FFIV - NASDAQ
F5, Inc.
FFIV·NASDAQ
$405.66
-0.85%TechnologySoftware - Infrastructure
F5, Inc. provides multi-cloud application security and delivery solutions for the security, performance, and availability of network applications, servers, and storage systems. The company's multi-cloud application security and delivery solutions enable its customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. It offers application security and delivery products, including BIG-IP appliances and VIPRION chassis and related software modules and software-only Virtual Editions; Local Traffic Manager and DNS Services; Advanced Firewall Manager and Policy Enforcement Manager that leverage the unique performance characteristics of its hardware and software architecture; Application Security Manager and Access Policy Manager; NGINX Plus and NGINX Controller; Shape Defense and Enterprise Defense; Secure Web Gateway, and Silverline DDoS and Application security offerings; and online fraud and abuse prevention solutions. The company also provides a range of professional services, including consulting, training, installation, maintenance, and other technical support services. F5, Inc. sells its products to large enterprise businesses, public sector institutions, governments, and service providers through distributors, value-added resellers, managed service providers, and systems integrators in the Americas, Europe, the Middle East, Africa, and the Asia Pacific region. It has partnerships with public cloud providers, such as Amazon Web Services, Microsoft Azure, and Google Cloud Platform. The company was formerly known as F5 Networks, Inc. and changed its name to F5, Inc. in November 2021. F5, Inc. was incorporated in 1996 and is headquartered in Seattle, Washington.
At a Glance
Live SnapshotMarket Cap$22.89B
EPS11.9600
P/E Ratio33.92
Earnings Date07/29/2026
Earnings Call Transcript
FFIV • 2023 • Q1
Operator
Greetings, and welcome to the F5, Inc. First Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Suzanne DuLong. Thank you, Suzanne. You may begin.
Operator
[Operator Instructions] Our first question is from Sami Badri with Credit Suisse.
Sami Badri
All right. Thank you very much for the question or at least opportunity to ask questions. I have two. First one is, could we just decompose the services revenue growth? You mentioned price increases and then maintenance renewals. Could you kind of split that reported number into each -- like what was stronger? Was it more renewals, et cetera, if you can just decompose that? The other question I have is, clearly, the IT landscape has shifted. And I think the big question myself and other investors are asking ourselves is if there is incremental risk through the year as far as demand or demand signals changing unless just say they get worse, how will those signals manifest themselves into F5's business and results? And a good example, a question we get is, if things decay or deteriorates, does that mean that product orders sitting on your backlog get canceled? Is that the -- is that kind of the deterioration that would yield that kind of output? I mean to get your comments on those two questions.
Operator
Our next question is from Tim Long with Barclays.
Operator
Our next question is from Alex Henderson with Needham.
Alex Henderson
Great. helping you address a little bit about what your backlog in systems looks like. I think it was running 40% to 50% of four-quarter product sales in systems. And I was hoping you could give us some insights there in terms of what the backlog is at? And then second, obviously, getting the rSeries out in March of last year was an important milestone, but there was a lot of application functionality that you needed to get built into it in order to solve individual customers' needs in order to replace the iSeries. And I was hoping you could give us an update on where you are on that? And do you think that, that then creates post, say, the June quarter, a refresh cycle on the large installed base of iSeries?
Operator
Our next question is from Samik Chatterjee with JPMorgan.
Samik Chatterjee
I guess for the first one, if I can, François, ask you to sort of share a bit more color on in terms of budget scrutiny, which regions as well as customer...
Frank Pelzer
Samik, we're having a hard time hearing you. You may want to speak up.
Samik Chatterjee
Can you hear me now?
Frank Pelzer
Yes, much better.
Operator
Our next question is from Amit Daryani with Evercore.
Operator
Our next question is from Meta Marshall with Morgan Stanley.
Frank Pelzer
Meta, in relation to gross margins, particularly product gross margins, our view of that for the year has not changed. And we talked about the supply chain improvements starting to benefit our product gross margins really in the latter half of this year, even all the way up into Q4. But the real benefit that we're going to see is going to be in FY '24 in terms of product gross margin improvement. We still had the purchase price variance and expedite fees that we're working through the components that make up our box builds through this year, and we still have got a few critical components where we are having to go in the broker market. So largely, we will start to see improvement in Q4, but more of it you will see in FY '24.
Operator
Our next question is from James Fish with Piper Sandler.
James Fish
On the software number, I don't get the reluctance to not give a number at this point. I get -- we're kind of missing the 15% to 20%, but it's the main question we're getting after hours. So any clarity on that would be helpful, Frank. And should we be assuming the kind of net new business, double-digit decline in new recurring software should continue for the remainder of the year? Or are you expecting this to kind of improve as that new business comp gets easier in the second half of the year? And just I have a quick follow-up after.
Frank Pelzer
Sure. And I appreciate the question, Jim. We -- again, as François mentioned, a second ago, we are not updating our 15% to 20% guidance because we do still see a path to get there. Again, it's harder path. I think that we're not necessarily expecting to change in environment. And part of the reason why we're not updating the back half is because the visibility is cloudy right now in terms of demand. And with -- when we came into the year, we talked about over 50% of the revenue that we expected as part of that 15% to 20% growth was going to come from new business activity. And that we didn't expect that to grow, but we didn't expect to see the types of percentage declines that we saw in Q1. And so just with the lack of visibility that we've got right now, we don't have a new range to offer to you today. But we do feel like it's less likely that we will be in that range.
Operator
Our next question is from Simon Leopold with Raymond James.
Operator
Our next question is from Tom Blakey with KeyBanc Capital Markets.
Thomas Blakey
I guess my first question is also -- or both questions are on software as well. The numbers you've given for us are -- you can kind of back into, I believe, strong double-digit growth in the renewal, kind of true-up business in the quarter. Is there anything onetime in that number? Or anything that kind of would lead us to believe that, that can't -- you don't have any visibility into that -- into fiscal '23, that growth kind of remaining?
Frank Pelzer
Yes. We did not experience any sort of onetime benefits, I think the -- however you want to think about the perpetual business versus the subscription business, but there was nothing unusual in the quarter.
Thomas Blakey
Yes. I'm sorry, I'm just focusing on the subscription business with regard to renewals and true-ups. And then as you mentioned -- sorry, Frank, go ahead.
Frank Pelzer
No, no, no. Absolutely, Tom.
Thomas Blakey
Okay. And then just on the perpetual side, you've been a little bit above trend line in the last couple of years -- the trend line over the last couple of years, where -- what kind of visibility do you have into this perpetual business line, in the pipeline there? Comments from François, maybe. And maybe if you could juxtapose that with your comments about pause and a slowdown in spending just doesn't really jive with your kind of like beating the last couple of quarters pretty handily from a perpetual license perspective, that would be helpful.
Frank Pelzer
Yes. Tom, let me start with that, and François wants to add, he certainly can. Again, we think some of the power of our model is the flexibility of the way customers want to consume. And in some cases, people have OpEx budgets and in other cases, they have CapEx budgets. And so in certain instances, I think they'd rather consume on a CapEx basis, and some of that will come through perpetual. It's not something that we try to spend a ton of time forecasting the split between the two. We're happy when revenue falls in either. And so for the last couple of quarters, you may have seen that tick up from what was sort of a low $30-ish million a quarter business to the upper $30 million, low $40 million. But generally, those are customer preferences and how they want to consume our solutions.
Operator
Our next question is from Jim Suva with Citigroup.
Jim Suva
Your commentary about the hardware being stronger especially with your outlook and such and the mix shift to more towards that, which will impact things. I understand it all, but the question is, is that impacted at all due to the supply chain issues during the past year or two in that maybe customers are absorbing some of the orders that they did and then this is going to face a headwind? Because normally, I would think about customers buying both the hardware and software kind of together.
Frank Pelzer
Jim, is it affected by the supply chain? The answer to that is yes, because we have a lot of orders that we were not able to ship last year, and we have made a lot of improvements in supply chain, both from our suppliers in the general environment and our own redesign of our platforms that give us better visibility on what we're going to be able to ship to customers over the next three quarters. And we've always said we wanted to be able to get all this these orders to our customers as soon as possible and reduce our lead times, which we believe actually will be a tailwind to demand when we're sale to reduce our demand. So yes, it is affected by that. But it is -- that's part of why we see the soft side in the hardware for the year. It's because our view today of what we'll be able to ship has actually improved from where it was three months ago.
Jim Suva
Okay. That makes a lot of sense. And then just given the macro cautiousness, how should we think about capital deployment, stock buyback, M&A, any changes there? Are you kind of holding, not holding up, reserving a little more for organic functions? Or how should we think about capital deployment versus maybe six, 12 months ago?
Frank Pelzer
Yes, Jim. So it really hasn't -- our outlook on capital deployment has not changed. We still expect to spend 50% of our free cash flow on share repurchase this year. And as you -- as we mentioned earlier, we did pay down the term loan debt associated with the Shape acquisition, which was a little over $350 million use of cash in the quarter. And so that reflects the change in our cash balance and the $40 million share repurchase we did in Q1. And we obviously announced Lilac, which was an undisclosed sum. It was a small acquisition that we did today. And so the balance of the activities and how we said we're going to use our capital has not changed, and we don't anticipate that it will change going forward.
Operator
Our next question is from Fahad Najam with Loop Capital.
Frank Pelzer
And we're not offering any new metrics on software like net retention rates. I will say that as we mentioned for the renewal side of the business, which includes the SaaS business is the true forwards associated with the business and some of the second terms of our multiyear subscription agreements as largely came in as we expected. The shortfall that we experienced was largely due to the new software business that just didn't drive growth in the way that we would have expected it in Q1.
Operator
Due to time constraints, we will be taking our last question from Ray McDonough with Guggenheim.
Ray McDonough
Just two if I could. I understand you're not giving any new software metrics right now. But can you talk about how contract duration trended on renewals? I understand you were selling three-year term license deals in that cohort. It's really the first cohort of renewals that you're seeing this year. Are you seeing any contraction of contract duration? And then the second question would be I appreciate the comment around double-digit EPS growth and the commitment there. But how should we think about cash flow growth and cash flow margins normalizing as you kind of lap the change towards more annual invoicing terms this year?
Frank Pelzer
Sure. Ray, why don't I take both of those? The first in terms of changes in duration of the contracts, we are certainly sensitive in monitoring that, but we have not seen any discernible change in contract duration on the second term renewals or on the primary contracts that we are putting in place. And so that has not impacted us at this stage. In terms of the commitment to our double-digit EPS growth and cash flow, we are -- we will see the benefits of some of the slowdown in the new flexible consumption programs that will then yield more actual cash in the back half because we're not adding on as much of the upfront revenue recognition in relation to the cash that we are receiving. So we will start to see the benefit of that and see that normalize out a bit. Part of the other benefit that we're going to see for cash flow is that the supply chain issues that we've had and the extra purchase price variance and expedite fees those will largely come out, and those will help our cash flow from operations. So both of those, I think, will start to see a normalization. But it is one of the more difficult areas to predict in the model going forward.
Transcript from January 24, 2023
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