Good afternoon. And welcome to the F5 Networks’ Third Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Also, today’s conference is being recorded. If anyone has any objections, please disconnect at this time. I will 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. François Locoh-Donou, F5’s President and CEO; and Frank Pelzer, F5’s Executive Vice President and CFO will be making prepared remarks on today’s call. Other members of the F5 executive team are also on hand to answer questions during the Q&A session. A copy of today’s press release is available on our website at f5.com, where an archived version of today’s call will be available through October 25, 2020. Today’s live discussion is supported by visuals, which are viewable on the webcast and will be posted to our IR site at the conclusion of today’s discussion. The replay of today’s call will be available through midnight Pacific Time, July 28th, by dialing 800-585-8367 or 416-621-4642, use meeting ID 8166352. 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. Factors that may affect our results are summarized in the press release announcing our financial results and described in detail in our SEC filings. Please note that F5 has no duty to update any information presented in this call. With that, I will turn the call over to François. François Locoh-Donou: Thank you, Suzanne, and good afternoon, everyone. Thank you for joining us today. I will talk briefly to our business drivers before handing over to Frank to review the quarter’s results in detail. Despite macro uncertainty, we delivered strong third quarter results. As a company, we continue to take a human first approach. This means working to support our customers and each other…

Thank you, François, and good afternoon, everyone. As François noted, we delivered a very strong Q3. Like last quarter, we are reporting non-GAAP revenue. Non-GAAP revenue excludes the impact of the purchase accounting write-down on Shape’s assumed deferred revenue. For transparency, we are committed to providing both GAAP and non-GAAP revenue during the period when purchase accounting will have an impact on Shape related revenue. On a GAAP basis, Q3 revenue was $583 million. Third quarter non-GAAP revenue of $586 million was up approximately 4% year-over-year and above the high end of million our $555 million to $585 million guidance range. Please note, as I review our revenue mix, I will be referring to non-GAAP revenue measures. Q3 product revenue of $256 million was up 3% year-over-year and accounted for approximately 44% of total revenue. Software revenue was $97 million, growing 43% against a particularly tough comparison of 91% growth in the prior year period. Software continues to grow as a percentage of product revenue, representing approximately 38% of product revenue in Q3, up from approximately 27% in the year ago quarter. We also continue our momentum towards a recurring revenue base with subscriptions of 73% of software revenue in the quarter. Services revenue of $330 million grew 5% year-over-year, and represented approximately 56% of revenue. Revenue from recurring sources, which includes term subscriptions as a service and utility based revenue, as well as the maintenance portion of our services revenue, totaled 66% of revenue in the quarter. Systems revenue of $159 million was down 12% year-over-year. On a regional basis in Q3, we saw strength in Americas and EMEA, with Americas delivering 11% revenue growth year-over-year and representing 57% of total revenue. EMEA delivered 6% growth, representing 24% of revenue. Against a challenging comparison in the year ago quarter,…

[Operator Instructions] Your first question comes from the line of Tim Long with Barclays. Your line is open.

Thank you. Yeah. Two quick ones if I could. Frank or François, first, could you just give a little color on how the performance was in the cloud or hyperscale space where you guys obviously have been increasing the service offering there, so could you just give us a little flavor on how it’s going? And then second, I was hoping you could talk a little bit about the telco business. I think you announced a win with Rakuten again, it might have been your second one. So you could just talk a little bit about how you see your solutions positioning in a 5G world, maybe more so than what we saw in the 4G world for the telco vertical? Thank you. François Locoh-Donou: Thank you, Tim. So I will start with the -- our solutions in the public cloud. I mean, generally, we are seeing a continuation of the trend of the past few quarters, which is that our footprint in public cloud is accelerating and growing faster and I will give you a couple of components of that. First, of course, our partnership with AWS continues to increase the number of opportunities that we have in public cloud. Largely AWS is making a number of opportunities visible to us that were not before, so that’s helping and contributing to accelerate our growth in public cloud. We are also seeing with NGINX, a large number of deployments. I think kind of half of the NGINX deployments are in public cloud and so we are now seeing an opportunity to be in front of modern applications in public cloud, but also applications that were traditional applications that are being refactored and move to the public cloud. NGINX has a very strong value proposition to keep up in front which…

Okay. Thank you. François Locoh-Donou: Thank you, Tim.

Your next question comes from the line of James Fish with Piper Sandler. Your line is open.

Hi, guys. Thanks for the question. NGINX was picking up for us ahead of the quarter and I was just wondering is the new integrated architecture starting to lead towards more wins with that architecture or is it a refresh of it -- or is it more of the refresh in terms of purchasing more what it’s knows through F5? And I guess also, how are you thinking about leveraging NGINX and F5 for moving it into the edge computing world? François Locoh-Donou: Yeah. Jim, I will start with the first part of your question around what -- and I want to make sure, Jim, you are asking about, what are the catalysts that are driving both in the NGINX business?

It’s more about understanding, François, if this new combined architecture of having NGINX and F5 together is leading towards more wins with customers or if it’s customers right now just spending to keep the lights on and buying what they knew before? François Locoh-Donou: Oh! Okay. Thank you for clarifying, Jim. So the answer is absolutely yes. I mean, this quarter, we have a higher set of number of multi-product deals 195 and largely driven by combinations of F5 BIG-IP and NGINX value proposition coming together and I will give you a couple of examples. We have ported F5 app security tack on to NGINX and we are now starting to a number of customers of that team, wanting to take advantage of the fast security. So what we call NGINX, which we see last quarter, is getting a lot of traction and helping accelerate the monetization of NGINX. We are also seeing with the controller that we have introduced traction around our API gateway and API gateway and API management solutions and we are able to add that to customers that already have F5 solution. So examples of these multi-product deals that this is by fact that is a large number of return subscriptions that we sold this quarter were a combination of F5 and NGINX together. So this better to get a story of really reaching the world of DevOps and the world of NetOps together are giving more visibility to network operations team into their all of this environment that is starting to play out and our customers, and that’s one of the drivers in our software growth. Your second question was around edge computing. So we today have, we call it a light asset edge service called Silverline, which broadly offer mass web application firewall and we offer the managed service. And we have now bought in Shape anti-bot technology on top of that offering and so we are able to serve the needs of some customers that want edge capability. We don’t intend to go in a CapEx-intensive way into the edge computing market ourselves, but our fundamental value proposition of the company is that we are essentially infrastructure agnostic and so we -- our solution can be deployed in public cloud, on-prem, in private clouds and in partnership with CDN providers. So we have a number of partnerships as well with CDN players that can use our app security in fact to protect applications in the whole study posted in the edge.

Got it. Thank you for all that color and take care. François Locoh-Donou: Thank you, James.

Your next question comes from the line of Sami Badri with Credit Suisse. Your line is open.

Hi. Thank you very much for the question and congrats on solid numbers for the quarter. My question mainly is to do with this new vision you are laying out the Adaptive application vision. Is this predominantly going to be offered in the form of an ELA or a very, very flexible consumption agreement with your customers and where exactly that will be consumed, is it going to be multi-cloud, is it going to be predominantly offered to customers scaling applications and public clouds? Can you just give us more of an idea on how mechanically the numbers are going to work or your revenue sources are going to work once this kind of like really rolls out and begins more -- begins to be more mainstream with your customer base? François Locoh-Donou: Sami, thank you. Look, some of this is still to play, but I think on the consumption examples that you have mentioned, it’s all of the above. We are -- by the way, I should say, we are already seeing elements of that vision coming into play today. What we see that with, I just mentioned a customer deploying F5 and NGINX together. This quarter, what we see in this environment, customers want to kind of consolidate on vendors that offer a strong breadth of application services and so there’s a number of deals we have already won this quarter, where essentially, we are taking out some niche players and niche solutions that our customers they have had. But as they look at their future needs, they kind of look at the vision of where F5 is going and they already take three or four of these application services together could change the digital experience and so we are starting to see that happen in real-time in the opportunities that we are winning today. And today that’s happening, we see deals combination of hardware and software, deals with a combination of on-prem and public cloud. We are seeing that with customers protecting a combination of traditional and modern applications. And we are now starting to see that with a Shape contributing division with the integrations we have already made with Shape and our Silverline offering and customers consuming that as the managed service. So you are -- we are early days in that. The realization as time goes on of this vision is going to get much bigger and that you saw in the 4 acts that we presented. I think, over time, the opportunity for F5 gets much larger. But you are already seeing some of these consumption models and consolidation of application delivery and application security across multiple types of infrastructure, that’s actually starting to play out right now.

Got it. Got it. Thank you for that color. And, kind of, like taking what you just said and just kind of framing the way we should be looking at the forward-looking business here, is as adaptive applications continues to scale, we will expect services software, NGINX, Shape to kind of be attached to that. But when we look at like some of the reported metrics that you guys have delivered on systems growth specifically and these kind of double-digit declines, should we expect this trend to essentially continue with systems continuously to be declining, whereas the rest of the business is growing, like, should that relationship continue as adaptive applications continues to accelerate? François Locoh-Donou: I mean, broadly, the answer is yes, because the -- a lot of our customers want to move to the software-first environment. And the software-first environment gives them the flexibility to deploy ultimately the vision for adaptive applications, give them a lot more flexibility to start new application services, to take the benefits of automation and orchestration, and ultimately, to leverage the work we are doing in analytics. So, overall, of these trends point to -- you will continue to see our systems business decline and you will continue to see our software growth and the -- overall, you will see that the majority of the business of the company will be software.

Got it. Got it. And I am sorry to ask the third one. There’s a lot in this earnings call tied to your telecom and service provider opportunities. You have had significant traction with Rakuten, obviously, the theme of virtualizing network cores is now coming to the U.S. with the DISH being a very, I want to say, first big batter here that has to prove itself and the infrastructure. Should it kind of go -- should people be making the assumption that since you guys were very effective at insertions with Rakuten in a virtualized core abroad that your advantages and your know-how and how to do this in certain use cases and functions in the U.S. cores, should we basically have some conviction in this idea or would you say that this is going to be completely different. There’s going to be a new bidding process, et cetera, because the idea of virtualizing cores for telcos is, I guess, we can all agree, it’s pretty complicated stuff. So, we just want to get an idea on how big or if traction is going to be one of the big drivers for F5 going forward in telco and SP? François Locoh-Donou: Sami, I think, you should -- the way to think about this is, every carrier, I think, is going to be different in their transition from 4G to 5G. Some will look for and some will not use that. But, overall, if you look at the 5G architecture and where kind of the end state of where people are going, we feel very, very good about the work we have done, the special software F5 bring to these 5G architectures to be inserted in large carrier infrastructure, one is in the U.S., actually in Asia or in Europe and we have already some informed design wins beyond Rakuten in that space. So, I think, you should read from that, that we have pretty good conviction around the role that we are going to play in 5G infrastructure going forward.

Got it. All right. Thank you very much, François. François Locoh-Donou: Thank you, Sami.

Your next question comes from the line of Samik Chatterjee with J.P. Morgan. Your line is open.

Hi. Thanks for taking my question. If I could just follow-up firstly on Sami’s question here about the vision you are laying out for application services. Just curious how to think about kind of when you think about all the pieces for Act 4, how much of that is organic versus inorganic and some of the AI, et cetera, capabilities, how much of that do you need to look outside to bring those capabilities in-house and I have a follow-up. François Locoh-Donou: Hi, Samik. Well, if you look at the analytics platform, so when we lay the acquisition of Shape, there were multiple reasons we felt strongly this was a great combination with F5. One was, of course, the business that the Shape was in at the anti-fraud business. And as I have shared with you, we really think we have entered the era of application capital where most cloud is going to be on applications and Shape is factoring that secular trend and that in fact, we already saw that we already saw that an acceleration of that this quarter with COVID, and I think I can come back to that later. But the anti-bot business was one of the big reasons for the acquisition. The second big reason for the acquisition was around technology and it was the large amount of money and time that Shape has invested in building an AI-powered analytics platform. And so the reason you see that here and that core part of our vision already realizing is in fact because of the technology assets from Shape. So the M&A as it relates to that essentially have been done with the acquisition. Overall, we don’t go out with that as we march towards this vision of adaptive applications, down the road, we might want to accelerate certain things inorganically, but in terms of analytics specifically we have a big head start with the acquisition of Shape.

Got it. Got it. Thank you. And if I can just follow-up, the guidance you issued for fiscal fourth quarter is a narrower range on the revenue right to the last quarter. So it does imply you have more visibility now, just kind of, again, wanted to get your kind of get what you are seeing in relation to customer activity, particularly cadence through the quarter, are the sales cycles compressing a bit relative to what you saw last quarter or is that driving the higher visibility here?

Samik, this is Frank. So I think our approach was very similar to last quarter. We obviously have had our quarterly business reviews with our sales team. We feel like the guidance that we have given is appropriate and because it was the first quarter that we were living in a post-COVID world, I think, we wanted to give a little bit more of a range, but I think we do feel a bit more comfortable going into Q4 with the visibility that we have got on that activity that we could tighten that up by $10 million.

Okay. Thank you.

Your next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.

Great. Thanks. You noted in an answer to a previous question about multi-product deals picking question. But just any commentary you could give on pickup in ELAs or just interest in ELAs in this environment, maybe are there people just wanting to know more what they are buying versus open-ended deals? And then maybe second question, any just update on the AWS partnership and any traction you have been able to make without sales or without in-person sales? François Locoh-Donou: Meta, so on ELA is the demand continues to be very strong. And -- but I would say, there are kind of two tale of the stories there. One of the effects we are seeing in this COVID environment is that customers -- there are some strategic kind of transformation that customers are pushing out, largely because they have to tend to more near-term priorities. So that in a way, there’s some large potential ELAs that could happen this quarter that will happen more down the road. But at the same time, we did more -- in terms of volumes of transactions, we did more ELAs this quarter than we did ever before and those ELAs were often a combination of multiple F5 products, so BIG-IP plus NGINX and now we started to see Shape as well. So that’s where we are at on ELAS. And as it relates to the AWS partnership, we are making very good progress. We have -- we are getting a lot of visibility for AWS in terms of new opportunities. We are -- where we thought we would be at this point in the relationship and I think we will see further acceleration in 2021 because we are working on joint solution integration. And also now working with AWS migration partners to accelerate the work we are doing for migration of workload. So, overall, good traction so far and expect even more in 2021 from the joint collaboration.

Great. Thanks. Congrats. François Locoh-Donou: Thank you, Meta.

Your next question comes from the line of Alex Henderson with Needham. Your line is open.

Thank you very much. I was hoping you could talk a little bit about the timeline between the various phases you described in your presentation. Clearly, you have already done Phase 1 and positioned into Phase 2, with Kubernetes and the application growth driving that vector, it’s pretty clear that ex number of years that’s going to be a very high rate of growth. I was wondering if you could give us a little granularity around that. Do you expect to gain share as a result of your high rate of penetration in Kubernetes and increasing Kubernetes deployment as a percent of new applications, and therefore, gain share within the application market? And then the second question is as you move into the Phase 3 and Phase 4, how do you see those ramping in as a contribution to the software growth rates? Is that a stutter for a year or so and then get a real head of steam around it to get into the Phase 3 or is that already happening and when does Phase 4 kick-in? Thank you. François Locoh-Donou: Okay. Thank you. Let me take you through the timeline of it. So, Act 1, which is really F5 providing app delivery against traditional application. Of course, is happening right now, largely driven with our BIG-IP platform and a lot of the work that we have done over the last two years, three years have been moving to software-first environment with a lot of innovation in our model that has gone on to be successful in a more automated, orchestrated software environments including public cloud. And I would say, a lot of the growth you have seen in our software today has really come from Act 1. Act 2, which is F5, getting in front of modern…

If I could just follow-up. It’s my understanding that you guys are the dominant controller that’s used in Kubernetes deployments today and if Kubernetes increases as sharply as a percentage of new applications, doesn’t that, by definition, drive share gains?

Hi, Alex. This is Kara. With NGINX we have a solution that is tailor-made to be deployed in microservices and container native environment such as Kubernetes and it is the leading collection of web servers in those environments for modern customer facing digital experiences. And so we think with NGINX at its presence in hundreds of millions of those kind of consumer facing modern applications, we have a good head start for then inserting some of those security capabilities and the analytics capabilities that François spoke about.

I know I could get Kara on there somehow. Thanks, guys.

Your next question comes from the line of Paul Silverstein with Cowen. Your line is open.

Thanks. I appreciate. François and Frank, I was hoping you could tell us what was the Shape contribution to revenue and related to that, obviously, what was the organic software revenue growth in the quarter and then I have got a quick follow-up?

Paul, so it was a little less than $20 million and so without Shape, I think, the number would have been 14%.

14% organic revenue growth?

Correct.

Oh! Okay. Just an observer -- a question related to observation, First of all, your 5G commentary was different this go around than what you said historically. Historically, you have made the comment, the observation that you won’t see meaningful 5G revenue until there was meaningful take-up of 5G services, because what you did with later in the cycle dependent upon the take-up of those services in terms of number of users and the intensity of use. And your commentary on this call seem to be very different in terms of same traction. Now I am just trying to understand exactly what you are saying and before you respond the other question would be, your ASEAN and India commentary, I just want to make sure I understood it, are you saying that not only did it get hit hard early on, but you haven’t seen any improvement, was it -- is it still in the doldrums or are you seeing any signs of that coming back relative to the impact of COVID-19, appreciate it. François Locoh-Donou: Paul, let me start with ASEAN. I think it’s still -- the business there is still impacted. In India -- and then to be specific, I am talking about India and few of the countries in ASEAN region, either because of first lockdowns or second waves and countries going back into lockdown such as Singapore. But, generally, in that region, we have been impacted throughout for the last really 60 days and it’s kind of ongoing. On 5G, Paul, I think, like, I think, I said two things in the past. One is, I said, once we would see 5G radios deployed that we would start to see capacity upgrade in the core, and I would say, to a large extent we haven’t seen those yet and I think there is still to come. I do think in the very short-term, some carriers have diverted from spend that would have gone on wireless infrastructure into wireline to address work-from-home issues that increase capacity, issues on fixed infrastructure and that’s true for kind of carriers that combine wireless and wireline infrastructure. But what I am seeing, as it relates to 5G opportunities for F5 is we are now you know seeing a ramp-up in opportunities in 5G and we have already some design wins that give us confidence in the role we are going to play. So I would expect to see that start to contribute to us next year. Exactly when I would be able to put or pinpoint, which quarter is, as you know, that service providers, you can’t predict that accurately, but I would expect that next year we would see those contributing.

And François, one quick follow-up, if I may. Once upon a time, F5 was a 40% operating margin company and I understand you all needed to make investments to reposition the company, but you are now down to 28% and change. Any thoughts on if and when we see a healthy rebound in operating margin and you start to leverage the revenue growth you are starting to generate?

Sure. Paul, we will have more to talk about this when we talk about our next quarter, as well as when we reschedule the end presentation. But I do feel like we are closer to the bottom here, and I think, you will see with the Q4 guide that we have given, we are ramping back up from here and expect to see that continue.

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

Thanks Paul.

This concludes the time we have for today’s session. Thank you for attending. You may now disconnect.