Good afternoon and welcome to the F5 Fourth 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'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Hello and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. 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 A copy of today's press release is available on our website at f5.com, where an archived version of today's call will be available through January 25, 2021. 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 mid-night Pacific time October 27 by dialing 800-585-8367 or 416-621-4642. Use meeting ID 6055259. 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. While fiscal year 2020 was not the year that any of us expected, I speak for the entire executive team when I say how proud we are of the F5 team for delivering a very strong year under extraordinary circumstances. Our results show building momentum in our pivot to a software…

Thank you, François, and good afternoon, everyone. I will speak first to our fourth quarter and then to our fiscal year results before discussing our outlook for FY 20212021. We delivered a very strong Q4. On a GAAP basis, Q4 revenue was $615 million. Fourth quarter non-GAAP revenue of $617 million was up approximately 4% year-over-year and above the high-end of our $595 million to $615 million guidance range. Please note, as I review our revenue mix, I will be referring to non-GAAP revenue measures. Q4 product revenue of $280 million was up 6% year-over-year and accounted for approximately 45% of total revenue. Software revenue was $113 million, growing 36% against a very tough comparison of 91% growth in the prior-year period. Shape contributed approximately $23 million in the quarter. Excluding Shape's contribution, software grew 9% again against a very tough comp in the year-ago period. As we look ahead, we are seeing very positive trends in our software business and expect a much stronger software growth in Q1. I will speak to that in greater detail, when I discuss our Q1 guidance. Software continues to grow as a percent of product revenue, representing 40% of product revenue in Q4, up from 31% in the year ago quarter. We also continue to drive subscription revenue momentum. Subscriptions represented 76% of software revenue in the quarter compared to 66% in the year-ago quarter. Services revenue of $336 million grew 3% year-over-year and represented 55% 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. This is up from 63% in the year-ago period. The improvement comes largely as a result of the strong subscription software momentum I mentioned…

Thank you. [Operator Instructions] Your first question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.

Hi, team, this is Erik on for Meta. Thanks for taking our question. Maybe just going back to the comments you made on service rider side. And just on that vertical, specifically, have you seen any change to order behavior that maybe matches with some of the other equipment providers have noted? And I know you noted some design wins for 5G, but wondering if that near-term has had any impact just being mindful of the percentage of revenue from that segment is a little bit lower than it has been traditionally? François Locoh-Donou: Hi, Erik. The short answer is, no. We haven't seen a fundamental change, Erik. The percentage of our revenue, of our bookings that comes from service providers is basically in the same range it has been for the last few quarters. We are seeing momentum in 5G activity. But in terms of when that will turn into kind of meaningful contribution to our order book. We think that's more of a second-half of 2021, but we are seeing continued traction in security use cases with service providers and specifically our position as a consolidator of multiple functions, which is kind of a unique position that, I don't think you necessarily would see with other equipment providers in the telco. We have a unique position in consolidating a number of functions like CGNAT and DDoS and DNS, TCP optimization and increasingly our service providers virtualize their infrastructure. Our ability to consolidate all these functions in a software bundle is very appealing to them. And so that's a use case that is growing, but overall the business, the trends in the business has been the same over the last few quarters, so no specific change.

Got it. Thank you. That's very helpful. And then if I could sneak in one more, just on kind of the stronger expectations on the hardware side moving forward, what would you guys point to is the strongest reason maybe some customers are still choosing hardware, are there any incremental drivers? François Locoh-Donou: I think, Erik, the -- we've always said that we have a number of geographies that have -- that continue to grow in their consumption in hardware, form factors. And also a number of verticals where hardware form factors play an important role, including service providers, government, even financial services. But I think the difference today is our security has become a more important mix of our hardware business than it was, say, a couple of years ago and our hardware security business is not declining. And so when you factor that in, that leads to a decline in hardware systems that's abating and that's largely because of the mix of security that's in our hardware business today.

Thank you. It's very helpful.

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

Thank you, guys. Congrats on the great quarter. Couple of questions here. You're talking about the strength in application security. I guess, how do you feel about the portfolio as a whole, whether there are areas that you'd want to get at organically or inorganically? And any sense to how many customers are now using Shape Security? François Locoh-Donou: Hi, Jim. So generally, we feel very good about our application security portfolio. We think we are one of the very, very few players who provide who can protect an application, but also protect how an application is used with a combination of F5 security capabilities and now Shape's portfolio. So we feel very good about our competitiveness and differentiation in this space. And, in fact, our security business had been growing healthily, but that has accelerated as well with COVID, because the amount of online fraud and tax on digital channels, not just for retailers, but all kinds of the companies has continued to increase and, in fact, has increased dramatically in the last few months and that's providing significant tailwinds for us. So that's the -- that's what we're at on app security in general. And Jim, we will probably say more about that at the Analyst and Investor Meeting.

Got it. Fair enough. And end of last quarter, you guys noted some weakness in sort of the APAC sales due to COVID-19 and not being able to get in front of customers. How did this change as you work through the quarter? François Locoh-Donou: I think in Asia-Pacific, Jim, we're still - we still have some geographies that are challenged with COVID-19. As you've seen, there has been some second wave and some lockdown. So there are some specific geographies where we have been challenged. The comment about some software projects that were put on hold, we - I think, that was throughout our Q4. That was still the case, but we're starting to see that abate and we feel very good about the pipeline we now have for the first-half of 2021. And in fact, we are, as you saw from the prepared remarks, we think our software business in Q1 of 2021 will grow faster than 50% year-on-year. And for the full-year, we think it will be greater than 35% year-on-year growth. So we feel that our software business really has -- we think we have turned an inflection point here where our software business is on a broader based of subscriptions and it's giving us some -- an opportunity for a number of true-forward opportunities on renewal. We've got a much broader base of subscription than we did a year ago. And as you see, the software business now more than 40% of our product revenue. So we generally feel that, while inflection point here where our software is going to continue to have very strong growth going into 2021.

Makes sense. Thanks for the color, François. François Locoh-Donou: Thank you, Jim.

Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.

Yes. Hi, guys, thanks for the question. I wanted to start off. You talked about enterprise order momentum being good. And I wondered if maybe you could dig a little bit more into that in terms of size of enterprise, are you seeing that more in margin enterprises or medium size? Can you give us some color there? And just kind of how that order momentum looks from a verticals point of view, too? And then on the growth, my second question is, I can calculate based on the parameters you gave, growth, it's a little slower than 20%, but I can also get up above 5% growth depending on some minor tweaks to that. And I'm just curious where do you think it's more likely growth does accelerate in 2021? And then what's your macro assumption there? Are you assuming macro improves? Or you assuming the current environment persists? I mean just curious kind of what do you guys think that demand environment will do on into 2021 in the context of that growth indication? François Locoh-Donou: Hey, Rod, there were number of questions there. So I'll make sure I'll try and answer.

Yes. Sorry, François. Thank you. François Locoh-Donou: No worries.

I'll repeat them, if you need. François Locoh-Donou: Yes. I'll start from the end, you may need to repeat. Just on the macro to start there, Rod, our assumptions as the environment does not get better than it is today, but we've also assumed it doesn't get materially worse. So we have been in this environment in the pandemic for the last three quarters, and I think we've reported now three full quarters under this environment. And it's allowed us to take stock of what our customers are doing where their priorities are and we've taken all of that into account into our 2021 planning. So basically, we kind of assume status quo. Now as to the beginning of your question on enterprise spend, look, the verticals, there are two things that are important. As you saw, our enterprise numbers were actually pretty strong, and I think there are two things that are important there. Number one, the verticals that we are most exposed to as a company are - in enterprise are really financial services, technology and government. And in these verticals, the need for more applications, more application security and more multi-cloud deployments of applications has continued to be strong. The verticals where we have seen a lot of weakness, which are more the retail transportation, the verticals that are directly affected by COVID, they represent less than 10% of our business. So, yes, they are soft, but the impact on our business has been limited. And generally, we have very limited exposure to the small and medium businesses. So that's - in terms of the mix of the business, that's the reason. And I think the other reason where you see strong enterprise demand for us is our -- I think, there still is a perception out there that F5 is really a networking datacenter company. And so folks tend to look at our results and compare us to campus switching or routing type equipment. But the reality is, our spend is more tied to the need for customers to protect their applications with security and the need for customers to deploy more and more applications globally in multi-cloud environments. And so we -- our business is closer -- closely tied to the growth, complexity and security of applications than it is to kind of network dynamics. Have I answered it, Rod?

And then, on -- yes, the only other one was the quantification of the growth. I -- if I add up kind of what you guys said, I can get to kind of a minimum growth rate of maybe 4%, but probably a little higher than that depending on where you think services grows, but I'm curious whether you see growth, you lean toward growth accelerating is the environment remains the same. Off of 2020 or do you think growth just kind of remains the same, or maybe it's a little worse. I'm just curious, which direction you think growth is going in 2021 if all other things held equal. François Locoh-Donou: Look, Rod, I think, so we're not -- we're not giving a full year top line guidance here. We will give a view of our Horizon 2 guidance in three weeks at AIM. So I think you'll get a little more color there. I would just say that generally based upon what we've seen in Q4 and our Q1 guidance. I think we feel good about what we could achieve and 2021.

Okay, great. Thanks, François. Appreciate it. François Locoh-Donou: Thank you, Rod.

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

Hi, thank you very much. The first question I have is related to the software strength in the quarter and I know, François, you made a couple of very granular examples in the drivers of cloud that we saw in the quarter that really drove solid results and are going to continue to be solid results. But when we think about the composition of product revenue and software revenues, is there any high concentrations on specific customers or was there any lumpy activity in the quarter? And then to take that a step further, does the fiscal 1Q 2021 also factor in lumpiness or concentration that are driving these solid results? François Locoh-Donou: You know, Sami, the answer is no. And actually that is precisely why I see that we have reached an inflection point in our software so if you look at our software results a year ago, we had pretty strong growth. If you remember, in Q4, we had 91% growth, but that was in part driven by a couple of large transformational kind of deals. The results we have this quarter are really not. So it's a broad base of adoption of our software and our software subscription. You probably saw that in our results. Now, more than three-quarters of our software revenues or 76% of our software revenues this quarter came from subscriptions. And so we've got a broad based on adoption of our software subscription consumption models across all of our verticals, not a specific customer, not a specific vertical and that's part of why we have confidence in growth in our software, because more now a larger number of customers have reached that point where they're thinking, our software and it's giving us a broader base of renewal opportunities going into 2021. We're starting to see the flywheel that you would see in a subscription business, where for a number of our multi-year subscription, we have a true-forward opportunity at the end of a one year subscription across a number of customers and that's going to start contributing to the growth in our software, so that's what I would say about lumpiness. I would say though that we are also seeing a good pipeline of, I would say these larger projects going into the first half of 2021, some of the projects that have been delayed, we think we'll see some of them in the first half of the year.

Got it. Thank you for that. And then one question for Frank. I was hoping you could just help us think about the services growth rate of fiscal 1Q 2021? Is there a way we should be thinking about at it, something similar to the last two quarters kind of guidance framework, any kind of real clarification on that would be great.

Yes. I'm not going to give a specific growth rate number, we'll have more to say as François said at AIM. I think the trend towards lower single-digit growth rate is likely in FY 2021. And so this is just consistent with the hardware, software attach rates, but we have been seeing consistent pricing, we've been seeing an increase in attach rates for all cohorts of the age contracts and so we're really happy with the overall services business.

Great, thank you. Solid results. Thank you for fitting in my questions. François Locoh-Donou: Yes. Thank you, Sami.

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

Thank you very much. So, we've heard a number of bars and other people in the industry to talk about the emergency spending type orientation to IT spending, particularly around security, particularly around work from home, endpoint security and the like. What they've also said though is that, some of the transition -- transitional programs, things that more strategically important, those programs have been delayed and pushed out somewhat. As a result of the temporary focus on, and we've got to make sure that everything secure from work from home. Are you starting to see any real clarity around some of those larger projects coming back in, particularly around digital transformations to cloud orchestrated application deployment and Kubernetes adoption? Or alternatively, is that still something that's a little further out in the headlines? François Locoh-Donou: Alex, I think so, the large kind of digital transformation projects, first of all, I would echo what you've said, we have seen a delay in some of these transformational projects, but we are also seeing people have tended to the immediate priorities and they are now coming back to these projects and starting to reignite them. So I think -- that's why I think in the first half of 2021, we should start to see some of these projects actually come to be -- to be realized. And that's what I've said there, applies to generally kind of digital transformation, movement to cloud, software first environments, big automation projects. Those types of projects. When you speak specifically to Kubernetes environment, I think what we're seeing, there is a lot of kind of excitement around taking this Kubernetes environment in production at scale. I think we're still in the very early innings of that. We've got a very good window into that with Nginx, as you know in Nginx is the number 1 egress controller into Kubernetes environment and deployment. And so we are seeing demand there and we're seeing an acceleration. But we still think we're in the very early innings of those types of containerized deployments.

And then just one last question for me, just going back to the 35% plus growth in software, can you parse that between what portion of that is organic and what portion of that is inorganic? François Locoh-Donou: Well, no, but the -- I think we've given information about the contributions of Shape in our Q3 and Q4. So you could do some of that information to kind of try and parse out, what's organic and inorganic. Remember that Shape was not part of F5 in Q1 of 2020, but pretty much from Q2 onwards, they were part of F5 last year. So the 35% is the overall growth rate. We -- and that's kind of the minimum we think we'll do. We think it's likely, we would do better than that. Overall, given the drivers that I've spoken to on Nginx, the acceleration I just mentioned that we're seeing there in this Kubernetes environment, what we're seeing in the cloud, Alex, I don't know if you pick that up in our script, but we have a -- about $100 million, our cloud business has now exceeded $100 million. We've got the partnership with AWS which continues to go very well. We announced last week a product integration with AWS -- in AWS CloudFront, which we think will be a catalyst and I talked about the broad base of subscriptions, that will drive organic growth next year. So overall, I think the software business is in acceleration phase and we're happy with that.

Thank you very much. Great quarter.

Your next question comes from the line of Tim Long from Barclays. Your line is open.

Thank you. Yes, two quick ones, if I could. First, just curious, if you could talk a little bit about revenue synergies from both in Nginx and Shape. It sounds like Shape had a pretty good quarter. And there is a lot of traction for Nginx. But if you can kind of let us know where we are on that synergy basis and how much more room there is for cross-selling there? And then second question is, just want to get into a little bit of the kind of the BIG-IP moderating on the hardware side, but good traction on the software side, could you talk a little bit about, I guess there has been, there had been cannibalization. So do you think we'll start hitting a point where it's a lot more driven by newer workloads on the BIG-IP software side, so that the sum of those two could be more positive than maybe it was when there is just some hardware to software replacement. Thank you. François Locoh-Donou: Hey Tim, thank you. Let me start on Shape and Nginx. And Tim, we will see more about that at AIM in a few weeks, but a few highlights for you in terms of the synergies. What we are seeing is that the deal sizes on both Nginx, so our engineers has been part of F5 for 18 months and Shape has been part of our nine month. What we are seeing for both is a substantial increase in the average deal size of the result of the F5 go to market capabilities with Nginx and would Shape and also an acceleration of essentially new logo acquisition for both organizations. And so the combination of Nginx, go-to-market and F5 is yielding these results. And so the monetization of the platform…

Okay, thank you. François Locoh-Donou: Thanks, Tim.

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

Hi, thanks for squeezing me in here. François, if I can just start with getting some color from you on the traction you're seeing for Shape. You talked about the opportunities that you're seeing. Can you just talk about whether you're seeing kind of this adoption happening just because there is more need for security solutions or are you replacing any existing solutions and how do we get comfort around not seeing like a wave of vendor consolidation and security, once we get post kind of COVID planning from the customers, and I have a follow-up. Thank you. François Locoh-Donou: Hi, Samik. Could you explain that last bit around concern of seeing a wave of consolidation.

What I was trying to get to is, we've had a lot of momentum here for the security vendors overall. So once we get post COVID planning from the enterprises, do we see kind of more consolidation and the number of security vendors like most enterprises work with. François Locoh-Donou: Yes, I think what we're seeing and what you'll continue to see Samik, is that most large. So remember that F5 really is most exposed to kind of large enterprises and both large enterprises and service providers increasingly want to use a best-of-suite approach. So our approach to them is to offer a combination of application security technologies that allow their applications to stay online, so stay secure and allow us to protect the data and logic of these applications. And that overall suite for application security is not a component. It's not a single slice of application security. It's essentially the broadest application security portfolio that you can have. And so...

Ladies and gentlemen, this is the operator. I apologize for there'll be a slight delay in today's conference, please hold until we reconnect the speakers' line. The conference will resume momentarily. Again, ladies and gentlemen, this is the operator. I do apologize for the slight delay in today's conference. Thank you for your patience. The call will resume momentarily. Ladies and gentlemen, our speakers have rejoined us, and we still have Samik Chatterjee in queue for question.

Hi, François. François Locoh-Donou: Samik, sorry about that. Our line was dropped. And did you hear the first part of the answer?

Yes. So, overall [ph] services. Yes, yes. So if I can just follow-up maybe for Frank quickly, because I know you're also up on the hour here. Just looking at the operating margins here, Frank, when the Shape acquisition was announced with prior to that, you were looking at about 33% to 35% operating margin. Now, you're guiding to about 31%, I think from next year, when I think about the delta there, is it primarily Shape or do you think there is kind of the environments that have had an impact on this? And thank you for taking my questions.

Sure, absolutely. So yes, Shape accounted for the large majority of that. And I think Shape talk about 30% to 32%. We ended up on the low end of that range to make, and as always to get back above 31% for the fiscal 2021.

Thank you. François Locoh-Donou: Thank you, Samik.

And your final question comes from the line of Jeff Kvaal from Wolfe Research. Your line is open.

Thank you. I guess I have a question for you, François, one for you, Frank. François, I'm wondering if you could sketch out a little bit for us. Now that your security portfolio is well integrated, where do you find yourself having the most success in security and where do you find some of your, your rivals to involve, do you run into Zscaler etcetera, etcetera. And then, Frank for you, I'm wondering if you could help us a little bit understand sort of the thinking behind the buyback. And what we might expect in the coming year from that? François Locoh-Donou: Yes, Jeff, so let me frame where we're having success and security. Number 1 is in application security. So we're not -- our focus is not on the endpoint security or really network security per se, our focus is on protecting applications and we're seeing that increasingly the most sophisticated attacks go through application, the sources of more breaches and incidents come from vulnerabilities in applications, and that's our focus. And we have now put a portfolio together, that is not only a single solution for application security. It's a suite of solutions for application security. And there are very few players that really provide Web Application Firewall, DDoS, remote access as well as bought and fraud protection and protecting not just how an application is accessed, but how the application is used, and protecting against module and behavior of that. And if you look at where we are having success with our portfolio, it's in the large enterprises. So, financial services, as you can imagine a lot at stake in terms of securing these applications and the digital interactions with our customers. But the same technology, some of the large, the largest social media platforms in the world are protecting -- protected by F5 and Shape, and we're seeing the same, the same kind of success in government and service providers. So that's the verticals where we get success and the types of solutions where we got a lot of traction.

And then, Jeff, on the buyback, it's the same as it's been, it's certainly one of the uses of our strategic cash that we see. The other two uses are potentially M&A as well as paying down our Term Loan A that we took out to acquire Shape. And so those are the three things that we're focused on. You saw in the last quarter that we did another $50 million of share repurchase and will continue to be opportunistic on that going forward.

Okay, that sounds great. And I will look forward to more detail on the security progress in a few weeks. Thank you.

Thank you so much, Jeff.

Thank you for attending today's call. You may now disconnect.