F5, Inc.

Good afternoon and welcome to the F5 Inc. Third Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this 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 Locot-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 here 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 A copy of today's press release is available on our website at F5.com, or an archived version of today's audio will be available through October 28, 2024. We will post the slide deck accompanying today's webcast 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 1374-7602. The telephonic replay will be available through midnight Pacific time, July 30th, 2024. 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 GAAP 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. I will speak to our Q3 highlights as well as our expectations for Q4. Franck will then review the details of our Q3 results and provide additional color on our outlook. We delivered Q3 revenue of $695 million, which is at the top end of our revenue guidance range. We also delivered non-GAAP EPS of $3.36. This is well above the top end of our guidance, as a result of our continued operating discipline, as well as some tax favorability in the quarter. Total software revenue grew 3% year over year and 13% sequentially. Our continued strong software renewals provide an indicator of both customer satisfaction and our momentum overall. In a positive shift from last quarter, during Q3, new software revenue also contributed to software growth in the quarter. Global services grew 3% in Q3. The combination of software and global services growth largely offset systems revenue, which was $130 million, down 16% year over year. During Q3, we started to see some areas of improving demand after a prolonged period of budget scrutiny, evidenced by improving pipeline and close rates. As a result, our team drove strong bookings growth in Q3, including an uptick in new business. Factoring in these signals, we expect Q4 revenue in the range of 720 to 740 million, which puts us on track to deliver toward the top end of our FY24 revenue guidance. Our outlook is informed by three considerations. One, our growing pipeline, two, our visibility into software renewals, and three, the continued strong expansion trends from customers. We expect FY24 revenue of approximately $2.8 billion, roughly flat with FY23. This is despite the roughly $180 million systems backlog headwind we have had to overcome this year. Given the strong performance from software thus far this year, and the good visibility we have into Q4, we now expect mid to high single-digit software revenue growth for the year. This is up from our prior characterization of flat to modest growth. We also expect continued operating discipline, combined with the tax favorability we saw in Q3, will enable us to achieve FY24 non-GAAP EPS growth of approximately 12%. This is up from our prior range of 7% to 9% growth. Before Frang discusses our results and outlook in greater detail, I will recap how F5 is solving our customers' hybrid multi-cloud challenges, what we call the ball of fire, by highlighting some notable customer wins from the quarter. The current state of application security and delivery for large enterprises has our customers' IT teams in crisis. They are battling increasing complexity, costs, and risks simultaneously. and AI-driven applications are only making these challenges more pronounced. Only F5 can truly support the demands of today's hybrid multi-class application infrastructures. We are the only solution provider that secures, delivers, and optimizes any app or any API anywhere. We are highly differentiated in addressing customers' pain points in several ways. First, app security. F5 delivers the most effective and comprehensive app and API security platform in the industry. We enable our customers to consolidate point products targeting specific threats onto a single integrated platform with a suite of best-in-class capabilities and no efficacy trade-offs. Second, simplification. F5 enables the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require. Only F5 has a solution footprint that extends across public clouds to the edge and customers' on-premises environments. Our solutions simplify connecting disparate infrastructure environments and the applications deployed in and across them. In short, we are on a mission to make hybrid multi-cloud ridiculously easy. And third, standardization and automation. F5 delivers more cost-effective and scalable IT operations. We streamline customers' operations with consistent policies, comprehensive automation, and rich analytics. This enables customers to consolidate vendors and tool sets, rationalize operational silos, and automate lifecycle management of their on-premises deployments. These three points of strong differentiation combined with the well-established role F5 plays embedded in the flow of application traffic enables us to extinguish the ball of fire for our customers in ways our competitors cannot. Let me review a few customer wins from Q3 that illustrate how F5 is differentiated and how our capabilities are delivering value for our customers. The first two customer examples I will speak to highlight our application and API security capabilities. During Q3, a US-based security products and services company launched an effort to modernize its IT infrastructure. Specifically, the customer was looking to expand beyond hardware to a hybrid cloud and SaaS-based IT and security infrastructure. The customer was an existing BIG-IP customer and selected F5 distributed cloud services to complement its big IP estate, creating a scalable, self-managed cloud and SaaS-based solution. F5's portfolio of hardware, software, and SaaS deployment options delivers standardized application and API security across their multi-cloud and hybrid environments, enabling them to modernize at their own pace. Also during the quarter, A channel partner brought in F5 when a U.S. state government experienced a DDoS attack that brought down its servers. We quickly completed a successful emergency mitigation and deployed a suite of F5 solutions via distributed cloud services. When the threat actor changed tactics and launched application layer attacks, F5's operations team quickly activated WAF and bug defense and stopped them. As a result of F5's performance under pressure, the customer is moving additional services to F5, including their DNS and other web and application properties. Before I move on to our next point of differentiation, I will take a minute to highlight that our continued innovation and industry-leading security performance is winning accolades from industry experts as well as customers. During the quarter, F5 was recognized as an application security leader by several independent parties. First, F5 is rated as a leader in both security efficacy and operational efficiency in SecureIQ Labs' 2024 Cloud WAP Cyber Risk Validation Report. F5 distributed Cloud WAP earned SecureIQ Labs' Secure by Design rating, passing the WAP vulnerability assessment with a perfect score. In addition, Enterprise Management Associates singled out F5 as a visionary in API security for our distributed cloud web app and API protection or WAP capabilities. In its vendor vision 2024 report, F5 is lauded for its holistic approach to API and application security, eliminating the need for customers to pay for and manage desperate API security solutions. And finally, Copingo Cole recognized F5 as a leader in web application firewall market, spotlighting F5 as a forerunner that is setting the bar for excellence in cybersecurity defenses. The next two customer wins I will highlight exemplify how F5 is enabling the hybrid multi-cloud flexibility our customers' businesses demand with the simplicity their IT operations require. They both also happen to be examples of our continued momentum against competitors. During the quarter, a US-based technology company that delivers a web and video collaboration platform selected F5 to replace its incumbent ADC provider. The customer will use BIG-IP, including WAF and DNS capabilities, to consolidate and standardize their infrastructure across their on-premises and third-party data centers. F5 was selected because of our software and hardware deployment options, the efficacy of our advanced WAF, and our flexible commercial models. I will note that this also was a land and expand win. In 2020, we displaced a competitor for DDoS protection. In another example from the quarter, the large APAC-based travel agency selected F5 Distributed Cloud to enable it to address multiple challenges simultaneously. Initially, the customer was looking to streamline app delivery through a single abstract layer. In the process of proving its capabilities for this use case, F5 distributed cloud outperformed the incumbent security provider. As a result, the customer consolidated on F5, enabling them to stage application migration to new data centers while minimizing disruption and risk. In addition, Distributed Cloud's SaaS console and comprehensive observability features drastically reduced operational overhead for the customer. The final two customer wins I will speak to highlight how we streamlined customers' operations with consistent policies, comprehensive automation, and rich analytics. During Q3, our team secured a large land and expand deal that was 18 months in the making. The customer is a global retail and investment bank with an extensive branch network. Banking regulations require them to separate segments of their IT environments. To accomplish this, they are building a new virtualized network to run in parallel to their existing environment. They selected BIG-IP software to augment their existing BIG-IP footprint. They also upgraded to NGINX Plus from NGINX Open Source. BIG-IP's automation capabilities enable them to implement automation best practices across the board, saving time and reducing the potential for human error. They are now able to operationalize multiple BIG-IPs in just 20 to 30 minutes versus the days or in some cases even weeks required previously. In addition, NGINX Plus delivers reliable and secure access to their Kubernetes applications and enables a consistent security posture across all of their application environments. The final example from the quarter I will highlight is with a global automotive company. This customer is an existing BIG-IP customer who is renewing and expanding their BIG-IP subscription for the second time. The customer is leveraging BIG-IP's automation capabilities to enable self-service application delivery and security services in seconds compared to the weeks or months it took previously. BIG-IP has significantly accelerated this customer's time to market for both internal and external customers. The value of BIG-IP's automation capabilities is so significant to them that their consumption has doubled with each renewal. Before I pass the call to Franck, I will close with some brief commentary about how we are enabling AI, shaping the AI revolution, and working with customers to ensure they are AI ready. During Q3, we continued to engage with several of our major customers, focusing on their AI initiatives and collaborating to address their critical AI related challenges. Two pivotal trends have emerged from these interactions. First, the largest organizations which are building AI factories are starting to recognize that high performance networking and security are non-negotiable for both model training and inference. Second, organizations that are using foundational AI models for inference use APIs extensively. This use case also demands top tier performance and robust security. In both scenarios, whether constructing AI factories for model training or executing inference, F5's leading ADC platform and our distinctive capabilities in application security and delivery will have an important role to play. We are seeing and winning early AI use cases. As an example, a global automotive company selected F5 Big IT to rapidly and securely transfer data from data storage systems to large scale clusters, significantly accelerating their model training process. For retrieval augmented generation use cases like this, our solutions are optimizing the performance of AI models as they access and incorporate external data sources in real time. Separate from this customer, Our entire product family is being utilized by other customers to load balance and protect AI-related API traffic. In the AI era, all communication is happening via APIs, which are increasingly distributed, running on-premises, in private clouds, and across multiple public clouds. F5's distributed cloud services is an ideal solution for organizations needing consistent management and security for their distributed AI APIs. Leveraging our longstanding partnerships with semiconductor leaders, we also are strategically positioned to advance these relationships in the AI era. Our approach remains technology agnostic, focusing on solving real-world practical AI challenges for customers. Realistically, we expect we are probably one to two years out from enterprises deploying AI in production at scale. Importantly, though, F5 is not just adapting to the AI revolution, we are actively shaping it, providing the critical infrastructure that enables our customers to harness the full potential of AI safely and efficiently. Now, I will turn the call to Franck.