Good afternoon, and welcome to the F5 Networks Third Quarter Fiscal 2020 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 session. Ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0.
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 DuLong. Ma'am, you may begin.
Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. Francois Loco Denu, F5's President and CEO, and Frank Peltzer, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the release is available on our website at f5.com, or an archived version of today's call will be available through October 25th, 2020. Today's live discussion is supported by visuals, 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, July 28th, by dialing 800585 8367or4166214642. Use meeting ID 816 6352. For additional information or follow-up questions, please reach out to me directly at s.dulongf5.com. Our discussion today will contain forward looking statements, which include words such as believes, 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
Thank you, Suzanne, and good afternoon, everyone. Thank you for joining us today. I will talk briefly to our business drivers before handing over the front to review the quarter's results in detail. Despite macro uncertainty, we delivered strong 3rd quarter results. As a company, we continue to take a human first approach.
This means working to support our customers and each other as we cope with the ongoing pandemic and the resulting economic upheaval. It also means supporting each other through the social unrest and protests over the inequitable treatment of black members of our communities. At F5, our commitment to the fight against racism is a foundational part of our culture. We consider diversity and inclusion part of being an F Fiber. As a company, our exec team in collaboration with our F Five appreciates Blackness or FAB employee inclusion group, and our diversity and inclusion team are taking several steps to fight bias.
This includes continuing our mandatory Unconscious bias training for all employees, but no amount of policies or programs will achieve change if we do not make it personal. Everyday actions are what will truly make F5 a more diverse an inclusive company. I have pledged to all our employees as has every member of the F Five exec team that we will be accountable in our words and in our actions. As part of our F5 global good efforts, We have previously committed to support STEM education grants, supporting women of color, and underrepresented youth. In Q3, our FAB employee inclusion group went a step further creating a fund and identifying partners to provide a resource for employees eager to support non profit, working to advance basic human rights for people color in the US.
Over a $124,000 was raised in just 1 month by F Fibers, including the company match. We firmly believe that our commitment to our human first approach makes what we do as a business possible. This quarter, despite a multitude of challenges globally, our team outperformed our non GAAP revenue and earnings guidance. Continued strong customer demand for software subscriptions and security use cases drove 4% total revenue growth and fueled our 43% software growth. Our systems business was down 12% while our services business grew 5%.
In the current environment, our incumbency is a significant advantage. We are benefiting as customers accelerate their digital transformations and turn to operationalized solutions to meet both immediate and long term business needs. After Frank reviewed the quarter's financial results and our Q4 outlook, I will talk to our business trends and customer highlights from the quarter. I will also click time today to introduce our vision for the future of applications. Tom?
Thank you, Francois, and good afternoon, everyone. As Francois noted, we delivered a very strong Q3. Like last quarter, we are reporting non GAAP revenue. Non GAAP revenue excludes the impact of the purchase accounting write down on Shapes assumed deferred revenue. For transparency, we are committed to providing both GAAP and non GAAP revenue during the period when purchase accounting will have an impact on shape related revenue.
On a GAAP basis, Q3 revenue was $583,000,000 3rd quarter non GAAP revenue of $586,000,000 $5,000,000 to $585,000,000 guidance range. Please note, as I review our revenue mix, I will be referring to non GAAP revenue measures. Q3 product revenue of $256,000,000 was up 3% year over year and accounted for approximately 44% of total revenue. Software revenue was $97,000,000, growing 43% against a particularly tough comparison of 91% growth in the prior year percent of product revenue in Q3, up from approximately 27% in the year ago quarter. We also continue our momentum towards a recurring revenue base with subscriptions of 73% of software revenue in the quarter.
Services revenue of $330,000,000 grew 5% year over year and represented approximately 56% 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 percent of revenue in the quarter. Systems revenue of 159,000,000 was down 12% year over revenue growth year over year and representing 57 percent of total revenue. EMEA delivered 6% growth, representing 24% of revenue. Against a challenging comparison in the year ago quarter, APAC was down 15% year over year and accounted for 19% of revenue.
Looking at our bookings by vertical, enterprise customers represented 67% of product bookings and service providers accounted for 15%. Government customers represented 18% of product bookings, including 5% from U. S. Federal. Turning to our Q3 operating results.
GAAP gross margin in Q3 was 81.8%, Non GAAP gross margin was 84.4 percent. GAAP operating expenses were 390,000,000 Non GAAP operating expenses were $327,000,000. Our GAAP operating margin in Q3 was 15%, and our non GAAP operating margin was 28.6 percent. Our GAAP effective tax rate for the quarter was 20.4%. Our non GAAP effective tax rate was 20.2 percent.
GAAP net income for the quarter was $70,000,000 or $1.14 per share. Non GAAP net income was $134,000,000 or $2.18 per share. This was above the top end of our guidance range due to our strong revenue performance as well as disciplined operating expense management. We generated $159,000,000 in cash flow from operations. Cash and investments totaled approximately $1,200,000,000 at quarter end.
While we have an estimated 1,300,000,000 remaining on our share repurchase authorization, we did not repurchase shares during the quarter, opting instead to conserve cash given the uncertain macro environment. DSO was 47 days and capital expenditures for the quarter were 12,000,000. Deferred revenue increased 9% year over year to 1,300,000,000 driven by an increase in maintenance contracts as well as the acquired shaped deferred revenue. We ended the quarter with approximately 6020 employees up approximately a 195 from Q2. Now let me share our guidance for fiscal Q4 of 2020.
Unless otherwise stated, please note that my guidance comments reference non GAAP metrics. Our Q4 outlook factors in the expected impact of continued global uncertainty related to COVID 19 and broader economic trends as we understand them that enable them to serve the immediate needs of their of the largest enterprises around the seen cycles or deferred projects. With this in mind, we are targeting Q4 FY20 non GAAP revenue in the range of 595 to $615,000,000. We expect gross margins between 84% 85%. We estimate operating expenses of $326,000,000 to $338,000,000.
We anticipate our full year FY 2020 effective tax rate will be in the range of 19.5% to 20.5%. This is lower than we previously estimated due to a nonrecurring impact to foreign tax credits resulting from an election we made in filing our FY19 US income tax return, which will impact our Q4 effective tax rate. Our Q4 earnings target is $2.30 to $2.42 per share. We expect Q4 share based compensation expense of approximately $52,000,000 to 53,000,000 Let me speak briefly on We expect to continue to prioritize building our cash position over near term share repurchases and overpaying down our term loan A associated with the Shape acquisition. However, consistent with what we have said previously, we also retain the option of repurchasing shares opportunistically in any open trading window.
With that, I will turn the call back over to Francois. Francois?
Thank you, Frank. I will begin by discussing some of our business dynamics and drivers. As an organization, We remain nearly a 100% work from home, and we expect the majority of our fibers will work remotely for the rest of the calendar year 2020. We are taking a phased and cautious approach to returning to our offices globally. In certain geographies, We are allowing a very small percentage of employees to return to the office on a strictly voluntary basis.
We also recently lifted travel restrictions in some geographies, but we ask employees to consider carefully whether travel is essential and to quarantine for 2 weeks following their trip. We will revisit our approach, regionally, as circumstances and local advisories dictate. Despite the continued work from home conditions, F Fivers remain very engaged and productive. My thanks to the entire F Five team for their persistence, ingenuity, and resiliency in these unprecedented times. Together, we delivered a very strong 3rd quarter despite it also being the 1st quarter closed without a single face to face customer interact While we are very pleased with our 3rd quarter performance, 2 quarters in, we also have more perspective on COVID 19 impact on our business.
Overall, demand in our business is proving more resilient in the second half than We are seeing evidence of 3 expected COVID related headwinds. First, similar to last quarter, While we are seeing strength from overall enterprise, we continue to see caution from the most severely impacted verticals. These include transportation, entertainment, and leisure, and retail, which combined represent less than 10% of our bookings. 2nd, our ASEAN and India sales regions were acutely impacted by COVID 19 related order delays in the last several weeks of the quarter. 3rd, while our sales team has kept up strong virtual engagement levels with customers, The prolonged lack of face to face engagement is causing some delays with new strategic projects These headwinds were in large part offset by the advantages of our strong incumbency and our alignment with customers' investment priorities resulting in the overall resiliency we have seen in our business.
We noted last quarter that customers plan to accelerate their digital transformations because of COVID 19. Our Q3 results are evidence that they are executing against that intent. Large enterprise and service provider customers are increasing their digital engagement and boosting capacity and security on customer facing applications, and on platforms that enable employee collaboration. While some customers are moving ahead with large scale transformation projects, We see an increasing number prioritizing speed and choosing to deploy solutions. They have already operationalized.
F5's incumbency, Broad solutions portfolio, and full hardware to software functionality are clearly an advantage in this environment. With F Five, customers can deploy operationalized solutions with confidence, knowing their application services can evolve in step with our application and business needs. We also continue to see broad customer demand for subscription based consumption models across all geographies. In fact, in q3, the team closed the largest number of subscription deals ever in a quarter. In addition, a growing number of customers are leveraging our broad application service portfolio and our ability to serve both traditional and modern applications.
They are choosing F Five to cover a suite of application services using a combination of traditional F Five engine X And Shape solutions. As an example, this quarter, we won a hybrid cloud data center redesign with the department of health. Our solution delivers speed, visibility, reliability, flexibility, and agility, while avoiding the management complexity that comes with multiple vendors. We delivered a detailed migration plan combining highly scalable big IP access policy manager, an advanced web application firewall, global and local traffic managers, along with NGINX controller and NGINX Plus. We also secured a win to deliver a comprehensive protection strategy for a major service provider.
Our solution includes F Five WAF, NGINX, shape, and silver line managed services. From a use case perspective, application security continues to emerge as a significant customer need for both traditional and modern applications. This is driving 4 kinds of opportunities for us. First, it is driving core F5 security deployments in both systems and software, including DDoS, SSL orchestration and web application firewall. In one example, during the quarter, a major video cop fencing and collaboration tool provider chose F Five to provide global DDoS protection.
2nd, The need for application security is creating demand for the combination of F5 security on top of NGINX. The power of this combination was part of the rationale for acquiring NGINX last year, and we are very pleased with our early traction. Last quarter, we mentioned an NGINX API gateway win that we combined with F Five WAF. This quarter, we secured a win with a Multinational Financial Services Corporation using NGINX API gateway and F5 App Protect. We are enabling them to scale to 10,000 transactions per second, while securing each individual API to their 3rd party fintech partners.
Use cases like this one, enabling best in class security on modern application architectures are gaining momentum and we believe will accelerate the appeal of NGINX to large enterprises. The 3rd kind of opportunity driven by application security needs relates to strong customer interest in our shape portfolio. Customers are looking to shape AI and machine learning enabled defense capabilities to protect against a growing number of threats both bots and human. For instance, this quarter, we secured a shaped defense win with a media conglomerate. We are protecting both the web and mobile deployments of their new over the top service against credential stuffing and other threats.
Finally, we are seeing managed services platform. The accommodation means we can provide customers the ability to protect not just the application, but also how the application works. A shaped silver line combination is ideal for customers who either do not want to own or don't have the expertise to manage the technology. We believe application security is a meaningful opportunity for a 5 and expect demand to fuel growth for several years, but we are not stopping there. I am going to spend the remainder of our prepared remarks outlining for you where we are taking F5.
How we intend to leverage and combine the respective strength and trajectories of traditional F5, NGINX, and shape to create adaptive application and open new addressable market opportunity. We see a future where an application, like a living organism, will naturally adapt based on the environment. It will grow, shrink, defend, and heal itself as needed. The combination of application services, telemetry, and automation will enable it to become an adaptive application. Ultimately, adaptive applications will deliver increased revenue, reduced costs, and better protection for application owners.
We have been sharing this vision with our customers over the last several quarters and the feedback has been resoundingly positive. Our vision strongly aligns with where enterprises see the greatest opportunities for their applications and the bid Through our organic and inorganic investments, we are well on our way to delivering this vision for customers. We are creating an application services platform that will help customers accelerate their digital transformations and fundamentally change the way applications are delivered and secured. Let us step back a bit. To deliver engaging user experiences, many things need to happen between the applications, business logic, and the user.
The application needs to scale as usage increases. It needs to be protected from attacks. And its availability must be maintained to meet end user expectations. These are elements that are typically not in the functional requirements of the application and typically not addressed when the application was built. DevOps and site reliability engineering can help address these non functional requirements.
However, non functional requirements are becoming more complex as the number of microservices based applications increase. Furthermore, business applications are increasingly distributed over a multi cloud environment. They often have multiple generations of application architecture components in them, namely 3 tier, web, mobile, microservices, and even serverless. This creates the need for application services, such as ingress controller, API gateway, load balancer, web application firewall, etcetera, which need to be injected in a standard way between the application business logic in the end user. Application services help applications operate securely at scale.
And distributed application services enable fast and secure digital customer experiences. Well, ideally, we could seamlessly insert and integrate application services in the application path. Today, it is not that simple. A typical enterprise IT needs to stitch together multiple application services from multiple vendors to deliver an application to customers. Our customer research showed that 59 percent of organizations use 10 or more application services.
For most organizations, each of these application services is managed separately with its own management tools. This results in silo teams and high operational complexity. This fragmentation also creates inconsistent application security. While teams work to protect the different aspects of application behaviors, The user experience of the business service often is left under protected. Finally, This piecemeal approach limits visibility across the application delivery chain, making it impossible for enterprises to get a holistic view of the business impact.
We are creating a unified platform to solve these challenges for our customers. We are delivering real value to customers, simplifying operational complexity, providing business insights and protecting the user experience end to end. We are also uniquely positioned to deliver a new level of application insights and automation. FIME's big IP instances, along with NGINX software, support more than 400,000,000 application workloads across the globe. We support application delivery with purpose built hardware in virtual machines, in container software, and in native cloud services.
Our solutions are truly multi cloud, supporting applications in customer's data centers in private clouds and in public clouds. This means we are ideally positioned to help customers to collect a rich set of business telemetry through these application services. Information like application latency, step information, and an online purchase, or the location information for end users. The business related telemetry we collect, combined with our proven AI powered analytics engine from shape, can help customers discover insights about their applications and application services translate the insights into application configuration policies to automate application delivery. With the addition of shape, we are setting the bar higher and marching toward a multipurpose application analytics platform.
Toucha platform supports application insights and automation and AI ops as well as AI enabled security and fraud end to end digital experience management and AI enabled business services. For example, Telemetry data about browser signature or customer credentials can help identify that a request to a retailer's website is actually generated by a bot, not a human. This kind of information can be used to help identify fraudulent transactions. We are developing this comprehensive application analytics platform leveraging telemetry from our rich set of application services and shapes AI powered analytics. Today, we offer the most comprehensive application services along the application path.
We scale and protect our customers' mission critical business services. Our application services support more than half of the world's enterprise application workloads. For the future, we are doubling down on application telemetry and cloud analytics, We are leveraging machine learning and AI to help our customers to discover insights about their applications, business flows, and user experiences. As a result of the investments we have made over the last several years, we have the major components required to realize our vision. We will accomplish this level of application insights and automation through multiple complimentary tools designed to address specific customer challenges.
The most recent of those tools is the shape AI fraud engine or SAFE. SAFE is a cloud fraud prevention service. We created and refined the initial version in a matter of weeks in response to fraud that first became visible in Shapes analytics and telemetry data. Safe and shape recognize another analytics based shape solution are both upsell propositions. They've enabled a higher level of fraud protection than other cloud security solutions, while recognize, minimize this friction for legitimate application users And in doing so, drives increased in top line revenue for customers.
Where other ship solutions target bots, Safe targets human fraudsters. Consider that a typical retailer's web traffic is 95% bot traffic. Shape enterprise defense can block more of that bot traffic than other cloud security solutions, typically more than 99%. Once the bot traffic is identified and blocked, we then can zoom in and begin to analyze the much smaller volumes of human traffic and to identify very subtle, low volume, fraudulent behavior. Let me share a story about how safe works using a customer example.
In this case, the customer is a $30,000,000,000 market cap nationwide restaurant chain. With COVID 19, more customers than ever before began ordering food online. Bad actors were eager to take advantage of these new patterns. In 1 month, the chain lost $600,000 to an incredibly clever discount scam that used fake credit cards. The fraudsters would use social media to advertise 70 or 80% discounts on meals if customers ordered and paid through them.
The fraudster then used fake credit cards or other payments to place orders at the restaurant. Food is prepared and picked up. Only later does the restaurant discover that the payment method was invalid. With safe, we delivered a 90% plus reduction in fraudulent orders. With safe and safe recognized, F Five delivers a complete set of application security capability that span high volume bot attacks in the hundreds of millions per day all the way down to ultra sophisticated fraud scheme that number in the tens per day.
We see our journey to creating adaptive applications occurring in 4 acts, each of which brings with it new growth opportunities for F5. With acts 2 through 4, we are also expanding our addressable opportunity. From a timing perspective, we are working multiple acts in parallel. In act 1, we took steps to expand our opportunity within traditional applications. In this phase, we unlock new growth opportunity by adding automation and orchestration to our existing software solutions.
We made them lighter weight. We made them easier to procure, consume, and deploy. We made upgrades easier. The majority of the software growth of this year and last comes as a result of these actions, and we believe there is additional growth ahead. We continue to innovate on next generation big IP software that will further differentiate F5 in traditional applications.
The addition of NGINX took us into act 2, opening a new addressable opportunity for F Five. NGINX enables us to serve modern application environments and cloud native applications. In fact, half of NGINX deployments are in the public cloud. NGINX also brought us modern application services including API Gateway And API Management, Kubernetes, ingress control, and microservices proxy. NGINX enables us to win against competing software vendors and cloud native services that lock customers into a specific architecture putting infrastructure and development teams at odds.
We took a different approach with a new version of NGINX controller. Our orchestration and analytics platform. We expect controller will bridge the divide between dev teams, building modern apps, and the infrastructure teams that need to secure scale and monitor them. We believe act 2 brings significant growth opportunity and complements our existing big IT footprint. Act 3 is all about application security, where the last decade was focused on network security We believe the next opportunity is application security.
We started this act organically focused on traditional applications. The addition of NGINX gives us the opportunity to expand application security to modern applications, and the addition of shape add significant capabilities to serve both traditional and modern applications, doubling our application security opportunity from $4,000,000,000 to $8,000,000,000. We are well on our way to establishing ourselves as the leading security player for our traditional application security solutions. We are very early on in our efforts to apply best in class security to modern applications with the combination of F5 and NGINX. And we are only beginning to tap the potential of growth per shape.
In act 4, we will leverage analytics to drive automation and deliver business insights. We will leverage our broad application services and shape powerful analytics to deliver AI enabled security and fraud protection, digital experience management, application performance management, and AI ops and analytics enabled business services. Through our existing investments, we are well on our way to delivering this vision for customers. We are creating a differentiated acquisition services platform that will enable adaptive applications. Helping customers accelerate their digital transformations and fundamentally changing the way applications are delivered and secured.
Let me wrap up the prepared remarks from today's call by thanking the entire F Five team again as well as our customers and partners. We are more confident than ever that our vision, our investments, and our innovation are well aligned with both near and longer term customer demand. With that, operator,
Your first question comes from the line of Tim Long with Barclays. Your line is open.
Thank you. Yeah, two two quick ones, if I could. Franklin Francois, first, could you just give her a little little color on, how the performance was in the cloud or hyperscale space where, you guys obviously have been increasing the service offering there. So could you just give us a little flavor on how that's going. And then second, I was hoping you could talk a little bit about the telco business.
I think you announced the a win with Rakuten again.
It
might have been your second one. So if
you could just talk a little bit about,
how your c you see your solutions positioning, in a 5 g world, maybe, maybe more so than than what we saw in a in a 4 g world for the telco vertical. Thank you.
Thank you, Taylor. So I'll I'll, start with the the our solutions in the public cloud, Generally, we're seeing a continuation of the trend in the past few quarters, which is that our footprint in public cloud is accelerating and growing faster. And I'll give you a a couple of components of that. First of course, our partnership with AWS continues to increase the number of opportunities that we have, in public cloud, largely the middle of the rest is making a number of opportunities visible to us that we're not before. So that that's helping and contributing to accelerate our our growth in public cloud.
We are also seeing, with NGINX, a large number of deployments, I think kind of half of the Internet deployments are are in public cloud. And so we're now seeing an opportunity to be in front of modern applications in public cloud, but also applications that were traditional applications that are being refactored, and moved to the public cloud, NGINX has a very strong value proposition to keep up in front of which factored application especially when they're going multi cloud. And so F5 study proposition, of, of multi cloud against a native tool is very compelling. So generally, you know, continued, continued growth in, in and with public cloud providers. So you mentioned hyperscalers as well.
I I will say that we are part of the infrastructure of some of the high schoolers, providing, a a number of processing applications as collaborating, collaboration, time applications. And so we had an opportunity to, to scale with these applications as well. As it relates to telco and, the evolution, as you know, we've had a very strong presence in the 4 gs, specifically in the GI line infrastructure rollout providers. And we're we're about, to transition into 5 gs we are seeing a substantial ramp up in the number of 5 g opportunities, and that is a very strong upcoming catalysts, for, it's a very strong upcoming catalysts, for our software. Because a lot of these 5 g opportunities take advantage of the the work we've done on virtualization, and, and essentially, that's, that most of the opportunities that are are software driven.
We have now won, important design wins in input, in environments that are essentially cloud native and container native. And we've been able to win these, these opportunities with a com combination of F5 VIP and NGINX, sitting in these cloud native environments. So, our excitement about telco and 5 g is we're we're seeing here the kind of breadth of the F5 application services. Playing an important role in the new, new architectures.
Okay. Thank you.
Your next question comes from the line of James Fish with Piper Sandler. Your line is open.
Hey guys, thanks for the question. You know, NGINX was picking up for us ahead of the quarter. And I was just wondering, is the new integrated architecture starting to lead towards more wins with that architecture? Or is it a refresh of it or is it more the refresh in terms of purchasing more what is known through F5? And I guess also how are you thinking about leveraging NGINX and F5 for moving it into the edge computing world?
I'll start with the first part of your question. Around what's and I wanna make sure, James, you're asking about what is, what are the catalysts that are driving both in the NGINX business?
It's more about understanding Francois if this new combined architecture of having NGINX and F5 together is is leading towards more wins with customers or if it's customers right now, just spending to keep the lights on and buying what they knew before.
Oh, okay. Thank thank you for for clarifying, Jason. So the answer is absolutely that I mean, This quarter, we have, the higher sever number of multi product deal 1195. And largely driven by combinations of F5, bigit and NGINX, value proposition coming together and I'll give you a couple of examples. We have ported, F5, the, app security stack onto engineering.
We're now studying a number of, customers, app dev teams wanting to take advantage of the fast security. So what we call internet which we teach with, last quarter is getting a lot of traction and helping accelerate the modernization of, Obaginate. We're also seeing, with a controller that we have introduced, traction around our API gateway and AI management solution and we're able to, add that to customers that already have, F5 F5 solutions. So Example, the multi product deal that this is my, that is, a large number of the term subscription that we, we sold this quarter. Or a combination of F5 and NGINX together.
So this better together, a story of really bridging, the world of DevOps and the world of NetOps. Together, giving more visibility to network operations team into their OSS environments, that is starting to play out, in our customers, and that's that's one of the drivers of our software base. Your your second question was around, edge computing. So we we today have, and we call it as a light asset edge service called Silverline, which largely offer, managed web application firewall and, and feed off of the managed service. And we've now bought and shaped and by bot technology on top of that, on top of that offering.
And so we are we're able to serve the needs of some customers that want edge capability. We don't, intend to go in a, in CapEx intensive way into the, the, the edge computing market ourselves, but our fundamental value proposition of the company, James, is that we are essentially for sub diagnostics. And so we you know, our, our solutions can be deployed, in public cloud, on prem, in private clouds, and in partnership with CDN Providers. So we have a number of partnerships as well, with with, CDN players that can use our app security stack to protect acquisitions for the hosted hosted at the edge.
Got it. Thank you for all that color and, take it. Take care.
Your next question comes from the line of Sami Badri with Credit Suisse. Your line is open.
Hi. Thank you very much for the question and congrats on the solid numbers for the quarter. My question mainly is to do with this new vision you're laying out, the adaptive application vision, is this predominantly gonna be offered in the form of an ELA or a very, very flexible consumption agreement with your customers and where exactly that will be consumed. It's gonna be multi cloud is gonna be predominantly offered to customer scaling applications in public clouds. Can you just give us more of an idea on how mechanically the numbers are gonna work, or your revenue sources are gonna work once this kind of, like, really rolls out and, begins more, you know, begins to be more mainstream with your customer base.
Tommy, thank you. Look, some of it is still to play out, but I think of the the consumption example that you've mentioned, it's it's all of the above. We are by the way, I should say we are already seeing, elements of that vision coming to play today. What we're seeing that with, I just mentioned, customers deploying F5 and NGINX, together, And this quarter, you know, what we see is that in this environment, customers want to kind of consolidate on vendors that offer a strong breadth of application services. And so there there's a a number of deals we've already won this quarter where essentially we're taking out some, you know, these players and these solutions that are customers they have had, but at at the look of their future needs, they kind of look at the vision of where I find it going.
And they already take 3 or 4 of these application services together, to chain a digital experience. And so we're starting to see that happen in real time, in the, the opportunities that we're winning today. And today, that's happening. We've seen deals that are a combination of hardware or software, deals that are a combination of, on prem, and and public cloud. We're seeing that with customers protecting a combination of traditional and modern applications.
And we're now starting to see that with, the, shape contributing to this vision. With the integrations we've already made, with, shape and our civil line offering and customers, you know, consuming that as a, as a managed service. So you are we are early days in that, the the realization as time goes on of the vision is gonna get much bigger. And as you saw in the 4 acts that we presented, I think, over time, the opportunity for F5 gets much larger but you're already seeing some of these consumption bottles and consolidation of application delivery and application security. Across multiple types of infrastructure, that's actually starting to play out right now.
Got it. Got it. Thank you for that color. Kind of like taking what you just said and just kind of framing the way we should be looking at the forward looking business here is as adaptive applications continues to scale we'll expect services software engine X, shape to kind of be attached to that. But when we look at, like, some of the reported metrics that you guys have delivered on systems growth specifically and these kind of double digit declines, should we expect this trend to essentially continue with systems continuously to, to be declining whereas the rest of the business is growing?
Like, should that relationship continue as adaptive applications continues to accelerate?
I mean, broadly, broadly the answer is yes, because the, you know, a lot of our customers want to move to the software first, environment. And the software first environment gives them the flexibility, to, to deploy, ultimately, this vision for, for adaptive application, gives them a lot more flexibility to insert, new application services, to, to take the benefits of automation and orchestration, and, and, and, ultimately, to leverage the, the work we're doing in analytics. So over all of these trends, point to, you'll continue to see our systems business decline. And you'll, you know, you'll continue to see our software, our software grow and the the, you know, overall, you'll see that the majority of the business for the company will be software.
Got it. Got it. And I'm I'm sorry I'd asked if there was a lot in this earnings call, tied to your telecom and service provider opportunities. Know, you've you've had significant traction with Rakuten. Obviously, the theme of virtualizing network cores is now coming to the US with the dish being a very I wanna say, 1st big batter here that improve itself and the infrastructure.
Should it kind of go you know, should should people be making the assumption that since you guys were very effective at insertions with Rakuten and a virtualized core abroad that your advantages and your know how and how to do this in certain use cases and functions in the US course, should should we basically have some conviction in this idea would you say that this is going to be, you know, completely different? There's gonna be a new bidding process, etcetera, because the idea of virtualizing course for telcos is know, I guess we can all agree is pretty complicated stuff. So, we just wanna get an idea on how big or if traction, you know, is gonna be one of the big drivers for our 5.4 in telco and SB?
Tommy, I think you should the way to think about this is, Every carrier, I think it's going to be different, in their,
in their
transition from 4 g to 5 g, you know, some, you know, you know, or some will not, use that but overall, if you look at, the 5 g architecture and where, you know, kind of the end state of where people are going, we feel very, very good about the work we've done, the special thought by 5 brings to the 5 year architectures to be inserted in, in, you know, large, large carrier infrastructure, whether it's in the U. S. Actually in Asia or in Europe. And we have already some important design wins beyond racketeering investments. So I think you should read from that, but we have pretty good conviction around the world, that 1.45g infrastructure going forward.
Got it. Great. Thank you very much, Francois.
Your next question comes from the line of Samik Chatterjee with JP Morgan. Your line is open.
Hi. Thanks for taking my question. If I could just follow-up, firstly on Sammy's question here about kind of the vision you're laying out for application services. Just curious how to think about kind of when you think about all the pieces for Act 4, how much of that is organic versus inorganic and kind of some of the AI, etcetera capabilities, how much of that do you need to kind of look outside to bring those capabilities in house. And I have a follow-up.
Well, if you look at the, analytics platform, so when when we, made the acquisition of Shapes, there were multiple reasons we, we felt strongly this was a great combination when I find one was, of course, the business that, the shape was in the anti fraud business. And as I've shared with you, we really think we've entered the era of of application capital where most fraud is going to be on applications and shape is capturing that secular trend. And as in fact, we already saw that, an acceleration of that this order with COVID, and I can, I can come back to that later? But the the the anti fraud business was one of the big reasons for the acquisition. The second big reason for the acquisition was around technology, and it was the large amount of money and time that Shafe had invested in building an AI powered analytics platform.
And so the reason you see that here, and and that whole part about our vision already realizing is in fact because of the technology assets on shape. So the the the M and A as it relates to that, essentially have been done, with the acquisition. Overall, you know, we don't roll out of that. As we, as we march towards this vision of adaptive application, down the road, we might want to accelerate certain things inorganically, but in terms of analytics specifically, we have a big head start, with the acquisition of shape.
Got it. Got it. Thank you. And if I can just follow-up, the guidance you issued for fiscal 4th quarter is a narrower range on the revenue rate to the last quarter. So it does imply you have more visibility now.
Just kind of, again, wanted to get your kind of get what you see relation to kind of customer activity, particularly cadence through the quarter? Are the sales cycles compressing a bit rate to what you saw last quarter? Is that driving the higher visibility you?
Sunny, this is Frank. So I think, you know, our approach was very similar to last quarter. We obviously have had our, quarterly business reviews with our, our sales team. We feel like, you know, the guidance that we have given is appropriate and because it was the first quarter that we were living in a post COVID world. I think we wanted to give a little bit more of a range, but I think we do feel a bit more comfortable going into Q4, with the visibility that we've got on that activity that, you know, we could tighten that up by $10,000,000.
Okay. Thank you.
Your next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.
Great, thanks. And you noted an answer to a previous question about multi product deals picking up. But, just any commentary you could give on, pickup in ELAs or just interest in ELAs in the environment, maybe are there people just wanting to know more what they're buying versus open ended deals? And then maybe second question, any just update on the AWS partnership, and any traction you've been able to make without sales or without in person sales.
And so on on, on the LA is that the demand continues to be, very strong, And I but I would say they're they're kind of 2 tell us two stories there. One one of the effects we're seeing in this COVID environment is that customers, there are some strategic kind of transformation that customers, are are pushing out you know, largely because they have to tend to, you know, more near term priorities. So that in a way, there's some, there's some large potential ELAs, that could, that could have happened this quarter that will happen more down the road. But at the same time, we did more, ELAs in terms of volumes of transactions. We did more ELAs this quarter than we did, ever before.
And and those, ELAs were often a combination of multiple F5, product. So, you know, big IP plus Nginx, and now we've started to see, shape as well. So that's, that's, That's where we're at on the LE. And as it relates to the AWS partnership, we're making very good progress. We have we are we're getting a lot of visibility from AWS terms of new opportunities.
We are, you know, kind of ahead of, you know, where we thought we would be at this point in the relationship. And I think we'll see further acceleration in 2021 because we're working on joint, joint solution integration. And also now, working with it on their migration partners, to accelerate the, the work we're doing for migration of, of more So overall, good traction so far and expect, even more in, in 2021 from the joint collaboration.
Great. Thanks. Congrats.
Question comes from the line
was hoping you could talk
a little bit about, the timeline between the various phases you described in your presentation. Clearly, you've already done phase 1 and positioned into phase 2, with Kubernetes and, application growth driving that vector. It's pretty clear that for the next number of years, that's going to be a very high rate of growth. I was wondering if you could give us a little granularity around that. Do you expect to gain share as a result of your high rate of penetration in Kubernetes and increasing Kubernetes deployment as a percent of new applications and therefore gain share within the application market.
And then the second question, is as you move into the phase 3 and phase 4, how do you see those ramping in as a contribution to the software growth rates, is that a stutter for a year or so and then get, a real head of steam around it to get into the phase 3, or does that already happening? And, when does phase 4 kick in? Thank you.
Alright. Thank you. Let me let me take you through, the timelines of us. So Last one, which is really on, you know, F5, providing app delivery against, traditional application. Of course, it's happening right now, largely driven with, with our big IP platform.
And a lot of the work that we have done over the last 2, 3 years has been moving to software first environment. There's a lot of, innovations in our models, that have gone on to be successful. Is it more automated, orchestrated, software environment in fully public cloud. And I would say, a lot of the growth you have seen in, in our software today has really come from from act 1. Act 2, which is, F5, getting in front of all that acquisitions really started with the the acquisition of EdgeGenx, And you're right, Alex, about the penetration of Kubernetes environment, we are we are accelerating in that space.
And, yes, we do intend to gain share. In the modern application phase, because we we worked there before. And that is something that's starting to play out now, and I think it's gonna play out for the next, next several years. I would say we're still in the early inning about, a, you know, being part of modern applications and, b, monetizing that presence. But the stuff we've done with, you know, taking up security, the application security solution, for F5, and putting that on, on NGINX as an example.
The new NGINX controller, the new application services like API Gateway that we really All of these things are starting to to provide traction on act 2. Act 3, is really, around protecting both traditional and modern application. We have started that organically, with F5. That's why our security, business is part of our software group. But that is being accelerated in shape, and we intend to port the shape capability across the near side of the portfolio.
We've already ported shift capabilities on civil lines, which is a managed security service, but we'll have our shift capabilities with, big IP. We'll have it with NGINX. So act 3 is already contributing today, but you should expect them to contribute even more in the, in, in the future. So I would say act 23, you know, over the next couple of years, we'll contribute meaningfully. As for, I think, in terms of, if there's anything in terms of, you know, material contribution to our financial performance, I would say at 4 is really, you know, beyond the next couple of years.
From a technology perspective, we already have a lot of components, we are, you know, we started engaging with, with, customers around some of the, the solutions that that resonate the most of them around leveraging analytics to give them the right divide insights on their application. Shape actually has already started, started releasing a couple of solutions that we just had. But I think in terms of that becoming material contributor to us, we think that's that's, you know, beyond the next couple of years.
If I could just follow-up, it's my understanding that you guys are the dominant, controller that's used in Kubernetes deployments today. And if Kubernetes increases as a as sharply as a percentage of new application doesn't that, by definition, drive share gains?
Yeah. Hi, Alex. This is Kara. With NGINX, we have a solution that is, tailored made to be deployed in microservices and container native environment, such as Kubernetes. And it is the, leading selection of web server in those environments, for modern, customer facing digital experiences.
And so we think with NGINXs at its presence in, hundreds of millions of, of those kind of consumer facing modern applications, We have a good head start for then inserting some of those security capabilities and the analytics capabilities that Francois talked about.
I knew I could get Cara on there somehow. Thanks, guys.
Your next question comes from the line of Paul Silverstein with Cowen. Your line is open.
Franco and Frank, I was hoping you could tell us what was the shape contribution of revenue? And related to that, obviously, what was the organic software revenue growth in the quarter? And then I've got a quick follow-up.
Paul, so it was a little less than, 20,000,000. And so, without shape, I think, the number would have been 14% 14%
for organic revenue growth?
Correct. Okay.
Just an observation, a question relates to observation. Your first of all, your 5G commentary was different this go around than what you said historically. Historically, you've made the comment, the observation that you won't see meaningful 5G revenue. And till there was meaningful take up of 5g Services because what you did was later in the cycle dependent upon the take up of those services in terms of number of users. And the intensity of use.
And your comments are on this call seem to be very different in terms of seeing traction now. I'm just trying to understand exactly what you're saying. And before you respond, the other question would be your Asian and India commentary, I just want to make sure I understood it. Are you saying that not only did it get hit hard early on, but you haven't seen any improvement? Was it is it still in the doldrums or are you seeing any signs of that coming back relative to the impact of COVID-nineteen?
Appreciate it.
Well, let me start with that again. I think it's still, you know, the the business there is still impacted. In India. And then to be specific, from India and, a few other countries in the Asian region, you know, either because of first lockdowns or second waves and, country going back in into lockdown, such as Singapore. But generally in that region, you know, we, we have been impacted throughout the future for the last, you know, really 60 days, and it's it's kind of ongoing.
On on 5 g, Oh, I I think my I I think I've said 2 things, in the past. One is I said, you know, once we would, see 5 g radios, the point that we would start to see capacity upgrades in the core. And I I would say So a large extent, we haven't seen those yet, and I think they're still to come. I do think in the very short term, Some carriers have, diverted some spend that would have gone a wireless infrastructure into wireline to address you know, work from home issues that include capacity, issues on fixed infrastructure. And that's true for kind of carriers that combine wireless and wireline infrastructure.
But what I'm seeing as it relates to 5 g opportunities, for a 5 is we are now, you know, seeing a red spot in opportunities, in 5 g. And we have already some design wins that give us confidence in, in the role we're going to play. So, you know, I, I would expect, let's see, that start to to contribute to us, next year. Exactly, you know, when that would be put the pinpoint, which quarter, as you know, that, you know, service providers, if you can't predict things that accurately, but I would expect that next year, we would see those both in January.
Hey, Francois, one quick follow-up, if I may. Once upon a time F5 was a 40% operating margin company, I understand you all have needed to make investments to reposition the company, but you're now down at 28 and change. Any thoughts on if and when we see a healthy rebound in operating margin and you start to leverage the revenue growth you're starting to generate?
Sure. Paul, we'll have more to talk about this. You know, when we, when we talk about our next quarter, as well as, you know, when we reschedule the end presentation. But, I do feel like we're closer to the bottom here, and I think you'll see with the Q4 guide that we've given, we're ramping back up from here and expect to see that continue.
Thank you, Paul.
This concludes the time we have for today's session. Thank you for attending. You may now disconnect.