Good afternoon, and welcome to the F5 Networks First Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms.
Suzanne Doolong. Ma'am, you may begin.
Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations Francois Coe Denoux, F5's President and CEO and Frank Peltzer, F5's Executive Vice President and CFO, We'll 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 and A session. A copy of today's press release is available on our website atf5.com, or an archived version of today's call will be available through April 27, Today's live discussion is supported by slides, which are viewable on the webcast and will be posted to our IR site at the conclusion of today's discussion. The replay of today's call will be available through midnight Pacific Time, January 27, by dialing 800 585-8367 or 416-621-4642.
Use meeting ID 6,05,529. For additional information or follow-up questions, please reach out to me directly ats.dulongf5.com. Our discussion today will contain forward looking statements, which include words such as believe, anticipate, 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.
And with that, I'll turn the call over to Francois.
Thank you, Suzanne, and good afternoon, everyone. Thank you for joining us today. Our Q1 results showed a strong momentum in our business. We delivered Q1 non GAAP revenue of $626,000,000 representing revenue growth of 10%. We also delivered 70% non GAAP software revenue growth, systems growth of 5% and global services growth of 1%.
Several quarters into the pandemic, several things are becoming clearer from the macro First, the realities of the pandemic have accelerated our customers' digital transformation and both business and consumer dependency on applications. At the same time, consumers' expectations about their application experience have As a result of higher volumes and higher consumer expectations, our customers are ramping their investments in their applications and the infrastructure needed to securely deliver them. In addition, incumbency is a significant advantage for FIs These micro drivers play to our strengths, including our strategy to invest over the last several years in pursuit of our adaptive applications vision. Our continued investments in BIG IP for multi cloud deployments and the deliberate and early investments in both NGINX and Shape are enabling us to rapidly grow our application security and deliberate footprint in modern application environments. I will speak more to our business growth drivers and momentum, including some customer highlights from the quarter, After Frank will use our Q1 financial results and our outlook for Q2.
Frank? Thank you, Francois, and good afternoon, everyone. As we previewed in our preliminary results announcement and as Francois just highlighted, we delivered a very strong Q1. On a GAAP basis, Q1 revenue was $625,000,000 1st quarter non GAAP revenue of $626,000,000 was up 10% year over year and well above the high end of our initial $595,000,000 to $615,000,000 guidance range. Please note, as I review our revenue mix, I will be referring to non GAAP revenue measures.
Also, this will be the last This quarter we speak about non GAAP revenue as we lap the acquisition of Shape. Going forward, the add back of the Shape purchase accounting write down is de minimis. Q1 product revenue of $289,000,000 was up 23% year over year and accounting for approximately 46% of total revenue. This is the strongest product revenue growth we have delivered since Q2 of fiscal year 2011, nearly a decade ago. As Francois noted, customers accelerating their digital transformation efforts drove growth in both our software and system sales.
Software revenue was $111,000,000 growing 70% compared to the year ago period, which did not include contribution from Shape. Excluding Shape's contribution in Q1 of 'twenty one, software revenue grew approximately 35% year over year. Our mix shift continued this quarter with software representing 38% of product revenue in Q1, up from 28% in the year ago quarter. Customers' preference for flexible subscription models continued to fuel our subscription revenue momentum. In Q1, we again drove record subscription volume with subscriptions representing 77% of software revenue in the quarter.
Services revenue of $337,000,000 grew 1% year over year and represented 54% of revenue. Revenue from recurring sources, which includes term subscriptions, as a service and utility based revenue, as well as the maintenance portion of our Services revenue totaled 66% of revenue in the quarter. This is up from 63% in the year ago period. The improvement comes largely as a result of the strong subscription software momentum I mentioned previously. Systems revenue of $179,000,000 was up 5% compared to last year.
Francois will speak to the drivers of this strong performance in more detail. On a regional basis in Q1, Americas delivered 14% revenue growth year over year, representing 55% of total revenue. EMEA delivered 4% growth, representing 26% of revenue, while APAC grew 7% and accounted for 19% of revenue. Looking at our bookings by vertical, Enterprise customers represented 67% of product bookings, service providers accounted for 14% And government customers represented 18% of product bookings, including 6% from U. S.
Federal. Let me now share our Q1 operating results. GAAP gross margin in Q1 was 81.6%. Non GAAP gross margin was 84.4%. GAAP operating expenses were $392,000,000 Non GAAP operating expenses were $322,000,000 Our GAAP operating margin for Q1 was 18.9% and our non GAAP operating margin was 33%.
Our GAAP effective tax rate for the quarter was 25.1% and our non GAAP effective tax rate was 21.7%. GAAP net income for the quarter was $88,000,000 or $1.41 per share. Non GAAP net income was $161,000,000 or $2.59 per share. I will now turn to the balance sheet. We generated $137,000,000 in cash flow from operations in Q1.
Cash and investments totaled approximately $1,500,000,000 at quarter end. We did not make any share repurchases in Q1. We remain committed to repurchasing $1,000,000,000 in shares over the next 2 years, including 500,000,000 via an accelerated share repurchase program in fiscal year 2021. DSO was 50 days and capital expenditures for the quarter for $5,000,000 Deferred revenue increased 10% year over year to $1,400,000,000 We ended the quarter with approximately 6,160 employees, up approximately 50 from Q4. Now let me share our guidance for our fiscal Q2.
Unless otherwise stated, please note that my guidance comments reference non Also with the Volterra deal recently closed, our Q2 outlook incorporates the addition of their financials to our guidance expectations. Near term, we expect customers will continue to invest to support application growth and the modernization of their application infrastructures. We also anticipate continued focus on an investment in Application security. With this in mind, we are targeting Q2 fiscal year 2021 revenue in the range of $625,000,000 to $645,000,000 reflecting year over year growth of approximately 8.5% at the midpoint of our range. While we do not give quarterly guidance on product revenue mix, we do anticipate continued near term strength in systems With Q2 growth likely similar to Q1, we would also remind you that our prior year Q2 software revenue growth This difficult comparison is likely to be reflected in our Q2 'twenty one software growth rate being below our Horizon 2 target of 35% to 40%.
This is consistent with our commentary about the potential for Quarterly variability in software growth rates as we continue to scale our software business. We expect q222 gross margins of 84% to 84.5 percent and we estimate operating expenses of $340,000,000 to 352,000,000 As we discussed last quarter, we generally see a seasonal increase in operating expenses in Q2. We Our Q2 operating margin to decline from Q1 and then to increase in the back half of the year to achieve our FY 'twenty one non GAAP operating margin target of 31% to 32%. I will remind you once more that our Q2 2021 outlook also incorporates the addition of Volterra into our operating model. We anticipate our effective tax rate for Q2 will be in the range of 21% to 22%.
Our Q2 earnings target is $2.32 to $2.44 per share. We expect q2 share based compensation expense of approximately $62,000,000 to $64,000,000 As for capital deployment, As I mentioned previously, we intend to repurchase 500,000,000 shares via an accelerated share repurchase in fiscal 2021. With that, I will turn the call back over to Francois. Francois?
Thank you, Frank. Several quarters into the pandemic, it is growing clear that Covain has accelerated digital transformation and both business and consumer dependency on applications. As a result, our customers are accelerating their digital transformation investments. Incumbency is also an advantage for us in the current environment And together, these trends are enabling us to drive strong growth. Underneath these macro drivers And consistent with our discussion at our November Analyst and Investor Meeting, there are 3 F5 specific growth drivers fueling our demand.
1, ongoing software and subscription momentum 2, growing demand for application security and 3, As we noted in November, These multiple growth drivers mean that we also have multiple paths to achieve our Horizon 2 revenue growth targets. More specifically, We do not need everything to go exactly right to achieve our goals. In Q1, we had a lot go right Customer demand drove growth across all three of these drivers. I will speak to each in turn. First, we continue to see demand for software and subscription consumption across our application security and delivery solutions.
I will focus first on our BIG IP and NGINX solutions. Customers look to BIG IP to refresh core business applications for capacity additions and to simplify traditional application delivery in cloud environments. In one example during Q1, A large financial institution struggled for months to turn off a mission critical application in a cloud environment. This was despite the best efforts of the cloud provider they were working with. Frustrated, they turn to F5.
In under one day, we help them get the app up and running in the cloud with multiple BIG IT virtual additions. This use case highlights the customer benefits we have driven as a result of our investment to modernize BIG IP, making it easier and more efficient to use in cloud environments. Let me turn to NGINX. At the time of the NGINX acquisition, we deliberately invested in new products, accelerating time to market. Specifically, we built a joint F5 NGINX controller and rapidly ported N5 security to the NGINX platform.
This quarter, NGINX delivered its largest quarter ever with broad based strength across geographies. This strength was driven in last part by robust NGINX controller traction as well as integrated F5 security through NGINX App Protect. During Q1, we also secured a win from BIG IP controller, NGINX Plus and NGINX Aprotec with a long time F5 federal government customer. While upgrading its current BIG IP infrastructure, This customer also selected NGINX to help prepare for migrating network infrastructure from physical to virtual, while building out capabilities to support containerization. NGINX is leading the way in a number of modern application use cases, including cloud native load balancing, scaling APIs and delivering Kubernetes applications in production.
As applications continue to get more distributed, we expect the investments we are making to deliver API gateway, API management and service mesh capabilities will drive additional NGINX momentum. It should come as no surprise that customer demand for application security is also growing With the ongoing pandemic fueling ever increasing consumer use of digital channels, the threat landscape is growing significantly. With application based attacks growing both in numbers and sophistication, customers are looking to F5 for help. The combination of our organic investment and the addition of Shape has created an enhanced F5 application security portfolio. If you map our solution set against the top application security threats, it is clear that we are very well positioned to help our customers address The most frequent incidents and the most damaging breaches.
We continue to see increased interest in adding F5's enterprise grade web application firewall protection to modern application. During Q1, A major car manufacturer selected NGINX with App Protect when they needed a cloud independent, portable, Scalable solution that included a container friendly web application firewall. We also are seeing growing traction for SSL orchestration. This ANCRIC, DECRIC use case is a strategic differentiator for F5. And while it tends not to be a big revenue driver on its own, It is a strategic control point in enterprise customers' security stack, which gives us the ability to pull in BIG IP security and shape.
Let me speak also to the traction we are seeing with Shape and in particular, our Shape Silverline combination. Last quarter, we highlighted the benefit of making Shape's industry leading anti fraud solution available to a much larger customer base through our Silverline Managed Services platform. Civilline's Ship Defense delivers advanced bot protection to prevent large scale fraud. Shape AI Fraud Engine or SAFE is a cloud fraud prevention service. As a combined solution, Our silver lined shaped defense and SAFE solutions enable sparsely resourced organization to deploy True industry leading capabilities.
Combining Shape's anti bot and anti fraud capabilities with CivilLine, InmanageService also makes it easy to quickly deploy Ship's capability, which is especially useful when customers are in crisis. There are 2 interesting use cases that have emerged. First, Shape Civil Line The combination of sky high demand and limited security of fraud capabilities as well as other unprotected state domains. With a shaped silver line defense solution, We can go in and offer real data about what is happening, unveiling the true scale of the threat. Once enabled, Shape's sophisticated AI and machine learning capabilities identify and block the fraudsters.
Credit unions also are emerging as an ideal use case for Shape's Silver Line Defense. With new web and mobile banking capabilities coming online and larger transfer limits being introduced, credit unions can present an easy target sophisticated attackers. Pressure to provide the same services as big banks is exposing them and their lack of cybersecurity and fraud capabilities. Shape Silverline Defense provides an affordable, turnkey, easy to deploy managed security and fraud solution As evidenced by the 5 credit union wins our sales team delivered in Q1 2021, We are as excited as ever about the use cases Shape has opened for us. Going forward, We see additional potential to leverage Shape's analytics engine to build new analytics offerings that enable us to build beyond application security to drive revenue enhancements for customers.
Finally, let us talk about systems and the drivers for the growth we saw in Q1. First, I will note that our systems business is also benefiting from the macro trends I mentioned previously, namely COVID driving increased application use and accelerating investment in digital transformation. Q1 strength in systems was broad based across geographies and industries. We identified 3 primary factors behind our strong systems performance. 1st, as we have discussed previously, We have seen growing demand for systems based security use cases.
2nd, over the last several years, Customers have gained clarity on their cloud strategies and now expect to operate in a hybrid multi cloud world for some time to come. As a result, they are more willing to purchase systems to support capacity needs driven by accelerating digital transformation. We believe both of these drivers are sustainable. 3rd, Q1 also benefited from some COVID suppressed systems catch up. Customers who have pulled off systems purchases for several quarters simply can no longer defer growing capacity demands.
For a very small subset of our customers that had not refreshed in a long time, a long planned April end Software development milestone on one of our legacy systems contributed to their desire to act sooner rather than later. For Clari, I would note that end of software development is very different than end of support. In this case, the April milestone pertains to an end of We estimate this catch up demand drove approximately $10,000,000 in system sales in Q1. We see this as a transient systems growth driver, but we do expect it to carry over into Q2. Finally, While I did not call it out as a growth driver, our expanded reach and role has also expanded Our strategic position with customers.
This has enhanced our ability to connect with C level personas and also means we are more often considered For opportunities that span our application security and delivery portfolio, bridging traditional and modern applications in both hardware and software form factors. As an example, in Q1, one of the United States' leading health care providers selected BIG IP hardware, software, security and NGINX to keep their critical care applications running nonstop while beginning to migrate Next generation apps of our care providers. This project reemerged as a priority for the customer after being deferred last February so the customer can divert all necessary resources despite COVID. In closing, we are are paying off for customers and investors alike. We were very pleased to announce that our acquisition of Ultera closed yesterday and the team has already begun the hard work of integration.
Initial customer feedback about the combination of F5 and Volterra has been very positive. Customers are excited about the potential of F5's Edge 2.0 to eliminate the pain they feel from today's closed edge platforms. Our Edge 2.0 will be the 1st Edge platform built for enterprises and service providers. It will be an open Edge platform that will allow every service to run on any server, virtual or otherwise, inclusive of public clouds. We are very excited to have the Voltera team as part of F5 and are looking forward to sharing our progress with you going forward.
I will wrap up today's prepared remarks by thanking the entire F5 team again as well as our customers and our partners. With that, operator, we will now open the call to Q and A.
Please standby while we compile the Q and A roster. Your first question comes from Sami Badri from Credit Suisse. Please go ahead.
Great. Thank you. And congratulations on the solid quarter and highlighting some of these major trends and drivers that we're seeing in your business. So, Francois, I want to go back to almost about a year ago when the pandemic first started and you called out all these You called out pros and cons of the pandemic, but some deals being pushed out, some deals being reaccelerated back. Some of the catch up Demand that you saw in fiscal 1Q and the catch up or potential pull forward or sorry, however you want to put it, recapture of demand in 2Q 2021, are you basically seeing all the deals that were punted about a year ago or through 2020 are all essentially coming back
Sunny, thanks for the question. The short answer is no. The on the what we call the catch up demand, there are some customers, and I would say there are subset a small subset Customers who have waited and waited and waited on adding capacity, in part because of the uncertainty related of COVID or The absence of resources or the ability to physically do it, who are now doing those refresh. But it isn't if you go back to the deals that were pushed out at the beginning of the pandemic, There were some software deals, we call them software transformation deals that were pushed out. And we're starting to see these come back, But not yet in a big week.
So I think that's still ahead of us.
Got it. Got it. My other question It's to do with systems revenue. And I know we had the Analyst Day relatively recently where you did guide a little bit differently to systems versus what you're guiding today and reported Fiscal 1Q and then guiding to fiscal 2Q with 5% growth. Now based on some of the underlying industry drivers Does your overall Analyst Day guide boosts for negative growth in systems in fiscal year 2021 and for Horizon 2?
Does that kind of Now go away and we're looking at a little bit of a different trajectory.
Well, Sami, I think we've got to Go back and look at the drivers of our hardware business. So I think If you look at where we're at today, Sami, there are 2 kind of macro things that are benefiting the company in general. Generally, there's more spending on applications infrastructure, And I think that's a long term effect. There's also the effect of the company is strategically better positioned Because of the combination of hardware and software and cloud solutions and security solutions that we have, and that allows us to have More strategic conversations with our customers and being seen as a future proof partner for the strategic plans and all of that benefits All of our business, including our systems business. If you look at the drivers specifically to our systems business, There are 2 drivers that I think are long term and one that is more of a transient driver.
So So if you look specifically on the long term, we talked about on Analyst Day that our mix of security had grown and that was helping our And this quarter, we saw again stronger growth in security than in the overall demand. So that helps the systems business. The second factor In our systems business is that generally, we have some customers who, as you recall, we About that 2, 3 years ago, customers who basically have said they were either going all in on the cloud or they were Essentially pausing their the systems business to reconsider their architecture for public cloud deployment. I think a lot of customers we're seeing have kind of graduated from that and now have a clear strategy around the cloud. They have maturity around knowing that they're going to operate in hybrid cloud environments for a long time to come, and they're very comfortable moving forward with hardware as part of They're long term architecture.
And so we're seeing some customers that have decided not to buy any more hardware at all, but are coming back Now refreshing or adding capacity to their systems. So I think those two aspects are longer term savvy. There was one transient driver, which is a subset of our customers that really had to make a refresh because of this end of software development. Think that was about $10,000,000 in the quarter. We think that kind of carries on in Q2, but that's a really short term demand.
So when you Take all of that into account. I mean, we're not changing our Horizon 2 guidance. But yes, there is the possibility that Our hardware business will do better in Horizon 2 than what we saw at PIM. We certainly think that For FY 'twenty one, it's likely to do better than what we had in our overall Horizon 2 guidance.
Got it. Got it. Thank you. Congrats again on
the quarter and the dynamics, and I'll
pass it over to the next
Your next question comes from Alex Henderson from Needham.
I was hoping you could talk a little bit about what you think the impact might have been from the solar impact and to what extent your Whether companies are increasing their spend on IT or specifically security as a result And to what extent you think that will translate to F5 demand? Alex, You're asking if they're increasing spend on cloud and security as a result of what? The SolarWinds Act. Okay. Not necessarily directly, Alex.
There is a there is, of course, heightened awareness Of it, generally by CECL and security organizations. Our security trends have been pretty strong over the last several quarters. The aspects that have accelerated security for us Relate more to, a, more customers moving to software and attaching more security use cases as they move to software, Same happening when they move to the public cloud, attaching more security in the public cloud environment. And then with the addition of Shape, What we have seen, frankly, since the pandemic started, what we're still seeing today is, As more and more businesses go to digital channels, that also attract more fraud. And so our offers for Anti fraud are seeing very strong demand.
I mentioned a couple of use cases in my prepared remarks, but That is across the board, large and small companies. There is more online fraud, and we're very well positioned to protect against that. If I could follow-up. So clearly, you guys are seeing an increased correlation between Your appliance sales and your software sales, you're suggesting that's from hybrid cloud, but hybrid cloud has been In place for quite a while. Is it also possible that the launch of the BEACON product and the integration of Ingenix back into the appliances Please accelerate and expand your ability to tie together the enterprise IT spending For campus and data center with the cloud integration and therefore pulling both as a result.
Alex, yes, there is definitely an element of the overall portfolio Creating stronger demand for F5. Beacon is still early days, but certainly with NGINX, There is a significant factor and we're seeing it here. It's the halo effect Our participation in modern application, we are what's happening, Alex, is A lot of times, we think about traditional and modern applications in kind of separate silos. But the reality for large enterprises is they do a lot of application modernization. That is they will have a traditional application that is typically supported by BIG IP.
And as they modernize that application, they don't refactor it, but they add modern components to that application. And these new modern Typically microservices, NGINX is ideally suited to support these modern components. And so we're seeing that the combination of NGINX and BIG IP gives a full solution set for these These modernization initiatives that customers have and it's pulling both NGINX and BIG IT together. So there's definitely an effect
Your next question comes from the line of Tim Long from Barclays. Please go ahead.
Thank you. Two quick ones, if I could. First, could you guys talk a little bit about the organic software Revenue growth line, Frank, understanding the tough compare. But maybe just talk a little bit about How should we look at that line in the future? Are we going to see it being a little bit less lumpy, particularly as we've seen deferred revenue really grow pretty strongly?
So Is that something you expect to normalize around a higher number as we get through some of the tougher compares? And then second, I think at your Analyst Day or somewhere around there, you talked about a $100,000,000 cloud revenue number. Could you just give us A little color in the quarter, whether it's qualitative or quantitative around how the cloud specific software businesses did for F5? Thank you.
Yes. Tim, it's Frank. Let me start with the first part and then I'll turn it over to Francois for the second. In terms of The organic growth in the quarter, we talked about 35% and in the second quarter, we in Q2 of 2020. And as the business continues to scale and as we get more of it from recurring subscriptions, we do expect To have some more normalization in that and not necessarily see the same swings, but as we talked about from the beginning When we discussed software revenue, gosh, almost 3 years ago now, we said that it will be lumpy for this As we continue to build up scale in the model, but overall, we are not changing at all our Horizon 2 outlook of Compounded annual growth rate of 35% to 40%.
Francois, you want to add anything on the cloud side?
Yes. On the cloud side, so Tim, we have very strong demand in the cloud. The growth in public cloud was actually stronger than the organic software And that has been the case for the last number of quarters. And just generally, Tim, to the demand of software, Yes. We will see still some variability, but the overall demand drivers for software are very strong, and I'll point to a couple.
We had an all time high number of multiyear Subscription agreements in the quarter, a lot of these subscription agreements include multiple software solutions from F5, including NGINX. NGINX had the best quarter ever, and we're really seeing as customers start to really deploy these modern applications, NGINX growing very fast. We also made some investments, as you know, in NGINX a year ago in the controller And app security, and we're seeing the effect of those in terms of growing the size of deals that we have and the addressable deals that we can bring to the table. And so when you factor that cloud, the number of subscription agreements, NGINX and some new catalysts that haven't played out yet, We have some catalysts around the true followers in our subscriptions, some new use cases for Shape That are coming. So we feel very good about our software for Horizon 2.
Okay. Thank you.
Thank you, Tim.
Your next question comes from Paul Silverstein from Cowen. Please go ahead.
Appreciate it. Before I ask my questions,
I was hoping I could ask Frank to just clarify 2 pedestrian issues. One, Frank, does the math is Is my math right that shaped at roughly $22,000,000 in the quarter given your comment about organic and total growth for software?
Paul, actually it was higher than that, Budd. So it's we didn't give the exact number, but it's higher than that. There was some
Francois, you made the statement multiple times that you had the best record NGINX quarter, which means you clearly know what the specific NGINX revenue was. Is that a number you're willing to share with us?
I hope the answer is yes.
No, we haven't You've broken out NGINX lately, but it's you saw the numbers, Paul, that we shared at our Analyst and Investor Day Around doubling of revenue of NGINX and the growth in deal size and essentially this trend is continuing or accelerating, I should say.
Yes. No, I get it. But okay, I'm not sure you want credit But you don't want to give us the details, but I'll move on. Let me ask you the real question. Operating leverage, You've been very clear that you're going to drive operating leverage this year, next year and beyond.
I assume it's as simple as you guys are Planning to grow OpEx slower than revenue, which I obviously that's the math, but the question really is, it's within your control. Since there's a variance And revenue growth up or down relative to your horizon to fiscal 'twenty one 'twenty two outlook. Are you planning to adjust OpEx accordingly or will you which leads? Does revenue lead or does OpEx lead?
Paul, so what we've talked about is the 31% to 32% and that's what we are If we find opportunities for investment to continue to drive that revenue growth, We will make those investments. Having said that, we are committed to that 31% to 32% in FY 'twenty one and the overall horizonal 2 outlook that we gave you as well as the long term model. And so that's the way we are managing the We are very excited to see the 10% growth this quarter and the 8.5% For next quarter implied in the midpoint of our guidance range and those are both obviously above the Horizon 2 outlook. And the factors That go into the rule of 40, we ended up at 43 this quarter. And so we're really happy with that continued progress.
But That rule of 40 is the North Star that we continue to strive for within the business.
All right. I trust from your comments and Francois' Comment that visibility today is better than it was 90 days ago, 365 days So let me ask you the opening question. What is visibility today versus previous periods? Has it improved or has it just it's remained solid?
And I'm assuming you mean visibility in the pipeline and sales opportunities is the primary factor here? Forward looking metrics, Correct. Yes. We visibility continues to grow and be strong for us, Paul, and we're excited about the outlook that we've given
All right. I'll pass
it on. Appreciate it. Your
next question comes from the line of Meta Marshall from Morgan Stanley, please go ahead. Leanna Marshall, your line is open.
Apologies. This might be circling around some of the other questions that were asked, but You noted a couple of quarters ago that people were kind of heads down amidst COVID and that If they were buying physical additions before, they continue to buy physical additions, if they were buying virtual, they continued You spoke, Renssela, about people kind of having a little bit more of a framework of what their hybrid architectures Look like, but I guess I'm just trying to get a sense of, is there still a contingent of customers who are Kind of heads down and just trying to address the problems with our current architectures and that could be kind of looking systems revenue for now. And then, just maybe some of the puts and takes on the lumpiness in the service provider revenue and just understanding some of that is project based, but just Maybe that tracking a little bit under traditional kind of percentage of revenue would be helpful. Thanks.
Let me start with the service provider. Our bookings in our demand in service provider We're up year on year, and we continue to see strong demand in 4 gs solution. We're seeing start of some capacity increases related to 5 gs, but we think the Bigger kind of demand in 5 gs is probably still 6 to 12 months away. But generally, so the trends in our As it relates to customers in the enterprise And whether some of them are still not moving forward with some projects, yes, That is still the case. What we're seeing, Meta, is our incumbency in a number of customers and the fact that we're operationalized, Whether we're operationalizing hardware or in software is actually a significant advantage because we still see a lot of customers that continue to do incremental things And we'll come back to bigger transformational projects later.
And yes, in some ways, because with a number of customers, Hardware is still a majority of our business. That does favor our hardware business in a way more than our software business.
Great. Thanks.
Your next Question comes from the line of Brad Hall from Goldman Sachs. Please go ahead.
Question. I wanted to see if you guys give us an indication of what you're thinking for services growth in Q2? And then I have a follow-up on that.
Yes. We didn't split it out Specifically, Rod, I think it's going to be in those low single digits. My guess is it's higher than the 1% that you saw this quarter, But I'm not expecting it to be in the mid single digits.
So like 2% or 3%, Frank, something like that?
Yes, something like that. Okay.
And then I wanted to come back and just clarify what you guys said in response to Paul on the organic software. Maybe, I guess, The more direct question is what the Volterra contribution would be in Q2. Can you give us any idea on that?
It's De minimis, we talked about less than $10,000,000 for the full year when we discussed the Announced the acquisition and so it's going to be de minimis route. It's not a number that we're going to split out.
Okay. And then finally, just another clarification. This $10,000,000 that you guys talked about in Q1 and then I think Frank said Well, Francois, you said it carries into Q2, but it wasn't clear. Are you saying $10,000,000 again in Q2? Or I would assume some number less But can you clarify what that number should look like in Q2 roughly for us?
Yes. It was about 5 growth points in the quarter and it may be something similar to that. There's obviously a It's hard to say exactly, but it probably is a little less than 10, but I wouldn't say it's dramatically less than 10.
And then Frank that falls to 0 after Q2, right? So it's just a Q1, Q2 phenomenon you think?
I don't not give any guidance beyond that, Budd. But the data we had given out was April 21, 2 or 3 years ago. And so it could stretch beyond that. Some customers, this is a Generation 2 or 3 generation old product. And so I don't know exactly when Yes, people are going to go through that upgrade cycle, but our guess is it's done mostly by next quarter.
Okay, great. Thanks very much. Appreciate it.
Your next question comes from James Fish from Piper Sandler. Please go ahead.
Hey, guys. Thanks for the question. A little bit of on the guide and the results here. No, you said it wasn't budget flush a few weeks ago and talked about project deferral and increased app infrastructure investment. I guess could you in any way break out how much of it was project deferral from product quarters coming into the quarter here versus Kind of increased activity and pipe around that app infrastructure investment versus frankly share gains.
Hi, James. Look, I think the major drivers here are more around increased investments in application infrastructure driven by an acceleration of digital transformation And digital channels for all companies, that is floating through application infrastructure I think that, I would say, is kind of factor number 1. I think our improved strategic position with customers And the fact that they are more comfortable moving forward with a hardware purchase with F5 knowing that We are also their partner for software that we're now also their partner for modern applications that we're also their partner for public cloud deployments, And they don't see F5 as a single threaded horse, if you will, that's just a hardware partner. That is also providing an opportunity for opportunities to move forward even in hardware. I would see those are the 2 major factors.
The catch up is just for some customers that have just Try to wait out, if you will, the pandemic to do some refresh. Some of them are moving forward, but I would say that's Less of a factor than that for us too.
That's helpful, Francois. Last one for me and going off of Rod's Obviously, it was announced a couple of years ago. Just making sure we should think about it as $10,000,000 for Q2 or could it be more? And really my question is, are there other systems over the next 12 to 18 months that are on a similar path that
Yes. So fiscal Q2, James, you should think of it as $10,000,000 or less Then so we think it will be less than what it was this quarter, as Frank said, but exactly where Can't pin it. And then to your point around other systems that were maybe the same situation, There isn't any similar effect in the next 18 months.
Your next question comes from Jason Mater from William Blair. Please go ahead.
Yes. Thank you. Guys, I'm just curious, do you would you say it's possible that the growth outlook for your ADC
Well, yes, I mean, I think as we discussed earlier, whilst we are not changing Our overall view for Horizon 2 of an overall growth of 7% to 8%, If you look at the recent trends, it's possible that we're going to see on our systems business a better trend than what we anticipated in our Horizon 2 guidance. Now I will remind you that When we laid out our Horizon 2 guidance and the drivers of growth for F5 that are driving the 7% to 8% growth, There were 3 substantial drivers. The first one is continued momentum in software and software subscriptions. And we are continuing I mean, we posted 70% growth year on year this quarter, and we're going to continue to see very strong growth in software because the Flywheel of subscriptions that we've put in motion now 2.5 years ago is really working well for us As a motion and for our customers. The second driver is demand for application security, and we're seeing that also being very strong, boosted by the addition of Shape and the use cases that I've talked about.
And then the 3rd driver was a moderation in our systems declines, And we had said that the timing would moderate from double digit to high to mid single digit decline. Now we felt when we Put the guidance together that not all three of these things have to go had to go perfectly for us to achieve the 7% to 8%. So we have multiple paths of getting there. And right now, in the Q1, essentially, they're All three are pretty much going very well. So if that continues, there's a possibility we do better than what we thought.
And right now, specifically in hardware, The trends are pretty strong.
And what was the can you remind us what was the kind of organic growth Excluding the 3 acquisitions, what were you telling us on what that would grow in Horizon 2?
The growth for Horizon 2 was 35% to 40% for all software. And the only component of that, pre Volterra, of course, that was organic, was just 1 quarter of
Okay. So I guess what I was asking is The kind of the non NGINX kind of ADC business, That was going to be flat to slightly up. I mean, could the outlook for that be more something like mid single digit growth going forward?
Yes. We don't break that out. The answer is no, it wasn't going to be flat. It was going to grow much faster than that. But we don't break out Specifically, the software growth percentage of big IP versus NGINX.
Frankly, increasingly, as I showed earlier, Those solutions are actually used in the same subscription agreement to support customers that are that have traditional and modern applications that need to scale. And so they have become increasingly synergistic and kind of driving growth for one another. But the software Growth number that we shared, including BIG IP, NGINX, shape, as part of our security portfolio. Okay. Thank you.
Thank you.
Your next question comes from Samik Chatterjee from JPMorgan. Please go ahead.
Hi. Thanks for taking my question and squeezing me I guess, Francois, from what I hear right up to your comments here, it does sound more like what you're Aim is you didn't really need kind of software systems and services to kind of fire on all cylinders, but given where you are today in the first half, you would exceed the 7% to 8% Horizon 2 revenue growth target this year if things continue this way. And so I just want Confirm that's what you're implying and then if you can help me think about sustainability of that higher than kind of 7% to 8% growth rate Next year given the momentum that you're seeing in the business? And I have a follow-up.
I think, I think, Ed, just to be clear, we're not changing our guidance for Horizon 2 of 7% to 8%. That remains Our view on Horizon 2. If we're thinking specifically about FY 'twenty one, Sameet, if you look clearly in the first half, our expectation, if you look at the midpoint of guidance for Q2 is we will exceed 7% to 8% just on the basis of the first half. And frankly, if the trends that we're seeing right now were to continue, There's a possibility we could exceed that as well for FY 'twenty one, but we're not here guiding for FY 'twenty one. If you're asking about the underlying drivers that I see in the business for growth, I think the drivers we're seeing for both Software and security are very strong and very sustainable.
And in hardware, some of the drivers we're seeing that I've talked to are actually sustainable. There is a change there that we're seeing in how customers are approaching deployment of traditional applications in this hybrid cloud environment. And the place that they're giving F5 in their go forward plans and the strategic position we occupy now, I think that is sustainable. There are a couple of things that I think are transient That are not. And so how much of that will play out in terms of FY 'twenty two and beyond?
It's really too early to say that now.
Okay. And then quick no, thanks for that. And a quick follow-up Frank, can you I'm talking about a $25,000,000 OpEx increase from 1Q to 2Q. Can you clarify how much That is from Volterra.
Yes. I'm not splitting it out specifically, Budd, but I would say it's in the Sort of single digit millions. So I would say mid single digit millions would be probably more accurate. But those That's something that we're not going to expect to sort of split out going forward. It's just too de minimis in terms of the total number.
Okay. Great. Thank you. Thanks
We'll take our last question today from Amit Daryanani from Evercore.
Thanks a lot for listening to squeezing it in, guys. I guess maybe just on the system side, I know it's been discussed A bit, but given everything you've talked about, which is not all the stuff that was held up last year is back yet, and I would imagine that perhaps the share gain narrative that hasn't been talked about could be somewhat powerful as well. Could we see a scenario where that systems business actually accelerates In the back half of the year, I apologize, what are the caveats to that statement?
I mean, I didn't catch the last part of your question. The first part is, could we could the systems business accelerate? What was the second part?
Yes. I guess, if I think about all the stuff that was held up last year that still has to come back into the funnel plus the share gain potential you could In terms of just picking up a little bit more share, I would imagine that systems that this would accelerate as it goes through fiscal 'twenty one. And so I'm curious, what would be the caveat for the Reservations from that dynamic.
Well, Amit, it's a good question. Look, The way I would think about this is, if you look at the kind of long term trends for F5 And where we're going to be as a company in the long term, and we have said for the long term, With the acquisition of Ultera now, we expect to grow double digit in the long term. That's going to be driven by software, software We don't expect our hardware business to be a growth business going into the future. So that's our view of things. And there's nothing that has happened in the last 3 months that would make us fundamentally change that view of the long term.
Now in the short term, Will it accelerate beyond what we're seeing in the second half of twenty twenty one? That's unlikely, But we're not going to rule it out given what we're given the dynamics that we're seeing with our customers today.
Got it. And if I could just clarify this, the modest or the deceleration that you're talking about in the software business in March versus December, Is that just a reflection of your compares are very difficult in the March quarter or is there something else you call out that's driving that modest
No, that's what we called out and that's our feeling. It's just a much harder comp than we had in Q1.
And it's a harder comp because we as a reminder, Amit, we had last Q2, I think, growth rate was 95% or 96% Year on year, so you have a harder comp. But the underlying dynamics and drivers for software demand Our very strong across NGINX, SHAPE, subscription agreements and the momentum we're seeing there and general security. So that we are very confident that is going to continue to pick up.
Perfect. That's it for me. Thank you very much.
Thank you.
That concludes our call today. Thank you for joining. You may now disconnect.