Good afternoon. And welcome to the F5 Networks First Quarter and Fiscal 2016 Financial Results Conference Call. At this time, all parties will be able to listen only until the question-and-answer portion. Also, today’s conference is being recorded. If anyone has any objections please disconnect at this time. I’d now like to turn the call over to Mr. John Eldridge, Director of Investor Relations. Sir, you may begin.

Thank you, Sam. Welcome to our conference call for the first quarter of fiscal 2016. John McAdam, President and CEO; and Andy Reinland, Executive VP and CFO will be the speakers on today’s call. Other members of our executive team are also on hand to answer questions following John and Andy’s prepared comments. If you have any follow-up questions after the call, please direct them to me at 206-272-6571. A copy of today’s press release is available on our website, at F5.com. In addition, you can access an archived version of today’s live webcast from the events calendar page of our website through April 20, from 4:30 PM today until midnight Pacific Time, January 20. You can also listen to a telephone replay at 888-562-6109 or 203-369-3766. During today’s call, our discussion will contain forward-looking statements that include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in our quarterly release and described in our detail on our SEC filings. Please note that F5 has no duty to update any information presented in this call. Now, I’ll turn the call over to Andy Reinland.

Thank you, John. In the context of our Q1 seasonality, F5 achieved solid revenue results in line with our expectations. Revenue of $489.5 million was at the top of our guided range of $480 million to $490 million, up 6% from the first quarter of fiscal 2015. As a result of both disciplined operational management and the benefit from the reinstatement of the R&D tax credit, we achieved GAAP EPS of $1.28 per share, well above our guidance of $1.13 to $1.16; and non-GAAP EPS of $1.73 per share, also well above our guidance of $1.58 to $1.61. Product revenue of $234.7 million in the first quarter was down 2.6% year-over-year and accounted for 48% of total revenue. Service revenue of $254.8 million grew 14.9% year over year and represented 52% of total revenue. Accounting for 55% of the total, revenue from the Americas was up 3.8% from the first quarter of fiscal 2015. EMEA, which represented 26% of revenue, grew 9.3% from the first quarter of last year. APAC accounted for 15% of revenue and grew 7.5% year over year. And Japan revenue, representing 5% of total, grew 4.3% from a year ago. Sales to enterprise customers represented 62% of total sales during the quarter. Service providers accounted for 23% and government sales were 14%, including 5% of total sales from U.S. federal. In Q1, we had four greater than 10% distributors: Westcon, which represented 19.7% of total revenue; Ingram Micro, which accounted for 14.6%; Avnet, representing 13.9%; and Arrow, which accounted for 11%. Our GAAP gross margin in Q1 was 82.5%. Our non-GAAP gross margin was 83.9%. GAAP operating expenses of $272.9 million were within our target range of $268 million to $277 million. Non-GAAP operating expenses were $238.3 million. GAAP operating margin was 26.8%. Our non-GAAP operating…

Thanks, Andy, and good afternoon, everyone. I was very pleased with the F5 team’s performance in our first quarter of fiscal 2016. We delivered year-over-year revenue growth of 6% with strong profitability and operating margins resulting in an all-time high cash flow from operations above $200 million. From a sales perspective EMEA, Japan and our Asia-Pacific region all delivered year over year sales bookings growth. EMEA and Asia both delivered record-high sales bookings. Sales bookings in our Americas region were down year over year in Q1, as we experienced delays in closing several forecasted transactions in the U.S., especially towards the end of the quarter. However, I was pleased to see that sales transactions above $1 million remain solid in the Americas during the quarter. Our services business continues to deliver strong results and excellent profitability along with a healthy sequential 7% increase in deferred revenue. Overall, deferred revenue grew 23% year over year in the quarter, which should bode well for future business. Our Good, Better, Best pricing models continues to be a significant percentage of our overall product revenues. Customer adoption of the Best category remains very strong and in Q1 we continue to see year-over-year growth in sales across all regions with the highest GBB growth coming from our EMEA and the APAC customers. I was also encouraged by our software revenue in the quarter. We continue to see more than one-third of product revenue coming from software sales driven by security module sales, GBB and software-only VE solutions. We had several wins in the quarter where customers are deploying our APM security module to ensure access security for their applications that have migrated into the public cloud environments. With the option to bring your own license or rent utility licenses by the hour, we offer flexible…

Sam, Q&A.

Oh, thank you. We will now begin the question-and-answer session. [Operator Instructions]

Hello.

Our first question is from James of Morgan Stanley. Please go ahead with your question.

Thank you very much. I had two quick questions. First, when you talk about an acceleration in growth that you’re anticipating for the second-half of the year as particularly new products start to roll out et cetera, are you anticipating that that will be evident on the total revenue line or are we talking about just a reacceleration in the product revenue? And then, on the most recent quarter, we saw a significant uptick in services and deferred revenue. I’m wondering if you can give us a little bit more color as to what that may be attributable to. Is this security products, Silverline virtual editions or something else? Thank you very much.

Okay. This is John in the first one. Then I’ll hand over to Julian to talk about services. No, our absolute focus is on product revenue growth. But by definition that will grow the overall revenue. I mean, you’ve seen the success we have in the service business with the deferred revenue. So we feel really good with that and the visibility of that revenue moving forward and Julian can again comment on that. It’s all about product revenue growth and clearly these business drivers. We’re absolutely very, very focused in delivering them, and so that we’ll get our product revenue growth, and then will give us total top-line growth.

And then on the services side, the growth is purely in maintenance services revenue and in professional services consulting revenue, which has grown across the globe, mainly as we’ve expanded working with partners. Pieces like Silverline and subscription are not included in that services number at all.

And one other thing, Julian, you might want to comment, I was impressed by the QBR, was that on the consultancy how much we’re doing remotely.

Indeed, if you look back over the last 18 months, we - gross margins for services has improved as we’ve improved the delivery of consulting through remote delivery, which is around 60% of all the consulting we now deliver.

Great. Thank you very much.

Thank you.

Welcome.

Thank you. Our next question is from Simona with Goldman Sachs. Please go ahead with your question.

Hi, thank you very much. I just wanted to get a little bit more color on the guidance, which was a little bit conservative. Was that just you are reacting to some of the macro headlines and what’s seen in the markets here? Or is that in response to any actual slowdown in purchasing behavior from your customers? And maybe, you can just comment on any potential influence you think you might see in this quarter as a result of the upcoming product introductions. In other words, might there be a slowdown as customers are waiting for the new products?

Yes, so on the first question, I mean, obviously, we’re looking at macro and we did take account of that, no question. We did see and I said in my script, we saw some slowdown on forecasted deals that happened towards the end - especially in Americas towards the end of the quarter. And we took that to some degree into account. So it’s a combination of all of the above. And we had the whole of sales management. John DiLullo had his team over and we had meetings, significant meetings last week. And we did our usual thing. We think we’re being cautious. We hope we’re being cautious. And yes, we did take the macro into account.

And did you discern any difference in demand by vertical in terms of your end-demand verticals?

Not really. If you look at the verticals, the split of verticals, it was pretty similar to what we normally see. And it was pretty similar to in terms of performance within the geographies as well, so not really. And then, you asked the question as well, sorry, about the new products coming. Obviously, you check that and that’s something we’ll look at. I don’t think - we’ve taken that into account. We don’t think we’ll see that. We have seen a big interest in the 100-gig product from the service provider. But having said that, we feel it was reasonably a good pipeline of existing business in the service provider pipeline anyway.

Okay. Got it. Thank you.

Thank you. Our next question is from Mark with Barclays. Please go ahead with your question.

Yes, thank you. Good afternoon. A couple of questions, I wondered if you could drill a little deeper into what was going on with the slowdown in the forecasted sales in the U.S. Can you talk a little about those drivers, and maybe even quantify the revenue that slipped maybe into the current quarter and how much that revenue is?

No. Okay. Well, I mean, basically, very straightforward, I mean, the sales force believed that we’re going to get some closed deals and they didn’t happen. And they can happen for all sorts of reasons. It could be the CFO stopping at the last minute. It could be optimism from the sales force. I mean, these things happen and you try and take account of that. Nothing - in terms of talking about metrics, remember we did right at top of our range at - in terms of last quarter from the revenue perspective, so clearly any small number of deals above that is a very, very good thing to have. But we’re not talking about massive amounts of slowdown, but, yes. I mean, when you are at the top of the range and you could go over and you see some slow deals, they’re all important.

Okay. And then, as we think about the second-half of this year, with respect to the vertical mix, is there any one mix that you’re more dependent on in terms of these new products really taking off and achieving some good adoption right out of the gate, or is it more balanced across enterprise and service provider and government?

Yes. I think it is pretty balanced personally. Anybody else can chip into this, but I think it’s quite balanced. I mean, I’ll out - there is one or two obvious things at the 100-gig board, right. That’s clearly service providers mainly. But the big drivers of that remains security. The product refresh is across the board. We did mention a FIPS solution for finance. But I don’t think that will change the dynamics of the verticals. So not really, no, I don’t see that. It’s more horizontal.

Okay. Thank you.

Thank you. Our next question is from Catharine with Dougherty. Your line is now open.

Oh, thank you for taking my question. Could you talk a little bit, John, on your service provider market and how that’s doing? Two years ago it was - opportunity seem to be with Traffix. The commentary seems to be around security, Gi Firewall.

Yes.

Just a little insight on what you are seeing there in the carrier environment. Thank you.

That’s true. And the traffic sales have been reasonable, still low numbers to be frank, but reasonable over the last couple of quarters. We’ve got lot of customer base. But, no, the thing that gets us excited at the moment, I mean, the Gi Firewall has done very well. When I retire - I talked a number of times about the Gi Firewall sales in the tier 1 in U.S. The good news is we’re starting to see that globally now with sales in EMEA and sales in Asia and at Asia-Japan as well. So we feel very good about that security in general. NFV, NFV is another big area for us. We think we got a great position there with NFV. We talked about where we’re - we’re looking to get a leading performance of 10-gig up to 40-gig. That will make a big difference in NFV. So, yes, they are the hot buttons for us right now.

Okay. Thank you.

Thank you. Our next question is from Rohit with Buckingham Research. Please go ahead with your question.

Thanks. I had a couple of questions for you, John. First one, if you could, talk a little bit more about the competitive environment. Just want to get a sense of what you’re seeing in the traditional ADC market and from traditional vendors, but also cloud vendors. And then, could you also address what you’re seeing in the security marketplace, the competition that you’re facing there? The second question was on the standalone security products. I just want to get a sense, is that a response to customers demanding something from you, something new from you or is it more of a defensive move to better compete with products from other vendors?

Okay. I’m going to - I’ll go to Karl.

[Indiscernible] and et cetera.

I’m going to pass this over to Karl. He’s going to do this as in a Scottish accent.

Hey, Rohit, this is Karl. Hey, let me address the second question first on these kind of purpose-built security offerings, because one of the challenges we’ve had with our current offering which addresses some significant security issues out there both with anti-fraud and web application security as well, just network-level security, is that that as it’s included in on the ADC platform it tends to be targeted more towards the network buying centers versus the security buying centers, even though we do get good access to those. And what we wanted to do was to take our functionality, help differentiate that by essentially packaging it ways that’s more consumable by these centers. And so for example DDoS, we provide comprehensive DDoS solution both for on-premises as well as in Silverline. And we now connect these, but we want to make it easier now for someone then to take that on-prem solution, configure it and get the benefits of that, without having to do the full ADC configuration. Same thing for things like SSL Air Gap and in our for proxy services, that we see that these things are difficult to configure sometimes when you start looking at the full sphere of what an ADC does and want to make that easier to consume and target these applications. There are other ones we would like to be able to do that with. And we want to increase the value of this by including like analytics and other things that that we can differentiate say from our Good, Better, Best offering. So it just allows us more precise Better targeting. It also allows us to contrast and differentiate this against existing solutions in the market versus trying to have this larger conversation around ADC level security. So it’s really more just being…

Thanks, Karl.

Yes. This is John DiLullo. I would just add that we did have a lot of energy in the competitive trade-out space, in particular some of the legacy environments versus the greenfield. So it’s a very good quarter for that.

Thanks, John.

Thank you. Our next question is from Mark with D.A. Davidson. Please go ahead with your question.

Great. Thanks for taking the questions. Could you tell us what percent of product revenue is subscription? What part of that is coming in from cloud and Silverline? And is that creating a headwind or do you anticipate that to create a headwind as buying pattern shift?

Yes. So we actually don’t disclose it. It’s still, as John said in his script early days, that we like the traction that we are seeing, we like the customers that we’re winning and expect that to continue. In terms of providing headwinds, I’m not sure what you mean by that. Do we think it displaces appliances? No, we don’t. We think it’s complementary to our current offerings and actually it is part of our differentiation.

So when the customer purchases something that is the subscription base, you don’t see that as detracting from current sales in the current quarter.

No, no. Especially if you look at the DDoS wins, a lot of them we never heard of the customers and maybe had an emergency and allows us to actually get into new customers. And that’s one of the reasons we say. We’re really going to pump up the resources in Silverline, because we think we’re going to be a winner there with - in terms of inside sales specifically and obviously more resources in the portfolio as well as we have increased - we’ve put quite a lot of investment into the datacenters globally.

Okay. Can you just talk about the ACE replacement market where that is - are we losing steam in that? Is that kind of playing itself up?

Yes. I mentioned in my opening remarks that, yes, it’s still a pretty material number in terms of millions-of-dollars that we’re booking there. And we saw some nice new big ones as well, but in truth, if you look at it from a year-over-year perspective it certainly doesn’t have the tailwind that did at last year and the previous years. But it’s still an important part of our business. The other side of it, not to lose sight of is, because we don’t count at this when we talk of ACE replacements, but when we win say a Fortune 50 company, we’ve done a few of those because of ACE, we get more and more business like security. We don’t actually call that ACE replacements moving forward. So it’s being great for us. It’s not the tailwind that it was last year having said that.

Okay. Thanks.

Thank you. Our next question is from Paul with Cowen & Company. Please go ahead with your question.

Thanks. John, and if this was asked and answered, I apologize. But relative to your comment about record bookings in AsiaPac and EMEA, if I heard you correctly, and then on the guidance, would you characterize this conservative? And we all recognize the macro factor up, but I guess my question is, given the strength in bookings abroad, but not in the U.S. little bit counterintuitive to me, how much - it feels like that guidance is incorporating an element of conservatism given the bookings numbers. But, I guess, I’m trying to - I’m really trying to understand what you’re seeing in terms of in-demand as its developing?

Yes, yes. No, and I hope it’s got a lot of conservatism, because that’s what it should have I think in this environment. Now, first of all it’s not abnormal for EMEA to have a very strong sales quarter at the end of a calendar year. It’s happened in the past. Having said that, they tend to have a tougher next quarter, this current quarter that we’re in and we’ve taken account of that. APAC, we’ve seen a lot of changes in APAC. We have put new management in there over a year ago. He is doing a tremendous job and we’re really - we come to see the benefits of that. So that wasn’t that surprising either. In terms of Americas, one of the things we did see and we haven’t seen this yet, but we did see that from a vertical perspective that service provider was pretty strong. We did see a little bit of the drop in Americas. We actually feel better about that this current quarter as well, so no real big trend to latch onto.

But, John, on the Americas piece where you saw weakness, how much of that was the pause in those large deals, the delays, and how much of it was broader in terms of just a downturn in demand?

I would call it more of a pause. We actually we - we’re reasonably confident moving into these closing stages. And obviously that confidence was misplaced in Americas, but, no, I didn’t - it was more of a pause at the end. And then, what we have done? We just checked actually today. We’ve basically seen a number of those deals that didn’t close, actually closed already.

All right. Thank you. I appreciate it.

Okay.

Thank you. Our next question is from George with Jefferies. Your line is now open.

Hi, guys. Thanks very much. I guess, I wanted to go back to the deferred revenue growth, 23% year on year. And obviously, that number is going up quite a bit faster than - now either product sales also declining or services which are, I guess, mid-teens in terms of year on year. And I would imagine some of the deferred revenue - our performances is - maybe Silverline certainly maybe more longer term services contracts. But can you give us a sense, again, why the diversion and what are the big contributors to that deferred revenue growth relative to the other metrics? Thanks.

So on the deferred revenue balance, the first statement to make is Silverline is not in that at all. So that’s a completely separate balances in the product number, not in the services piece. The reason for the services deferred acceleration versus the revenue is, yes, you’re right, some of it is - support contracts are taking out for year-two and year-three. And we saw some of that in the BRIC countries, where they try and do guarantee the price out into the second and third year. So, Brazil actually was quite strong for us there. And then the other piece is our consulting revenue has grown, but the consulting bookings have grown fast as we’ve sold more consultants for a year at a time which you cannot obviously take the revenue in the short-term.

Got it, okay. Great. That helps. And then, just separately I wanted to ask about the share repurchase this quarter. It looks like you bumped it up to $200 million. It had been $150 million a quarter. Maybe, I guess I’m kind of wondering what’s going on there. Thanks a lot.

I’m sorry. I missed the question.

Share repurchase [indiscernible].

Yes. When the board decides to move forward with the share repurchase we put it against the 10b5-1 plan that has tiering for different pricing levels and we saw that kick in.

Great, thanks.

Thank you. Our next question…

Excuse me, Sam. This is John Eldridge. We’re going to take two more callers and then call quits.

Okay. Thank you. And our next question is from Jeff with Nomura. Please state your - or please go ahead with your question.

Thanks very much for taking the question. I appreciate that. I have one question for you, John, and then, Andy, one for you. I think for John, could you help us in maybe feel for any sub-seasonal - should we worry about sub-seasonal revenue growth ahead of these product transitions over the next several quarters or do you feel that your pipeline is efficient and full enough that seasonal is a prudent way to go, to the extent that you can comment on that, of course?

Oh, yes. And obviously, you have to be very careful about that. If you look at the time, a few years ago or three years ago I think it was when we did the last product refresh, we did it. We frankly took a year to do the refresh. And I think we paid for that. And we will not take a year this year. We will do it quicker. But when we look at the pipeline, we don’t - we think we’re okay. We think we’re going to manage through that quite well. And obviously, we will start most of the - a lot of the new products is next quarter. And some of them are on different areas, brand new areas, so that we should be safe with that. And then, the larger product refresh we see happening in this sort of Q4 time scales, and again I think we’ll manage through that.

Okay. And then, my question for you Andy is, you look like you are adding about 50 employees in the March quarter, which if we go back historically that seems in the low end of the range or be even below the low end of the range for you. Can you talk a little bit about what’s happening there? And then, should we be expecting you to pick that up? I’m wondering if there is a change in view on how you’re managing your OpEx and your margin structure over time. Thanks.

Yes, there’s no change in how we’re managing. And I said at least 50, meaning it could be higher. We’re just going to balance that as we watch the quarter roll out, but directly ties to our guidance. So we brought on 95 last quarter; we’re absorbing them this quarter. And with our guidance and wanting to hit our targets that we put out there, 50 is the right number to start with.

Okay. All right. Thank you both very much.

Thank you.

Thank you. And our last question is from Brent with Pacific Crest Securities. Please go ahead with your question.

Thanks for squeezing me in. And, John, welcome back. Two questions, if I could. I guess, one, strategically you’ve lived through several cycles and if we think about kind of the next cycle in the next kind of - but your philosophy on what you do with a-billion-plus in cash investments; cash flow remains very strong; really good margin structure. As you think about kind of the current environment and certainly we’re in, do you have a change relative to your appetite to maybe get more aggressive with the buyback, more aggressive with acquisitions, any change in your strategic positioning around being a bigger company with bigger cash flows and your appetite to invoke change more, one? And then, I have one follow-up.

Yes, okay. I wouldn’t see a change. I mean, so I don’t see as - I think you still see the conservatism that we’ve hopefully always had in the M&A space. Frankly, evaluations look a little bit better these days, which is good-news/bad-news; but that they do. We may broaden the lens somewhat. Obviously, we’re very, very interested in increasing our security business and that may be an area. But we will be conservative, but we are getting bigger. And, yes, so, I’m saying we’re not changing, but the company is getting bigger. So to some degree we may look at some other stuff that we wouldn’t have looked at five years ago.

Very helpful. Then my last question really is around kind of the logic behind the announcement here on the call that you’re kind of looking at purpose-built appliances. And the reason why I ask, it is a little bit of a departure from the past, historically obviously. And if you look at the fastest-growing parts of the business, it’s kind of software-only; it’s add-on security modules on top of the BIG-IP. Now, you’re talking about kind of coming out with purpose-built appliances. So, I guess, one, kind of why now? And, two, how encompassing will you have a purpose-built appliance portfolio?

Oh, yes. So this isn’t a move to purpose-built appliances in general. I mean, we - it’s not that. However, we see some real opportunities with things like SSL Intercept with SSL Air Gap with specific DDoS behavior analysis type capability. We just - we see opportunities. And, I mean, it’s catalog-only for this. But it’s a fairly easy technology roadmap to move forward to. So we’re going to take advantage of that. It’s not that we’re - we sat back and said, oh, my goodness, we need to move away from our TMOS platform approach to special. But we haven’t done that at all. In fact, if you look at what we’re doing with that we were building VIPRION with 100-gig, it’s almost the opposite in the other side. And then, when you look at the overall refreshes, they are very much in the same vein as have been before.

Perfect.

Yes, I mean, the big push there - Brent, this is Karl - is really to target the buying centers, the security buying centers with it. So it’s not the - not, we’re not killing off TMOS. This is all still a part of that. But it’s to have more application-specific implementations that are easy to deploy. And we’re leveraging iApps and other technologies to kind of help create that packaging to make it easier to get in there, so that they can realize the full value of it, because quite frankly a lot of times some of the security functions would get buried kind of in the mass quantity of ADC features and functions we provide. We’re going to make sure that’s very obvious and easy to go take the market.

Okay. Thank you very much.

[Indiscernible] thanks so much.

Thank you.

Thank you very much for joining us. And we look forward to the prospect of seeing many of you in the conference circuit and at Mobile World Congress during the coming quarter. Thank you.

Thank you, speakers. And this does conclude today’s call. Thank you for joining. All parties may disconnect at this time.