F5 (TICKER: FFIV) F5 Networks Inc Ffiv Ceo Francois Locoh Donou On Q2 2019 Results Earnings Call Transcript

F5 Networks, Inc. (NASDAQ:FFIV) Q2 2019 Earnings Conference Call April 24, 2019 4:30 PM ET Company Participants Suzanne DuLong - Vice President, Investor Relations Francois Locoh-Donou - President, Chief Executive Officer Frank Pelzer - Executive Vice President and Chief Financial Officer Chad Whalen - Executive Vice President, Worldwide Sales Conference Call Participants Paul Silverstein - Cowen Alex Kurtz - KeyBanc Samik Chatterjee - JPMorgan Sami Badri - Credit Suisse Simon Leopold - Raymond James Michael Genovese - MKM Partners Rod Hall - Goldman Sachs Catharine Trebnick - Dougherty Operator Good afternoon. And welcome to the F5 Networks Second Quarter Fiscal 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] Also, today's conference is being recorded. If anyone has any objection, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am you may begin. Suzanne DuLong Welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. Francois Locoh-Donou, 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 on hand to answer questions during the Q&A portion of the call. A copy of today's press release is available on our website at f5.com where an archived version of today's call also will be available through July 24, 2019. A replay of today's discussion will be available through midnight Pacific Time tomorrow, April 25 by dialing 800-585-8367 or 416-621-4642. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements, which includes 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 in the press release announcing our financial results and described in detail in our SEC filings. Please note that F5 has no duty to update any information presented in this call. With that, I'll turn the call over to Francois. Francois Locoh-Donou Thank you, Suzanne, and good afternoon, everyone. Thank you for joining us today. I'll talk briefly to our business drivers before handing over to Frank to review the quarter's results in detail. With 30% software revenue growth in the quarter, we're delivering strong results from the resource shifts we've made in the last 18 months. Customers are leveraging our multi-cloud deployment model and consuming our flagship software and offerings, both on-prem and in the public cloud. Increasingly, they are consuming for new vehicles, including subscriptions and enterprise license agreements. Security services, including Advanced WAF and bot mitigation are leading the vast majority of our customer conversations and public cloud continues to be our strongest software growth area. I will speak to our software growth drivers in more detail later in my remarks. Systems revenues declined in line with the market, down 5% in the quarter. As expected, with customers adopting a cloud-first mentality, hardware investment and use cases are being carefully evaluated, and we are seeing some elongations of deal timing as a result. That said, we continue to see systems growth opportunities in certain segments of the market such as high-performance security use case and in emerging markets. Our Services business delivered 4% growth in the quarter and continues to produce robust gross margins while maintaining world-class customer satisfaction scores. Our services capabilities continue to differentiate F5 as customers' application environment has become increasingly sophisticated and they recognize the need for reliable and responsive support from their most critical solution providers. We are achieving consistently strong 90%-plus attach rates. In fact the attach rate for the Americas increased 300 basis points in the quarter. As we discussed at our Analyst and Investor Day in March 2018, over time, we do expect our services growth rates to slow as we transition to a higher percentage of subscription and other service offerings. In summary, we're very pleased with the progress we are seeing in our software transition. Progress that will be augmented as we begin to see contribution from our recently launched as-a-service platform, F5 Cloud Services, and as we complete the acquisition of NGINX. I'll speak to both topics in greater detail after Frank reviews our Q2 results and our outlook for the third quarter. Frank? Frank Pelzer Thank you, Francois and good afternoon, everyone. As Francois noted, we delivered solid revenue and strong EPS growth in the quarter. Second quarter revenue of $545 million was up approximately 2% year-over-year and within our guided range of $543 million to $553 million. GAAP EPS was $1.93 per share. Non-GAAP EPS of $2.57 per share was above our guidance of $2.53 to $2.56 per share. Q2 product revenue of $238 million was flat year-over-year and