F5 Inc (FFIV) — Q3 2015 Earnings Call Transcript

Thank you, Wanda and welcome all of you on the line to our earnings conference call for the third quarter of fiscal 2015. Manny Rivelo, President and CEO, and Andy Reinland, Executive VP and Chief Financial Officer, will be the principal speakers on today’s call. Kristen Dimlow, our new EVP of Human Resources, and the other members of our executive team are also on hand to answer questions following these prepared remarks. If you have any follow-up questions after the call, please direct them to me at 206-272-6571. A copy of today’s press release is available on our website at f5.com. In addition, you can access an archived version of today’s live webcast from the Events Calendar page of our website through October 28 from 4:30 p.m. today until midnight Pacific Time, July 23. You can also listen to a telephone replay at 800-879-6771 or 402-220-5335. During today’s call, our discussion will contain forward-looking statements, which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in our quarterly release described in detail in our SEC filings. Please note that F5 has no duty to update any information presented in this call. And now, I will turn the call over to Andy Reinland.

Thank you, John. In the third quarter of fiscal 2015, F5 delivered solid results that reflect growing demand for our expanding array of products and services. As more large organizations deploy hybrid architectures, we continue to see momentum in sales of our software offerings, both as modules on our purpose-built hardware and the standalone virtual editions. During Q3, we also saw the beginning of what we believe will be a steady ramp in sales of our subscription-based Silverline services. These trends, combined with the ongoing success of our Good, Better, Best sales motion, demand for our security products, and continued traction with our key partners, all contributed to the quarter’s positive results. Revenue of $483.6 million grew 2% from the prior quarter and 10% year-over-year and was at the high end of our $475 million to $485 million guided range. GAAP EPS of $1.29 per share was above our guidance of $1.16 to $1.19 per share. Non-GAAP EPS of $1.67 per share also exceeded our guided range of $1.57 to $1.60 per share. The strength in EPS was driven by our solid revenue and operating margin results and a lower-than-expected tax rate during the quarter. Product revenue of $248.8 million, up 2% sequentially and 5% year-over-year, represented 51% of total revenue. Service revenue of $234.8 million increased 3% sequentially and 15% year-over-year and accounted for 49% of total revenue. The Americas accounted for 58% of revenue during the quarter; EMEA contributed 24%; APAC, 13%; and Japan, 4%. On a year-over-year basis, Americas revenue grew 13%; EMEA revenue grew 14%. Conversely, APAC revenue declined 6% and Japan revenue was down 2%. Enterprise customers represented 66% of total sales during the quarter. Service providers accounted for 20% and government sales were 14%, including 6% of total sales from U.S. federal. In Q3, we have three greater than 10% distributors: Westcon, which accounted for 19.2%; Ingram Micro, which represented 16.7%; and Avnet, representing 13.5%. Our GAAP gross margin in Q3 was 82.3%. Our non-GAAP gross margin was 83.6%. GAAP operating expenses were $257.8 million at the low end of our guided range of $257 million to $266 million. Non-GAAP operating expenses were $224.3 million. GAAP operating margin was 29%. Our non-GAAP operating margin was 37.2%. Our GAAP effective tax rate for Q3 was 33.9%. Our non-GAAP effective tax rate was 33.5%. Turning to the balance sheet, cash flow from operations was $172.5 million. In Q3, we repurchased just over 1.2 million shares of our common stock at an average price of $124.92 for a total of $150 million, ending the quarter with approximately $1.16 billion in cash and investments. Approximately, $624 million remains authorized under the share repurchase program. DSO at the end of Q3 was 49 days. Inventories were $30 million. Capital expenditures for the quarter were $21.2 million. Deferred revenue increased 20% year-over-year to $742.5 million. We ended the quarter with 4,110 employees, an increase of 75 from the prior quarter. Now, for the outlook, building on another quarter of solid momentum with our key drivers, we believe we will continue to see strong year-over-year revenue and earnings growth. Our revenue target for the fourth quarter of fiscal 2015 is $500 million to $510 million. GAAP gross margin is anticipated to be in the 82% to 82.5% range. This includes approximately $4 million of stock-based compensation expense and $2.7 million in amortization of purchased intangible assets. Non-GAAP gross margin is expected to be in the 83.5% to 84% range. We anticipate GAAP operating expenses in the range of $267 million to $276 million. This includes approximately $38.5 million in stock-based compensation expense and $0.7 million in amortization of purchased intangible assets. The stock-based compensation guidance reflects a one-time approximately $5 million increase as a result of the CEO transition as outlined in our 8-K filed April 22. For Q4, we are forecasting a GAAP effective tax rate of 37% and a non-GAAP effective tax rate of 35%. Reflecting the increased stock-based compensation expense, our GAAP EPS target is $1.26 to $1.29 per share. Our non-GAAP EPS target is $1.72 to $1.75 per share. We plan to increase our headcount by at least 125 employees in the current quarter, and we believe our cash flow from operations will be at or around $185 million. And with that, I will turn the call over to Manny Rivelo.

Thank you, Andy. I would like to thank everybody for joining F5’s 2015 Q3 earnings conference call. Overall, I am pleased with our performance in Q3 as reflected by a record revenue and profitability. Among the notable signs of our progress this past quarter, we significantly grew our software revenue with the uptake of our Good, Better, Best packaging driving million-dollar-plus deals. Moreover, our standalone software module attach rates were solid, especially the security modules. We saw major deals from service providers in the areas of Gi LAN service consolidation, security, network function virtualization. And we are excited about the progress we saw on our Silverline anti-DDoS subscription service, plus the recently launched Silverline Web application firewall has opened up new use cases for our customers. From a regional perspective, we had a strong quarter in the Americas with bookings ahead of our internal expectations. In EMEA, we saw bookings growth rebound from a slower Q2 performance with particular strength in Northern Europe. Bookings in our Asia-Pac and Japan regions were slightly down year-over-year, in line with our expectations heading into the quarter. Now let me drill down into the specifics of our major business drivers, which include core, security, service provider, professional services, and our partner ecosystem. In our core business, we continue to help our customers leverage our Synthesis architecture to deliver their applications in the most efficient, secure, and cost-effective manner. This includes optimizing their own datacenters, as well as leveraging both private and public clouds. Key to this is offering all of our products and software that can run on the major industry hypervisors or on top of our high-performance hardware. Software is at the core of everything we do. Over the past three years, quarterly revenue from the sales of software modules and virtual editions has more than doubled, accounting for more than a third of our product revenue in Q3. The growth of our software-only business is reflected in a recent industry analyst report, which reported that we grew 2.5 times faster than the general virtual ADC market, making us the market leader. As more of our customers deploy hybrid solutions and adopt our Good, Better, Best offerings, we believe this trend will continue. An example of a key customer win validating our hybrid application services strategy is a large hardware and software deal with an academic medical center that has standardized on F5. Leveraging our Access Policy Manager, specifically the portal access, we are helping them drive down their total cost of ownership while creating the flexibility to move their applications between different cloud providers. In addition, we continue to see success with our platform refresh in the Cisco ACE replacement programs with many of our customers expanding their solutions to include our enhanced software modules. Lastly, our user community DevCentral grew nicely at 38% year-over-year with over 200,000 members, further demonstrating the value of our TMOS programmable architecture. Our security modules remain a major growth driver for us. Given this past quarter’s highly visible cybersecurity attacks, more customers from an increasing diverse pool are approaching F5 for our ability to secure applications, manage user policy and access, and mitigate application attacks across traditional datacenters and public and private clouds. As a result, we had a number of notable wins this quarter, including a branch of the U.S. government, a prestigious medical research group, both of whom needed to secure their organization’s remote access capabilities. In addition, a multinational defense contract to purchase our Access Policy Manager for single sign-on federation and three national carriers came to F5 for a variety of security solutions. Chief among them was our DNS security for mobile devices. As you may recall, we also launched our Silverline DDoS mitigation service last November. In this past quarter, we launched our web application firewall service built on our industry-leading Application Security Manager. We are seeing solid early adoption of these services. For example, a household name in retail that is an F5 customer added anti-DDoS Silverline protection in Q3 to their global web properties. Over the next several quarters, we plan to deliver additional Silverline services, including an upcoming iRule catalog that can be leveraged for various application solutions allowing zero-day vulnerability protection. In addition, we will deliver hybrid on and off-premise solutions that allow seamless interoperability between our Silverline SaaS offerings and BIG-IP on-premise solutions. In April, we opened a new Security Operations Center in Seattle. This gives us 24/7 support to clients helping mitigate web fraud, malware, phishing attempts, and combat DDoS and web application attacks through our Silverline services. On the service provider side, major carriers across the globe continue expanding their use cases with F5, driving down their costs and expanding their monetization strategies. In particular our solutions around Gi LAN service consideration, network function virtualization, Gi firewall, and diameter routing are helping service providers manage mission-critical service issues like traffic management, increase mobile application delivery, and security. In Q3, we signed our largest service provider security deal to date, a multi-million dollar agreement with a domestic Tier 1 carrier. Meanwhile, a major operator in Asia-Pac leveraging two of our key ecosystem partners recently achieved ADC certification for the F5 NFV solution positioning our virtual editions as network functions. During Q3, our services business continued to produce solid results with 15% year-over-year revenue growth. New and renewed service maintenance contracts drove 20% year-over-year of deferred revenue totaling $743 million, which ensures a positive revenue stream for quarters to come. From a partner ecosystem perspective, we continue to see great momentum in our partnership with the likes of Amazon, Cisco, VMware, and Microsoft. I can point to competitive SDN, cloud and VDI wins in media companies, technology companies, and large U.S. retailers. We are confident that our current and future roadmaps position us well in helping our current customers and future prospects migrate their application services to software-defined infrastructures. In the meantime, as CEO, I want to ensure that we are continually innovating, delivering best-of-breed products for our customers and expanding our addressable market. Key to our success is continuing to invest in the right people to help F5 reach the next level of growth. We have hired a new EVP of Human Resources. Kristen Dimlow has joined us from Microsoft and she will be focused on recruiting and retaining world-class talent. Another organizational change is the transition of the worldwide sales team to a new leader. After 11 years of service, with sales that ranked in the billions, Dave Feringa has decided to step down on October 1 to spend more time with his family on the East Coast. I want to thank Dave for all that he has built at F5, especially the strong global sales team and our lead position in the ADC market. We are actively looking for Dave’s successor and plan to announce our decision shortly. As you heard from Andy, we have had a solid year thus far and look forward to a strong finish in Q4. We will continue to focus on ensuring that our customer’s applications can run where they run best; our emphasis will be on driving top-line growth, particularly for product revenue. I am excited about what the future holds. In Q4, we will launch our next version of BIG-IP, version 12.0. This release will help our customers navigate their application-centric environment without compromising our security or operational efficiency. With new features like modern pictographic cyber support, HTTP 2.0, single sign-on enhancement, hyper-scale DNS and expanded SDN and cloud orchestration and management options, as well as early assets features for our next generation of iApp and iRules, we expect this release to open up over $500 million in additional addressable market. For insights to draw our longer-term plans, I want to spend a few moments on our vision and strategy. We help organizations deliver the fastest, most secure and reliable applications to anyone, anywhere on any device. We are delivering on this vision through flexible scale-up and scale-out architectures that means we can provide our customers with a consolidated set of application services on-premise, in the cloud, and as a service. Moreover, we know that as applications become more prolific and dynamic, operational complexity has become the primary constraint holding organizations back. F5 is eliminating this complexity while simultaneously driving down the total cost of application ownership via centralized management, orchestration, and analytics-driven insights. We call this F5 Synthesis hybrid application services and is the cornerstone of our business and technology strategy. In closing, I would like to thank the entire F5 team, our partners, and customers for their support last quarter and we look forward to a great Q4. I will now open the call up for Q&A.

Thanks. Congratulations, Manny, it’s a great trend. A question for you would be around the competition. Recently, we have heard in the news on Actavis taking a role in Citrix. Are there any thoughts on the competitive dynamics playing versus Citrix NetScaler in the field? For example, would you look to proactively refresh NetScaler’s Web 2.0 customers? That's the first part of the question? Thanks.

Vijay, thanks. I appreciate those kind words. So yes, competition is something we look out for very closely. As a matter of fact, just earlier this week, we did a QVR and we review the competition every single quarter. The competitive trend hasn't changed significantly. I think you have seen over the last course of the last four to six quarters that we have been gaining market share in the market. We see that as going very well for us. Regarding our traditional competitors, we think they are in a position that we know not only how to compete against them, but we have superior solutions. Yes, you will see us continue to expand our programs, which we have aggressively focused on, things like Cisco ACE replacement to also conclude the competition. So, we know that there is opportunity there. We are competing with them directly. We are also partnering with companies like VMware and tackling their VDI space. And you should expect to see more of that over the course of the next 90 days.

Excellent. And a quick follow-on for Andy. Yes, hi, Andy. This would be around cap return. I get this question a lot from clients. Any thoughts on an accelerated buyback? Any thoughts on M&A? Where would you be looking into? Thanks.

Yes. So, on the buyback, that’s something that we address every quarter with the board. I don’t think – I think if you look at how we have performed on our buyback over the last couple of years, we are probably one of the most aggressive companies out there in terms of the percentage of buyback to our cash flow. So, the concept of an accelerated buyback or anything like that, that’s something we may go with the board, discuss with the board, but nothing to announce about that right now. And then on M&A, we continue to look very actively. Anything that we believe can accelerate our roadmap we are going to look at very seriously and beyond that, really no change to the strategy.

And the only thing I would add, Vijay, it’s Manny. On the M&A side, it’s something that we are very active on. We look at a lot of deals and we look at deals, as Andy said, to enhance our portfolio, consolidate services inside the portfolio from a roadmap perspective. So, we will continue to do that as we see fit. Obviously, the markets are a little floppy right now, but to be completely honest, that doesn’t mean that we will slow down our activity.

Excellent. So, this is clearly a positive surprise. Thanks, again.

Alex, you there? Let’s move on.

Thanks. Can you hear me?

Yes, we can.

Alright, it works. Congrats, Manny, on the first quarter as CEO on the public call. So, congrats, a great start for the quarter. I had a couple of questions. First of all, looking at your federal business, I went back for the last five years. In fact, I do remember a quarter where the June quarter was actually sequentially up from March. So, clearly, great results over there. But how do you make us feel comfortable that you weren’t pulling from September, the fiscal year-end quarter into June? So, could you give us some color on the U.S. Fed? That will be great. And then second to you, Andy, 75 employees hired, I think your target was north of 100. So, any color on why is it you are not able to get the people you want? Are they hard to find? Were you distracted? How do I think about that going forward?

So, Ittai, it’s Manny. Just on federal real quick, so we won’t provide as you know guidance into future quarters. But what we see in federal is just a strong pipeline of business, right. There have been a lot of projects in the federal market space. I think we have been telegraphing that, but it’s not for lack of visibility into the projects; it’s in the past been more for lack of budget into that. So, we saw a very strong quarter. We anticipate in typical fashion right with the federal as its largest quarter usually in our fiscal Q4. So, we don’t anticipate that changing.

And then, yes, Ittai, the 75 increase you are right, we were hoping to be well north of 100. And it’s a tough market for hiring out there and we tend to be pretty picky. So, that’s why the guidance this time we said we want to be in excess of 125. We brought on Kristen as EVP of Human Resources and that’s one of the areas of focus that she has been tasked with attacking. So, we want to hire. I think if you go out to our website, you see a lot of postings. And we are trying to be as aggressive as we can about it.

Very good. Good luck, guys.

Hi, guys. Thanks for taking my question. And two for you. The first I was hoping you could provide some additional insight into the growth you are seeing in the software business. How much of that’s coming from virtual ADC versus security? And then perhaps longer term is this transition from hardware to software-as-a-service business occur; should we be expecting product growth to remain in the low single digits for a while, or would you expect that to reaccelerate as comps ease in fiscal 2016? And then I have got another one.

Okay. So, let me just address the software growth. So, as you know – and we have talked about this in the past, our business predominantly software, what goes into our platform tends to be predominantly software. And we have been seeing that growth increase, as I pointed out in the comments over the course of the last three years. We continue to expect that to increase. But I want to be very clear it’s not as if the market is rapidly transitioning from software to hardware. What we are seeing is a new set of applications that require much more of a scale-out solution and/or applications that are going directly into cloud environments. We actually think that the future architectures have two tiers associated with it. And what I mean by that is an ingress tier into the data center that requires high-performance hardware to mitigate traffic whether it be firewall services, DDoS attacks, and all of those capabilities we provide using our hardware. On top of that, what we see is a second tier, which sometimes tends to be much more propagation tier, which could go to these. So, we think the future will have a mix of both hardware and software. And then the other part, are we going to see cannibalization of the hardware business? The way we price our VE relative to our hardware is on par from a unit pricing perspective. And I will just give you an absolute data point so you could have that. If you look at a 5-gig virtual edition of our product, it’s about $26,000. Our BIG-IP 2200, it’s about $28,000. So, it’s almost on par and those are both 5-gig devices inside the environment. So, what we are really seeing is customers making a decision much more on whether they want accelerated performance and/or they want the flexibility of the software for scale-out architecture. So, we don’t anticipate that to be a rapid cannibalization moving by any stretch of imagination.

Yes. And then future growth rates you know, Jess, we don’t talk about that or give that out, but we believe our opportunity is there and we need to execute against that. And driving top-line growth is what we are all about as an executive team. And I think you will see us continue pushing that and investing to make that happen.

And then secondly, I was hoping you could comment on the carrier business. Looks like it ticked down sequentially. Do you expect that to improve during the second half of the calendar year? And it sounds like you did sign a few big deals in the quarter. Can you provide any insights into when you think you will start to recognize revenue in some of those larger opportunities and carriers?

Yes. So, we are having good momentum in the carrier space. And as you know, the carrier business tends to be a little lumpy in project base. We did see our largest security, Gi firewall win with a domestic Tier 1 operator. It’s been repeat business and we continue to see that ramping up. We continue to see that same traction in other theaters. But I think what’s also very interesting is that service providers are moving very rapidly to software-based architectures using things like NFV, network function virtualization. And our products because we provide the same feature functionality, whether it be on accelerated hardware and as virtual editions are very well suited. We are seeing our huge uptick in proof-of-concepts around NFV. We are seeing that movement really, really rise. So, that’s future opportunity for us early days like we have spoken about, but very exciting for us.

And then we did take some revenue in the current quarter on the deals that we talked about and there will be some next quarter too.

Thanks, guys. Keep up the good work.

Great, thank you for taking my question. I wanted to see if you could talk a little bit about the effects of foreign exchange in the quarter. It sounds like a number of companies in the technology space are more broadly feeling effects from either demand or exchange rates given the change in rates, particularly in Europe and a little bit in Asia. So, I know you are selling dollars, you don’t have European direct competitors, but if you could talk about the dynamics of foreign exchange and whether or not you had to do any discounting in order to help out the customers overseas? Thank you.

Yes. So, in both APAC and LatAm, we did some messaging from our sales organizations that the currency did impact the business. It just tends to slow things down because people want a stable currency. And so we saw a little bit there. In Southern Europe, it’s a little different. It could have been currency. There are also macro issues. But that was slower than we would like to see. I mean still looking at that. We haven’t really had to do much additional discounting. It's more working with the sales teams and the partners to get a situation where the currency stabilizes and we can execute the deal. But we haven’t really had to address it through discounting.

And have you had any push-back from customers asking for discounting or is it simply this is what it is?

No, usually what happens because we sell through resellers and distributors, it will come through the channel to us to request for us to partner with them to work a deal. And we just haven’t been getting those types of requests. I think it’s more about the stability of the currency than so much the dollar change.

Great. Thank you. That’s very helpful.

I also wanted to offer congrats to Manny and team on the solid quarter here. Manny, I am curious to know how much do you think remains on this Cisco ACE replacement opportunity? It seems like we are pretty long process here.

Yes, it’s a great question, Troy. So we have been executing through that now for about a year and a half. We still see opportunities. Believe it or not, we are still seeing large, significant opportunities. But the low-hanging fruit, you could argue, is probably being picked in the market. What we are seeing is two things. We are seeing additional opportunities that tend to be not that large from our key accounts, much more the mid-market that we are going after at this point in time. And then what we are seeing is repeat business either, because these were largest installed bases that are being consumed over time and customers are turning dozens or hundreds of devices at a time, so they repeat that purchase cycle. But what we also see when they repeat that purchase cycle, we see them consuming our Good, Better, Best licensing modules or our software modules. Meaning that we are having a deeper penetration and we are swapping out our traditional ACE load balancer for really an ADC platform and/or service consolidation platform. So that bodes very well for us. And I think that has continued business for quarters, if not a year plus to come here for us.

Okay. Maybe a follow-up here for Andy. Silverline sounds like it’s going well. I was wondering if you could just size that for us; whether the revenue contribution, I also understand it’s probably more on the deferred revenue side, so anything you can help us gauge the success would be helpful?

Yes. I think you are right. It’s about deferred revenue, really is the metric that we will start to put out there. It’s early days. I think that the message we are putting out there is we have the set of expectations for that business and we are ahead of that plan, and we feel good about it and we feel good about the conversations that it’s creating with customers. We think it's a great add to our overall offerings and we will continue to expand it. And I don’t know if Julian wants to add anything?

Just to say, it really comes back to the hybrid offering. Half the deals are from existing customers with on-premise product and functionality, and then they are bringing Silverline in. And the other half from Silverline does put us into on-premise deals at the same time. And we seem to be doing well against the competition and we are very pleased to be sticking to the plan.

Okay. Nice, keep up the good work done.

Hi, this is Kulbinder Garcha. Do you hear me?

Yes, we can hear you.

Question is can you tell us about the pricing differences between the virtual ADCs and physical ADCs? And could you tell us also what the sales mix on virtual versus physical has been so far?

We don’t provide sales mix. We will just give you an example, I just provided a moment ago. So I will give you a different unit. So if you look at a 10-gig virtual, right, a 10-gig virtual is $30,000, a BIG-IP 4000 is $30,000. A BIG-IP 4200 is $42,000. So it’s almost comparable, right on a per unit for the same throughput performance. The delta really being the acceleration you get – the acceleration you get when you have hardware. So what we see when we do virtual as we see large volume on the software side. So usually there, you are discounting your prices a little more aggressively, but you are picking it up in the volume. So per unit is identical. If a customer was buying a single unit, there will be no doubt in that pricing.

Got it. Thank you.

Hi, good afternoon. This is Spencer for Mark Sue. Thanks for taking the question. You talked a little bit about the ADCs; the traditional ADC part of the business is maturing, slowing a bit while you are seeing good source of security. Have you already or are you going to – how quickly are you going to see the shift in spending moving towards the investment in security and the growth in that area?

Yes. What we – well, our focus has always been on application delivery and it continues to be on that. What we are predominantly seeing is that application delivery, in the early days, which started out around availability, has more to care about at the same token security, acceleration, and things of that nature. So it’s not that we are positioning a standalone security appliance; what we are positioning is really an application delivery device where security is a key component of that. And that’s the traditional shift. Classically, a typical enterprise and their service provider will be looking at purchasing two or three components or boxes to provide that service, we have been consolidating that into a single fabric. So that’s how we position into the markets that we are really capturing the consolidation play as part of the security solution.

Great. Thank you.

Thanks for taking the question. Andy, can you comment on the CapEx of the facility upgrade? Is that – are we going to see that continue for many quarters? And then I was hoping you could derive a little bit more for us the $0.5 billion addressable market increase that’s going to come with 12 and maybe comment on what’s going on with diameter signaling?

Yes. So, I think we will see – you are right, a lot of it has driven our CapEx is investments we have made in our San Jose facility, where we expanded that facility. We put in a tech center in San Jose so that we can bring customers in down there in conjunction with our partners all in the Bay Area. So we think that’s going to be really good. We expanded Tel Aviv. We have been expanding in Seattle. I think you will see one more big quarter next quarter. And then we will continue with expansion and upgrade in Seattle. So to a lesser degree, you will see it continue, I mean it’s all going to be good for hiring.

And Karl, talk a little bit about Badger?

Yes. Just to parse out a little bit on the market growth here. About half of that growth we see coming from security, from the additional security products, specifically some of the DDoS and other capabilities we are adding to the product, as well as the portion coming from cloud. So cloud infrastructure basically updating the VEs to run across different cloud environments we are adding, Badger. It’s actually part of the list and there is a lot of things we are doing with auto-scaling and other capabilities on that side, a bunch of things in service provider. So being able to support the mobile core better, adding capabilities there are a number of functions and also enhancing the firewall, the S/Gi firewall components or the firewall components.

Okay. Anything about diameter signaling?

Anything – I am sorry, on diameter signaling, is that the question? Actually in Badger, we are actually adding core to big IT new scalability for diameter signaling. And then we also have some new opportunities on the traffic products with regards to like we call SRF. So basically, it’s managing some subscribers. We call some subscriber line management, some other things we are getting with Tier 1 carriers.

Okay. Well, this is John Eldridge, excuse me for interrupting but we would like to take two more questions and then we will call it.

Thank you. Two quick questions, one for Manny, one for Andy, if I could, Manny first off, if I go back it’s been about four years since, I think Version 11 was formally launched, coming out here with Version 12. As you think about this release and kind of what it means to F5, how important of a release is it? Is this really more a continuation of security or is there something else we should think about relative to the release? And then again one follow-up for Andy?

Alright. Brent, I will start, and then I'll hand it over to Karl. Although I wasn't with the company four years ago, I can say that 12.0 is an excellent release. What it signifies for us, as demonstrated by our expanding portfolio, is our focus on hybrid solutions. We are moving beyond traditional availability services to offer our solutions both on-premises and within a modernized SDN environment. This involves a significant amount of integration as we enhance our product to ensure it works well in contemporary SDN and data center environments, as well as how we manage our services in the cloud. The platform is evolving so that application services can be deployed across various locations and types of infrastructure, which is central to the essence of 12.0. Karl, do you have anything to add?

Yes, just add to that, Badger is our largest release to date, 194 major features are being released with Badger. And yes, we are doing a lot of work in security. Obviously, that’s a big area for us. So, we are adding capabilities across the board in security. SSL is a big area that we focused a lot of attention on, especially in the areas of performance and adding new cyber suites and being able to address applications, but also we have had a lot just into the core of the product being able to address protocols like HTTP 2.0. And that’s big because customers are shifting to 2.0, because one, it’s less costly for them to support it with their applications, and two, the performance is much better. And so we are supporting that. Service provider, there are a number of areas that we are enhancing support service provider functionality, including things with our firewall on our 10 modules and see just across the board we are doing things to help enable core service provider, including NFV-based applications. And then also supporting cloud partners in being able to make – we made major enhancements to support VMware, Microsoft, Cisco, and others to make ourselves much more natively deployable into their environments. And then there are other things that we have done within our hardware platforms. We talk about our software-defined hardware. While we have two new major functions that we are releasing to help support significant increases in DNS performance, for example, and also significant increases in security performance being able to offer with a lot more functionality into the hardware itself. So, there are a lot of major functions across the board to address some of these – the things that Manny articulated early on in what he was talking.

Helpful color. And then for Andy here real quickly, if I look at your guide for cash flow from ops for Q4, it looks like you are on pace to grow cash flow by 25% this year, 2x faster than revenue. As you kind of think philosophically about cash flow, do you expect cash flow to continue to be growing faster than revenue here looking out into the next couple of years? Is that tied to mix shift to software or mix shift to subscription? Just trying to get a little more color as you think about cash flow kind of growing faster than revenue?

Yes. To be honest, we really approach there is so much more on profitability and that’s our focus. I do think that as the Silverline services ramp up, that will drive cash flow more strongly, but we will see. I don’t – I actually not really comfortable talking about guiding cash flow from that perspective. But I think the way you see it operate, focus on the top line growth, managing our profitability, and staying on top of the business is something that we plan to continue.

Okay, thanks.

Thank you. Two quick ones. First on product revenue growth, Manny, if you can talk about the levers given the growth you have seen on the software side, how should we think about software versus hardware product revenue growth? And we are seeing hard revenue growth slow kind of to the mid-single-digit range and you mentioned that as a priority. So, how should we think about that going into next year? And then on the telco side, you mentioned the move to NFV being aggression on that front. And I just wanted to see if how that changes the growth profile that’s been tested at all with the ADC business in the telco side understanding that a lot of the security stuff is incremental?

Yes. So, we don’t break down the hardware/software revenue as we go forward. But what we are seeing is obviously because it’s smaller numbers, the software business is outpacing the hardware business from a growth perspective. We don’t think that there will be a little bit of a mix shift for an enterprise from the perspective that maybe three years ago, they were buying all hardware. But the enterprises we talked to and the service providers we talked to are not going 100% software. They are really going, as I depicted earlier, to these two-tier architectures with a set of hardware services that are going – that you need to scale, scale up, really meaning throughput, connection for second things of that nature, and the second tier of scale-out services that are much more at the application environment. So, we actually think it’s incremental. What we think also it’s incremental is in cloud solutions. Cloud solutions, when customers move applications more close to the cloud, predominantly that’s the software play. There are a couple of cloud providers that have hardware options, but in general, it’s a software play. So, we think that’s going to mix. You want to add to that, Karl?

Yes, I was going to add – just add to the NFV comments. What we are seeing from the operators, customers they are looking for operational leverage. So, what they want to do is apply whatever software, whatever hardware they can that reduces their operational cost. Their problem is their budgets are scaling linear to the traffic that’s growing exponentially. And so they need a way to manage that. And the way they are doing that is through automation, and they want to be able to automate not only aspects of the applications but their entire environment. We play a key role in being able to bridge the applications to the environment and support that overall automation requirement. And so that’s what they are looking at us for the private part of NFV in addition of being able to support whatever footprint they need software versus hardware.

Alright. So, you will see the telcos and I will close on this: the NFV movement is really a management of the total cost of ownership for service providers. And that’s been predominantly because the cost – how they were monetizing their networks historically has been a throughput or bandwidth type of connection. The internet traffic and the consumer is consuming both services costs and they could provide it. So, as a result of that, they have to go attack the network cost; scaling the network cost through software sometimes is easier for them to do and are a lot more predictable. So, we are seeing that rapid movement by most of the telcos out there. But don’t confuse the fact that they are also going to have hardware. They have 100-gig interfaces and above, and those interfaces have to be provisioned through hardware sets of technology. So, it’s a mix that you are going to see; it’s a shift of hardware to hardware/software.

If I could just follow-up on the product revenue point, the product revenue growth this quarter at 5%. I mean, do you see that – is it just some mix things that are impacting right now and do you see that reaccelerating in line with kind of overall growth? How should we think about product revenue in the intermediate term?

Yes. We are not going to talk about specific guidance on product revenue except to say, again, it’s our number one priority and that’s where we are focused on doing and how we are managing and driving the business forward.

Okay. Thank you again all of you for joining us on this call. And we hope you have a good quarter and we will do our best to put up another good quarter, and we’ll talk to you again in three months or so.

Thank you.