The F5, Inc. Third Quarter Fiscal 2024 Financial Results Conference Call is about to begin, with Francois Locoh-Donou, F5's President and CEO, and Frank Pelzer, F5's Executive Vice President and CFO, making prepared remarks. Other members of the F5 executive team will also be available for the Q&A session. The conference call will be recorded and available for replay on the F5 website. Forward-looking statements will be discussed, and non-GAAP metrics will be referenced.

In the second paragraph, Francois Locoh-Donou, the speaker, thanks everyone for joining the call and provides an overview of the highlights from the third quarter. He mentions that revenue was at the top end of their guidance range and non-GAAP EPS was above expectations due to operating discipline and tax favorability. He also notes that software revenue and global services both saw growth, while systems revenue declined. The company saw improving demand and strong bookings in Q3 and expects revenue to continue growing in Q4 and reach the top end of their FY '24 revenue guidance.

Despite facing a backlog and challenges in the current state of application security and delivery, F5 expects strong software revenue growth and non-GAAP EPS growth for the year. They are solving their customers' hybrid multi-cloud challenges with their comprehensive app and API security platform and simplified solutions that extend across public clouds, the edge, and on-premises environments.

F5's solutions simplify connecting different infrastructure environments and applications, making hybrid multi-cloud easier. They offer standardization and automation, resulting in more cost-effective and scalable IT operations for customers. F5's role in application traffic allows them to stand out from competitors. Two customer examples from Q3 showcase F5's application and API security capabilities, with a US-based security company modernizing their infrastructure with F5's Distributed Cloud services and a US state government successfully mitigating a DDoS attack with F5's solutions.

F5's operations team successfully stopped application layer attacks and as a result, the customer is moving additional services to F5. F5 has also been recognized as a leader in application security by various independent parties. Two recent customer wins highlight F5's ability to provide hybrid multi-cloud flexibility and simplicity for IT operations, as well as its momentum against competitors. A U.S.-based technology company chose F5 over its incumbent ADC provider for its web and video collaboration platform.

The customer will use BIG-IP for WAF and DNS capabilities to consolidate and standardize their infrastructure. F5 was chosen for its software and hardware deployment options, advanced WAF, and flexible commercial models. In 2020, F5 displaced a competitor for DDoS protection and won a contract with a large APAC-based travel agency. F5 Distributed Cloud outperformed the incumbent security provider, leading the customer to consolidate on F5. Two other customer wins showcase how F5 streamlined operations with consistent policies, automation, and analytics. One customer, a global retail and investment bank, selected BIG-IP software to augment their existing footprint and upgraded to NGINX Plus. BIG-IP's automation capabilities helped them implement best practices and save time.

In the third quarter, F5 has seen significant success with customers utilizing their BIG-IP automation capabilities, with one customer able to operationalize multiple BIG-IPs in just 20-30 minutes. Another customer, a global automotive company, has renewed and expanded their BIG-IP subscription twice, leveraging the automation capabilities to accelerate their time-to-market. Additionally, F5 is working with major customers to address AI-related challenges and has identified two key trends: the importance of high-performance networking and security for AI model training and inference, and the use of APIs for foundational AI models, which also require top-tier performance and robust security. F5's ADC platform and capabilities in application security and delivery are well-suited for these scenarios.

In the paragraph, the speaker discusses how F5 is seeing success in early AI use cases, such as a global automotive company using their solutions to accelerate model training. They also mention how their products are being utilized by other customers to load balance and protect AI-related API traffic. The company is focused on solving real-world AI challenges for customers and expects enterprises to deploy AI in production at scale within the next one to two years. The speaker also mentions F5's role in shaping the AI revolution and providing critical infrastructure for customers. They then turn the call over to Frank, who reviews the company's Q3 results, which included $695 million in revenue with a mix of global services and product revenue. Global services revenue grew 3%, in line with expectations.

In the third quarter, the company's product revenue decreased by 6% due to a lower level of backlog-related systems shipments. However, software revenue showed a 3% year-over-year growth and 13% sequential growth, with subscription-based revenue contributing the majority. Recurring revenue accounted for 77% of total revenue. The Americas region saw a 4% decline in revenue, while EMEA and APAC showed 5% and 1% growth respectively. Enterprise customers were the largest source of product bookings, followed by government customers and service providers. The company's operating results were strong, with a GAAP gross margin of 80.4% and non-GAAP gross margin of 83.1%. Operating expenses were $396 million on a GAAP basis and $346 million on a non-GAAP basis, resulting in a GAAP operating margin of 23.4%.

In the fourth quarter, the company's non-GAAP operating margin improved by 20 basis points to 33.4%. The GAAP effective tax rate was 16%, while the non-GAAP effective tax rate was 17.5%. The company's cash flow and balance sheet remained strong, with $159 million generated in cash flow from operations and $943 million in cash and investments. Deferred revenue decreased by 1% due to changes in sales and maintenance renewals. The company also repurchased $150 million worth of shares in the quarter. The company expects revenue in the range of $720 million to $740 million in the fourth quarter, with non-GAAP gross margins of approximately 83%.

F5 has estimated its Q4 non-GAAP operating expenses and EPS, and expects positive updates to its outlook for FY '24. They anticipate mid-to-high single digit software revenue growth and a lower non-GAAP effective tax rate. The CFO has announced their retirement after helping the company successfully transition to a more software-led business. They will remain in their role until the filing of the FY '24 10-K.

The paragraph announces that Cooper Werner will take over as CFO upon Frank Pelzer's departure. Cooper has been with F5 for 23 years and has been SVP of Finance for the last 12 years. He is praised for his financial expertise and leadership skills. The CEO, Francois Locoh-Donou, thanks Frank for his contributions and expresses confidence in Cooper's abilities. F5 is well-positioned to help customers with the challenges of hybrid and multi-cloud environments.

F5 is playing a key role in modernizing IT infrastructure and enabling customers to leverage AI at scale. The company's partnership with customers has resulted in enhanced automation and operational efficiencies. As we enter the era of AI-driven applications, F5 believes that customers will require a hybrid SaaS platform to cover all their app security and delivery needs. The company is well-positioned to capture a share of customer spend as they gain more confidence in their IT budgets. The call is now open for questions, and the first question is about the strong sequential growth in software. The company will update ARR metrics at the end of Q4, so they cannot provide specific details at this time.

The NRR is still world-class and subscription renewals are strong, but there were challenges in the bot business. New business activity was better than expected, leading to a lift in new business activity. Hardware has stabilized over the last few quarters, but demand signals for next year are positive and it may even see an increase. This is due to a strong pipeline of tech refresh activity from customers who have digested inventory or can no longer sweat their assets.

The speaker discusses the strong pipeline for F5, particularly in the service provider space and for AI-related hardware. They mention the potential for AI to be a catalyst for growth in the future and how F5's technology is well-suited for improving efficiencies in large AI factories. The speaker also mentions that the pipeline for NGINX and Distributed Cloud is also strong.

The paragraph discusses the growing complexity of hybrid and multi-cloud environments for enterprise customers and how F5's portfolio, including NGINX, Distributed Cloud, and BIG-IP, aims to simplify these environments. The company has seen a doubling in the number of customers operating in more than six infrastructure environments in the past year, which creates risks and drives up operational costs. F5's products have been used by a security company to standardize security across multiple environments. The company's pipeline is driven by the need to address this complexity for customers.

James Fish congratulates Frank on his retirement and Cooper on his promotion. He asks about the issues with Bot Manager and what the company is doing to improve it. Francois Locoh-Donou explains that they are migrating the technology to the F5 Distributed Cloud platform and have seen success with customers using the WAAP bundle, which includes WAF, Bot, API security, and DDoS services. The number of customers using this bundle has doubled in the last year.

The speaker is discussing a transition from a point solution to a platform and bundle, which is what customers want. They are also discussing their outlook for fiscal year 2025, with a mid-single digit growth and a 35% operating margin. They expect more growth in the back half of the year due to subscription renewals.

The company is seeing progress in the transition of its SaaS business, with around $65 million in legacy products and services being retired or migrated to the Distributed Cloud platform. The process is expected to take two years and is going according to plan. There is some churn in the high-end Bot Manager business, with some customers choosing not to renew and instead moving to lower-end or platform-based solutions.

In the SaaS platform on Distributed Cloud, the company is experiencing strong growth and new customer adoption due to its bundle of offerings, including WAAP and API security. The company has built a comprehensive API security solution that automates manual testing and analysis. The number of API security customers has tripled since last year. In terms of maintenance, the company offers high-quality service and has a high attach rate, allowing them to recoup discounts over time instead of requiring upfront payment.

The speaker congratulates two individuals on their recent changes and then answers two questions. The first question is about changes in sales staffing levels and whether competitors have been poaching employees from F5. The speaker answers that there have been no changes in staffing levels and there is no evidence of poaching. The second question is about the overall application environment and whether there is stability and acceleration in the market. The speaker responds that there is no evidence of this yet and suggests looking at cloud company sales as a potential indicator.

The CEO of F5 discusses the company's low sales attrition and strong sales team, which includes a large number of channel partners. He expresses confidence in the company's ability to hire and retain top salespeople. He also mentions that the trend of customers using multiple infrastructure environments is a positive for F5, as their platform can handle the complexity and security of these applications.

The speaker discusses how their company is the only one in the market that is infrastructure-agnostic in terms of app security and delivery. They mention the potential for AI to accelerate the distribution of applications, which plays to their company's strengths in solving the "ball of fire" problem. The speaker also addresses a question about the impact of Broadcom's price adjustments on VMware, stating that there have been some anecdotal instances of budget shifting for customers, but it is not a significant trend and is likely a short-term reaction that will settle out in the future.

The speaker discusses the potential for enterprise adoption of AI and how it could impact their business. They mention cost and security as key issues in this area, and explain how their existing products can help improve efficiency and reduce costs for companies building AI factories. They also mention their focus on API security and how AI could be a significant catalyst for this solution in the future.

The speaker, Francois Locoh-Donou, responds to a question about the mix shift between software and hardware in the company. He emphasizes that F5 does not force customers to adopt one delivery model over the other and instead meets them where they are in their preferences. This flexibility and choice is seen as a valuable aspect of F5 compared to other players in the industry.

The company's unique combination of hardware and software sets them apart from traditional ADC vendors and pure SaaS infrastructure players. They expect to see growth in both hardware and software next year and are successfully cross-selling to both existing customers and new customers. They are also displacing other vendors in some cases.

The increasing complexity of using F5 on-prem, public cloud players, and CDNs for applications has led to a desire for a single vendor solution. With F5 Distributed Cloud and its integrations, customers can have consistent security across all environments, leading to displacing of SaaS players and solving security and complexity issues for new applications.

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