F5, Inc. (NASDAQ:FFIV) Q2 2023 Earnings Call Transcript

So we did have some unusual cash hits to last year in relation to component costs and other supply chain challenges that we do anticipate are going to work their way out of our model by Q4. You saw some of that happen in the Q2 timeframe, you will see more of that happen in Q3. But we don’t guide to a specific margin percentage, because we don’t guide to cash flow.Ray McDonough Okay. Thanks for taking the questions. Appreciate it.Frank Pelzer Sure.Operator And the next question comes from the line of Tim Long with Barclays. Please proceed with your question.Tim Long Thank you. I have two as well on software. First, you guys said a few times the renewals came in as expected. It would be helpful if you could give us a little color about what you were expecting there, were you expecting them to be down or up?

So any color you can give us on what your kind of expectations were for the renewals business? And then second, similar to a previous question, but if you could talk about kind of the weakness more on the product and solution lens. So how much of this is the core virtually do you see, how much of this is maybe not fully monetizing in NGINX, how much of this is not really able to bundle other software offerings on top of virtual ADCs. So anything you can give us kind of on that, what’s missing when you look back at the acquisitions and what it was supposed to do for the software business, what’s not happening? Thank you.François Locoh-Donou Thank you, Tim. I will start with the second part of your question and Frank will come back to the renewables question.

So if we could — so let me start with the product piece. Where we have seen an impact in is, in the ADC area we are impacted both on hardware and software. And then — what I mean by that is really traditional ADC, both systems and software.And we are seeing very strong evidence that this is our customers sweating their assets and we are seeing that from the service renewals and the attach rates. In some cases, where we are able to measure it, we can see the utilization of some of our platforms have gone higher than customers would typically go and even in customer conversations, it is clear that where they can avoid spending right now, they are avoiding it or delaying making these purchases later.In security, part of our security business is attached to ADC and that part of the business we have seen an impact and it is affected, and we are also seeing a bigger impact in the service provider vertical in security, whether they have tried to reduce their CapEx pretty quickly.Our software security business is more resilient, and our SaaS and managed services security business actually continues to grow, albeit at a lower rate than last year, but continues to grow.

So if you parse it out, I would say, those are the areas, and of course, NGINX, we have continued to see growth there. Of course, the growth rate is also impacted, but we continue to see growth there.When you step back from this then and you mentioned the overall portfolio and acquisitions. We are absolutely clear and it’s the feedback from our customers that the world is going more and more to hybrid cloud and multi-cloud and the portfolio that we have assembled is essentially the only portfolio in the industry that can secure and deliver every application in any one of these environments, private cloud, public cloud, increasingly at the edge in any consumption form factors, so hardware, software and SaaS.And so we feel very good about the portfolio we have and how it’s positioned to drive the architectures of our customers going forward, where we think we are seeing the more severe slowdown in the short-term, is in ADCs, where customers can actually perhaps sweat the assets for a little longer, but we expect that demand will resume in short order.Frank Pelzer And Tim, on the maintenance — the renewal question, I am going to separate out the maintenance renewals, which have obviously been quite strong on the services side and the software renewals, which are also strong, and the your saying, what are your expectations?When you think about the way we have talked about businesses, STPs [ph] have been the predominant amount of growth that we have seen in our software business and that’s the majority of what comes up for renewal in any given quarter.

Those have performed largely to our expectations, and in many cases, growing from the levels that they were when they ended year three.There has been some this year where we have taken a look at years two of the agreement and year three of the agreement, where that true forward amount has not been up to the level of expectations that we had that we modeled from previous years as people are very critical on trying to consume very close to what they have contracted for.And so we are not seeing the same overages that we have before, and we think that’s probably indicative of the same way that cloud providers are seeing their consumption. So when we say the renewal base, the renewal base is up substantially last year as expected as this is the first full year of STP sales when we take a look back three years ago as a comparison.Tim Long Okay.

Thank you.Operator And the next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.Samik Chatterjee Yeah. Thank you and hi. Thanks for taking my questions. I guess for the first one, I think, just to clarify, I think, François, you made a comment about fiscal 2024 talking about double-digit earnings growth. Just wanted to see sort of how you are thinking about topline sort of underpinning that expectation? I know you talked about gross margin improvement, as well as operating margin, but sort of maybe give us a bit more color about how you are thinking about the topline underpinning that guide? And I have a follow-up. Thanks.François Locoh-Donou Samik, I missed part of the question, but is it about topline in fiscal 2024?Samik Chatterjee Yes.

I think you made a comment about double-digit earnings growth. So just curious sort of how you are thinking about the topline as you talked about margin expansion being the key driver there?François Locoh-Donou Yeah. So look, Samik, when we look at fiscal 2024, of course, we are not in a position or have the visibility really to guide to the topline for 2024. But I can give you just a few pointers here. It is clear from the — from where we are at with our ability to ship today that we will ship the vast majority of our backlog in fiscal 2024, either by the end of the third quarter or the end of the fourth quarter, sorry, by the end of fiscal 2023, sorry, by the end of Q3 or at the end of Q4 fiscal 2023.So when you look at that on a normalized backlog level in 2024, clearly, that’s going to represent a headwind to revenue growth in 2024 in the order of 6 points to 8 points of growth given that dynamic.On the other hand, we also see that the — we are seeing a lot of projects that are delayed and our view is that customers can only sweat their assets for so long.