F5 Inc (FFIV) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the F5 Networks First Quarter and Fiscal 2018 Financial Results Conference Call. (Operator Instructions) Also, today's conference is being recorded. If you have any objections, please disconnect at this time.

I'd now like to turn the call over to Mr. Jason Willey, Director of Investor Relations. Sir, you may begin.

Thank you, and good afternoon, everyone. As Sylvia said, I am Jason Willey, F5's Director of Investor Relations. François Locoh-Donou, President and CEO of F5; and Andy Reinland, Executive VP and CFO, will be speakers on today's call. Other members of the F5 executive team are also on hand to answer questions following the prepared remarks.

If you have any questions after the call, please direct them to me at (206) 272-7908 or jay.willey@f5.com. A copy of today's press release is available on our website at www.f5.com. In addition, you can access an archived version of today's call from our website through April 25, 2018. You can also listen to a telephone replay at (866) 456-9376 or (203) 369-1276.

In today's call, our discussion will contain forward-looking statements which include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized on our quarterly release and described in detail in our SEC filings. Please note that F5 has no duty to update any information presented in this call.

Before we begin the call, we wanted to remind everyone that we plan to hold our 2018 Analyst and Investor Meeting in New York on the morning of Thursday, March 8. More information on the meeting, including a link to where you can register for the event, is available on our Investor Relations webpage.

I will now turn the call over to Andy.

Thank you, Jason. Fiscal Q1 was a quarter of disciplined execution. We delivered Q1 '18 revenue and non-GAAP EPS above the midpoint of the ranges we provided in October and executed another quarter of strong gross margin and cash flow.

We continue to see strength in our software offerings, particularly deployments in the public cloud, and our services business delivered another strong quarter of revenue growth.

First quarter revenue of $523 million, up 1% year-over-year, was above the midpoint of our guided range of $515 million to $525 million. Driven by the recent U.S. tax reform legislation, GAAP EPS of $1.41 per share was below our guidance of $1.47 to $1.50 per share. Non-GAAP EPS of $2.26 per share was above our guidance of $2.02 to $2.05 per share. I will discuss the impact of the tax law changes in more detail later in my comments.

Product revenue of $227 million in the first quarter was down 5% year-over-year and accounted for 43% of total revenue. Services revenue of $296 million grew 7% year-over-year and represented 57% of total revenue.

On a regional basis, Americas revenue grew 2% year-over-year and represented 56% of total revenue. EMEA revenue grew 7% year-over-year and accounted for 27% of overall revenue. APAC, which accounted for 14% of the total, decreased 5% year-over-year. And Japan at 4% of total revenue decreased 12% from a year ago.

Sales to enterprise customers represented 64% of total sales during the quarter. Service providers accounted for 20% and government sales were 16%, including 8% from U.S. federal. In Q1, we had 5 greater than 10% distributors: Ingram Micro, which accounted for 15% of total revenue; Tech Data accounted for 12%; Arrow and [Cynics], each accounted for 11%; and Westcon accounted for 10% of revenue.

Moving on to our operating results. GAAP gross margin in Q1 was 83.3%. Non-GAAP gross margin was 84.7%. GAAP operating expenses of $294 million were within our $288 million to $298 million guided range. Non-GAAP operating expenses were $258 million. Our GAAP operating margin in Q1 was 27.1% and non-GAAP operating margin was 35.5%.

Our GAAP effective tax rate for the quarter was 38.7% and our non-GAAP effective tax rate was 24.6%. GAAP and non-GAAP effective tax rates were impacted by the recently enacted tax reform legislation. Our GAAP effective tax rate of 38.7% was primarily impacted by 2 large nonrecurring items, an estimated $7 million tax related to Dean's repatriation of undistributed foreign tax earnings and an $11.6 million impact from the remeasurement of our deferred tax assets due to the change in the U.S. tax rate.

Our non-GAAP tax rate of 24.6% reflects the benefits from the reduction of the U.S. tax rates.

Turning to the balance sheet. In Q1, we generated $190 million in cash flow from operations, which contributed to cash and investments totaling $1.35 billion at quarter end. DSO at the end of the quarter was 50 days. Capital expenditures for the quarter were $6.5 million. Inventory at the end of the quarter was $29 million and deferred revenue increased 8% year-over-year to $991 million.

We ended the quarter with approximately 4,375 employees, up slightly from the prior quarter. In Q1, we repurchased approximately 1.24 million shares of our common stock at an average price of $120.73 per share, for a total of $150 million.

Moving to our guidance for fiscal Q2. We continue to see enterprises and service providers adopt our software and security offerings as core components of the next-generation application architectures. While this trend has linked [the sale] cycles for hardware day solutions with some organization in the middle of this transition, it is driving substantial growth opportunity in both private and public cloud deployments, providing a solid foundation for improving product revenue as we progress through the remainder of the fiscal year and beyond.

With this in mind, for the second quarter of fiscal year '18, we are targeting revenue in a range of $525 million to $535 million. We expect GAAP gross margins at or around 83%, including approximately $5.5 million of stock-based compensation expense and $2 million in amortization of purchased intangible assets.

Non-GAAP gross margins are anticipated at or around 84.5%. We estimate GAAP operating expenses of $296 million to $306 million, including approximately $38 million of stock-based compensation expense and $0.8 million in amortization of purchased intangible assets.

We expect a GAAP effective tax rate of approximately 26% for the second quarter and a non-GAAP effective tax rate at or around 25%. We anticipate tax rates to remain at or around these levels for the remainder of fiscal 2018 and we'll continue to update on a quarterly basis.

And while we are not yet providing tax rate guidance for fiscal year '19, it is worth noting that we would expect another small step-down in both our GAAP and non-GAAP tax rates in fiscal year '19 and beyond, reflecting full calendar year impact from the new tax legislation.

Our Q2 GAAP earnings target is $1.66 to $1.69 per share. Our non-GAAP earnings target is $2.24 to $2.27 per share. As a reminder, we will be hosting our investor and analysts meeting in New York on March 8. And with that, I will turn the call over to François.

Thank you, Andy, and good afternoon, everyone. During the first quarter, we saw continued momentum with our virtual editions and another strong quarter from our services business. We are increasingly seeing security lead the conversation in new opportunities with customers and our cloud activity is growing as more customers look to our solutions for help in deploying applications across multi-cloud environments.

Earlier this month, we released our annual State of Application Delivery report. With over 3,000 respondents, the report provides a comprehensive view into the application trends impacting enterprises, service providers and government organizations across the globe. The results show digital transformation is at the forefront of our customers' minds as they look to optimize their IT infrastructure and evolve how they develop and deliver applications.

Multi-cloud architectures are taking on growing relevance as most organizations pursue a best-of-breed strategy for each application deployment. Nearly 9 in 10 respondents reported using multiple clouds, with over half saying cloud decisions are made on a per-application basis.

Our customers are increasingly looking to automation and orchestration to realize leaner IT with the goal of reducing OpEx and better scaling applications to meet user demand. Trends around supporting multi-cloud deployments and the growing importance of automation align with areas where we have increased our development investment over the past year.

During the first quarter, we introduced per application VE offerings supporting traffic management and web application firewall services, and we made platform enhancements that reduce the boot time and footprint of our software by 50% for public cloud deployments. These offerings are building blocks for enhanced central management and automation capabilities we will introduce later this year that support elastic provisioning of VE capacity. Executing in these areas will extend the number of applications we can address, whether these applications reside on-prem or in the cloud.

Taking a closer look at first quarter results. Revenue was above the midpoint of our guided range with strength in our software offerings. We saw a rebound in our EMEA theater as initiatives we undertook in 2017 to improve execution in this region are paying dividends. We continue to deliver strong profitability and cash generation even as we accelerate our development and go-to-market investment in software, public cloud and security.

We are not satisfied with the current level of product revenue growth, but we are encouraged by improvements in execution and the continued strength in the fastest-growing areas of the business. And while we have seen instances of longer sign-up periods for hardware-related sales within some organizations, our overall appliance revenue was in line with our expectations entering the first quarter.

We continue to expect the iSeries platform will be a growing part of our clients' mix in the coming quarters. We believe this product family offers compelling performance and customization advantages versus competing offerings and will enable us to take market share in the appliance segment as we progress through fiscal 2018.

iSeries provides advantages in key use cases for customers, including efficiently managing encrypted traffic and scaling to support high transactional applications such as IoT. We have several significant customer wins in the quarter driven by the SSL capabilities enabled by iSeries. These includes 7-figure deals with the government organization and a large financial services organization, where our ability to efficiently inspect and re-encrypt SSL traffic was a clear differentiator over competing offerings.

A large pan-European managed service provider will utilize our hardware, security and IoT protocol capabilities to support the need for securely scaling applications to better manage customer premise equipment and data. This includes: Inspecting SSL traffic, providing DDoS protection, load balancing and authentication of IoT traffic. F5's ability to innovate around scaling to support bidirectional communication in an IoT environment was a key contributor to this win.

During the first quarter, our VE sales grew over 25% compared with the first quarter of 2017. Driving this growth was increased activity within the public cloud from both bring-your-own license and utility offerings. We are present within all 3 major public clouds and providing advanced application services and security across multi-cloud deployments is becoming a priority to customers as they move forward with their digital transformation efforts.

To accelerate growth within the public cloud, we continue to deepen our partner relationships. In December, we earned Amazon Web Services' networking competency designation by showcasing our ability to ensure performance, availability and security for business-critical applications hosted within AWS. This follows our security competency recognition by AWS in October.

We joined a select group of partners to meet the qualifications set forth by AWS for technical proficiency and customer success in multiple competencies. As we look to extend our solutions to a broader set of our customer's applications, we are focused on creating more flexibility in deployment and consumption.

Over the past 6 months, we launched our subscription offerings on large scale and launched enterprise license agreements. Initial customer response for these consumption models has been very positive with a building pipeline, including net new opportunities across on-prem and cloud environments.

Our enterprise security momentum remained strong in the first quarter, driven by our WAF and identity access offerings. We believe we are uniquely positioned to address our customers' growing needs around application security. At F5's core is an unmatched level of application fluency with large, complex applications. Our security capabilities are increasingly leading the way in opening new opportunities across our customer base. We continue to expand our application security portfolio across private and public cloud environments.

Building on our market-leading position in WAF, we are partnering with AWS to make our WAF security [roles] available to our common customers through the AWS Marketplace.

Today, we announced several new additions to the senior management team. We are excited to welcome Anna, [Cara], Ram and Tom to the F5 team. These additions put into action the plans from the business review process we undertook last year and discussed on our Q4 earnings call. Focus on clearly aligning our product roadmap with customer needs through ADC and security business leadership is a key priority that Cara and Ram will drive. Tom will be responsible for driving the business' long-term strategy as well as overseeing corporate development in our incubation areas, which we will discuss in more detail in March.

We are pleased with our execution in the first quarter and we are well-positioned to evolve with our customers as they make their digital transformations. To better reach the next tier of applications in the enterprise, we are reducing frictions associated with purchasing, deploying and managing our solutions. We are excited by our growing traction within the public cloud and the role our application security solutions are playing across our customer base. Driving improved product revenue growth remains our top priority, and we expect to show progress on this front as we move through fiscal 2018.

In closing, I would like to thank the entire F5 team and our partners for their efforts during the first quarter. With that, we will now hand the call over for Q&A.

(Operator Instructions) Our first question is from Paul Silverstein of Cowen and Company.

First one, Andy, from a, I guess, 2 perspectives. One from a macro and health of in demand perspective where it looks like the objective numbers relative to U.S. growth, EU growth, et cetera have been trending up. And it appears right now, to be quite favorable, and so there's a favorable economic backdrop. And then in terms of the company-specific issues or product market-specific issues, especially relative to the product refresh from a year ago that hadn't transpired, and we still don't see the product revenue growth picking up. The question being, can you give us more insight, more detail, on what you're seeing in terms of customer behavior, their willingness to spend, as well as your particular issues in the ADC market?

Thank you, Paul. So I'll start on your first question as it relates to Europe. I think you heard that we had some challenges in Europe in 2017, which we felt were linked both to some macro issues around the environment, Brexit, some uncertainty around regulation. And we also felt that some of it had to do with our own organization and some execution challenges we were having. Over the last, I'd say, 2 quarters, we felt a number of these have got -- have moved in the right direction. So a lot of the macro uncertainties in Europe, I think, our resolve is more clarity around Brexit. Generally, the European economies and Continental Europe are doing much better. And so we feel that the macro environment is generally better. And we've made some changes in our own formation in Europe. We've made some leadership changes. We've also realigned our teams towards the -- what we perceive to be the best opportunities for growth. And as a result, we're doing better. We are really encouraged by the results we saw in Europe this quarter. We're cautious because we had several quarters of challenges there, but we're also optimistic about what we're seeing with our pipeline generally in Europe and our execution. Your second question was on product revenue growth and, generally, the customer behaviors that we're seeing. There hasn't been much change on that front since last quarter. In fact, we're seeing 2 things specifically on the iSeries refresh. Number one, the adoption of the product continues to be very strong. It is a very high-quality product. Our customers really see actually new use cases for the product and really love the performance of the product. So we're continuing to see strong adoption within our customer base for the platform. On the other hand, we're also continuing to see some delays in decision-making related to hardware, in part because of the complexity of the architectures that our customers are dealing with now. As they move applications across multiple clouds, some in hybrid cloud, some in private cloud, some in public cloud, the variables in the decision-making process are just more complex and we're seeing elongated cycles of decision-making, and that's one of the reasons. I think the key reason, why we don't think we've seen the growth acceleration that we would've expected at this point in past cycles.

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

Yes, so we don't quantify it, Paul. I think we've said it is growing fast. These numbers are still small relative to our overall revenues. They're growing very fast. And we're actually -- exceeded our own expectations again this quarter in terms of the growth we're seeing in our solutions in the public cloud. We'll probably say more about, overall, our public cloud strategy, the solutions we have in there and the traction we're seeing in the public cloud at our analyst meeting in March, Paul.

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

Actually, I do think -- so you have to part that into 2 domains. There are some applications that are -- that we support that are moving to the public cloud. And generally, we have a very strong attach rate to these applications, but I can't -- I think in these use cases, it is substitutive to something we would've done on-prem in the past. So that's definitely an element of cannibalization or if you will, just a change in deployment model of on-prem versus public cloud. But we're also seeing net new use cases. So we do acquire, and we did again this quarter, acquired a number of net new logos. So these are companies that have never bought from F5 before and bought for the first time in public cloud partners, AWS, Azure or Google. And we're also seeing some types of deployments that we would have not had access to before. So a number of our deployments in the public cloud are utility-based. This is where customers are essentially renting F5 virtual editions for hours, and we're already billing several millions of hours of virtual edition in public cloud today. And that's net new incremental for us. That's not opportunities we would've had access to before.

Our next question is from Tim Long of BMO.

Just 2 for me as well. You talked about, a little bit about the service line. It was very strong again, a little stronger than expected here. Was there any kind of one timers or anything abnormal would seem the growth reaccelerate there? And then on the telco vertical, a little bit less than normal seasonal in Q4. Could you point a little bit to what might have held that business back and talk a little bit about the outlook for the telco piece looking out the next few quarters?

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

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

The next question is from Mark Kelleher of D.A. Davidson.

I wanted to go back to the product revenue. I want to probably stick on that a little bit here. The last 3 quarters, we've seen continued deceleration and in this quarter, despite the iSeries kicking into it cycle and strong Europe, we're seeing that deceleration again. What are the headwinds that you've been facing that are -- that you see going away that will allow that top line to grow into next year -- this year?

Thank you, Mark. So I think the -- actually, from an iSeries refresh perspective, we don't see a change. We think the demand for the product is very healthy. And as I've said, we're seeing new use cases for the product in IoT, high transactional applications, et cetera. And we think that's going to continue for the longer term. There are, though, some product drivers of product revenue growth that we think are kicking in and probably will accelerate in the second half of the year. Virtual editions will continue to grow. We expect our public cloud revenues to continue to grow. We continue to see strong demand for our security solutions, in particular, driven by WAF, and the increasing trend towards encryption of all traffic that we deal with. And our SSL capabilities position very well -- position us very well to deal with that. So security, virtual editions and public cloud, I think, will continue to be a driver in the second half of the year. And then there's some changes we've made. We talked about a realignment during our earnings call 3 months ago. There's some changes we've made structurally in our sales channels, go-to-market and some consumption models that we have started offering that we expect to have also an impact going into the rest of FY '18. So when you factor all of that, I think we feel pretty good about what we've said last quarter, which is continued improvement in product revenue performance throughout the year.

All right. Just as a quick follow-up. Europe was very strong, but the U.S., the Americas was kind of weak. Was there anything particularly going on in the U.S.?

No, nothing, I would say nothing in particular. I think the demand in service providers in the U.S. was -- it's typically lumpy, but it was weak this quarter. So you factor all that in, it made up for, I'd say, decent performance in North America, but not particularly strong. I'd say North America enterprise was stronger than North America service provider.

The next question is from James Fish of Piper Jaffray.

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

So I'll take your question on the product and Andy will touch on the services, James. So on the product, first, this was an execution quarter for us. The product revenue came roughly in line with where we expected it to be. As you know, we don't guide product revenue specifically for the outer quarters. But the drivers that I've just gone through around software, security and cloud, as well as the initiatives we undertook, both on the product and the sell side, give us good visibility into where we think we're going to be going into FY '18. And we expect our product revenue performance to improve sequentially from what we had in Q1 throughout the rest of FY '18. I think that's what we said 3 months ago, and we still feel pretty good about that.

Yes. And then on the services business, yes, because most of our services business and revenue is driven by maintenance and renewals, and given where our product revenue has been over the last 1.5 year, many times we've talked about we're going to see that pull down our services billings over time, and therefore, the revenue. We think returning the product to revenue growth will then pull that back up. So year-over-year, we're are seeing it pull down a little bit on a percentage basis. It was expected. It's directly correlated to our products business. That's just how it is. And as François said is we expect to see that improve as we execute through the year, we'd expect that -- to see services pull from that as we return to product revenue growth.

Got it. And then just a quick clarification. I'm not sure if I've missed it. But did you guys mention what the average deal size was this quarter? I think last quarter, it was about 122,000. And then, Andy, any color as to any change in the renewal rates?

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

The next question is from Jeff Kvaal of Nomura Instinet.

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

Yes. So what we expect is we'll see -- as we see the benefit of that through the year, the majority of it we think is going to fall through. Now it's still early days. We're evaluating it against our strategy. But -- and we'll talk more about this at [AM]. But there's a reality to how we view our business and where -- how we value our business model, and we're going to take all that into consideration. And we think by March 8, we'll be able to talk in more detail about what we're going to do with that free cash flow. But again, as I started out, we'll see a lot of that flow through. But reluctant to give anything more specific than that right now.

I can tell, yes.

And Jeff, on your -- to the second part of your question. So we will talk more about capital allocation at our analyst meeting in March. But I would say this, generally, access to capital has not impacted our capital allocation strategies, historically, and I don't expect this tax rate to fundamentally impact our capital allocation strategy. And it has been, and our view will continue to be, that we want to return a fair amount of capital to shareholders, and that's been our practice. I think we have one of the strongest buybacks in the industry. But we've also said that when we have opportunities for M&A, we will be disciplined about these opportunities. But if we see opportunities to accelerate things that are strategic to us, we will do that. And that philosophy is not fundamentally changed by the benefit we're getting from the change in tax legislation.

The next questioner is from Alex Henderson of Needham & Company.

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

Thank you, Alex, I'll take the first one. John will take security. So yes, I mean, if you look at our guidance for the March quarter, and I think you do a good analysis on the midpoint of the guide, et cetera, yes, it would imply that we have -- that the product revenue performance in Q2 will be better than what it was in Q1. And in fact, generally, when we look at our -- on the progress we have, the pipeline we see in our product revenue, the execution we see, we actually do feel we are turning the corner on product revenue growth in Q2. And frankly, we would be disappointed if we did not return to product revenue growth in the second half of '18.

Much easier comps there.

Answering -- Alex, answering your question on WAF. So this is a really, a great market for us. And as you know, we have a leading product there. We have also very differentiated product, especially in our installed base, which is still a very large market for us to go after. And then we're -- as it relates to greenfield opportunities with competition, I think we have some competitive differentiators. But we also have a lot of mobility and our product works on -- in a multi-cloud environment and all the public clouds as well, and that's one of the fastest areas of growth for us, people trying to standardize their security posture across the multi-cloud environment. So it's mostly the -- mostly been a positive for us.

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

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

The next question is from James Faucette of Morgan Stanley.

A couple of questions for me. First, just wondering with the kind of bringing some of the customer through service and maintenance contract have expired back into the fold, if you will, on those, I'm wondering if we should think about that potentially hurting the chances that they will upgrade to the newest versions of product? Or dos that help? Just trying to think about like how that may impact it. And I guess as part of the improvement in Europe, any evidence, from your perspective, that the weakening dollar may have helped a little bit, either in terms of accelerating close times or expanding product or deal size, excuse me? And I guess my last question is, François, for -- with the appointing of Ram to be Director of Security, can you talk a little bit about how you would like to have kind of what his to-do list is and what impact do you like to see him have on security and tied to the existing F5 product portfolio, and over what timeframe we should expect that?

There's a lot in there. Which was the first question again?

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

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

Yes. And then on the foreign currency, could that be helping us? I mean, clearly, because we bill internationally, primarily in U.S. dollars, it makes our equipment more affordable. Anecdotally, I'm not hearing anything that would say that's driving business. I would contend this really is more about projects that were delayed as they work their way through, everything going on, from Brexit to GDPR, and it's getting to the point where it's freeing up again. So I wouldn't correlate those 2 things personally.

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

The next question is from Michael Genovese of MKM Partners.

Can you help us quantify some of these things in security. For instance, security applying to cash rates? Do you have any kind of metric we can track there? Even more importantly, standalone security sales as a percentage of revenue? And are we targeting that to grow over time? Any what can you share with us there?

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

Okay, that's fair. And then you just hired a new Strategy Corporate Development Manager. And so my question is, how do you think he can and his team can help you drive the top line growth in the company? And do you think security will kind of be an overrated portion of that?

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

The next question is from Jayson Noland of Baird.

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

Yes, so what we've seen is a number of customers are -- when they're making decisions, and this comment was specific to the refresh cycle on iSeries and specifically on hardware purchases, where we're seeing a number of customers, before making these decisions as part of the decision-making cycle, undertake a review of what assets do they want to have where. You will see that one thing that has changed year-on-year, and we've reported on that in the State of Application Delivery report, is that customers are embracing multi-cloud, and as part of that, they're having a sort of best cloud for the app strategy. So they're making decisions on where an app is going to reside on a per-app basis in cloud versus noncloud. And as they go and make these decisions and have to make significant commitment on infrastructure assets, that decision-making cycle is elongated. Cloud is not new. You are correct about that. But I think multi-cloud and per app decision-making around multi-cloud is a trend that we are seeing becoming reality. For us, frankly, while this has given, I would say, short-term headwinds, specifically on hardware and as we said, I think, last quarter, we didn't see on hardware the uptake that we would have seen at this tape in the cycle. Overall, we think over the long run, it bodes very well for us because we feel that we are probably uniquely positioned to serve these needs across multi-cloud environments with our hardware, on-premises, our software on-premise, and increasingly, our software in the public cloud with multiple consumption models across all these environments. There aren't -- there isn't any other company that really has the breadth of offerings for supporting these multi-cloud strategies.

Okay. And then to finish things up, you've called your growth areas cloud security and then virtual editions. Is -- which of those is receiving the most investment, or which offers the most opportunity across those 3?

So that's a good question. So there are different stages of growth. I would say, our Virtual Edition software is already a meaningful business for F5. And we were -- we continue to shift more investments in that direction. Security, also, I think is at scale for us at F5. Public cloud is more nascent. So in terms of growth in investment, public cloud probably has the highest growth of investments in these areas. But the 2 other areas are, if you will, larger to date and with increasing investments year-on-year.

Thank you, everyone, for participating today. We hope that we see many of you in New York in March. Have a good afternoon.

Thank you.

And that concludes today's conference. Thank you for your participation. You may now disconnect.