Good afternoon, and welcome to the F5, Inc. Fourth Quarter Fiscal 2023 Financial Results Conference Call. [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. Francois Locoh-Donou, F5’s President and CEO; and Frank Pelzer, F5’s Executive Vice President and CFO, will be making prepared remarks on today’s call. Other members of the F5 executive team are also 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 A copy of today’s press release is available on our website at f5.com, where an archived version of today’s audio will be available through January 28, 2024. The slide deck accompanying today’s discussion is viewable on the webcast and will be posted to our IR site at the conclusion of our call. To access the replay of today’s webcast by phone, dial 877-660-6853 or 201-612-7415 and use meeting ID 13741762. The telephonic replay will be available through midnight Pacific Time, October 25, 2023. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today’s discussion. Please see our full GAAP to non-GAAP reconciliation in today’s press release and in the appendix of our earnings slide deck. Please note that F5 has no duty to update any information presented in this call. With that, I will turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. Thank you for joining us. In my remarks today, I will speak to our Q4 and FY ‘23 highlights, as well as our expectations for FY ‘24. Frank will then review the details of our Q4 and FY 23 results and provide some additional color about our outlook. We delivered a solid Q4, in an environment that showed some additional signs of stabilization. We saw strength from our enterprise vertical, including technology and financial services customers, offset by softness from service providers. The result was Q4 revenue near the high-end of our guidance range. Our continued operating discipline helped us deliver earnings per share, well above the high end of our range. Our global services team delivered robust 9% revenue growth, driven by strong maintenance renewals and reflecting the benefit of price increases announced last year. In addition, software revenue grew 11%, aided by 27% growth in subscription software. Software revenue from renewals, which have performed well all year ticked up in Q4 over Q3. And while new subscriptions remain down year-over-year, we saw some improvement compared to the first half. Strength in global services and software offset a systems decline of 25%, which reflects a lower level of backlog related shipments than we had for the first three quarters of the year. Stepping back and looking at fiscal year 2023, we adjusted to the environmental challenges we faced, resolving supply chain pressures and largely returning to normalized delivery times. We took decisive actions to adjust our operating model to the realities of the demand environment, driving meaningful improvement to our operating margins and delivering 15% EPS growth. We also returned 58% of our annual free-cash flow to shareholders by our share repurchases. Highlights from FY ‘23 include. First, subscription renewals performed largely to…

Thank you, Francois And good afternoon everyone. I will review our Q4 and FY ‘23 results, before I elaborate on the outlook Francois shared. We delivered Q4 revenue of $707 million, reflecting 1% growth year-over-year, with a mix of 54% global services and 46% product revenue. Global services revenue of $382 million grew a strong 9% due to continued high maintenance renewals as well as the price increases, we introduced last year. Product revenue totaled $325 million, down 7% year-on-year. Systems revenue of $134 million declined 25% year-over-year, reflecting a lower level of backlog related shipments that we had in prior quarters and demand that showed some signs of stabilization, albeit at lower levels than we have seen historically. In contrast, software revenue grew 11% over the year ago period, to a new high of $191 million. Subscription based revenue grew 27% year-over-year to $166 million, another record-high, representing 87% of Q4 total software revenue. Perpetuals and software license sales of $25 million represented 13% of Q4 software revenue. Revenue from recurring sources contributed 76% of Q4’s revenue another all-time high. Recurring revenue includes subscription based revenue as well as the maintenance portion of our services revenue. On a regional basis, revenue from Americas was down 6% year-over-year, representing 57% of total revenue. EMEA grew 16%, representing 26% of revenue, and APAC grew 4%, representing 17% of revenue. Looking at our major verticals, during Q4 enterprise customers represented 72% of product bookings. Service providers represent 9% and government customers represented 19%, including 7% from U.S. Federal. Our Q4 operating results were strong, reflecting operating discipline and a full quarter benefit from the cost reductions announced in April. GAAP gross margin was 80.1%, non-GAAP gross margin was 82.7%, an improvement of 125 basis points from Q4 of FY ‘22. GAAP operating…

Thank you, Frank. Before we open the call to questions, I want to address our view on F5’s AI opportunity. At the highest level, we believe customer’s use of AI will accelerate the growth of applications and APIs and the corresponding need to deploy, manage and secure them, which is what we do best. We also believe AI inference, the process of using a train model to make predictions on never seen before data will become increasingly distributed. Organizations will need to support it anywhere from datacenters to manufacturing floors to public clouds. We believe every application and API will soon require inference just as they require security and traffic management. With our rich history of delivering innovative ML based security solutions, including bot defense, protection against denial of service attacks and anti-fraud and our role in the flow of application traffic, we are uniquely positioned to secure AI workloads, wherever they reside and to empower our customers to run AI wherever they need it. In conclusion, we are leveraging our incumbency and our position in the flow of 40% of the world Internet traffic, to deliver hybrid, multi-cloud solutions that dramatically simplify application and API deployment, security and management for our customers. We are also significantly reducing our customer’s total cost of ownership. We are uniting and automating all of our customer’s apps and APIs across their datacenters, cloud and edge environment. We are encouraged both by the early signs of stability we saw in the second half of ‘23, and with the residence our converging portfolio is having with customers. We have an install base of 20,000 customers, all of whom have an acute and significant multi-cloud challenge. Other than F5, there is no one company that can address this challenge. With F5 Distributed Cloud services, we have created a platform to drive SaaS growth in the future. In closing, I’ll reiterate the three pillars of our long-term operating model, which will enable us to drive double-digit earnings on a compound annual growth rate. Number one, delivering sustained mid-single-digit revenue growth, supported by our differentiated positioning in attractive end markets, along with our durable high margin global services business. Number two, driving non-GAAP operating margin expansion, which we will achieve through gross margin improvement and operating discipline. And number three, returning cash to shareholders, via share repurchases, using at least 50% of our annual free-cash-flow. Operator, please open the call to questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Amit Daryanani with Evercore. Please proceed with your question.

Yep. Good afternoon. Thanks for taking my question. You know, I guess, Francois maybe to start with, you talked about software growth being flat to have been up modestly, but that included some of the headwinds around the business transition is taking place on the managed services side. I didn’t appreciate this, but is the headwind from this transition $65 million or is it half that number? And maybe just flush out how much that is and what are the transitions that you’re doing?

Hi, Amit. So in, in total, so we talked about it roughly $200 million in SaaS and managed services. In that $200 million there is about $65 million of revenue stream, that essentially are going to go away. Now, but that’s more than half of that is revenue streams coming from a legacy managed services platform Silverline, that we are retiring. But we intend to migrate the customers over to Distributed Cloud. So we would expect you know a portion, if not a significant portion of that, you know of that revenue stream to go on to Distributed Cloud over time. The other a little less than half of that $65 million are offerings that we are retiring completely that, you know, when we looked at our portfolio and looked at the offerings we wanted to rationalize, that we felt were underperforming. We decided to retire these offerings completely to, you know, focus on the products that are going forward and successful rationalize our cost and improve our efficiency.

Got it, that is really helpful to get -- understanding the split on the $65 million. And then you know, I think, Francois you in your comments you sort of talked about, you’re seeing encouraging signs from enterprise customers in September quarter. Can you just perhaps talk about what are these signs, is it just the assets are running at high utilization, you can’t sweat them anymore. And is there any sort geo vertical, we’re just trying see these initial positive signs that you may have from customer demand.

Amit there, I wouldn’t say there is a particular geography where we are -- where, that’s really different than others. I would say, North America has been probably more solid and stable than our Asia and European markets. If we look at verticals in terms of where we’re seeing stabilization, I think the enterprise market, we’re seeing more stabilization. The service provider market has been soft. That’s for a number of factors service providers continue to sweat assets, and, and be really ruthless in their prioritization, the 4G to 5G transition is a little slower than anticipated. So service providers in general have been soft than we’re kind of expecting that to continue. What we were encouraged by, especially, in the second-half of the year, but specifically in Q4 is in the enterprise space specifically, we saw some customers that had been sweating their assets, and got to kind of at the end of that cycle and started demanding hardware again or ordering hardware again. So we did see a rebound in hardware orders in the fourth fiscal quarter. Coming from A, we think some customers having sweated their assets, but also, you know, it took a long time for us to ship equipment to a number of our customers in 2023. And in Q4 we saw some of these customers that finally had received their hardware and had been able to deploy that to start ordering again. So we were encouraged by those trends.

Got it. Thank you very much.

Our next question comes from the line of Alex Henderson with Needham. Please proceed with your question.

Great, thanks so much. Looking back at your prior longer term expectations, I think you had talked about growth rate in software in excess of 20%, and high to mid-single declines in systems. Can you give us an update on what do you think those percentages might look like in longer term once you get through the wobble in FY ‘24?

Yes. So, Alex, we’re -- so today we’re talking -- so I don’t want to talk about what’s beyond FY ‘25, I’m going to talk about FY ‘24 and ‘25. Beyond FY ‘25, I think our view of our end markets haven’t really changed. And so you know in the future that opportunity to return to 20%-plus growth in software, is there based on the end markets that we are targeting. But let’s talk about FY ‘24 and FY ‘25. So FY ‘24 we’ve talked about growth in software being you know flat to modest. And that, if you take the three components of software that we’ve, we just talked about, we expect, you know, frankly, the perpetual base of the business to be roughly flattish. We have a similar view on the SaaS and managed services part of the business based on the transitions we’re going through. And potentially, you know in the term subscription part of the business is where potentially we would see some modest growth. Going into 2025 from a revenue perspective, we don’t necessarily expect growth from perpetual or the SaaS and managed services business because of the transitions that we’re going through. But we have strong visibility into our -- the renewals and expansion in our term subscription business. The expansions which are very strong from what we’re seeing and we expect that to continue and be amplified in 2025. So in 2025, we would expect you know software growth to return to double-digit, really powered by our term subscription business.

I see. Just if I can follow-up on, you talked about your backlog having been normalized, but you’ve also had orders out for components that were driven off of the tight supply environment. When do you expect the full normalization of the component costs, you know, in your cost of goods sold, is that already achieved or is that going to be something that’s going to feather in over the next year maybe, year and a half?

Alex, it’s Frank. So largely most of that has been achieved but there is still some of the purchase price variances that are coming through in FY ‘24. By FY ‘25 we expect that to be fully out in a normalized level.

Could you give some sense of what the ‘24 variance would be?

Alex, I think it’s probably in the range of 25 to 50 basis points of where we’ll see improvement just based off of that, in comparison to expectations for gross margins in FY ‘25.

Great. Thank you so much.

Our next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Hey, thanks for taking my question. I guess Francois just relative to your fiscal ‘25 outlook for mid-single-digit, I’m just curious if you’ve changed your view about what the long-term trajectory in systems demand looks like, particularly as you mentioned, you’ve seen orders pick up a bit. And maybe you can also talk about, when you talked about AI demand, do you expect -- how do you expect it to play out between systems, related to sort of software within your portfolio? And I have a quick follow-up. Thank you.

Samik. Thank you. These -- so over a long period of time I think we, you know, we think that the hardware business would be more of a you know low-single, low-single-digit decline or overtime. However, that is a statement you know that is based on a normal, first a normalization of the hardware business, and we’re not there today. And that’s been as you know, the demand was much softer in 2023. And so we actually expect our hardware business to rebound in 2024, and we saw some signs of that already in this fourth quarter. And you know the -- I’m giving you more of a long-term trend kind of beyond 2025. But you know I think at least for 2024, we expect to rebound in the hardware business. In terms of where AI will play in our business, so the way to think about it Samik is, we -- the portfolio that we’re putting together, which is hardware, software and SaaS, we expect, you know, that will enable our customers to secure and deliver their API and their applications in any environment. AI workloads are going to be modern applications, some of which may run on-prem but we think a, a lot of them will run in software environment, and so it’s likely that supporting AI workloads will accrue more to our software business over time. And in addition to that, we think we have a very unique position in that with our distributed cloud capabilities, we are able to run inferences really in any cloud environment and beyond. So we can run inferences in any public cloud, we can run it at the edge, we can run it in our own cloud. And increasingly, we’re hearing from customers that they will want to run these inferences on manufacturing floors or on the retail branches for retail customers or and vehicles for some far as use cases. And we have the ability to run and secure and deliver these inferences in any environment. You know, whether it’s in the cloud or in any one of these far edge environments and that makes F5 very unique in its position for running AI inferences in the future. All of that of course will accrue to our software business.

Go it, got it. A quick follow-up Francois, you mentioned the green shoots you’re seeing in terms of enterprises spending and the recovery there. I think one of the pushbacks we’ve seen from investors on that front has largely been the expectation that there might be a pickup here in the back end of the year just from a budget flush perspective from the enterprises, and you might sort of see a pull back again, as we enter into next year and more sort of budget cuts. Any insight you know, that you’re already getting from your customers about how budgets look for next year or in relation to whether would this sort of pickup, if anything to do with the more temporary flush of budgets before the year end? Thank you.

Yes. Thank you, Samik. I, I don’t think it, it was related to a budget flush for -- you know because, you know, the comments we made in resumption were really things we observe in the, the quarter that ended in, in September for us. When we look at next year, no, we do not have visibility into exactly what budgets our customers will have in FY ‘24. We do have a strong pipeline, entering the fiscal year on hardware. And you know that would -- it will come down to what are the close rates on that. In Q4 the close rates that we saw on our pipeline entering the quarter were better than in the prior three quarters of the year. That’s also part of why we talked about stabilization. And green shoots in Q4 is because what we saw in the close rate. So we’re going into the fiscal year with a stronger hardware pipeline. Recent data points on close rates that are positive. But of course, we are cautious, because there’s still a lot of uncertainty out there. Around the macro as you noted. We continue to see customers you know in certain occasions, delaying, delaying deals or having continued budget scrutiny and more approvals. We are seeing that phenomenon continue. And so overall, we’re still cautious going into the year.

Yes. Thank you. Thanks for taking my questions.

Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Great, thanks. Maybe building on Samik’s question to start. You know, as you look at your pipeline, is your view that a lot of this is, okay, we’ve sweated assets as much as we can, or the utilization of the appliances is too high or you know, are we starting to see kind of growth in multi-cloud projects again? Just trying to get a sense of as you look at your pipeline, is it kind of traditional applications are expanding our use cases? And then maybe as a second question, You know, you mentioned kind of having plays as AI and inference cases grow, you know, is that going to require productization of any kind of suites of products today or just kind of tailoring to kind of have AI ready solution? Thanks.

Thank you, Meta. The -- so let me start with the first question, and my comments on pipeline. There are more related to what we’re seeing in the -- on the hardware side of things, where we had a number of customers that A, number one have been sweating their assets, and they’re getting sometimes the utilization levels, where we, we know that at some point in ‘24 they will have to do something. Or number two, customers who have placed orders in FY ‘22 have not been able to receive equipment for these orders, who now have and have started to deploy that capacity and are starting to be ready to order again. So that is accruing to a stronger hardware pipeline. In terms of big you know, kind of multi-cloud software, what we’ve called this transformational software project, we are not yet seeing a you know substantial resumption of these kinds of projects. But then that’s what I was saying earlier is customers are still very cautious on undertaking, you know, big projects like that. And we’re not seeing a different pattern going into the year on those aspects. As it relates to AI and whether it will require productization, we have essentially and so on, on the aspect of being able to run inferences in any environment, we have these capabilities in Distributed Cloud. I think we need to ensure that we harden these capabilities and there is a strong go-to-market effort to be made around that to make customers aware of that in the future as they start deploying AI workloads. As it relates to being able to secure and deliver AI workloads, those capabilities exist today and we are ready to go with that already.

Meta, I just wanted to add that, you know, last year we talked about in our outlook, particularly, in software that, we were a little less than 50% of our outlook at the time was coming from the renewals and the trueforwards portion of our term subscription agreements, and that’s and our SaaS based revenue. And that’s a little more than half was going to come from new, this year as we take a look at that same formula and we look out over 60% of you know what we expect in that flat to modest software growth is coming from, both the renewables pieces of the SaaS and managed service business, plus the renewables true forwards of our term subscription business. So we tried to take into account the fact that we don’t see these transformational projects on the horizon as we thought about the guidance.

Great. Thank you.

Our next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

Hey, good afternoon. Thank you for the question and for all the comments on, on the outlook. I just had two, both on software. You know, first, I was just wondering if you could talk a little bit about, you know, your visibility into the term business. You know, you called out term as something that would help drive the double-digit software revenue growth in fiscal ‘25, as well as potential growth in fiscal ‘24. And then second, I was just wondering if you could talk a little bit more about this migration from Silverline to DCS. It sounds like it’s a multi-year headwind, you know, something that contributed to the weakness in ARR in fiscal ‘23, but it also seems to be a headwind in fiscal ‘24 and fiscal, fiscal ‘25. So maybe you could just talk about that and you know, how that transition is rolling off and you know, over how many years. Thank you.

Sure, Michael. Let me start with the first question and then I’ll let Francois jump in on the second on the Silverline side. So on the, first on the term subscription, particularly the, you know, the trueforwards and the expansions that we have seen, with the second terms coming on and we’ve had probably about seven or eight quarters now of run rate, and are getting much more comfortable with the early signs that you know, where massive expansions continue. And so getting very, very strong utilization from the -- from that base of deployed, flexible consumption programs, and this specifically covers right now BIG-IP and the NGINX portfolio within our business, as I mentioned in the prepared remarks. And that’s giving us a lot of comfort, both in FY ‘24 and more importantly, in FY ‘25. FY ‘25, we’ve got our, you know, a bigger pool of expansion revenue than we do in FY ‘24 and ‘24 is growing on top of ‘23, so all of these continue to compile upon themselves. As I just mentioned to me Meta that, you know more than 60% of the outlook that we’ve got within our software revenue is coming, you know, from that cohort that we feel pretty good about seeing which is the term renewals, as well as true forwards plus SaaS and managed service renewal piece that we’ve got in the revenue stream. So both of those, you know, we feel very confident about, and it’s probably the highest visibility that we’ve got within the revenue stream.

Thank you, Frank. And to your second question, Michael on SaaS and managed services. So, like, if we talk about, you know, FY ‘22 to FY ‘23, you saw that the ARR there was flat to slightly down. There are two reasons for that. One is, yes, the transitions we talked about started in ‘23 and there was about call it roughly, you know, $12 million of ARR that we transitioned out of the business in 2023. The other reason is at the high-end of the bot business, we saw quite a bit of softness, especially in the second-half of the year, as customers had significant budget scrutiny and you know we’re reluctant unless they were under immediate attack, to really implement our more sophisticated solutions. We think over time that will change, but specifically this year with the macro pressures and budget scrutiny, we saw a lot of softness there, both in, you know, new bookings and in some churn in some cases. So that is the FY ‘22 to FY ‘23. So from going into 2024, well, you asked about, you know, is this transition is a multi-year transition. Yes, we expect that the $65 million of, of revenue stream that we are transitioning will work themselves out over the next couple of years, so over FY ‘24 and FY ‘25 they are a headwind to total growth. However, we are quite excited by what’s happening with F5 out of the SaaS portion of our offerings, specifically SaaS on F5 Distributed Cloud. We have launched a WAF offerings, the security offering, you know, about 18 months ago. We are seeing extraordinary traction on that. As I said earlier, we’ve won over 500 customers in that period, all of whom are enterprise customers. And we are seeing very rapid traction on that. We’re also seeing rapid traction on the multi-cloud networking market, where we bring both networking and security capabilities and we’re quite differentiated to anybody in the market. So that has grown fast and we expect that portion of the business to continue to grow fast, and overtime become a, a majority of this SaaS and managed services portfolio.

Thank you, Frank. Thank you, Francois. Very helpful.

[Indiscernible] Michael.

Our next question comes from the line of Tim Long with Barclays. Please proceed with your question.

Thank you. Two, if I could as well. First, Francois, I think you talked about replacing competitor with, in the ADC, both hardware and software, domain. Could you dig into that a little bit more, is that something that you think it is kind of, it’s a one-off or do you think there is a sustainable move there and how is that happening. And then second, just on the, you know, the changes in the transitions in software, it sounds like you know, move into Distributed Cloud services makes a lot of sense. Having looked at some of those businesses and kind of you know, moving on from them. Does that change your view of kind of synergies across product offerings or is it a sign that maybe those businesses didn’t have the same synergy and that’s why you’re not, you know, you’re not going forward with them. Thank you.

Thanks, Tim. Maybe let me start with the second part. No, it’s not about synergies. So there are two aspects of that, Tim in terms of the transitions we’re talking about the $65 million of transition. One is a legacy platform that we have, you know that -- on which we have built managed services offering. We have now built a with the F5 Distributed Cloud in much more modern platform with an architecture that’s differentiated, and that’s gaining rapid traction and we want to transition our customers through this modern platform. And that was always the plan to do that. However, you know, we have to first of all, build a platform and build all the security capabilities on the platform, to be able to start this transition. So we’re very excited that we were able to do all this work on the Volterra platform over the last couple of years, and we’re able to start this transition in 2023. The second part of the revenue stream that is being retired is not about synergies, it’s new offerings that we had launched recently, that we hope to do well in the market. But given the macro environment and what we’ve seen as the early traction on these offerings, we’ve made some decisions as you know, in April to rationalize our portfolio and focus on the most attractive investment, and we decided to not go forward with these products. So that’s the second part of your question. On the -- I should say that the last thing I’d say about that is, in terms of the synergies between elements of the portfolio, no -- we are actually very encouraged on what we’re seeing. We’re seeing actually a number of customers, who already have BIG-IP adopt Distributed Cloud. You know so…

Okay. Thank you.

Our next question comes from the line of Ray McDonough with Guggenheim. Please proceed with your question.

Great, thanks for taking the questions. Francois, given some of the changes you’re making to your software portfolio, it seems like in a way you’re, you’re simplifying or even converging some of your solutions. So as we think about the roadmap for Distributed Cloud in particular, what can you do to accelerate adoption and make sure you capture the potential voluntary churn that you’ve talked about or, or even how should we think about the priorities around Distributed Cloud next year.

Thank you. The -- look our goal is to make it ridiculously easy for our customers to secure and deliver their applications. And Distributed Cloud is getting a lot of traction because it does that for, for our customers. So when you look at the priorities next year, of course, it’s scaling the platform, so it’s available in, you know, more markets in more environments and continue to add services to the platform. We have the two -- I would say first two sets of services WAF and multi cloud networking. We have a backlog of other services that we want to add to the platform that our customers will want to add. We’ve recently added CDN capabilities on the platform, you know, after the [Acqui hire] (ph) of Lilac a few months back and we’re starting to get customers adopting our CDN because it’s convenient for them to like catch back to load balancing and, and security in some cases. So the first priorities are, you know, scaling the platform and adding services. As far as go-to-market, frankly, the priority is going into customers that are already F5 customers, that have our hardware or software, but want a SaaS solution to make it easier to front -- to use F5 to front a bunch of applications for which they don’t want to manage the lifecycle of deployable products. And if you look at the 500 customers or so that are on Distributed Cloud today, over two-thirds of them are actually existing BIG-IP customers. So about a third of them are net new customers that had never bought anything from F5 and two-thirds of them are existing BIG-IP customers. And we think actually with both net new and with existing customers there is a lot of growth and that’s where the focus is. And the focus is going to continue to be with large enterprise customers where F5 has a strong presence.

I appreciate that. And if I could snick one more in, maybe for Frank. Certainly appreciate the continued focus on operating margins and EPS growth. But can you help us think through how we should think about cash flow margins in fiscal ‘24. I know you typically don’t guide cash flow. But should we think of cash flow growing in line with operating income, ex-some of the tax headwinds you had in fiscal ‘23, any even directional thoughts would be helpful.

Yes. Ray, as you described, I think, that’s roughly correct. You know, cash flow is one of the hardest things for us to, to predict, but those dynamics are it should narrow a bit that net income growth with, you know, with some exceptions to the two tax impacts. Some of the restructuring expense we had last year that we don’t have this year that are real cash, but split out for non-GAAP purposes. So there is a few ins and outs, but it should be roughly, roughly close to that.

Great. Appreciate it.

Our next question comes from the line of James Fish with Piper Sandler. Please proceed with your question.

Hey guys, thanks for snicking me in. I’ll just make it simple here. You know, you guys talked about in the prepared remarks about subscription renewals performing well. Any more color into specifically what products are seeing those better renewals, but the cross-sell that you’re seeing or any qualitative or quantitative color around net retention rates understanding, you, you have this headwind around specifically with the SaaS and MSP business about $65 million. You know, how should we think about that net retention rate within the term business or the aggregate overall when you kind of exclude even the impact of that SaaS please. Thanks guys.

Sure. Fish I’ll start and then Francois wants to add anything that would be great. So you know, within our term subscription business, which is generally our BIG-IP software, as well as NGINX and that’s the expansion rates that we’ve seen. It’s not the easiest like task in the world to convert that term into an ARR type of business, because of all the moving parts, but when we’ve tried to do that and try to convert and look at what would you know an expansion rate would be or net revenue retention rate. It’s north of what you would think of as the industry norm of 120% let me just put it that way. And that combination of where it is, plus our SaaS managed service our net revenue retention rate is still north of that 120%. So that combination you know, is what gives us a lot of visibility and firmness in our expectation of those pieces of the business that will continue to do well.

Makes sense. And just on the go-to-market side, any changes in terms of incentives or approach as we turn to page into this next fiscal year and as we have, you know, transitions now within the overall software transition.

The incentive plans between the two years are largely the same Fish. There is always going to be a couple of tweaks here and there as we’re looking and seeing what was successful the year before and not but nothing major.

Thanks guys.

Our last question comes from the line of Simon Leopold with Raymond James. Please proceed with your question.

Great, thanks for taking the question, I just wanted to get a better sense of where the systems business is stabilizing, in that I assume the September quarter did not have much if any backlog drawdown in it. And so, other than maybe some seasonal movement, I’m just trying to get a sense of if sort of it’s you know $120 million to $130 million per quarter level, sort of, the new normal for systems. And then just quickly on how the software is trending with the Silverline exit. Does that manifest itself gradually throughout the year or is that something that shows up in a particular quarter. Thanks for that.

So I’ll start with the first one and then Francois, I don’t know if you want to take the second. But in terms of, what we’ve, what we’ve said I think in both the prepared remarks and some of the answers, we did both -- we do believe that we hit a trough in FY ‘23 in terms of systems bookings. And, you know, what we’re equating that to the term demand. Now the offset or the balance of that is that, there was FY ‘22 bookings they were delivered in FY ‘23. And so the shipments that they actually received, which is the revenue that we recognized that came in in FY ‘23 and started to be utilized. Now, as that utilization started to increase and more capacity was needed, we started to see that come through in Q4, which was our best systems bookings quarter of the year. It looks like on a revenue basis, that wasn’t necessarily the case, but from a demand perspective, our bookings perspective, that was the case. There will still continue to be fluctuations. There’s probably a bit of leveling or even improvement that we’ve seen in the enterprise side. On the SP as Francois mentioned service providers have been hesitant and we expect that to continue on. And in Q1, in particular, you know, we’ve got a federal government that isn’t necessarily functional right now, and we’ll see what that means as an impact to, you know, bookings for systems in Q1 and we’re trying to take that into account, as we, you know looked at the guidance and the expectations. We do expect as we’ve talked about many times in the past, there is that four to six-quarter long and the dynamics that I just talked about explains why sometimes that takes four to six quarters particularly in a supply-chain restrained environment. So we do expect at some point we’re in the that we will pick up in bookings from that Q4 level and then return back to a higher-level. I can’t say normalized level, because it’s tough to know when exactly that will, will take place. But our outlook and our expectation is not that we are going to do $180 million less with systems bookings, our SaaS systems revenue. Our bookings will improve, but the revenue will be down from last year because of that $180 million of headwind.

And to the second part of your question, in terms of Silverline no, it’s not going to be all in one quarter. You know, it’s going to bleed off over the next couple of years, kind of, every quarter. And it’s going to be time with, you know, when customers are at a point where they have to renew or migrate their subscription that there will be a decision point. And so you’re going to see it I think over the next six to eight quarters.

Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.