F5 Inc (FFIV) — Q1 2018 Earnings Call Transcript

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 In addition, you can access an archived version of today’s call from our website through April 25, 2018.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

Thank you, Jason. Fiscal Q1 was a quarter of disciplined execution. We delivered Q1 ‘18 revenue and non-GAAP EPS above the midpoint of the ranges we provided in October and executed another quarter of strong gross margin and cash flow. We continue to see strength in our software offerings, particularly deployments in the public cloud and our services business delivered another strong quarter of revenue growth. First quarter revenue of $523 million, up 1% year-over-year was above the midpoint of our guided range of $515 million to $525 million. Driven by the recent U.S. Tax Reform Legislation, GAAP EPS of $1.41 per share was below our guidance of $1.47 per share to $1.50 per share. Non-GAAP EPS of $2.26 per share was above our guidance of $2.02 per share to $2.05 per share. I will discuss the impact of the tax law changes in more detail later in my comments. Product revenue of $227 million in the first quarter was down 5% year-over-year and accounted for 43% of total revenue. Services revenue of $296 million grew 7% year-over-year and represented 57% of total revenue. On a regional basis, Americas revenue grew 2% year-over-year and represented 56% of total revenue. EMEA revenue grew 7% year-over-year and accounted for 27% of overall revenue. APAC, which accounted for 14% of the total, decreased 5% year-over-year and Japan at 4% of total revenue decreased 12% from a year ago. Sales to enterprise customers represented 64% of total sales during the quarter. Service providers accounted for 20% and government sales were 16%, including 8% from U.S. Federal. In Q1, we had five greater than 10% distributors. Ingram Micro, which accounted for 15% of total revenue, Tech Data accounted for 12%, Arrow and Cynics each accounted for 11%, and Westcon accounted for 10% of revenue. Moving on to our operating results, GAAP gross margin in Q1 was 83.3%. Non-GAAP gross margin was 84.7%. GAAP operating expenses of $294 million were within our $288 million to $298 million guided range. Non-GAAP operating expenses were $258 million. Our GAAP operating margin in Q1 was 27.1% and non-GAAP operating margin was 35.5%. Our GAAP effective tax rate for the quarter was 38.7%, and our non-GAAP effective tax rate was 24.6%. GAAP and non-GAAP effective tax rates were impacted by the recently enacted Tax Reform Legislation. Our GAAP effective tax rate of 38.7% was primarily impacted by two large non-recurring items; an estimated $7 million tax related to deemed repatriation of undistributed foreign tax earnings, and an $11.6 million impact from the re-measurement of our deferred tax assets due to the change in the U.S. tax rate. Our non-GAAP tax rate of 24.6% reflects the benefits from the reduction of the U.S. tax rate. Turning to the balance sheet, in Q1 we generated $190 million in cash flow from operations, which contributed to cash and investments totaling $1.35 billion at quarter end. DSO at the end of the quarter was 50 days. Capital expenditures for the quarter were $6.5 million. Inventory at the end of the quarter was $29 million. Deferred revenue increased 8% year-over-year to $991 million. We ended the quarter with approximately 4,375 employees, up slightly from the prior quarter. In Q1, we repurchased approximately 1.24 million shares of our common stock at an average price of $120.73 per share for a total of $150 million. Moving to our guidance for fiscal Q2, we continue to see enterprises and service providers adopt our software and security offerings as core components of the next-generation application architectures. While this trend has lengthened sales cycles for hardware-based solutions with some organizations in the middle of this transition, it is driving substantial growth opportunity in both private and public cloud deployments, providing a solid foundation for improving product revenue as we progress through the remainder of the fiscal year and beyond. With this in mind for the second quarter of fiscal year ‘18, we are targeting revenue in a range of $525 million to $535 million. We expect GAAP gross margins at or around 83%, including approximately $5.5 million of stock-based compensation expense and $2 million in amortization of purchased intangible assets. Non-GAAP gross margins are anticipated at or around 84.5%. We estimate GAAP operating expenses of $296 million to $306 million, including approximately $38 million of stock-based compensation expense and $0.8 million in amortization of purchased intangible assets. We expect a GAAP effective tax rate of approximately 26% for the second quarter and a non-GAAP effective tax rate at or around 25%. We anticipate tax rates to remain at or around these levels for the remainder of fiscal 2018 and will continue to update on a quarterly basis and while we are not yet providing tax rate guidance for fiscal year ‘19, it is worth noting that we would expect another small step down in both our GAAP and non-GAAP tax rates in fiscal year ‘19 and beyond, reflecting full calendar year impact from the new tax legislation. Our Q2 GAAP earnings target is $1.66 per share to $1.69 per share. Our non-GAAP earnings target is $2.24 per share to $2.27 per share. As a reminder, we will be hosting our Investor and Analyst Meeting in New York on March 8. And with that, I will turn the call over to François.

Thank you, Andy, and good afternoon, everyone. During the first quarter, we saw continued momentum with our virtual additions and another strong quarter from our services business. We are increasingly seeing security lead the conversation in new opportunities with customers and our cloud activity is growing as more customers look to our solutions for help in deploying applications across multi-cloud environments. Earlier this month, we released our annual State of Application Delivery report. With over 3000 respondents, the report provides a comprehensive view into the application trends impacting enterprises, service providers, and government organizations across the globe. The results show digital transformation is at the forefront of our customers’ minds as they look to optimize their IT infrastructure and evolve how they develop and deliver applications. Multi-cloud architectures are taking on growing relevance as most organizations pursue a best-of-breed strategy for each application deployment. Nearly nine in 10 respondents reported using multiple clouds, with over half saying cloud decisions are made on a per-application basis. Our customers are increasingly looking to automation and orchestration to realize leaner IT with the goal of reducing OpEx and better scaling applications to meet user demand. Trends around supporting multi-cloud deployments and the growing importance of automation align with areas where we have increased our development investment over the past year. During the first quarter, we introduced per-application VE offerings supporting traffic management and web application firewall services, and we made platform enhancements that reduced the boot time and footprint of our software by 50% for public cloud deployments. These offerings are building blocks for enhanced central management and automation capabilities we will introduce later this year that support elastic provisioning of VE capacity. Executing in these areas will extend the number of applications we can address, whether these applications reside on-prem or in the cloud. Taking a closer look at first quarter results, revenue was above the midpoint of our guided range with strength in our software offerings. We saw a rebound in our EMEA theater as initiatives we undertook in 2017 to improve execution in this region are paying dividends. We continued to deliver strong profitability and cash generation even as we accelerate our development and go-to-market investment in software, public cloud, and security. We are not satisfied with the current level of product revenue growth, but we are encouraged by improvements in execution and the continued strength in the fastest growing areas of the business. And while we have seen instances of longer sign-off periods for hardware-related sales within some organizations, our overall appliance revenue was in line with our expectations entering the first quarter. We continue to expect the iSeries platform will be a growing part of our appliance mix in the coming quarters. We believe these product family offers compelling performance and customization advantages versus competing offerings and will enable us to take market share in the appliance segment as we progress through fiscal 2018. iSeries provides advantages and key use cases for customers including efficiently managing encrypted traffic and scaling to support high transactional applications such as IoT. We have several significant customer wins in the quarter driven by the SSL capabilities enabled by iSeries. These include seven-figure deals with a government organization and a large financial services organization where our ability to efficiently inspect and re-encrypt SSL traffic was a clear differentiator over competing offerings. A large pan-European managed service provider will utilize our hardware, security, and IoT protocol capabilities to support the need for securely scaling applications to better manage customer premise equipment and data. These include inspecting SSL traffic, providing DDoS protection, load balancing, and authentication of IoT traffic. F5’s ability to innovate around scaling to support bi-directional communication in an IoT environment was a key contributor to this win. During the first quarter, our VE sales grew over 25% compared with the first quarter of 2017. Driving this growth was increased activity within the public cloud from both bring your own license and utility offerings. We are present within all three major public clouds, and providing advanced application services and security across multi-cloud deployments is becoming a priority for customers as they move forward with their digital transformation efforts. We accelerated growth within the public cloud and we continue to deepen our partner relationships. In December, we earned Amazon Web Services networking competency designation by showcasing our ability to ensure performance, availability, and security for business-critical applications hosted within AWS. This follows our security competency recognition by AWS in October. We joined a select group of partners to meet the qualifications set forth by AWS for technical proficiency and customer success in multiple competencies. As we look to extend our solutions to a broader set of our customers’ applications, we are focused on creating more flexibility in deployment and consumption. Over the past six months, we launched our subscription offerings on a large scale and launched enterprise license agreements. Initial customer response for these consumption models has been very positive, with a building pipeline, including net new opportunities across on-prem and cloud environments. Our enterprise security momentum remains strong in the first quarter driven by our WAF and identity access offerings. We believe we are uniquely positioned to address our customer’s growing needs around Application Security. Our F5 core is a non-matched level of application fluency with large complex applications. Our security capabilities are increasingly leading the way in opening new opportunities across our customer base. We continue to expand our application security portfolio across private and public cloud environments. Building on our market-leading position in WAF, we are partnering with AWS to make our WAF security rules available to our common customers through the AWS marketplace. Today, we announced several new additions to the senior management team. We are excited to welcome Ana, Kara, Ram, and Tom to the F5 team. These additions put into action the plans from the business review process we undertook last year and discussed on our Q4 earnings call. Focus on clearly aligning our product roadmap with customer needs through ADC and security business leadership is a key priority that Kara and Ram will drive. Tom will be responsible for driving the business long-term strategy, as well as overseeing corporate development and our incubation areas, which we will discuss in more detail in March. We are pleased with our execution in the first quarter and we are well-positioned to evolve with our customers as they make their digital transformations. To better reach the next tier of applications in the enterprise, we are reducing frictions associated with purchasing, deploying, and managing our solutions. We are excited by our growing traction within the public cloud and the role our application security solutions are playing across our customer base. Driving improved product revenue growth remains our top priority, and we expect to show progress on this front as we move through fiscal 2018. In closing, I would like to thank the entire F5 team and our partners for their efforts during the first quarter. With that, we will now hand the call over for Q&A.

Thanks. First, Andy, from a macro perspective regarding health and demand, it appears that the objective numbers related to U.S. growth, EU growth, and so on have been trending positively, creating a favorable economic backdrop. However, concerning company-specific and product market issues, particularly relating to the product refresh from last year that has not yet occurred, we are not seeing an increase in product revenue growth. Can you provide more insight and detail on customer behavior, their willingness to spend, and the specific challenges you are facing in the ADC market?

Thank you, Paul. I'll begin with your question about Europe. We faced some challenges in Europe in 2017, which we believed were tied to macroeconomic factors, including environmental issues and Brexit-related uncertainties, as well as our own organizational execution challenges. Over the past two quarters, however, we have observed positive developments. Many of the macro uncertainties in Europe seem to have been resolved, there is greater clarity concerning Brexit, and the economies in Continental Europe are showing improvement. We believe that the macro environment is generally more favorable now, and we have made changes within our organization in Europe, including leadership adjustments and realigning our teams to target the best growth opportunities. As a result, we are seeing better performance and are encouraged by the results from Europe this quarter. While we remain cautious due to previous difficulties, we are optimistic about our pipeline and execution in the region. Your second question pertained to product revenue growth and customer behavior. There hasn't been much change since last quarter. Specifically regarding the iSeries refresh, we continue to see strong adoption of the product, which our customers appreciate for its quality and performance, leading to new use cases. However, we are also experiencing delays in decision-making related to hardware. This is partly due to the increasing complexity of the architectures our customers are managing as they transition applications across various cloud environments. The complexity creates elongated decision-making cycles, which we believe is a key reason why we have not seen the expected growth acceleration at this stage compared to past cycles.

And François, just a quick clarification, if I may, on your commentary about seeing strength in public cloud with respect to enterprises adopting multi-cloud architecture, I know you don’t quantify it, but I am asking you if you would be willing to quantify it for the benefit of all of us, I think it’s awfully important?

We don't quantify it, but we have mentioned that it is growing rapidly. These figures are still small compared to our total revenues. They are increasing very quickly, and once again this quarter, we have exceeded our own expectations regarding the growth of our solutions in the public cloud. We will likely provide more details about our overall public cloud strategy, the solutions we have, and the traction we are experiencing in the public cloud at our Analyst Meeting in March.

And you don’t believe there’s any cannibalization or meaningful cannibalization?

I do believe that there are two different areas to consider. Some applications we support are transitioning to the public cloud, and we generally have a strong attachment rate to these applications. However, in these cases, it replaces something we previously did on-premises, resulting in some level of cannibalization or simply a shift in deployment model from on-premises to public cloud. On the other hand, we are also experiencing new use cases, as we acquired several new customers this quarter—companies that have never purchased from us before—who are now buying through our public cloud partners like AWS, Azure, or Google. We're also seeing types of deployments that we previously couldn't access. Many of our public cloud deployments are utility-based, where customers are renting F5 Virtual Editions for hours. We're currently billing several million hours of Virtual Edition in the public cloud, which represents new incremental business for us, as these were opportunities we didn't have access to before.

I appreciate. I’ll pass it on. Thank you.

Thank you, Paul.

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

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

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

Okay. Thank you.

Thank you for the questions. I wanted to revisit the product revenue. I would like to focus on that for a moment. Over the last three quarters, we've experienced ongoing deceleration, and in this quarter, despite the iSeries entering its cycle and strong performance in Europe, we are seeing that deceleration again. What challenges have you been encountering that you think will fade away and enable top-line growth this year?

Thank you, Mark. From our perspective on the iSeries refresh, we do not anticipate any changes. We believe the demand for this product remains strong. We are observing new applications for the product in areas such as IoT and high transactional environments, and we expect this trend will persist in the long run. Additionally, there are several factors contributing to product revenue growth that we believe will gain momentum in the latter half of the year. Virtual Editions will continue to expand, and we expect our public cloud revenues to keep increasing. We are also witnessing robust demand for our security solutions, particularly driven by WAF and the growing trend of encrypting all traffic. Our SSL capabilities position us advantageously to address this need. Therefore, security, Virtual Editions, and public cloud will likely be key growth drivers in the second half of the year. We have implemented some changes, including our realignment discussed in the earnings call three months ago, and have made structural adjustments in our sales channels, go-to-market strategies, and introduced new consumption models. We anticipate these changes will positively impact the remainder of FY18. Taking all this into account, we feel optimistic about our previous statement, which indicated ongoing improvement in product revenue performance throughout the year.

Okay. Just as a quick follow up, Europe was very strong but the U.S., the Americas was kind of weak, was there anything particular going on in the U.S.?

No, nothing in particular. I think the demand among service providers in the U.S. was typically inconsistent but weak this quarter. When you consider that, it balanced out what I would describe as a decent performance in North America, although not particularly strong. I would say that the enterprise sector in North America was stronger than the service provider sector.

Okay. Great. Thanks.

Thank you, Mark.

Hi guys. Thanks for the question here. Not to keep beating a dead horse but with product down 5% and it looks like actually on a billings basis you guys were down as well for the first time in a little while. At what point do you guys think that as we progress through the year that we could see stability in the product line, if at all and potentially what concerns you on sort of services billings potentially being down then on a year-to-year basis?

So I’ll take your question on the product and Andy will touch on the services, James. So you know, on the product first, this was an execution quarter for us. The product revenue came roughly in line with where we expected it to be. As you know, we don’t guide product revenue specifically for the other quarters, but the drivers that I’ve just gone through around software, security, and cloud, as well as the initiatives we undertook both on the product and the sale side give us good visibility into where we think we’re going to be going into FY18. And we expect our product revenue performance to improve sequentially from what we had in Q1 throughout the rest of FY18. I think that’s what we said three months ago and we still feel pretty good about that.

Our services business primarily relies on maintenance and renewals. Over the past year and a half, we've noted that our product revenue has decreased, which has led to a decline in our services billings and revenue. We believe that a return to product revenue growth will subsequently increase our services revenue. Year-over-year, we do see a slight decline in percentage terms, which aligns with our expectations and is directly linked to our product business. As mentioned earlier, we anticipate improvements as we progress through the year, and expect our services to benefit from the resurgence in product revenue growth.

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

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

Got it. Thanks, guys.

Thank you.

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

We expect to see the benefits of this throughout the year, and we believe the majority will be realized. It's still early, and we're assessing it in relation to our strategy. We'll provide more details about this at the upcoming meeting. There are important factors that influence how we view and value our business model, which we'll take into account. By March 8, we hope to discuss in greater detail what we plan to do with the free cash flow. For now, while we anticipate significant flow-through, I'm hesitant to provide any more specific information.

I can tell. Yeah.

Jeff, regarding the second part of your question, we will discuss capital allocation further at our Analyst Meeting in March. Generally, access to capital has not affected our capital allocation strategies in the past, and I do not anticipate this tax rate to significantly change our approach. We aim to return a substantial amount of capital to shareholders, which has been our consistent practice. I believe we have one of the strongest buyback programs in the industry. However, we've also indicated that while we will be disciplined with potential M&A opportunities, we will pursue strategies that align with our goals when they arise. This approach will not fundamentally change due to the benefits from the recent tax legislation.

Okay. Thank you both.

Thank you, Jeff.

Thanks. Two quick questions, one, just looking at the March quarter guide on the revenues, is it reasonable to think that the rate of decline in products has hit the trough in the December quarter is down 5% or is it possible that we could see a similar decline or more in the March quarter given it’s against a tougher comp? And then the second question I had was really on the security side. I was wondering if you could give us some sense of, is WAF the vast majority of what you’re selling in security and if so, it looks like that’s becoming more and more of a feature on most of the security platforms that are out there. Has competition increased and made it more difficult in that space as a result of that becoming a more widely distributed feature on more and more platforms? Thank you.

Thank you, Alex. I’ll start with the first question. John will address security. If you examine our guidance for the March quarter, and analyze the midpoint, it suggests that our product revenue performance in Q2 should improve compared to Q1. Overall, as we assess our progress, the pipeline for product revenue, and our execution, we genuinely believe we are beginning to see product revenue growth in Q2. In fact, we would be disappointed if we do not see a return to product revenue growth in the second half of 2018.

Alex, in response to your question about WAF, this is a strong market for us, and we have a leading product in this space. Our product is notably differentiated, especially within our existing customer base, which remains a significant market opportunity for us. Regarding greenfield opportunities in the face of competition, we possess key competitive advantages, along with substantial mobility. Our product operates effectively in multi-cloud environments and across all public clouds, which is one of our fastest-growing segments as customers seek to standardize their security practices across such environments. Overall, this trend has been largely beneficial for us.

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

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

Thanks for the explanation.

Hi. Good afternoon. I have a couple of questions. First, I'm curious about whether bringing customers back through expired service and maintenance contracts might impact their likelihood of upgrading to the latest product versions. Does this situation hinder or help their decision-making? Additionally, regarding improvements in Europe, do you see any evidence that the weakening dollar may have contributed to faster closing times or larger deal sizes? Lastly, François, with Ram's appointment as Director of Security, could you elaborate on what his priorities will be and the impact you hope to see on security in relation to the existing F5 product line, and over what timeframe we should expect these results? Thank you.

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

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

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

Yeah. And then on the foreign currency, could that be helping us, I mean, clearly because we bill internationally primarily in U.S. dollars, it makes our equipment more affordable. Anecdotally, I am not hearing anything that would say that’s driving business. I would contend this really is more about projects that were delayed as they worked their way through everything going on from Brexit to GDPR and it’s getting to the point where it’s freeing up again. So I wouldn’t correlate those two things personally.

And then to the second part of your question, James, so Ram and his priorities. Firstly, on his background, RAM has a long experience in the security industry, both with more traditional security companies and more sort of next-generation cloud-oriented security companies. And so he has a very broad perspective of the industry and that is going to be very valuable for us, because in security we have no shortage of opportunities, and a key part of the mission for Ram is to really prioritize the opportunities that we go after. One of the immediate elements of what Ram is working on is we have been quite successful selling security attached to our ADC, and we see opportunity more and more, and demand from our customers to take on some of our standalone security offerings that would appeal more to a sec ops buyer. And so Ram’s looking at what’s the best way to capture that opportunity and which offerings should be first versus offerings that would follow on later, and that’s an immediate priority. And then more broadly, in the space of application security, we’re seeing a lot of new complexities emerge. Those were validated again by the research we did in our State of Application Delivery report, where we’re seeing that, as people adopt more and more multi-cloud environments, their confidence in security solutions is actually decreasing. And really, there’s an opportunity to emerge as a partner to solve these new complexities. Where we start in this journey to multi-cloud application security, again, is a set of priorities and investments that RAM is going to define for us.

That’s great. Thank you so much.

Thank you, James.

Thanks a lot. Can you help us quantify some of these things in your security, for instance, security appliance attach rates? Do you have any kind of metric we can track there and even more importantly, standalone security sales as a percentage of revenue, and are we targeting that to grow over time, what can you share with us there? Thanks.

Hi, Mike. And so the last question is easy. Yes, we are targeting standalone security offerings to grow over time. To the first part, no we don’t break that out. I can tell you an important portion of our security or even of our ADC business is driven by security and I would say qualitatively that that portion of the business that’s driven by security is growing every quarter. The other data point I’d give you is that, as our public cloud business grows, the security attach rate in the public cloud is about double what it is on-prem and that’s because of the complexities of securing applications in the public cloud. So that’s as far as I’ll go as far as quantifying our security business, generally the trends are up and more important for us.

Okay. That’s fair. Thanks, François. And then you just hired a new Strategy Corporate Development Manager and so my question is how do you think he and his team can help you drive the topline growth in the company and do you think security will kind of be over weighted portion of that?

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

Okay. Thank you, François.

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

Okay. Great. Thank you. François, I wanted to ask about your comment on architectural change causing decision-making delays. Public cloud isn’t new and SaaS isn’t new, so maybe there’s an inflection point that’s happened of late, but could you talk to that statement a little more?

We have observed that many customers are reviewing their existing assets before making decisions, particularly regarding the refresh cycle on iSeries and hardware purchases. This change has been noted in our State of Application Delivery report, indicating that customers are increasingly adopting multi-cloud strategies, opting for the best cloud platform for each application. Consequently, they are evaluating options on a per-application basis, which has resulted in a longer decision-making cycle for significant infrastructure commitments. While cloud solutions are not new, the trend towards multi-cloud and specific application-based decision-making is becoming more prevalent. Although this shift has created some short-term challenges for hardware sales, we believe it positions us well in the long term, as we are uniquely equipped to meet the needs of customers operating in multi-cloud environments with our range of hardware, on-premises software, and increasingly, our software available in the public cloud across various consumption models. No other company offers such a comprehensive suite of solutions to support these multi-cloud strategies.

Okay. To wrap up, you’ve identified your growth areas as cloud, security, and Virtual Editions. Which of these is receiving the most investment or shows the greatest potential among the three?

So that’s a good question. So there are different stages of growth. I would say our Virtual Edition software is already a meaningful business for F5 and we continue to shift more investments in that direction. Security also I think is at scale for us at F5. Public cloud is more nascent. So in terms of growth in investment, public cloud probably has the highest growth of investments in these areas, but the two other areas are if you will larger to-date and with increasing investments year-on-year.

Okay. Thanks a lot, François.

Thank you.

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

Thank you.