F5, Inc.

Good afternoon and welcome to the F5 Incorporated Second Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Also, today's conference is being recorded. If anyone has any objection, Please disconnect at this time. I'll now turn the call over to Ms. Suzanne Dulong. Ma'am, you may begin. Hello and welcome.

I am Suzanne Dulong, F5's Vice President of Investor Relations. Francois Locot-Denoux, F5's President and CEO, and Frank Peltzer, 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 A copy of today's press release is available on our website at F5.com, or an archived version of today's call will be available through July 24, 2022. Today's live discussion is supported by slides, which are viewable on the webcast and will be posted to our IR site at the conclusion of today's discussion. To access a replay of today's call by phone, please dial 800-585-8367 or 416-621-4642 and use meeting ID 776-9889. The telephonic replay will be available through midnight Pacific time, April 27, 2022. For additional information or follow-up questions, please reach out to me directly at s.dulong at f5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in the press release announcing our financial results and described in detail in our SEC filings. Please note that F5 has no duty to update any information presented in this call. With that, I will turn the call over to Francois.

Thank you, Suzanne, and hello, everyone. Thank you for joining us today. As you all know, we entered our second quarter with some significant challenges that limited our ability to fulfill demand from our systems business. We are pleased to have delivered above the midpoint of our revenue guidance and at the upper end of our non-gap EPS guidance despite those challenges. Importantly, we continue to deliver strong results from our software business. With 40% year-over-year growth in the quarter, software represented the majority of our product revenue for the first time. Systems revenue declined 27% as a result of supply chain constraints, and our global services revenue was flat year over year. Our second quarter reflected another in an ongoing trend where customers continue to rapidly grow and scale both their traditional and modern applications while placing increased importance and focus on application security. This benefits F5 and translates to continued strong demand across our portfolio. While our view towards strong demand drivers remains clear, our visibility into resolution of hardware supply chain challenges is murky. Going into Q2, we discussed two primary supply chain challenges. I am happy to report that we successfully resolved the first, which was related to standard electronic components and required us to design in and qualify an alternative source. The second challenge we discussed is related to global shortages of specialty semiconductor components. While we have made some incremental progress on this issue, we continue to expect supply constraints will limit our ability to fulfill systems demand through the end of this fiscal year. Part of our efforts to fulfill system demand included shifting customers from our I-Series appliances to our next generation R-Series appliances, which launched in February. We are seeing solid traction in R-Series sales and we are ramping manufacturing. However, Semiconductor constraints, primarily from a handful of suppliers, continue to limit our ability to ship I-series and are now also impacting our ability to accelerate the ramp of R-series. As a result, our systems revenue recovery has been delayed beyond the expectations we had last quarter. Frank will review our outlook in detail later in our prepared remarks, but as a result of the delayed systems revenue recovery, we now expect to deliver fiscal year 2022 revenue growth in a range of 1.5% to 4%. This compares to our prior expectations for 4.5% to 8% growth. Our underlying demand remains strong, however, and we continue to expect to deliver software revenue growth near the top end of our 35% to 40% target for the year. In light of the sustained strength of our demand, and our view that the supply chain constraints are temporary, we are not making changes to our operating structure and therefore our margins will be impacted correspondingly near term. We obviously feel a strong sense of frustration with this change and an equally strong sense of urgency toward resolution so we can get back to reflecting the true health of the business in our reported results. We are taking every available path to resolve the issues as quickly as possible. Our suppliers expect additional capacity beginning in the last calendar quarter of 2022, which should translate into improvement during our second quarter for fiscal 2023. While the supply chain challenges are more severe than we estimated last quarter, they are temporary. In addition to seeing continued demand for hardware, we are seeing good traction across our software portfolio, including from security use cases and our ability to bring a broader solutions portfolio to customers. I will speak to our business momentum and demand drivers before Franck reviews the quarter's results and our outlook in detail. Our customers are increasingly operating both traditional and modern architectures and looking to F5 for solutions that simplify and unite their strategies for both. As an example, during Q2, an American multinational beverage company and a longtime big IP customer selected NGINX to serve its cloud and Kubernetes-based workloads and modern use cases. The customer is using NGINX to automate app content delivery, including its loyalty program and delivery services, both of which have experienced substantial growth during the pandemic. The addition of NGINX technologies to the customer's multi-year subscription resulted in a 2x expansion of the subscription upon renewal. Customers also are operating in multiple clouds and uncovering new challenges as a result. F5's infrastructure-agnostic approach to application security and delivery differentiates us from vendors who are siloed to a single environment. This means we are uniquely positioned to help customers with their multi-cloud challenges. During Q2, we were selected by the Ministry of Health for a nation in our APAC region. Not being locked into a single cloud was an important consideration for this customer. They had intentions of modernizing in a single cloud short term, but planned to expand to additional clouds in the near future. This customer selected F5 over cloud native offerings as a result of our solution's clear value add and our cloud agnostic capabilities. We enabled the customer to create a true multi-cloud architecture with both on-premises and cloud environments in a deal spanning our portfolio, including big IP hardware and software with advanced WAF and NGINX, including app protect and API management. Finally, it's clear that hybrid architectures, including on-premises data centers and as a service offerings are here to stay. Applications and workloads also are increasingly containerized and mobile. This means complexity is here to stay too, and that managing applications across disparate environments will remain a challenge for customers. Meeting that challenge is likely to require a distributed cloud architecture and platform-agnostic security and delivery technologies that provide consistent protection, visibility, and performance for all applications. legacy, modern, and mobile across environments. In Q2, we took a large step forward toward helping customers better manage multi-cloud complexities with the launch of our F5 distributed cloud services. With this platform, we are delivering security, multi-cloud networking, and edge-based computing solutions on a unified software as a service platform. Our first solution for the platform F5 Distributed Cloud Web Application and API Protection, or WAP, augments multiple security capabilities across F5 technologies in a SaaS offering. This offering reflects the first major step in our integration of our Voltera platform and F5 software security stack. F5 Distributed Cloud Services is globally available, and we are seeing strong early enterprise and service provider interest. SoftBank announced one of the first notable wins for F5 distributed cloud this quarter. The corporate information technology division of SoftBank needed to improve low resource utilization and other inefficiencies of its private, virtualized infrastructure. But its security requirements mandated on-premises deployment with an option for future public cloud capabilities. It sought a way to bring the effectiveness of cloud-native microservices and containers to its private data center and turn to F5 distributed cloud services. We are leveraging F5 distributed cloud branding to further integrate customers' experience with F5 by simplifying our product naming. You will see we have united and renamed our SaaS and managed services portfolio, including Shape, Volterra, and SilverLine under our F5 distributed cloud services umbrella. So expect to hear us refer to those solutions accordingly going forward. In summary, despite our short-term supply chain challenges, there is a lot to look forward to from F5. We have multiple current and future software drivers that are well aligned with our customers' most pressing application needs. Between BIG-IP's ability to serve and secure traditional apps, NGINX's ability to serve and secure modern apps, and the exciting opportunity to grow and expand F5 distributed cloud services, we are well-placed to enable our customers to manage and secure their growing and rapidly evolving application estates. Now, I will turn the call to Franck to review our Q2 results and our second half outlook in detail.