F5, Inc.

Good afternoon and welcome to the F5, Inc. Fourth Quarter Fiscal 2023 Financial Results Conference Call. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Also, today's conference is being recorded. If anyone has any objections, 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-Logo Danu, 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 A copy of today's press release is available on our website at F5.com, where an archived version of today's audio will be available through January 28, 2024. 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 1374-1762. The telephonic replay will be available through midnight Pacific time, October 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-gap 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. In my remarks today, I will speak to our Q4 and FY23 highlights as well as our expectations for FY24. Frank will then review the details of our Q4 and FY23 results and provide some additional color about our outlook. We delivered a solid Q4 in an environment that showed some additional signs of stabilization. We saw strength from our enterprise vertical, including technology and financial services customers, offset by softness from service providers. The result was Q4 revenue near the high end of our guidance range. Our continued operating discipline helped us deliver earnings per share well above the high end of our range. Our global services team delivered robust 9% revenue growth driven by strong maintenance renewals and reflecting the benefit of price increases announced last year. In addition, software revenue grew 11% aided by 27% growth in subscription software. Software revenue from renewals, which have performed well all year, ticked up in Q4 over Q3. And while new subscriptions remained down year over year, we saw some improvement compared to the first half. Strength in global services and software offset a systems decline of 25%, which reflects a lower level of backlog-related shipments than we had for the first three quarters of the year. Stepping back and looking at fiscal year 2023, We adjusted to the environmental challenges we faced, resolving supply chain pressures, and largely returning to normalized delivery times. We took decisive action to adjust our operating model to the realities of the demand environment, driving meaningful improvements to our operating margins, and delivering 15% EPS growth. We also returned 58% of our annual free cash flow to shareholders by our share repurchases. Highlights from FY23 include, first, subscription renewals performed largely to plan for the year. In today's tough IT spam environment, this is a strong signal that customers are getting the value and return they expect from our software solutions. Second, F5 Distributed Cloud Services' SaaS offerings are gaining traction with both new and existing customers. In fact, 29% of distributed cloud SaaS customers are new to F5. In total, we now have more than 500 customers for our SaaS services on distributed cloud, an increase of more than 200% since Q4 of last year. Third, we are having very good success displacing a traditional ADC competitor in both software and hardware form factors. And finally, we delivered meaningful operating improvements driving our non-GAAP operating margin up 130 basis points from FY22. As we look ahead, we enter FY24 in an environment that seems to be stabilizing. In fact, from a demand perspective, we saw encouraging early signs with enterprise customers in Q4, though it is too soon to say if what we are seeing is a durable trend. As we contemplate our outlook for FY24, we consider a number of factors. At the macro level, we expect continued application and API growth fueled by automation efforts and new use cases, including generative AI. We also expect customer spending caution persists into FY24, but is stable. And finally, we believe the tension between application and API growth and customers' ability to sweat assets will reach a tipping point, causing them to reinvest in their application infrastructure, likely beginning sometime in FY24. At the F5 level, we also consider, first, we have an approximately $180 million revenue headwind from FY23's backlog fulfillment, primarily in systems. We expect flat to modest total software revenue growth in FY24 as a result of a number of dynamics including continued subscription renewal strength and steady distributed cloud SaaS revenue growth. These positive trends will be offset by a series of transitions we are executing in our SaaS and managed services offerings. And third, we expect our global services revenue will return to low single-digit growth as we lap price increases. As a result of these factors, we expect our FY24 revenue will be flat to down low single digits from FY23, inclusive of the 6% headwind related to FY23 backlog shipments. We also expect to return to mid single digit revenue growth in FY25. Whether we achieve the low or high end of our revenue range, we are committed to driving continuing strong profitability, and we will continue to manage our operating model with discipline. We expect to deliver FY24 non-GAAP operating margin in a range of 33% to 34%. We are also targeting FY24 non-GAAP EPS growth of 5% to 7%, reflecting growth of at least 10% on a tax-neutral basis compared to FY23. 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. F5 is the only company that can deliver, secure, and optimize any app and API anywhere. Our security and delivery solutions offer a custom fit for each app and API. Modern apps and APIs require different solutions than legacy apps. We have the right solutions for both. In addition to delivering the right tools for the right app or API, our combination of deployable software and hardware and SaaS and managed service offerings means we are the only vendor that can serve every app and API across all environments in a data center, public cloud, and at the edge. We are the only company who can do this today. And going forward, further integration and convergence of our solutions will make it much easier for our customers to secure and deliver their apps across all infrastructure environments. The power of our converged portfolio is resonating with customers who are able to deploy the solutions they need today with the knowledge that F5 will be with them on every step of their multi-cloud journey. Before I pass the call to Frank, I will speak to some customer highlights from each of our product families. Our F5 BigIP family serves traditional applications either on-premises, co-located, or in cloud environments. BigIP's data plane performance, automation capabilities, and seamless integration into public cloud environments continues to differentiate the platform. And we continue to win against competitors. 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 80% of Q4 systems bookings. In one example of a big IP win from Q4, we displaced a competitor at a North American healthcare customer. The opportunity arose as a result of the incumbent provider's inability to handle a mission-critical upgrade to the customer's physician portal. The customer selected F5 Big IP based on its advanced application delivery capabilities, secure access management, our partnership with their healthcare records platform, and confidence in our roadmap. In addition to providing the mission-critical functionality the customer needed urgently, We replaced all of the competitors' use cases with the customer, simplifying their application environment and future-proofing their data centers. F5 NGINX delivered a very strong Q4. 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, And as those applications scale, we are seeing our NGINX opportunity scale as well. In addition, customers are also leveraging NGINX for app layer security for containers. As an example, in Q4, when the e-commerce division of a global technology customer needed to comply with new data security standards, they selected NGINX App Protect to implement app layer security to the container's processing consumer's credit card data. We have invested both organically and inorganically to build our F5 distributed cloud services, a portfolio of SaaS and managed services. Apart from the offering transitions I mentioned, we are really excited about the future for distributed cloud. We are intercepting two exciting emerging growth categories, web app and API protection, or WAP, and secure multi-cloud networking, or secure MCN, that will drive future growth for distributed cloud services. In one WAP win for the quarter, we are helping an EMEA-based banking customer evolve from its traditional WAP security posture to a more comprehensive WAP solution that encompasses web application firewall, as well as API protection, bot defense, and Layer 7 DDoS protection. This customer approached us when they came under attack by a malicious foreign actor that their existing WAF could not handle. Against multiple competitors, we successfully demonstrated the superiority of our WAF offering, including our ability to protect major payment companies' APIs. Early traction for our secure multi-cloud networking offerings includes a Q4 win with a large retailer in Latin America that also offers a range of financial services to its customers. As part of its digital transformation efforts, the customer needed a solution to enable them to grow and manage their expanding body of cloud-native applications. They also planned to migrate their large existing footprint of virtual machines and on-premises appliances to the cloud. After a thorough proof of concept, the customer selected our secure multi-cloud networking solution because of our ability to use the customer edge to make the move 100% transparent to both internal users and consumers. We are also seeing cross-portfolio traction with customers who are operating in hybrid environments choosing to deploy F5 across multiple form factors. In a win that highlights the synergies of our product families during Q4, we secured a win with an APAC based financial services provider. The customer launched a multifaceted modernization project designed to add and consolidate applications and enable scalability to handle exponential traffic growth. They also needed help stopping a barrage of constant automated attacks. In a competitive bid, Our combination of BIG-IP and F5 distributed cloud bot defense won out. The combination enables the customer to manage unpredictable traffic growth, customize services for each application, and enhance their security posture with our ML-based AI engine. These real-life use cases offer a view to how we are enabling customers to secure, deliver, optimize and manage their applications and APIs, and how we simplify the challenges of operating in a complex hybrid multi-cloud world. Now I will turn the call to Franck. Franck?