Jason Willey - F5 Networks, Inc. Andrew Reinland - F5 Networks, Inc. François Locoh-Donou - F5 Networks, Inc..

Jason N. Ader - William Blair & Co. LLC Alex Kurtz - KeyBanc Capital Markets, Inc. Rod Hall - Goldman Sachs & Co. LLC Jim Suva - Citigroup Global Markets, Inc. Simon M. Leopold - Raymond James & Associates, Inc. Ittai Kidron - Oppenheimer & Co., Inc. Mark Kelleher - D. A. Davidson & Co. Jayson A. Noland - Robert W. Baird & Co., Inc.

Jeffrey Thomas Kvaal - Nomura Instinet George C. Notter - Jefferies LLC.

Good afternoon, and welcome to the F5 Networks' Second Quarter and Fiscal 2018 Financial Results Conference Call. At this time, all parties will be able to listen only until the question-and-answer portion. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'd now like to turn the call over to Mr.

Jason Willey, Director of Investor Relations. Sir, you may begin..

Thank you, and good afternoon, everyone. As the operator said, I am Jason Willey, F5's Director of Investor Relations. Francois Locoh-Donou, President and CEO of F5; and Andy Reinland, Executive VP and CFO will be speakers on today's call. Other members of the F5 executive team are also on hand to answer questions following the prepared remarks.

If you have any questions after the call, please direct them to me at 206-272-7908 or j.willey@f5.com. A copy of today's press release is available on our website at www.f5.com. In addition, you can access an archived version of today's call from our website through July 25, 2018.

You can also listen to a telephone replay at 800-925-8051 or 402-220-3075. In today's call, our discussion 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. Factors that may affect our results are summarized on our quarterly release and described in detail in our SEC filings.

Please note that F5 has no duty to update any information presented in this call. I will now turn the call over to Andy..

Ingram Micro, which accounted for 17% of total revenue; Tech Data accounted for 12%; and Arrow, SYNNEX and Westcon, each accounted for 11% of revenue. Moving on to our operating results. GAAP gross margin in Q2 was 83.2%. Non-GAAP gross margin was 84.6%. GAAP operating expenses of $300 million were within our $296 million to $306 million guided range.

Non-GAAP operating expenses were $264 million. Our GAAP operating margin in Q2 was 26.9% and non-GAAP operating margin was 35.2%. Our GAAP effective tax rate for the quarter was 25% and our non-GAAP effective tax rate was 24.7%. Turning to the balance sheet.

In Q2, we generated $185 million in cash flow from operations, which contributed to cash and investments totaling $1.4 billion at quarter end. DSO at the end of the quarter was 49 days. Capital expenditures for the quarter were $9.8 million. Inventory at the end of the quarter was $30 million.

Deferred revenue increased 8.7% year-over-year to just over $1 billion. We ended the quarter with approximately 4,385 employees, up slightly from the prior quarter. In Q2, we repurchased approximately 1.1 million shares of our common stock at an average price of $140.82 per share for a total of $150 million. Moving to our guidance for fiscal Q3.

Based on strengthening pipeline and discussion with our sales organization, we see momentum building in the business as we enter the back half of our fiscal year. We expect further improvement in our revenue growth rate in the third quarter, highlighted by a return to year-over-year product revenue growth.

With this in mind, for the third quarter of fiscal 2018, we are targeting revenue in the range of $535 million to $545 million. We expect GAAP gross margins at or around 83%, including approximately $5.5 million of stock-based compensation expense and $2 million in amortization of purchased intangible assets.

Non-GAAP gross margins are anticipated at or around 84.5%. We estimate GAAP operating expense of $297 million to $307 million, including approximately $36.5 million of stock-based compensation expense and $0.8 million in amortization of purchased intangible assets.

We expect a GAAP effective tax rate of approximately 25% for the third quarter and a non-GAAP effective tax rate at or around 24%. And our Q3 GAAP earnings target is $1.79 to $1.82 per share. Our non-GAAP earnings target is $2.36 to $2.39 per share. And with that, I will turn the call over to François..

Thank you, Andy, and good afternoon, everyone. During the second quarter, we saw momentum across the business. Our software revenue continues to expand, growing 28% year-over-year. This growth was driven by deployments in the public cloud as our customers increasingly look to support and protect their applications across multi-cloud environment.

We saw strong demand for our security solutions at our enterprise customers as they embrace our Web Application Firewall, identity and access management and SSL capabilities. Our Services business had another solid quarter with revenue up 7% year-over-year and non-GAAP gross margins above 86%.

This group provides customer support that is unmatched by any of our competitors, creating a significant differentiator and driving customer satisfaction and stickiness. The value of our Services capabilities only grows as complexities associated with multi-cloud deployments impact more customers.

We had strong execution during the second quarter and we are encouraged by the underlying trends as we move into the second half of fiscal 2018. Our software solutions are gaining traction across deployment environments with strength in public cloud, Bring Your Own License and utility-based consumption.

We saw good customer interest in our recently-introduced consumption models, particularly Enterprise License Agreements. The ability to offer more flexibility in procuring and deploying our Virtual Editions is enabling more strategic conversations with customers allowing us to reach a broader set of buyers.

During the quarter, we closed several meaningful ELAs, including a transaction with a U.S.-based communication services company, which also included a hardware refresh and service renewal.

Through an ELA structure for our Virtual Editions, we were able to meet the customer's need for enabling speed to market for their applications and frictionless movement between cloud providers as they aggressively roll out a multi-cloud strategy. Our ability to structure an ELA at a large U.S.

financial technology provider helped us replace an incumbent WAF vendor in an account where we were not historically the primary ADC or WAF.

Key to winning this deal was the breadth of our WAF functionality, the flexibility for enabling speed to market for application services provisioning, and the ability for our Virtual Editions to interact with our Silverline WAF and DDoS services. In both transactions, our ability to structure ELAs drove larger overall opportunities for F5.

The traction we are seeing in software will be further enhanced by the introduction of BIG-IP Cloud Edition, which we officially announced earlier today.

This release allows us to better reach the next tier of applications within our existing customers through improvements in usability and comprehensive per-app visibility, analytics and auto-scale capabilities.

The solution gives customers a lightweight option when developing, deploying, and securing all applications at every step in the testing and production pipeline, including use cases designed around public and private clouds. Security is a critical component of an increasing number of our customer interactions.

We saw good momentum in our WAF offerings, which delivered a solid year-over-year growth during Q2. We also saw growing customer interest in our identity and SSL solutions targeted at enterprise accounts. A great example of this momentum in security is a competitive win at a U.S.

Government agency, driven by the performance of our BIG-IP appliances with our WAF modules. A key differentiation in this deal was our ability to scale well in excess of the competition to meet the customer's need to protect over 100 global web-based applications.

Our industry-leading WAF portfolio takes another meaningful step ahead of the competition with the availability of our Advanced WAF offering, an important component of our stand-alone security strategy.

We have customized the form factor, features, and user interface in way that enable security teams to focus on getting the information they need to know, when they need to know it. As we outlined in March, we see additions to our security portfolio over the course of 2018 opening substantial new addressable opportunities.

Core enhancements with Advanced WAF include bot detection beyond signatures and reputation to block evolving automated attacks, application layer encryption to protect against credential theft and DDoS detection using machine learning and behavioral analytics at layer 7.

Advanced WAF supports a variety of consumption and licensing models, including a per-app, perpetual, subscription and utility billing.

We are already seeing strong customer interest in the differentiated capabilities provided by our Advanced WAF, which is evident in a deal we won during the second quarter at a large African stock exchange, where our behavioral DDoS capabilities, in-browser encryption, and ability to integrate with our Silverline offering allowed us to stand out from traditional WAF vendors and cloud-native solutions.

In a situation where the customer is migrating workloads to a multi-cloud environment, the ability to centralize critical security services and the cost savings versus individual cloud provider offerings resonated with the customer.

From an organizational perspective, we are excited to announce Frank Pelzer has agreed to join the F5 team as our new CFO starting on May 21. Frank brings to F5 tremendous software and cloud experience, most recently as the President and COO as Cloud Business Group at SAP.

Previously, he was CFO at Concur Technologies, a leading publicly-traded cloud-based travel and expense management solution that was purchased by SAP in 2014. Frank's background makes him an ideal fit for the next phase of F5's growth.

We also announced today that John DiLullo, our EVP of Worldwide Sales, will be leaving the company in May to pursue other opportunities. Steve McMillan, our Head of Global Services, will oversee the sales organization, while we undertake a full search to find John's permanent successor.

In John's time at F5, he laid a restructuring of F5's sales organization, including evolving our channel program to better address cloud-enablement partners and security opportunities. With a strong set of theater leads now in place, the organization is structured for success, as is evident in our improved execution over the past several quarters.

As we outlined at our March Analyst & Investor Meeting, we are evolving from an ADC company to a multi-cloud application service company that will reach every app anywhere. Our conviction that multi-cloud application services will define the next phase of F5's growth is only bolstered by my conversations with our customers.

Having spent time with dozens of them this past year in every theater and across a diverse set of industries, not one of them believes the complexities they are facing managing their apps across multiple clouds can be solved by a single generalist cloud provider.

They require a focused player who understands the intricacies of enterprise applications. While we have meaningful work ahead of us to achieve the goals we outlined in early March, I am pleased with our execution over the past several quarters.

Both in delivering to the near-term financial targets we have laid out and with the progress in prioritizing and accelerating efforts in product development and go to market.

As we move into the second half of our fiscal year, we see momentum both in terms of growing our product revenue and in continuing to deliver strong profitability and cash generation. We are focused on executing to the long-term strategy that we outlined in March and we look forward to updating you on continued progress over the coming quarters.

Finally, I would like to thank the entire F5 team and our partners for their efforts during the second quarter. In particular, I want to thank Andy for his contributions over the past 20 years as he will be retiring from F5 in May.

Andy was a key part of growing F5 into the $2 billion annual business it is today, instilling the structure and discipline that helped drive our enviable margins and cash generation. It has been a pleasure to work with him over the past year.

And I know I speak for everyone at F5 in wishing him nothing but happiness and success in his future endeavors. With that, we will now hand the call over for Q&A..

Thank you. We will now begin the question-and-answer session for today's conference. Our first question comes from Jason Ader from William Blair. Jason, your line is now open..

Yeah, thank you very much. And, Andy, wanted to wish you my best, and it's been fun working with you over all these years. So, good luck in your next chapter..

Thanks, Jason. Same..

So, my question really is on the – I guess it looks like you're seeing some pick-up on the product side. And maybe it's a combination of infrastructure refresh and some momentum in software. I guess, firstly, is that leading to some larger deals? And it sounds like there may be some ELAs that are starting to get pretty chunky.

And then, why do you think you didn't see more infrastructure refresh last year when you had iSeries just coming out and the rest of the industry seemed to be experiencing more refresh? Why do you think there has been this lag?.

Hi, Jason. Thanks for the question. I'll start with the latter part.

I think what we've seen last year is a number of customers who were considering or reconsidering their architecture, especially looking to move towards a multi-cloud environment and trying to figure out how much they would deploy in hardware, how much they would deploy in software, what would be in public cloud and private clouds and so forth.

I think we talked about it last year, saying the decision cycle in some cases was causing some pause in their decision-making. I think to a certain extent that still exists, and we still see that dynamic in the marketplace. But I think we see also a number of customers that have kind of made their decisions on their architecture.

And therefore, they're moving forward on their decisions. And whether it's ELAs in software or some hardware deployments, they're just moving forward. So I think that's the dynamic we're seeing in the market. I think in a number of cases we also see customers who have waited to make these decisions.

But application traffic and the pressures on traffic kind of catches up with them and, at some point, they have to move forward and make their decisions. So, that's the dynamic in the market. In terms of ELAs, Jason, that's an offering that's only been in the market for us for really only a couple of quarters.

And we're really pleased with the traction that we're seeing with this mode of consumption. It just gives a lot more flexibility to our customers to deploy our technologies in a frictionless way across on-prem or public cloud. And both the initial traction and the initial deals that we're seeing are, in fact, pretty chunky..

And then, Jason, I'd jump in and add to your question around deal sizes. Overall, we saw our average deal size increase in the quarter over Q1. So, Q1, we were at $113,000, and that increased to right at $123,000.

And we also saw in Q2 – for Q2, in particular, a significant step-up in million-dollar deals, which is, for us, a good sign of business, especially this early in the calendar year..

Is that contributing to the visibility for the second half? Is that part of it?.

Yeah, I think in both François and my commentary, talking about momentum and talking with the salespeople, it's definitely a dynamic that we keep our eye on when we're assessing to make statements like that..

Excellent. Thank you, guys..

Thank you, Jason. And our next question comes from Alex Kurtz from KeyBanc Capital Markets. Alex, your line is now open..

Yeah. Thanks, guys, for taking the questions here.

So, as the sales organization starts moving towards ELA type of sales processes and, obviously, introducing some multi-cloud products that are new to customers and to the sales org, do you see a need to change or to kind of re-factor how the sales organization goes to market or how it's constituted? Or do you feel like the folks that you have in place can execute like a VMware-type ELA consistently every quarter? Or maybe you just don't see ELAs becoming a big part of the business longer term and it's not an issue?.

Thank you, Alex. It's a good question. So a couple of data points, perhaps just to frame the context for this. Software revenues are about 15% of our product revenues today, and largely ELA's applied primarily to our software business. So just to frame how much of a play it has in our current business.

In terms of the implications for the sales organization, I'd say, number one, we are largely going after our existing customers so that the same large enterprises and large service providers that have been customers of F5 are the customers that want to consume us in these ELAs.

So, it doesn't require for our sales organization to find an entirely new set of customers. We're talking about providing a different consumption model to our existing customers.

We have been preparing the sales organization for this, so it's really more about enablement, making sure that the team understands the intricacies of these commercial models, and also making sure we have the right incentives in place.

And so at the beginning of this year, we put some incentives in place for our sales organization to make sure that it was attractive for them to sell and market these ELAs. And I think we're seeing the traction as a result of that..

Okay. Thanks. And Andy, it's a pleasure working with you and good luck with what's next..

Thanks, Alex..

Thank you, Alex. And our next question comes from Rod Hall from Goldman Sachs. Rod, your line is now open..

Yeah. Hi, guys. Thanks for the question. Yeah, first of all, Andy, great working with you as well and best of luck in the future..

Thanks..

I just had a couple of questions. One is Japan. The revenue rebound there was pretty substantial. So I just wonder if you guys could comment on the sustainability of that.

Is that kind of more back to a normal level in your minds, or what's happening in Japan and how sustainable is it? And then the second question I had was just regarding the ex-Federal growth rate. That number kind of is up quarter-on-quarter, which looks a little bit better. So, I'm just curious what you think the trajectory of that non-U.S.

Federal Government revenue looks like through the course of the year. Thanks..

Thanks, Rod. I think I'll take Japan and Andy will talk to the Federal piece. Yes, so in Japan, I think generally you should look at that revenue as pretty stable. It's still a relatively small business in the overall picture of F5. So, you may experience a little bit of lumpiness quarter-to-quarter there.

But what we're seeing right now, the momentum is pretty stable. I think there were some – cloud providers were perhaps a little late to the Japanese market relative to other markets and we're seeing actually a pickup in demand there with this multi-cloud strategy as well..

And then to the Government question, if you set Federal aside, yeah, you're right. It would look like – outside of the U.S. and state and local, it looks stronger, and that's lumpy for us, though, it's hard when we look at non-Federal to really see any determined seasonality, and I think an element of it is lumpiness.

Federal, on the other hand, which was okay for Q2, we definitely see the September quarter much stronger with the other quarters kind of around this level. So, that's what I would attribute it to..

Okay. Great. Thank you, guys..

Thank you. And our next question comes from Jim Suva from Citi. Jim, your line is now open..

Thank you very (27:36) much.

Can you talk about how we should think about the quarter linearity for this calendar year, the products and services? Kind of how you think about the linearity of whether it'd be seasonal, up, down, any product launch, transitions? How we should think about the products and services and, I guess, also security for this year?.

So, Jim, you're asking just how are we looking at the linearity this year and expectations for revenue through the year? I'll consider that yes. I mean, I still think the way we see our year lay out, and I don't think we've changed our view on this, is Q1, Q2 are usually slower part of the year for us.

And then going in the back half, Q3, Q4, which is our June and September quarters, is where we see strength. And a lot of that is how the sales organization is incented, Federal in Q4.

And as you can see in my comments, for Q3, we expect to get back to product revenue growth, which is implied in the guidance that we gave and we think that bodes well for going into Q4 as well. So, generally, that's the view of linearity..

Thank you so much for the information, yeah, that's what I was asking for. Thank you..

Thank you. One moment, please. Our next question comes from Simon Leopold from Raymond James. Simon, your line is now open..

First of all, Andy, congratulations. Best of luck wherever you head next. In terms of questions, two things I wanted to see if we could investigate.

One is noticing the substantial deferred revenue, is it possible to quantify some aspect of the mix between software and services in that deferred revenue? I'm assuming that software is getting to be more significant within that.

Can you help us quantify the mix?.

Yeah, when you look at the deferred revenue, the vast majority of it today is maintenance contracts. So, you're right that it is building software and deferred related to that, but still the vast majority is the maintenance contracts..

Great. Appreciate that. And I wanted to see if we could delve a little bit more deeply in terms of the security mix. My impression is that WAF is really where you lead and sort of where you get much of the attention. I'm not necessarily trying to get a strict break down.

But is your security-related revenue strongly dominated by the WAF products or is there a good traction in terms of identity, SSL? I'm looking for some idea of how we should think about the drivers.

And in terms of the security market, certainly coming out of RSA last week, it sounds like expectations are that this particular market overall is getting better growth. Are you seeing better growth in security than what you anticipated just three months ago? Thanks..

Simon, I'll take that. So first of all, no, I would say our security traction in revenues is not just on Web Application Firewall. It's actually broader than that.

We're getting a lot of traction in identity and access management, as an example, in SSL orchestration, which we've talked about; also in DDoS, with the introduction of our DDoS Hybrid Defender. So, there's a broad range of products that we introduced actually in our Q1 that are getting strong traction.

We are talking about WAF in part because we introduced an Advanced WAF product that is very differentiated in the marketplace and allows us to extend our addressable opportunity, because it addresses a number of use cases we weren't addressing before, including things like layer 7 DDoS with machine learning and behavioral analytics, or preventing credential theft and abuse, which essentially we're the only vendor who provide these capabilities today.

And so, we're highlighting that introduction, but the traction is pretty broad. Overall, in terms of growth in the security space, I'd say, we did expect to be growing in this area. We have said it was a strong driver and it continues to be a strong driver, and will be in the second half of the year..

Great. Thank you for taking my questions..

Thank you. Our next question comes from Ittai Kidron from Oppenheimer. Ittai, your line is now open..

Thanks. And, Andy, let me add my congratulations and good luck to you. It's been a pleasure. As to my questions, I wanted to focus on the software part of your business.

Is there a way you can, if not actually quantify, at least qualitatively talk about how much of that revenue is split between Virtual Editions, Silverline, your as-a-service business and cloud consumption?.

Ittai, we'll try and give you some pointers here. I would say, first of all, a majority of our software business is in the Virtual Editions. But a growing part of the consumption of the Virtual Edition is across multiple clouds, including consumptions of Virtual Editions in the public cloud.

And so today, our customers buy Virtual Editions for on-prem deployments, but they also buy them to instantiate them in Amazon, or Azure, or Google's public clouds. And that's a growing part of the software business.

The other factor, which is going to be, I think, an accelerating factor in that, is the introduction of our Cloud Edition today, really makes the consumption of Virtual Editions in the public cloud a lot easier; A, because it provides a lighter weight Virtual Edition to be used on a per-app basis.

And a lot of folks who want to deploy in the public cloud want to do it on a per-app basis. And, B, because we provide with the Cloud Edition a centralized orchestration mechanism that allows customers to turn Virtual Editions on and off, or even to scale the deployment of Virtual Editions across multiple clouds, or across on-prem and public clouds.

So, it's a big catalyst for Virtual Editions deployment across multi-clouds..

Got it. Just want to follow-up on that.

Are you not concerned that the introduction of this BIG-IP Cloud Edition would kind of cannibalize your more – your existing Virtual Edition volume? And help me think about, as you look at the customers that have been adopting software from you, is there a way to think about what portion of those customers are actually net new to F5 versus software is just a reflection of a different purchasing framework for them?.

Yeah, Ittai, so to the first question, are we worried that the Cloud Edition will cannibalize our classic Virtual Edition? The short answer to that is no, we're not, and largely because customers who use the Virtual Editions today, they use it to typically support multiple applications, basically five to eight applications, I would say, on average.

And the Virtual Edition is only to be used on a per-app basis. And there are very few customers who use a classic VE on a per-app basis. So, I think the cannibalization will be minimal.

The other aspect of that is the per-app Virtual Edition also allows our customers to support and put Virtual Editions in front of applications that traditionally would not have had them. So, it's an expansion of use cases for us, including in security.

The Cloud Edition is a great vehicle for our customers to put, for example, a Web Application Firewall in front of all their applications, which increasingly they want to do and, sometimes, they're required to do by regulation.

So to the second point around which customers are deploying our software, I would say, it's actually both, existing and new customers. Most of our large customers are considering some form of addition of software to their existing hardware deployments.

But we also have net new customers who haven't bought any hardware from F5 and are going straight to a Virtual Edition, either in the cloud or in their own data centers..

Very good. Good luck, guys..

Thank you, Ittai..

Thank you. And our next question comes from Mark Kelleher from D. A. Davidson. Mark, your line is now open..

Great. Thanks for taking the questions. Andy, congratulations, let me add mine as well. It's been great working with you. I wanted to ask about Silverline, specifically.

Can you talk a little bit about how important that is for your sales effort and how big that's growing? And then, along those lines, as your model changes a little bit to more software, more security, how's the competitive environment changing? Who do you see as your challengers there?.

Mark, let me start with Silverline. It's actually linked to your second question.

What we're seeing is key, both in the Web Application Firewall market and in the DDoS market, which is where the Silverline offering has been focused, is the ability to offer both an on-prem solution and, essentially, an off-prem scrubbing center solution is actually key for a lot of large enterprise customers.

And beyond that, the ability for us to signal from an on-prem solution to a customer that they should divert their traffic to a scrubbing center on an automated basis is absolutely a key differentiator.

And that's really what Silverline brings to the table, is we have this ability to offer on-prem and off-prem solution and very strong signaling between the two solutions. And that's really the differentiator between us and other vendors that are either purely in a cloud DDoS or cloud WAF space or purely on the on-prem space.

In terms of software and security, I think I'd have to separate those two. In security, we compete with basically a number of players and it really depends on the use case and the type of solution.

In the space of – in software, really, I think we have perhaps smaller competitors that have an interesting story around nimbleness and agility of deployment. But what we've seen is really what the customer wants is both the agility of deployment and a depth and breadth of features to support critical applications.

And I think with the Cloud Edition, we're essentially the only player that really brings both of those things to the market for the first time and we think it's actually going to grow the addressable market for virtual ADCs..

Okay. Great. Thanks..

Thank you..

Thank you. And our next question comes from Jayson Noland from Baird. Jason, your line is now open..

Okay. Super. My congrats too. Andy, it's been quite some time. François, a question on stand-alone security and coming out of RSA, any incremental thoughts there.

And then, what do you expect to see with the split between on-premise solutions and cloud-based solutions from F5? And then, Andy, as a follow up, job postings at F5 have doubled roughly year-to-date. Should we expect a hiring ramp later this year? And I'll leave it there..

Jayson, couple of things. First, on the on-prem versus cloud offerings for F5, I think overall, the message I'd give you is that on-prem deployment for us is still the majority of the business, though, cloud deployments are growing relatively fast and certainly faster than on-prem deployment.

The thing, though, for us that is the catalyst is that we're seeing – I would say, not a single one of the customers that I have spoken to in the last six months has articulated to me a strategy that was not a multi-cloud strategy.

And so, every one of our customers has plans for evolving their on-prem architectures and potentially growing their deployment and doing some things in one or multiple clouds, and a lot of times they want to replicate their on-prem environment across multiple clouds.

That's a big driver for us, because we're, I think, uniquely positioned as a vendor that supports both across their journey.

Andy?.

In line with our commentary about expectations for the back half, returning to product revenue growth, momentum in the business, yeah, the hiring is ramping up a bit. And we'll continue to manage it as we always have and watch the quarters unfold against our expectations on a week-by-week basis and adjust as we need to.

But if all goes according to expectations, we should see hiring pick up..

Thanks, guys..

Thank you, Jayson..

Thank you. And our next question comes from Jeff Kvaal from Nomura Instinet. Jeff, your line is now open..

Yes. Thank you very much. And I guess, François, to begin with you, could you help us understand a little bit with a little bit more resolution what the cadence of new products may be across the course of the year? We've got some now. You talked at your Analyst Day about some through 2018 into 2019.

And then that may segue into the second part of that, which is you'd talked about share gains in both physical and virtual, and if you could update us on that, that would be wonderful. Thank you..

Thank you, Jack (sic) [Jeff] (43:25). So, what you should see in terms of new products is – so we did announce some of the products in our App Protect portfolio and campaign in February, including the Advanced WAF. We are going to release the Cloud Edition at the end of May this year.

In the second half of this year, you should see more security, new stand-alone security products from our portfolio come to market and we'll talk about that at the right time. And then, you will see also from us in the first half of 2019 some exciting announcements, generally, in the software space and cloud solutions.

So I think over the next 12 months, we're bringing to market some new solutions that essentially extend our addressable market into new use cases.

In the hardware space, we have released a new variant of our iSeries, I think both at the low end and at the high end, first iSeries with 100 gig capabilities, and we're seeing quite a bit of traction with that capability coming up because moving to 100 gig in data centers is – not just in our ADC category, but across a number of other categories, that's a hot topic at the moment.

So, that's what's ahead. Your second question was about share gains in virtual ADC and hardware. On that topic, I think what we've said at our AIM conference really stands in that. We feel that, overall, our hardware business, if you look at 2018, we expect that to decline in the low-single digit to flat.

I think overall, based on what we see as market forecast, we will gain share, because the expectation of the market is declining at mid-single digits. And the reason I feel pretty good about that share gain is because I feel good about our position with service providers.

I feel very good about the use cases that iSeries is enabling and the breadth of use cases that we can attack. And I feel very good about the conversation we're having with customers having made their decisions on architecture. So, I think I stand by what we said at AIM.

In the case of the virtual ADC space, it's more of a nascent space, but growing fast. And I think if we maintain the growth rate that you've been seeing for the first half of the year, we clearly will be gaining share in that market..

And repeating the software break out you gave at the beginning, we literally had a fire drill happening here. I just couldn't catch that..

You couldn't catch the part on software, Jack?.

The software split at the beginning. I'm so sorry..

So, the software was 15% of product revenue and the growth rate for Q2 was 28% year-on-year growth..

Great. Thank you..

Operator, I think we'll take one more question..

Thank you. Our next question comes from George Notter from Jefferies. George, your line is now open..

Hey. Thanks very much and, Andy, best of luck to you. I wanted to ask about the product growth rate. Obviously, it's been a real improvement here from December to March to your guidance for June and the back part of the year.

I guess the question, is there a way to sort of apportion that improvement in growth rate by the different variables here, the product refresh, growth in Virtual Editions, maybe it's ELAs or Silverline? Just bigger or smaller than a breadbox type of question, like where do you think the growth is really coming from? Thanks..

Thank you, George. Well, if you recall, George, I think it was in our Q4 – at the end of our Q4 in the October earnings call, we shared at the time that we felt pretty good that we would return to product revenue growth in 2018.

And at the time, we said the reasons were, number one, we had put the number of initiatives in with our sales organization in terms of some restructuring and some better alignment of our teams against some opportunities. And I feel John and his team have been executing very well against these initiatives and we're seeing that.

Number two, we were also expecting to see traction with some new offerings we had put in place, including ELAs and subscriptions. And we are actually seeing that, and that's contributing.

And then number three, the offerings that you're hearing, iSeries, what we've done on iSeries and the refresh, some of these new security offerings that we've put in place, all of these are catalysts for enhancement in product revenue growth. And we now have better line of sight to this than we did six months ago.

So, all of the above are actually contributing, frankly, in line with what we felt would happen throughout the year..

Got it. Okay. Thank you very much..

Thank you, George..

I'd like to thank everyone for participating today, and we look forward to speaking with you again over the coming months. Thank you, and have a good afternoon..

Thank you. And that concludes today's conference. Thank you all for your participation. You may disconnect at this time..