The operator introduces the F5 Inc. First Quarter Fiscal 2024 Financial Results Conference Call and reminds participants that the call is being recorded. Suzanne DuLong, F5's Vice President of Investor Relations, introduces the speakers and provides information on accessing the press release and slide deck. She also mentions that the discussion will include forward-looking statements and references to non-GAAP metrics.

In the second paragraph, Francois Locoh-Donou, CEO of F5, discusses the highlights of Q1 and expectations for Q2. He notes that Q1 was the third consecutive stable quarter and that the team delivered solid performance across all geographic theaters. He also mentions a strong performance from the service provider vertical and a higher than expected revenue and non-GAAP operating margins. However, he notes that customers are still cautious with their budgets but there are encouraging signs such as better predictability, increasing systems demand, and some customers making necessary investments.

Despite facing a backlog headwind in the previous year, the company is seeing stronger underlying demand and is cautiously optimistic about an easing of customer spending caution. However, customers are currently facing more intricate and costly challenges due to the increasing number of applications across distributed environments. F5 believes they are strategically positioned to support customers in navigating these challenges with their innovative product portfolio.

F5's BIG-IP family of products is able to serve traditional applications in various environments, including on-premises, co-located, and in the cloud. Its high performance, automation capabilities, and integration with public cloud environments sets it apart from competitors. F5's investments in modernizing BIG-IP have led to a significant win with a North American service provider, where its cloud-native software is being deployed at scale in a 5G architecture. NGINX, which serves modern container-native and microservices-based applications and APIs, is also seeing success with large enterprises adopting it for their cloud and Kubernetes-based applications. An APAC-based auto manufacturer has selected NGINX Plus with App Protect to power and protect its next-generation connected car data and service offering, showcasing the versatility and security of NGINX.

The customer has chosen NGINX for their project due to its ability to implement WAF for containers on AWS and support specific requirements. F5 Distributed Cloud Services, which includes WAAP and secure multi-cloud networking, has seen significant growth in the number of attacks blocked and is gaining traction in API security. A large financial institution utilized the flexible consumption program to add API discovery and protection for their fintech aggregator applications. In the last 12 months, there has been a substantial increase in API attacks, with 95% of customers surveyed deploying an API gateway. In Q1, 92% of attacks mitigated by Distributed Cloud were targeted towards APIs.

In the first quarter, F5's Distributed Cloud Services were successfully implemented by a service provider in APAC and a global provider of learning resources. These services offer multi-cloud networking capabilities and help simplify infrastructure and improve application security. With the rise of AI applications, F5 sees a growing opportunity for API security as these applications are API-driven and rely on the APIs of third-party AI models and services.

In the paragraph, it is stated that API security is a top priority for customers to protect AI and machine learning models. F5 is an AI enabler and has the expertise and capabilities to effectively optimize and secure AI applications and their APIs. They also secured a win with an EMEA-based service provider for their AI-as-a-service offering. This showcases how F5 supports and enables AI-driven use cases. The company simplifies the challenges of operating in a complex hybrid multi-cloud world.

In the first quarter, the company's total revenue was $693 million, with a mix of 56% global services and 44% product revenue. Global services revenue grew 7% due to high maintenance renewals and price increases, while product revenue declined 10%. Systems revenue declined 22%, but software revenue grew 2% due to strong perpetual software license sales. The company believes providing consumption model flexibility is an advantage over competitors. Subscription-based revenue declined 3%, but recurring revenue contributed 73% of total revenue. Revenue from the Americas was down 6%.

In the first quarter, EMEA and APAC saw growth in revenue, with enterprise, service providers, and government customers making up the majority of product bookings. Operating results were strong, with a significant improvement in gross and operating margins. The effective tax rate was lower than expected due to IRS guidance. Net income exceeded expectations, driven by revenue beat and operating discipline. Cash flow and the balance sheet remained strong, with a significant amount of cash and investments and a 4% increase in deferred revenue. F5 also repurchased $150 million worth of shares in the quarter. The company ended the quarter with approximately 6,440 employees.

In conclusion, F5 expects Q2 revenue and gross margins to increase, with operating expenses also rising due to seasonal and marketing expenses. The company is targeting non-GAAP EPS and maintaining its FY '24 targets for revenue and operating margin. The tax rate is expected to be slightly lower, resulting in higher non-GAAP EPS growth. F5 is the only company capable of securing, delivering, and optimizing any application in any location, and is unifying its solutions to provide customers with enhanced security, streamlined operations, and increased automation.

The speaker elaborates on the upcoming strategy and product session, discussing the challenges faced by large organizations regarding hybrid multi-cloud and AI. They will also provide an overview of their product families, market opportunities, and portfolio transformation. They are seeing encouraging signs of stabilizing demand trends and expect mid-single digit growth if the backlog effect is excluded. They will now take questions from the audience.

The speaker, Francois Locoh-Donou, discusses the demand and product trends in the first half of 2023 compared to the same period in 2024. He mentions that demand is up across all major theaters and industry verticals. He also talks about the progress of their core franchise, BIG-IP, NGINX, and Distributed Cloud Services. The next question is about the subscription numbers in the quarter and the speaker, Frank Pelzer, addresses the sequential downtick in subscription and mentions potential reasons for it. Francois Locoh-Donou also talks about competitive wins in the traditional ADC area and the potential for taking more market share.

The speaker discusses how subscriptions have performed as expected, with some renewals in Q4 and no change in outlook for the year. The competitive position of F5 is strong, with increased interest from customers and partners due to competitors going through changes. F5 has invested in new propositions and a strong roadmap, while some competitors are weakening.

The speaker discusses the strengthening of their hands in the contracting of road maps between players, which has allowed them to gain access to previously blocked accounts. They mention a recent success in migrating a large company's application estate to F5, and their approach of landing and expanding with customers. They believe this trend will continue and are confident in their competitive position for the next few quarters. In regards to software performance, they do not anticipate a change in their previous forecast of flat to modest growth for the fiscal year, and are encouraged by their results in Q1.

The company is maintaining its modest growth outlook for software, with no changes expected in the near future. There may be a headwind from a managed services transition in 2024 and 2025, but the impact is uncertain. The operating margin outperformed in the December quarter, driven by tax and expenses being pushed into the next quarter. The company's marketing event in Q2 will also impact expenses. The migration of Silverline is going as expected, but it is still in the early stages.

Francois notes that there has not been a significant change in customer budgets, but there is a trend towards more predictable spending patterns. There is also a pickup in RFP activity, but it is still in the evaluation stage. The service provider segment is constrained due to election decisions, but there is some activity in the market.

The environment for the company has become more stable and predictable compared to nine to twelve months ago. There has not been a significant increase in budgets yet, but there is an uptick in the pipeline for the next four quarters. Service providers are still trying to minimize CapEx spend, but there are some exceptions, such as a significant win with a North American service provider in their 5G architecture. This is driven by consumer demand for 5G and fixed wireless access.

The company has seen success in their investments in the BIG-IP franchise over the past four years, which has resulted in benefits for customers. They have invested hundreds of millions of dollars to future-proof the franchise and bring cloud-native benefits to the platform. This has led to customer wins and reinvestment for the future, particularly in the service provider and enterprise sectors. The company is not updating their Q1 figures, but at the end of Q4, they had about $200 million in ARR, with $135 million being recurring.

F5 is planning to grow their Distributed Cloud services and $65 million of that growth will come from retiring old products and migrating customers from Silverline. The company is not yet able to provide updates on the progress of these migrations but early feedback has been positive. F5 is also starting to see some contribution from AI, but it is still in the early stages and the company is not able to provide details yet.

The speaker believes that enterprise adoption and deployment of AI workloads will increase in the next 12-24 months. While some enterprises are currently testing and experimenting with AI models, they are not yet at the stage of deploying them in production. However, the speaker is confident that F5 will be an enabler of AI adoption and deployment for two reasons. First, AI workloads heavily rely on APIs, making API security a significant opportunity for F5. Second, AI workloads are becoming more distributed, which aligns with F5's core value proposition of serving any application or API in any environment. The speaker believes that this will play to F5's strengths and set them apart from other companies.

The speaker discusses the strong growth in global services revenue in the first quarter, attributing it to high maintenance attach and a price increase. They also mention the possibility of a refresh cycle in the future and state that their outlook for the full year remains unchanged at low-single digits growth. They will continue to monitor the situation over the next few quarters.

The company is pleased with its recurring revenue and expects it to meet expectations. The speaker answers a question about enterprise behavior patterns, saying that they have seen a trend towards consolidation in large enterprises, with a focus on rationalizing and reducing their application portfolio. However, the traffic on important apps continues to grow.

F5 is focused on modernizing applications by incorporating components from both public and private clouds, resulting in a multi-cloud environment for enterprises. They are positioned to be the ideal partner for large enterprises with distributed application portfolios. The cross-selling effect between BIG-IP and NGINX is making it easier for customers to modernize their applications. F5 has seen success with customers using both BIG-IP and NGINX, as well as with their Distributed Cloud offering. The upgrade cycle from the older iSeries to the newer rSeries is expected to pick up in the next 12-18 months, as all use cases have now been completed.

The speaker is pleased with the adoption of their series in their customer base, which has been helped by bringing cloud benefits like multi-tenancy. The majority of use cases previously on the private platform are now covered by the series, and more than 50% of appliances being shipped are rSeries. While there may not be a big refresh cycle like in the past, the pipeline for tech refresh is improving and may lead to increased subscription turnover in the next few quarters. However, the conversion of this pipeline remains to be seen.

The company is seeing a slowdown in the aging of their platform, indicating that the sweating of assets is decreasing among enterprise customers. The next question is about the company's strategy for growing their SaaS and managed services revenue, which currently represents 7% of their total revenue. The company expects flat growth in this area over the next few years, but plans to focus on growing markets such as WAAP and gaining more customer adoption in areas such as web application firewall, API security, bot defense, and DDoS.

The company is seeing success in the WAAP and multi-cloud networking markets with their Distributed Cloud Services and has ambitions to grow in these areas. They plan to attract customers with initial services and expand over time. They will face competition from more established CDN players, but they believe their recent software-defined architecture and existing customer base give them an advantage. They are also focusing on educating their channel partners to improve their go-to-market strategy.

The speaker is pleased with the success of their SaaS deals, with 50% being partner-initiated. They have been educating their partners on the value proposition and are seeing more traction. The speaker acknowledges that there is more work to be done in the go-to-market strategy, but is happy with the initial contribution of partners. In response to a question, the speaker states that the CDN module of Distributed Cloud has had early adoption from customers who did not start with F5 for CDN, but for security solutions.

The company has seen a trend of customers migrating to their platform to simplify their architecture and adopt CDN as an additional module. The company expects strong performance in renewals and some expansion in new software subscriptions, but not a significant contribution from large transformational projects. There are no further questions at this time.

This summary was generated with AI and may contain some inaccuracies.