F5, Inc.

Hello and welcome. I'm Suzanne Dulong, F5's Vice President of Investor Relations. Francois Loco-Denoux, 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 A copy of today's press release is available on our website at F5.com, where an archived version of today's audio will be available through October 24th, 2023. The slide deck accompanying today's discussion is 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 webcast by phone, dial 877-660-6853 or 201 612-7415 and use meeting ID 1373-9739. The telephonic replay will be available through midnight Pacific time, July 25th, 2023. 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. We have summarized factors that may affect our results in the press release, announcing our financial results, and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today's discussion. Please see our full gap to non-GAAP reconciliation in today's press release and in the appendix of our earnings slide deck. 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. In my remarks today, I will speak to the quarter's results and the current customer spending environment. I will then highlight some notable customer wins from the quarter, including some emerging areas where we are seeing good early traction. Overall, customer caution persists with customers continuing to sweat assets amidst tight budgets and lingering macroeconomic uncertainty. Despite the tough environment, our team is executing well and we delivered third quarter revenue at the midpoint of our guidance range with earnings per share well above the high end of our range. From a demand perspective, we are seeing some early signs of stabilization. Q3 demand played out slightly above our beginning of quarter forecast, which was up from Q1 and Q2 this year, though still off from FY22 levels. Our global services team delivered strong 8% growth, driven by a continuation of customer trends from the first half of the year, including strong maintenance renewals and price realization. With customers sweating existing assets, we also continue to see higher maintenance attach rates on older deployments. Our product revenue grew 1%, with systems revenue growing 5% and software revenue declining 3% year over year. While systems revenue is benefiting from supply chain normalization and our efforts to substantially work down backlog, systems demand remains constrained. In contrast, we are seeing some positive signs in software demand. Total software revenue was down 3% year-over-year against a strong Q3 2022 compare. However, total software grew 32% sequentially. And within software, our subscription software revenue grew 4% year-over-year to a record high $152 million. This reflects strong growth in our software renewals and interim expansions, or true forwards, as well as some stabilization in new term subscriptions from the first half. Moving from revenue to our operating results, we are also demonstrating operating discipline and driving operating leverage. Our Q3 non-GAAP gross margins of 82.5% improved more than 200 basis points from Q2. This was slightly ahead of our guidance and reflects the combination of expected supply chain easing and price realization. as well as some of the ancillary supply chain costs like broker and expedite fees finally working their way out of our inventory as planned. In addition, our Q3 non-GAAP operating margins of 33.2% improved 600 basis points from Q2 and more than 400 basis points from Q3 FY22. As a result of these improvements, as well as some tax favorability, we significantly overachieved our non-GAAP EPS expectations in the quarter and now expect to deliver double-digit non-GAAP earnings per share growth for FY 2023. We believe our growth opportunity is fundamentally linked to the continued growth of applications and APIs and the need to secure, deliver, and optimize those apps and APIs. As part of our efforts to capture that growth, we continue to drive innovation, advances, and integration across our product families, including F5 BigIP, F5 NGINX, and F5 Distributed Cloud Services. I will call out some customer highlights from each product family from the quarter. Our BigIP family, which serves traditional applications either on-premises, co-located, or in cloud environments, continues to take share from competitors who have failed to invest in innovation. From a hardware perspective, the value proposition with our next-generation platforms is resonating with customers, with our R-Series and Velos platforms representing more than 70% of Q3 systems bookings. On the software side, BIG-IP's data plane performance, automation capabilities, and lower total cost of ownership continues to differentiate our offering and drove multiple wins in the quarter, including wins at a major American airline, a multinational automobile manufacturer, and a major UK retail and commercial bank. We also saw strong demand for F5 NGINX in the quarter. NGINX serves modern, container-native, and microservices-based applications and APIs. We continue to see large enterprises adopt NGINX for their cloud and Kubernetes workloads. We have repeatedly demonstrated that when applications are built with NGINX from the ground up and those apps grow, we grow with them. We saw this in several NGINX growth opportunities in the quarter, including a multi-million dollar term-based subscription renewal that grew by an extraordinary 10x from initial inception. The customer, which provides a large collaboration platform, is streamlining deployments in both public and private clouds using F5 Engine X as their single platform for load balancing, caching, and telemetry. Over the last several years, we have invested both organically and inorganically to build a portfolio of SaaS and managed services called F5 Distributed Cloud Services. Since launching Distributed Cloud in February of 22, we have been expanding our offerings and building momentum for multiple security use cases. A great example of this is a win with a global financial services industry application provider that wanted to standardize its web application firewall and API protection, or WAP, policies and deployments in APAC and EMEA to reduce time to delivery. Their existing disjointed application security and complex policy tuning was a challenge, as was managing apps and APIs across distributed environments with a small team. Today, F5 Distributed Cloud Services is protecting their apps and APIs with WAP and multi-cloud networking, reducing their time to delivery from months to minutes. It is early days still, but we also are seeing encouraging signs that our distributed cloud services are intercepting the market specifically in two emerging categories. API security, and multi-cloud networking. On API security, with the growth of modern applications using containers and composed of distributed microservices, the number of API endpoints is exploding. CISOs tell us they struggle to know how many APIs they have, where they all are, who is connecting to them, and to what extent they are secured. Doing so requires robust API discovery and protection capabilities like those we offer in our distributed cloud API security service. When a North American service provider experienced a serious cybersecurity incident, which caused them to lose their entire virtualization infrastructure at multiple data centers, they turned to us for urgent help. F5 Distributed Cloud Services' superior features, functionality, and value beat a competitive offering, and we worked with the customer to emergency onboard the platform including advanced WAP, bot defense, and API security. Once deployed, the customer immediately started migrating sites, restoring their services. We are also seeing strong early traction in our distributed cloud multi-cloud networking offerings launched just this past March. 85% of respondents cited in our 2023 State of Application Strategy report since they already are managing multi-cloud environments. Securely connecting applications between on-premises, multi-cloud, and edge environments at scale is a tough task for any organization. Our secure multi-cloud networking solutions change the game. Our ability to package networking, security and distribution of applications and APIs is unique. Until now, customers have been forced to manage and secure these layers in isolation, often leading to operational complexity, network latency and weak security. Our multi-cloud networking solutions reduce operational complexity for our customers and make it possible for them to securely connect distributed networks and applications across public clouds, on-premises data centers, and edge locations. Customers are beginning to understand the power of our secure multicloud networks' ability to provide end-to-end visibility, control, and security across all of their applications. This empowers them to move workloads to the cloud, between clouds, and even to the edge while maintaining end-to-end visibility and consistent security policy. FI Distributed Cloud uniquely unifies the visibility, control, and security for every application and API so that applications can be delivered without constraints and with the security today's threat environment demands. Early traction for our secure multi-cloud networking offerings includes a win with one of the world's largest independent providers of insurance claims management systems. FI's multi-cloud networking now enables their global SaaS offerings. The customer first deployed our distributed cloud WAP in February of 2022 to protect a business-critical public cloud workload. In early 23, the customer was abruptly asked to leave a data center, forcing them to lift and shift workloads to the public cloud in just two weeks. They used F5 distributed cloud for this emergency lift and shift. In fact, the project went so smoothly that they opted to expedite moving their global data centers to public clouds. now the customer has standardized on f5 distributed cloud for their secure multi-cloud networking needs spanning across multiple clouds and protecting external and internal applications and apis these are just some of the customer challenges we help tackle in q3 while we are not in a position to predict with precision when customer spending patterns will return to more normal levels F5 is well-placed to benefit when they do. We are encouraged both by the early signs of stability in Q3 and with the resonance our application and API-focused approach is having with customers. We are making it possible for our customers to secure, deliver, and optimize their applications and APIs with a consistent approach no matter what environment they are deployed in, data center, co-located, private cloud, or public cloud. And this is a critical capability and differentiator in today's hybrid multi-cloud network world. Now, I will turn the call to Frank. Frank?

Thank you, Francois, and good afternoon, everyone. I will review our Q3 results before I discuss our fourth quarter outlook. We delivered Q3 revenue of $703 million, reflecting 4% growth year-over-year. Our revenue remained roughly split between global services and product, with global services representing 53% of total revenue. Global services revenue of $374 million grew a strong 8% due to continued high maintenance renewals as well as the impacts of the price increases introduced last year. Product revenue totaled $328 million, representing growth of 1% year-over-year. Systems revenue of $155 million grew 5% year-over-year. Software revenue totaled $174 million, down 3% from a tough compare in the year-ago period. Our software revenue is comprised of both subscriptions and perpetual license sales. Subscription-based revenue hit a new high in Q3 in both dollars and as a percentage of software revenue. Our subscription revenue totaled 152 million, or 87% of Q3's total software revenue, and as Francois mentioned, grew 4% year-over-year. Perpetual license sales of 22 million represented 13% of Q3's software revenue. Revenue from recurring sources contributed 75% of Q3's revenue, which is a new all-time high as a result of the strong subscription contribution. Recurring revenue includes subscription-based revenue, as well as the maintenance portion of our services revenue. On a regional basis, revenue from Americas grew 3% year-over-year, representing 57% of total revenue. EMEA grew 16%, representing 26% of revenue, and APAC declined 6%, representing 18% of revenue. Looking at our major verticals, during Q3, enterprise customers represented 66% of product bookings, Service providers represented 13%, and government customers represented 21%, including 8% from U.S. federal. Our Q3 operating results were strong, reflecting our previously announced cost reductions and overall operating discipline. GAAP gross margin was 79.8%. Non-GAAP gross margin was 82.5%, an improvement of more than 200 basis points sequentially. GAAP operating expenses were $457 million. Non-GAAP operating expenses were $346 million, slightly lower than our guided range, and reflecting a partial quarter benefit from the cost reductions we announced in April. Our GAAP operating margin was 14.7%. Our non-GAAP operating margin was 33.2%, representing a sequential improvement of more than 600 basis points. Our GAAP-affected tax rate for the quarter was 16.4%. Our non-GAAP-affected tax rate was 18.1%. This is below our target range for the year, largely driven by a non-recurring benefit associated with the filing of our annual federal income tax return during the quarter. Our GAAP net income for the quarter was $89 million or $1.48 per share. Our non-GAAP net income was very strong at $194 million or $3.21 per share, well above the top end of our guided range. of $2.78 to $2.90 per share. This reflects the combined impact of our gross margin improvements and operating expense discipline, as well as a Q3 tax benefit. I will now turn to cash flow and the balance sheet, which also remains very strong. We generated $165 million in cash flow from operations in Q3, driven by our improved profitability and strong cash collections. Capital expenditures for the quarter were $15 million. DSO for the quarter was 56 days down from 62 in Q2 and closer to our historic range as a result of earlier invoicing related to improved shipping linearity as our supply chain continued to stabilize. Cash and investments totaled approximately $696 million at quarter end. Deferred revenue increased 9% year over year to $1.79 billion. driven by the high service maintenance attach rates we've seen throughout the year and continued growth in subscription as a percent of our software mix. As we committed to on our last call, we repurchased $250 million worth of shares in Q3. Finally, we ended the quarter with approximately 6,500 employees, which reflects the headcount reductions we announced in April. I will now share our outlook for Q4. We expect Q4 revenue in the range of $690 to $710 million, with gross margins of approximately 83%. Unless otherwise stated, my guidance comments reference non-GAAP operating metrics. With the full quarter benefit from the cost reductions announced in April, we estimate Q4 operating expenses of $338 to $350 million. Incorporating our year-to-date results, we have now narrowed our estimates for our FY23 effective tax rate to approximately 20% for the year. As a result, we are targeting Q4 non-GAAP earnings in the range of $3.15 to $3.27 per share. We expect Q4 share-based compensation expense of approximately $55 to $57 million. Year-to-date, we have used 68% of our free cash flow towards repurchases. We remain committed to returning cash to shareholders and continue to expect to use at least 50% of our annual free cash flow towards share repurchases. I will now turn the call back over to Francois. Francois?