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spk06: Good afternoon and welcome to the F5 Inc. Third Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants' lines have been placed on mute to prevent any background noise. Following the presentation, we will conduct a question and answer session and instructions on how to queue up will be provided at that time. As a note, today's conference call is being recorded. If you'd like to turn the call over to Ms.
spk02: Suzanne, you may begin. Hello and welcome. I am Suzanne Dulong, F5's Vice President of Investor Relations. Faswala Godinu and Frank Pelzer, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. The executive team are also on hand to answer questions during the Q&A session. Today's press release is available on our website at F5.com or an archived version of 4th, 2022.
spk13: Visuals accompanying today's discussion are viewable on the webcast and will be posted to our IR site at the conclusion of the call. To access the replay of today's call by phone, dial 888-674-7000. or 416-764-8692 and use meeting ID 468081.
spk02: The telephonic replay will be available through midnight Pacific time, July 26th, 2022 at F5.com. Our discussion today will contain forward-looking statements, which expect to target.
spk13: 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 and now in detail in our SEC filings.
spk02: No duty to update any information presented in this call. With that, I will turn the call over to Francois.
spk04: Thank you, Suzanne, and hello, everyone. Thank you for joining us above the midpoint of our revenue guide, our non-GAAP EPS guidance. Software growth of 38% year over year, partially offsetting continued supply chain constraints for systems. Overall, we delivered 5% product revenue growth. While supply chain our demand signals remain strong and we remain ahead of our initial FY22 demand plan. While we have not seen meaningful improvement in supply volumes in the last three months, we also, in general, our suppliers' commitments held up better in Q3 than in the previous year. Based on what we see today, We continue to expect our ability to ship systems will improve during our second quarter of fiscal 2022 without the most constrained components and the additional capacity our key suppliers expect beginning in the last calendar quarter of 2022. We likewise continue to expect that will be the low point in systems revenues. We continue to see our growth opportunity fund to the growing number of apps as well as increased usage and heightened business value. And as customers added, scaled, and secured their applications with demand for security and from our service provider vertical fueling sales in the quarter. In fact, security concerns continue to drive the majority with demand showing up in both software and hardware form factors and across multiple consumption models. In one example from Q3, an existing of the world's largest banking and financial services organizations turned to F5 when a large foreign exchange was sufficiently protecting against zero-gay threats. F5 demonstrated that our advanced web application firewall provided immediate protection against current also during Q3 to F5 after experiencing challenges with their existing bot defense provider over a head-to-head three-month proof of concept against their current solution and risk solution demonstrated significantly higher efficacy and the customer is now deployed and their customers. We have said previously that our customers are increasingly operating both traditional and modern architectures and looking to F5 to modify their operations. During Q3, an American multinational financial services corporation selected a combination of Big IP and NGINX, to secure and process the high volume of critical encrypted transactions.
spk05: Last quarter, I also spotlighted five distributed cloud services, which we launched in February. With this platform, multi-cloud networking and edge-based computing solutions on a unified software as a service platform.
spk04: While it is still very early, we are seeing good traction in customer interest. During Q3, a global company specializing in clinical services and customizable medical devices, the deployment of their security policy at scale, and to provide global delivery of services via SAS. Finally, service providers drove demand in the quarter as customers scale and secure 4G cores into production. In one win in the quarter, we expanded our carrier-grade firewall business with a North American service provider as they continue to grow both their 4G and 5G traffic. In another service provider win, we expanded our offerings with an APAC-based customer to include Big IT cloud-native network functions for its 5G mobile core. These recently introduced cloud-native functions are perfect for moving workloads from legacy NFV to a modern cloud-native architecture. We've also enabled service providers and large enterprises to realize the full benefit of the cloud, automating and simplifying their operations with a more secure, more secure environment.
spk05: Before I turn the call to Franck to review our Q3 results and our Q4 outlook, I will comment on the macro environment.
spk04: As I said previously, we saw strong demand in Q3, and we've got a strong Q4 pipeline. At the same time, we also observed more While we are not seeing it today, we believe the combination of micro uncertainty and inflation will put pressure on customer budgets and eventually force customers to reprioritize investments. We will continue to closely monitor signals from our customers, and like others, we are assessing adjustments we would make in the event that the environment or our customers turn more cautious. We have built a stronger and more resilient F5 by expanding our solutions portfolio and our consumption models. As a result of our business transformation, F5 is positioned to benefit both from software growth drivers, including Big IT, NGINX, and our F5 distributed cloud services SaaS offerings, and what we expect will be persistent demand for systems. As a result of our successful transformation efforts to date, we have a stronger business model that increases our confidence in our ability to deliver sustained revenue and earnings growth. Now, I will turn the call to Frank.
spk12: Frank? Thank you, Francois, and good afternoon, everyone. I will review our Q3 results before discussing our Q4 outlook. We delivered third quarter revenue of $674 million, reflecting a four-product revenue represented 48% of total revenue in the quarter, and software represented 55% of product revenue. Q3 software revenue grew 38% to $179 million. Systems revenue of $148 million declined 18% year-over-year due to ongoing supply chain challenges and resulting shipment delays. Similar to Q2, we added systems backlog of tens of millions of dollars in Q3. Rounding out our revenue picture, global services delivered $348 million in Q3 revenue. Taking a closer look at our software revenue, subscription-based revenue contributed 82% of total software revenue in the quarter, a new high. Term-based subscriptions continue to represent over half of our subscription revenue, with smaller but growing contributions from software-as-a-service and utility consumption models. Revenue from recurring sources of service and utility-based revenue, as well as the maintenance portion of our services revenue, totaled 72% of revenue in the quarter. This is another milestone for us and is up from 66% in the year-ago period. On a regional basis, America has delivered 5% revenue growth year-over-year, representing 57% of total revenue. EMEA declined 7%, representing 23% of revenue, and APAC grew 15%, representing 19% of revenue. I will remind you that, given current supply chain constraints, our geographic revenue distribution in a quarter is not fully indicative of demand for each given region. Enterprise customers represented 70% of product bookings in the quarter, service providers represented 18%, and government customers represented 12%, including 3% from U.S. Federal. I will now share our Q3 operating results. Gap gross margin was 80.6%. Non-gap gross margin was above our guide at 83.2%.
spk05: While we continue to experience increased component price
spk12: prices, expedite fees, and other sourcing-related costs, our Q3 gross margin reflects some improvement in average selling price on systems in the quarter. We are not ready to say it's a trend, but we are encouraged about the overall direction. GAAP operating expenses were $436 million. Non-GAAP operating expenses were $367 million. This is lower than our guided range as a result of some investments we delayed in anticipation of potential macro headwinds that did not materialize in the quarter and lower international expenses related to the strengthening dollar. Our gap operating margin was 15.9%. Our non-gap operating margin was 28.8%. Our gap effective tax rate for the quarter was 18%. Our non-GAAP-affected tax rate was 17.4%, largely driven by a non-recurring benefit associated with the filing of our federal income tax return during the quarter. GAAP net income for the quarter was $83 million, or $1.37 per share. Our better-than-guided gross and operating margin performance and lower tax rate contributed to non-GAAP net income of $155 million, or $2.57 per share. I will now turn to cash flow and the balance sheet. We generated $71 million in cash flow from operations in Q3. This is net of more than $30 million of payments to partners related to securing component inventory to support future hardware builds and component expedite fees. Capital expenditures for the quarter were $9 million. DSO for the quarter was 61 days. Similar to last quarter, this is up from historical levels due to back-ended shipping linearity in the quarter resulting from ongoing supply chain challenges. Cash and investments totaled approximately $757 million at quarter ends. During the quarter, we repurchased approximately $250 million worth of F5 shares, or approximately 1.5 million percent year-over-year to $1.64 billion, up from $1.60 billion in Q2, largely driven by subscriptions and SaaS bookings growth and, to a lesser extent, deferred service maintenance. Finally, we ended the quarter with approximately 6,900 employees. I will now share our outlook for the fourth quarter. Unless otherwise stated, please note that my guidance comments reference non-GAAP metrics. We expect Q4 revenue in the range of $680 to $700 million. Our pipeline indicates Q4 demand that would put our software revenue growth towards the high end of our 35% to 40% target for the year. And as a result, we see more risk at the top end of our software growth range than there was a quarter ago. Given the Q3 strength in global services, we now expect global services revenue to grow approximately 1.5% to 2% for the year. We expect Q4 gross margins in a range of 82% to 83%. We are seeing component costs continue to rise and expect that they will be higher still next year. As a result, we implemented an approximately 15% price increase in systems effective July 1st. Given our backlog, we expect it will take some quarters for the price increase to manifest into sustainable gross margin improvements. We estimate Q4 operating expenses of $374 to $386 million, which would put our FY22 operating margin at approximately 29%, an improvement of 100 to 200 basis points from our prior outlook. Factoring in the tax rate benefit from Q3, we now expect FY22 effective tax rate will be approximately 19%. Our Q4 earnings target is $2.45 to $2.57 per share. We expect Q4 share-based compensation expense of approximately $61 to $63 million. Finally, as we announced in the earnings press release, our board authorized an additional $1 billion for our share repurchase program. This new authorization is included in the existing program. As we have over the last two years, we expect to continue to balance share repurchases with other strategic uses of cash.
spk05: This concludes our prepared remarks today. Operator, would you please open the call to Q&A?
spk06: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Please stand by while we compile the Q&A roster. Your first question comes from Sami Badri of Credit Suisse. Please go ahead.
spk11: Hi, thank you for the question.
spk05: First thing I wanted to just clarify was
spk11: I think there was a reference to the backlog increasing or at least adding more revenues to the backlog. Could you clarify if the backlog exiting fiscal 3Q is actually higher than where it was exiting fiscal 2Q? We have interest in the investor base around the software growth trajectory of the business. And I know you guys discussed coming in and what fiscal year 23 is going to look like just because the growth rates are rather significant.
spk05: I'll take the first question, then I'll let Francois speak to your second question.
spk12: So, yes, the backlog was higher and significantly higher in Q3 than it was in exiting Q2. We did not quantify that, actually released the number as part of the October call, and you'll see it in the case.
spk04: And, Sami, I'll take the second part of fiscal 2023.
spk05: You know, overall, if you look at our software, you know, we guided 35% to 40% of our investor meeting about November of 2020.
spk04: And, you know, we have delivered that in the first year in 2021, and this year, we're delivering closer to the top end of the range of that guidance. So we feel very, very good about the drivers of software growth in the business that we talked about, including modern applications, the strength we're seeing in security and, you know, the adoption of multi-year agreements with F5 driven by digital transformations and automation. And so we'll talk more about that. But when you look at 2023, frankly, the factors, I think some of the factors that will affect that, one, of course, like every Every other company is the macro environment, and will that have an effect on our growth rate? Today, frankly, it's too early to say because we haven't seen a fundamental change in the buying behavior factors.
spk05: Through the pandemic, I would say to the big IT part, we have seen continued demand for hardware and we have seen a number of customers that
spk04: had declared that they would move to software pretty quickly, that have actually recommitted to hardware and stayed with hardware longer. So we're seeing very, very strong resilience and move to software. So if that kind of makes shift, if you will, continue in 2023, our software growth rate some, but it wouldn't affect the top line because it would be more of a makeshift factor
spk05: if we continue to see that shift in customer behavior.
spk11: ...providers, because that came up a couple times on this call. Could you just give us some... ...what exactly the inflection is... ...customers are relying more heavily... ...or see, you know, what specifically are they seeing in the F5 portfolio... that's most helpful or the right solution for them? Could you give us just specifics on, you know, a little bit more detail on what's going on?
spk05: I think there are two dynamics. Also, the provider business is doing a lot of accepting, I think, the market at the right time. We have invested, you know, heavily in cloud-native functions that allow service providers who want to build 5G cores to do that with us. And we have now a number of design wins in this area that are starting to go into production.
spk04: And this quarter we had more of these going into production, and so it's turning into revenue. And our expectation is that that will continue, but we feel well positioned for the cycle of, you know, kind of next generation software deployment with service providers, both in the core infrastructure and at the edge. The other dynamic that's going on with service providers is that they continue to increase capacity in their 4G environment for, you know, increasing traffic, specifically 5G traffic. And we need to make investments in our hardware platforms to prepare for these increased demands for capacity. And as a result, you know, we've been able to get to, you know, some price performance points that are really meeting the demands of high-scale, high-capacity service providers for things like carrier-grade firewalls. And that's driving strong demand and execution in the service provider vertical.
spk00: Got it. Thank you.
spk06: Your next question comes from James Fish of Piper Sandler. Please go ahead.
spk09: Hey, guys. Thanks for the questions here. I want to go off the software question from before. Is there a way to think about how much the unattached software deal flow is either independent or dependent on some of the systems deal flow, given you're already selling into some of the largest organizations out there? And also, you mentioned there, Francois, multi-year agreements just now. Is duration actually extending for software?
spk04: I'll start with the latter part of that question, Jim. So, no, I think the trends are pretty steady, Jim, on the multi-year agreement. Typically, there are three-year agreements, and we haven't seen a fundamental change in duration.
spk05: In terms of the first part of your question, you know, if you change in X, it's not attached to any dynamics around hardware.
spk04: And our managed services and SaaS business, you know, distributed cloud services, is not attached to any dynamics around the hardware business. With BIG-IP, what you're seeing is the software business does not have a, is not attached to the dynamics in hardware. However, you know, customers who are, We still have a number of customers who are migrating from a sort of hardware-first environment to a software-first environment. And where we have seen changes, I would say, not specifically this quarter, but over the last... know 18 months is we have seen a number of customers who had declared that they would go to a software first environment sooner and and we have seen a number of them constantly delay that and stay with a more of a hardware first environment and i'd say that's where you have an effect in specifically in that area of the big id business where um you know you're seeing um you know very strong resilience from the hardware
spk09: um and but it's affected a little bit our software growth rates all right and then maybe for frank um i do want to unpack your guide a bit here especially the bracket of the street uh for q4 is there a way to understand for how much during the year will be a net issue from the supply chain constraints versus that prior i believe 60 to 90 million dollar headwind versus the macro impact you're now including in guide again i
spk12: I think you'll probably be able to see that more specifically in Q4 when we talk about the backlog number. As a policy, if the backlog number is more than 10% of product revenue, then we will release the actual number, and that's fully our expectation right now. And so I think you'll be able to effectively pull out what was the difference in that change and, you know, make some assumptions on what that would have meant for the software revenue or the total revenue overall. So if you can, you know, hold off for three months, I think you'll get your answer.
spk06: Your next question comes from Meta Marshall of Morgan Stanley. Please go ahead.
spk07: Great. Thanks. This is Nita. A couple of questions. Just, you know, on the supply chain piece, when you're expecting these
spk02: by kind of the second quarter of next year.
spk07: Does that mean that the redesign process is kind of complete at that point or that there's component availability expected to take place at that point? And then maybe as a second follow-on question, just how is the R-series transition from I-series progressing versus expectations? Thanks.
spk04: So when we're talking about improvements in our shipments in the second fiscal quarter of 2023, it's driven by two factors. The first is what we expect to be better component availability from our suppliers based on commitments they've made to us and generally from what we see they are on track with execution against these commitments on some of the most constrained components. So that's factor number one. Factor number two is we have also been doing some design work to design around or redesign around some of the most constrained components. And those design efforts should complete towards the tail end of the calendar year, which would allow us to, you know, ship with the new components in the second quarter or the second fiscal quarter of 23. So those are the two factors driving that meta. As of today, both of those factors are really on track. Now, we're talking about things that are, you know, happening in the next six to nine months and then, you know, looking at the full second half of 2023. So, you know, we caveat that by saying there's still a ton of execution to come and commitments to be delivered by our suppliers. But generally, we're on track, and I would say, you know, We feel incrementally better about that than we did three months ago from what we've seen from our suppliers' commitments and our own work. As it relates to our series, we are very happy with the ramp of our . The ramp is happening two times faster than prior new platform introductions. And that's largely due to the benefits of the R-series platform. So it's an investment we started a few years ago with this environment.
spk05: So they're getting, you know, a lot of R-series, the ability to run multiple software tenants on customers that –
spk04: really want to automate their environments, which is at the heart of a lot of the digital transformations, what they're getting from our series is not just the price performance benefits, but also a lot of the cloud-like benefits of automation and multi-tenancy into the platform.
spk05: So that's a good one.
spk04: I think we're pretty excited about what our series is going to do for the business, not just this year, but for the next few years.
spk07: Great. Thanks.
spk06: Your next question comes from Tim.
spk10: Thank you. Just a few on the software business. First, any RPO, ARR, Netballer retention, love to get them out.
spk05: update on when we could potentially see those numbers more specifically.
spk10: And then maybe about, you know, kind of what you're seeing is that, you know, new deals versus true forwards. How do we look at that aspect of the software growth this quarter? And then maybe the The last one is maybe for you, Francois. We're coming up on three years. Could you talk to us a little bit about, you know, how you think those renegotiations or renewals would be working and how that can, you know, work into the model? Maybe just a little color on, you know, that first set of deals. It should be a. I would think, and if so, some of the other business where it's kind of been running above run rates, so the renewals could potentially be larger than the initial contracts. Thank you.
spk12: Sure, Tim. Thanks so much for the question. I'll start and then I'll turn it over to Francois. So in terms of the split out on the software ongoing, we're just starting to hit the second term of where, you know, we're not ready to release them externally. Again, as I've said in the past, we want to make sure that they are used in the right way and they can be predictive for the future outlook of the business. And as we get, you know, more and more of these data, if we do release these metrics.
spk10: And so, you know, more to come on that in FY23.
spk05: I know you had another question for Francois, specifically on some of the renewals. Yeah, Jack, the, you know, the early indicators on are really good. On these, you know, on those large multi-year renewals, What we're seeing is, you know, continued growth in application usage. And that's a part of what's driving the expansion in some of these opportunities.
spk04: So it's early days, as you said, but it's going very well. I would say the other driver, I would say both of a very strong quarter, again, in security. And what we're seeing is that the portfolio that we've put together that allows our customers to put security capabilities across their environment is really making a difference. So this quarter we had a very strong quarter on security with Big IT and WAF.
spk05: The second quarter in a row where we had NGINX with security. very strong debut, if you will, for our distributed cloud services WAP on security. And we're bringing all of these over time under a single SaaS console that will allow our customers to push the same policy to all of their environments for protecting differentiation, we're seeing the benefit of that both in terms of expansion of existing agreements as well as new agreements that are driven by our security software.
spk10: Okay. And, Frank, if I could just to follow up on the metrics. In the past, you talked a little bit about, you know, the software growth in subscription businesses being driven by, you know, true forwards and or, you know, new deals in the pipeline. So could you just give us a little color? new deal contribution?
spk05: Yeah, Tim, we're not going to split that out of the quarter. I think we can look at, you know, where we have been in the past. The true forward contribution was along our expectations in the 38% software. But I'm not going to give a specific split between the two for the call.
spk10: All right. Thank you.
spk06: Your next question comes from Alex Henderson of Needham. Please go ahead. Great. Thank you very much.
spk05: So, across the specifically said at one point that buying behavior patterns haven't changed. Another point you said that there's some increase in the number of signatures required, and you've weighed into your guide the expectation of continued softness in the broader economy.
spk04: But can you talk a little bit about where you are in terms of the pipeline of activity that you're chasing, whether the activity is more robust, less robust than you would bigger, smaller, how the price increase might impact that longevity, and within the backlog, whether there's any concern around cancellations of orders. Alex, let me start with the last part of your question. So, no, with the backlog, we have absolutely no concerns about cancellations of orders. And that's because we haven't seen any.
spk05: There hasn't been any trend into cancellation.
spk04: And also, our lead times, you know, whilst elongated, are still at about four months. And relative to, you know, some of the other hardware, in fact, we have seen some of our orders delayed because customers were willing to get their networking gear that had 12 months of lead time before ordering from S5 that only has, you know, two to six months of lead time depending on which platform you pick. So we're not worried about cancellations at all. Let me talk to the other dynamics. you mentioned sort of customer buying behavior, the implications of price increases. So if I take a picture right now, Alex, of where we're at, no, we haven't seen on a global level, I would say with the exception of Europe specifically, I'll come back to that in a moment, we have not seen a fundamental change in quarter and yes some deals that had a lot more scrutiny in terms of the number of the overall demand signals in the quarter they were very strong and we didn't see a fundamental change in close rates if you will from our pipeline That is, I would say, across the globe is true. In Europe specifically, we did see some continued softness and very back-ended linearity, and we think that the macro is definitely affecting buying behavior in Europe already today. Now, when you look forward around, you know, what we think we will see in, you know, in coming months, let's start with our pipeline is strong for Q4, and it is about what we would expect to have, you know, as of today for our Q4 pipeline. We have a number of large deals, specifically in software. Q4 is always a quarter with some of the largest deals. And we have that pipeline of large deals to deliver against our guidance. That being said, what we are cautious about is, you know, of course, you know, we see the dynamics in the macro environment. And I think the combination of inflation, you know, in the U.S. and elsewhere, and also outside the U.S., foreign exchange, which, you know, ends up making our gear more expensive to customers in Europe, Latin America, and Asia, those increases in cost to customers will force them to make prioritization calls on their investment. And we think that that may result in some deals being pushed out or a different prioritization of projects than what we are currently expecting.
spk05: We haven't seen any sign of that to date.
spk04: But our view is that given that every other networking vendor out there has made increases in prices, including us, customers at some point, their budgets are not going up. We think we are likely to see in the next few months.
spk06: Your next question comes from Samik Chatterjee of J.P. Morgan. Please go ahead.
spk01: Great. Thank you. Thanks for taking my questions. I just wanted to start with, you've talked about the reprioritization of spending from your customers or the cautious environment you're in, but also sounds like you're already starting to prepare internally for that to some extent. I mean, more curious about hearing how you're thinking about the levels you can pull or the changes or reprioritization in terms of F5 internally. Would you sort of increase more sales incentives on the software business or focus more on security? Like what are the levels you're thinking you can sort of drive towards if you do see the customer behavior changing because of the macro? And then just a quick follow-up, I mean, since the 15% price increase on systems, what have been the order trends that you've seen? Thank you.
spk04: Samik, just the last part of your question about the 15% price increase, what was your question about that?
spk01: Any color on the order trend since the price increase, pushing through the price increase.
spk04: Ah, okay. So let me just start with that part of the question. So, Samik, yes, we did have a price increase that took effect on July 1st. And As a result of that, we had a number of orders that were pulled into our third quarter by customers wanting to order early to not be affected by that price increase. When we look at the demand signals for Q3, we normalize out these orders that were pulled in. And even if you normalize out for these orders, it was actually a strong to very strong demand quarter.
spk05: In terms of the order trends post the price increase, you know, we're in the month of the quarter.
spk04: On how we're preparing for what may transpire in the macro, you know, you will see that, you know, we are, you know, being cautious. So we're not, I want to be clear, we're not seeing any change in our demand signals today, but given everything out of caution, significantly slowed down hiring in the last month across functions. There were some kind of investment initiatives that we had delayed to see more clearly what's going to transpire in the macro and see if we push forward with these investments or not. So right now, Sanik, it's more on the you know, management of our OPEX and OPEX run rates that we have focused our, if you will, our preparation and readiness. Our incentives for software for our teams are pretty strong, and they're going to, you know, continue to remain strong, and hopefully you've seen that in the results we're having on our software growth rates.
spk01: Great. Thank you. Thanks for the responses. Thank you.
spk06: Your next question comes from Rod Hall of Goldman Sachs. Please go ahead.
spk08: Yeah, hey, guys. Thanks for the question. I wanted to come back to the comment. I think, Francois, you made it about the back-end loaded nature of the core. I guess I was curious about the, you know, the driver said the back-end loading. I mean, you guys are saying you're not seeing demand impacts, but I wonder what, you know, how would you – how would you characterize the drivers for the back-end loaded nature? Was there a promotion, something like that? And I'm curious also on the DSO, whether you think next quarter those might come back down again. Thanks.
spk12: So, yeah, Rob, let me start with the DSO side of the question, and then let Francois talk about some of the back-end linearity of it. So the DSO, a lot of that, I think, is going to be a little more linked to not bookings, but just frankly, you know, when things can be shipped. And it's the components that came in in the back half that then had the shipments go out. The bills then go out associated with that. It's likely going to see a return to normalcy when we get into the back half of FY23.
spk05: that's when we're going to, you know, see DSOs come back down.
spk12: I will note that the quality of those receivables, we haven't seen any aging increase. It just happens to come after the end of a quarter. So I will expect that, you know, DSOs as we go.
spk05: And while on the back-end load quarter,
spk04: First of all, yes, it was more back-ended, but on a very, very strong demand quarter. And so I think I mentioned earlier that we saw at the very end of the quarter some orders that we felt should have come in Q4 that came in Q3.
spk05: Normalized a little more than linearity of the quarter. The other factor is was, in fact, back in, you know, track and loaded in linearity. We think that's got to do with the macro and the scrutiny. About these two factors, there was probably also an element that we started to see around more customers. I want to say out. in the second month to happen in the third month of the quarter.
spk08: Okay. And, Francois, could I just follow up on one thing there? So you're saying most of the types of orders you would have seen were systems, kind of ahead of the pricing increases. Is that the right way to characterize the, you know, kind of the type of order you saw on the back end?
spk04: Yeah, that's an order very late in the quarter.
spk05: It would have been more about systems. than for software, where I think we have a more... Great, okay. Thanks a lot. Amit Daryani of... Thanks for taking my question. I have two words. On the software side, right, even if you have higher end of the 35% to 40% growth rate this year. Is there anything you would call out that's more one-time in nature that you think helps or big deal or something? Or macro environment in 2030, does that help or hurt your software business over time? Let me start with that. I'll let Francois take the back.
spk12: back after your question so um there's nothing that is abnormal to what our expectations were i will note that repeated themselves that repeated itself this year uh and you know that's part that's going to be part of the normal process and reasons why we have potentially quarter-to-quarter volatility um even
spk05: again, be muted and decreased. But we've, you know, talked about, you know, some large activity in FY19 that repeated itself, you know, this year. When we thought about what a horizon to outlook would be.
spk04: The second part of your question, you know, so the question is whether if we are in a recession in 2023, does that help or hurt our software business?
spk05: Well, you know, some thoughts around how I think about this. And I think one thing we've seen in past recessions is people hunker down and not start, you know, new things. And so what that would mean is on hardware, you know, it's likely that some of these companies will continue to stay on the hardware train. They've got a whole new architecture, a new project. They haven't done that already. that would, you know, favor our hardware business and less our software business. You know, opportunity between. On the other hand, you know, the vast majority of our software business is subscription.
spk04: And we think, you know, there are a number of customers that would prefer to move to this OPEX model in that environment rather than. and that would favor more of our software business.
spk05: But if you step back from it, we have now built a business model that we think is actually quite resilient because we can meet our customers where they are with hardware form factors, software form factors that, you know, to their environment, but they want to start with a lower expense and a pay-as-you-go model.
spk04: Our fast offerings are going to get traction very rapidly.
spk05: They already are. And that would favor that in 2023. So overall,
spk04: you know, we feel that we've got the resilience in the model to be able to meet customers in the economic model that makes most sense for them in a recessionary environment. Perfect.
spk05: Comments on fiscal Q1 and 2020 revenue. I'm sure that you already declined your peak over there. And then, you know, really if I look at all the stuff you have on the system side from the back, with the price increases and, you know, full dependent demand.
spk04: Is there a reason why you don't see your hardware business show positive growth next year?
spk05: So, yeah. Point in our. That is purely a result of the component
spk12: that are needed to ship when we see those schedules coming in. As Francois, mentality associated with decommits has gone to the experience in recent quarters that having said, the commitments that be the low point of what we can actually produce to that volume. And so that's why on a dollar basis, we expect Q1 to be the low point.
spk04: But to your second part of your question, Amit, whether we would expect hardware to show positive growth next year, our expectation would be yes, that our hardware would show positive growth next year if, of course, we are able to have the recovery profile in our supply availability that we have talked about.
spk05: So, you know, we are on track with that. profile for now.
spk04: And if that confirms, I would expect our hardware, uh, revenues to be greater next year than they are this year.
spk05: Um, because we're, we're not environment that the hardware demand was to, um, unless here, the hardware demand is much higher than, you know, the, the revenue we're, we're printing. Um, you know, even if the demand was to be less, um, I'm not going to speak to demand on our hardware business. But specifically, speaking to what hardware revenue is there. Perfect. Thank you. I will reconfirm what Francois said last quarter.
spk12: Q1 will be low point. We will see a build in Q2 from there as some of the redesigns and components become more available. We expect Q3 to be higher yet still because we're able to ramp production even more on the new platforms.
spk05: And then ultimately by
spk12: Q4, we may actually start to begin to bring down backlog because of availability, but we do expect it, you know, to take a linear up curve on the revenue for systems next year.
spk04: Got it. Thank you very much.
spk06: Comes from Jim Suva of Citigroup. Please go ahead.
spk03: Thank you. And I just have one question. Francois, in your prepared comments, you mentioned additional signatures and a little bit more time to get deals to be completely approved. I'm wondering, does this also allow the CTOs more time or more contemplation to do production orders from you? Or is it kind of the cadence of what they're looking at kind of as you expect? I'm just kind of wondering time, does it actually allow them to kind of take a step back and look at the whiteboard a little bit more about the solutions that they're buying from you?
spk05: Thank you. Thank you, Jim. So we're having Jim, I think the
spk04: the extended nature of our portfolio today where we are able to engage our customers with a staff offering you know a software offer where they want to look at that um or a combination of all of the above for their capabilities for addressing multiple applications in different environments uh that's in the cycle So by the time we get into a project that's been defined and scoped by teams and getting into an approval cycle, I don't think it's a question of let me reconsider all of that.
spk05: I think it's more of a, you know, in the first few quarters in the pandemic, there was such a rush to add capacity that I think, you know, coming into the queue.
spk04: And now, you know, especially perhaps with people knowing maybe there's a recession around the corners, they're making sure that the right levels of approvals exist in order to meet the full goal.
spk05: So I think it's more than just a step back around. It's happening up front early on with the customer's tech. technology teams and our own technical teams.
spk03: I appreciate the clarity.
spk06: Thank you. Ladies and gentlemen, due to time constraints, we have Simon Leopold of Raymond James.
spk02: Please go ahead.
spk05: Thank you. I wanted to get a quick clarification and then a broader question.
spk03: On the clarification front, Francois, you indicated growth towards the high end for the software business for the year. And I think that might imply a sequential decline from the systems business in the September quarter. And I want to verify that if it is down sequentially, I just want to get a better understanding of why, because it sounds not sure on that point. And the broader question, I wanted to see if you could talk a little bit more about unpacking your enterprise verticals. In the past, you used to disclose more detail about the composition of your enterprise customers. And in light of the concerns about a potential recession, I think it would help to get a better understanding of the profile of these enterprise customers' abilities might be. Thank you.
spk12: Let me start, and I'll let Francois pick up on the back half of your question. So, as you know, we, as a policy, don't really guide to specific mixes within the components of our product revenue. I did say last quarter that we expect, you know, either Q4 or Q6 purely due to supplier commitments and what we could actually ship. And so I'm not going to address are we going to be down sequentially quarter over quarter in terms of dollar revenue, but that directionally, you know, I was saying, last quarter and still feel that Q4 and Q1 were the low points. We're saying now specifically Q1 may be lower than Q4. I wasn't saying specifically what Q4 is going to be in relation to Q3. The stabilization on most of the components, but we do have what we limit to building boxes, meaning that you have to have everything obviously to do it. And there are still a few components associated
spk05: are constrained and continue to be constrained and so uh if for whatever reason those are freed up which is could do better than these but that's that's not not the expectation that we want to set for you they're still though broadly the mark the supply chain is getting better for most
spk12: There are still a few in our specific builds that are constrained. We talked about physical Q2 being better, not because those suppliers are able to ship us more, but more because of the redesign efforts that will likely go into effect in the back half of our physical Q1. That will help us with the improvements in builds in Q2.
spk04: question we have no virtually no exposure to the smb segment um you know so our exposure is really large enterprises um thank you ladies and gentlemen this noon we would like to thank you all
spk02: that you please disconnect your line.
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