Good afternoon, and welcome to the F5 Networks 4th Quarter Fiscal 2019 Financial Results Conference Call. At this time, all participants are in a listen only mode. Also, today's conference is being recorded. If anyone has any objection, please disconnect at this time. I will now turn the call over to Ms.
Suzanne Yuva.
Suzanne, you may begin.
I'm Suzanne DuLong, a Five Five's President of Investor Relations. Fransalo Salomere, Hub Vice President and CEO, and Frank Kelser, as Vice Executive Vice President and CFO, we'll be making prepared remarks on today's call. Other members of the outside executive team are also enhanced to answer questions during the Q And A portion of today's call. A copy of today's press release is available on our website atf5.com, or an archived version of the call also will be available through January 27 2020. The replay of today's discussion will be available through midnight Pacific Time tomorrow, October 24th.
By dialing 8005858367or4166214642. For additional information or follow-up questions, please reach out to me directly atf.com. Our discussion today will contain forward looking statements, which include words such as statements, anticipate, expect, and target. These forward looking statements involve uncertainties and risks that may cause our actual results to differ materially from the abide 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 5 has no duty to update any information presented in this call. With that, I'll turn the call over to Francois.
Thank you, Sudan, and good afternoon, everyone. Thank you for joining us today. I will talk briefly to our business drivers before handing over to Frank to review the quarter's results in detail. Customer demand for consistent application security and reliable acquisition performance across multi cloud environments drove 5% total revenue growth in our 4th quarter. Strong customer demand for security resources, including web application firewall and identity aware proxy, as well as continued real attraction fueled our 2nd consecutive quarter of 91% software growth and drove overall product revenue growth of 3%.
As time as application services are making it possible for enterprises and service providers across the globe to deliver digital experiences with the reliability and speed their customers expect. Our software growth was partially offset by our systems business which was down 15% as customers increasingly look to consume F5 services as software. Our services business delivered a strong 6% revenue growth and continues to produce robust gross margin with consistently strong attach rates. I will speak more to our business dynamics later in my remarks. Overall, we are pleased by the acceleration in our transition to more of a software driven business and the team is executing very well.
Against our long term strategy.
Frank? Thank you, Francois, and good afternoon, everyone. As Francois noted, we delivered another quarter of strong revenue growth. I'll speak first to our 4th quarter and then to our fiscal year results. Q4 is our 1st full quarter with NGINX, and NGINX's contribution is fully integrated into our results.
4th quarter revenue of $590,400,000 was up approximately 5% year over year and above the top end of our guided range of 577 to 587,000,000. GAAP net income for the quarter was 94,800,000 or $1.57 per share. Non GAAP net income was a 156,700,000 or $2.59 per share, also above the top end of our guidance range. Q 4 product revenue of $265,000,000 was up 3% year over year and accounted for approximately 45% of total revenue. As Francois mentioned, software revenues grew 91% year over year for the 2nd consecutive quarter.
Software represented approximately 31 percent of product revenue in Q4, up from approximately 27% in Q3 and from 17% in the year ago quarter. We continue to experience strong uptake on our software solutions sold as ELAs and annual subscriptions. The contribution from ELAs is up quarter over quarter and up substantially year over year. I will take a moment to elaborate on the impact of the implementation of 606, which
was a
source of some discussion with investors last quarter. Let me give you the punch line though, which is that the adoption of 606 hardly impacted our year over year software revenue growth in Q4. Let me explain why. Under the modified retrospective approach to ASC 606, we are required to compare our 606 q44 'nineteen results to what they would have been under 605. In Q4, we estimate the implementation of 606 had a similar impact to Q3.
The 606 to 605 comparison is not meaningful for measuring our software growth because nearly all of our 2018 revenue came from perpetual licenses or other consumption models not impacted by 606. In the year ago quarter, had 606 been in effect The net impact to software revenue would have been de minimis, slightly more than a $100,000, which means our Q4 software growth rate using 606 in FY19 compared to FY18 would have been approximately 90%. Said differently, our software revenue growth is being driven by new offerings and new consumption models and not an acceleration of an existing run rate of subscription revenue. Moving on. Systems revenue of a 182,000,000 made up approximately 69% of product revenue and was down 15% year over year as customer continue to accelerate their transition to software based solutions.
Services revenue of 325,000,000 grew 6% year over year and represented approximately 55% of total revenue. On a regional basis in Q4, Americas delivered an exceptionally strong quarter with 11% revenue growth year over year and represented 59% of total revenue. EMEA was down 3% and accounted for 23% of revenue, while APAC was down 2% and accounted for 18% of revenue. Looking at our bookings by vertical, enterprise customers represented 61% of product bookings and service providers accounted for 17%. Our government business was very strong, representing 22% of product bookings including 13% from US Federal.
In Q4, we had 3 greater than 10% distributors, Ingramicroa, which accounted for 18% of total revenue, and Carahsoft and Tech Data, each of which accounted for 10%. Let's now discuss our FY Q4 2019 operating results. GAAP gross margin in Q4 was 84.6%. Non GAAP gross margin was 86.3 percent. GAAP operating expenses were 395,000,000 Non GAAP operating expenses were $317,000,000.
Non GAAP operating expenses were higher than our expectations as a result the higher sales commissions related to software sales. Our GAAP operating margin in Q4 was 19.4%, and our non GAAP operating margin was 32.6 percent. Our GAAP effective tax rate for the quarter was 19.7%, our non GAAP effective tax rate is 20%. Turning to the balance sheet. In Q4, we generated $206,000,000 in cash flow from operations, up slightly from last year.
Cash and investments totaled approximately $1,300,000,000 at quarter end. DSO was 49 days and capital expenditures for the quarter were $21,000,000, down sequentially as we completed the final phases of building up our new downtown Seattle facility. Deferred revenue increased 18% year over year to $1,200,000,000. Less than half the increase over the prior year quarter relates to the adoption of 606. We ended the quarter with approximately 5 325 employees, up approximately 130 employees from Q3, reflecting our continued investments in growth areas, including sales and research and development.
In Q4, we did not repurchase any of our common stock. We continue to view cash as a strategic asset for our future growth. So our primary focus with cash generation is augmenting our strong balance sheet and building a war chest for strategic purposes We may opt to repurchase shares during any open trading window. Let's briefly discuss our fiscal year results. For the full year, $1,000,000, grew 3% from the prior year and accounted for 44% of total revenue.
Within product revenue, software grew 60% while systems revenue declined 8%. Services revenue of 1,260,000,000 grew approximately 5% during the year and represented 56 percent of 20 revenue. GAAP net income for FY19 was $427,700,000 or $7.08 per share. Non GAAP net income was $626,300,000 or $10.36 per share. For FY 2019, Cash flow from operations totaled $748,000,000, down $13,000,000 from FY18 largely as a result of the NGINX acquisition.
Capital expenditures were a $103,000,000. Now let me share our guidance for fiscal q1 of 2020. Unless otherwise stated, please note that my guidance comments reference non GAAP operating metrics. We continue to make strong progress transitioning our business to a software driven model We remain confident in our position in the market and expect our growth will be driven by the growth of applications and increasing demand for our multi cloud application services. We also expect continued strong demand for our software solutions as subscription and ELA offerings.
With this in mind, we are targeting a q120 revenue in the revenues of 560 to 570,000,000. We expect gross margins of approximately 86%. We estimate operating expenses of $296,000,000 to $308,000,000. We anticipate our effective tax rate for Q1 will remain in the 21 to 22 percent range. Our Q1 earnings target is $2.41 to $2.44 per share.
In the quarter, we expect share based compensation expense of approximately 46,000,000 and $4,600,000 in amortization of purchase intangible assets. Finally, as has been our practice, we want to provide you with a high level fiscal 2020 modeling assumptions. First, we are tracking to our Horizon One outlook for mid single digit total revenue growth and anticipate the continuation of the trend we saw in the second half of FY19 with customers accelerating the transition of their applications to software based solutions. On FY20 operating metrics, We anticipate gross margins of approximately 86% for the year. Following our typical seasonal pattern, We would expect operating margins to move down in Q2 from Q1 and then increase in the second half with full year results within the horizon run range of 33 to 35%.
We expect FY 2020 stock based compensation in the range of $185,000,000 to $195,000,000 and capital expenditures in the range of $50,000,000 to 70,000,000. We expect to update our Horizon 2 outlook at our next Analyst and Investor Day, which we have scheduled for March 3 2020 in New York. Details will follow as we get closer to the date. With that, I will turn the call back over to Francois. Francois?
Thank
you, Frank. I will speak to some of the business trends we are seeing, highlights some customer wins in the quarter and speak to why we think we are well positioned to capitalize on sky rocketing application growth before moving to Q And A. But first, I want to highlight the partner news we announced today with Amazon Web Services. We have signed a strategic collaboration agreement with AWS. The agreement outlines specific areas of collaboration across our field sales solution architecture and professional services teams.
N5 will now have dedicated AWS solutions to architect and professional services resources trained on F5 technical architecture, and our application services across all product lines and geographic areas. They will be designed with us by the Zebra solutions for existing and new cloud native customers. Additionally, you have agreed to jointly collaborate on new offerings, integrating outside application services with AWS services, control power, cloud front, and other core offerings. We expect this will result in improved customer experience for those customers pending their existing workloads to AWS and some new cloud native applications being deployed in public cloud. We are excited with this next step in our partnership with AWS.
So our joint customers, our collaboration will reduce the executed securing their assets with a consistent security posture and policy management in hybrid cloud deployments. Now let me turn to the 4th quarter and the tremendous progress we are making in transforming air tight business and driving software revenue growth. Last quarter, we said that from our customer's perspective, it is clear that F Five has moved beyond a traditional ADC player. This quarter's results provide another data point of our progress and highlight the fact that F5 is emerging as a leader in a rapidly and in multi cloud application services space. Our customers increasingly want to consume more F5 services and software and to securely deploy applications faster.
We have taken a number of steps to unlock this market demand. First, We have created new consumption models, making SI services available in subscription and ELAs. In doing so, we have a decent friction for both enterprise and service provider customers and showing easier software provisioning and reducing operating complexity. As Frank mentioned, we continue to see strong subscription and ELA traction in Q4. In some cases, we are seeing opportunities to expand our revenue opportunity with customers with whom we have already secured an ELA.
For instance, last quarter, we mentioned we had closed an ELA with a large net generation mobile carrier in APAC where our 5 g rating energy solutions would address their growing 4 g mobile broadband consumer services. I am pleased to announce today that the customer is Rakuten, and during Q4, we secured a second all software use case with them for GI firewall. 2nd, we are enabling more automation and orchestration on our platform enabled faster application provisioning. In a real world example of customer impact, we are providing 1 of the world's leading converged video, broadband, and communication companies, a cloud based disaster recovery solution for their mission critical entertainment back office support sales. In the case of High Failure, a disaster recovery solution is activated replicating the customer's back office support service in AWS.
As far as BIG IT, the central management solution for Big IT provides a functionality to automatically start F5 Big IP Virtual Edition in AWS when needed. It also provides application and performance visibility of the activated disaster recovery system. In addition, BIG IQ is providing on the main licenses for the BIG IP virtual additions, which are being consumed under an EOA to ensure cost effective consumption based licensing for the disaster recovery infrastructure. 3rd, with NGINX, we are enabling application services consumption in native container environment. As a example, During q 4, we secured a joint F Five NGINX win with an EMEA based financial tech customer.
This customer has been visiting F Five customer and also a long time user of NGINX open source for application services in the night for services environment. The company's development team have built functionality on top of NGINX's open source edition to achieve the level of functionality that business demanded. As the scale, however, the do it yourself approach became difficult to manage. The combined F Five and NGINX team worked together to demonstrate a standardizing on NGINX plus with software support we deliver better value for the customer's development and operations teams. 4th, we are extending all our security offerings software form factors.
We continue to see strength in our software security business as customers tap into the efficiency and scale of the public cloud while utilizing F Five to secure their applications and maximize availability. During Q4, for instance, A large credit union with well over 1,000,000 members chose F5 to protect their apps at the expense of public cloud. The customer wanted the efficiency of the cloud along with a consistent set of application protection policies that matched their on premise security. They are fully integrating the F Five solution into a CICD pipeline, utilizing the F Five automation toolchain, data team, and advanced security features in our web application firewall. 1st and finally, we also are providing solutions specific to the software consumption needs of our service provider customers.
In a Q4 win with an EMEA based service provider, for instance, We sold virtual GIN capacity extensions to VNS manager in a win that included systems, software, energy, and professional services. As a result of these actions and our customers ability to operationalize and manage virtual infrastructures, We are also experiencing changes in our systems business. What I would ask that you keep in mind as we work our way through this model transition, is that S5 is different from traditional hardware data center vendors. Our value proposition is and always happen in our software and application fluency. As a result, the value we bring to our customers is not tied to the data center.
Rather, it moves with the application. So as we continue to take steps to uncover our software from public store hardware, we are capturing goods in new forms of consumption of our application services. While we believe software leases are and will remain top of mind for customers, we do see system demand in certain high performance use cases. With customers that wants to control and manage NCM application delivery in certain two customer segments and in some emerging geographies. As an example, during Q4, we worked with a state owned real estate company in APAC that was looking to reach Fresh F5 solutions that we're approaching the end of support.
We initially viewed this simple systems refresh opportunity. However, we learned the customer was also looking to enhance and improve their current lock solution. The also planning an upgrade to comply with the application infrastructure architecture standard. Had issues with their single sign on solution, and suffered from an inefficient security chain. We won the deal with a system based solution that combines our local traffic manager with our application security manager, SSL Orchestration, and access policy manager.
Before I move on from Q4, Let me also provide a brief update on NGINX. In our first full quarter of the United F Five NGINX team, we continue to drive our value creation plan at a rapid pace. Our first combined solution, the controller that builds on the already successful NGINX controller with enhanced enterprise class features is on plan for release by the end of January 2020. We expect this converged solution will be an accelerator for our engine X business, expanding both the addressable market and potential big sizes by spending a broader set of use cases across DevOps and cheaper NetOps customer SI and NGINX sales teams are coming together well with tighter go to market team work and collaboration, which we expect will only accelerate in 2020. I will spend just a few minutes speaking to how we see our opportunity unfolding in fiscal year 2020 and beyond before we move to Q And A.
We are focused on expanding our leadership in multi cloud application services. On driving continued software growth on big IP virtual edition, as well as on NGINX and our cloud services SaaS platform. At the same time, we are working to forge new world global market capabilities. To expand our reach to DevOps to strengthen enterprise competencies on supporting and growing a subscription business. And to scale our public cloud partnerships.
And we believe the size of our opportunity is growing. At our March 2018 Analyst And Investor Day, we said F Five growth opportunity was intrinsically late to global application growth. IAC estimates there were more than 314,000,000 enterprise application workloads globally in 2018. And forecast, that number will grow to approximately 1,800,000,000 by 2023. At the same time, the number of applications is growing nearly 5x, the complexity of deploying, managing, and securing these applications is improving.
Enterprises are addressing new, highly distributed architectures, and multi cloud environments. Simultaneously, the risk of cyberattacks and security threats is improving with the majority of threats targeting applications or the identity of the person accessing that application. This set of challenges is as fines opportunity. In an increasingly fast moving and complex environment, we have a unique position to actually reduce the flexity of deploying applications across multi cloud environments to help our customers develop, deploy, and scale that business driving applications significantly faster with substantial cost savings on the infrastructure required to support manage and secure those applications. Perhaps most importantly, we are approaching this challenge with a customer focused mindset.
Let me elaborate. Over the course of 2019, I have had the opportunity to talk to customers around the globe that manage their application capital as well, a strategic asset, similar to how we manage physical and human capital. They all share 2 common attributes. They consistently deliver a higher volume and faster velocity of code to be there. What do I mean by that?
Developers, of course, the building applications. To write the code that is the foundation of application, the business logic, back end components, and customer facing interfaces. However, building a great application is only half the journey. The other half is delivering that application that code all the way to the mobile device, machine, or browser that a NAND customer uses to access the application. The world's most competitive company has mastered how to push code from development into production with velocity at high volume.
They do it in minutes. Good companies do it in days. For most, however, it still takes weeks. And F5 can change that. For example, we recently helped a large banking customer reduce the amount time it takes to deliver calls to users from 23 days down to just 6 minutes.
The website solutions, this customer is driving new revenue generating services and powering developments to be more productive and saving time and money on the infrastructure needed to support their application capital. Our customers can achieve results like this because we deliver the most comprehensive set of technologies and services available, and we remove friction from the code to user delivery chain. So how is this different from other approaches? Most vendors are trying to vertically integrate application services as tightly coupling the infrastructure and a siloed set of application services. We believe application services need to be infrastructure agnostic stemming from code to user.
Ours is the only portfolio of application services that stretches horizontally from the servers that house developer code all the way out to the devices that their customers use. In other words, we are extracting the application services from the infrastructure and make it a possible for our customer's application to run anywhere. Cloud, container, legacy with access to a consistent set of application services. We believe this horizontal approach better serve our customers and provides a sustainable differentiation in the market. During q 4, we shared a decision with more than 75 of our most important customers and 90 of our key partners out of Spire.
Our premier customer engagement forum hosted in Seattle. We went from 550 attendees to our new customer engagement center including customers from every theater and every industry. The benefit of extracting application services from network infrastructure resonated very well with attorneys who received custom demos and tailored sessions showing how F Five can help them move faster and more cost effectively. The reaction is very positive, and we're looking forward to sharing this perspective with all of our customers in 2020. In summary, we are entering 2020 in a position of strength We built on our market leading ADC and security portfolio with data team, agent x, and cyclops services silver line and other investments and continue to add new application services.
We have added technologies that either provide our power app servers, web servers, container networking, API solutions, DNS, distributed denial of service capabilities, and content delivery networks. We are leveraging best in class application management and security services, a CT base of thousands of enterprise customers and real time intelligence and actions. And we will continue to enhance our ability to meet applications wherever they are to simplify multi cloud complexity for our customers and to expand the breath of our application services including extending security services across all our platforms. In closing, my faith in the entire S5 team for driving a great quarter year. Your grit, determination, and flexibility is behind a significant transformation of our business that we believe will be a long term return to our customers and shareholders.
And thanks also to our partners, our customers and our shareholders for joining us on our journey. With that, operator, we will now open the call to Q And A.
Certainly.
And our first question is from Sami Badri with Credit Suisse. Your line is open.
Hi. Thank you. So, you commented on the strength of software and the dynamics to expect in 2020. Just to give us a little bit more of an idea on how we should be modeling systems growth, would you say that the dynamics and the growth rates that we seen in the last two quarters in systems growth should all be should also be extended through FY 20 with the software dynamics maintained?
Hi, Sammy. Thanks for the question. So what you saw in the second half of twenty twenty is an acceleration in the decline of the systems business, and a also very significant acceleration in our in our software business. I think that that dynamic generally is going to continue in 2000 and 20. So relative to what we would have expected a year ago, we think we are ahead of plan on our transition, and that the the software growth is going to be higher than what we thought, and the the system decline is also going to be, faster than what we would have thought in the past.
And that's that's driven by a combination of things. On the one hand, customers, we're seeing customers that have matured in their ability to consume applications and services in software. So a number of customers have software first policy have posted to leverage multi cloud. They have more operational maturities around virtualization, and we've seen that both in enterprise and the service provider segment now. So there's a there's a demand pulled on the market, and there are also a number of things that we have done to accelerate that transition.
By enabling customers to consume, our our VIP software in new consumption formats specifically subscription and benefit license agreements, among working public cloud marketplaces. We've done things like automation and orchestration that allow them to deploy applications faster in software. We've got a lot of our software and security and software consumption factors and we've also done a lot of, wants to help some of its riders move to software. So when you combine, a lot of the things that we have done, as well as the the demand from the market, you're gonna see that trend continue. And and for us, it's good that because we feel that our strategic thesis is intact, and, we are ahead of our plan on our transition.
Got it. Thank you for the color on that. And then the second question I had is if you were to categorize the movements or I guess you could say the growth in strength in software and systems across your customer types, across enterprise, SPs, and government. Which one which one of these buckets is accelerating the system's decline versus which one of these buckets is actually accelerating the software adoption growth, right, just so we can get an idea on which customers are driving these changes.
I think all three have, Sonny, I think all three have both trend to a degree. But I'll I'll take them separately. So the in the enterprise, we I think that's the transition to a software solid in the enterprise earlier than the other two segments that you you mentioned. And that trend is always accelerating for the reasons I mentioned around operational maturity, ability to operationalize virtualization technologies and also the freedom of consumption that we have given them. The in the service provider segment, I would say it's only in the last couple of quarters that we, you know, our customers have spoken about NSE, for a number of years, but we are now seeing them really start to implement, the virtualization technology, in parts with in combination with 5 g or in getting ready for 5 g, architectures.
We're seeing more of our service provider customers adopt software architecture. I mentioned in the script, one of the, one of the customers with one, rescue vet in which, you know, who are building, essentially a, you know, a telco, a next gen telco infrastructure that's, 100% virtual. And so there, there, I think that's one of those spectrum, but we're seeing a number carriers move in that direction. And then I would say in the government, the transition is also happening, but at a slower pace relative to the other two segments.
Got it. Thank you. And then my last question for you is regarding the cash pile in war chest. If you could just give us an idea on specifically what you're looking for. You mentioned that the security offerings are now going to be following software form factors.
Is that where you're gonna spend the majority of your time to consider? Bolstering the business or using a war chest, or can you just give us a better idea on what exactly you're looking for, as opportunities?
Well, and, Sonny, I would I would the way I'd characterize it for you is, we want to become the best application services platform in the industry. And and and the way to look at it is, you know, if if you look at, everything that exists between an application and the user of that application, there is a set of services that are in that chain that include things like load balancing and security and firewalls and app servers and web servers, we have significantly broadened our presence in the code to customer chain with the acquisition of NGX. And our strategy is potentially to own that horizontal chain and provide the best, application services that enhance customer experience for users and applications. And so when we look at and that's kind of different than others who are perhaps pursuing more of a vertical approach for their tied to a, a single siloed infrastructure. We want to be a 100% infrastructure agnostic, enable those application services for any app anywhere regardless of how it's built and regardless of what is deployed.
And so in the context of that horizontal, strategy, you know, you're looking at opportunities to broaden our portfolio organically or inorganically, anywhere in that chain from close to customer So security is, of course, an important component of that, but it's not the the only one.
Got it. Thank you.
Your next question is from James Fish with Piper Jaffray. Your line is open.
Hey guys, congrats on a great quarter here and thanks for the questions. Frank, more for you, you called out large ELA being up year over year and sequentially. Can you just give us a sense to how much ELAs got booked as in virtual versus appliances, or any sense to help save the ELA businesses as a percentage now within 5, is it seems like it's becoming more material over the last few quarters?
Sure. And Jay, thanks so much for, the congratulations. We also heard it was a great quarter. We don't quantify the effects of ELA, and I did say that we were out in terms of dollars per 4 sequential quarters, and the deal count was also up over a broader base, and we're seeing our ASPs up as well. And so, you know, we're really, really happy with the way DLAs are trending and that they are locked in the spend that we see.
We see very robust pipeline going forward because we've really only scratched the surface on the opportunity set within our customer base. I'm, unfortunately, I'm not going to quantify the amount of ELAs, but I will say that it has been a positive trend for us.
Got it. And then, you guys had talked about the F5 Engenexx controller kind of coming at year end. It sounds like it actually got pushed a month But also didn't really hear too too much around sort of the WAF as a service and global load balancer as a service. Any sense of the timing around those and how you guys are thinking about it for 2020? Thanks.
I'll take that one. No. The controller, the combined controller, with NGINET is not the style of modeling. We said, January when we last spoke, and we're well on track, to to be able to deliver on that. And we're we're pretty excited about it because it enhances the addressable market for NGINX in the number of, products inside of the enterprise, the the large enterprises as it relates to, the, you know, all the questions, I think, related to s time cloud services, which is now fast offering.
And and, you know, we have released our DNS offering a few months ago. We just released earlier this month, our global server, low balancing, our service offering, and we're seeing strong interest in that. And then what application firewall as a service? What as a service, is next on our road map? And that should happen, before the end of the calendar year.
Good. Thanks. Congrats again, guys.
Your next question is from Rod Hall with Goldman Sachs. Your line is open.
Hi. Thank you for taking my question. This is Ashwin on behalf of Rod. I was just wondering if you could comment on the sustainability of the strength in the U. Federal vertical, and how you're thinking about that in fiscal 2020.
And, another question related to competitive dynamics, can you, can you comment on any changes you're seeing in the competitive landscape? Any color on win rates? Or anything you can give us, post the acquisition, completion of VM where army networks acquisition will be great.
Just, Ashwin, can you repeat the second part of the question? The first part was around the federal government, the second part? The second was, really
on the competitive landscape, following the acquisition of VMware. Can you comment on any changes in win rates, or anything there will be helpful?
Yes, Ashwin. I'll I'll take the the second part on the competitive landscape and then, Chad will take the the question on the federal government in the capability of that strain there. So essentially, we haven't seen a change in the competitive landscape after the acquisition of of, VMware, oh, Bobby, sorry, by by VMware, on the last call, I mentioned to you, we we were not seeing, Adi in very many deals. And where we see them, we have been pretty, happy and comfortable with our win rate. And so, essentially, that hasn't changed.
I would expect it to change with the the present and distribution that the VMware has has around the world, and to see them more over time, especially in customers that have gone all in on NSX, and, really are are tied to that infrastructure. But we don't see that as a very large portion of the market. So what's the color on that, but so far no change.
Perfect. Good afternoon, Ashwin. This is Chad Whelan. Regarding the strength of the Fed business in 2020,
as we did
in the release, several, performance in Q4 was fantastic. Much of this is sustainable for a very simple reason. We're built into very large programs across federal government base from 3 lander agencies all the way through, the Department of Defense. And so for 2020, we're planning for a very robust year in the federal government basis will build upon much of what we've done over the last number of years, within this, with this, excuse me, within this segment. Driving some of the key tenants within our security portfolio and some of the needs that are unique to the federal government.
Thank you.
Your next question is from Tim Long with Barclays. Your line is open.
Thank you. Thanks a lot. Could you talk a little bit? Two questions from your own. So first, the new AWS partnership.
Sounds like a nice expansion. Can you talk a little bit about the timing and when you think that could, material, materially pick up kind of the cloud businesses for you? And are there any other, potential public cloud partnerships, or expansions that we should expect to see? And then the second, I wanted to follow back up on the systems business. You know, obviously, there's this transition going on.
Just curious, is Is this an area where we're going to need some kind of refresh for some of the customers? And if not, given that it's becoming a smaller piece, From an investment standpoint, does this change the investment profile of
the overall company where maybe there's
a little less R and D or less sales push on the hardware side and maybe that means some overall better leverage on OpEx for the entire business? Thank you.
Thank you, Tim. So let me start with the, the, your questions on AWS and the public cloud. Just just a context, thing, look, our our software business as you see has accelerated very significantly in 2019. And, you know, if you look at the second half of the year, where our software grew about 90% year on year. Our PolyStar business is actually growing faster than that, all year.
So, you know, it has, continued to grow because of the the integrations we had already done with public cloud providers the availability of our solutions in marketplaces and also enabling our customers to pull their license into public clouds And so as we look at all this, our our public cloud business has become a meaningful portion of our overall, software business. Now the partnership with AWS, takes that to a a new level, because we we have been meeting AWS in the market where customers walk AWS and walk outside and ask us to get together and, help them move forward with their public cloud initiatives. But now we're gonna have, a number of, AWS solution architects and professional services people who are trained on that time and are designing in
F
side into, the architectures and their solutions when they're engaging, customers. And AWS obviously has a lot more resources than than we do. So we look at that as a multiplier effect of our own resources, in the market to to design up in, for customers that want to leverage public cloud, infrastructure. So we're very excited about that, and we're also very excited about the collaboration with a group of them on the product side I don't know. It's a good, anything like a a loss into platforms to compliment their CEM with a a security solution to enable them to better compete with like the Bank of mine, and other, integrations with their control power, which is really how customers manage and deploy their, application to public cloud.
So it's just gonna give us, you know, an expanding surface into the public cloud and and more visibility. When that will impact, you know, our our numbers, I think overall, this is gonna provide further acceleration to an already fast growing public cloud business, and, you know, the specific impact of that partnership, I think, is more of a second half of twenty twenty through to 2021, but could be could be significant. On the second part of your question, which is on the, on the hardware decline. And what does that mean for our investments and, potentially operating leverage. We're going to continue to manage the investment overall in, in hardware.
We have, an over platforms that are in development that are going to come to market, in the next few quarters. But overall, you know, if you look at where we're at, in terms of what we guided to, on, on operating profit. We said we will be about 30 to 35 percent, for for the year, and we expect to be in that range, this year. And then, you know, at our Analyst And Investor Meeting, we will give you an update on what we think is gonna have it in Verizon too, which is 2122.
Okay. Thank you.
Your next question is from Paul Silverstein with Cowen.
Guys, some clarifications and a couple of questions. First off, did y'all give us the Ingenics contribution? I know that the revenue is small at the time you acquired them, but can you provide a number for Ingenics
Paul, we did not. I mean,
I told you, at the in the call last quarter that we thought that it would be approximately 8,000,000 It was slightly more than that ever so slightly, but it was it was spot on. And when you take a look at the inorganic and organic growth, it is almost the exact same as we had last quarter.
Oh, yeah. And I just posted in 1,000,000 software. Or primarily software?
No. Actually, there's a split between, software and services, the software component was approximately 6,000,000, and, and the services was just slightly over, over 2.
Alright. I appreciate it. That's helpful. Now let me ask my question relative to that. So your hardware was down 15% following 11% decline.
And you obviously made that up with software and then some and we all know that software pricing, at least I think software pricing, maybe there should be some cavalier about that software pricing is well below hardware pricing. I trust that's a given before I ask the real question.
No. I don't think that's a good
There goes, my friend. I guess what I'm trying to decipher looking forward is normally when when one sees hardware applying to this magnitude, I would expect that to swamp your ability to to transition the model, at least or over the transitionary phase, but you just put a drop. And I guess from a big picture perspective, I'm trying to decipher as we look forward what's going on in that tree. And and I've lost an attendant with your call. You said a lot of things and a lot of trims.
But that's this is the 1st quarter in the Americas. We're seeing 11% year over year growth, 14% sequentially. The other had a quarter of that type of growth in the Americas region in the U. S, you'd have to go back about 3 years. At the same time, you sat cited macro conditions for depression, for the decline in EMEA, which had been strong up until the beginning of this year.
In APAC, which has been more mixed. So, again, first of all, if I could ask you to take a step back and appreciate it, you've given us a lot of detailed informational call. But from a big picture perspective, when you look at the regional trends, you look at the hardware to software mix before I ask about margins, you know, what's going on from a revenue perspective? The growth we saw in the Americas, is is that the new norm?
Yeah. Paul, I I I appreciate that there is, you know, there there are lots of signals there that you're you're trying to make sense of. So let let's talk hardware software for us, and then let's talk a little bit about geography. And, sure, I mean, I think, Paul, the reason I say it's not that the software price per unit is is lower than the hardware price per unit is because it really depends on the use case the type of application, words deployed, what bundle of application services are used for that application and in some cases, yeah, it's what was, but there are a lot of cases where, the software software deal ends up being larger than the the hardware deal would have been because we can deploy more of it and and more functions.
Well, Chris, I apologize for the interruption, but this is my this is exactly what was going on with this. I I trust the reconciliations that unit volume, whether whether literally measured by units are measured by the use case. That you're making up for the degradation on a like for like pricing basis. The differential between hardware and software and pre dating your arrival at 5. F5 consistently forever with site virtual additions at 80% of the price point of the hardware.
I was assuming that hadn't changed or if anything had changed for the worse, not for the better. But assuming that's still the case, to the point you just made, I trust these deals are getting bigger in scope. And that's the that's what. There's a positive offset on the revenue.
Yes. Yeah. I think you're correct on both counts. So it is still a case, on your price comparison of the versus hardware, that in terms of the margin dollars to F5, that nets out to being about the same. If you just took pure functionality software versus software, software versus hardware, exactly the same functionality.
Like you said, about the 70% to 80% of some of the percent hardware for the price per minute is true. But what happens when we are in, when we move to a software consumption form factor is that it's easier for us to expand our role with a customer, because they have more freedom to deploy the technology. They can add use cases faster they can replicate the solution in multiple environment. And so the overall, consumption becomes larger. Now if you look at the the numbers I was going to, if you look at our fiscal year 2018, our hardware only declined 4%, but our product revenue for the full year was flat with 0% growth.
If you look at 2019, our hot declined 8%. The total cost of revenue was plus 3%. So you you have kind of a several quarters of us showing that the software growth is more than offsetting the hardware decline. And that's because, you know, our our software slowly elevate our relevance with with customers and give us an opportunity to expand our role and, you know, I think it's an example in the script. The the rocket engine I mentioned in Japan is a good example where, you know, we we did a very large for Zillowen and we came back 3 months later and already extended that with more, kind of multimillion dollar software opportunity, because of the speed of consumption and the number of use cases we're addressing.
So that's a hardware software call. If you thoughts a little bit on geography, to to your question. I I think we we we have seen, Yeah. Yeah. I think we we continue to see macro uncertainty in in Europe.
And I don't see that changing in the first half of twenty twenty. You know, for for another reason that VIP is a part of it. And generally, I think Continental Europe were things you know, macro softness there. In, in, North America, we have a very strong, quarter in, in the federal government, we had a softer quarter in financial services, and I would expect that we will see better performance on financial services in the first half of of 2020. And so, generally, I expect North America to be healthy going into 2020.
Alright. Can I ask you a quick question on margins? If your services have consistently been 87% plus minus 30 basis points over the past five quarters, Your product margin was just up to over 85% following, almost 84% last quarter from 8283 and the 9 previous quarters. I trust the improvements driven by the shift of software from hardware, and I trust that trend should continue.
That's that's right, Paul. Alright. I'll pass
it on.
Thank you. Your next question
is from Alex Coats with KeyBanc Capital. Your line is open.
Yeah. Thanks. Just a clarification, then a question. The long term deferred,
I think it was strong
in the quarter, just kind of what was the dynamically short and long term. And then, Francois, just kind of following up on on Paul's question around, kind of share of wallet or or how you're increasing use case within existing customers. So how does how does what are the what are the applications or the use cases that when you transition the software, you make it more, easily consumable that you're capturing, right, within existing kinda like, what's that bell curve type of outcome that you're seeing right now?
Sure. So, thanks, Alex. I think the on the On the long term deferred, a lot of that was driven by the growth of ELAs and, some unbilled receivables. And so That's why you saw the the strength in the long term deferred revenue. Okay.
And then, Alex, your your second question is on the types of used cases that we're seeing?
Yeah. When you're when you're when you transition most of your portfolio to software, you you're talking about incremental use cases that are allowing you to grow your share of wallet. So above and beyond the traditional ADC, like, what are you seeing in these in these bigger software deals with, you know, that are that are driving the the bigger outcomes?
Oh, so, Alex, 2 things. Number 1, you might you might a deal in hardware that is more balancing only. And then, you know, what when you're in software because it's it's kind of natural for customers to consolidate multiple software modules. We will do, you know, load balancing DNS last and, you know, other other disabilities. So you're you're adding, what capability for the deal?
But the other the other factor also is that when we're in software, a customer has an ability to deploy that market in their data center, They'll deploy it in a public cloud. They'll deploy it, in multiple public clouds sometimes in front of cloud.
So you're
seeing, more, kind of replication of, a virtual instance to that site. And then the 3rd factor that extends our opportunity in software is that the the public cloud model for security is a shared security model, where the pub public cloud provider secured the the neighborhoods and, the customer, the enterprise has to secure their home. And by definition, that's the only function for our customers to add more security, you know, software in the public cloud. And so As a result of that, our security attach rates in, in software use cases that are deploying public cloud is much higher. If I could double the criteria tax rate in, on prem.
So those are three factors that are driving extension of the opportunity in software.
Thank you.
Your line is open.
Hi, guys. This is Victor
Chiu in for Simon Leopold. Can you tell us by your estimation what portion of the ADC market has gone to the public cloud and, you know, what your view is on the trajectory and the rate of continued adoption And, you know, I guess off of that, of your existing customers that have migrated at least some portion of their workloads, what portion continues to utilize that five solutions there?
What what was the second part of the of the of the question they took?
Of your existing customers that have migrated at some portion of the workloads? What portion of, you know, then do you, expect continued or, you know, or, you know, are continuing to utilize F Five solutions?
I'll take the second part of your question. First, and then we'll come to the first part. Generally, Victor, customers who are on, F5, on prem, who migrate to the public cloud majority of them, are migrating, with websites. And that's because it's a lot easier to do that than to go ahead and, you don't wanna have to refactor an application. It's a lot easier to migrate with F Five than not.
And that's one of the, one of the benefit for the results of the partnership would, would often allow because, migrations to happen a lot faster. But, the the metadata, the vast majority of our customers who are on it side still on it by the public cloud.
Kara. In regard to your first question, the question was about roughly what share of the AT market do we see having moved to the public cloud? I think that's what you asked. You know, what we actually see as these applications start getting lit up in public clouds is an expansion in terms of the, use cases for AEC like technology. So what has typically been bucketed into the AEC market has been things that include, load balancing.
There's been parts of application security and other things. Those capabilities are, getting lit up in public clouds, either through the public cloud native providers or through third party providers like F5. And in many cases, those applications that are there are, oftentimes net new cloud native applications that are taking advantage of those services. So that has been an expansion of the TAM, for that market.
Right. And and, you know, are there any headwinds you know, competing with, you know, you know, now in the public cloud, you know, alternative solutions you know, you know, guys like Amazon.
Oh, well, you know, from from
the strategic agreement is we see there's a lot more synergy between our 2 companies and a lot more, partnership opportunities and actual competition. And in fact, you know, one of the big benefits that on 5, brings to this is on 5 has been the go to ADC, solution provider for our enterprise customers for their most important applications. Many of those most important applications are still sitting on print. And they're looking at numerous telecom, vendors, for selection for their new workloads or for modernizing their old applications. In the case of a new workload, they're finding use cases that apply for the public cloud native capabilities as well as use cases that apply for vendors like F Five, especially where they value that multi cloud story.
And for the modernization of their old applications, what we're finding is that our customers really wanna move those applications and modernize them with that size. Because it gives them an easier path into the public cloud.
K. Great. That's helpful. Thank you.
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