F5 Inc (FFIV) — Q2 2019 Earnings Call Transcript

Welcome. I'm 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 portion of the call. A copy of today's press release is available on our website at f5.com where an archived version of today's call will also be available through July 24, 2019. A replay of today's discussion will be available through midnight Pacific Time tomorrow, April 25, by dialing 800-585-8367 or 416-621-4642. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in the press release announcing our financial results and described in detail in our SEC filings. Please note that F5 has no duty to update any information presented in this call. With that, I'll turn the call over to Francois.

Thank you, Suzanne, and good afternoon, everyone. Thank you for joining us today. I'll talk briefly about our business drivers before handing over to Frank to review the quarter's results in detail. With 30% software revenue growth in the quarter, we're delivering strong results from the resource shifts we've made in the last 18 months. Customers are leveraging our multi-cloud deployment model and consuming our flagship software offerings, both on-prem and in the public cloud. Increasingly, they are consuming through new vehicles, including subscriptions and enterprise license agreements. Security services, including Advanced WAF and bot mitigation, are leading the vast majority of our customer conversations, and public cloud continues to be our strongest software growth area. I will speak to our software growth drivers in more detail later in my remarks. Systems revenues declined in line with the market, down 5% in the quarter. As expected, with customers adopting a cloud-first mentality, hardware investment and use cases are being carefully evaluated, and we are seeing some elongation of deal timing as a result. That said, we continue to see systems growth opportunities in certain segments of the market such as high-performance security use cases and in emerging markets. Our Services business delivered 4% growth in the quarter and continues to produce robust gross margins while maintaining world-class customer satisfaction scores. Our services capabilities continue to differentiate F5 as customers' application environment has become increasingly sophisticated, and they recognize the need for reliable and responsive support from their most critical solution providers. We are achieving consistently strong 90%-plus attach rates. In fact, the attach rate for the Americas increased 300 basis points in the quarter. As we discussed at our Analyst and Investor Day in March 2018, over time, we do expect our services growth rates to slow as we transition to a higher percentage of subscription and other service offerings. In summary, we're very pleased with the progress we are seeing in our software transition. Progress that will be augmented as we begin to see contributions from our recently launched as-a-service platform, F5 Cloud Services, and as we complete the acquisition of NGINX. I'll speak to both topics in greater detail after Frank reviews our Q2 results and our outlook for the third quarter. Frank?

Thank you, Francois and good afternoon, everyone. As Francois noted, we delivered solid revenue and strong EPS growth in the quarter. Second quarter revenue of $545 million was up approximately 2% year-over-year and within our guided range of $543 million to $553 million. GAAP EPS was $1.93 per share. Non-GAAP EPS of $2.57 per share was above our guidance of $2.53 to $2.56 per share. Q2 product revenue of $238 million was flat year-over-year and accounted for approximately 44% of total revenue. As François mentioned, software grew 30% year-over-year and represented approximately 19% of product revenue, up 80 basis points from Q1 as a percentage of product revenue. Systems revenue of $192 million made up approximately 81% of product revenue and was down 5% year-over-year and roughly flat sequentially. Services revenue of $307 million grew 4% year-over-year and represented approximately 56% of total revenue. On a regional basis, in Q2, America's revenue grew 4% year-over-year and represented 56% of total revenue. EMEA was flat year-over-year and accounted for 25% of overall revenue. APAC revenue grew 1% year-over-year and accounted for 19% of total revenue. Looking at our bookings by vertical. Enterprise customers represented 65% of product bookings. Service providers accounted for 20%. Our government business in the quarter reflected some modest impact from the government shutdown representing 16% of product bookings, including 6% from U.S. Federal. In Q2, we had three greater than 10% distributors: Ingram Micro, which accounted for 20% of total revenue, and Arrow and Tech Data, each of which accounted for 10%. Let’s now turn to operating results. GAAP gross margin in Q2 was 83.8%. Non-GAAP gross margin was 85%, in line with our expectations. GAAP operating expenses were $314 million. Non-GAAP operating expenses were $273 million. Our GAAP operating margin in Q2 was 26.2%, and non-GAAP operating margin was 34.9%, in line with our expectations. Our GAAP effective tax rate for the quarter was 22.7%. Our non-GAAP effective tax rate was 21.8%. Turning to the balance sheet. In Q2, we generated $194 million in cash flow from operations, which contributed to cash and investments totaling over $1.6 billion at quarter end. DSO at the end of the quarter was 53 days. Capital expenditures for the quarter were $29 million, up sequentially as we continue to build out our new facility in Downtown Seattle. Inventory at the end of the quarter was $33.5 million. Deferred revenue increased 15% year-over-year to $1.16 billion. Approximately half of the increase over the prior year quarter relates to the adoption of 606. We ended the quarter with approximately 4,795 employees, up 215 people from Q1 as we continue to hire aggressively as planned in our growth areas, including sales and research & development. In Q2, we repurchased approximately 617,000 shares of our common stock at an average price of $162.06 per share for a total of $100 million. Now let me share our guidance for fiscal Q3 of '19. Overall, we are pleased with the progress we are making with our software transition and remain confident in our position in the market and in the growth opportunities for the business. We also believe we are well aligned with the long-term trend towards multi-cloud environments and increasing demand for application security. In addition, we are seeing increasing traction with subscription and ELA offerings as they provide customers consumption flexibility and better agility for their ever-evolving software architectures. With this in mind, we are targeting Q3 of '19 revenue in the range of $550 million to $560 million. We expect gross margins of approximately 85% to 85.5%. We estimate operating expenses of $275 million to $287 million. We anticipate our effective tax rate for the year will remain in the 21% to 22% range we previously provided for the full fiscal year with some fluctuation quarter-to-quarter. Our Q3 earnings target is $2.54 to $2.57 per share. In the quarter, we expect share-based compensation expense of approximately $40 million and $1.7 million in amortization of purchased tangible assets. Capital expenditures are expected in the range of $110 million to $130 million for the year. This range includes approximately $70 million of costs related to our previously announced corporate headquarters move to F5 Tower in Downtown Seattle. The initial phase of the move occurred over the last several weeks, and we expect to complete the move this summer. I'll reiterate that we continue to expect the NGINX transaction to close in the second calendar quarter, but we have not included any revenue or cost impact from the deal in our guidance. We expect any revenue impact in the quarter to be immaterial and expect to provide contribution details when we report our Q3 quarter results. With that, I will turn the call back over to Francois.

Thank you, Frank. I'll spend just a few minutes on the trends we're seeing in the business and highlighting some customer wins from the quarter before we move to Q&A. Focusing first on our 30% software growth. We are accelerating software growth across three vectors. First, we are capitalizing on significant customer demand for security capabilities packaged as software. This is particularly true as customers deploy multi-cloud applications, including applications in the public cloud where the demand for security is even more critical. As a result, security use cases continue to drive our software growth rate and account for a higher share of our overall product business. In particular, our anti-bot and machine-generated traffic monitoring and blocking capabilities appeal to customers who continue to face an increasing array of threats. We are also seeing new security use cases emerge, including privileged user access, credential stuffing, and zero trust. As an example, during the quarter, we deployed a combination of access policy manager and our Advanced WAF at an international energy company. They selected F5 to secure their application access. In other words, applications on their network are secured with an F5 application security policy. For example, F5 provides highly secure access to systems on their oil rigs and oil plants for third parties doing systems maintenance. The second vector accelerating software growth comes from our subscription and ELA consumption models, which were introduced last year and provide customers flexibility as they manage the transition to multi-cloud environments. Increasingly, customers are using ELAs to leverage our technology in public clouds. During the quarter, we closed three times the number of opportunities and equivalent value compared to the first quarter. While the overall dollars are still relatively small, ELAs are an important tool for our sales force; and we have a robust third-quarter ELA pipeline. As an example, during Q2, we closed an ELA with an online gaming company. The customer needed the flexibility to deploy Advanced WAF and API capabilities to protect the games' layer seven DDoS, bots, and bad actors. Using an ELA consumption model, we replaced other security vendors and gave the customer the flexibility to deploy the needed multi-cloud security application services when and where they wanted. The second ELA example came from an airline undergoing digital transformation and pivoting to a multi-cloud approach. This customer preferred an ELA to ensure flexibility as their needs scale. They selected our high-performance BIG-IP Virtual Edition as well as BIG-IQ. The same customer also upgraded from the public cloud-native Web Application Firewall to F5's Advanced Web Application Firewall. They are using F5 to secure their consumer loyalty application with both bot mitigation and credential stuffing protection. This deployment offers an interesting example of how F5 can work across often siloed teams within an organization as we work successfully with both the network and the security teams. The third vector for accelerating software growth is our advanced capabilities in automation, orchestration, and central management, which resonate with customers facing an increasingly complex combination of environments and sprawling deployments. In fact, our ability to unify and simplify deployments is unlocking new spending. For instance, during the quarter, we had a large U.S. payment processor purchase BIG-IQ to manage their global infrastructure deployment of BIG-IP. The customer had come to F5 last year looking for a solution to help them automate their infrastructure and operate at the speed of business. They are now deploying BIG-IQ to manage their global estate of hundreds of BIG-IP instances. As we look toward the back half of 2019, we believe we will continue to drive software growth with a number of catalysts. First, in Q2, we launched our F5-as-a-Service platform and the first SaaS offering running on top of it. F5 Cloud Services is designed to support modern deployment scenarios. These include cloud-native applications in container-based environments with high availability, strong service, enterprise-grade SaaS solutions that are easily provisioned and configured within minutes. Launched with a basic DNS service set, we have a number of customers already in free 60-day trials. Later this year, we'll deliver even more F5 enterprise-grade SaaS abilities, including security services designed to protect applications from existing and emerging threats. Another catalyst for continued software growth is a new high-grade ELA consumption model we're launching in response to additional use cases. Customers have asked for an ELA that protects their entitlement when they are migrating from hardware to a software and cloud environment. With this new high-grade ELA, we are providing customers even more flexibility and license portability as they contemplate digital transformation and what it means for their businesses. We have already developed pipeline, and we are excited about what this new model means for future multi-cloud application services. Finally, we are increasingly confident in the opportunities enabled by our acquisition of NGINX. We continue to expect the acquisition to close in the second calendar quarter. In the weeks since our initial announcements, internal reaction from both F5 and NGINX has been very positive and initial integration planning is going well. Customers across all theaters are very excited about what they see as the strong potential of the combination and the ability to bridge the divide between NetOps and DevOps. Together, F5 and NGINX will be able to offer solutions that provide the requisite control to satisfy the CIO while giving application developers the freedom to innovate. We are excited by the complementarity between F5's cloud-native app services platform and NGINX's controller. As a result, post-close we expect to converge both under one product family using the NGINX brand and maintain the momentum in NGINX's current offering. This converged offering will address a larger total addressable market and will span a broader set of use cases across DevOps and Super-NetOps customer personas. When closed, we expect our F5 cloud-native team to move under NGINX CEO, Gus Robertson, providing a significant increase to the NGINX engineering team and additional resources to accelerate new product capabilities and use cases. The traction we're getting with our software solution is perhaps the most demonstrable evidence that F5 is on a path to become the leader in multi-cloud application services. I mentioned in my opening remarks that customers are increasingly taking a cloud-first approach. We are as well. As our customers contemplate and begin to work across multiple environments, F5's value proposition actually increases. Organizations of all sizes are quickly learning that operating in multiple environments makes things more complicated, and F5's solution simplifies that complexity with consistent environment-agnostic policies, automation, orchestration, and central management. I'll speak briefly to our service provider business before we go to Q&A. We continue to drive our network function virtualization, or NFV, solutions in new areas of service providers' business. We are securing DNS and CGNAT wins in growth portions of providers' networks, and we see wireline and MSO deals ramping. Recent wins with wireline carriers include DDoS, DNS, and firewall services. In addition, we are also seeing opportunities emerge from managed web application firewalls. We continue to have conversations with mobile operators about 5G, and while we continue to see the majority of near-term 5G spend focused on the spectrum and radio portions of the network, we are confident that our spending will move towards the core there will be increased opportunities for F5. During Q2, we successfully expanded our use case with a North American communications provider to include security. We are now providing WAF to front-end all of their consumer-facing websites. The same communications provider was also experiencing numerous outages and network challenges in its field technicians network, which was leading to unsatisfactory customer experiences. F5 proposed an access policy manager solution with manageability through BIG-IQ. This allowed the provider to achieve greater scale and reliability while supporting dual stack connection, allowing for better access and stability for internal users and delivering greater efficiency for remote field technicians. We're also having discussions with this customer as they contemplate the move from 4G to 5G and expect that as they transition, our sales motion with them will become more software-focused.

Thanks. I appreciate it. First one, Frank, first from a regional perspective, was there anything unique in the quarter in the EMEA region? You have been posting strong growth over the better part of the past six quarters and there was a significant downtick from your previous growth rate in the quarter; similarly, there was an uptick in the Americas. Can you discuss what's going on regionally? And then I've got a follow-up.

Yes, I think - North America had a solid quarter, specifically internationally, and I'll go to Europe where for the last three quarters we've got growth - we've got year-on-year growth rate now in the 7% to 8% range. And this quarter, Europe was flat year-on-year. That was concentrated specifically in the U.K. where I think we saw this uncertainty around Brexit push up some deals. And I think we also had some softness in Germany, specifically in the Germany-Austria region. And so as a result, we had less than perhaps we would have hoped in Europe. Overall, if you recall, Paul, about 18 months ago, we felt we were having some execution challenges in Europe. We made a lot of progress on those - we made some changes both in leadership and in the way that we have put our formation in Europe. We feel we've made a lot of progress there with these challenges, but this progress is still in the backdrop of continued macro uncertainty in Europe. And so I think that's what we're dealing with. But generally, we're happy with the way we are - our team is organized and performing over there. I think this quarter was specific to the U.K. and a little bit in Germany. And then in Asia-Pacific, we also had less cost than we've had in the last couple of quarters, but we think that's a little bit of lumpiness there. Generally, the trajectory for our business in Asia-Pacific is north, and we continue to expect good growth in that region. There isn’t anything macro that we worry about there at the moment.

Hey, Francois, on the Brexit comment, just playing devil's advocate, why now? Brexit has been hanging out there for a while, one would think that last quarter, the quarter before, no different than this quarter, that would have presented a challenge to you and other suppliers, i.e., the uncertainty. And then I also want to ask you, last quarter you made a comment about lack of manpower in the federal government to actually process the paperwork, which was adversely impacting you from a revenue recognition standpoint. But there wasn't otherwise an issue related to federal government weakness. And I'm wondering if there's been any change with respect to that?

On Brexit, Paul, you're right. But I guess there has been some uncertainty around it. But folks have known that the outcome would be that the U.K. would exit the European Union. In the last few months, the uncertainty around how that would happen and when has increased. A number of companies have been trying to make contingency plans for what will happen in the very short term. So in the last month of the quarter, in the U.K. in particular, we saw folks push out decisions because they wanted to wait until they had clarity on what the real outcome would be. Specifically on the Fed, we did have a reasonable quarter in the Fed. It could have been better if the government shutdown had not taken place. The impact for us is we didn't lose any business, but there was some business that wasn't processed in the quarter. Even though the shutdown ended I think early February, there was some business that we had won that wasn't really processed in the quarter. So there are a few deals that could have come in the quarter that did not come. But overall, we thought we had a reasonable quarter in the Fed.

All right. I'll pass it on. Thank you.

Thanks. Thanks for taking the question. Francois, just on your commentary around the service providers, it sounded like you're becoming more constructive about the opportunity. I know it's been a challenging vertical over the last couple of years. Is something changing there from a demand perspective? Should we start thinking about this group of customers maybe growing faster than the overall business for a period of time?

Alex, I would not conclude that for now. I think we're still cautious about the near-term opportunity with service providers. We felt better about a couple of the North American service providers this quarter than we were in Q1. But overall, if I look at our use cases and spending globally with service providers, I still think we are in the middle of this 4G to 5G transition. And that there are good opportunities ahead of us several quarters out, once we see the rollout to 5G radios and the capacity upgrades that will happen for us. In the meantime, though, we are getting a lot of traction with service providers in two areas specifically. NSD, where we're seeing them use more of our virtual solutions, which contributed to our growth in software as well, and also in security, on a number of use cases, including firewalls, but also things like CGNAT and other use cases. So these two areas in service providers are doing well. And hopefully, the 5G will come, but as we said that's a few quarters out.

And just to clarify, do you think 5G could be a better dollar opportunity for F5 than 4G wasn't? I know you weren't here for that. But just talking to the team that works those accounts. Is there a sense that this could be a better dollar opportunity?

We think so because of the sort of size and scale of these deployments. The fact that we're very well positioned to help teams with network slicing that are critical in 5G and then the way they'll have to handle the traffic. There are a lot of catalysts that give us a belief that this could have a meaningful, perhaps more significant than 4G, impact on F5.

Hi. Thank you. Francois, I just wanted to clarify. I think in your comments about the system revenue being down 5%, you mentioned you are seeing some elongation of deal timing. Is it primarily that you're seeing kind of them evaluating other solutions? Or potentially evaluating kind of a move to the cloud? Or is it more just kind of a pause in spending that you're seeing? If you could just clarify what you're seeing there?

Hi, Samik. I wouldn't characterize it as a pause in spending. The phenomenon there is as customers adopt a stance that is more software-first or cloud-first, they do scrutinize their spend on hardware more. And as a result, the approval cycles for hardware are getting elongated. I think that's what we're seeing really as the dynamics in large enterprise organizations. But those that have made a decision to go software-first or to go cloud-first, from the time we have a project that a team has approved and wants to move forward to the time that transaction can be processed, there's a lot more scrutiny on it. That's what I was referring to.

Okay. Got it. And just a quick second question. You've referred to the launch of the cloud-native product as well as a service offering in the quarter. When you're going and looking at these products, are customers opting to wait for the NGINX controller to be available that you mentioned you plan to put them together and have a converged offering, or are they closing deals even before it?

Yes, so Samik, I think your - so there was an announcement in the quarter about F5 Cloud Services, which is a pretty important milestone because it's the first Software-as-a-Service offering of F5 and we will talk later about what I see as catalysts for F5 Cloud Services. But I think your question is specifically between NGINX and cloud-native application services platform that F5 has been developing. If I look at NGINX, they bring elements of the portfolio that are not in the virtual ADC space, so they are completely complementary to what we have been doing. It's really their API Gateway technology, and what they've been doing in web server and app server space are completely new, adjacent TAMs for F5. In the virtual ADC space specifically, NGINX has a controller that is in the market and our cloud-native app services platform was based on a controller we have built organically but hadn't been launched in the market yet. We’re in the initial stages of integration planning, and where we’re headed is there is significant complementarity between the two in the sense that the NGINX controller appeals to a sophisticated DevOps audience whereas our controller was more targeted at a mainstream enterprise buyer that wanted an easy way to control their data plans. We are going to start with the NGINX controller because it is in the market, and we want to maintain and accelerate that momentum. We will be rapidly porting the capabilities of our controller to the NGINX controller so the combined offering can target a larger addressable market from the sophisticated DevOps users all the way down to the less sophisticated that want an easy capability with all the analytics that come with it. We’re pretty excited about that potential acceleration of the combined offering.

Okay. That is very clear. Thanks, Francois.

Great. Thank you. So the software revenue, and then the watermarks that you're starting to reach every single quarter is very commendable, but I think the one thing I just want to try to understand is on margins. It looks like, on a sequential basis, there is a little bit of pressure now. The operating margin that you had this quarter makes sense given your aggressive hiring you commented on. But on specifically non-GAAP gross margins, can you just walk us through what exactly is happening on the cost side, just because you think that a software ramps up dramatically more, you see some margin expansion and we just want to get a better idea on what exactly is going on?

Hi Sami. It's Frank. Let me start with that one. It's actually right in line with our expectations, what we said was sort of 85% to 85.5%. So we were at the lower end of that range, but it was exactly as we expected. Over a long period of time, as we scale the software business, the actual inherent margin in there in the growth side is higher than the hardware business. As we talked about at AIM in 2018, as we get further into closer to Horizon 2, you should see some of the impacts of that investment start to make its way as additional components of our product revenue come from software and drive expansion in that gross margin side. But I'd just go back to say that this is exactly what we expected and how we talked about it in guidance last quarter.

Got it. And then, I think one thing on NGINX, there is a lot of commentary on bringing in NGINX and integrating it and going to market more under the NGINX umbrella and unifying the offerings. So one other kind of follow-up question to all of this narrative, will there be any type of cannibalistic dynamics by doing this with the existing F5 business?

I think the short answer to that, Sami, is we don't think so. To be clear, NGINX does not create a direct competition with us. If one wants to go from their current mode of deployment from using ADC as part of their infrastructure to supporting multiple applications, but they want to go from a hardware ADC to a virtual ADC, we already cover that today with our Virtual Editions, and we do that very well. The reason our software has been growing at the rate it has is because of what we're doing on Virtual Editions, and the introduction of our Cloud Edition and the IQ platform that provides better centralized management, automation, orchestration, and the flexible consumption that we give people around our enterprise license agreement that allow them to have license portability. All of these things address the use case of how do you go to virtualized ADC deployment, and we're doing very well there. The NGINX capability is really more of an augmentation of that than a cannibalization of it.

Got it. Thank you very much for those answers.

Great. Thanks very much for taking the question. I have two. One is pretty simple. In the quarter, you did $100 million share repurchase, but you do have this acquisition. Just want to get a revisit of your plans in terms of share buybacks, given the longstanding pattern had been around $150 million a quarter. Now we see a couple of quarters at $100 million. Want to get a better understanding of how to think about it going forward?

Sure, Simon. So as we discussed on March 11 when we talked about the canceling of our automatic share repurchase program, our viewpoint really hasn't changed. We do view our cash balance as a very strategic asset for us, and we're going to use that opportunistically. It may be for additional share repurchases; we're just not going to automatically do it. It may be for additional acquisitions or it may be for other activities. So for the time, we have talked about suspending the automatic share repurchase, but we're going to be opportunistic with additional share repurchases in the future.

Thanks. And Francois, in your prepared remarks, I had the impression that you were pleasantly surprised about the telco results this quarter, kind of getting back to a trend we had observed during much of fiscal '18, just over $100 million versus $76 million in the prior quarter. And so I understand what you said about the outlook, but if we look at the March quarter, if you were pleasantly surprised by the telco improvement, was there an unpleasant surprise offsetting it? What was weaker than you expected in the quarter? And maybe elaborate on what trends would be in that aspect of the business mix?

Hey, Simon. So I'll start with the last part of your question. What was weaker than I expected in the quarter was Europe. I thought we could have done better, and I think as I said the dynamic in the last month of the quarter was weaker than we would have thought. There was a little bit we could have done more in the Fed. But again, I think we had kind of anticipated that because of the shutdown. As it relates to service providers, I wasn't necessarily pleasantly surprised. I think what we were trying to point to is, in our first quarter, service providers were particularly weak. My point was that I felt the interpretation of that was perhaps too strong because the service provider segment is naturally lumpy. So I think we wanted to point out that we came back to numbers in the service provider space that are more in line with historical mix for F5. But that being said, I am still cautious about the service provider segment for the next few quarters because of the transition dynamics we've talked about.

And what's your expectation for the behavior from Europe over the next few quarters?

My expectation is, I think we continue to make very good progress on our own internal execution with the changes we've made. We've had very good confidence and Chad Whalen, our Global Head of Sales, has been very confident about the leadership team and the formation of the resources we have in place there. I have a little caution specifically around the U.K. and Germany based on what we've seen. But overall, I think with the changes we've made and the hiring we've had in Europe, our expectation would be that we continue to grow in Europe.

Thanks very much. Francois, hi, I wanted to check in and go back to the presentation when you acquired NGINX and gave the post-NGINX Horizon 1 guidance. And just checking to see if those guideposts are still going to be applicable after today.

Hi, Mike. Yes, they are.

So generally speaking, post-acquisition we should model and for this year, next year a little bit faster revenue growth, but a little bit of dilution in the EPS. I just want to make sure that we're factoring in the acquisition correctly.

That's correct.

Yeah. Hi, guys. Thanks for the question. I guess I had two. I wanted to start off with the OpEx line, particularly R&D. We continue to see R&D creeping up a little bit, especially if we look over a multiyear period, and we've just bought NGINX. So I'm just wondering how much more R&D do you think you need to spend to integrate that and to continue to push products forward? Should we anticipate that the R&D line continues to grow as a percentage of sales for a while, or does that stabilize in a few quarters?

Hi, Rod. I think you'll see the R&D line pick up a little more over the next few quarters both because of the NGINX acquisition and additional investments that we want to make to capitalize on the opportunities in front of us, specifically in the case of NGINX, beyond the organic investment there. We want to port security capabilities into the NGINX platform fairly quickly. We want to accelerate what they've been doing in the API management space. It's a big market; there is a big opportunity there. They didn't have the resources to fully capitalize on the opportunity for us. We're going to accelerate that. Same on the application server space. All of these things should pick up. That being said, all of those investments have just gone through; they were considered when we gave revised Horizon 1 guidance of operating profit between 33% and 35% for Horizon 1. So all of that's accounted into what we should expect.

So are you - just to clarify that, François, you're saying that it creeps up in the next couple of quarters, then it stabilizes? Or does it creep up peak and come back off? Just can you give us some idea on trajectory, what we ought to be thinking?

I think it stabilizes. We're not giving specific guidance for next year, but essentially, I think it stabilizes to get into that 33%-35% range for Horizon 1.

Okay. And then my follow-up was with regards to service providers, the telco revenue. I mean if our calculations are right, I guess they are, I mean you are right back to the revenue - absolute revenue level you were at two quarters ago. When you guys had said last quarter after the big deterioration in that revenue line, you thought it would take a couple of quarters to get back. I just wonder, any color you could give on what happened there? Was there a project that you thought would be delayed longer that came back, or did those one or two carriers that deteriorated in revenue terms add new projects? Just give us any color on why that snapped back so much more quickly than you thought it would?

Well, it was, Rod. It was pretty concentrated, and we've had good projects this quarter around a couple of carriers where we had specific softness. My comments overall are related to the opportunity that we see in service providers. And I think the levels where we're at today are not the levels where we would like to be 18 months down the road when we - when the 5G opportunity is truly mainstream.

Oh, thanks for taking my question. Back to the service provider. Any - are which regions do you think are tracking faster as far as getting ready to implement 5G? And then where do you think you're best positioned, North America? Because you have such good relationships with top-tier carriers, one? And how are you doing in Asia Pacific versus EMEA? Thank you.

Hi Catherine, this is Chad Whalen. I think from a service-provider perspective, we've seen motions across different theaters, isolated in certain countries outside of North America. I would say there has been a stronger movement in some of the APAC region as opposed to maybe throughout Europe. Here in North America, there is deep interest in what's going on with 5G planning both in terms of core capacity for enhanced mobile broadband, which is the first service that they are launching. But more importantly for us is the new architectures they include mac at the edge. We're spending a lot of time, and that's a forcing function for what we're doing around our virtual software offerings. So we're seeing it kind of broad-based, but I would say from a concentration perspective, North America and Asia Pacific are probably furthest along.

And are you seeing any different competitors spring up in this area, especially when it comes to the NFV piece of it, combining CGNAT with DDoS and DPI? Are you seeing any other - I mean who do you typically see when you're competing at that level? Thanks.

Well, from a - in many parts of the globe, the network equipment providers are the key access into the carriers. So Nokia, Ericsson, and Samsung are new and have made a pretty marked impression in APAC and we're expecting that to continue in EMEA. In terms of new entrants on the software side, Affirmed Networks has been around for some time, and we see them some more. But it's typically the same players that we're seeing and have seen in the 4G space that are transitioning in the 5G.

Hi. This is Vinod on for Ittai. Thanks for taking the question. I have another NGINX question. You know, I know it's early in the planning and integration projects, but now that you're converging NGINX with cloud-native, how does your go-to-market approach change? Are you going to be adopting their approach?

Hi, Vinod. So the approach that we have around the NGINX opportunities, we are going to integrate their sales force, which has been, I would say, for the most part, an inside sales motion. We're going to integrate that organization into Chad Whalen's global sales organization. We're going to complement that inside sales motion with the enterprise high-touch sales motion that F5 has had in place and excels at. I think with the combination of these two capabilities, we're going to be able to touch both the low-end deals as well as more and more the high-end, high-touch deals, because one of the things that we think is going to accelerate as we monetize NGINX at scale is that with the acceleration of their controller capabilities with the new resources we are putting in, NGINX is going to have access to deals of, I think, increasing size as well as larger deals in the enterprise space. We think we're going to need both motions, both motions will operate under a single organizational umbrella under Chad Whalen, and we've started to think about the governance and collaboration between these organizations to make that very smooth.