Good afternoon. And welcome to the F5 Networks First Quarter and Fiscal 2018 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 you have any objections, please disconnect at this time. I’d now like to turn the call over to Mr. Jason Willey, Director of Investor Relations. Sir, you may begin.

Thank you, and good afternoon, everyone. As Savvy said, I am Jason Willey, F5’s Director of Investor Relations. François Locoh-Donou, President and CEO of F5; and Andy Reinland, Executive VP and CFO will be speakers on today’s call. Other members of the F5 executive team are also on hand to answer questions following the prepared remarks. If you have any questions after the call, please direct them to me at 206-272-7908 or j.willey@F5.com. A copy of today’s press release is available on our website at www.F5.com. In addition, you can access an archived version of today’s call from our website through April 25, 2018. You can also listen to a telephone replay at 866-456-9376 or 203-369-1276. In today’s call, our discussion will contain forward-looking statements, which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized on our quarterly release and described in detail in our SEC filings. Please note that F5 has no duty to update any information presented in this call. Before we begin the call, we wanted to announce that we plan to hold our 2018 Analyst and Investor Meeting in New York on the morning of Thursday, March 8. More information on the meeting, including a link to where you can register for the event is available on our Investor Relations webpage. I will now turn the call over to Andy.

Thank you, Jason. Fiscal Q1 was a quarter of disciplined execution. We delivered Q1 ‘18 revenue and non-GAAP EPS above the midpoint of the ranges we provided in October and executed another quarter of strong gross margin and cash flow. We continue to see strength in our software offerings, particularly deployments in the public cloud and our services business delivered another strong quarter of revenue growth. First quarter revenue of $523 million, up 1% year-over-year was above the midpoint of our guided range of $515 million to $525 million. Driven by the recent U.S. Tax Reform Legislation, GAAP EPS of $1.41 per share was below our guidance of $1.47 per share to $1.50 per share. Non-GAAP EPS of $2.26 per share was above our guidance of $2.02 per share to $2.05 per share. I will discuss the impact of the tax law changes in more detail later in my comments. Product revenue of $227 million in the first quarter was down 5% year-over-year and accounted for 43% of total revenue. Services revenue of $296 million, grew 7% year-over-year and represented 57% of total revenue. On a regional basis, Americas revenue grew 2% year-over-year and represented 56% of total revenue. EMEA revenue grew 7% year-over-year and accounted for 27% of overall revenue. APAC, which accounted for 14% of the total, decreased 5% year-over-year and Japan at 4% of total revenue decreased 12% from a year ago. Sales to enterprise customers represented 64% of total sales during the quarter. Service providers accounted for 20% and government sales were 16%, including 8% from U.S. Federal. In Q1, we had five greater than 10% distributors. Ingram Micro, which accounted for 15% of total revenue, Tech Data accounted for 12%, Arrow and Cynics each accounted for 11%, and Westcon accounted for 10% of revenue. Moving…

Thank you. [Operator Instructions] Our first question is from Paul Silverstein of Cowen & Company. Your line is open.

Thanks. First one, Andy, from a, I guess, two perspectives, one from a macro in the health and in-demand perspective where it looks like the objective numbers relative to U.S. growth, EU growth, et cetera, have been trending up and [indiscernible] right now to be quite favorable.

Yeah.

And so there’s a favorable economic backdrop. And then, in terms of the company specific issues or product market specific issues, especially relative to the product refresh from a year ago that hadn’t transpired and we still don’t see the product revenue growth picking up, the question being, can you give us more insight, more detail on what you’re seeing in terms of customer behavior, their willingness to spend, as well as your particular issues in the ADC market?

Thank you, Paul. So, I’ll start, on your first question as it relates to Europe. I think you heard that we had some challenges in Europe in 2017, which we felt were linked both to some macro issues around the environment, Brexit, some uncertainty around regulation, and we also felt that some of it had to do with our own organization and some execution challenges we were having. Over the last, I’d say, two quarters, we felt the number of these have gotten -- have moved in the right direction, so a lot of the macro uncertainties in Europe I think are resolved. There’s more clarity around Brexit, generally the European economies in Continental Europe are doing much better. And so we feel that the macro environment is generally better, and we’ve made some changes in our own formation in Europe. We’ve made some leadership changes. We’ve also realigned our teams towards what we perceive to be the best opportunities for growth. And as a result, we’re doing better. We are really encouraged by the results we saw in Europe this quarter. We’re cautious because we had several quarters of challenges there, but we’re also optimistic about what we’re seeing with our pipeline generally in Europe and our execution. Your second question was on product revenue growth; and generally, the customer behaviors that we’re seeing. There hasn’t been much change on that front since last quarter that -- we’re seeing two things specifically on the iSeries refresh. Number one, the adoption of the product continues to be very strong. It is a very high-quality product. Our customers really see actually new use cases for the product and really love the performance of the product, so we’re continuing to see strong adoption within our customer base for the platform. On the other hand, we’re also continuing to see some delays in decision-making related to hardware, in part because of the complexity of the architectures that our customers are dealing with now. As they move applications across multiple clouds, some in hybrid cloud, some in private cloud, some in public cloud, the variables in the decision-making process are just more complex and we’re seeing elongated cycles of decision-making and that’s one of the reasons. I think the key reason, why we don’t think we’ve seen the growth acceleration that we would have expected at this point in past cycles.

And François, just a quick clarification, if I may, on your commentary about seeing strength in public cloud with respect to enterprises adopting multi-cloud architecture, I know you don’t quantify it, but I am asking you if you would be willing to quantify it for the benefit of all of us, I think it’s awfully important? François Locoh-Donou: Yeah. So we don’t quantify it, Paul. I think we’ve said it is growing fast. These numbers are still small relative to our overall revenues. They’re growing very fast, and we’ve actually exceeded our own expectations again this quarter in terms of the growth we’re seeing in our solutions in the public cloud. We’ll probably say more about -- overall our public cloud strategy, the solutions we have in there, and the traction we’re seeing in the public cloud at our Analyst Meeting in March, Paul.

And you don’t believe there’s any cannibalization or meaningful cannibalization? François Locoh-Donou: Actually I do think so, you have to part that into two domains. There are some applications that are -- that we support that are moving to the public cloud and generally we have a very strong attach rate to these applications. But I think in these use cases, it is substitutive to something we would have done on-prem in the past, so that -- there’s definitely an element of cannibalization or if you will, just a change in deployment model of on-prem versus public cloud. But we’re also seeing net new use cases, so we do acquire and we did again this quarter acquired a number of net new logos, so these are companies that have never bought from F5 before and bought for the first time in our public cloud partners AWS, Azure, or Google. And we’re also seeing some types of deployments that we would have not had access to before. So a number of our deployments in the public cloud are utility based. This is where customers are essentially renting F5 Virtual Editions for hours, and we’re already billing several millions of hours of Virtual Edition in public cloud today, and that’s net new incremental for us. That’s not opportunities we would have had access to before.

I appreciate. I’ll pass it on. Thank you. François Locoh-Donou: Thank you, Paul.

Our next question is from Tim Long of BMO. Your line is open.

Thank you. Just two for me as well, if you talk about, a little bit about the service line, it was very strong again, a little stronger than expected here, was there any kind of one timers or anything abnormal with seeing the growth reaccelerate there? And then on the telco vertical, a little bit less than normal seasonal in Q4. Could you point a little bit to what might have held that business back and talk a little bit about the outlook for the telco piece looking out the next few quarters? Thank you.

Yeah. Tim, so I’ll start with the service line and I think a couple of things is when we tend to see seasonally just based on calendar end contracts align and things like that and that helps drive business. We also had a program in place for really focusing on going after business in Europe that we felt we weren’t focused on enough and actually had a pretty effective quarter in recapturing a lot of maintenance contracts that for lack of a better description slipped through the cracks. So those one-time things helped drive the strength that we saw. So we’ll see that pullback a little bit in Q2 along with normal seasonality but that’s built into the guidance.

Yeah. This is John DiLullo. Also I can answer the question about the carriers. We saw as per normal a little bit of lumpiness last quarter and it didn’t come exactly where we’d expected. But aren’t reading anything long-term into that and continue to see a lot of activity in both the software and the hardware environments in that vertical.

Okay. Thank you.

The next question is from Mark Kelleher of D.A. Davidson. Your line is open.

Great. Thanks for taking the questions. I wanted to go back to the product revenue. I want to probably stick on that a little bit here. The last three quarters we’ve seen continued deceleration and in this quarter despite the iSeries kicking into its cycle and strong Europe, we’re seeing that deceleration again. So what are the headwinds that you’ve been facing that are -- that you see going away that will allow that topline to grow into next year -- this year? François Locoh-Donou: Thank you, Mark. So I think actually from an iSeries refresh perspective, we don’t see a change. We think the demand for the product is very healthy. As I’ve said we’re seeing new use cases for the product in IoT, high transactional applications, et cetera, and we think that’s going to continue for the longer term. There are though some product drivers of product revenue growth that we think are kicking in and probably will accelerate in the second half of the year. Virtual editions will continue to grow. We expect our public cloud revenues to continue to grow. We continue to see strong demand for our security solutions, in particular driven by WAF and the increasing trend towards to encryption of all traffic that we deal with. And our SSL capabilities position very well -- position us very well to deal with that. So security, Virtual Editions and public cloud, I think will continue to be a driver in the second half of the year. And then there’s some changes we’ve made, we’ve talked about our realignment during our earnings call three months ago. There’s some changes we’ve made structurally in our sales channels, go-to-market and some consumption models that we have started offering that we expect to have also an impact going into the rest of FY18. So when you factor all of that, I think we feel pretty good about what we’ve said last quarter, which is continued improvement in product revenue performance throughout the year.

Okay. Just as a quick follow up, the -- Europe was very strong but the U.S., the Americas was kind of weak, was there anything particular going on in the U.S.? François Locoh-Donou: No. Nothing -- I would say nothing in particular. I think the demand in service providers in the U.S. was, it’s typically lumpy but it was weak this quarter. So you factor all that in, it made up for I’d say a decent performance in North America but not particularly strong. I’d say North America enterprise was stronger than North America service provider.

Okay. Great. Thanks. François Locoh-Donou: Thank you, Mark.

The next -- I am sorry, the next question is from James Fish of Piper Jaffray. Your line is open.

Hi guys. Thanks for the question here. Not to keep beating a dead horse but with product down 5% and it looks like actually on a billings basis you guys were down as well for the first time in a little while. At what point do you guys think that as we progress through the year that we could see stability in the product line, if at all and potentially what concerns you on sort of services billings potentially being down then on a year-to-year basis? François Locoh-Donou: So I’ll take your question on the product and Andy will touch on the services, James. So you know, on the product first, this was an execution quarter for us. The product revenue came roughly in line with where we expected it to be. As you know, we don’t guide product revenue specifically for the other quarters, but the drivers that I’ve just gone through around software, security and cloud, as well as the initiatives we undertook both on the product and the sale side give us good visibility into where we think we’re going to be going into FY18. And we expect our product revenue performance to improve sequentially from what we had in Q1 throughout the rest of FY18. I think that’s what we said three months ago and we still feel pretty good about that.

Yeah. And then on the services business, yeah, that -- because most of our services business and revenue is driven by maintenance and renewals, and given where our product revenue has been over the last year and a half, many times we talked about we’re going to see that pull down our services billings overtime, and therefore, the revenue. We think returning to product revenue growth will then pull that back up. So year-over-year we are seeing it pull down a little bit on a percentage basis, it was expected, it’s directly correlated to our products business. That’s just how it is and as François said, as we expect to see that improve as we execute through the year, we’d expect that to see services pull from that as we return to product revenue growth.

Got it. And then just a quick clarification, I am not sure if I’ve missed it, but did you guys mention what the average deal size was this quarter, I think last quarter it was about $122,000.

Yeah.

And then, Andy, any color as to any change in the renewal rates?

Yes. So to the average deal size, this quarter it was about $113,000, so still within that kind of band that we see. We think a little bit of that’s seasonality, if you look a year ago Q1, it was $110,000. We’re not seeing any dynamic in the deals combined with that that would lead us to any other conclusion that we’re still in that band and we don’t think it’s pulling up or down deals. And as far as renewal rates, we saw that tick up because of the cleanup in EMEA, but overall I’d say it’s pretty normal.

Got it. Thanks, guys. François Locoh-Donou: Thank you.

The next question is from Jeff Kvaal of Nomura | Instinet. Your line is open.

Thanks very much. I’d like to change the subject a little bit and get to tax. Part of that, Andy, is for you in terms of what can you tell us about how we should be thinking about the benefits to your free cash flow from the tax reform? And then, François, for you to some extent this gives you an even more powerful balance sheet to work with, what are the triggers that you might consider to deploy that? Thank you.

Yeah. So what we expect is we will see -- as we see the benefit of that through the year, the majority of it we think is going to fall through and now it’s still early days. We’re evaluating it against our strategy. But and we’ll talk more about this at AM. But there’s a reality to how we view our business and where -- how we value our business model, and we’re going to take all of that into consideration, and we think by March 8 we’ll be able to talk in more detail about what we’re going to do with that free cash flow. But again, as I started out, we’ll see a lot of that flow through, but reluctant to give anything more specific than that right now.

I can tell. Yeah. François Locoh-Donou: And Jeff, on your -- to the second part of your question, so we will talk more about capital allocation at our Analyst Meeting in March, but I would say this, generally, access to capital has not impacted our capital allocation strategies historically and I don’t expect this tax rate to fundamentally impact our capital allocation strategy. And it has been and our view will continue to be that we want to return a fair amount of capital to shareholders and that’s been our practice. I think we have one of the strongest buybacks in the industry. But we’ve also said that when we have opportunities for M&A, we will be disciplined about these opportunities, but if we see opportunities to accelerate things that are strategic to us, we will do that. And that philosophy is not fundamentally changed by the benefit we’re getting from the change in Tax Legislation.

Okay. Thank you both. François Locoh-Donou: Thank you, Jeff.

The next questioner is from Alex Henderson of Needham & Company. Your line is open.

Thanks. Two quick questions, one, just looking at the March quarter guide on the revenues, is it reasonable to think that the rate of decline in products has hit the trough in the December quarter is down 5% or is it possible that we could see a similar decline or more in the March quarter given it’s against a tougher comp? And then the second question I had was really on the security side. I was wondering if you could give us some sense of, is WAF the vast majority of what you’re selling in security and if so, it looks like that’s becoming more and more of a feature on most of the security platforms that are out there. Has competition increased and made it more difficult in that space as a result of that becoming a more widely distributed feature on more and more platforms? Thank you. François Locoh-Donou: Thank you, Alex. I’ll take the first one. John will take security. So, yes, I mean, if you look at our guidance for the March quarter and you -- I think you do a good analysis on the midpoint of the guide, et cetera. Yes, it would imply that we have -- that the product revenue performance in Q2 will be better than what it was in Q1. And in fact, generally, when we look at our -- at the progress we have, the pipeline we see in our product revenue and the execution we see, we actually do feel we are turning the corner on product revenue growth in Q2, and frankly, we would be disappointed if we did not return to product revenue growth in the second half of ‘18.

How much is your comps there?

Answering -- Alex, answering your question on WAF. So this is a really a great market for us and as you know, we have a leading product there. We have also a very differentiated product especially in our installed base, which is still a very large market for us to go after. And then, as it relates to greenfield opportunities with competition, I think we have some competitive differentiators, but we also have a lot of mobility and our product works in a multi-cloud environment and all the public clouds as well, and that’s one of the fastest areas of growth for us, people trying to standardize their security posture across the multi-cloud environment. So it’s mostly been a positive for us.

So you haven’t seen any erosion in that market or any increased pressures in it as a result of additional competition?

No. I’d say there’s a greatly increased demand and some of our competitors are raising awareness and that’s generally been a positive.

Thanks for the explanation.

The next question is from James Faucette of Morgan Stanley. Your line is open.

Hi. Good afternoon. A couple of questions for me, first, just wondering with the kind of bringing some of the customers through service and maintenance contracts that expired back into the fold, if you will on those. I am wondering if we should think about that potentially hurting the chances that they will upgrade to the newest versions of product or does that help, just trying to think about like how that may impact it? And I guess as part of the improvement in Europe, any evidence from your perspective that the weakening dollar may have helped a little bit either in terms of accelerating close times or expanding product or deal size, excuse me? And then, I guess my last question is, François for -- with the appointing of Ram to be Director of Security, can you talk a little bit about how you would like to have kind of what his to do list is and what impact you’d like to see him have on security and tied to the existing F5 product portfolio, and over what timeframe we should expect that? Thanks a lot.

Thank you, James. That’s a lot in there. Which is the first question again?

Well, I’ll start with the first one on the service and maintenance. Do we think that hinders customers upgrading and John can add on to this if he has additional commentary from his perspective, but really this was a program put in place, because we think we lost a little focus there. This wasn’t anything more than smaller deals were just not getting addressed. We regrouped the team and where they thought they were lost we said they’re not lost, go after them, and get renewals. And when we renew, we can capture the revenue for the period of time that’s gone by between the expiration of the contract and the renewal and we think that was the main driver there, not anything that you could correlate that that’s directionally how they might be thinking about upgrading their equipment.

But I would add to that that it’s very powerful from a sales go-to-market perspective to continue to have that commercial relationship with those customers. It doesn’t inhibit future sales. In fact, it gives us lots of visibility in the challenges our customers are having and really sets up the next generation sales, so it’s hugely positive to have a high renewal rate for us.

Yeah. And then on the foreign currency, could that be helping us, I mean, clearly because we bill internationally primarily in U.S. dollars, it makes our equipment more affordable. Anecdotally, I am not hearing anything that would say that’s driving business. I would contend this really is more about projects that were delayed as they worked their way through everything going on from Brexit to GDPR and it’s getting to the point where it’s freeing up again. So I wouldn’t correlate those two things personally. François Locoh-Donou: And then to the second part of your question, James, so Ram and his priorities. Firstly, on his background, RAM has a long experience in the security industry, both with more traditional security companies and more sort of next-generation cloud-oriented security companies. And so he has a very broad perspective of the industry and that is going to be very valuable for us, because in security we have no shortage of opportunities, and a key part of the mission for Ram is to really prioritize the opportunities that we go after. One of the immediate elements of what Ram is working on is we have been quite successful selling security attached to our ADC and we see opportunity more and more, and demand from our customers to take on some of our standalone security offerings that would appeal more to a sec ops buyer. And so Ram’s looking at what’s the best way to capture that opportunity and which offerings should be first versus offerings that would follow on later, and that’s an immediate priority. And then more broadly, in the space of application security, we’re seeing a lot of new complexities emerge. Those were validated again by the research we did in our State of Application Delivery report, where we’re seeing that, as people adopt more and more multi-cloud environments, their confidence in security solutions is actually decreasing. And really, there’s an opportunity to emerge as a partner to solve these new complexities. Where we start in this journey to multi-cloud application security, again is a set of priorities and investments that RAM is going to define for us.

That’s great. Thank you so much. François Locoh-Donou: Thank you, James.

The next question is from Michael Genovese of MKM Partners. Your line is open.

Thanks a lot. Can you help us quantify some of these things in your security, for instance, security appliance attach rates? Do you have any kind of metric we can track there and even more importantly, standalone security sales as a percentage of revenue, and are we targeting that to grow over time, what can you share with us there? Thanks. François Locoh-Donou: Hi, Mike. And so the last question is easy. Yes, we are targeting standalone security offerings to grow over time. To the first part, no we don’t break that out. I can tell you an important portion of our security or even of our ADC business is driven by security and I would say qualitatively that that portion of the business that’s driven by security is growing every quarter. The other data point I’d give you is that, as our public cloud business grows, the security attach rate in the public cloud is about double what it is on-prem and that’s because of the complexities of securing applications in the public cloud. So that’s as far as I’ll go as far as quantifying our security business, generally the trends are up and more important for us.

Okay. That’s fair. Thanks, François. And then you just hired a new Strategy Corporate Development Manager and so my question is how do you think he and his team can help you drive the topline growth in the company and do you think security will kind of be over weighted portion of that? François Locoh-Donou: Yes, Mike. So there are multiple responsibilities for Tom Fountain who’s joined us last week as our Chief Strategy Officer. One is we have initiated a number of incubation initiatives where we’re looking at new developments that would have potentially long-term growth opportunities for F5 and these are under Tom in part, because Tom has also a background in venture capital and can help us provide the right oversight for this part of the business. Tom also owns our Business Development Group and our relationships with a number of companies with whom we have partnerships in the IT space. And these partnerships are actually quite important for the topline, because we co-market, we co-sale, we do certifications, we are integrated in their environments, whether it be SDN environments or next-generation IT architectures. And so those partnerships are key to short-term revenues and Tom’s going to help drive that with the Business Development Group. Then the last portion of Tom’s responsibilities is in fact corporate development and in that Tom has the experience to help us with the build versus buy decisions that we think we will be making as we assess opportunities in security and elsewhere around developing our portfolio.

Okay. Thank you, François.

Operator, I think, we’ll take one more question.

Certainly. The next question is from Jayson Noland of Baird. Your line is open.

Okay. Great. Thank you. François, I wanted to ask about your comment on architectural change causing decision-making delays. Public cloud isn’t new and SaaS isn’t new, so maybe there’s an inflection point that’s happened of late, but could you talk to that statement a little more? François Locoh-Donou: Yes. So what we’ve seen is a number of customers are when they’re making decisions and this comment was specific to the refresh cycle on iSeries, and specifically, on hardware purchases, where we’re seeing a number of customers before making these decisions as part of the decision-making cycle undertake a review of what assets do they want to have where. You will see that one thing that has changed year-on-year and we’ve reported on that in this State of Application Delivery report, is that customers are embracing multi-cloud and as part of that they’re having a sort of best cloud for the app strategy. So they’re making decisions on where an app is going to reside on a per app basis in cloud versus non-cloud. And as they go and make these decisions and have to make significant commitment on infrastructure assets, that decision-making cycle is elongated. Cloud is not new. You’re correct about that. But I think multi-cloud and per app decision-making around multi-cloud is a trend that we are seeing becoming reality. For us, frankly, while this has given I would say short term headwinds specifically on hardware and as we said, I think, last quarter, we didn’t see on hardware the uptick that we would have seen at this part of the cycle. Overall, we think over the long run it bodes very well for us, because we feel that we’re probably uniquely positioned to serve these needs across multi-cloud environments with our hardware, on-premises, our software on-premise and increasingly our software in the public cloud with multiple consumption models across all these environments. There aren’t -- there isn’t any other company that really has this breadth of offerings for supporting these multi-cloud strategies.

Okay. And then to finish things up you’ve called your growth areas cloud, security and then Virtual Editions. Is -- which of those is receiving the most investment or which offer has the most opportunity across those three? François Locoh-Donou: So that’s a good question. So there are different stages of growth. I would say our Virtual Edition software is already a meaningful business for F5 and we continue to shift more investments in that direction. Security also I think is at scale for us at F5. Public cloud is more nascent. So in terms of growth in investment, public cloud probably has the highest growth of investments in these areas, but the two other areas are if you will larger to-date and with increasing investments year-on-year.

Okay. Thanks a lot, François. François Locoh-Donou: Thank you.

Thank you everyone for participating today. We hope that we see many of you in New York in March. Good afternoon. François Locoh-Donou: Thank you.

That concludes today’s conference. Thank you for your participation. You may now disconnect.