F5 Inc (FFIV) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to the F5 Fourth Quarter Fiscal 2020 Financial Results Conference Call.

(Operator Instructions)

Also, today's conference is being recorded.

(Operator Instructions)

I'll now turn the call over to Ms. Suzanne DuLong.

Ma'am, you may begin.

Hello, and welcome.

I'm 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A copy of today's press release is available on our website at f5.com, where an archived version of today's call will be available through January 25, 2021.

Today's live discussion is supported by visuals, which are viewable on the webcast and will be posted to our IR site at the conclusion of today's discussion.

The replay of today's call will be available through midnight Pacific Time, October 27, by dialing (800)-585-8367 or (416)-621-4642.

Use meeting ID 6055259.

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 good afternoon, everyone.

Thank you for joining us today.

While fiscal year 2020 was not the year that any of us expected, I speak for the entire executive team when I say how proud we are of the F5 team for delivering a very strong year under extraordinary circumstances.

Our results show building momentum in our pivot to a software and subscription driven business.

They also show the value by our incumbency, the strength of our customer relationships and the stickiness of our solutions.

In the last several years, we have aligned our investments with our customers' most pressing priorities.

As a result, we have built close to a $450 million software product run rate business, that in FY '20 grew 52%.

With $365 million in fiscal year 2020 revenue, the strength of our software business more than offset a decline in our systems business, which was down 10% for the year.

Our Services business grew 5%.

For the year, we delivered 5% non-GAAP revenue growth and 5% non-GAAP product revenue growth.

Today, our customers face exploding application growth and the reality that users expect more than they ever have from applications.

Our customers' business depends not just on whether they're application loads, but how quickly it responds, and whether it and its users are secure.

New ways of working and the higher expectations for application performance have customers focused on solutions that enable them to work smarter and scale faster.

We believe we are ideally positioned to serve this demand.

Frank will review our fourth quarter and fiscal year financial results and our outlook.

I will then speak to our fiscal year 2021 growth drivers, including some customer highlights from the quarter.

Frank?

Thank you, François, and good afternoon, everyone.

I will speak first to our fourth quarter and then to our fiscal year results before discussing our outlook for FY '21.

We delivered a very strong Q4.

On a GAAP basis, Q4 revenue was $615 million.

Fourth quarter non-GAAP revenue of $617 million was up approximately 4% year-over-year and above the high end of our $595 million to $615 million guidance range.

Please note, as I review our revenue mix, I will be referring to non-GAAP revenue measures.

Q4 product revenue of $280 million was up 6% year-over-year and accounted for approximately 45% of total revenue.

Software revenue was $113 million growing 36% against a very tough comparison of 91% growth in the prior year period.

Shape contributed approximately $23 million in the quarter.

Excluding Shape's contribution, software grew 9%, again, against a very tough comp in the year ago period.

As we look ahead, we are seeing very positive trends in our software business and expect much stronger software growth in Q1.

I will speak to that in greater detail when I discuss our Q1 guidance.

Software continues to grow as a percent of product revenue, representing 40% of product revenue in Q4, up from 31% in the year ago quarter.

We also continue to drive subscription revenue momentum.

Subscriptions represented 76% of software revenue in the quarter compared to 66% in the year ago quarter.

Services revenue of $336 million grew 3% year-over-year and represented 55% of revenue.

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 66% of revenue in the quarter.

This is up from 63% in the year ago period.

The improvement comes largely as a result of the strong subscription software momentum I mentioned previously.

Systems revenue of $168 million was down 8% compared to last year.

On a regional basis, in Q4, Americas delivered 4% revenue growth year-over-year, representing 58% of total revenue.

EMEA delivered 9% growth, representing 24% of revenue.

APAC was down 1% year-over-year and accounted for 18% of revenue.

Looking at our bookings by vertical, we saw robust enterprise activity in the quarter, with enterprise representing 70% of product bookings.

Service providers accounted for 15% and government customers represented 16% of product bookings, including 7% from U.S. Federal.

Let me now share our Q4 operating results.

GAAP gross margin in Q4 was 81.8%.

Non-GAAP gross margin was 84.4%.

GAAP operating expenses were $404 million.

Non-GAAP operating expenses were $335 million.

Our GAAP operating margin in Q4 was 16% and our non-GAAP operating margin was 30.1%.

Our GAAP effective tax rate for the quarter was 20.4%.

Our non-GAAP effective tax rate was 19%.

GAAP net income for the quarter was $78 million or $1.26 per share.

Non-GAAP net income was $150 million or $2.43 per share.

I will now turn to the balance sheet.

We generated $175 million in cash flow from operations in Q4.

Cash and investments totaled approximately $1.3 billion at quarter end.

We repurchased approximately 358,000 shares of F5 common stock in the quarter at an average price of $140 per share for a total of approximately $50 million.

DSO was 43 days, and capital expenditures for the quarter were $12 million.

Deferred revenue increased 6% year-over-year to $1.3 billion.

We ended the quarter with approximately 6,110 employees, up approximately 90 employees from Q3.

Let me now turn to our full year 2020 results.

For the year, GAAP revenue totaled $2.35 billion.

Non-GAAP revenue grew 5% to $2.36 billion.

Non-GAAP product revenue of approximately $1 billion grew 5% from the prior year and accounted for 44% of total revenue.

Within product revenue, software grew 52%, while systems revenue declined 10%.

Subscriptions represented 71% of software revenue in fiscal year 2020 compared to 55% in fiscal year 2019.

Revenue from recurring sources totaled 65% of revenue for the year, up from 60% in fiscal year 2019.

Services revenue of $1.32 billion grew approximately 5% during the year and represented 56% of total revenue.

Our non-GAAP effective tax rate for the year was 20.2%.

GAAP net income for FY '20 was $307 million or $5.01 per share.

Non-GAAP net income was $575 million or $9.37 per share.

Now let me share our guidance for the first quarter and some high-level modeling assumptions for fiscal 2021.

Unless otherwise stated, please note that my guidance comments reference non-GAAP metrics.

In our Q1 and fiscal year outlooks, we have attempted to factor in the expected impact of continued global uncertainty related to COVID-19 and the broader economic trends as we understand them to date.

Let me start with sharing our expectations for the first quarter of 2021.

Near term, we expect customers will continue to prioritize investments that enable them to serve the immediate needs of their customers and employees.

We also anticipate continued focus on and investment in application security.

We expect to benefit from being a trusted and operationalized partner of the largest enterprises around the world as they continue to drive innovation and agility with their application strategies to increase business value.

With this in mind, we are targeting Q1 FY '21 non-GAAP revenue in the range of $595 million to $615 million.

We expect Q1 '21 gross margins of 84.5% to 85%, and we estimate operating expenses of $324 million to $336 million.

We anticipate our effective tax rate for Q1 will be in the 21% to 22% range.

Our Q1 earnings target is $2.26 to $2.38 per share.

We expect Q1 share-based compensation expense of approximately $56 million to $58 million.

As for our capital deployment, we retain the option to repurchase shares opportunistically in any open trading window.

Now let me share some of our operating expectations for the full fiscal year of 2021.

We have made tremendous progress on our software transition and expect momentum to continue as the contribution from subscription, software and SaaS grows.

Accounting for this progress in FY '21, we expect to grow software revenue for the full year by more than 35%.

Based on our strong Q1 software pipeline and increasing momentum from our software subscription offerings, we expect a software growth rate of at least 50% in Q1.

We expect systems declines will moderate slightly compared to FY '20, likely declining high single digits for the year.

We anticipate gross margins of approximately 85% for the year.

We expect to achieve at least 31% non-GAAP operating margin for FY '21.

We also expect operating margins to move down from Q1 to Q2 and then to increase in the second half of fiscal '21, following our typical seasonal pattern.

We anticipate our full fiscal year effective tax rate to be in the range of 21% to 22% with some fluctuations quarter-to-quarter.

We expect fiscal year '21 stock-based compensation in the range of $230 million to $240 million and capital expenditures in the range of $40 million to $60 million.

We expect to update our longer-term outlook at our Analyst and Investor meeting, which we will conduct virtually on November 18.

Please remember to pre-register on our Investor Relations site.

With that, I will turn the call back over to François.

François?

Thank you, Frank.

It has been more than 2 years since we unveiled our strategy to transform F5.

In the process of extending our reach and expanding our role, we have built the broadest available application security and delivery portfolio and significantly expanded our addressable market.

As a result, the foundation of our business has grown stronger, and we are on our way to becoming a predominantly software-driven company.

Going forward, our software growth will be more diversified, thanks to a broader and growing subscription and SaaS base of revenue.

We have a renewal flywheel that is starting to turn with momentum and true forward revenue opportunities on a sizable portion of our long-term subscription contracts.

Demand for subscription-based consumption is growing across all geographies and verticals.

As Frank mentioned, 71% of our fiscal year 2020 software revenue was subscription-based, up from 55% in 2019.

We expect continued software momentum in fiscal year 2021, and I will speak to our growth drivers in turn.

First, core BIG-IP software.

Much of the software growth we have delivered thus far comes on the back of BIG-IP.

I have spoken previously about the extensive work we have done to reduce friction in purchasing, deploying and managing BIG-IP software.

We have focused on flexibility in our commercial models and on enhanced automation and central management.

During Q4, customers chose BIG-IP to refresh core business applications as well as for capacity additions.

In 1 instance, a multinational delivery services company chose BIG-IP to handle both increased traffic to its consumer-facing dotcom site and to scale back-end processing.

Looking ahead, we expect continued growth from BIG-IP driven by customers' need to support and scale mission-critical traditional applications in hybrid and multi-cloud environment.

Our second growth driver is NGINX.

NGINX brings multiple growth vectors to FY '21 and beyond.

In addition to continuing to expand NGINX Plus instances, we see increasing customer interest in NGINX Controller, our modern app orchestration and analytics platform.

Controller is complementary to BIG-IP and bridges the divide between desk teams building modern apps and the infrastructure teams that need to secure, scale and monitor them.

We are also opening new application security opportunities with NGINX and App Protect our WAF solution for modern applications.

NGINX with App Protect enables security professionals and developers to introduce application security early in the development life cycle, making security part of the modern app stack.

In Q4, we secured an NGINX App Protect win with a major video conferencing and collaboration platform.

NGINX already is a key technology for this customer, enabling them to scale the platform to meet explosive COVID-19 demand.

With that explosive growth, however, also came increased security concerns.

NGINX' ability to scale rapidly with no impact on service delivery was a key differentiator as was our ability to meet a wide set of requirements in a cloud agnostic way, including load balancing, caching and security with App Protect.

Not only did this win expand our existing footprint with the customer, it also positions us to capture additional use cases, including protecting log-in pages and preventing credential stuffing with Shape solutions.

Use cases like this one, enabling best-in-class security on modern application architectures are gaining momentum, and we believe, accelerate the appeal of NGINX to large enterprises.

That provides a good transition to our third growth driver, application security.

Application security is a large and growing focus for customers and understandably so.

In the current environment, organizations are more reliant than ever on applications to enable employee collaboration and customer engagement.

At the same time, the attack surface and sophistication of attacks has increased dramatically.

During FY '20, web application firewalls, remote access, SSL orchestration and fraud protection led customers' security demands.

As an example, during Q4, we secured a cloud win with a retailer with a significant dotcom presence.

BIG-IP virtual editions outperformed both a cloud-native load balancing and web application firewall solution.

As a result, the customer doubled its F5 consumption in just the first year of its multiyear term subscription.

We expect the application security demands we have seen this year persist and grow in FY '21.

As a result, we expect to expand our leadership in the space.

Our ability to apply consistent and robust security across multi-cloud environments is fulfilling a significant and growing customer need.

Within the context of application security, we also see Shape as a significant software growth driver.

Customers are looking to Shape's AI and machine learning enabled defense capabilities to protect against a growing number of threats, both bot and human.

Shape already has been a strong contributor and a great addition to the F5 portfolio.

In the roughly 9 months, the Shape team has been part of F5, we have grown even more confident in the opportunity it brings to F5 and our customers.

Shape's intelligent fraud and bot protection value proposition is resonating with customers across multiple verticals.

For instance, in Q4, we secured a Shape win with one of the world's largest social networking platforms to protect the platform and its users from artificially generated influence caused by inauthentic behavior.

Shape's ability to deliver a high degree of efficacy with high confidence and actionable intelligence was a key differentiator in this win.

Shape also is available via our Silverline managed services platform, which allows customers to benefit from Shape's capabilities with no integration work.

We have secured several wins in a very short time frame, thanks to this integration, and the ease of implementation it brings.

In fact, 1 recent integrated win takes Shape, which is already installed on the majority of the top 10 U.S. banks and extends it to thousands of small and mid-sized banks who are using Silverline for their managed security needs.

This is an example of one of the core premises of our combination with Shape.

We are taking Shape's industry-leading anti-fraud solutions and making them available into a much larger customer base at a time when customers are facing tremendous increases in both the volume and sophistication of attacks.

Our fourth growth driver is continued growth in cloud deployments.

Our FY '20 cloud business totaled more than $100 million.

Security use cases are playing an increased role as customers rely on F5 to ensure robust and consistent application security.

Our cloud presence has been driven both by our organic investments in F5 Cloud Services and through our partnership with the cloud providers.

Our strategic collaboration agreement with AWS is just 1 example of a highly complementary cloud provider partnership.

In addition to a co-selling motion, which is generating new leads for F5, AWS and F5 have co-innovated on programs and cloud-native integrated solutions.

Just last week, we introduced a joint solution combining Amazon CloudFront and F5's essential App Protect.

CloudFront is a fast content delivery network, or CDN service from AWS.

F5's essential App Protect is our easy-to-deploy SaaS security solution for protecting web applications.

Integrating essential App Protect and Amazon CloudFront securely delivers data, videos, applications and APIs to customers globally with low latency and high transfer speeds, all within a developer friendly environment.

We are leveraging the power of AWS to provide customers with application caching capabilities that we discussed, strengthened security and increased performance.

And we are doing this in a single SaaS solution, which delivers higher long-term return on customers' application investment and a better experience for their users.

This integration illustrates the power of our collaboration with AWS, and we continue to explore how our 2 companies can come together to help customers deliver more value through their cloud applications.

I would be remiss if I did not also speak to the opportunity we see with service providers.

In general, service provider RFP activity is up from last year and quote requests and informal activities are much higher.

In addition, following our Rakuten win, we are beginning to see more movement in solid customer plans on their 5G strategies.

At this point, we are engaged in multiple activities, including trials with several customers.

We have traditionally played a role as the preferred choice for Gi LAN solutions in 4G networks, and we are well positioned to continue to own that segment and grow into new 5G functions.

In fact, we have already secured multiple design wins in 5G architectures and we expect deployments to begin ramping in the second half of 2021.

A few words on our systems business before we wrap up.

As Frank noted, we expect our systems decline to slow in fiscal year 2021 compared to fiscal year 2020, likely declining in the high single digits.

While there is a tendency to think that accelerated digital transformation means 100% software deployments, it does not always.

Our business, whether software or systems, is tied to applications, whether they are in the data center, the public cloud or anything in between.

We are supporting mission-critical applications globally.

Many of these applications are experiencing rapid growth because of remote working and rising e-commerce demands.

With this growth comes escalating application security concerns, including application fraud.

F5 is there to help with whatever consumption model our customers prefer.

As we look ahead, we see a significant opportunity to enable our customers to bring extraordinary digital experiences to life.

We are reducing our customers' operational complexity, improving their application performance, securing all apps no matter where they live and unlocking valuable business insights.

F5 has always been about solving our customers' most important application challenges.

Over the last 2 years, we have built the broadest available application security and delivery portfolio for both traditional and modern applications.

Our understanding and appreciation of our customers' rapidly evolving needs has also deepened over the last 2 years.

Today, customers face exploding application growth and the reality that the baseline of user expectations from applications has been redefined.

Think of your own experience and how markedly it has changed.

The richness of your favorite app experience: it is reliable; fast; personalized; and trusted.

How long do you wait if the application is slow?

What do you do when an upgrade degrades your experience, or worst yet, the app fails altogether?

Switching brands has never been easier.

A large insurer, an industry where competitive advantage has not historically been rooted in applications, told us that if their home page does not load in under 3 seconds, they lose the customer.

A fast-based digital world is just as fast to move elsewhere.

Digital transformation has reset expectations for the experience an application must deliver to be compelling, to be competitive.

Our customers need F5 to enable these rich experiences.

And we have a unique position from which to help them to do so.

We see a world where our customers' application portfolio adapts as needed, where it automates redundant processes for greater efficiencies and it protects itself, securing all points of vulnerability, where it expands and contracts based on performance needs and where by mining and harnessing application data, it gets smarter, more insightful, becoming self-healing and evolving more quickly.

F5 is uniquely positioned to deliver this vision because of the portfolio and capabilities we have assembled.

We are looking forward to speaking more about our vision for adaptive applications and how we are making it a reality at our upcoming Analyst and Investor Meeting.

In closing, we have made significant progress pivoting F5 and changing the way customers see us.

We have built the broadest available set of application security and delivery services, and expanded our total addressable market in the process.

We are also successfully driving a more software-driven business and building a robust and growing base of recurring revenues.

Let me wrap up our prepared remarks by thanking the entire F5 team again as well as our customers and partners.

We are more confident than ever that our vision, our investments and our innovation are well aligned with both near and longer-term customer demand.

With that, operator, we will now open the call to Q&A.

(Operator Instructions)

Your first question comes from the line of Meta Marshall from Morgan Stanley.

This is Erik on for Meta.

Maybe just going back to the comments you made on the service provider side.

And just on that vertical specifically.

Have you seen any change to order behavior that maybe matches with some of the other equipment providers have noted?

And I know you noted some design wins for 5G, but wondering if that near-term has had any impact just being mindful of the percentage of revenue from that segment is a little bit lower than it has been traditionally?

Erik, the short answer is no.

We haven't seen a fundamental change, Erik.

The percentage of our revenue of our bookings that comes from service providers is basically in the same range it has been for the last few quarters.

We are seeing momentum in 5G activity.

But in terms of when that will turn into kind of meaningful contribution to our order book, we think that's more of a second half of 2021.

But we are seeing continued traction in security use cases with service providers.

and specifically, our position as a consolidator of multiple functions, which is kind of a unique position that I don't think you necessarily would see with other equipment providers in the telco.

We have a unique position in consolidating a number of functions like CGNAT and DDoS and DNS, TCP optimization.

And increasingly, our service providers virtualize their infrastructure.

Our ability to consolidate all these functions in a software bundle is very appealing to them.

And so that's a use case that is growing.

But overall, the business -- the trends in the business have been the same over the last few quarters.

So no specific change.

Got it.

That's very helpful.

And then if I could sneak in one more, just on kind of the stronger expectations on the hardware side, moving forward, what would you guys point to is the strongest reason?

Maybe some customers are still choosing hardware?

Are there any incremental drivers?

I think, Erik, the -- we've always said that we have a number of geographies that have continued to grow in their consumption in hardware form factors, and also a number of verticals where hardware form factors play an important role, including service providers, government, even financial services.

But I think the difference today is our security has become a more important mix of our hardware business than it was say a couple of years ago.

And our hardware security business is not declining.

And so when you factor that in, that leads to a decline in hardware systems, that's abating.

And that's largely because of the mix of security that's in our hardware business today.

Your next question comes from the line of James Fish from Piper Sandler.

A couple of questions here.

You're talking about strength in application security.

I guess how do you feel about the portfolio as a whole, whether there are areas that you'd want to get at organically or inorganically?

And any sense to how many customers are now using Shape Security?

Jim, so generally, we feel very good about our application security portfolio.

We think we are one of the very, very few players who provide who can protect an application but also protect how an application is used with a combination of F5 security capabilities and now Shape's portfolio.

So we feel very good about our competitiveness and differentiation in this space.

And in fact, our security business had been growing healthily.

But that has accelerated as well with COVID because the amount of online fraud and attacks on digital channels, not just for retailers, but all kinds of companies has continued to increase.

And in fact, has increased dramatically in the last few months.

And that's providing a significant tailwinds for us.

So that's the -- that's where we're at on app security in general.

And Jim, we will probably say more about that at the Analyst and Investor Meeting.

Got it.

Fair enough.

And end of last quarter, you guys noted some weakness in sort of the APAC sales due to COVID-19 and not being able to get in front of customers.

How did this change as you worked through the quarter?

I think in Asia Pacific, Jim, we're still -- we still have some geographies that are challenged with COVID-19.

As you've seen, there's been some second waves and some lockdown.

So there are some specific geographies where we have been challenged.

The comment about some software projects that were put on hold.

We -- I think that was throughout our Q4.

That was still the case.

But we're starting to see that abate, and we feel very good about the pipeline we now have for the first half of 2021.

And in fact, we are -- as you saw from the prepared remarks, we think our software business in Q1 of 2021 will grow faster than 50% year-on-year.

And for the full year, we think it will be greater than 35% year-on-year growth.

So we feel that our software business really has -- we think we have turned an inflection point here.

Where our software business is on a broader base of subscriptions, and it's giving us an opportunity for a number of true forward opportunities on renewal.

We've got a much broader base of subscription than we did a year ago.

And as you see, the software business is now more than 40% of our product revenue.

So we generally feel that we're at an inflection point here where our software is going to continue to have very strong growth going into 2021.

Your next question comes from the line of Rod Hall from Goldman Sachs.

I wanted to start off.

You talked about enterprise order momentum being good.

And I wondered if maybe you could dig a little bit more into that in terms of size of enterprise.

Are you seeing that more in large enterprises or medium size?

Can you give us some color there?

And just kind of how the order momentum looks from a verticals point of view, too.

And on the growth, my second question is I can calculate based on the parameters you gave, growth that's a little slower than '20, but I can also get up above 5% growth depending on some minor tweaks to that.

And I'm just curious where do you think it's more likely growth does accelerate in '21?

And then what's your macro assumption there?

Are you assuming macro improves?

Or are you assuming the current environment persists?

I mean just curious kind of what you guys think the demand environment will do on into '21 in the context of that growth indication?

Rod, there were a number of questions there, so I'll make sure I try and answer.

Yes.

Sorry, François.

I'll repeat them if you need.

Yes.

I'll start from the end.

You may need to repeat.

Just on the macro to start there, Rod.

Our assumptions that the environment does not get better than it is today.

But we've also assumed it doesn't get materially worse.

So we have been in this environment in the pandemic for the last 3 quarters, and I think we've reported now 3 full quarters under this environment.

And it's allowed us to take stock of what our customers are doing, where their priorities are.

And we've taken all of that into account into our 2021 planning.

So basically, we kind of assumed status quo.

Now as to the beginning of your question on enterprise spend.

Look, the verticals -- there are 2 things that are important.

As you saw, our enterprise numbers were actually pretty strong.

And I think there are 2 things that are important there.

Number one, the verticals that we are most exposed to as a company are, in enterprise, are really financial services, technology and government.

And in these verticals, the need for more applications, more application security and more multi-cloud deployments of applications has continued to be strong.

The verticals where we have seen a lot of weakness, which are more the retail transportation, the verticals that are directly affected by COVID, they represent less than 10% of our business.

So yes, they are soft, but the impact on our business has been limited.

And generally, we have very limited exposure to small and medium businesses.

So that's -- in terms of the mix of the business, that's the reason.

And I think the other reason where you see strong enterprise demand for us is our -- I think there still is a perception out there that F5 is really a networking data center company.

And so folks tend to look at our results and compare us to campus switching or routing-type equipment.

But the reality is, our spend is more tied to the need for customers to protect their applications with security and the need for customers to deploy more and more applications globally in multi-cloud environments.

And so we -- our business is closely tied to the growth, complexity and security of applications than it is to kind of network dynamics.

Have I answered it, Rod?

Yes.

The only other one was the quantification of the growth.

If I add up kind of what you guys said, I can get to kind of a minimum growth rate of maybe 4%.

But probably even a little higher than that, depending on what you think services grows.

But I'm curious whether you see growth -- you lean toward growth accelerating if the environment remains the same off of '20?

Or do you think growth just kind of remains the same?

Or maybe it's a little worse?

I'm just curious which direction do you think growth is going in '21, if all other things held equal?

Look, Rod, I think -- so we're not giving a full year top line guidance here.

We will give a view of our Horizon 2 guidance in 3 weeks at AIM.

So I think you'll get a little more color there.

I would just say that generally, based upon what we've seen in Q4 and our Q1 guidance, I think we feel good about what we could achieve in 2021.

Your next question comes from the line of Sami Badri from Crédit Suisse.

The first question I have is related to the software strength in the quarter.

And I know, François, you made a couple of very granular examples and the drivers of cloud that we saw in the quarter that really drove solid results and are going to continue to be solid results.

But when we think about the composition of product revenue and software revenues, were there any high concentrations on specific customers?

Or was there any lumpy activity in the quarter?

And then to take that a step further, does the fiscal 1Q 2021 also factor in lumpiness or concentrations that are driving these solid results?

Sami, the answer is no.

And actually, that is precisely why I say that we have reached an inflection point in our software.

So if you look at our software results a year ago, we had pretty strong growth.

If you remember, in Q4, we had 91% growth.

But that was in part driven by a couple of large transformational kind of deals.

The results we have this quarter are really not.

So it's a broad base of adoption of our software and our software subscription.

You probably saw that in our results, now more than 3/4 of our software revenues.

So 76% of our software revenues this quarter came from subscriptions.

And so we've got a broad base and adoption of our software subscription consumption models across all of our verticals, not a specific customer or not a specific vertical.

And that's part of why we have confidence in growth in our software is because we're seeing now a larger number of customers have reached that point where they're taking our software.

And it's giving us a broader base of renewal opportunities going into 2021.

We're starting to see the flywheel that you would see in a subscription business, where for a number of our multiyear subscription.

We have a true forward opportunity at the end of a 1-year subscription across a number of customers, and that's going to start contributing to the growth in our software.

So that's what I would say about lumpiness.

I would say, though, that we are also seeing a good pipeline of, I would say, these larger projects going into the first half of 2021.

Some of the projects that had been delayed.

We think we'll see some of them in the first half of the year.

Got it.

And then 1 question for Frank.

I was hoping you could just help us think about the services growth rate in fiscal 1Q 2021.

Is there a way we should be thinking about it, something similar to the last 2 quarters kind of guidance framework?

Any kind of real clarification on that would be great.

Yes.

I'm not going to give a specific growth rate number.

We'll have more to say, as François said, at AIM.

I think the trend towards lower single-digit growth though is likely in FY '21.

And so this is just consistent with the hardware-software attach rates.

But we've been seeing consistent pricing.

We've been seeing an increase in attach rates for all cohorts of the age contracts.

And so we're really happy with the overall Services business.

Your next question comes from the line of Alex Henderson from Needham.

So we've heard a number of VARs and other people in the industry talk about the emergency-spending type orientation to IT spending, particularly around security, particularly around work from home, endpoint security and the like.

What they've also said though, is that some of the transitional programs, things that were strategically important, those programs have been delayed and pushed out somewhat as a result of the temporary focus on and got to make sure that everything is secure from work from home.

Are you starting to see any real clarity around some of those larger projects coming back in, particularly around digital transformations to cloud orchestrated application deployments and Kubernetes adoption?

Or alternatively, is that still something that's a little further out in the headlights.

Alex, I think -- so the large kind of digital transformation projects -- first of all, I would echo what you've said.

We have seen a delay in some of these transformational projects.

But we are also seeing people have attended to the immediate priorities, and they are now coming back to these projects and starting to reignite them.

So I think that's why I think in the first half of 2021, we should start to see some of these projects actually come to be realized.

And that's what I've said there applies to generally kind of digital transformation, movement to cloud, software-first environments, big automation projects.

Those types of projects.

When you speak specifically to Kubernetes environment, I think what we're seeing -- there's a lot of kind of excitement around taking these Kubernetes environments in production at scale.

I think we're still in the very early innings of that.

We've got a very good window into that with NGINX.

As you know, NGINX is the #1 egress controller into Kubernetes environment and deployment.

And so we are seeing demand there, and we're seeing an acceleration.

But we still think we're in the very early innings of those types of containerized deployments.

And then just one last question for me.

Just going back to the 35% plus growth in software, can you parse that between what portion of that is organic?

And what portion of that is inorganic?

Well, no.

But the -- I think we've given information about the contributions of Shape in Q3 and Q4.

So you could use some of that information to kind of try and parse out what's organic and inorganic.

Remember that Shape was not part of F5 in Q1 of 2020.

But pretty much from Q2 onwards, they were part of F5 last year.

So the 35% is overall growth rate.

We -- and that's kind of the minimum we think we'll do.

We think it's likely we would do better than that.

Overall, given the drivers that I've spoken to on NGINX, the acceleration I just mentioned that we're seeing there in this Kubernetes environment.

What we're seeing in the cloud.

Alex, I don't know if you picked that up in our script, but we have a about $100 million -- our cloud business has now exceeded $100 million.

We've got the partnership with AWS, which continues to go very well.

We announced last week a product integration with AWS and AWS Cloudfront, which we think will be a catalyst.

And I talked about the broad base of subscriptions that will drive organic growth next year.

So overall, I think the software business is in an acceleration phase, and we're happy with that.

Your next question comes from the line of Tim Long from Barclays.

Yes.

2 quick ones, if I could.

First, just curious if you could talk a little bit about revenue synergies from both NGINX and Shape.

It sounds like Shape had a pretty good quarter, and there's a lot of traction for NGINX.

But if you can kind of let us know where we are on that synergy basis and how much more room there is for cross-selling there?

And then second question is, I just want to get into a little bit of the kind of the BIG-IP moderate rating on the hardware side, but good traction on the software side.

Could you talk a little bit about -- yes, I guess, there's been -- there had been cannibalization.

So do you think we'll start hitting a point where it's a lot more driven by newer workloads on the BIG-IP software side so that the sum of those 2 could be more positive than maybe it was when there was just some hardware-to-software replacement?

Tim, thank you.

The -- let me start on Shape and NGINX.

And Tim, we'll say more about that at AIM in a few weeks.

But a few highlights for you in terms of the synergies.

What we are seeing is that the deal sizes on both NGINX -- so NGINX has been part of F5 for 18 months and Shape has been part of F5 for 9 months.

What we are seeing for both is a substantial increase in the average deal size as a result of the F5 go-to-market capabilities with NGINX and with Shape, and also an acceleration of essentially new logo acquisition for both organizations.

And so the combination of NGINX go-to-market and F5 is yielding these results.

And so the monetization of the platform is better.

With Shape, we only have 9 months of runway but we're seeing exactly the same trends.

Now in terms of product synergies, as you know, when NGINX came as part of F5, they were really early into monetization of the platform, very powerful platform, but early in monetization.

We've now just released 2 new solutions, the NGINX Controller and the app security called NGINX App Protect.

Which are in early days but gaining traction and will substantially also increase the deal size with NGINX.

So new products coming to accelerate monetization.

And then on Shape, we have moved extremely quickly to build integrations between Shape and BIG-IP and Shape and our Silverline offering.

So for example, we now offer the Shape bot defense technology as a managed security service on top of the WAF and DDoS bundle that already existed in our Silverline managed security service, and that has already accelerated the Silverline business in the last quarter.

So we're very excited about what's to come there.

And I will touch on that again in a few weeks.

Now on to your question about BIG-IP.

Tim, I think the -- what we are seeing there is, I think the hardware -- if you think about it, the hardware and load balancing business, we think that's going to continue to decline.

But increasingly, our hardware business is driven by either a stand-alone security hardware or bundles of security and ADC together.

And our stand-alone security hardware business is not declining, but it's a bigger mix of our total hardware business.

And the result is, you're seeing that decline of hardware, which was in the 11%, 12%.

We think next year it's going to be in the high single digits.

So that's where we're at.

And then to your point on cannibalization.

I think we will continue to see more customers that our ADC customers adopt a software-first approach, both on-prem and in the cloud.

And that's why we're continuing to forecast declines in overall hardware.

Your next question comes from the line of Samik Chatterjee from JPMorgan.

François, if I can just start with getting some color from you on the traction you're seeing for Shape.

You talked about the opportunities that you're seeing.

Can you just talk about whether you're seeing kind of this adoption happening just because there's more need for security solutions?

Or are you replacing any existing solutions?

And how do we get comfort around not seeing like a wave of vendor consolidation in security once we get post kind of COVID planning from the customers?

And I have a follow-up.

Samik, can you explain that last bit around concern of seeing a wave of consolidation?

What I was trying to get to is we've had a lot of momentum here for the security vendors, overall.

So once we get post-COVID planning from the enterprises, do we see kind of more consolidation in the number of security vendors that most enterprises work with?

Yes.

I think what we're seeing and what you'll continue to see, Samik, is that most large -- so remember that F5 really is most exposed to kind of large enterprises.

And both large enterprises and service providers increasingly want to use a best-of-suite approach.

So our approach to them is to offer a combination of application security technologies that allow their applications to stay online, to stay secure and allow us to protect the data and logic of these applications.

And that overall suite for application security, it's not a component.

It's not a single slice of application security.

It's essentially the broadest application security portfolio that you can have, and so (technical difficulty)

Ladies and gentlemen, this is the operator.

I apologize, but there will be a slight delay in today's conference.

Please hold as we reconnect the speakers line.

The conference will resume momentarily.

Samik, sorry about that.

Our line was dropped.

Did you hear the first part of the answer?

Yes.

So overall broad application services.

Yes.

Yes.

So if I can just follow-up, maybe for Frank quickly because I know you're also up on the hour here.

Just looking at the operating margins here, Frank, when the Shape acquisition was announced.

But prior to that, you were looking at about 33% to 35% operating margin.

Now you're guiding to about 31%, I think, for next year.

When I think about the delta there, is it primarily Shape?

Or do you think there's kind of the environment that had an impact on this?

Sure.

Absolutely.

So yes, Shape accounted for the large majority of that.

And I think post-Shape talked about 30% to 32%.

We ended up on the low end of that range, Samik.

And our goal is to get back above 31% for fiscal '21.

And our final question comes from the line of Jeff Kvaal from Wolfe Research.

I guess I have a question for you, François and one for you, Frank.

François, I'm wondering if you could sketch out a little bit for us now that your security portfolio is well integrated.

Where do you find yourself having the most success in security and where do you find some of your rivals doing well?

Do you run into Zscaler or, et cetera, et cetera?

And then, Frank, for you, I'm wondering if you could help us a little bit understand sort of the thinking behind the buyback, and what we might expect in the coming year from that?

Yes.

Jeff, so let me frame where we're having success in security.

Number one is in application security.

So we're not -- our focus is not on endpoint security or really network security per se.

Our focus is on protecting applications.

And we're seeing that increasingly, the most sophisticated attacks go to application.

The sources of more breaches and incidents come from vulnerabilities in applications, and that's our focus.

And we have now put a portfolio together that is not a single solution for application security, it's a suite of solutions for application security.

And there are very few players that really provide web application, firewall, DDoS, remote access as well as bot and fraud protection and protecting not just how an application is accessed, but how the application is used and protecting against fraudulent behavior of that.

And if you look at where we are having success with that portfolio, it's in the large enterprises.

So financial services, as you can imagine, a lot of stake in terms of securing these applications and the digital interactions with a customer.

But the same in technology, some of the largest social media platforms in the world are protected by F5 and Shape, and we're seeing the same kind of success in government and service providers.

So that's the verticals where we get success and the types of solutions where we get a lot of traction.

And then, Jeff, on the buyback, it's the same as it's been.

It's certainly one of the uses of our strategic cash that we see.

The other 2 uses are potentially M&A as well as paying down our term loan A that we took out to acquire Shape.

And so those are the 3 things that we're focused on.

You saw in the last quarter that we did another $50 million of share repurchase, and we'll continue to be opportunistic on that going forward.

Thank you for attending today's call.

You may now disconnect.