Good afternoon, and welcome to the F5 Networks Third Quarter Fiscal 2019 Financial Results Conference Call. Also, today's conference is being recorded. If anyone has any objections, Please disconnect at this time. I would now like to turn the call over to Ms. Suzanne Belong.
Ma'am, you may begin.
Hello, and welcome. I'm Suzanne DuLong, F Five's Vice President of Investor Relations. Francois Loco Denu, F Five's President and CEO, and Frank Peltzer, a 5th executive vice president and CFO, will be making prepared remarks on today's call. Other members of the F5 executive team are also on hand to answer questions during the Q And A portion of the call. A copy of today's press release is available on our web site at f5.com, or an archived version of today's call also will be available through October 24 2019.
The replay of today's discussion will be available through midnight Pacific Time tomorrow, July 25th, by dialing 800 5858367or4166214642. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward looking statements, which includes words such as believe, anticipate, expect, and target. These forward looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in the press release, announcing our financial results, and described in detail in our SEC filings.
Please note that F Five has no duty to update any information presented on 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'll talk briefly to our business drivers before handing over to Frank to review the quarter's results in detail. We continue to aggressively execute our strategy of transitioning F5 to a software driven model. From our efforts to reprioritize our development resources to the introduction of new flexible consumption models and most recently, the acquisition and integration of NGINX customers are seeing a new F5.
We believe the steps we have taken, including very deliberate go to market changes, are accelerating our transition to a software driven business while driving overall product revenue growth. As a result, it is no longer accurate to view F5 through the narrow lens of a traditional ADC player. In Q3, we delivered 4% total revenue growth and 3% product revenue growth with 79 percent organic software growth. If we include the partial quarter of NGINX, our software growth was 91%. Our exceptional software growth in the quarter is being driven by security The quarter also included a few multimillion dollar ELA deals.
Software growth was partially offset by our systems business which was down 11%. Our services business delivered 4 and continues to produce robust gross margins with consistently strong attach rates. I will speak our business dynamics and the NGINX integration later in my remarks. Overall, the team is executing very well against our long term strategy. Believe with the combination of NGINX, we are exceedingly well positioned to capitalize on continued application growth and a rapidly evolving application services landscape.
Frank? Thank you, Francois, and good afternoon, everyone. As Francois noted, we delivered another quarter of strong revenue and EPS growth.
As you know, we closed the acquisition of Ingenx on May 8, and our Q3 results include NGINX from that point through quarter end. As a reminder, our guidance for Q3 revenue and earnings was at prior the close of the Ingenx acquisition and accordingly did not include any impact related to Ingenx's results. For this quarter only, during my remarks, I will break out NGINX's contribution to several Q3 performance metrics. Going forward, NGINX's contribution will be fully integrated into our results and guidance. 3rd quarter revenue of $563,000,000 was up approximately 4% year over year.
Nginx contributed $5,100,000 in the period. Excluding NGINX's contribution, we delivered revenue of $558,000,000 near the top end of our guided range of 5.50 was $1.43 per share and non GAAP EPS was $2.52 per share. Excluding the impact of NGINX, non GAAP EPS would have been $2.57 per share at the top end of our guidance range. Q3 product revenue of $249,000,000 was up 4% year over year and accounted for approximately 44% of total revenue. Enginex contributed $4,000,000 to product revenue in the quarter, all of which was subscription software revenue.
As Francois mentioned, software grew 91% year over year and represented approximately 27% of product revenue up from Q2 when it was approximately 19% of product revenue. Excluding NGINX software revenue grew 79% year over year and represented 26 percent of product revenue. In the quarter, we had very strong uptake on our software solutions sold as ELAs and annual subscriptions. Under the modified retrospective approach to ASC 606, we are required to compare our results In the quarter, the implementation of 606 resulted in $29,000,000 more in recognized revenue compared to what it would have been under 605 Excluding any impact of NGINX, I would like to remind everyone of one point about our business. In the year ago quarter, almost all of our revenue was being driven by perpetual licenses or other consumption models that are not impacted by the adoption of 606 At ASC 606 been applied to our Q3 2018 quarter, you would have seen a de minimis difference in revenue.
Therefore, the adoption of 606 had Systems revenue of $181,000,000 made up approximately 73% of product revenue and was down 11% year over year. Services revenue of $314,000,000 grew 4% year over year and represented approximately 56% of total revenue. Enginex contributed $1,100,000 in services revenue in the quarter. On a regional basis in Q3, America's revenue declined 1% year over year and represented 53% of total revenue. EMEA was up 2% year over year and accounted for 24% of overall revenue.
APAC was very strong in the quarter, with revenue growth of 22% year over year, representing 23% of total revenue. Looking at our bookings by vertical, enterprise customers represented 60% of product bookings and service providers accounted for 20%. Our government business was very strong, representing 19% of product bookings, including 8% from US Federal. In Q3, we had 3 greater than 10% distributors Ingram Micro, which accounted for 18% of total revenue, Tech Data, which accounted for 11% and Westcon, which accounted for 10%. Let's now turn to operating results.
GAAP gross margin in Q3 was 83.9 percent. Non GAAP gross margin was 85.4 percent, in line with our expectations. GAAP operating expenses were 370,000,000 Non GAAP operating expenses were $295,000,000. Non GAAP operating expenses excluding NGINX were on the higher end of our expectations as a result of higher sales commissions related to software sales. Our GAAP operating margin in Q3 was 18.2% and our non GAAP operating margin was 33.1%.
Excluding NGINX, non GAAP operating margin was 34.2%, which was in line with our expectations. Our GAAP effective tax rate for the Turning to the balance sheet in Q3, we generated $150,000,000 in cash flow from operations down from recent levels mainly due to the strength in subscription sales, including ELAs, where revenue proceeds to the collection of cash. Cash and investments totaled $1,150,000,000 at quarter end. DSOs at the end of the quarter was 51 days. Capital expenditures for the quarter were $33,000,000, up sequentially as we approach the final phases of building out our new facility in downtown Seattle and our new facility in Hyderabad.
Deferred revenue increased 14% year over year to 1,170,000,000 A little less than half of the increase over We ended the quarter with approximately 5195 employees, up 400 people from Q2 reflecting the addition of NGINX and our continued hiring in growth areas, including sales and research and development. In Q3, we did not repurchase any of our common stock opting instead to rebuild our cash balance following the NGINX acquisition. We continue to augmenting our strong balance sheet, Now let me share our guidance for reference non GAAP operating metrics and include our NGINX business. We continue to make strong progress transitioning our business to a our growth will be driven by the growth of applications and increasing demand for our multi cloud application services. We also expect With this in mind, We note for Q4, we expect NGINX to contribute less than $8,000,000 in revenue, which includes the impact of purchase accounting write down of deferred revenue.
We do not expect to provide NGINX specific guidance after this quarter. We expect gross margins of approximately 85.5 percent to 86%. We estimate operating expenses of $301 to $313,000,000. We anticipate our effective tax rate for Q4 will remain in the 21% to 22% range as previously provided for the full fiscal year. Our Q4 earnings target is $2.53 to $2.56 per share.
In the quarter, we expect share based compensation expense of approximately $43,000,000 in amortization of purchase intangible assets. We expect Q4 CapEx of $25,000,000 to $35,000,000 as we complete the build out of our new corporate headquarters. With that, I will turn the call back over to Francois. Francois? Thank you, Frank.
I'll spend just a few minutes on the trends we're seeing in the business as well as the NGINX integration before moving to Q And A. F5 today is very different than the F5 of even 24 months ago. A year ago in March, We laid out our strategy for transitioning F5 to a software driven model. Since then, the team has been executing on that strategy and making deliberate changes that have substantially reshaped that 5 and our growth opportunities. What do I mean by that?
In the last 24 months, we have number 1, executed a wholesale reprioritization of our resources aligning the business with our growth priorities. Number 2, introduced new consumption models like subscriptions and ELAs that make it easier for customers to purchase and deploy F5 application services as software. Number 3, we have doubled down on security including investments in WAF and bot mitigation. And number 4, we have also brought new solutions to market solutions like Cloud Edition And Central Management, orchestration, and APIs, all of which have opened new opportunities for us. As a result, it is no longer Our efforts to expand our reach and broaden our role have accelerated our software transition and it is becoming evident in our performance.
And this is true even before we factor in future software growth catalysts, including NGINX and F5 cloud services. Today, F5 is a leader in an emerging and rapidly expanding multi cloud application services space. A space that has arguably been underserved, which is why we are generating the kind of software growth we are. The multi cloud application services opportunity differs from the traditional ADC opportunity in 3 fundamental ways. First, multi cloud application services offer customers a much broader range of application services beyond low balancing and traffic management to include security, analytics, API management, application performance management, and service mesh.
2nd, multi cloud application services, which beyond the data center to public cloud into containers, They are more versatile and agile. And as a result, they can support a much larger universe of applications. And third, multi cloud application services are easier for customers to deploy, consume, and manage. It is clear that customers We continue to see security use cases driving software growth and accounting for a higher share of our overall product business. In particular, we continue to drive strong traction with our web application firewall, anti bot and machine generated traffic monitoring and blocking capabilities.
During Q3, for instance, we secured our largest global web application firewall deployment yet with an international financial institution. This customer had been using multiple WAF platforms to protect its applications and selected F5 as their enterprise wide WAF solution after thorough evaluation of a number of competitors. Orchestration and central management. We help them simplify an increasingly complex combination of environments and sprawling deployments. During Q3, we secured a win with a government customer that selected Big IQ to manage a large and growing number of big IP deployments.
The customer also expects to deploy our application security manager to manage web application firewall policies. We also continue to see customers who are migrating to cloud environments demanding the same level of application security and agility This was the case with a U. S. Enterprise customer that selected our cloud addition during the quarter. The customer expects to transition consumption and deployment model an ideal solution.
Finally, our new subscription consumption models continue to facilitate software growth across our customer base with both enterprise and service provider customers leveraging friction free F5 services procurement and deployment. As an example, one of the ELAs closed in the quarter was with a large next generation mobile carrier in APAC, F5's 5G ready NFV solutions will address the needs of this customer's growing 4G mobile broadband consumer services. We will enable connectivity and security for voice over LTE IMS services and enterprise IoT services. Our solution reduces both capital and operating expenses while increasing service agility with faster build, tests and deployment cycles. We also simplified the network with software based network functions scriber preference and usage.
A word on our systems business and how it fits into our multi cloud application services opportunity. We believe our systems business is seeing the effects of 2 factors. The first relates to the actions that we have taken to make it easier for ensuring easier provisioning of software, simpler licensing management and models and generally reducing operating complexity. The second is that our customers are better able to operationalize and manage a virtualized infrastructure environment. And as a result, the number of them are implementing software first policies.
As a result of these 2 factors, we are seeing an accelerated shift in our product mix towards software. Before we move to Q And A, let me talk to our combination with NGINX. With the NGINX acquisition completed on May 8, the teams have come together well and we are executing our integration and value creation plan at a rapid pace. I will highlight progress on 2 key work streams in particular for this audience. 1, go to market and 2, product integration.
1st, on go to market. NGINX's sales team has worked hard to maintain the momentum of NGINX current offerings and since close has been operating as an overlay to the FI sales team, all of whom have been trained on Nginx. Our ability to bridge the gap between NetOps and DevOps is resonating with customers and we are already seeing the power of our combined sales efforts. We estimate that the joint F5 NGINX and F5 initiated sales efforts have increased NGINX's net new Q4 pipeline by roughly 20%. As an example, during Q3, we secured a joint F5 and NGINX win with an APAC based international telecommunications provider.
The customer needed a security solution for its private cloud distributed over 10 major city points of presence. We selected F5 software based WAF to protect traffic ingress points. We selected NGINX for micro service security, including protection for API gateways, cloud governance and reverse proxies. The combined F5 NGINX solution resolved scaling issues with central controls and provided a consistent approach to security pressures across the business while underpinning faster application delivery. Briefly on F5 NGINX product integration.
As planned, the F5 cloud native product development team has been combined with the NGINX team reporting to Gus Robertson. The teams have come together well and have made very strong progress on engineering and product integration. As a first priority, the teams are moving quickly to converge NGINX's controller and F5's cloud native application services platform. In fact, We expect the first release of a converged F5 NGINX offering within the next six months. We expect the converged F5 NGINX controller will be an accelerator for our NGINX business, expanding both the addressable market and potential deal size by spanning a broader set of use cases across dev ops and supernet ops customer personas.
Overall, we are more enthusiastic than ever about the opportunities near term, we are addressing a critical challenge for customers by bridging the NetOps DevOps divide. The combined F5 Nginx provides the management and ease of use features that traditional infrastructure buyers, including network buyers expect, enabling F5 to cover the full spectrum of application and modernization needs. Going forward, We believe applications will be increasingly desegregated into smaller components, containerized and distributed across multi cloud environment. NGINX is true software, ideal for this container based DevOps environments, which means LL's agility and lower cost for our customers. We are confident that F5 and NGINX with our combined solutions and application expertise bring significant advantages to these cloud native and containerized environments.
In summary, we are very pleased with the progress we are making overall and we are confident we can continue to drive software momentum. One of the things we find most encouraging is that the software growth we have delivered thus far is largely from solutions that have been in the market As we look ahead, we see even more growth coming from new offerings, including our recently introduced SaaS platform F5 Blood Services and our combined F5 NGINX offerings. In closing today, my thanks to our partners, our customers, and our shareholders. My thanks to the entire F5 team and especially to those working to ensure the combined F5 NGINX is as successful as we believe it can
Thank Your first question comes from the line of Alex Kurtz from KeyBanc Capital Markets. Your line is open.
Yeah. Thanks guys for taking the question. Just on the impact from software, which is really great to see, Francois, in the quarter, any dynamics around how customers are consuming it and that these comments are excluding NGINX for a second, but just what it means for deal size, what does it mean for for how the revenue is being recognized in the quarter and how we should think about that relative to systems business?
Hey, Alex, I'll take the first part and perhaps Frank can comment on the revenue recognition portion. So the way that, our customers are consuming our software is both via perpetual licenses. And also via ELAs, which are typically 3 year subscription agreements and also 1 year subscriptions. The part of the business in software that has the fastest growth is in fact the subscription portion of the business. Because it gives our customers a lot more flexibility, in terms of their own cost models and also the ability to consume the features as they go.
So we're seeing a lot of traction with these, with these consumption models. And we're seeing the range of deals to your point around deal size ranges from small kind of 1 year subscription that are typically multiple tens of Ks all the way to multimillion dollar, you know, a 3 year enterprise license agreements.
And Alex, with the adoption of 606 this year, the revenue recognition associated with a lot of subscription deals, look exactly like what we would have had as perpetual deal in previous years. And so instead of ratably recognizing, you split out the value components and and recognize that proportion of the revenue, which frankly modeled after our perpetual. So on a year over year comparison, it's very, very close to the same.
Okay. Thank you.
Your next question comes from the line of Paul Silverstein from Cowen. Your line is open.
I appreciate it. A couple if I may. First off, my math must be wrong, but on the software revenue, I'm coming out to $67,000,000 in the current fiscal Q3, $65,000,000 if we exclude Ingenx business, what you said versus $45,000,000 a year ago, that will work out to 42% year over year growth, not the 79% organic and 91% in total. Can you just help me out in the numbers? Did I mishear y'all that it was 19% of product revenue a year ago and 27% in the current quarter, 26% ex Ingenics?
Yes. So I think your number, Paul, for this year is correct. The number for last year is not. It's much lower. I think it's something close to 34,000,000 dollars, $35,000,000.
Did you all not do $239,000,000 of product revenue last year in the year ago quarter? Yeah.
About 2:39.
19% of $239,000,000 is $45,000,000.
No. 19% that I referenced was last quarter, not a year ago. Quarter?
My apologies. What was it in the year ago quarter?
I think it was I'm doing this off memory, bud, but I think it was about 14%. 14.
All right.
I'll come back to you after the call on that. Secondly, related to, software NGINX in particular, I think there's a view out there among most investors that NGINX displaces existing F5 platforms You all bought Silverlineback win previous acquisition. You're working hard on it. If I recall for the past 2 plus years, Can you just clarify whether NGINX totally displace what you've done with respect to cloud platforms or whether it augments? And then I've got a quick question on VMware Avi.
No, Paul, so thanks for the question. On NGINX, no, it does not displace either our perpetual software sort of virtual edition offerings or silver line. So Silver Line is essentially a managed, security services platform for customers that want to consume WAF and DDoS and other security services, with associated 24 by 7 support and and, and leveraging our infrastructure to scrub the traffic and provide managed services to them. NGINX is a great platform for DevOps environment. Essentially injecting application services in the code of, of, application logic.
And it plays to a very different market than the market we have played in, to Bates either with civil line or with our virtual additions.
All right. Frank, before I ask the obvious question, what percent of your total revenue is now recurring?
Oh, I would say it's north of 70% including the services piece.
Do you know what it was a year ago?
I'd have to get back to you on that one, Paul. I don't have that off the top of my head.
If you could, that would be appreciated. Now for the Avi question. So Avi was talking a really good game before it got acquired. And it just got acquired by VMware. Obviously, that lends resources, incumbency, customer base, all things are needless to say.
I know it hasn't been a long time, but what are you seeing in terms of their success or lack thereof currently versus whatever degree of success they were having previously in competition against
Hi, Paul. So I'll, I know this one has gathered, quite a bit of interest after the VMware acquisition. So I would take the time to answer your question thoroughly and put a few facts on the table. So Avey is essentially a software load balancer with the value proposition around NICE analytics and a NICE GUI. And where that value prop plays is in use cases where a customer would value GUI and analytics over having a truly lightweight, truly scalable solution.
And I'll tell you that this is actually a very small fraction of the market. And let me be specific about that. Historically, we have seen them in less than 2% of our deals. Even when we've seen them, we win the large majority of these deals. Even in the light has all the accounts that they had claimed to be light has accounts for them, we've looked at them in F5, still, for the most part, has 95% or more of the wallet share of ADC in these accounts.
And then again, going back to some of these lighthouse accounts, we've seen a number of customers that are coming back to us 5, from Avi because of lack of scale, lack of features or difficulty in getting this stuff operationalized. So that's where historically things have been. And I just wanted to make sure the facts were clear around that. Now VMware is a great company we have a lot of respect, for them. We do partner with them.
And, of course, they're gonna provide, a larger distribution for Avi. But what where I think this is gonna play out is that the VMware Avi proposition, I think, will will appeal to customers who have gone all in on NSX and value deep integration between NSX and a software load balancer more than the value a true multi cloud architecture and a broad range of application services. But again, I think that's a, that's going to be a fairly limited portion of the market. So let me get to how we're going to, you know, how we're going to compete with, in this space. The first piece around this, the Dewey and analytics, frankly, we're neutralizing that with our controller.
Which, as you heard in my prepared remarks, is going to be released within the next 6 months. And this is the combined, NGINX and F5 controller, which is a combination of the NGINX controller that's in the market and the work that S5 has done on our cloud application services platform, there's a lot of excitement about this combined platform. But beyond just, that, when we when we looked at the market and ended up buying NGINX, We've always said this was an offensive play on the architectures of the future. And so what we did is we looked at all the players in the virtual ADC space. And we moved very quickly on what we believe was the most attractive assets in that space.
And we chose NGINX because number 1, they have the smallest footprint, which enables, them to be inserted in microservices environments. They're a natural fit for these cloud native microservices environments. Number 2, they have proven scalability. They are the platform that everybody built on, and the largest public clouds around the world are built on NGINX, And number 3, they are a true platform that enables a broad range of application services, including things like API Gateway, up security, up server, they're not a virtual appliance, with the set of constraints and limitations. And so for all these reasons, NGINX is a natural choice for dev ops and application development teams, and that's why we chose NGINX, and we're very excited what the combination of that 5N X is going to do in the market.
I appreciate the response. Thank you.
Your next question comes from the line of Sami Badri from Credit Suisse. Your line is open.
Thank you. So I just had a quick question first on some of your cash, right? And where your cash balance is going to be by about mid year 2020 or like at least the next fiscal year basically 2 to 3 quarters from where we are today. I just wanted to understand maybe what the corporate plan was what you're going to do with this cash balance? Are you going to consider more M and A?
Are you going to potentially reinstate your cash buyback when you consider some other factors, just to give us a bit of an idea on what you're going to do with this quickly escalating cash balance.
Hi, Sami. Look, I think you can look out of this way. We are, you know, for now, we're placing a significant emphasis and focus on augmenting our balance sheet and rebuilding our cash balance. But we're going to continue to look at, opportunities in the marketplace, whether it's, potential M and A or, if the opportunity presents itself potentially more buybacks, all of these options are on the table, but in the very short term, there is more emphasis to rebuilding our cash balance.
Got it. Thank you. And then my next question has a lot to do with Given the formation of some of the new offerings at Five And Engine Exeter and coming together and go to market with, would it be safe to assume that systems, revenues specifically or at least the growth rate or I guess we'd say the decline could accelerate in probably 6 months out from today given that the fair majority of the new offerings coming to market are more software based versus hardware. And this is also probably a bit more correlated with the IT backdrop that you're trying to see certainly some metrics start to decelerate in a broader macro IT world, could you potentially see further deceleration of growth in the system side and then naturally see some acceleration further in the software side?
I don't necessarily think that the factors you mentioned, Sami, would lead to further deceleration on the on the hardware side, because there there are also other sort of compensating factors you know, when you look in 2020, I think we should probably see a bit more from service provider around capacity upgrades that are more naturally, hardware driven. We also have some evolution of our own platforms, hardware platforms that would contribute to that. So, I think there are factors on both sides of that equation. We've taken all of that into account when we have, given our guidance for Horizon 1 around mid single digit growth. And I think we're still comfortable with that, with that guidance.
Now in in that guidance, Sami, what our our thought was that hardware would decline at sort of low single digit to flat and software would grow in the 35% to 40% range. And so given what we're we've seen over the last 6 months, I think it's fair to say that perhaps software is going to grow a little faster and hardware is going to decline also a little faster than what we thought. But it's, at this point, it's hard to give you a hard answer on the exact numbers for each. But overall, we're still seeing the balance of revenue growth is going to be what we talk.
Got it. Thank you. And then my last question has to do with the APAC deal. Regarding the carrier. And just to give us an idea, could you give us an idea of mix on software versus hardware in terms of what this carrier bought from you guys, just so we have, like, maybe some kind of illustration on what future carrier deals could look like?
So it's a it's a good example of a a carrier that is moving to, NFV. In anticipation of the 5G rollout. And in this case, they bought software, essentially. It was a 100% software ELA with a number of virtual functions, included in the deal.
Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
Yeah, hi guys. Thanks for the question. I guess I wanted to go back to this, this question of systems and systems decline and ask you what you think your market share position looks like for the quarter? Like do you think you've maintained share? Do you think you lost share?
And then what would you expect to happen in the future like the next few quarters? Do you think that within the systems business for ADCs, you'll be able to maintain share and just kind of track market performance or would you expect to kind of outperform the market still?
Well, Ron, I think if you look at, look, first of all, I think looking at the just the ADC market is a fairly narrow lens to look at when it comes to a 5 now. As I said in my prepared remarks, I think we're really becoming more of a multi cloud application services player. And I think that's a broader opportunity. Now that being said, if you're going to look at the lens of the ADC market, overall hardware and software, I definitely think we're gaining share. Specifically in the hardware space, is how we gained share this quarter, I can't tell I can't answer that and we won't know until market share reports come out in, you know, you know, in a couple of quarters.
But what I can tell you, there are things that we have done that are deliberate actions for MAT5 that are transitioning some of our hardware business to software. And then this includes things we've done on our software, offers to make them much easier to consume and renew all of the friction that exists in our customers adopting these solutions. It also revolves around the commercial offerings and the way we've structured and changed our contracting structure. And it also revolves around the things we've done on go to market and the incentives we've put in our field teams, to proactively help customers who want to transition to software, transition to software faster. And so those actions are driven by us.
Of course, there are effects that have to do with the market around customers themselves, wanted to implement software first policies, and also wanting to have this multi cloud portability which is made easier with software. But so when you look at these 2 factors, that's what I think is driving the decline in systems, but some of it is driven by And the last comment on this, Rod, is we have not been losing, if that's kind of where you're what you're getting to, we have not been losing, hardware deals. If this is your question, we're actually continue to be very, very happy with
was more you guys had been gaining share in hardware. And I wondered if you thought you would sustain that or whether you thought maybe you would match kind of the hardware market more, but that was kind of where I was coming from. And I also wanted to ask Francois, given the high software growth in quarter. What can you give us any idea what you think software growth either for the market or even better yet you looks like over the next year? I mean, do you are you thinking that you can maintain this kind of ballpark in terms of growth or is this a one off or what sort of growth do you think think is likely as we look out?
I think Rod, if you if you look at the analyst reports on ADC software growth, excluding by the way, my comments here include ADC as a service, which is largely the native cloud offerings. I'll come back to that in a moment. But if you exclude them, the analyst report, so far have pointed to, I'm going to say, 20% ish growth rate in the ADC software market. And so if you look at that we definitely believe that we are gaining a significant share in the ADC software market, even though our software growth isn't just driven by ADC. It's also it also has a strong component of security, which is which has very strong software growth.
So that's kind of when you look at things, so the so your question around, can we maintain the software growth in the coming quarters. Look, I don't expect 90% software growth every quarter. As I said before, I think we my expectation is that we are likely to do better than the 35% to 40% software growth that we've put in our Horizon 1 guidance in part because we have growth catalysts, that are that haven't played out yet. Specifically NGINX, and also as 5 cloud services, which is more of, sort of back half of twenty 20 contributor and certainly a contributor in Horizon too. So I think those are growth catalysts that are yet to materialize for us.
But overall, when you combine that and what's happening with hardware, I still think what we've shared with you for Horizon 1 is about for overall aggregate revenue growth Horizon 1 is correct.
Okay, great. Thank you, Francois. Appreciate it.
Yep. Thank you, Rob.
Your next question comes from the line of Jeff Kvavel from Nomura. Your line is open.
Thank you. Yes, I have two questions. I think first, Francois, for you, you know, it's a tremendous success in software this this quarter, does put you on a much higher trajectory when it comes to that piece of the business, but it doesn't seem as though your overall corporate growth rates have picked up despite the software explosion. And I guess I would have expected there to be a little bit of of uptick in the overall corporate growth rate if you are expanding into standalone security, etcetera, etcetera. So I was wondering if you could offer some thoughts about that.
And then Frank, on your side, the OpEx number that you are offering us the September quarter is a little higher than we had modeled and there's integration of an acquisition, so I get that. But I'm just wondering if you could help us understand where the OpEx is and where it might go over the course of the fiscal year to the extent you can. Thank you.
Jeff, thank you. I'll take the first part. Look, I think this is if you look at our overall revenue growth, this is playing out so far pretty much in line with what we have shared at AIM and what we have shared when we made the NGINX acquisition, in terms of overall aggregate revenue growth. And Neil, I think we shared that in our Horizon 2, we expected this to pick up. And that's still our view.
But for Horizon 1, you know, I think when you look at the dynamics combined of, there's a the transition we have to go through as a company, starting from a large base of hardware and transitioning to a majority software business That's how it's playing out. And I think the growth rate reflects that for the time being.
And Geoff, in terms of non GAAP operating margin for the our fiscal year, actually, the coming quarter that we have is the rest of our fiscal year. And so, we're not providing any guidance at this point for FY 2020, but as we talked about in the acquisition of NGINX, we expected that our non GAAP operating margin in Horizon 1 was going to be in the range of 30 35%. This is absolutely in that range. And we did that with the anticipation of the expenses that were going to come on through the, NGINX acquisition. So that's exactly what we're seeing.
Your next question comes from the line of Samik Chatterjee from JP Morgan. Your line is open.
Hi, thanks for taking the question. Franco, I just wanted to start off with a more broader question on what are you seeing in terms of spending trends from enterprise customers. I think, last quarter, particularly there were a few companies that had mentioned that given the uncertain macro, there was some kind of softness in signing large deals. What are you seeing on the ground? Are you seeing kind of any hesitation in signing those large deals at this point?
Hi, Samik. I would, maybe give you a couple of pointers. Overall, I think the macro environment is, less, healthy than it was a year ago. It's not, I wouldn't, I wouldn't, characterize it as being, kind of difficult, but it is, it is not as healthy as it was a year ago. Where we're seeing, specific areas of softness, I would say, the UK and Germany, in for us in Europe, and specifically the UK were uncertainty persist and we have seen a number of deals that are being delayed or canceled altogether.
And, I would also say specifically in hardware, we continue to see more scrutiny applied to hardware deals. Of course, especially in in, companies that have a software first policies. And so that probably elongates the deal cycle, specifically for hardware deals.
Got it. If I can just quickly follow-up with a question on the software side, you had very strong sequential growth in the software revenues. And you mentioned most a lot of that was driven by the security products. You also launched new SaaS offerings, I think, I believe in March. Can you just kind of help us understand if the sequential growth, how much contribution was there from the new SaaS offerings?
Or if it's immaterial now, how much time do you think it takes to ramp those up? So that they become material to your kind of outlook?
Yes, Savi. So we are, yes, you're right. We launched a 5 cloud services, our SaaS platform in March, and introduced our first service on the platform, which is a DNS as a service. And we're now in the process of launching our next set of service, the global server load balancing actually is next and is going to go GA pretty soon followed by, WAF as a service, etcetera. So we are where we are is we're very early days and we basically just have the first service, but even on the first service, we already have the first paying customers on the on the platform.
And we have actually a large number of customers in trial, and we expect that the pickup will accelerate we introduced the new service like GSLD and WAF. In terms of so this obviously did not contribute to the quarter. We don't expect it to be really material, certainly not in the next three quarters. SaaS businesses have a you know, take a bit of time to ramp, but certainly going into, FY21 and, you know, 22 when we get into Horizon 2, we would expect, our F5 cloud services platform to be a meaningful contributor to our overall business and certainly to our software growth.
Got it. Thank you.
Your next question comes from the line of James Faucette from Morgan Stanley. Your line is open.
Great. This is Meta Marshall for James. Maybe a first question, understanding that the 33% to 35% OpEx is kind of within the Horizon 1, that you had noted. But just also, you kind of noted a change to the go to market. And so I just want to get a sense of how much of this is just layering in NGINX versus how much of this is kind of is there a cost to kind of the change in go to market approach.
And then maybe the second question, just if you if we could get a sense of what is the impact of the just accounting on NGINX for kind of your forecast of just, you mentioned it's an $8,000,000 in the quarter, what would that have been without kind of the purchase adjustment?
I need a, I'll take the first part and, Frank will take the second part. On the 33% to 35%, operating profit, guidance, for Horizon Juanita. This is mainly, due to investments in our, software platforms largely NGINX, and the investments we have to do there, some of the 5 cloud services, but it's mainly NGINX. And it's not really, about the go to market or to change in the go to market models, even though We have increased the size of our go to market teams with the addition of NGINX. This is more about the platforms than a fundamental change in our go to market.
I mean, in relation to the $8,000,000, that was a discussion about the contribution to NGINX next quarter. Without a purchase accounting. My assumption is that would be just approximately $10,000,000, maybe slightly more than $10,000,000 next quarter.
Got it. Great. Thanks guys.
Your next question comes from the line of Simon Leopold from Raymond James. Your line is open.
Great. Thanks for taking the question. I wanted to maybe come at the OpEx question a little bit differently. I want to reflect on the June quarter, excluding the acquisition you had forecast, I believe, $275,000,000 to 2 $87,000,000, which would imply, something like $60 ish 1,000,000 coming from the acquisition. If you could maybe unpack, what occurred in the June quarter and then help us understand what's maybe one time ish, what's sort of ongoing from the acquisition because obviously you're forecasting significantly lower operating expenses in September.
So I just want to make sure I understand the moving parts of components to operating expenses.
Sure, Simon. So, all that 60,000,000, I think, where you're getting that figure is, when we talk about the, not just contribution from NGINX, but also some of our non GAAP, things that we had to split out. And that reconciliation can be found in the press release. And so I'd point you to that, but some of the bigger items where there was a portion of, the NGINX acquisition where it was part of the consideration, but accounting makes us take that as an expense in the quarter and it was effectively a whole back or a re vest for key employees that was part of the deal negotiation. And so, that was a, a large portion of that.
There were some facility exit charges. And then the rest of, the rest of what we would discuss would be the inflow of the new NGINX employees. And so, All of that was anticipated, as part of our guidance and our guidance going forward.
So the incremental expenses from NGINX by itself in terms of what it's doing to operating expenses is in kind of a 25000000 to 30,000,000 range per quarter?
It's it's a prox. I think it's actually, Simon, a little bit less than that, but it's It's not a number that we're splitting out for all practical purposes. We've already combined some of the teams together and it's not the way we're tracking the business.
Okay. And maybe just to pivot, in terms of the cash position, I understand this is, I think the 1st quarter in more than 10 years that F5 has not bought back stock. So sort of a significant break in the pattern What is the cash level that you feel is necessary to run the business? Because it seems as if you've certainly got adequate cash to do everything you'd like and could still buy back stock. So I guess I'm trying to really even if you're not ready to give us a number, if you can maybe explain your philosophy.
Sure, Simon. I mean, for a long time, we've had plenty of cash to run the business and have chosen to do a share repurchase as opposed to other things that you can do with cash, including inorganic expansion. And so, we are adding back up that flexibility to continue to use cash for multiple purposes. And we will be strategic with it. I can't say that there is ultimately one level of where the cash balance has to be before we go back in the market and repurchase shares.
That could be this quarter.
Could you maybe just follow that with your thought on on instituting a dividend?
Yeah, I, we don't have any anticipation at this point of institutional dividend. We think that that's actually not a great tax efficient way of redistributing cash to our shareholder base and we'd be much more apt to do share repurchases, as that vehicle to redistribute cash.
Great. Thanks for taking the questions.
Thank you ladies and gentlemen. This concludes today's conference call. You may now disconnect.