F5 Inc (FFIV) — Q4 2022 Earnings Call Transcript

Hello, and welcome. I'm Suzanne DuLong, Vice President of Investor Relations. Francois Locoh-Donou, F5's President and CEO; and Frank Pelzer, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the F5 executive team are also on hand to answer questions during the Q&A session. A copy of today's press release is available on our website at f5.com, where an archived version of today's audio will be available through January 24, 2023. Visuals accompanying today's discussion are viewable on the webcast and will be posted to our IR site at the conclusion of our call. To access the replay of today's call by phone, dial (800) 770-2030 or (647) 362-9199 and use meeting ID 3209415. The telephonic replay will be available through midnight Pacific Time, October 26, 2022. 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 Francois.

Thank you, Suzanne, and hello, everyone. Thank you for joining us today. I will speak first to our fourth quarter results before discussing fiscal year '22 and our outlook for fiscal year '23. Against the backdrop of a rapidly changing environment, our team delivered fourth quarter revenue at the top end of our guidance and earnings per share above the high end of our guided range. Related to new projects and new architectural rollouts, these dynamics were especially evident in our Q4 software revenue. While we had a strong pipeline for new multi-year subscriptions headed into the quarter, customers' macro concerns led to lower close rates and lower software growth than we expected. We had some customers pause large-scale digital transformation projects in favor of business as usual. We also had customers resize projects with more conservative initial usage estimates. And we saw foreign exchange headwinds contribute to budget and spending challenges with customers in both EMEA and APAC, including customers who delayed projects with the hope that currency would stabilize. Conversely, Q4 marked a significant improvement in our systems revenue versus prior quarters, thanks to better availability of several critical components in the broker market. These scarce components came at higher costs, which are reflected in our Q4 product gross margins. However, our priority was and will remain fulfilling customer demand for systems which stayed strong throughout the year. We were able to partially offset higher product costs and continued operating discipline and a favorable tax rate enabled us to outperform our Q4 earnings per share target in the quarter. When I step back and look at FY '22 as a whole, I readily acknowledge that the year did not look the way we envisioned when we began it. Despite supply chain challenges and growing customer caution beginning in Q4, we saw persistent customer demand and our sales teams drove record-breaking bookings for the year. In addition, we achieved several important milestones. First, with portfolio and consumption model diversification, we drove our product mix to 51-49 software-hardware, a noteworthy accomplishment in our transformation journey and very different from where we were just five years ago when software represented less than 15% of our product revenue; second, with the expansion of our application security portfolio and increasing demand for securing applications and APIs, we have grown our security business to $1 billion in revenue. Security-related revenue now represented 37% of our FY '22 total revenue; third, 69% of our total revenue was recurring in FY '22 with a double-digit 3-year compound annual growth rate. Over time, higher levels of recurring revenue will continue to add predictability and stability to our model. Finally, we launched three significant new platforms during the year, leveraging customer-focused innovation across the continuum of deployment models. These launches included expanding and unifying our SaaS offerings through F5 distributed cloud services as well as our next-generation rSeries and VELOS systems. These milestones are representative of how significantly we have evolved F5 over the last five years. F5 is stronger and better balanced with a more resilient revenue base and an operating model capable of delivering significant leverage. Over the next year, our business is likely to benefit from tailwinds to our systems business as a result of improving component availability. It's also likely to bear some weight from macroeconomic headwinds. In the balance, we expect to deliver FY '23 revenue growth of 9% to 11%. We also expect the combination of revenue growth and operating leverage will enable us to deliver non-GAAP earnings growth in the low to mid-teens, which means we also expect to deliver on our Rule of 40 benchmark in FY '23. Further, we are committed to operating the business to maintain the Rule of 40 and double-digit earnings growth on an annual basis going forward. Frank will speak to our outlook in greater detail in his remarks. Before I pass the call to him, though, I will talk to several of the reasons why we believe we will deliver strong revenue and earnings growth this year. First, hybrid IT is here to stay. Our multi-cloud infrastructure-agnostic approach means we can create a more unified experience across customers' disparate environments. We are enhancing automation and driving operational efficiencies and corresponding cost efficiencies. Our ability to create a more seamless application environment for our customers is already an advantage. It is likely to become even more so as customers look to reduce operating costs and complexity; second, demand for security use cases is likely to remain resilient. Customers rely on our security solutions, including DDoS protection, advanced vulnerability defense with web application firewall and bot fraud abuse and API protection to protect them across what feels like an ever-increasing attack surface. With the February launch of our SaaS-based F5 distributed cloud services, we are now an attacker in a rapidly growing segment of the overall security market; third, we expect the combination of a resilient systems business and gradually improving component supply will contribute to drive systems revenue growth in fiscal year '23. Beyond 2023, with customers embracing hybrid IT, we expect hardware demand will prove more resilient and longer-lived than expected just a few years ago. Near term, we also see the opportunity to take share from traditional hardware competitors undergoing structural change; fourth, our breadth of form factors and consumption models makes us an ideal partner for customers who are likely to be prioritizing their investments, optimizing costs and may want to shift from one consumption model to another, whether hardware, software, SaaS or managed service, perpetual license, or subscription via an OpEx or CapEx budget approach, we are flexible. In an environment of shifting priorities, removing friction and enabling customers to consume how and when they want is a distinct advantage. And finally, we are a trusted and operationalized partner of the largest enterprises, service providers and government entities around the world. In good times and especially when faced with adversity, organizations tend to rely heavily on the partners they know and trust. We have worked for decades to earn that trust. Our customers count on us on our deep understanding of how to protect and optimize their application and on our continuous innovation. It's these factors, among others, including our very sticky installed base and our growing base of recurring revenue, which helped give us confidence in our outlook for next year. Before I conclude, I will highlight two interesting customer use cases from Q4. The first is an example of a multi-year subscription renewal with a sizable expansion. In this case, a customer, a global retailer had a goal of automatically flexing its capacity into its public cloud environments as spiky traffic demands warranted. The customer augmented its existing on-premise Big IP hardware with scalable virtualized Big IP software in the public cloud. With our deep automation capabilities, we fully automated the deployment and configuration of the F5 stack, enabling them to burst capacity as needed. Automation also simplified how their developers consume infrastructure and best-of-breed cloud services. In an example of an F5 distributed cloud services SaaS win in the quarter, we worked with a global transport company based in South America that needed to protect its multi-cloud applications but did not want the complexity or inefficiency of disparate cloud-native services. The customer selected F5 distributed cloud services as a one-stop comprehensive security solution including web application firewall, advanced bot defense, API security and DDoS. With F5, the customer gained more consistent security across its multi-cloud environments, improved protection against bots and is now more self-sufficient for its security and traffic management with a single platform to support expansion to other regions. In both of these use case examples, F5 delivered automated multi-cloud solutions that dramatically simplified our customers' operations and improved their ability to scale their businesses. And we did so with the form factor and consumption model that best fit their needs. Now I will turn the call to Frank.

Thank you, Francois, and good afternoon, everyone. I will review our Q4 results before moving on to briefly recap FY '22 results. I will then speak to our FY '23 and first quarter outlook. We delivered fourth quarter revenue of $700 million, reflecting 3% growth year-over-year with 3% product revenue growth and 2% global services growth. Product revenue represented 50% of total revenue in the quarter and was split 49% software, 51% systems. Q4 software revenue grew 13% to $172 million, and systems revenue of $178 million was down 5% year-over-year. Rounding out our revenue picture, global services delivered $350 million in revenue. Let's take a closer look at our software growth. Our software revenue is comprised of subscription-based and perpetual license sales. Subscription-based revenue, which includes term subscriptions, our SaaS offerings and utility-based revenue totaled $131 million or 76% of Q4's total software revenue; the remaining 24% or $41 million came from perpetual license sales. Let's talk first about subscriptions and their performance in the quarter. Multi-year subscription renewals and our SaaS solutions performed as expected. However, as Francois noted, as the quarter progressed, we began to see increased budget scrutiny from customers and elongating selling cycles, particularly related to new projects and new architectural rollouts. While we had a strong pipeline of new multi-year subscriptions headed into the quarter, these dynamics led to lower close rates on new deals. We believe budget pressures also led to a strong mix of perpetual software sales in Q4 with an increasing number of customers for foreign tech-based consumption models. Revenue from recurring sources, which includes term subscriptions SaaS and utility-based revenue as well as the maintenance portion of our services revenue, totaled 67% of revenue in Q4. On a regional basis, Americas delivered 6% revenue growth year-over-year, representing 61% of total revenue. EMEA declined 3%, representing 23% of revenue, and APAC declined 2%, representing 17% of revenue. Enterprise customers represented 66% of product bookings in the quarter. Service providers represented 13% and government customers represented 21%, including 12% from U.S. Federal. I will now share our Q4 operating results. GAAP margin was 78.9%. Non-GAAP gross margin was 81.4%. This was below our guidance of 82% to 83% as a result of the higher systems revenue mix in the quarter and higher costs associated with procuring and expediting critical components in the broker market. GAAP operating expense was $445 million. Non-GAAP operating expense was $379 million, in line with our guided range. Our GAAP operating margin was 15.4%. Our non-GAAP operating margin was 27.3%. Our GAAP effective tax rate for the quarter was 10.4%. Our non-GAAP effective tax rate was 14.1%. GAAP net income for the quarter was $89 million income was $158 million or $2.62 per share. I will now turn to cash flow and balance sheet. We generated $154 million in cash flow from operations in Q4. Capital expenditures for the quarter were $9 million. DSO for the quarter was 60 days. Similar to last quarter, this is up from historical levels due to the back-end shipping linearity in the quarter resulting from ongoing supply chain challenges. Cash and investments totaled approximately $894 million at quarter end. Deferred revenue increased 14% year-over-year to $1.69 billion, up from $1.64 billion in Q3. This increase was largely driven by subscriptions and SaaS bookings growth and, to a lesser extent, deferred service maintenance. Finally, we ended the quarter with approximately 7,090 employees. I will now briefly recap our FY '22 results. For the year, revenue grew 3% to $2.7 billion. Product revenue of $1.3 billion grew 6% from the prior year and accounted for 49% of total revenue. As Francois noted, we achieved a significant milestone in the year, with software representing 51% of product revenue. Software revenue grew 33% to $665 million for the year, while systems revenue declined 13% to $652 million. Global services grew 2% to $1.4 billion. FY '22 software growth came from both subscriptions and perpetual license growth. Since FY '19, we have driven total software revenue growth at a 41% compound annual growth rate. Subscription software at a 58% compound annual growth rate and perpetual license at a 10% annual growth rate. In FY '22, revenue from term-based subscription models, including renewals and inter-term expansions or true forwards continues to represent the majority of our software subscription revenue. With the launch of F5 distributed cloud services in February, we have introduced a new growth vector for our software business with a SaaS-based consumption model. We are thrilled with the early customer traction for the platform, but scaling ratable SaaS revenue takes time. We are transitioning all of our previously available SaaS services, including solutions from Shape and Silverline managed services to F5 distributed cloud services, creating a unified delivery platform for customers. We fully expect F5 distributed cloud to be a meaningful contributor to our revenue in the future. We will look to disclose both its revenue contribution and other relevant ratable revenue metrics as the business grows and matures. Our software revenue growth is driving us towards a higher recurring revenue base. In FY '22, 69% of our revenue was recurring, up from 66% in FY '21 and reflecting an 11% compound annual growth rate since FY '19. We closed FY '22 with approximately $231 million in product backlog, the vast majority of which is system space. This is up more than 80% from approximately $125 million in product backlog in FY '21. While backlog orders are cancelable, we continue to see very low to nonexistent cancellation rates. Two years ago, we began disclosing the portion of our revenue derived from security solutions. Francois mentioned, we delivered $1 billion in security revenue in FY '22, representing 37% of total revenue. We estimate our stand-alone security product revenue, which includes solutions sold exclusively for security use cases in either software SaaS or hardware deployment models, grew to approximately $440 million. This reflects a 30% compound annual growth rate since FY '19. I will now turn to our FY '22 operating performance. GAAP gross margin in FY '22 was 80%. Non-GAAP gross margin was 82.6%. Our GAAP operating margin in FY '22 was 15% and our non-GAAP operating margin was 28.9%. Our GAAP effective tax rate for the year was 16.4%. Our non-GAAP effective tax rate for the year was 18.1%. Our FY '22 annual tax rate was lower than expected primarily due to a dispute benefit from filing our fiscal year 2021 state income tax returns. GAAP net income for FY '22 was $322 million or $5.27 per share. Non-GAAP net income was $623 million or $10.19 per share. I will now share our outlook for FY '23. Unless otherwise stated, my guidance comments reference non-GAAP operating metrics. As Francois noted, we expect to deliver 9% to 11% revenue growth in FY '23. This view incorporates a balance between tailwinds to our systems business from gradually improving component availability during the year and macroeconomic headwinds. It also factors in current customer caution. In FY '23, we expect the dynamics around budget scrutiny and caution around new projects will be similar to what we experienced in Q4. As a result, we expect software growth of 15% to 20% for the year. We expect systems revenue growth in FY '23 with growth weighted towards the second half when supply chain risk related to critical components begins to abate. Finally, we expect low to mid-single-digit revenue growth from our global services. Shifting to our operating model, we expect supply chain pressures to remain acute in the first half of the year and to gradually improve in the second half. This dynamic will impact our FY '23 operating model trends likely outweighing our usual seasonality. Specifically, revenue, gross margin, and operating margin expansion are expected to be more weighted in Q3 and Q4 of FY '23. We expect FY '23 gross margins of approximately 81% with the combination of moderating supply chain costs and price realization from our previously announced price increases flowing through as we progress through the year. We expect continued operating expense discipline will result in non-GAAP operating margin in the range of 30% to 31% for the year. We expect our FY '23 effective tax rate will be 21% to 23%. And we expect to deliver non-GAAP EPS growth in the low to mid-teens for the year. As Francois noted, with results in these ranges, we would achieve our Rule of 40 target for FY '23. We are committed to maintaining it and double-digit earnings growth going forward on an annual basis. Our FY '23 outlook incorporates the expectation that we will allocate 50% of our free cash flow for the year to share repurchases, consistent with our balanced approach and the commitment we made at our last Analyst Day. Included in this expectation is that we pay down the $350 million remaining on our term loan related to the Shape acquisition when it matures in January of 2023. I will now speak to our outlook for Q1 FY '23. We expect Q1 revenue in the range of $690 million to $710 million with gross margin of approximately 80%. We estimate Q1 operating expenses of $370 million to $382 million. And our Q1 non-GAAP earnings target is $2.25 to $2.37 per share. We expect Q1 share-based compensation expense of approximately $61 million to $63 million. I will now turn the call back over to Francois.

Thank you, Frank. To reiterate a few key points. We believe we are positioned to deliver FY '23 revenue and earnings growth, we are well aligned with our customers' most pressing application challenges, including easing the complexity of protecting increasingly distributed applications and managing and scaling complex hybrid IT environments. With a $1 billion and growing security business and an increasing mix of SaaS-based solutions, we are well positioned for the future. Our innovation and successful transformation efforts to date have substantially expanded our portfolio, driving balance in our hardware software mix. As a result, we have a stronger business model and increased confidence in our ability to deliver sustained revenue and earnings growth. In the balance of what we see are likely both tailwinds resulting from improving component availability and macroeconomic headwinds in FY '23, we expect to deliver meaningful top-line growth and double-digit earnings growth. In FY '23 and beyond, we expect to continue to exercise operating discipline, driving to the rule of 40 and double-digit growth on a sustainable basis annually. This concludes our prepared remarks today. Operator, would you please open the call to Q&A?

A few here, if I could. Number one, all related to software here. About three years ago, I think, is when you started with a pretty large term deals and there was a few really big quarters there. Just curious on those handful of deals that really contributed a lot back then. They should come up for a three-year renewal. Could you just talk a little bit about those deals in aggregate? Were they renewed? Were they renewed larger, what kind of upside can we see to them? Or were those deals lost or pushed out? And then I have more follow-ups.

Tim, it's Francois. In 2022, which was our first year dealing with numerous renewals, we observed very strong renewal rates for our large deals, and in addition, the expansion we experienced on these deals was quite healthy. We are pleased with the renewals. However, in Q4, we did encounter a shortfall in new business. We had anticipated a stronger performance for new software business, but the close rates did not meet our expectations due to a change in customer behavior towards the end of the quarter. As mentioned in the prepared remarks, we saw deals being delayed, resized, or postponed by customers, primarily due to pressures from the macroeconomic environment and the looming recession. This dynamic impacted new business, but existing deals that we needed to renew saw strong renewal rates along with good expansion.

And then you updated the security number there, which is helpful. Also at that Analyst Day a few years ago, you gave a $100 million revenue number into the cloud vertical. I'm hoping you could give us some kind of update on how business to the cloud vertical has transpired over the year?

I don't have an update for you there. Our cloud business, in general, has continued to grow pretty substantially. What we are seeing more and more, Tim, is customers augmenting their on-prem or private cloud environment with applications going into public cloud, and they're leveraging for that our software, of course, but not just Big IP software, but increasingly, we're seeing them do that with NGINX software. And what we're seeing more and more is hybrid cloud being here and being here to stay with large enterprises who want to automate environments, both on-prem and in the public cloud. And we've positioned our technology to be able to do both. So with the growth that we're seeing in the hybrid cloud environment, our business, of course, in the public cloud and the number of applications we support in the public cloud has grown.

So I have two for the team. The first question is on a comment Francois that you just made that kind of peaked my interest here. You said that hardware revenue is likely more durable and may take share. And I think you said other from companies and existing customers or something along those lines. Now could you just give us some color here? Are you taking share from software companies, hardware companies, other form factors? Maybe you could just expand a little bit on that comment, it's a little bit different from what we've been used to hearing before. The other question is for the systems revenue growth and the path through fiscal year '23. I think, Frank, historically, there's been a discussion where fiscal 1Q of '23 is the low point of systems revenue capture. And then we ramp up through the year and fiscal 4Q was the kind of peak of systems revenue capture. Just could we just go through that systems path just to understand the glide path a little bit better?

Yes. Sam, I'll take the first part, and I think Frank will take the second part. So on my commentary on hardware. Let me just comment on three segments quickly. Let me start with the ADC segment. So in the ADC segment, we have been taking share from our traditional competitors throughout 2022 and before. And we feel that this is happening for a couple of reasons. Number one, we have continued to invest in our hardware franchise and have brought new features and capabilities that help customers automate their environment. And as a result, when customers are really trying to create these hybrid cloud implementations where they have to have hardware on-prem but they also need to have applications in public cloud, they can go to F5 as a partner that can help them balance the load between public cloud and on-prem environment. A good example of that, I'll give you we have a customer, a global retailer that really needed to deal with spiky traffic on their website in the peak retail season. They're using F5 on-prem for hardware, and they're using our virtual edition in the public cloud. And they are bursting into the public cloud with our virtual edition where necessary, but built with automation that allows them to go from one to the other. So the investments we've made there have really created a unique proposition for our ADC business, and we're seeing more and more customers want to move to these automated hybrid cloud environments. The second element driving hardware is security. We continue to grow our security hardware business across application security, encryption, decryption, and protection against ransomware. And then we've also seen strong performance and resilience in the service provider market for hardware, driven by 5G traffic where we have seen augmentation of capacity on both 4G and now 5G infrastructure. So these are the drivers really on the hardware business. Of course, we have been challenged to ship all of that demand, as you have seen with the backlog in 2022, but we expect that to steadily increase through 2023.

Yes. On your question about the supply chain, it is still an issue, but it has improved. We are seeing fewer vendors decommitting to us and better availability of components, although there are still some critical components that we have experienced decommits on. In Q4, we were able to buffer some of our supply in Q1 by accessing the broker market for those components. I cannot guarantee that we will continue to have that access since the situation can fluctuate. I am confident that Q3 and Q4 will be significant shipping quarters for our systems. I feel less certain about the mix between Q1 and Q2 at this time. Our engineering team has made good progress in redesigning and reworking some products, with some ready earlier than expected. We anticipate that the rest will be completed by the end of Q2 or the beginning of Q3, which gives us confidence for the second half of the year. It remains to be seen whether Q1 or Q2 will be the low point, as that depends on the availability of critical components. The positive news is that the overall supply chain is definitely improving, even though we still face risks with a few items.

Great. I was hoping we could talk a little bit about the mechanics that you're assuming into the current quarter and forward year guidance. You talked about some pipeline erosion during the quarter. You talked about closure rates weakening and delays in projects. So I was hoping you could talk about what you're assuming when you look forward in terms of those metrics, are you assuming they stay at the current depressed rates rebound back to where they were prior or get worse from here, and particularly are the projects that have been delayed, expected to stay delayed or be canceled outright given the environment?

When we look to 2023 and our software guidance, we assume that the healthy renewal rate we have observed in existing multi-year subscriptions will continue. We have seen consistent renewal rates throughout 2022 and based on customer utilization of these projects, we do not anticipate a significant change in renewal behaviors. However, we do expect that more projects will be delayed or resized by customers, and there will be increased scrutiny on large multi-year projects compared to last year. This will impact new business related to new multi-year subscription agreements, and we do not anticipate year-over-year growth from these large new projects in 2023. For context, new business still accounts for over half of our total software business, so we have a considerable reliance on this new business, which will be impacted in 2023 due to the current macro environment. Looking beyond 2023, we expect the rate of new projects to increase again, along with a healthy rate of renewals and expansions. We also anticipate growth in our SaaS and managed services business. Given these factors, we believe a long-term growth rate of over 20% for our software is an appropriate target for us.

Can you discuss the transition from the iSeries to the rSeries as 2023 progresses? Do you anticipate that in the second half of the year, there will be a significant increase in the proportion of the product mix between I and R?

Yes, Alex. We expect that the transition between iSeries and rSeries will accelerate in 2023, and especially in the back half of 2023. I don't have the exact mix for you here, but I think, Alex, you should be assuming that exiting 2023, the large majority of what we will ship will be rSeries rather than iSeries.

I guess for the first one, I'm just still trying to understand your guidance on the systems revenue for fiscal '23 a bit. You had a big step-up here in the systems revenue from buying components from the broker market. I just wanted to understand if you're embedding that you can sort of continue on that path and essentially 4Q is sort of where you build on top of by going into the broker markets and buying from there to satisfy sort of demand from your customers? Or if you were to do that, is there more downside to the gross margin expectations that you outlined in terms of premium costs for that? And I have a follow-up.

Sure, Samik. I'll begin with that, and Francois can add in. We anticipate an improving gross margin as the quarters progress because we are no longer reliant on the broker market for essential components. We've gone through redesigns and sourced different resins, allowing us to ship products without the critical components that have impacted us over the past six to eight months. This effort is expected to be mostly completed by the end of Q2 or the beginning of Q3, and it is incorporated into our assumptions for gross and operating margins for the year.

Yes, I believe the general situation in the supply chain over the past 90 days has shown more stability compared to previous quarters. Specifically, we are experiencing fewer decommits than before, although they are still occurring. Suppliers are reporting an increase in available capacity at their fabs, and we have noticed our suppliers making progress in extending their capacity as well. These factors boost our confidence in hardware as we move into 2023. However, as Frank mentioned, the main factor for us is the engineering work we’ve done at F5 to work around the most constrained components. Some of this effort has already resulted in deliveries, and we expect more to come in the next three to six months. This is why we anticipate a very strong second half of the year for hardware.

You mentioned delays from international customers. Was this mainly due to foreign exchange? Could you help us quantify the demand impact from products becoming relatively more expensive for international customers? Also, just to clarify, is it correct to assume that F5 primarily conducts transactions in U.S. dollars?

Yes. Yes, that's a correct assumption. And to the question, was it driven by FX? Yes, FX, of course, had a large impact on that. But of course, if you are specifically, I would say, in the world of hardware, if you're a customer purchasing in euro or yen and we've done a price increase, there's two price increases that have increased hardware a little over 20%. And on top of that, you've had significant devaluation of your currency. Your budget does not buy you as much as it did. In software, that is a little less pronounced because there hasn't been as much of a price increase in software. But despite that, we saw these deal delays in software, primarily internationally. And I would say it's a combination of inflation, currency devaluation, and just macroeconomic environment and people preparing for a tough economic environment and changing their approach to spend.

I heard you mention something about second half of fiscal '23 being more back half loaded for demand or, I guess, deliverable. Was that on both the hardware and the software? And was it more from your discussions with your customers or more just you can't get all the components together to complete the various items? Because I'm just kind of wondering on the software side, it seems like it would be a little bit early to say back half loaded for something nine months from now.

Yes, Jim, the guidance was purely about the ability to ship systems and the rework that we are doing and the component availability for those new builds. And so that's our expectation is that Q3 and Q4 are going to be much stronger systems revenue quarters than Q1 and Q2 for us.