F5 Inc (FFIV) — Q4 2021 Earnings Call Transcript

Hello, and welcome. I am Suzanne DuLong, F5's Vice President of Investor Relations. François Locoh-Donou, F5's President and CEO; and Frank Pelzer, F5's Executive Vice President and CFO will be making prepared remarks on today's call. Other members of the F5 executive team are also on hand to answer questions during the Q&A session. A copy of today's press release is available on our website at f5.com, where an archived version of today's call will be available through January 25, 2022. Today's live discussion is supported by slides, which are viewable on the webcast and will be posted to our IR site at the conclusion of today's discussion. To access the replay of today's call by phone, dial 800-585-8367 or 416-621-4642, and use meeting ID 6879935. The telephonic replay of this call will be available through midnight Pacific Time, October 27. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in the press release announcing our financial results and described in detail in our SEC filings. Please note that F5 has no duty to update any information presented in this call. With that, I will turn the call over to François.

Thank you, Suzanne, and hello everyone. Thank you for joining today. On the pandemic conditions that have persisted far longer than anyone initially expected, the F5 team delivered another very strong quarter, closing out a robust year for us. Customer demand for application security and delivery amid skyrocketing application growth and heightened application security awareness are driving strong demand for F5 Solutions. This demand spans our portfolio and our regional theaters in Q4, driving 11% revenue growth and our fourth consecutive quarter of double-digit revenue growth. We delivered 35% software growth, 12% systems growth, and 2% global services growth in the quarter. With software revenue representing 45% of product revenue in the quarter and 80% of our software coming from subscriptions, we continue to mark milestone after milestone in our rapid transformation to a more software-led business. I will speak more about our business drivers and customer highlights from the quarter after Frank reviews our Q4 and FY'21 results and our outlook for Q1 and FY '22.

Thank you, François, and good afternoon everyone. I'll review our Q4 results before briefly recapping our fiscal year results. As François just outlined, our team delivered another very strong quarter. Fourth quarter revenue of $682 million is up 11% year-over-year and above the top end of our guidance range. Please note as I review our revenue mix, I will be referring to non-GAAP revenue measures for the year ago period. Q4 product revenue of $340 million is up 21% year-over-year, representing a significant acceleration from 6% in the same period last year. Q4's software revenue grew 35% to $152 million, representing 45% of product revenue, up from 40% in the year ago period. Systems revenue of $188 million is up 12% compared to Q4 last year when systems were down 8%. Rounding out the revenue picture, we continue to see strength from our global services at $342 million in Q4, up 2% compared to last year and representing 50% of revenue. Taking a closer look at our software revenue, customer preference for subscription-based consumption models is evident. In Q4, 2021 subscription-based revenue represented 80% of total software revenue, up from 76% in the year ago period. Subscription-based revenue includes our radically recognized as a service offerings and our solutions sold as term-based licenses. Within subscriptions, customer demand is driving substantial volume and value growth from our multi-year subscriptions. The deal volume of our multi-year subscriptions more than doubled year-over-year and is approaching 500 in total. This consumption model offers flexibility for the customer and through the annual true forward and normal renewal cycles offers us visibility to customers' utilization and consumption patterns. In addition, we ended the year with more than 600 SaaS and managed service customers, reflecting growth of 50% year-over-year. Revenue from recurring sources, which includes term subscriptions as a service and utility-based revenue, as well as the maintenance portion of our services revenue totaled 67% of revenue in the quarter. On a regional basis in Q4, Americas has delivered 11% revenue growth year-over-year representing 59% of total revenue. EMEA delivered 11% growth representing 24% of revenue and APAC delivered 9% growth accounting for 17% of revenue. The strength in Q4 spanned customer verticals as well. Enterprise customers represented 69% of product bookings in the quarter, service providers represented 13%, and government customers represented 18%, including 8% from U.S. Federal. I will now share our Q4 operating results. GAAP gross margin in Q4 was 81.1%, non-GAAP gross margin was 83.7%. GAAP operating expenses were $427 million. Non-GAAP operating expenses were $350 million. Our GAAP operating margin in Q4 was 18.5%. Non-GAAP operating margin was 32.4%. Our GAAP effective tax rate for the quarter was 10.3%. Our non-GAAP effective tax rate was 15%. GAAP net income for the quarter was $111 million or $1.80 per share. Non-GAAP net income was $185 million or $3.01 per share. I will now turn to the balance sheet. We generated $197 million in cash flow from operations in Q4. Cash and investments totaled approximately $1.04 billion at quarter end. DSO was 45 days and capital expenditures for the quarter were $7 million. Deferred revenue increased 17% year-over-year to $1.489 billion, up from $1.273 billion. The growth in total deferred was largely driven by subscription and SaaS bookings growth and to a lesser extent deferred service maintenance. Finally, we ended the quarter with approximately 6,460 employees, up approximately 80 from Q3. This does not include approximately 90 employees added with the Threat Stack acquisition, which closed in our fiscal first quarter of 2022.

Thank you, Frank. A very strong fourth quarter results are the perfect cap to our robust outperformance in FY '21. In the last 18 months, our reliance on applications, both for businesses and our consumers, have escalated sharply and likely forever changed. Our customers are massively accelerating digital transformation to keep up with current demand and forecasted growth. They are doing this while also working to consistently meet consumers' high expectations for application performance and availability, and while also ensuring their applications and their consumers' data are secure. In my conversations with investors, I am often asked what is potentially misunderstood about F5? Let me address the key points here. First, traditional on-premise applications continue to grow contrary to the prevailing expectations from two to three years ago. In fact, traditional apps are generating more traffic and more revenue than ever, because every aspect of life and business relies on applications. For F5, this means BIG-IP demand will continue to grow in both software and systems form factors. Second, contrary to early cloud hype, the vast majority of traditional applications are not being refactored. They are either remaining on-premise or they are moving to the cloud with a lift-and-shift motion. In other words, F5-run applications are remaining attached to F5. As a result, BIG-IP is growing both on-premise and in public clouds. Third, modern container-based applications continue to grow at a rapid pace and not only for new applications. Customers are bolting new modern components onto traditional applications to improve the user experience. In many cases, cloud-native application security and delivery simply are not robust enough to meet the application's needs. For F5, this means accelerating NGINX demand enabling application security and scale for modern applications, often as a complement to BIG-IP. Lastly, given the volume of business and data that is now flowing through applications and the increasingly distributed nature of applications, application security has taken on new significance. Where in the past, network and infrastructure security was a focus for customers and vendors alike, we expect application security will be one of the hottest areas of investment over the next decade. F5 is one of the few players 100% focused on application security and we not only protect access to applications but also how they are used. As a result, we expect our role and reputation as a leading application security provider will accelerate. To sum up these points, F5 is differentiated and well positioned to benefit from significant emerging secular trends. There are some companies focused on applications. There are also some focused on application security. F5 is the only company that is at the epicenter of these two secular forces with a focus, expertise, and the technology assets to secure and deliver any application anywhere. Let's ground our opportunity in real customer trends and use cases. Last quarter, I talked about five sustainable customer trends we expected to drive demand across our portfolio. Let's revisit those trends with some customer examples from Q4. Number one, enterprise customers, developers, and DevOps teams are using NGINX to insert security earlier in the application lifecycle. NGINX with App Protect delivers robust application security for microservices with the flexibility and agility developers demand. In one example during Q4, we secured an NGINX win with a global insurance group. They are migrating their consumer-facing insurance services into a public cloud. For risk mitigation and security reasons, they required a scalable and container-friendly solution. They also needed enterprise-grade security capable of protecting their strategic high-value apps and guaranteeing risk management compliance. They wanted all of this within a lightweight footprint that could drive automation saving time and money. NGINX with App Protect was the natural choice. Trend number two, heightened security concerns and high-profile ransomware attacks are escalating demand for top-notch application security and fraud and abuse mitigation. With pronounced application growth and an ever-expanding threat landscape, including high-profile ransomware and credential stuffing attacks, we see growing demand for application security in cloud environments and rising demand for fraud and bot defense. During Q4, a North American electric utility experienced a credential stuffing attack, resulting in substantial infrastructure failure. More than 6 million customers had to reset their account passwords. Based on their experience as a BIG-IP customer, the utility turned to F5 for help. Shape was emergency onboarded, identified high volumes of automated traffic, and deployed highly effective mitigation measures to stop the attack. Trend number three. Customers are leveraging F5 for Kubernetes, containers, and cloud-native architectures. Our growth in modern applications continues to accelerate driven by NGINX, Kubernetes, and cloud-native deployments. We are seeing several top use cases emerge for NGINX, including managing APIs, optimizing Kubernetes' traffic management, and load balancing cloud-native and hybrid cloud applications. With customers' modern applications experiencing significant and constant swings in user demand, they need infrastructure that scales up automatically to meet user demands or down to save cloud costs. During Q4, the Canadian online investment manager selected NGINX to move their Kubernetes-based applications into production at scale. Initially, they attempted to use a competitive solution, but it lacked performance and did not integrate well with their HashiCorp console or with AWS auto scaling. NGINX Plus delivered low latency and high uptime to improve user experience and integrated seamlessly with AWS auto scaling to spin down half of their instances during off-peak traffic demand. Trend number four. Customers are scaling their existing hardware-based infrastructures to handle accelerating application growth, driving continued strength for BIG-IP systems. We are finding that customers are often looking to scale both their existing infrastructure and their modern apps infrastructure simultaneously. This is particularly true among tech and SaaS provider customers who continue to experience rapid adoption and growth of their digital products and services. In the latest of a growing list of examples during Q4, a high-growth SaaS provider selected F5 to help them scale both the traditional apps on BIG-IP and their modern public cloud apps with NGINX. This deal was made sweeter by the fact that NGINX displaced the competitor that wasn't performing as promised. Finally, trend number five. Customers are leveraging BIG-IP for transformation including cloud migration and automation initiatives. The demand we are seeing for BIG-IP systems and software is about more than just capacity additions. Customers also are choosing BIG-IP to drive transformation, often combining it with NGINX. F5 is particularly well-suited for enterprises that operate both modern and traditional applications, which most do. NGINX integrations with BIG-IP provide differentiation over competitor and cloud-native offerings, and we will extend this with integrations into Volterra at the edge. During Q4, the BIG-IP and NGINX combination was selected by one of the largest online betting companies in the Asia Pacific. The customer, who processes more than one billion annual transactions, needed hybrid on-premises data security as well as the ability to support modern app development and new engaging multimedia capabilities. They selected BIG-IP and NGINX as the foundation for their digital transformation. Let me touch briefly on service providers and our Volterra integration progress before concluding our prepared remarks. We had a good year with service providers in FY '21. While it's true that several of the trends I have just described also apply to our service provider customers, they also face unique challenges as a result of 4G to 5G migration and growing 5G traffic demands. Thus far, our service provider demand has come largely from 4G core network upgrades as they expand hardware capacity and upgrade existing infrastructures to handle 5G traffic. We expect software use cases will begin to emerge as carriers virtualize their 5G cores. Looking forward, our Volterra platform is generating significant interest from service providers. They view it as a way to insert their capabilities at the edge, thus creating 5G in a box offerings. That offers a good transition to discussing progress on the integration of Volterra. Volterra is a universal edge platform, which will enable us to insert critical application services at the edge and allow our customers to consume these services in a fast format. Our initial priority is on security offerings. We have one of the best, if not the best application security software stacks in the industry including our web application firewall, our DDoS protection, API security, and bot capabilities. We are taking that entire security stack and integrating it natively into the Volterra platform. Our first priority is a SaaS security offering that will address the shift towards modern web apps and APIs, and we are on track to deliver within our committed 12 to 18 months integration window. Our recent acquisition of Threat Stack, a leader in cloud security and workflow protection, is designed to accelerate our SaaS security offerings with cloud endpoint telemetry and analytics for better detection and response. Threat Stack also augments our telemetry and virtual security and technology expertise, and I want to take this opportunity to once again welcome the entire Threat Stack team to F5. In closing, we are more confident than ever in our vision and in our ability to continue to execute. The combination of application growth, our expanded solutions platform, our continuously evolving go-to-market strategy, and our vision for the future of adaptive applications is resonating with customers and puts us at the epicenter of several emerging strong secular trends. I extend my heartfelt thanks to the entire F5 team for their steadfast focus and execution. As a team, we have accomplished more faster than anyone even us thought we could. We've got more work ahead, but I am more confident than ever in our ability to achieve our goals. My thanks to our customers and partners for being on our journey with us and providing guidance and support along the way. With that operator, we will open the call to Q&A.

Thank you for giving me a question, and you've given us quite a bit to talk about on this conference call. I want to shoot the first question over to Frank, and I want to talk about the backlog and the backlog composition. You mentioned, the majority of the system-based backlog, but I wanted to break down the customer mix of that backlog. If you could just tell us a little bit more about what's going on there?

I don't have much more to add. I will say that at the end of the year, we observed a continued increase in the backlog that exceeded our shipping capacity. At the end of Q4, many service provider customers likely fit into this category, but it's important to note that this was the $125 million we referenced, and nearly all of it is related to systems.

Got it. Got it. And then, François, just kind of shifting over to you. I want to talk about the U.S. Federal Segment and how that made up about 8% of the total revenue mix. Are you expecting elevated levels of U.S. federal activity in the upcoming quarters, which would actually be almost out of the seasonal pattern of your model?

Well, the short answer, Sami, is no. I think what we're seeing in the federal business just follows the regular seasonality that we've seen over the years and we don't expect the fundamental change to that pattern.

Got it. Thank you. I'll hand it over to another analyst.

Thank you. I have a couple of questions. First, I know there have been instances where Shape Security found success when dealing with threats or identifying entry points where they needed help. However, in the past, there have been some delays in proof-of-concept activities. Are you noticing an increase in that area? Secondly, regarding the impact on gross margins due to costs, is it primarily related to expediting? Do you have any ability to pass those costs on? I'm interested in how we should view the supply chain's effect on gross margins. Thank you.

Hi, Meta. Thanks for the questions. Let me start on shape. Yes, a couple of quarters ago we did mention we were seeing the elongated times to close on these proof of concepts largely, because customers were not in the office and getting those bonds were taking a little longer. We have seen that abate over the last few months. And so, we're seeing a pickup in traction and momentum there. Specifically, I think in the e-commerce area. We have a number of customers whose applications are revenue-generating and they're constantly under these either account takeover attacks or bot attacks that are causing disruption to their business. So they want to move pretty quickly on getting things done, either as insurance against future attacks or oftentimes when they're under attacks, of course, things go very, very quickly because their business is disrupted. So generally, we are happy with the quarter we just had with the Shape. And in general, Meta, I would say, the other thing we're seeing with customers is that the number of customers have been evaluating their security posture as a result of some of the high-profile breaches that have been well-publicized and that has resulted overall in a very strong year for the fiscal year for us in security, but especially in the second half, where customers have reinvigorated the motion of attaching security to BIG-IP and we've also seen the momentum with Shape and Security. That's the overall picture we're seeing in security. Regarding your second question on gross margins, yes, our gross margins have been impacted by the challenges on the supply chain, whether it's some increases in prices on some components or some expedite fees to get our supply when we need it. So, the supply chain generally has been quite a challenging environment. Generally, we have managed that pretty well with our team, but it continues to be a challenging environment. So, we're going to continue to monitor developments there and we'll adjust over time as needed.

Great. Thank you.

Hey, guys. A little bit of a raise thereafter running through all those details. But can you help us a bit understand the amount of recurring software that is term license versus SaaS at this point? As it would suggest SaaS is, it's actually north of 10% of the overall product line today. And within that term license piece, while clearly both go together in organic. I guess, how specifically should we think about the growth rate of NGINX we exited this year?

Thank you for the comments and questions. We haven't separated those two components yet, but we appreciate seeing how the subscription aspect influences our revenue targets for the upcoming year, reducing the proportion relative to our software revenue due to the dynamics of our subscription base. We have not divided the term subscription from the SaaS subscription, but we are monitoring the situation and will provide updates when it becomes significant. I apologize for missing your second question.

Just how should we think about the growth in NGINX today?

Yes. NGINX continues to grow incredibly well within the base. Again, this quarter, we saw from our multi-year subscriptions, NGINX was in more than 50% of those, which is driving great use cases on both sides. On a customer basis, we continue to see strong growth on the overall customer base within NGINX. So, really, really happy with the progress we've seen in NGINX.

And just quick hallmark piece for me. Threat Stack, so we think about that as a term licensed business or a SaaS business?

That's a SaaS business, but that's ratable.

Cool. Thank you guys.

Thank you, Jim.

Thanks for the question. I wanted to check on the guidance and see what your thoughts are on the systems and software trajectory in Q1. I have a follow-up to that as well. Thank you.

Hey, Rod, as you know, we don't provide guidance on a quarterly basis or break down hardware versus software. However, I can share that we have annual revenue guidance of around 8% to 9%. For software, we anticipate a growth rate of 35% to 40% for the full year. We expect systems revenue growth to be flat or slightly positive for the year, and we still anticipate low single-digit growth in global services revenue. All of these revenue expectations are at or above our most recent Horizon 2 outlook, which was shared in January during the Volterra acquisition announcement.

Okay, thanks François. Looking at the overall picture, I wanted to understand your perspective on systems for 2022. When I review the years 2018, 2019, and 2020, all three years showed a decline in systems, with 2020 being down 10%. However, you achieved a 12% growth in systems in 2021. While you've indicated that 2022 might be flat or slightly down, I’m considering a more stable growth scenario. What makes you confident that 2021 wasn’t just an anomaly? We’ve observed a similar trend across various infrastructure companies, which had strong demand in 2021. Many are assuming that this will continue into 2022. So, why do you believe that 2021 isn’t just an exception but could actually represent a new norm for you? Thanks.

Yes, Rod. From our perspective, our revenue increased by 12% in 2021, and we experienced even stronger demand, as evidenced by a significant backlog at the year's end. However, we believe that some of the demand in 2021 might be driven by transient factors that may not persist. There was a certain level of catch-up demand due to a period of low demand the previous year. Additionally, after we announced the end of software development, some customers may have acted quickly to refresh their systems. While we think some of these factors are one-time occurrences, we also recognize that there are enduring macro trends driving growth. Specifically, the traffic and usage of traditional applications are on the rise and are expected to continue growing because these applications generate more revenue, enhance customer loyalty, and are increasingly relied upon by large companies. Thus, in reviewing 2021, we see a mix of one-off factors and lasting influences. Overall, we feel more positive about our situation today compared to a year ago.

Great. Okay François. Appreciate it. Thanks for the time.

Thank you, Rod.

Thank you. Yes, two questions if I could as well. First maybe you guys mentioned the true forwards. Could you just give us an update on kind of what you guys are seeing on some of those larger term deals as it goes to usage, traffic growth, things like that? I think they were running ahead. So, any color you can give us on true forwards and what that means for your visibility into next year? And then second, thanks for the update on overall security. At the Analyst Day, you also gave us a look into the cloud vertical. So I'm just wondering if you could kind of update us on how that cloud vertical performed in fiscal 21 and what you're expecting moving forward there? Thank you.

Yes, Absolutely, Tim. So on the true forward, but we weren't specific. I would say, though, that the data that we saw this quarter was actually better than what we saw in Q3. I must preface that by saying it's a small group of customers that have hit their second term and they're in their multi-year subscription agreements with us. We saw a fairly healthy step up between that initial term and the second term. So that's all very quite positive. And in terms of the true forward expansions within the terms for those customers, that's a growing customer base. Again, that was a bit higher than where we were last quarter. I can't say that that's going to absolutely continue, but we're very, very optimistic by the progress that we've seen in the data that we've gotten so far today.

So, Tim, regarding your second question about the cloud vertical, when we discussed our cloud revenue at Analyst Day, we specifically referred to F5 solutions being used in public cloud environments. The revenue figure we mentioned, which was over $100 million, does not account for much of the business we conduct with hyperscalers, SaaS providers, and cloud providers where we support their infrastructure and help them deliver applications. This clarification indicates that our cloud revenue continues to increase. It is entirely software-based and has been growing at a faster rate than our overall software growth this year. What we are observing is that in private offers on marketplaces, more large enterprises are fulfilling their spending commitments with major public cloud providers. We have completed all necessary integrations, both technical and commercial, that enable these enterprises to utilize their spending commitments on F5. We have noticed an acceleration in this trend.

Okay. Thank you. That's great.

Thank you for the question. I wanted to ask about your targets for 2025. You're currently achieving 8% to 9%, which is your target for next year. How do you see progress from this point? Will you move towards the 2025 targets of double-digit growth? Do you think this sets a foundation to reach those targets more quickly than anticipated? I'm asking because many enterprise IT companies are mentioning strong demand, and we often get inquiries from investors about how much of this strength is secular versus cyclical, influenced by an investment cycle from enterprise customers. I'm looking to understand how you view the setup for the coming years. I have a follow-up question as well. Thank you.

Yes. Thank you, Samik. There is a significant amount of time between now and 2025, but I believe we should consider it this way, Samik. Looking back at where we were 12 months ago during our Analyst Day, we discussed our long-term goal of achieving double-digit revenue growth. We didn’t specify a year but aimed for that target. When I evaluate our current position, I would say that the factors we expected to contribute, such as growth in SaaS, NGINX security growth, and our new value proposition, are progressing as planned and align with our earlier views. What is notably improving is the overall demand for BIG-IP. Part of this is driven by a long-term trend expected to continue for several years. Looking at the broader picture, a few years ago, there was a general belief that all applications would transition to public cloud, envisioning it as the future. However, as we've seen from various industry insights, including statements from cloud providers themselves, the reality for large enterprises is that for many decades, they’ve been told they just need to move to the next big thing, but in practice, that transition hasn’t occurred.

So, just to follow up there in terms of positioning the company and you talked about application security being one of the strongest growth areas that you're looking at. I mean, should we assume that most of the M&A that you evaluate going forward is going to be focused on that segment? Thank you.

First of all, we have made three significant acquisitions in a short time: Shape, NGINX, and Volterra. When we acquired Volterra, we decided to concentrate on integrating Shape and NGINX during that time, and we're making good progress with that. Our ongoing focus on these integrations and expansions is crucial. Now, with Threat Stack, we gain a valuable new capability that enhances our visibility into cloud environments, allowing us to observe where cloud workloads operate, which complements our security portfolio that is entirely centered on application security. This approach is aimed at developing the most comprehensive application security stack. Regarding future mergers and acquisitions, we will remain disciplined in evaluating whether to build or buy, always preferring to build. However, if time-to-market issues or opportunities arise that can accelerate our vision, we will consider those. Our ongoing focus is on realizing our vision for adaptive applications, which addresses the complexities and challenges of running applications for large enterprises. We believe our architectural vision will greatly enhance automation, uptime, security, and provide better insights into application performance. We are committed to making this vision a reality for our customers, whether through organic growth or acquisitions in the future. Our goal is to position F5 as a strategic partner in our customers’ digital transformation rather than just being a provider of point solutions.

Okay. Got it. Thank you.

Thank you very much. So I was hoping you talk a little bit about, now that the fiscal year has ended, what the transition between last year and this year in terms of market share for NGINX looks like? It looks to me like you picked up substantial share over the course of the year. Can you talk about that a little bit? My guess is you're up around 65% to 67% market share. Is that accurate within Kubernetes workloads?

Hi Alex, it's Kara. We're very happy with what we're seeing in terms of the adoption of NGINX. NGINX plays a variety of roles in an application. For example, one thing that is commonly reported is the use of NGINX as a web server. It is true that we have overtaken Apache and NGINX is the number one leading web server. There are other uses like reverse proxy, NGINX used as an API gateway and API management capability, and NGINX is increasingly used now as a workload protection capability. In those areas, there's less reporting on shares. The one that has very regularly been reported and we see consistent gains is the web server piece, and we're very happy with the outcome there.

Okay. And could you talk a little bit about the degree to which you're able to identify the number of coders that are working with your technology, and to what extent there's a growth rate or a rate of adoption among the coding community. Can you talk about your outreach there and to what extent that that's one of the key building blocks as we go forward?

Yes. We've always had a very active community of engaged individuals around F5 technologies. Even if you go and you look at our capability in BIG-IP given it was one of the most programmable proxy solutions available in the market. We have a very active community of contributors who were sharing iRules-based solutions and are actively contributing and continue to actively contribute through our developer community. Now that community has grown further as we extended our portfolio with NGINX. Given NGINX has an open-source model, it attracts a wide variety of application developers that use that as a fundamental technology for their solutions. That's an additional expansion of the developer community around that. We expect that to continue to be an important part of our technology and our strategic direction as appealing to developers and providing them the tools they need to deliver excellent digital experiences.

So, no quantification though?

No quantification at this time.

Can you discuss the competition between Cloudflare, Akamai, and other players in that space? Thanks.

Yes, Alex. For the most part, I would say we don't compete very directly with Cloudflare; that's not a significant overlap today. I think that will grow more as we introduced our Volterra platform to wide distribution post-integration, because we will play way more at the edge with SaaS security offerings for a wide range of customers. We do see Akamai specifically with Shape security in the protecting customers against bot attacks. Their approach is to bundle security with their CDN especially for customers that are using their CDN. We have an approach that's more about best-in-class efficacy for enterprise customers that place a significant premium on having world-class efficacy against bot attacks, and we do very well with that customer segment. We're starting to see more and more competition with these players as a disruptor with our universal edge platform, that competition is going to grow. We feel very good about the attributes of Volterra, and when you combine all these attributes that Volterra being an Edge universal platform and you put there the best-in-class security stack that F5 provides from shapes, from BIG-IP. I think you have a formidable offering for customers that want to consume security as a service at the Edge. It's going to be a best-in-class offering.

Great. Thanks.

Thank you, Alex.

Thank you for squeezing me in. I'm going to assume and hope on the last one, so I could ask my five questions. Put on a serious note, François and Frank, I'll apologize if you all have already answered these questions because you all talk faster than I can listen. First off, with respect to the operating margin rebound as you all have referenced in the past, can you all give us any insight on the glide path considering the significant supply chain challenges that you face along with everybody else in the industry? And before you respond since it's on the same topic. If I heard you correctly, the 8% to 9% of your revenue guidance you provided for fiscal 2022, what are the supply chain assumptions with respect to that growth rate? What assumptions are you making underlying that? And finally also related, can you address? I assume your visibility is that 8% to 9% visibility in general has improved as an increasing number of customers you provided with longer-term forecasts. I'd just like to confirm that that is in fact the case that was fully has been continuing to improve if in fact customers are providing these longer-term forecasts.

Yes, Paul. Let me start with your second question. In terms of what we think about for our outlook on the 8% to 9% and supply chain. As we said in the prepared remarks, it does not anticipate a materially better outlook in terms of our supply chain, even though you’re able to get components, able for everything else. We are assuming that we're looking at that 8% to 9% on what we believe we can ship and what we believe the demand will be for those products. In terms of the specific operating margin expansion, as you recall we had a 32% to 34% range that we tightened up to 32% to 33%, largely driven by the gross margin hits that we are seeing and what we expect to see because of some of those supply chain constraints through FY 2022. We are increasing the efficiencies that we are seeing in the business by lifting that up from where we ended at that 31.6%. So at the midpoint, almost 100 basis points increase, but we're doing that on the backs of having higher costs on the gross margin side, so actually some more efficiencies coming through the operating margin line.

I think on the visibility question, and Frank, just to be clear, if the supply chain improves, does that translate to better than 8% to 9%?

It could, but I don't anticipate that from what we see right now, Paul. I mean, if you know, again, we're early in Q1, so anything is possible. But what we've seen is obviously all of the things that we've been reading from the other vendors collectively; I don't think people are seeing the material - starting to see some improvement in the back half of FY '22 calendar which is our Q4 obviously. It doesn't leave us a ton of room to catch up.

Understood. And has visibility improved because of long-term forecasting from customers?

The visibility on demand I think has improved. I think the visibility on supply has not. Matching those two up with long lead times makes it hard to say that you catch up within a reasonable period of time.

I appreciate the responses. Thanks so.

Thank you for squeezing me in. I just want a classification. Your fiscal 2022 revenue guidance assumes $15 million of revenue contribution from Threat Stack. Am I correct that that is almost all entirely software recovering in nature?

Yes. To be clear, you broke up the first second, Fahad.

The question is, if we exclude the Threat Stack acquisition, would you not have about 50% of your revenue coming from software, given the strength in systems? Do you feel like you’re undershooting your targets as discussed at the analyst day? Is there a perceived slowdown in organic software growth? At the Analyst Day, you mentioned expectations of achieving more than 50% of your revenue from software. If fiscal 2021 is around 47%, wouldn't you anticipate considerable acceleration in software for fiscal 2022? What changes in software adoption do you foresee for the future that haven't occurred in fiscal 2021?

Yes, thank you, Fahad. To be clear, we are indeed meeting our targets. We set a goal of 35% to 40% and achieved 37% this year, while guiding for the same percentage next year. Whether we finish next year with a mix of hardware and software that is 50% or more in software, I believe we will reach that point eventually because software is on a growth trajectory. Over time, we don't expect hardware to drive growth. However, if we miss that target because our hardware performs exceptionally well, we will be pleased with that outcome. This is not just a short-term perspective; it suggests that the overall performance of the BIG-IP franchise is stronger than anticipated. Additionally, customers delaying their transition to software and continuing to purchase hardware increases our install base, making it easier to migrate to software in the future. This is positive news for our software business, as it expands our market. Our primary focus is on the absolute dollar figures, and I am confident we’ll meet the software revenue targets for F5 in our Horizon 2. If those dollar figures lead to a 50% mix, that's acceptable. If not, and hardware has performed better, we will still be satisfied.

And Fahad just as François is stating what we said before. We said our exit rate 50%, that would be the equivalent of the 45% of what we just did in Q4. The trajectory is absolutely heading in that direction and stay tuned, it's Q1.

Yes. To follow up on that, regarding your long-term goals around 2025, it appears that your business is actually shifting more towards software due to the strong performance in hardware. I want to ensure that I understand this correctly, as there may be fundamental improvements beyond what was presented at the Analyst Day. It seems like the long-term targets suggest you're aiming to surpass previous projections. However, as you mentioned, it's still early, and I'm just trying to grasp the overall framework.

I just would point to the obvious, but if we just did over 10% total growth in the first year of a Horizon 2 and so your basis comes out much bigger on which to build going forward. We're incredibly excited about the trajectory of the business that we've been seeing. We talked specifically about FY 2022 guidance, more to come on the long-term target updates, but our focus is really on ending Horizon 2 at or above any of the expectations that we set at our Analyst and Investor Day as well as what we updated after the Volterra acquisition.

Appreciate the answers. Thank you.