Good afternoon, and welcome to the F5 Inc. First Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] 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. 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 A copy of today's press release is available on our website at f5.com, where an archived version of today's audio will be available through April 28, 2024. The slide deck accompanying today's discussion is viewable on the webcast and will be posted to our IR site at the conclusion of our call. To access the replay of today's webcast by phone, dial 877-660-6853 or 201-612-7415 and use meeting ID 13743521. The telephonic replay will be available through mid-night Pacific Time, January 30, 2024. 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. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today's discussion. Please see our full GAAP to non-GAAP reconciliation in today's press release and in the appendix of our earnings slide deck. 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. In my remarks today, I will speak to our Q1 highlights as well as our expectations for Q2. Frank will then review the details of our Q1 results and provide some additional color about our outlook. Q1 was our third consecutive quarter of stability with the quarter and individual deals playing out largely as expected. We are not yet hearing that customers' budgets are increasing but the more predictable spending patterns are encouraging. Our team delivered another solid quarter with consistent performance across our geographic theaters. We had a strong performance from our service provider vertical, which correlates to unusually strong perpetual license software revenue in the quarter. This is likely less indicative of service provider trends overall and more of a reflection of F5's position in some key projects. We delivered Q1 revenue above the high end of our guidance range. In addition, our continued operating discipline enabled us to deliver non-GAAP operating margins of 35.5%. This is up more than 900 basis points from the year ago period. As a result of these factors and a modest tax benefit, we also delivered non-GAAP earnings per share growth of 39% with EPS of $3.43 per share, well above the high end of our guidance range. Our customers are still watching their budgets closely. As we look ahead, we are encouraged by several factors, including better predictability from customers, improving systems demand and the fact that some customers are making decisions that investments need to happen now. We are cautiously optimistic that these factors signal an easing of the extreme customer spending caution that characterized last year. And in fact, we are seeing stronger underlying demand. Because of the backlog headwind we faced in FY '24, despite improving demand signals, we expect our Q2 revenue will be down low-single digits from Q2 of last year. Frank will discuss our outlook in greater detail in a few minutes. As little as five years ago, nearly every large enterprise organization expected that they would move their application environments from on-premises to the public cloud or SaaS. They also expected that doing so would dramatically simplify their operations and reduce costs. Instead today, customers are grappling with a more intricate and costly set of challenges than ever before. In our most recent State of Application Strategy research, 88% of our customers report they are currently operating applications across on-premises and cloud environments. The same research found that 38% of organizations are hosting their applications in six different types of environments. The expanding number of applications across distributed environments demands specific expertise and tools for each environment, which adds cost and operational complexity. At the same time, this expanded landscape provides cybercriminals with more potential targets, amplifying security concerns. This complexity is further intensified by the rapid growth in the number of applications, a growth trajectory that is poised to accelerate significantly with the widespread adoption and proliferation of AI. We firmly believe that F5 is strategically positioned to support our customers as they navigate these escalating challenges across a rapidly evolving landscape. Our innovation and product portfolio evolution over the last several years has been aimed at addressing exactly these challenges. Before I pass the call to Frank, I will speak to some customer highlights from the quarter. Our F5 BIG-IP family serves traditional applications either on-premises, co-located or in cloud environments. BIG-IP's data plane performance, automation capabilities and seamless integration into public cloud environments continues to differentiate it from competitors. Our commitment to innovation and to providing customer flexibility through a range of consumption models also has enabled us to continue to gain share in the traditional ADC space. BIG-IP's capabilities drove a significant win in Q1 with a North American service provider. The customer is now deploying F5 cloud-native software at scale in its 5G architecture. Over the last five years, we have invested to modernize BIG-IP and to deliver industry leading container native functions to scale and secure 5G cloud infrastructures. These investments made this win possible. Modern F5 BIG-IP software is now powering the growth from this provider's consumer 5G handset demand and securing its overall fixed wireless access offerings, the fastest growing 5G service in North America. Turning to F5 NGINX, which serves modern container-native and microservices-based applications and APIs. We continue to see large enterprises adopt NGINX for their cloud and Kubernetes-based applications. As those applications scale, we are seeing our NGINX opportunity scale as well. In addition, customers are also leveraging NGINX for app layer security for containers. In Q1, an APAC-based auto manufacturer selected NGINX Plus with App Protect to power and protect its next-generation connected car data and service offering. Beyond the standard car-related maintenance information, the customer is empowering a range of vehicle related services from traffic management and statistics to fleet management and automated insurance claims. The customer envisions providing rich data enabled services, including traffic data to government agencies for road maintenance and enabling automated insurance claim filing using telemetry and location data. The customer selected NGINX for this ambitious project because of its unique ability to implement WAF for containers on AWS as well as its ability to support specific requirements that could not be met by native cloud services. F5 Distributed Cloud Services is a portfolio of SaaS and managed services which we have built from a combination of organic and inorganic efforts. The platform will have its second birthday shortly and continues to gain traction with customers as a result of its flexibility and strong capabilities. We are intercepting two exciting growth categories with Distributed Cloud, Webapp and API Protection, or WAAP, and the emerging opportunity in secure multi-cloud networking. In fact, we have seen explosive growth in the number of attacks blocked by Distributor Cloud's WAAP capabilities with a number of blocked attacks growing more than 100% in Q1 from Q4. In one WAAP win from the quarter, a large U.S. based financial institution selected F5 Distributed Cloud Services to solve its challenge of application security in hybrid cloud. The customer leveraged our flexible consumption program, adding API discovery and protection to manage the many fintech aggregator applications that access their financial data through APIs. F5 Distributed Cloud Services is also gaining traction in API security. In just the last 12 months, we have observed a substantial increase in the volume of API attacks. 95% of customers surveyed for our State of Application Strategy report say they have deployed an API gateway. This is a significant increase from 2019 when only 35% have deployed one. In fact, 92% of the total attacks mitigated by Distributed Cloud in Q1 were targeted towards APIs, that is up from 73% in Q4. As an example of an API security win in Q1, following multiple service impacting outages, a service provider in our APAC region selected Distributed Cloud to replace their prior API security vendor. Distributed Cloud's multi-cloud networking capabilities are making it possible for the customer to switch between public clouds when necessary while providing visibility and reporting via a single pane of glass. F5 Distributed Cloud Services is also gaining traction in secure multi-cloud networking use cases. In another example from Q1, a global provider of traditional and digital learning resources deployed Distributed Cloud Services. The customer was looking for consistent application-level security, multi-cloud scalability and networking. Distributed Cloud enable them to simplify their infrastructure, strengthen the management of their multi-cloud architecture and improve application security. They also deployed multiple F5 customer edge software instances in their cloud infrastructure and in their on-premises data center, enabling them to meet an aggressive cloud migration schedule. I will spend just a 2 minutes talking about the opportunity we see emerging with AI applications. AI will accelerate the growth in the number of applications and APIs. We are seeing the start of this already in the form of AI models and new AI-driven services becoming available from start-ups and established tech companies alike. We expect that as enterprises ramp adoption of AI over the next one to two years, that adoption will bring with it a flood of new enterprise applications that leverage those AI models and the APIs of the new AI-driven services. These AI-powered applications differ from typical applications in several important ways: first, they are API-driven, both in terms of leveraging the APIs of third-party AI models and services and also in terms of exposing their own capabilities as APIs for downstream use. Thus, API security for these AI-powered apps is critical. Customers tell us that API security is the top security service in used or planned for use to protect the integrity of AI and machine learning models. Customers also tell us that AI is driving demand for a comprehensive API security solution, inclusive of DDoS protection, bot detection and data masking and leak protection. Second, AI-powered applications tend to be comprised of many different components and data sources, which are distributed across hybrid and multi-cloud environments. F5 is an AI enabler. Effectively optimizing, managing and securing AI applications and the APIs that connect them demands a blend of specialized expertise and capabilities that align seamlessly with our solutions portfolio. We are the application and API expert with a deep understanding of the needs of demanding applications built over decades. This expertise and the capabilities of F5 Distributed Cloud Services is a powerful combination, particularly as customers begin to deploy real-life AI use cases. During Q1, we secured a win that highlights the synergies of our product families and showcases how F5 supports and enables AI-driven use cases. An EMEA-based service provider selected the combination of F5 Distributed Cloud Services and BIG-IP to secure and deliver a first-of-its-kind AI-as-a-service offering for their B2B customers. After comparing F5's capabilities to alternatives, the customer determined only F5 can meet the security and scalability requirements needed to deliver their offering in a cost efficient way. These real-life use cases offer a view to how we are enabling customers to secure, deliver and optimize their applications and APIs and how we simplify the challenges of operating in a complex hybrid multi-cloud world. Now I will turn the call to Frank. Frank?

Thank you, Francois, and good afternoon, everyone. I will review our Q1 results before I elaborate on our Q2 outlook. We delivered Q1 revenue of $693 million, reflecting sales that were down 1% year-over-year with a mix of 56% global services and 44% product revenue. Global services revenue of $387 million grew a strong 7% due to continued high maintenance renewals as well as the continued benefit from price increases we introduced in FY '22. Product revenue totaled $306 million, down 10% year-over-year. Systems revenue of $135 million declined 22% year-over-year, reflecting a lower level of backlog-related shipments than we had in the year ago period. Software revenue grew 2% over the year ago period to $170 million. As Francois noted, Q1 was an unusually strong perpetual software license quarter with several service providers opting to leverage CapEx versus OpEx models. Our perpetual software revenue was $46 million in Q1, representing 19% growth year-over-year and 27% of Q1 software revenue. We believe providing consumption model flexibility to our customers is a strategic advantage over competitors who restrict customer choice. The result can be quarters like this one, where we have unusual growth in perpetual software revenue. We do not believe that Q1 software revenue mix is indicative of changing customer preferences. Rather, it is a function of preferences of specific customers in the quarter. Our subscription-based revenue declined 3% year-over-year to $125 million, representing 73% of Q1's total software revenue. New subscriptions and renewals both performed to plan in the quarter. Revenue from recurring sources contributed 73% of Q1's revenue, up from 68% a year ago. This is down slightly from recent levels as a result of the perpetual license revenue contribution in the quarter. Recurring revenue includes subscription-based revenue as well as the maintenance portion of our services revenue. On a regional basis, revenue from Americas was down 6% year-over-year, representing 54% of total revenue. EMEA grew 5%, representing 28% of revenue, and APAC grew 8%, representing 18% of revenue. Looking at our major verticals. During Q1, enterprise represented 64% of product bookings, service providers represented 17%, and government customers represented 19%, including 4% from U.S. federal. Our Q1 operating results were strong, reflecting our continued operating discipline. GAAP gross margin was 80.3%, non-GAAP gross margin was 83.1%, an improvement of 264 basis points from Q1 of FY '23. GAAP operating expenses were $392 million. Non-GAAP operating expenses were $330 million. Our GAAP operating margin was 23.8%. Our non-GAAP operating margin was 35.5%, an improvement of more than 900 basis points from Q1 of FY '23. Our GAAP effective tax rate for the quarter was 20.7%. Our non-GAAP effective tax rate was 19.9%. This is below our initial expectations for the year as a result of IRS guidance issued during the quarter relating to foreign tax credits. Our GAAP net income for the quarter was $138 million or $2.32 per share. Our non-GAAP net income was $205 million or $3.43 per share, well above the top end of our guidance range. This is a result of the revenue beat, continued operating discipline with $0.09 as a result of the Q1 tax benefit. I will now turn to cash flow and the balance sheet, which also remain very strong. We generated $165 million in cash flow from operations in Q1. Capital expenditures for the quarter were $9 million. DSO for the quarter was 67 days due to the back end linearity of invoicing in the quarter. Cash and investments totaled approximately $832 million at quarter end. Deferred revenue increased 4% year-over-year to $1.83 billion. Our share repurchases reflect our ongoing commitment to returning cash to shareholders. We repurchased $150 million worth of F5 shares in Q1 at an average price of $163 per share. Finally, we ended the quarter with approximately 6,440 employees. Francois outlined our Q2 outlook at the start of the call. I'll recap it with some additional color. We expect Q2 revenue in the range of $675 million to $695 million. We expect gross margins in the range of 82% to 83%. We estimate Q2 operating expenses of $347 million to $359 million. This is a step-up from Q1, reflecting our seasonal sequential uptick related to the reset and payroll taxes. This year, it also reflects marketing expenses related to our global App World customer events, which will take place in Q2 in San Jose and in other locations across the globe. We are targeting Q2 non-GAAP EPS in the range of $2.79 to $2.91 per share. We expect Q2 share-based compensation expense of approximately $56 million to $58 million. At this point in the fiscal year, we are not revising our revenue or operating margin targets for FY '24. We continue to expect to achieve our FY '24 operating margin target range of 33% to 34%, which accounts for the normal seasonal step-up in operating expenses from Q1 to Q2. We now expect our FY '24 tax rate will be in the range of 21% to 22%, down slightly from our prior range of 21% to 23%. Given the new outlook in our annual tax rate, we now expect FY '24 non-GAAP EPS will grow between 6% to 8%. This is up from the 5% to 7% range we provided last quarter. I will now turn the call back over to François. François? Francois Locoh-Donou: Thank you, Frank. In conclusion, I will reiterate that F5 is the only company capable of securing, delivering and optimizing any application, any API regardless of its location, be it in the data center, any one of the public clouds, as SaaS, or at the network edge. Amidst a complex web of environments and solutions, F5 empowers customers to establish and maintain a consistent security posture across all of their applications, enhancing security, streamlining operations and reducing costs. Moreover, we are unifying our solutions to provide customers with unprecedented levels of visibility, manageability and automation. Before we go to questions, I will elaborate on the strategy and product session we are hosting next Thursday. We are going to use this event to discuss the hybrid multi-cloud challenges faced by large organizations worldwide including the implications of AI on applications, APIs and security. We also will provide an overview of our product families, the market opportunities we see for them and how our portfolio transformation benefits our customers and differentiates F5. We look forward to seeing several of you live in San Jose and more of you virtually. Operator, please open the call to questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Samik Chatterjee with JPMorgan. Please proceed with your question.

Hi. Thanks for the question, guys. This is Joe Cardoso on for Samik. Just one question from me. You highlighted encouraging signs of stabilizing demand trends. Can you maybe just talk to the year-over-year revenue trends that you're seeing excluding the backlog headwinds from a year ago? And then perhaps can you just provide a bit more granularity around that comment? Like, what are you seeing specifically under the hood from a customer or product portfolio perspective, and whether you're seeing any areas trending or any areas trending better than others? Thanks for the question. Francois Locoh-Donou: Well, thanks, Joe. Let me start with the first part of your question. Look, we shared at the beginning of the fiscal year that even though we were guiding revenue down -- flat to down to 3% down for the fiscal year, that if you excluded the backlog effect, that would amount to about mid-single digit growth. In terms of the demand that we are seeing, certainly in terms of demand, if I compare what we saw in the first half of 2023 versus the demand that we saw in Q1 and what we expect to see in our Q2, half-on-half, first half ‘23 to first half ‘24, demand is meaningfully up relative to last year. Now that is, I would say, generally broad-based across all major theaters and it’s also across most industry verticals. We talked to some verticals are performing better than others. But generally, broadly, we’ve seen that across all industry verticals. In terms of the product trends, I would say the trends are similar across the portfolio and not different than what we described in October with continued great progress on our core franchise, BIG-IP, continued progress on NGINX and modern applications and continued strong adoption of our Distributed Cloud Services.

No, I appreciate the color, Francois. Thanks. Francois Locoh-Donou: Thank you.

Thank you. Our next question is from Tim Long with Barclays. Please proceed with your question

Thank you. Two questions, if I could. First, maybe Frank or Francois, if you could just talk a little bit about the subscription number in the quarter. I guess the perpetual is really strong, but could you talk a little bit about particularly the sequential downtick in subscription? Is this related to kind of true forwards or any kind of cannibalization or anything else in there you could go a little deeper on the software subscription weakness? And then, the follow-up for Francois, I think you mentioned something about competitive wins in more in the systems and traditional ADC area. Obviously, there's some disruption at one of your major competitors. Could you just give a little color on how things are going competitively and how win rates are and how much room you think there is to take share in that more traditional ADC area? Thank you.

Yeh. Absolutely, Tim. Let me take the first part and I'll let Francois take the second part. So with subscriptions, again, as I mentioned in the prepared remarks, largely performed to our expectations. On a sequential basis, if we were purely ratable, obviously, that would be concerning. But since we obviously have got some 606 term-based subscriptions in there that will hit at different points in time. We had more renewals, frankly, in Q4 than we did in Q1. And so that's just the natural progression on the sequential growth side there. But we're not concerned at all about it. This is really our renewals and the new performed to our expectations and no change for our outlook for the year based off of that. But I'll let Francois talk a little bit on the competitive side. Francois Locoh-Donou: Tim, on the competitive side, we felt we are in a pretty strong competitive position, and I think our position of strength is, in fact, growing. And I would say, we are seeing, actually, increased inbound interest from both customers and partners into F5, and I think that's largely due to two big factors. One factor is, frankly, we have not one, but three competitors that have gone through a change of control events in the last 12 months to 18 months. One was primarily a hardware software competitor, one has been a software competitor and one has been a SaaS competitor. And all three have had to kind of change their customer playbook as a result. And we're seeing inbound customer interest from that. That contrasts with our approach and, frankly, the investments we've made over the last several years, where we have, just at this point in time, where some competitors are getting weaker. We're introducing a very exciting set of proposition, that rSeries has had very strong adoption in the market. We're introducing next-generation hardware and software, that creates an exciting road map for competitors -- sorry, for customers. And so the contracting sort of investment in road maps between players is really strengthening our hands. And we're seeing a lot of accounts where historically, we had been blocked or locked out of these accounts that we have been able to crack in the last couple of quarters and we expect that to continue. In fact, just this week, we had a customer here that is one of the largest companies in America, one of the Fortune 100. We have not been able to crack that account. And we are now migrating pretty much their entire application estate from a competitor to F5. And the approach with these customers is, we are landing them generally on our BIG-IP platform, but then we're able to land and expand and cross-sell into the other value propositions in the portfolio once they discover the full portfolio of F5 when they start working with us. So we think that, that trend is going to continue, and we feel very good about our competitive position over the next two to three quarters. And we’re starting to see a growing pipeline that reflects that stronger position. Okay. Thank you, guys.

Thank you. Our next question is from Amit Daryanani with Evercore ISI. Please proceed with your question

Thanks for taking my question. I have two as well. I guess first up on the software performance, I'd love to just understand if you still think for the fiscal year, flat to up modestly is the right way to think about it? And if there is any change in how you think about sort of the -- what happens to the perpetual market or the managed services or subscription as you go from here? Just an update on how you think about software stacking up for the rest of the year in any of those three buckets that changed your perspective right now?

Yeah, Amit. Let me start with that one. No is the answer. It's one quarter doesn't make a trend. We're obviously encouraged by what we saw in software in Q1. More to come on Q2 and beyond. But at this point, we're not changing the outlook on that modest growth view for software and largely, again, subscription and perpetual service. It was a big quarter for perpetual this quarter. It may not be the same next quarter in that regard. This is really about some specific customer preferences in the service provider market. And they could have easily have gone into a subscription model and we would have seen that dynamic reverse. So no real change in our outlook for software right now for FY '24.

Got it. And then I guess last time around, you talked about there might be a 400 basis point, 500 basis point headwind from this managed services transition you're going to take across '24 and '25. I was wondering, if there was a better sense of when do you think those headwinds would happen if it's this year or next year? And then, Frank, on the operating margin side, you had quite a bit of outperformance in the December quarter, which is really notable. And I realize you don't want to change the long-term target, but I'm wondering, was there anything one-off that enabled this upside in December or not? Thanks.

Sure, Amit. So look, we changed the outlook on EPS for the year, up 1%, really driven by tax in the quarter itself with OpEx. There were a few expenses that probably got pushed into either Q2 or beyond. But seasonally, Q1 is relatively strong, Q2 goes down because of the tax resets. It's also going down this year, in particular because we're having our marketing event. We take those expenses in the quarter in Q2 versus previous years where they have been in Q3 or Q4. We actually didn't do one in FY '23. And so as a comparative point, that's new expense this year on a year-over-year basis. But the seasonality of where we really hit that tax reset happens in Q2 and we build our way back up from there, so that's that. In terms of some of the migration of our Silverline, it's going as expected. It's very early. There's not really a lot more to say about it. As we said, generally, we're going to see more -- we'll probably see a balanced amount of customer accounts, but more of the ARR come across that will come across in FY '25, just given some of the feature parity that we're still working on that's going to take some time. And the bigger customers are the long tail of the ones to migrate. So it's just going as planned right now, but we're obviously one quarter into an eight quarter transition.

Perfect. Thank you.

Thank you. Our next question is from Meta Marshall with Morgan Stanley. Please proceed with your question

Great. Thanks. Francois, you noted that you weren't yet seeing kind of customer budgets change but getting to more predictable spending patterns. Just what are you seeing in terms of RFP activity, understanding people are still kind of doing evaluations? But are you starting to kind of see a pickup in the valuations that they're doing and any particular categories in which you're seeing that pickup in activity? And then second, just on the service provider piece, it sounds as if that's really just an election decision. But anything that you're -- just given how constrained service provider spending has been over the last year, just anything that you were seeing in terms of them being more active in the market or any specifics around that vertical would be helpful? Thanks. Francois Locoh-Donou: Meta, the -- so let me start with the environment. What we have seen, Meta, is the -- relative to -- if I compare to where we were kind of nine months, 12 months ago, we feel that the environment is more stable and more predictable in the sense that the budgets that are in place and the projects that our customers have told us they're moving forward to, when we get to the end of a selection process or the end of an RFP process, we very rarely get into a surprise where a project is canceled or an extra approval comes in and deals get delayed or pushed out. So that has subsided largely, and therefore, we see more predictability with customers. That said, I would say there -- we haven't seen yet a notable increase in budgets. I think for the most part, for the calendar year, our customers don't have the kind of budget fully in place yet. So we'll start to learn more about that as the quarter goes on here. But what we are seeing that is encouraging is when you look at our pipeline over the next four quarters, we are seeing an uptick in the pipeline and potentially more tech refresh kind of activities. So that's an encouraging sign for what's ahead. In terms of service providers, I would say generally, we're still seeing service providers continue to sweat their assets as much as they can and therefore suppress CapEx spend as much as they can. There are some exceptions to that, including, I mentioned in my prepared remarks, a significant win with a North American service provider in their 5G architecture. And so this is work that we have been doing with them now for several years, and we have been able to be part of their core 5G architecture. And this is a spend for the next phase of scaling of their 5G services, which is really driven by consumer demand for 5G as well as fixed wireless access, which is a fast growing service. And so there are a couple of carriers in America and outside that are moving forward with 5G and are investing in their architecture and scaling their architecture. And we're part of that and that's where we're seeing success. That, Meta, I should also say is the result and the benefit from investments we started making over four years ago. And so over the last four years, we have invested hundreds of millions of dollars in our BIG-IP franchise really to future-proof the BIG-IP franchise for the next decade, and really by bringing to the BIG-IP franchise benefits that customers would have seen either in the public cloud or in cloud-native architectures. And those 5G architectures in the case of service provider are container-native and cloud-native, and we were really first out of the gate to bring a lot of 5G functions into a cloud-native architecture. And these investments that we've made into our BIG-IP platform are really starting to benefit in terms of customer wins where customers are now starting to reinvest for the future. We're seeing that in service provider, but I think that's also going to play out in the enterprise as enterprises start to adopt the next generation of BIG-IP.

Great. Thanks so much.

Thank you. Our next question is from James Fish with Piper Sandler. Please proceed with your question

Hey, guys. Thanks for the question here. Just building off of some of the prior ones. Frank, can you just help us with how much of the recurring software product was tied to that SaaS drawdown or the headwinds that we've talked about with moving this more towards the Distributed Cloud Services over time versus the term license or roughly where that SaaS ARR sits today? And what's the early feedback been from some of these customers on this transition, Francois?

Yeah, Fish, not going to update Q1. Obviously, we talked about doing that on an annual basis. But where we were at the end of Q4 was roughly $200 million of ARR associated with that business. $135 million of that was going to be recurring. We are going to be growing that really on the back of Distributed Cloud, and $65 million of that was split between $30 million of product that we were retiring and did not expect to have a future, and $35 million or so was from Silverline that would migrate -- some portion of that would hopefully migrate over the next couple of years. But not going to update where we are at the end of Q1 in regards to that. We will give an update for that at the end of the year. But I'll let Francois answer the second part of your question. Francois Locoh-Donou: What's the second part?

Sorry. Francois Locoh-Donou: Jim, can you repeat the second part?

Yeah. I was just looking for the early feedback from some of those customers that were part of that $65 million that essentially is being end of life, what those conversations are looking like at this point? Francois Locoh-Donou: Okay. Great. No, Jim, look, those -- we are -- as Frank said, we are early days in this process, Jim, and we said it's going to happen over the next couple of years, so I think it's very early to draw some kind of long-term conclusions. However, we have migrated some customers from Silverline to F5 Distributed Cloud Services. And for those customers who have completed the migration, it has gone very well. And generally, they're very happy with the outcome. So we are pleased with the early results of these migrations but more to come as we get more into it.

Got it. I know you don't want to give too much ahead of the event here in a few weeks, but are you guys seeing much contribution from AI? Or how should we think about when this contribution could really pick up for you guys and accelerate product growth? Thanks, guys. A – Francois Locoh-Donou: Thank you, Jim. So our view on AI, so we have started seeing this quarter kind of the first emerging AI use cases of AI workloads that either needed to be traffic managed or load balanced or required some security. It’s early days because we think enterprise adoption and deployment of AI workloads is going to really start happening more, we think, in 12 months to 24 months. We think a lot of enterprises right now are testing some AI models and experimenting and getting through the learning curve, but they’re not at a stage of deploying in production. So we think it’s kind of 12 months to 24 months away even though we’re starting to see the first couple of use cases. That being said, from what we are seeing today, we feel very good that F5 is going to be an enabler of AI adoption and AI deployment. And we feel this way for two reasons. The first is AI workloads are heavy consumers of APIs. And so APIs play a big role in the architecture of AI workloads because they need to ingest data and information or services from other AI models and also expose their own capabilities to other AI models or data sources. And because of that, there’s a lot of API traffic in AI workloads. And therefore, API security is going to be a substantial opportunity for AI, and we are very well positioned for that with the investments that we’ve made across the portfolio, including in F5 Distributed Cloud Services. And then the second reason is that we’re seeing AI workloads becoming quite distributed because some of the compute needs to be at the edge, but the data and the data sources could be in more central locations or in public clouds or at the edge. So the fact that these workloads are distributed plays very well to the value – the core value proposition of F5 being a company that can serve any application or any API anywhere in any environment. And we’re quite unique in being in that position, so we think with AI, that is going to play to our strength.

Thank you. Our next question is from Michael Ng with Goldman Sachs. Please proceed with your question.

Hey, good afternoon. Thank you for the questions. I just have two. First, on global services, very strong growth in the quarter, 7%. Could you talk about what may have gone better than expected? Are you still expecting global services revenue to grow low-single digits for the full year? And then second, I was just wondering if you could provide a little bit more color on the recurring revenue figure in the quarter, whether you could talk about the year-over-year increase or the sequential increase, kind of key factors impacting the change in recurring revenue? Thank you very much.

Sure, Michael. So the -- let me -- I'll take both but let me start with your first question on global services. It was quite strong for the quarter. There are a couple of factors. We are still seeing high maintenance attach, particularly for some of our older platforms. We're starting to see some of that decline a little bit, which gives us some thoughts that over time, we're going to see some of the refresh happen. But it's too early to call like which quarter, in particular, that, that starts to take place. And it's still, as I mentioned in the prepared remarks, we had our price increase that impacted our global services revenue as well in July of '22. We captured some of that, a good portion of that in Q1 of '23, but there was some more that came forward in Q1 of '24 that ended up lifting that as well. We have not changed our outlook for the full year on low-single digit. There’s a possibility we do better than that, but I wouldn’t change – we’re not changing our model at this stage for this first quarter. We’ll see what happens over the next couple of quarters because there are some of those dynamics that could flop that we’ve seen for the past five or six quarters on asset sweating to turn into a refresh cycle. And so some of that could swap out. But we will see as we continue to go throughout. And then in the recurring revenue piece of the total business, some of that was just impacted by the large service provider deals, is on track to exactly what we were expecting and modeling. And so we are feeling quite good about the business to come.

Thanks.

Thank you. Our next question is from Alex Henderson with Needham & Company. Please proceed with your question.

Great. Thanks. I was hoping you could talk a little bit about the enterprise behavior patterns around what has been termed the year of efficiency, which obviously had a negative impact on new application development as well as the impact it had on existing applications, which were then shut down, downsized or cleaned up. I've heard some indications that, that's starting to shift to a reacceleration. And I would think that, that would play well to your application and particularly NGINX and other product lines. So is that something that you're seeing or are you just too early to say that there's any reacceleration of application growth? Francois Locoh-Donou: Alex, it's a great question. Let me parse it out. I think one thing we have seen perhaps accelerate in large enterprises really over the last 12 months is consolidation, and so really going through their portfolio of applications in an enterprise and looking through that portfolio and looking at what apps are really mission-critical, which apps really need to continue to be in service and which apps need to be decommissioned or rationalized. And we have seen more enterprises pick the decisions of rationalizing some apps and, in some cases, reducing their application portfolio to focus on the ones that are most meaningful. At the same time, we have seen those apps that are important to enterprises. Application traffic on these apps continue to grow. And they continue to modernize applications, meaning they can start with traditional applications and add modern components that are in a public cloud or in a private cloud. And that leads to more and more of these multi-cloud environment for application portfolio. And that's where really we have positioned F5 to be the ideal partner for large enterprises that have an application portfolio that is distributed across multiple environments, private cloud, public cloud, on-prem and increasingly at the edge. And we are starting in our engagement with customers, we're starting to see that play out. So for example, outlook today, two-thirds of our NGINX customers are also BIG-IP customers. So the cross-selling effect on the portfolio of taking a BIG-IP customer that has a traditional application that then goes and wants to modernize that application or parts of their application portfolio, landing on NGINX is a motion that we have made easier for customers, both technically and in our commercial agreements. We mentioned in the call on Q4 that we had passed 500 Distributor Cloud customers, and two-thirds of those customers of Distributed Cloud are also existing F5 customers on BIG-IP or NGINX. And so again, these are examples of customers that are distributing apps across multiple environments, and they are leveraging more and more multiple products in the F5 portfolio to do so.

And then the second question was on the upgrade cycle around the rSeries versus the older iSeries. We've been now, I think, 18 months, almost 24 months into that product launch. Initially, it was hampered by inability to do a lot of the use cases. My assumption is that you have now completed all of the use cases that were on the iSeries and therefore should be seeing a meaningful upgrade cycle over the next 12 months to 18 months to that platform. Can you talk a little bit about what type of renewal cycle you expect there? Thank you. Francois Locoh-Donou: Alex, thank you. Well, first of all, we are really pleased with the adoption of our series in our customer base. I mean, I mentioned earlier that we have put a lot of work towards bringing these cloud benefits like multi-tenancy to our customers. And that's one of the reasons the adoption of rSeries has gone very well. Relative to where we were a few quarters ago, Alex, you're absolutely right. We have maybe now the majority of the use cases with -- that we had on our private platform, iSeries are now covered by rSeries. Not all of them, we're still working through some of them, but the majority are covered. And I think this year, the majority of the appliances we ship will be rSeries. So they are -- I think they have passed already 50% -- more than 50% of the appliance we're shipping are now rSeries. In terms of would we see a big refresh cycle or a big ramp related to rSeries in coming quarters, I would say, I wouldn't think about this the way we used to think about refresh cycles seven, eight years ago when our business model was entirely appliance driven. But I do think we are seeing a pipeline of tech refresh in the coming quarters that is stronger than what we had six months to 12 months ago and that will go to rSeries largely.

So the pipeline is improving and the subscription turnover should be amplified over the next two, three, four quarters is sort of the read? Thanks. A – Francois Locoh-Donou: Well, I just want to make sure, Alex. I’m talking about the pipeline of tech refresh, which is hardware, which is largely not sold on a subscription basis but rather typically on a perpetual basis. But yes, that pipeline is increasing. Of course, what we’ll have to see is what is the conversion on that pipeline when we get to it? Over the past, I would say in 2023, pipeline conversion was, of course, not as good as it has been in prior years, but we’re hoping with more predictability, we would – that we would see a better pipeline conversion. The other data point that we’re seeing is the rate of increased aging at our customers, aging of the platform is slowing down, which suggests that the sweating of assets is tempering down a little bit specifically with enterprise customers. And so hopefully, this will play out in coming quarters.

Understood. Thank you.

Thank you. Our next question is from Tal Liani with Bank of America. Please proceed with your question.

Hi, guys. I have two questions, more kind of longer term, not on the quarter. SaaS is about 7% of total revenues, give or take, if I look at what you disclosed last year. What needs to happen or what can you do in order to grow SaaS revenue substantially? And I'm talking about, what are you doing on front of educating the channels and things you need to do with the channels and go-to-market and things? And the second question is related to that but kind of an aside. How much competition do you see from CDN companies like Akamai and CloudFlare are adding features and how much of a risk is it to F5? Thanks. Francois Locoh-Donou: Thank you, Tal. I think I'll start here. So Tal, first of all, let me make sure we're using the same terminology here. So SaaS and managed services represent, you're right, about 7% of our revenues. We have said on our October call that given the transition we were going through in our managed services, that we expected our ARR in SaaS and managed services to be flat over the -- basically over FY '24, FY '25, but then beyond that, returning to growth. In terms of the things that we can do to drive growth in this business, it's -- we're continuing to focus on areas that are markets that are growing and where we will gain more customer adoption, specifically the WAAP market for all application security, API security, bot defense, web application firewall, DDoS, this bundle of services. We're doing very well in the WAAP market today with Distributed Cloud Services, but there's plenty of opportunity for us to grow. And the multi-cloud networking market, we're starting to see traction and more customers needing to connect applications between clouds. And we have a perfect solution that is a SaaS-based solution for that marketplace. So I think the ambition here is to really win in these two markets, and that alone should drive substantial growth over time in our SaaS and managed services business. And the approach to that is really lending the customers on an initial service and then expanding over time to other services. In terms of competition with CDN players, yes, in this market, we will compete more and more with those players. They have been, frankly, in the market for longer than we have, and they have more maturity today in this market than we have. So we are in the SaaS part of the business, we are -- this is really a net new opportunity for us and we are an attacker in this market. I think the two big strengths we bring to this competition is, number one, the architecture that we have is a more recent architecture and it’s entirely defined in software. And so it’s not limited by the limitation of hardware in any given thought. And so it’s more universal and more flexible than prior architectures. Number two, we bring 20,000 customers that we have that have used F5 hardware, software, deployable hardware/software products in the past and often want to continue to use those products and add SaaS to support other applications. And ideally, we want to be able to manage the whole thing from a single pane of glass. And that is something that F5 is going to be able to do that our competitors are not able to do. In addition to all the sort of product capabilities, we’re also – I think you touched on it, Tal, we’re also spending a lot of time on our go-to-market, educating our channel partners. We are very pleased that a lot of the deals we’re winning in SaaS, actually, over the last – I think over the last 12 months, close to 50% of the deals we have won in SaaS have been partner-initiated opportunities. And so we are very pleased with the early contribution of our partners to this growth. But there’s more to do. We’ve been on the road show over the last several months, educating all of our partners on the value proposition, and we’re seeing more and more traction with them. So a lot more work to do on the go-to-market because it’s early days, but we’re happy with their initial contribution to the success.

Thank you.

Thank you. Our final question will be from Sebastien Naji with William Blair. Please proceed with your question.

Great. Thanks for squeezing me in here. Can you maybe comment on how much of your software growth outlook here in fiscal year '24 is underpinned by the app growth that you've been talking about driving expansions versus your ability to cross-sell some of your existing customers to either additional security or to Distributed Cloud Services? And then as a second question, just following up on the CDN commentary. What are the types of customers that have been the early adopters of that CDN module and Distributed Cloud. Francois Locoh-Donou: Let me start with the second part of the question. So the CDN module of Distributed Cloud, as you know, is fairly recent. I think we launched it about a quarter ago, if I recall. And we've had adoption. So this has been, I was mentioning earlier, a land and expand motion. So the customers who have adopted that are customers that typically did not start with F5 for CDN, but typically, they started with F5 for a security solution. And it may have been web application firewall, it may have been DDoS protection or, in some cases, they may have been load balancing on distributed cloud, but then having landed on our platform, wanted to simplify their architecture and then adopted CDN as an additional module. We've seen service providers do that and we've seen enterprises do that across a number of verticals. To the first part of your question around our software growth for the year, okay, it's really about having a strong renewal performance on a renewal basis. So we have pretty good visibility on our renewals in the first quarter, frankly, and even most of last year. Even in a tough environment last year, renewals performed largely as we expected. So we continue to expect to see strong performance on our renewals and true forward and some expansion. And then in the new software subscription, our premise here is that the environment hasn't changed too much from last year. We have a lot of predictability. But we are not expecting a lot of these large transformational projects to really be a big contributor to our new software subscriptions in the year.

Got it. Thanks you, Francois. Francois Locoh-Donou: Thank you.

There are no further questions at this time. This does conclude our conference today. You may disconnect your lines at this time. Thank you for your participation.