F5, Inc.

Please stand by. We're about to begin. Good afternoon, ladies and gentlemen. Welcome to the F5 Incorporated fourth quarter fiscal 2022 financial results conference call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. And finally, if anyone has any objections, please disconnect at this time. And at this time, I'd like to turn the call over to Ms. Suzanne DeLong, Vice President, Investor Relations. Please go ahead, ma'am.

Hello and welcome. I am Suzanne DeLong, F5's Vice President of Investor Relations. Francois Locodinou, 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 A copy of today's press release is available on our website at F5.com, where an archived version of today's audio will be available through January 24th, 2023. Visuals accompanying today's discussion are viewable on the webcast and will be posted to our IR site at the conclusion of our call. To access the replay of today's call by phone, dial 800-770-2030 or 647-362-9199. and use meeting ID 3209-415. The telephonic replay will be available through midnight Pacific time, October 26, 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 risk, 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. I will speak first to our fourth quarter results before discussing fiscal year 22 and our outlook for fiscal year 23. Against the backdrop of a rapidly changing environment, our team delivered fourth quarter revenue at the top end of our guidance and earnings per share above the high end of our guided range. As Q4 progressed, we witnessed increased budget scrutiny from customers and elongating selling cycles. particularly related to new projects and new architectural rollouts. These dynamics were especially evident in our Q4 software revenue. While we had a strong pipeline for new multi-year subscriptions headed into the quarter, customers' macro concerns led to lower close rates and lower software growth than we expected. We had some customers pause large-scale digital transformation projects in favor of business as usual. We also had customers resize projects with more conservative initial usage estimates. And we saw foreign exchange headwinds contribute to budget and spending challenges with customers in both EMEA and APAC, including customers who delayed projects with the hope that currency would stabilize. Conversely, Q4 marked a significant improvement in our systems revenue versus prior quarters, thanks to better availability of several critical components in the broker market. These scarce components came at higher costs, which are reflected in our Q4 product growth margins. However, our priority was and will remain fulfilling customer demand for systems, which stayed strong throughout the year. We were able to partially offset higher product costs, and continued operating discipline and a favorable tax rate enable us to outperform our Q4 earnings per share target in the quarter. When I step back and look at FY22 as a whole, I readily acknowledge that the year did not look the way we envisioned when we began it. Despite supply chain challenges and growing customer caution beginning in Q4, we saw persistent customer demand and our sales teams drove record-breaking bookings for the year. In addition, we achieved several important milestones. First, with portfolio and consumption model diversification, we drove our product mix to 5149 software hardware, a noteworthy accomplishment in our transformation journey, and very different from where we were just five years ago when software represented less than 15% of our product revenue. Second, With the expansion of our application security portfolio and increasing demand for securing applications and APIs, we have grown our security business to $1 billion in revenue. Security-related revenue now represented 37% of our FY22 total revenue. Third, 69% of our total revenue was recurring in FY22 with a double-digit three-year compound annual growth rate. Over time, higher levels of recurring revenue will continue to add predictability and stability to our model. Finally, we launched three significant new platforms during the year, leveraging customer-focused innovation across the continuum of deployment models. These launches included expanding and unifying our SaaS offerings through F5 distributed cloud services, as well as our next-generation R-series and Velo systems. These milestones are representative of how significantly we have evolved F5 over the last five years. F5 is stronger and better balanced with a more resilient revenue base and an operating model capable of delivering significant leverage. Over the next year, our business is likely to benefit from tailwinds to our systems business as a result of improving component availability. It's also likely to bear some weight from macroeconomic headwinds. In the balance, We expect to deliver FY23 revenue growth of 9% to 11%. We also expect the combination of revenue growth and operating leverage will enable us to deliver non-gap earnings growth in the low to mid-teens, which means we also expect to deliver on our Rule of 40 benchmark in FY23. Further, we are committed to operating the business to maintain the Rule of 40 and double-digit earnings growth on an annual basis going forward. Frank will speak to our outlook in greater detail in his remarks. Before I pass the call to him, though, I will talk to several of the reasons why we believe we will deliver strong revenue and earnings growth this year. First, hybrid IT is here to stay. Our multi-cloud infrastructure agnostic approach means we can create a more unified experience across customers' desperate environments. We are enhancing automation and driving operational efficiencies and corresponding cost efficiencies. Our ability to create a more seamless application environment for our customers is already an advantage. It is likely to become even more so as customers look to reduce operating costs and complexity. Second, Demand for security use cases is likely to remain resilient. Customers rely on our security solutions, including DDoS protection, advanced vulnerability defense with web application firewall, and bot fraud, abuse, and API protection to protect them across what feels like an ever-increasing attack surface. With the February launch of our SaaS-based F5 distributed cloud services, we are now an attacker in a rapidly growing segment of the overall security market. Third, we expect a combination of a resilient systems business and gradually improving component supply will contribute to drive systems revenue growth in fiscal year 23. Beyond 2023, with customers embracing hybrid IT, we expect hardware demand will prove more resilient and longer-lived than expected just a few years ago. Near term, we also see the opportunity to take share from traditional hardware competitors undergoing structural change. Fourth, our breadth of form factors and consumption models makes us an ideal partner for customers who are likely to be prioritizing their investments, optimizing costs, and may want to shift from one consumption model to another. Whether hardware, software, SaaS, or managed service, perpetual license, or subscription, via an OPEX or CAPEX budget approach, we are flexible. In an environment of shifting priorities, Removing friction and enabling customers to consume how and when they want is a distinct advantage. And finally, we are a trusted and operationalized partner of the largest enterprises, service providers, and government entities around the world. In good times, and especially when faced with adversity, organizations tend to rely heavily on the partners they know and trust. We have worked for decades to earn that trust. Our customers count on us. on our deep understanding of how to protect and optimize their application, and on our continuous innovation. It's these factors, among others, including our very sticky install base and our growing base of recurring revenue, which help give us confidence in our outlook for next year. Before I conclude, I will highlight two interesting customer use cases from Q4. The first is an example of a multi-year subscription renewal with a sizable expansion. In this case, the customer, a global retailer, had a goal of automatically flexing its capacity into its public cloud environments as spiky traffic demands warranted. The customer augmented its existing on-premise BIG-IP hardware with scalable virtualized BIG-IP software in the public cloud. With our deep automation capabilities, we fully automated the deployment and configuration of the FI stack enabling them to burst capacity as needed. Automation also simplified how their developers consume infrastructure and best of breed cloud services. In an example of an F5 distributed cloud services SaaS win in the quarter, we worked with a global transport company based in South America that needed to protect its multi-cloud applications, but did not want the complexity or inefficiency of disparate cloud native services. the customer selected F5 distributed cloud services as a one-stop comprehensive security solution, including web application firewall, advanced bot defense, API security, and DDoS. With F5, the customer gained more consistent security across its multi-cloud environments, improved protection against bots, and is now more self-sufficient for its security and traffic management with a single platform to support expansion to other regions. In both of these use case examples, F5 delivered automated multi-cloud solutions that dramatically simplified our customers' operations and improved their ability to scale their businesses. And we did so with a form factor and consumption model that best fit their needs. Now I will turn the call to Franck. Franck?