Good afternoon and welcome to the F5, Inc. Third 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. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Hello and welcome. I 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 here 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 A copy of today's press release is available on our website at f5.com, where an archived version of today's audio will be available through, October 28, 2024. We will post the slide deck accompanying today's webcast 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 13747602. The telephonic replay will be available through midnight Pacific Time, July 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 today. I will speak to our Q3 highlights as well as our expectations for Q4. Frank will then review the details of our Q3 results and provide additional color on our outlook. We delivered Q3 revenue of $695 million, which is at the top end of our revenue guidance range. We also delivered non-GAAP EPS of $3.36. This is well above the top end of our guidance as a result of our continued operating discipline as well as some tax favorability in the quarter. Total software revenue grew 3% year-over-year and 13% sequentially. Our continued strong software renewals provide an indicator of both customer satisfaction and our momentum overall. In a positive shift from last quarter, during Q3, new software revenue also contributed to software growth in the quarter. Global services grew 3% in Q3. The combination of software and global services growth largely offset systems revenue, which was $130 million, down 16% year-over-year. During Q3, we started to see some areas of improving demand after a prolonged period of budget scrutiny, evidenced by improving pipeline and close rates. As a result, our team drove strong bookings growth in Q3, including an uptick in new business. Factoring in these signals, we expect Q4 revenue in the range of $720 million to $740 million, which puts us on track to deliver toward the top end of our FY '24 revenue guidance. Our outlook is informed by three considerations: one, our growing pipeline; two, our visibility into software renewals; and three, the continued strong expansion trends from customers. We expect FY '24 revenue of approximately $2.8 billion, roughly flat with FY '23. This is despite the roughly $180 million systems backlog headwind we have had to overcome this year. Given the strong performance from software thus far this year and the good visibility we have into Q4, we now expect mid-to-high single digit software revenue growth for the year. This is up from our prior characterization of flat to modest growth. We also expect continued operating discipline, combined with the tax favorability we saw in Q3, will enable us to achieve FY '24 non-GAAP EPS growth of approximately 12%. This is up from our prior range of 7% to 9% growth. Before Frank discusses our results and outlook in greater detail, I will recap how F5 is solving our customers' hybrid multi-cloud challenges, what we call the ball of fire by highlighting some notable customer wins from the quarter. The current state of application security and delivery for large enterprises has our customers' IT teams in crisis. They are battling increasing complexity, cost and risks simultaneously and AI-driven applications are only making these challenges more pronounced. Only F5 can truly support the demands of today's hybrid multi-cloud application infrastructures. We are the only solution provider that secures, delivers and optimizes any app or any API anywhere. We are highly differentiated in addressing customers' pain points in several ways. First, app security. F5 delivers the most effective and comprehensive app and API security platform in the industry. We enable our customers to consolidate point products targeting specific threats onto a single integrated platform with a suite of best-in-class capabilities and no efficacy trade-offs. Second, simplification. F5 enables the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require. Only F5 has a solution footprint that extends across public clouds to the edge and customers' on-premises environments. Our solutions simplify connecting disparate infrastructure environments and the applications deployed in and across them. In short, we are on a mission to make hybrid multi-cloud ridiculously easy. And third, standardization and automation. F5 delivers more cost-effective and scalable IT operations. We streamline customers' operations with consistent policies, comprehensive automation and rich analytics. This enables customers to consolidate vendors and tool sets, rationalize operational silos and automate life cycle management of their on-premises deployments. These three points of strong differentiation combined with the well-established role F5 plays embedded in the flow of application traffic enables us to extinguish the ball of fire for our customers in ways our competitors cannot. Let me review a few customer wins from Q3 that illustrate how F5 is differentiated and how our capabilities are delivering value for our customers. The first two customer examples I will speak to highlight our application and API security capabilities. During Q3, a US-based security products and services company launched an effort to modernize its IT infrastructure. Specifically, the customer was looking to expand beyond hardware to a hybrid cloud and SaaS-based IT and security infrastructure. The customer was an existing big IP customer and selected F5 Distributed Cloud services to complement its big IP estate, creating a scalable, self-managed cloud and SaaS-based solution. F5's portfolio of hardware, software and SaaS deployment options deliver standardized application and API security across their multi-cloud and hybrid environments, enabling them to modernize at their own pace. Also during the quarter, a channel partner brought in F5 when a US state government experienced a DDoS attack that brought down its servers. We quickly completed a successful emergency mitigation and deployed a suite of F5 solutions by our Distributed Cloud services. When the threat actor changed tactics and launched application layer attacks, F5's operations team quickly activated WAF and bot defense and stopped them. As a result of F5's performance under pressure, the customer is moving additional services to F5, including their DNS and other web and application properties. Before I move on to our next point of differentiation, I will take a minute to highlight that our continued innovation and industry-leading security performance is winning accolades from industry experts as well as customers. During the quarter, F5 was recognized as an application security leader by several independent parties. First, F5 is rated as a leader in both security efficacy and operational efficiency in SecureIQLab's 2024 Cloud WAAP CyberRisk Validation Report. F5 Distributed Cloud WAF earns SecureIQLab's Secure by Design rating passing the WAF vulnerability assessment with a perfect score. In addition, Enterprise Management Associates singled out F5 as a visionary in API security for our Distributed Cloud Web App and API protection or WAAP capabilities. In its Vendor Vision 2024 report, F5 is lauded for its holistic approach to API and application security, eliminating the need for customers to pay for and manage disparate API security solutions. And finally, KuppingerCole recognized F5 as a leader in web application firewall market, spotlighting F5 as a forerunner that is setting the bar for excellence in cybersecurity defenses. The next two customer wins I will highlight exemplify how F5 is enabling the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require. They both also happen to be examples of our continued momentum against competitors. During the quarter, a U.S.-based technology company that delivers a web and video collaboration platform selected F5 to replace its incumbent ADC provider. The customer will use BIG-IP, including WAF and DNS capabilities to consolidate and standardize their infrastructure across their on-premises and third-party data centers. F5 was selected because of our software and hardware deployment options, the efficacy of our advanced WAF and our flexible commercial models. I will note that this also was a land and expand win. In 2020, we displaced a competitor for DDoS protection. In another example from the quarter, the large APAC-based travel agency selected F5 Distributed Cloud to enable it to address multiple challenges simultaneously. Initially, the customer was looking to streamline app delivery through a single abstract layer. In the process of proving its capabilities for this use case, F5 Distributed Cloud outperformed the incumbent security provider. As a result, the customer consolidated on F5, enabling them to stage application migration to new data centers while minimizing disruption and risk. In addition, Distributed Cloud's SaaS console and comprehensive observability features drastically reduced operational overhead for the customer. The final two customer wins I will speak to highlight how we streamlined customers' operations with consistent policies, comprehensive automation and rich analytics. During Q3, our team secured a large land and expand deal that was 18 months in the making. The customer is a global retail and investment bank with an extensive branch network. Banking regulations require them to separate segments of their IT environments. To accomplish this, they are building a new virtualized network to run in parallel to their existing environment. They selected BIG-IP software to augment their existing BIG-IP footprint. They also upgraded to NGINX Plus from open source. BIG-IP's automation capabilities enable them to implement automation best practices across the board, saving time and reducing the potential for human error. They are now able to operationalize multiple BIG-IPs in just 20 minutes to 30 minutes versus the days or in some cases, even weeks required previously. In addition, NGINX Plus delivers reliable and secure access to their Kubernetes applications and enables a consistent security posture across all of their application environments. The final example from the quarter, I will highlight, is with a global automotive company. This customer is an existing BIG-IP customer who is renewing and expanding their BIG-IP subscription for the second time. The customer is leveraging BIG-IP's automation capabilities to enable self-service application delivery and security services in seconds compared to the weeks or months it took previously. BIG-IP has significantly accelerated this customer's time-to-market for both internal and external customers. The value of BIG-IP's automation capabilities is so significant to them that their consumption has doubled with each renewal. Before I pass the call to Frank, I will close with some brief commentary about how we are enabling AI, shaping the AI revolution and working with customers to ensure they are AI-ready. During Q3, we continued to engage with several of our major customers focusing on their AI initiatives and collaborating to address their critical AI-related challenges. Two pivotal trends have emerged from these interactions. First, the largest organizations which are building AI factories are starting to recognize that high-performance networking and security are non-negotiable for both model training and inference. Second, organizations that are using foundational AI models for inference use APIs extensively. This use case also demands top-tier performance and robust security. In both scenarios, whether constructing AI factories for model training or executing inference, F5's leading ADC platform and our distinctive capabilities in application security and delivery will have an important role to play. We are seeing and winning early AI use cases. As an example, a global automotive company selected F5 BIG-IP to rapidly and securely transfer data from data storage systems to large-scale clusters, significantly accelerating their model training process. For retrieval augmented generation use cases like this, our solutions are optimizing the performance of AI models as they access and incorporate external data sources in real time. Separate from this customer, our entire product family is being utilized by other customers to load balance and protect AI-related API traffic. In the AI era, all communication is happening via APIs, which are increasingly distributed, running on-premises in private clouds and across multiple public clouds. F5's Distributed Cloud services is an ideal solution for organizations needing consistent management and security for their distributed AI APIs. Leveraging our long-standing partnerships with semiconductor leaders, we also are strategically positioned to advance these relationships in the AI era. Our approach remains technology agnostic focusing on solving real-world practical AI challenges for customers. Realistically, we expect we are probably one to two years out from enterprises deploying AI in production at scale. Importantly though, F5 is not just adapting to the AI revolution, we are actively shaping it, providing the critical infrastructure that enables our customers to harness the full potential of AI safely and efficiently. Now, I will turn the call to Frank. Frank?

Thank you, Francois, and good afternoon, everyone. I will review our Q3 results before I elaborate on our Q4 outlook. We delivered Q3 revenue of $695 million with a mix of 56% global services and 44% product revenue. Global services revenue of $387 million grew 3%, in line with our expectations, which reflected lapping the benefit of prior price increases. Product revenue totaled $308 million, down 6% year-over-year due to a lower level of backlog-related systems shipments than a year ago quarter. Systems revenue of $130 million demonstrates a slowing decline of 16% year-over-year. Software revenue totaled $179 million, representing 3% year-over-year growth and 13% sequential growth. Subscription-based revenue contributed $155 million or 87% of total software revenue, representing 2% growth year-over-year and 10% sequential growth. Subscription renewals remained strong in Q3 with continued solid expansion in our multi-year agreements. An exception to this trend is our Bot Defense point solution where the majority of customers are renewing, but some are opting for less sophisticated lower-cost options. Rounding out our software revenue, perpetual software contributed $24 million. Revenue from recurring sources contributed 77% of Q3's revenue, up from 75% a year ago. Recurring revenue includes the subscription-based revenue as well as the maintenance portion of our global services revenue. On a regional basis, revenue from Americas was down 4% year-over-year, representing 55% of total revenue. EMEA delivered a strong quarter with 5% growth representing 27% of revenue. APAC declined 1%, representing 18% of revenue. Looking at our major verticals, enterprise customers delivered another strong performance, representing 67% of product bookings in the quarter. Government customers also performed well representing 21% of product bookings, including 7% from US Federal. Finally, service providers represented 12% of Q3 product bookings. Our Q3 operating results were strong, reflecting our continued operating discipline. GAAP gross margin was 80.4%. Non-GAAP gross margin was 83.1%, an improvement of approximately 65 basis points from Q3 in FY '23. Our GAAP operating expenses were $396 million. Our non-GAAP operating expenses were $346 million. Our GAAP operating margin was 23.4%. Our non-GAAP operating margin was 33.4%, reflecting an improvement of approximately 20 basis points from Q3 of FY '23. Our GAAP effective tax rate for the quarter was 16%. Our non-GAAP effective tax rate was 17.5%. Similar to Q3 of last year, the lower-than-expected tax rate reflects a non-recurring benefit associated with filing our annual federal income tax return during the quarter. Our GAAP net income for the quarter was $144 million or $2.44 per share. Our non-GAAP net income was $199 million or $3.36 per share. I will now turn to cash flow and the balance sheet, which also remained very strong. We generated $159 million in cash flow from operations in Q3. CapEx was $6 million. DSO for the quarter was 54 days, in line with 51 days in Q2. Cash and investments totaled approximately $943 million at quarter end. Deferred revenue was $1.77 billion, down 1% from the year-ago period. The change is due to a higher weighting of our sales to term-based subscriptions and a corresponding lower allocation of bookings to deferred revenue. In addition, we are lapping price increases on maintenance renewals. We also have implemented some strategic go-to-market decisions, including no longer incentivizing customers towards multi-year maintenance agreements. Our share repurchases reflected our ongoing commitment to returning cash to shareholders. We repurchased $150 million worth of F5 shares in Q3 at an average price of $172 per share. Year-to-date, we have used approximately 77% of our free cash flow towards share repurchases, far in excess of our commitment to direct at least 50% of free cash flow towards share repurchases. Finally, we ended the quarter with approximately 6,500 employees. I will now speak to our outlook for Q4. We expect Q4 revenue in the range of $720 million to $740 million on the strength of our software renewals and a slight uptick in new business momentum. We expect non-GAAP gross margins of approximately 83%. We estimate Q4 non-GAAP operating expenses of $350 million to $362 million. We are targeting Q4 non-GAAP EPS in the range of $3.38 to $3.50 per share. We expect Q4 share-based compensation expense of approximately $54 million to $56 million. Our Q4 guidance implies some positive updates to our prior outlook for FY '24. We expect approximately $2.8 billion in revenue for the year. Embedded in this is the expectation for mid-to-high single digit software revenue growth, up from the flat to modest growth expectation we had at the start of the year. We now expect our FY '24 non-GAAP effective tax rate will be in the range of 19.5% to 20%, down from our prior range of 20% to 22%. With the combination of revenue growth, continued operational discipline and a tax rate that is improving compared to our prior expectations, we now expect FY '24 non-GAAP EPS growth of approximately 12%. This is up from our prior expectations of 7% to 9% growth. We are not revising our gross or operating margin targets for FY '24 and continue to expect non-GAAP gross margins in the range of 82% to 83%, which would reflect an improvement of 50 basis points to 150 basis points from FY '23. We also continue to expect non-GAAP operating margin in the range of 33% to 34%, which would reflect an improvement of 280 basis points to 380 basis points from FY '23. Before I pass the call back to Francois, I wanted to share some personal news. I've made the decision to retire from F5. I joined F5 in 2018 to help the team navigate a massive transition from a hardware-led company to one that was more software-led. Delivering our Q4 guidance will make FY '24, the third consecutive year, where software revenue is the majority of our product revenue, signaling that we have in fact successfully completed that transition. I plan to remain with the team as CFO through the filing of our FY '24 10-K likely in mid-November. Cooper Werner, who is currently our SVP of Finance, is slated to take over as CFO upon my departure. Many of you know Cooper well. He has been with F5 for 23 years, during which he has consistently taken on new responsibilities as F5 has grown and changed. He has been SVP of Finance for the last 12 years, managing our FP&A, real estate procurement and trade organizations. His extensive financial expertise and institutional knowledge have been pivotal in guiding our business model as we have executed our software transformation. Cooper is a strong and engaging leader and we expect him to be a great addition to the executive leadership team. I will continue to work with the team between now and November to ensure a smooth transition. With that, I'll pass the call back to Francois. Francois? Francois Locoh-Donou: Thank you, Frank. I truly cannot thank you enough for your partnership and counsel over the last six years. You have been an integral part of our executive leadership team with an immeasurable impact on F5. Your deep knowledge of software and SaaS-led businesses was instrumental to F5's successful transition to a software-led company. You have been a tireless advocate for F5, our business and our employees and an extraordinary partner and friend. I know it's not goodbye at this point, but I really want to thank you here and now. I will also echo your comments about Cooper. I have worked very closely with Cooper in my tenure at F5 and have enormous confidence in his ability to succeed you in the CFO role. In conclusion, I will reiterate that F5 is uniquely positioned to help our customers as they move forward in a hybrid and multi-cloud reality that brings with it untenable operational complexity, considerable cost and escalating security risks. As large enterprises across the globe are modernizing their IT infrastructures and driving IT cost optimization, they also are developing comprehensive AI strategies for their businesses. F5 is proving itself an invaluable partner in this modernization process and in enabling our customers to ready their IT infrastructure to leverage AI at scale. F5 is optimizing application security, delivery, management and performance across hybrid, multi-cloud environments with enhanced automation and meaningful operational efficiencies. Going forward, and especially as we enter the era of AI-driven applications. We believe customers will require a hybrid SaaS platform that covers all of their app security and delivery needs regardless of form factor. This is the world we have invested for and as customers gain more confidence in their IT budgets and priorities, we believe we are well-positioned to capture our share of their spend. Operator, please open the call to questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Tim Long with Barclays. Please proceed with your question.

Thank you. Congratulations and best of luck, Frank, and Cooper, congrats to you on the new role coming. I wanted to touch on the software side, Frank or Francois. I know you don't give a lot of -- all the specifics, but just looking at maybe the sequential growth, it seems a little surprisingly strong in the quarter there? Is there any way you can parse out for us kind of what drove the -- you said strong new business, any way you can quantify that? And then as far as the renewals, are these stronger true forwards? Is there better dollar retention? How do we, at a high level, think about the two aspects of what's looking better in software currently? And then at a hardware follow-up.

Sure, Tim. So thanks so much for the kind wishes and thanks so much for the question. Yes, Cooper is going to do a great job in the role. On the software in particular, as you know, we will update some of the ARR-type metrics at the end of Q4. So I don't want to get too much into that. But I would say that when we take a look at an NRR, it still is world-class across the business. The subscription renewals in particular continue to be quite strong with some expansion. We, obviously, talked about a little bit of a challenge in the bot business, which is helping us somewhat in that number. But what really was strong was the new business activity, which we see in the pipeline, in some cases, we see it in hardware and it converts into a software deal through the course of the negotiations. But more broadly, it was the -- guidance that we had given was really based off not necessarily expecting a lot of new business activity. And in the quarter, you obviously saw that we ended up at the top end of our guidance. So you can sort of extrapolate that into a lift in new business activity.

Okay, great. And then just quickly on hardware. I know is still a challenge, but it does seem like other pockets of networking is starting to see a bottom. How do you feel about where we are at these levels given that most of the backlog comparison is hopefully behind you? Francois Locoh-Donou: Hi, Tim, it's Francois. Look, I think we have seen hardware stabilize over the last several quarters as customers have digested inventory. And over the last several quarters, we have seen a number of customers still sweating their assets in the current macro-environment, but we're starting to see that change. And so for this year, we are about at the levels we think we're going to be this year. But going into next year, our view is that there -- the demand signals on hardware are pretty good. And so our expectations is that hardware, next year, will certainly not decline, possibly could be up relative to this year. And it's driven by a few use cases, Tim. Number one is we have a strong pipeline of tech refresh activity and this is largely from customers that have digested their inventory or customers that were sweating assets and no longer can do that at this point. And we're starting to see that the close rates on this pipeline are going to be pretty strong. Specifically in the service provider space where they have sweated assets very aggressively, we're now starting to see large programs come up again for CapEx in hardware in service provider. And also, we're starting to see AI as a catalyst on the horizon for hardware. So, specifically for the few large enterprises or service providers that are building large AI factories. And one of the big issues in building these large GPU clusters, obviously, is the cost of training these models. And our technology specifically are high capacity, high performance, traffic management technology, BIG-IP is perfectly suited to improve the efficiencies of these large AI factories and thereby reduce the cost of them. So we have already won a couple of opportunities in this area. We think it's going to take time to develop, but we're starting to see that as well as a potential positive catalyst for FY 2025.

Okay. Thank you. Appreciate it. Francois Locoh-Donou: Thank you, Tim.

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

Great. Thanks. Maybe to start following up on Tim's question, just in some of that better pipeline, is that Distributed Cloud, is that NGINX, clearly you're kind of talking about some of the systems upside, but just if any more kind of disclosures around what kind of the makeup of that better pipeline is? And then maybe as a second question, I know you noted better expansion as well. Is that coming from kind of new products or customers expanding in their product portfolio within F5 or higher volumes? Thanks. Francois Locoh-Donou: Hi, Meta. So the comments I just made were specific to hardware where, in fact, we have seen a stronger pipeline of tech refresh. But generally, our pipeline has been strong and that applies as well to NGINX and Distributed Cloud. Where this come from, Meta, is we've talked about the ball of fire and you've heard this term, but generally, our enterprise customers are really in a crisis because to be able to deliver the digital experiences that they have to deliver, they have to operate in these hybrid and multi-cloud environments and the complexity of these environments is escalating. So to give you an example, if you go back a year ago, we had about 20% of our customers that operated in more than six infrastructure environments and that has doubled in the last year to now 40% of our customers operating in these environments. And that creates a risk because of inconsistent security policies between this cloud and that cloud in this on-prem environment. It drives up operational cost, it forces them to use multiple vendors where they could use less vendors or consolidate on one. And all of these constitute this daunting complexity that we are on a mission to simplify. And so it's really the portfolio that we have put together with NGINX, Distributed Cloud and BIG-IP that creates effectively a single platform that can extinguish this ball of fire and really simplify hybrid and multi-cloud environments for our customers. In my prepared remarks also, I mentioned a couple of examples of that. We had a big security company that was using BIG-IP and used Distributed Cloud to augment their footprint and standardize their security across multiple environments, leveraging the portfolio of F5. So the pipeline that we're seeing across these product lines is really an effect of hybrid and multi-cloud complexity, being very present for our customers and us having multiple products to really address that complexity and simplify the operations of our customers.

Great. Thank you.

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

Hey guys, thanks for the questions here and congrats to you, Frank, on retirement, and Cooper, on the promotion. Looking forward to working with you more, Cooper. Maybe not to pick on something you guys mentioned here, but on the Bot Manager side, shape has been kind of problematic over the last year or so based on what you guys have said? I guess, what are you guys doing to try to change the trajectory of Bot Manager and how are you thinking about any potential security bundles between Bot Manager WAF and API security pieces, especially given you talked about customers looking at lower-cost alternatives? Francois Locoh-Donou: Thank you, Jim. I'll take that one. And what we're seeing in Bot, so in the Bot Management solution that is a high-end managed service. And it is a point solution. This is where Frank was sharing that we have been challenged on this area because it is a point solution and it is at the high end of the managed services scale. And we're seeing the majority of customers actually see enormous value in the solution and are renewing their subscription. But some customers not only want a lower end solution but also want to have a platform and have Bot as part of a platform bundle. And so our plan has been to migrate and take that technology, take the most sophisticated Bot technology that is on the market that we now have and integrate that technology onto our F5 Distributed Cloud platform. And so we now have Bot as part of F5 Distributed Cloud, our SaaS solution and we are now commercializing Bot as part of that bundle. In fact -- and we're getting quite a bit of traction on that. In fact, if you look at our WAAP as a service customers so those are customers that would buy a bundle that includes WAF, Bot, API security and DDoS, any one combination of these four services. The number of WAAP as a service customers that we have has doubled over the last year, but those are WAAP customers on our platform using the bundle. So it's really a transition, Jim, from a point solution at the high end to a solution that's part of a platform and part of a bundle, which is where I think our customers want to go.

Got it. And Frank, for you, one of the questions I'm getting here after ours is around you guys talked about raising fiscal Q4 kind of outlook. Last quarter, you guys kind of gave some color around fiscal '25. So growth rate goes up this year, should we continue to expect the dollar numbers that you outlined last time as kind of a good proxy for fiscal '25 at this point or are you still feeling confident in those growth rates on higher numbers? Thanks, guys.

Yes, absolutely. I appreciate the question, Jim. So look, we'll have more to say in October about FY '25. We're not updating anything as of now for FY '25. My starting point would still be go back to what I said in October of a mid-single digit growth off of a flat-to-low single digit FY '24. And you'll probably triangulate around to the number where we are. We are still in the process of our FY '25 planning process. What we absolutely will do is deliver 35% operating margin off of that revenue number. And that is largely based off of the confidence that we've got in the subscription renewals and how they are playing out. The one thing that I'd probably add is if you take a look as I just want to make sure there's no confusion as we look ahead into next year versus maybe what happened in this quarter, we do expect more of that growth to come in the back half of FY '25 because of just where we see the subscription renewals and the larger ones really happening in the back half of '25. And so I would expect the first half to be relatively flat, maybe slightly up depending on what happens with some of the new business activity and if that momentum continues. But more of that growth is going to come in the back half of FY '25 of what we did in FY '24. So I just want to directionally give you that's the way we're thinking about the business.

Helpful. Congrats again on retirement, Frank.

Thanks so much. I appreciate it, Jim.

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

Hey, good afternoon. Thanks for the question. I just have two. First on software. I was wondering if you could comment on how the potential headwinds related to the retirement of the legacy SaaS businesses and migration of Silverline to DCS has gone relative to expectations. I was just wondering if you could update us, I think previously you had said an up to $65 million headwind there. And then second, in your prepared remarks, you talked about no longer incentivizing customers toward multi-year maintenance. I was wondering if you could just provide a little bit of additional color on why there's a good market change there. Thank you very much. Francois Locoh-Donou: Yes. I'll start with the question on the transition in the SaaS business. Things are progressing pretty much the way we expected to. Indeed, we have about $65 million of legacy in the $200 million ARR that we shared in October. We -- some of this is products that we have retired and other is services that we intend to migrate to our Distributed Cloud platform. Those migrations have started. We are early in the curve. We did say it would be a two-year journey. So we are early in the process, but the migration are starting and largely going to plan. What we're seeing in that business is, A, on the -- as Frank mentioned earlier, on the -- at the high end of the Bot Manager business, we are seeing there some churn because we're seeing a lot of customers renewing, but some customers not renewing, wanting to move to lower-end solution or platform-based solutions. But on the flip side, in our SaaS platform on Distributed Cloud, we are seeing strong growth, strong new customer adoption, and that's driven by the bundle of offerings that we have in the platform. I mentioned WAAP earlier as an incredible offering, but it's also -- that traction is also driven by API security. So securing APIs is becoming a really big challenge for enterprises. You'll hear more about this in quarters and years to come because AI is going to make the importance of API security even greater. But we're seeing significant traction in this area in part because we have built the most comprehensive API security solution that goes from code scanning to comprehensive discovery of APIs all the way to protecting these APIs. And so it's eliminating weeks on end of manual testing and analysis in a solution that automates all of that. The -- and so the traction we're seeing is year-on-year. The number of API customers, API security customers that we have has tripled since last year. So those are the dynamics in the SaaS and managed services business.

And Michael, on the maintenance question, this is the maintenance associated with our perpetual hardware and software. And as most people know, our global service organization is world-class, they do an amazing job in all the customer relationships and they lead -- that has led to significant, very high attach rates throughout those products for a long period of time, frankly, on some of those products. And so what we have seen over time is that, generally, the discounts that we offer for those services upfront. Over time, we try to recoup some of that discount rate as each renewal cycle goes through. And what we found is that, with our super-high attach rate, the quality of the service that we delivered and the fact that we are a very cash-generative company, we don't really need three years of cash upfront to lock in those customers. The service does it itself, the product does itself. And so we did need to continue to incentivize through higher discounts and multi-year maintenance agreements and have strategically moved away from that. So that was really the comment in relation to the deserve -- the deferred revenue associated with our services business.

Great. Thanks, Francois. Thanks, Frank.

Yes, sure, Mike. Francois Locoh-Donou: Thank you.

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

Great. Thanks. First off, let me say congratulations to the two people involved in these changes. Frank, it's great working with you. And I certainly look forward to working more with Cooper who's been fabulous over the years. So my question is, first and foremost, is there any change in the sales staffing levels? Have you been seeing any increase in poaching by competitors? There's been some chatter around a couple of your competitors who have had some management changes that they pulled some pretty good people out of F5 on the sales front. Is that accurate or inaccurate? And then the second question, more to the environment. As we look at the year of efficiency to take Zuck's comment and extend it out to multi-years, which is really the right frame -- timeframe, that appears to have run its course and does it look like it's starting to show a stability in the application arena where applications are starting to reaccelerate broadly. Is that a metric that we can use to get at least a directional qualification on F5's outlook? For instance, if we see strong sales or application growth at the cloud companies, is that a read-through to you guys? Francois Locoh-Donou: Hi, Alex. Let me take you through two questions. Let me start with your question on our sales -- on the sales side and staffing level. So at the highest level, I will tell you our attrition in sales is well below industry norms and has been that way for a while, in part because of the culture we nurture at F5 and the very strong leadership team that we have in the sales organization. We have an extraordinary sales team at F5. I am very proud of the sales team we have, the relationship that we have with large enterprise customers across our sales organizations and the way that this organization is serving our customers. I'm actually proud that competitors are trying to poach a person here or there, but it takes way more than a couple of hires to recreate the enterprise go-to-market model that we have built over 20-plus years, not just with our own field teams, but also with our several 1,000 channel partners that get up every day and to go promote F5 and build relationship with customers. So I feel very, very confident about our go-to-market organization and very confident about our competitiveness in continuing to hire and retain the best salespeople on the market. Then as a -- as it really to your second question around how to think about outlook for F5, yes, it is a big positive. The dynamic you mentioned around where customers are at in their application rationalization is a big positive for F5 because our business is driven by the number of applications, the complexity of applications and also where -- the distribution of applications. And so increasingly, what we are seeing, Alex, is that customers have to place their application in multiple infrastructure environments. I mentioned a stat earlier, about 40% of organizations operating in more than six infrastructure environments. That creates flexibility for customers, but on the other hand, it creates massive complexity. And we have built the only platform in the industry that can truly secure and deliver and optimize any of these applications or API regardless of where they're at. We truly are the only infrastructure-agnostic player in the market, in app security and delivery. And so this distribution of application which will accelerate with AI, right, is a big positive for us. And it will accelerate with AI because as you know, AI has the issue of data gravity. Models want to be close to where the data is, inference needs to run where inference is going to run. And so we're seeing also more distribution of apps and app components with AI. Again, that plays to the F5's capability in solving this ball of fire problem.

Great. Thanks for the clarity.

Thank you. Our next question is from Simon Leopold with Raymond James. Please proceed with your question.

Thanks for taking the question. First, Frank and Cooper, congratulations on the job switching. Best of luck to both of you. First of all, this might be a tricky question for you to answer, but one of the anecdotes we've picked up is regarding Broadcom's price adjustments on VMware, and the thought was that this was affecting your business because it was perhaps shifting budgets for your customers. Now clearly, you put up a very strong software number this quarter. And I'm wondering if this is either despite what's happening with the VMware pricing or if there's some other explanation and maybe this number would be even better if not for that. Francois Locoh-Donou: I mean, anecdotally, I think you are right in the sense that I have heard, again, anecdotally from a couple of customers where in the short term in terms of coping with these price increases, they have had to pull budget and into the VMware Broadcom situation. I have not seen that as a very significant trends across a large base of customers. And I also think it's a fairly short-term reaction to what's going on with -- I think that will settle out a little differently down the road. So that's perhaps the only validation that I have for the anecdote you just raised.

Great. And then just as a follow-up. In terms of the way you're envisioning your opportunities with enterprise adoption of AI, would you expect that your opportunity would be correlated to essentially traditional server sales? And I'm presuming that really in the GPU clusters, that NVIDIA is -- basically has its own internal load balance. And so that's not your use case. I just wanted to clarify that. Thank you. Francois Locoh-Donou: So the -- if you pull way up, Simon, in terms of AI, the big trends that are emerging, the big issues are, number one, cost and number two, security or safety and security. So let me talk to each for a moment. The cost issue, it's first with the companies, there are few digital innovators that are building large AI factories and they're investing massive amounts in these GPU clusters, but there is a challenge around the utilization of these GPUs. And so our high capacity data ingestion capability, our high capacity load balancing solutions are a perfect fit to increase the efficiency of these AI factories or low balance traffic between multiple AI clusters, thereby reducing the cost per query, if you will, of these infrastructures. And so there we see an immediate opportunity with existing products for the companies that are building these kinds of factories, where I think the opportunity shifts in the long term is for all enterprises who will deploy an AI in their environments and who will want to run inference in their environment. A big issue is going to be how do you secure these AI models and we believe that APIs are absolutely key -- securing APIs is the key to securing data and securing AI workloads. And for that reason, we have placed significant investment in API security. And I mentioned earlier that we are already seeing year-on-year a tripling of the number of API security customers that we have. That has not been driven by AI yet, but we expect AI to be a substantial catalyst on that solution going forward.

Perfect. Thank you.

Thank you. We'll take our final question from Sebastien Naji with William Blair. Please proceed with your question.

Great. Thanks for taking my question. I just wanted to first echo the congratulations to both you, Frank and Cooper as well. My first question is really around the mix shift between software and hardware. It just seems like over the last few years, that mix shift to software has been maybe a little bit slower than expected with many customers preferring to stick to their hardware form factors. I'm just wondering as we enter a new upgrade cycle here in fiscal year '25, could something change? Could we see a more rapid shift to more software solutions this time around? Francois Locoh-Donou: I think we talked about the dynamics, the dynamics of hardware and software and what we see as the catalyst for hardware in next year. But I should say, we don't preference -- we've been very clear about that over the last several years that part of the value that our customers see in F5 relative to other players is that we don't force them to adopt one delivery model or the other. We are advisors and we help them make the right choices, but we don't force them. And I think especially relative to SaaS players who come into large enterprises and are asking them to change the way they do business to go adopt talent solutions, we're completely different in the sense that we meet our customers where they are. And if that is starting with hardware and modernizing with software or hybrid hardware-software solution or it's leveraging hardware or software in their environment and then SaaS for a certain number of applications, we meet our customers where they're at and we provide them flexibility and choice that is unparalleled in the industry. And that differentiates us from either the traditional ADC vendors that have historically only have hardware-software clients or the pure SaaS infrastructure players that do not have hardware-software consumption models and therefore want to force customers to do something different. And that doesn't work for large enterprises either. So we -- that is really how we go to market. And in terms of how will that manifest itself in terms of hardware and software next year and we will see. We've got good catalysts on hardware. We think our software is going to continue to grow. We did say that we expected to return to double-digit growth in software next year. We still feel that way. And so that's where we are overall in the mix of these solutions. But the most important for our customers is the combination of both and meeting them where they are to modernize their environment and solve their ball of fire problem.

Got it. That's helpful. Maybe as a quick follow-up, when you're successfully cross-selling F5 customers to some of the Distributed Cloud Security solutions, are you typically displacing another vendor or is there a lot of greenfield opportunity for things like API security where maybe they're not -- they don't have a dedicated solution for that yet? Francois Locoh-Donou: So it's both. It's a combination of both. We've shared, I think, earlier in the year that about two-thirds of our distributed cloud customers are BIG-IP customers or existing F5 customers and about one-third are net new customers to F5, they have never had a relationship with F5. So we're also acquiring new logos with Distributed Cloud. However, as it relates to customers with whom we are cross-selling, sometimes it is customers who had to go to a pure SaaS player before F5 had a SaaS solution. And so therefore had to increase their complexity because they would use F5 on-prem and they would either use a public cloud player for some applications or a CDN or edge player for applications, thereby creating complexity and multiplicity of vendors. And now that we have F5 Distributed Cloud and we've built some integrations, they are coming back to us saying, actually, I can have a single vendor for all of my application deliver and security. I can have consistent security across all my environments. That is way simpler for me and therefore, that's a better solution for me. So yes, at times, this is displacing SaaS players essentially that had gone into the environment. And sometimes it is greenfield. It's a set of applications that they were perhaps not yet protecting and for which Distributed Cloud comes with our full application security bundle and solves a big problem of security and complexity for them.

Great. Thank you.

This concludes today's call. You may now disconnect. Thank you for your participation.