that?

Any color on the order trends since -- in stating the price increase -- pushing through the price increase? Francois Locoh-Donou: Okay. So let me just start with that part of the question. So Samik, yes, we did have a price increase that took effect on July 1. And we -- as a result of that, we had a number of orders that were pulled into our third quarter by customers wanting to order early to not be affected by that price increase. When we look at the demand signals for Q3, we normalize out these orders that were pulled in. And even if you normalize out for these orders, it was actually a strong -- I would say, strong to very strong demand quarter. In terms of the order trends post the price increase, we are early in the quarter, and the linearity that we're seeing today is not really different than what we would see in the first month of the quarter. To the first part of your question around how we're preparing for what may transpire in the macro, we -- you will see that we are being cautious. So, we're not -- I want to be clear, we're not seeing any change in our demand signals to date. But given everything else that's going on in the macro, we have, out of caution, significantly slowed down hiring in the last month across functions. There were some kind of investment initiatives that we have delayed to see more clearly what's going to transpire in the macro and see if we push forward with these investments or not. So right now, Samik, it's more on the management of our OpEx and OpEx run rate that we have focused our -- if you will, our preparation and readiness. Our incentives for software for our teams are pretty strong, and they're going to continue to remain strong. And hopefully, you've seen that in the results we're having on our software growth rates.

Your next question comes from Rod Hall of Goldman Sachs. Please go ahead.

I wanted to come back to the comment, I think, Francois, you made it about the back-end loaded nature of the quarter and kind of the DSOs. I guess I was curious about the drivers of the back-end loading. I mean you guys are saying you're not seeing demand impacts, but I wonder what -- how would you characterize the drivers for the back-end-loaded nature of the quarter? Was there a particular type of product you were selling more in the back end of the quarter? Was there a promotion, something like that? And I'm curious also on the DSOs whether you think next quarter those might come back down again.

So yes, Rod, let me start with the DSO side of the question and then let Francois talk about some of the back-end linearity of it. So the DSO, a lot of that, but I think it's going to be a little more linked to not bookings but just frankly when things can be shipped and is the components that came in, in the back half but then had the shipments go out. The bills can go out associated with that, and that drove the increase in the AR balance, which is the calculation for your DSO. So, it's likely going to see a return to normalcy when we get into the back half of FY '23, and that's when we're going to see DSOs come back down. I will note that the quality of those receivables that you haven't seen any aging increase, it just happens, to come after the end of the quarter. So, I will expect that DSOs, as Francois mentioned, in the shipping side in the back half of FY '23 to see when that's going to start coming down and that AR balance coming down. Francois Locoh-Donou: Yes. And Rod, on the back-end-loaded quarter, first of all, yes, it was more back ended but on a very, very strong demand quarter. And so I think I mentioned earlier that we saw at the very end of the quarter some order being -- some orders that we felt should have come in Q4 that came in Q3. We attributed some of that to customers are doing ahead of a price increase. I think if you normalize that out that would normalize a little more the linearity of the quarter. The other factor is Europe, which was, in fact, back-end loaded in linearity. We think that to do with the macro and the scrutiny there. And if you normalize out these two factors, there was probably also an element that we started to see around more customers, I want to say outside of Europe that had more approval cycles in their orders. And so, it may have pushed some orders that we may have expected in the second month but happened in the third month of the quarter.

Okay. And Francois, could I just follow up on one thing there? The -- so you're saying most of the types of orders you would have seen were systems kind of ahead of the pricing increases. Is that the right way to characterize the kind of the type of where you saw on the back end or... Francois Locoh-Donou: Yes. That phenomenon around the sort of orders very late in the quarter to avoid the price increase would have been more about systems than for software, where I think we had a more kind of normal linearity.

Your next question comes from Amit Daryanani of Evercore. Please go ahead.

I have two as well. I guess maybe to start with on the software side, right, even see at the higher end of the 35% to 40% growth rate this year, is there anything you would call out that's more onetime in nature that you think helped you on software growth in fiscal '22, ELAs or big deals or something? And if you do end up in a slower macro environment in '23, does that help or have your software business over time?

Amit, let me start with that, and I'll let Francois take the back half of your question. So, there's nothing that is abnormal to what our expectations were. I will note that we did have large deal activities that happened three years ago that repeated themselves -- that repeated itself this year. And that's going to be part of the normal process and reasons why we have potentially quarter-to-quarter volatility even on larger numbers. As these numbers increase in the denominator, that fluctuation will again be muted and decrease. But we've talked about some large deal activity in FY '19 that repeated itself this year, and it's always been part of our expectations, even going back to aim in November of 2020 when we thought about what a Horizon 2 outlook would be. Francois Locoh-Donou: Yes. And then the second part of your question, Amit, about -- so the question is whether if we are in a recession in 2023, does that help or hurt our software business, well, I will just give you some thoughts on how I think about this. On the one hand, I think one thing we've seen in past recessions is people hunker down and not start new things but continue to do the things that they've been doing. And so what that would mean is for our customers that are on hardware, it's likely that some of these customers would decide to just continue to stay in the hardware train rather than start a whole new architecture, a new project if they haven't done that already. And if you look at it that way, that would favor our hardware business and less our software business for where there's this BIG-IP opportunity between hardware and systems. On the other hand, the vast majority of our software business is subscriptions, and we think there are a number of customers that would prefer to move to this OpEx model in that environment rather than new large CapEx outlays. And that would favor more of our software business. But if you step back from it, I think the way we look at it is we have now built a business model that we think is actually quite resilient because we can meet our customers where they are at with hardware form factors, software form factors, a term subscription or perpetual and even SaaS and managed services form factors. And so if we have customers that want to add security capabilities to their environment but they want to start with a lower expense on a pay-as-you-go model, our SaaS offerings are going to get traction very rapidly. They already are, and that would favor that in 2023. So overall, we feel that we've got the resilience in the model to be able to meet customers in the economic model that makes most sense for them in a recessionary environment.

Perfect. And then if I could just follow up on the system side. You made some comments on fiscal Q1 in '23 will be the low point of systems revenue. Was that an absolute revenue statement or a signal that you're already declining peak over there? And then really if I look at all the stuff you have on the system side from the backlog with the price increases and we have the pent-up demand, is there a reason why you don't see your hardware business show positive growth next year?

So yes, let me start with that and let Francois. So, we were giving an absolute in terms of revenue dollar value for when Q1 would be the low point in our systems revenue. And that is truly a result of the components that are needed to ship when we see those schedules comings in. As Francois mentioned, the volatility associated with decommits has gone down from what we have experienced in recent quarters. That having been said, the commitments that we have, will show that, that will be the low point of what we can actually produce to that volume. And so that's why on a dollar basis, we expect Q1 to be the low point. Francois Locoh-Donou: And to your second part -- the second part of your question, Amit, whether we would expect hardware to show positive growth next year, our expectation would be yes, that our hardware would show positive growth next year if, of course, we are able to have the recovery profile in our supply availability that we have talked about. So, we are on track with that profile for now. And if that's confirmed, I would expect our hardware revenues to be greater next year than they are this year because we're not -- certainly our backlog, frankly, is so large today that even if in a recessionary environment the hardware demand was to be less than it is this year. And to be clear, this year, the hardware demand is much higher than the revenue we're printing. Even if the demand was to be less, we would be able to ship more revenues than we have this year. At this stage, I'm not going to speak to demand on our hardware business for next year because there are too many unknowns, and we know we're going into a macro environment. But specifically speaking to what hardware revenue could be, I would say, yes, assuming that supply is there.

And Amit, I will just -- I will reconfirm what Francois said last quarter. Q1 will be a low point. We will see a build in Q2 from there as some of the redesigns and components become more available. We expect Q3 to be higher yet still because of -- we're able to ramp production even more on the new platforms. And then ultimately, by Q4, we may actually start to begin to bring down backlog because of availability. But we do expect it to take a linear up curve on the revenue for systems, next year.

Your next question comes from Jim Suva of Citigroup. Please go ahead.

And I just have one question. Francois, in your prepared comments, you mentioned additional signatures and a little bit more time to get deals to be completely approved. I'm wondering, does this also allow the CTOs more time or more contemplation to do virtual instances, more software, VM type of production orders from you? Or is it kind of the cadence of what they're looking at kind of as you expect? I'm just kind of wondering what the elongated closing time, does it actually allow them to kind of take a step back and look at the whiteboard a little bit more about the solutions that they're buying from you? Francois Locoh-Donou: Thank you, Jim. So we're having, Jim, I think the expanded nature of our portfolio today, where we are able to engage our customers with a SaaS offering, a software offering or a hardware offering where they want to look at that or a combination of all of the above for their capabilities for addressing multiple applications in different environments, that's creating great strategic kind of architectural conversations with our customers, but they are happening early on in the cycle. So by the time we get into a project that's been defined and scoped by teams and getting into an approval cycle, I don't think it's a question of a CTO stepping back and saying, "Let me reconsider all of that." I think it's more of a -- in the first few quarters in the pandemic, there was such a rush to add capacity that I think people were just approving orders as soon as they were coming into the queue. And now and -- especially perhaps with people knowing maybe there's a recession around the corners, they're making sure that the right levels of approvals exist in an organization and they take their time. And when they make a decision, it's a full go. So I think it's more of that effect, Jim, than a step back around architecture, which does happen, but it's happening upfront, early on with our -- the customers' technology teams and our own technical teams.

Ladies and gentlemen, due to time constraints, we will take our last question from Simon Leopold of Raymond James. Please go ahead.

I wanted to get a quick clarification and then a broader question. On the clarification front, Francois, you indicated growth towards the high end for the software business for the year. And I think that might imply a sequential decline from the systems business in the September quarter. And I want to verify that if it is down sequentially, I just want to get a better understanding of why because it sounds like supply chain constraints are somewhat better or the same. So not sure on that point. And the broader question, I wanted to see if you could talk a little bit more about unpacking your enterprise verticals. In the past, you used to disclose more detail about the composition of your enterprise customers. And in light of the concerns about a potential recession, I think it would help to get a better understanding of the profile of these enterprise customers in some sense that you have very little to no exposure to the SMB market within that enterprise vertical and where your vulnerabilities might be. Thank you.

Let me start and I'll let Francois pick up on the back half of your question. So as you know, we -- as a policy, don't really guide to specific mixes within the components of our product revenue. I did say last quarter that we expect either Q4 or Q1 to be the low point of our systems revenue purely due to supplier commitments and what we could actually ship. And so, I'm not going to address are we going to be down sequentially quarter-over-quarter in terms of dollar revenue. But that directionally, I was saying last quarter and still feel that Q4 and Q1 were the low points. We're saying now specifically Q1 may be lower than Q4. I wasn't saying specifically what Q3 -- what Q4 is going to be in relation to Q3. The supply -- so on the supply chain dynamics, you are correct. We are seeing a bit of a stabilization on most of the components. But we do have what we call the Golden Screw component to building boxes, meaning that you have to have everything obviously to do it. And there are still a few components associated with our builds that are constrained and continue to be constrained. And so if for whatever reason, those are freed up, which is not our expectation, we could do better than these, but that's not the expectation that we want to set for you. There's still -- know broadly, the supply chain is getting better for most components. There are still a few in our specific builds that are constrained. We talked about fiscal Q2 being better, not because those suppliers are able to ship us more but more because of the redesign efforts that will likely go into effect in the back half of our fiscal Q1. That will help us with the improvements in build in Q2. Francois Locoh-Donou: And to the second part of your question, we have no -- virtually no exposure to the SMB segment. So our exposure is really large enterprises. And of course, service providers and government, but those are the three verticals we serve. And in the enterprise base, it's really the large enterprises around the world.

Ladies and gentlemen, this concludes your conference call for this afternoon. We would like to thank you all for participating and ask that you please disconnect your lines.