Good afternoon, and welcome to the F5 Networks First Quarter And Fiscal Twenty Nineteen Financial Results Call. Also today's conference is being recorded. If any has any objections, please disconnect at this time. I'd now like to turn the call over to Ms. Suzanne DuLong.
Ma'am, you may begin.
Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. Francois Donu, F5's President and CEO and Frank Peltzer, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the 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 A copy of today's press release is available on our website at f5.com or an archived version of today's call also will be available through April 24, 2019.
Telephonic replay of today's discussion will be available for midnight Pacific Time tomorrow January 24 and can be accessed by dialing 800-688-2171 or 402-998-0565. For additional information or follow-up questions, please reach out to me directly at s.dulongf5.com. Our discussion today will contain forward looking statements which includes words such as believe, anticipate, expect, and target. These forward looking statements involve uncertainties and risks, that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in the press release announcing our financial results and described in detail in our SEC filings.
Please note that F5 has no duty to update any information presented in this call. With that, I'll turn the call over to Francois.
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 delivered a solid Q1 over achieving on earnings with revenue growth of 4%. Year on year software growth of 21 percent drove our 3rd sequential quarter of product revenue growth.
Focusing on software, public cloud continues to be our strongest software growth area in this quarter we also saw increasing Our new software consumption models, including virtual edition subscriptions and ELAs, also contributed to software growth in the quarter. Our ELA pipeline continues to grow, accelerating in Q1, and we expect ELA sales continue to pick up as our customers continue to shift to multi cloud deployments. Overall, Our software story is evolving to plan, putting us on pace to achieve our Horizon 1 target of 30% to 35% software growth in fiscal year 2019 to fiscal year 2020 timeframe. Our services business had another strong quarter delivering 5% growth with robust gross margins resulting from transformation initiatives we've been executing to improve an already effective and efficient business. Services team remains a differentiator for us.
And with a customer satisfaction rating of 9.6 out of 10 for our technical support team, it is clear we are providing support at levels unmatched in the industry. During the quarter, systems also continued to perform as expected with customers choosing our traditional appliances when they want to control and manage the end to end application delivery solution and in most high performance use cases.
At this point, I will hand the call over to Frank to review our Q1 fiscal year 2019 results and our outlook for the second quarter of fiscal 2019. Frank? Thank you, Francois, and good afternoon, everyone. As Francois noted, we delivered solid revenue and strong EPS growth in the quarter. 1st quarter revenue of $544,000,000 was up approximately 4% year over year, within our guided range of $542,000,000 to 5 $22,000,000.
GAAP EPS was $2.16 per share. Non GAAP EPS of $2.70 per share was well above our guidance $2.51 to $2.54 per share. The beats for GAAP and non GAAP EPS were driven largely by strong gross margin, hiring that was slightly behind plan and better than expected other income. Q1 product revenue of $234,000,000 was up 3% year over year and accounted for approximately 43% of total revenue. Software was approximately 19% of product revenue, and grew 21% year over year.
Systems revenue made up approximately 81% of product revenue and was down less than a percent year over year. Services revenue of $310,000,000 grew 5% year over year and represented approximately 57% of total revenue. On a regional basis, in Q1, Americas revenue was flat year over year and represented 54% of total revenue. EMEA revenue grew 7% and Japan segments for external reporting to reflect the way we now view the business internally. Revenue for this combined region grew 11% year over year and accounted for 19% of total revenue.
Sales to enterprise customers represented 65% of total sales for the quarter. Service providers accounted for 14% and government sales were 21%, including 10% from U. S. Federal. In Q1, we had 3 greater than 10% distributors.
Ingram Micro, which accounted for 17% of total revenue, and Westcon and Arrow, each of which accounted for 11% of total revenue. Turning to our operating results. GAAP gross margin in Q1 was 84.1 percent. Non GAAP gross margin was 85.2%, slightly better than our expectations, driven by improving product margins, which are benefiting from an increasing mix of software sales, as well as continuing strength in our services margins. GAAP operating expenses were $299,000,000.
Non GAAP operating expenses were 262,000,000 Our GAAP operating margin in Q1 was 29.1 percent and our non GAAP operating margin was 37% above our guidance of in the mid 30 percent range, driven largely by gross margin strength and operating expense efficiency. Our GAAP effective tax rate for the in line with which contributed to cash and investments totaling $1,550,000,000 at quarter end. DSO at the end of the quarter was 54 days driven by service maintenance renewals at the end of FY18. Capital expenditures for the quarter were 21,000,000 Inventory at the end of the quarter was $31,600,000. While our adoption of ASC 606 had a de minimis impact on our income statement, we did experience a few changes Approximately half of the $134,200,000 increase over the previous quarter was due to the adoption of 606.
Other current and long term assets increased by $135,500,000 from the previous quarter, of which approximately 80 percent was due to the adoption of 606 as we are now capitalizing unbilled receivables and commission paid for sales of service contracts. Finally, retained earnings increased by $130,700,000 in the quarter, approximately $36,000,000 of which was driven by the adoption up 170 people from Q4 as we executed on our plan to aggressively hire in our growth areas. In Q1, we repurchased approximately 569,000 shares of our common stock at an average price of $177.64 per share for a total of $101,000,000. Unless otherwise stated, please note that all of my comments reference non GAAP operating metrics. Overall, we remain confident in our position in the market and in the growth opportunities We believe the long term trend toward multi cloud environments is strong and will be a fundamental growth driver for the solutions we offer today and those we will launch in the first half of calendar twenty nineteen.
While sales to enterprise customers continues to remain strong, we have seen some softness within our service providers vertical as some of our larger customers are planning their next generation application architectures. F5 is positioned very well to capitalize on the massive increase in application traffic anticipated with 5G architectures but we believe it is prudent to factor in a measure of near term softness with our service provider customers in our outlook. Our guidance does not include With this in mind, we are targeting revenue in the range of $543,000,000 We expect gross margins in the 85 percent to 85.5 percent range. ES meaning operating expenses of $70,000,000 to $282,000,000. You'll recall that last quarter, we mentioned we expected operating margin to move down slightly in Q2 and Q3 before moving into the upper 30 percent range we previously provided for the full fiscal year with some fluctuations quarter to quarter.
Our Q2 earnings target is $2.53 to $2.56 per share. In the quarter, we expect share based compensation expense of approximately 40,000,000 and $1,800,000 in amortization of purchase intangible assets. As reminders, we anticipate stock based compensation to be in the range of 155,000,000 to 165,000,000 for the year. Capital expenditures are expected to be in the range of $110,000,000 to $130,000,000 for the year. This range includes approximately $70,000,000 quarters to F5 Tower in Downtown Seattle as we ready the space for occupancy this year.
With that, I will turn the call back over to Francois. Francois?
Thank you, Frank. Before we move to Q And A, I'll spend just a few minutes on the trends we're seeing in the business. Highlighting some customer wins from annual state of application services report. With input from nearly 2000 respondents across a range of industries, company sizes, and roles, The report provides a view into application trends impacting our customers globally. One of the key takeaways from this year's survey is that organizations progress on their digital transformation journeys, they see application services as vital for cloud adoption.
The report also respondents reporting they are implementing multi cloud architectures. And forcing consistent security and ensuring reliable performance in these multi cloud environments remains challenging. These and other trends highlighted in the report align with our vision of expanding F 5's reach and role and with our efforts in the last year to repurpose investment and focus on growth areas for our business. These trends are also playing out in real time with our customers and you can see them in some of our customer wins from Q1. These include a win with a global software and service provider customer who is already leveraging F5 solutions, a frost our multi cloud environments, including a Bring Your Own license in AWS marketplace and virtual additions in Equinix and Azure.
This quarter, they purchased licenses for their procurement and supply chain software as a service offering on Google's cloud platform. Customers increasingly are making decisions on a per app basis and during Q1, we had a per app public cloud deployment with a U. S.-based cryptocurrency exchange. This customer wanted to differentiate its services to the financial industry through best in class security solutions for blockchain transactions. They chose F5's cloud edition virtual web application firewall for its more robust performance over native public cloud tools and big IQ for the ability to manage their end user billing cycles.
There are 2 big IP cloud edition wins I'd highlight from the quarter. One with an international stock exchange and the other with a large energy supplier in Europe. In both cases, customers are using cloud addition for application service isolation, enabling agile application development. This includes simplifying the move from a development environment into production across multiple clouds and ensuring policy compliance through self-service templates. We continue to see security use cases driving a significant portion of our customer conversations and net new customer wins.
That's not surprising when you consider data from our application services report, shows that customers are increasingly deploying a combination of security services to protect their applications and data. Our advanced web application firewall solution plays right into that trend and our bot detection and mitigation capabilities are a significant differentiator. During the quarter, we had a number traffic monitoring and blocking capabilities. This includes a major U. S.
Cities police department that needed enhanced features and functionality beyond the native cloud tool sets that they have been using. Turning to service providers. We are driving continued adoption of our NFV solutions in new areas of business with our service provider customers. In Q1, we closed the deals stream scale DNS infrastructure, along with the ability to protect that infrastructure with our integrated security capabilities. In addition, we also continue to and we see continued strength in firewall we see 2019 as a significant pivot point for our business, a point where our customers will begin to experience a different F5.
What do I mean by that? I mean, they will be able to migrate our upgrade their F5 instances in minutes. They will be able to consume F5 technology as a native cloud service without owning F5 hardware or software. They will our investments and resources towards innovation in automation and orchestration, cloud native software and software as a service. And we are excited our customers will experience these new capabilities firsthand in 2019.
Big IP Cloud Edition was introduced in May and continues to gain traction with customers wanting to consume ADC on a per app basis or wanting to offer better SLAs to their DevOps users. The majority of use cases for Big IP Cloud Edition continue to be net new applications we were not addressing before. As we continue to bring new solutions and new innovations to our customers, F5's reach and role will continue to evolve. Our development teams continue to drive our cloud native software and F5 as a service platforms forward. These are 2 disruptive platforms that we are convinced will change the paradigm of application delivery.
Both are well on track for 1st commercial availability in the first half of calendar twenty nineteen. And I have to tell you I am so proud of these teams. They have moved forward relentlessly and have taken these solutions from paper to reality in an incredibly short period of and in the hands of early customers providing feedback on initial features. At the same time, we're moving full Steve ahead with the internal digital transformation required to support our digital touch motions and ensure frictionless procurement and service renewals for our new offerings. It's a different kind of innovation but innovation nonetheless.
We believe that robust and constant innovation is a necessity for F5, so we're also innovating in new ways. For more than a year now, We've had teams dedicated to focusing on testing new disruptive innovations in technology, business models or customer segments. Operating under the supervision of Tom Fountain, our Chief Strategy Officer, each team is led by a general manager and staffed with dedicated employees. We expect innovations will be complementary to our goal of delivering the broadest and most consistent portfolio of app services across cloud and on premises environments. During Q1, we announced one of the first innovations to come from this program an open beta of our Aspen Mesh solution.
With the shift from monolithic to microservice architectures a rapidly increasing number of applications are being deployed in container environments, yet there is still a need for services that help enterprises monitor, manage and control microservice based applications at runtime. Aspen Mesh provides critical enterprise features in a platform built on top of this deal. So organizations enjoy the benefits of an open source approach without foregoing the features, support, and guarantees needed to power enterprise applications. It's very early days for this solution but we've already got customers speak to the drive and dedication of our global team. In closing, my thanks to the entire F5 team, our partners and our customers.
We are excited about the progress we're making toward our long term vision for F5. We are expanding our reach and our role expanding our reach by taking our industry leading solutions beyond traditional data centers and into private and public clouds and expanding the role we play for applications by providing additional high value
Thank you. Your name is required to Your line is now open.
Hi, thank you for the question.
I first wanted to kick
it off with just talking about your guidance for 1Q. Or calendar 1Q coming up. And it does not include any partial government shutdown impacts, just as a clarification, I believe I heard that earlier. And then the second piece of that is if there is any customer impact so far from the U. S.
Partial government shutdown, that would be great color.
Sure, Sandy. So it's Frank. I'll take that one first. So to answer the second part of the question first, we have seen an impact but it's not in probably the way that you might expect. We've actually won business, but there's no one in the central procurement agency to actually process the paperwork.
And so Our guidance anticipates that this does not go on through the remainder of the quarter, but somebody's actually going to be there process where we'll find another route in which to process those orders. It if we find that this continues to go throughout the quarter, we probably would expect some impact that is not anticipated in our guidance.
And just to complete that, on the question. And no, we have not seen an impact outside of the federal government in our broader at a price business to date.
Got it. Thank you. And then my second question has to do with the GAAP services gross margin that continues to expand and it continues to hit a record high as of this quarter. And can you walk us through what are the dynamics that are driving this expansion in Could you potentially attribute the EPS beat in the quarter to both services margin expanding? And on top of that, the ELA that was reported in the quarter?
Yes. So the dynamics on the services business There are essentially 2 initiatives we've put in place last year that are bearing fruits. Generally, there's a set of transformation initiatives we have in services. But specifically, we're leveraging more, more tools and more AI tools and automation to deflect as many cases as possible, where we can. And it's allowing us to have better efficiencies, better utilization of our resources.
We've also embarked on having a better distribution of our resources globally to support different geographies. And both of these efforts are benefiting in our gross margins.
Thank you. The next question is from Sameet Chatterici of JP Morgan. Your line is now open.
Hi, thanks for taking my question. Franco, I just want to start off with the Horizon 1 targets that you have, which kind of you alluded to in terms of software growth of 30% to 30 percent on this year. So clearly you're expecting our acceleration in the coming quarters. Just want to understand if you expect that to be more driven by the cloud edition product that you're ramping up on? Or is there also contribution kind of that you're thinking of from the products that are coming up in terms of cloud native apps as well as F5L service coming data this year?
How are you thinking about kind of the driver of this acceleration in software this year?
Yes, we are expecting an acceleration. Generally, we feel we are on track with this Horizon 1 target. For everybody's benefits, we said in Horizon 1, which is 2019 2020, we expected software growth to be in the 30 to 30 percent range. And we still feel that when you look at these 2 years in aggregate, that's where we're going to be. So there is going to be an acceleration the contributors, Sumit, in 2019, I do expect Cloud Edition to be a meaningful contributor to that growth.
We have seen continued traction with Cloud Edition. We did actually more deals, on Cloud Edition just in this past Q1 than we did for all of 2018. So we are seeing a pickup there. And I also expect that in 2019, we will see meaningful contributions from our new modes of consumption, specifically these ELA, these enterprise license agreements and the subscription models, which are also gaining traction with our customers. The newer products, that will be released in the first half of calendar twenty nineteen, specifically cloud native app services platform.
And, our F5 as a service, our SaaS offering, They will start contributing in 2019, but I would expect that the ramp that the more meaningful contribution comes in 2020 for these lower propositions.
Got it. And I just had a quick follow-up for Frank. The, frankly, pace of repurchases moderate over the last over what we seen as a piece for you over the last year. Is that something procedural in terms of like blackout periods, etcetera? Or is this more of a reflection of how you're thinking about capital allocation this year?
I think I would just say capital allocation, not just this year, but just broadly, how we think about our capital allocation strategy We think cash is a very strategic asset. And for the first time in a long time, we're actually getting some decent interest rate return on it, that we saw a beat on our other income. It's clearly not necessarily where we want to beat. We want to beat on the top line, but we'll take it on the operating on the other income line as well. I think, share repurchase is one of several alternatives for our cash.
Dividends are also a possibility. M and A is also a possibility in several other things. And so we view this as strategic to the business. And we also believe we're likely going to be in the $100,000,000 to $150,000,000 range for the quarter to come. And so I think that should be the expectation that you set.
It's what we baked into the guidance that we've given you.
Okay. Thank you.
Thank you. The next question is from Paul Silverstein of Cowen. Your line is now open.
Thanks guys. If we could just focus on the telecom segment, Brent, so if I'm looking at the numbers correctly, We'd have to go back over 5 years. The last time telecom was as low. It looks like you did around $76,000,000 down from the $100 plus 1,000,000 level. That prevailed throughout fiscal 2018.
That's a $30 plus 1,000,000 drop. I know you made some comments during the call, but I'm hoping you can give us more insight in terms of what is going on in that segment and your expectations going forward.
Yes.
Hi, Paul. So generally, we had a soft quarter on service providers. In Q1. And we actually expect the softness to prolong for a couple of quarters. The softness was particularly marked in a more in North America, than globally.
And I would say that generally what we're seeing is we're in a bit of a transition between 4G and 5G where we had a number of projects, 4G related projects that are kind of tailing off. And 5G related projects that haven't yet picked up. We feel pretty good about our position for 5G because as 5G, radios get deployed, we are going to be in line with that traffic. So we expect to see potentially significant capacity upgrades down the road as that 5G traffic start hitting the GI core. But that's not in place yet.
And we think we're seeing a bit of a transition from one to the other and we're in between.
I'm sorry. Go ahead.
I was going to say, we also saw a couple of projects that we won in quarter that were pushed out that we think will pick up in the next quarter. But if you look at the broader trend, which we also saw last quarter, by the way, were soft in service providers in Q1, sorry, in our Q4. That is kind of a similar trend we're seeing. This transition between 4G and 5G.
Francois, just to be clear, and I understand it's hard to in situations like this, it's hard to project or forecast. But given the magnitude of the softness where again, from the $100,000,000 to $110,000,000 quarterly run rate that have prevailed for the past 3 years, this dramatic fall off if is this do you have visibility that this is primarily or just a function of the 4G to 5G transition? How much of this is true insight? How much of this is speculation?
I would, I would hope more of it is is inside. I, I, generally, think, we are, we are experiencing, we are in the middle of this transition. Paul, there there, of course, there are always areas you can look at and say, look, there are areas where in terms of our go to market, we could execute better. In fact, we are in the process of hiring at the front end of our business and one area where we are actually doing significant hiring is in the service provider space, both in North America and Internationally, because we see strong opportunity. We think that architecturally we're well positioned.
We've brought in a new GM, as you know, Jim's figure a few months back and we getting a lot of clarity around some of the future developments we're going to make. So generally, I feel good about where our service provider business is going to go. But I do think the softness we're seeing is not going to go away in just a quarter or 2. I think we're going to see that for a few quarters.
I appreciate it. Thank you.
The next question is from Alex Keirst of Key Capital Markets. Your line is now open.
Thanks for taking the question guys. Just on the ELA outlook, can you just kind of reset for us how long the enterprise sales organization has been, talking to your top enterprise accounts about ELAs what's your multi year outlook for ELASSR is, adoption within your enterprise accounts or service provider accounts and kind of what it's done maybe to deal size, share wins, any kind of qualitative or quantitative feedback kind of how long it's been in the system for the sales organization and kind of what outcomes you're seeing from it?
All right. Thanks, Alex. I'll start and then I'll ask Chad Whelan to add in terms of the pickup with the sales team last year, we introduced the ELA's just, last year. And really in 2018, we're essentially experimenting with the sales motion. We've now launched it as of November to our sales team, and we're seeing significant excitement and traction with it.
In terms of your question around the multi year, outlook for ELAs, I would say we expect over time in our horizon too for a meaningful portion of our software business. If not the majority over time, to be ELA or subscription based. And we'll see that we believe both in the enterprise space and to some extent in the service provider, in the service provider space. So it is a, it is a meaningful and important development for us. It gives our customers a lot more flexibility around where to deploy their licenses.
And when they have uncertainty around lifecycle of an application or the amount of capacity or need for certain applications, it's a great vehicle for them to deal with that uncertainty And it also allows them to consume much faster because, they don't have to deal with multiple procurement cycles. So for the first PLAs that we have signed, we're actually seeing a good opportunity to, to expand on those ELAs when we renew them sometime in 2019.
And just to clarify, every sales every account exec can, can, can quote out in ELA or is it just in certain pods in certain verticals?
Yes, hi, Alex. This is Chad Whelan. Yes, every account exec can and does quote out ELA. And in fact, we just launched an aggressive incentive campaign for all of them, and that's really driven appreciable increase to the pipeline of opportunities. At the end of the day, that our customers are really embracing this vehicle because it's an easy commercial construct to consume our services in any kind of mode that they want across the different application suites, whether it's on prem or in the cloud It's a great vehicle that kind of takes away some of the complexity as they're going through these digital transformations.
In terms of the adoption from our sales team, it takes time to get the motion right in the market, understanding how to size it from a customer perspective and take friction out of that process. What we're seeing now after we've spent the time that Francois talked about in terms of pressure testing and learning last year, we're getting a lot more velocity in the motion and we're seeing that translate into pipeline of opportunities now and in the future quarters.
The next question is from Jim Suva of Citi.
When you mentioned about your cloud native solutions without having to buy a 5 hardware. Can you walk us through, such transaction specifically some economics of it, dollar amount and gross margins or just generally how we should think about that on the premise that this continues to increase? Is there any way for us to frame about the detriment to the hardware and the uptake on the software and the impact of margins and dollars?
Yes. Hey, Jim. Let's start with margins. As you know, our gross margins in hardware are in the early 80s, and our gross margins, on cloud native software by bought as a as packaged software, are going to be in the early 90s. So there's not a, there's not a huge difference.
We've said in our guidance that in our Horizon 2, which was 2021, 2022, we potentially would see a bit of an uptick in gross margins. We're in the 85% range now and we would be in the 85% to 87% range, in that, in that horizon. As it relates to the price or the top line impact of this, the equation is actually, fairly simple for us. The hardware today, you know, we primarily what our customers consume today, before the introduction of our client addition was hardware and virtual additions. These have been largely consumed on prem, though we have a very rapid growth now happening in the cloud.
The new, the new package software products that we are releasing, the cloud edition that came out last year and this cloud native application services platform coming out in the first half of twenty nineteen. Those are opening up new use cases and allowing us to address applications that we have not addressed in the past. That would characterize as the longer tail of applications. The price per unit for each of those applications is going to be less than when you're buying a big unit of hardware, of course, but the volume of applications we can address is much greater. And so we look at it as an expansion of our addressable market.
And we think that largely this new platform address an incremental market and an incremental opportunity for us.
Operator, can we move to the next question, please?
Certainly, the next question is from Simon Leopold of Raymond James. Your line is now open.
Great. Thank you for taking the question. I wanted to come back to the topic of capital allocation. The company up until this most recent quarter, has been pretty steadily buying back at least $150,000,000. And then with the renewal, you updated with an additional $1,000,000,000.
I want to see if we can get a better understanding of the board's logic and your logic for why wouldn't you institute a dividend of perhaps a 3% or 4% yield that should give you some wiggle room from $85,000,000 to $100,000,000 per quarter to go to a dividend and be attractive to a larger set of shareholders. Could you help us understand that?
Yes, Simon. Look, I will bring you back, Simon, to what we said at our Analyst and Investor Meeting in March. We are pursuing a growth strategy, and we laid out what we think the financials are of that growth strategy. And part of that, as we said, is we want to use our cash as a strategic asset to pursue that growth some of which could be used potentially for acquisitions. And so we want to have that flexibility.
If we see opportunities in the market, to accelerate our growth or derisk part of our plan, to take the opportunity and use our cash as a strategic asset to do And we don't want to lose that flexibility because that's the strategy we'll pursue it.
And could you just maybe outline your acquisition philosophy in terms of what type or size of deal would you be biased towards technology tuck ins or larger deals that might require the company actually take on debt.
Simon, here's what I would share with you about our philosophy as it relates to acquisitions. We feel that we have a significant opportunity to extend our reach in terms of being able to reach every application anywhere. We think the world is becoming more application centric We believe our growth is going to be linked to applications, and we want to reach every application anywhere. In addition to that, we offer a number of app services today and we believe we have an opportunity because of our position to offer more application services and extend our role. We will look at acquisitions that allow us to accelerate the expense of our reach or the expansion of our role.
And when you look at it within this context, we may look at things that are what you would call tuck ins or even equity hires or small acquisitions. And or there may be opportunities for things that are bigger. We're not constrained and we're not looking at it, just in terms of is it small or big? We're really looking at it in terms of, is there a strategic fit? The most important thing for me as we go through and potentially explore these opportunities is to make sure that we remain disciplined about it, discipline in terms of, of course, being, being continuing to focus on organization, organic innovation as our 1st priority and discipline in making sure that if and when we make an acquisition that we have truly thought through, how we create value from having the asset inside of F5 as opposed to outside.
And that as a result of that, we have a very strong value creation plan through a transaction.
Great. Thank you, Princess. That was helpful.
Thank you, Simon.
The next question is from Jason Ader of William Blair. Your line is now open.
Yes, thank you. I had two questions. First, can you comment on the federal strength? It looks like that grew about 30% year over year. And, love to get any, comments on, what's happening there.
And then secondly, Francois. Could you remind us the difference between the cloud edition and the upcoming cloud native apps services platform. So we can kind of level set the, the, the differentiation there.
Sure. I'll take your first question and Cara here, we'll take your second one. We generally have a strong fourth quarter on federal. So we have a good quarter there. We saw specific traction, in security in that space.
And specifically, with our SSL orchestration solution. So we announced, in 2018 that we were coming to market with new solutions to provide, encryption, decryption of SSL traffic and be able to chain, services for, for security stack, inside of large enterprise customers. We're seeing traction actually across the enterprise base with us, we're very excited about the pipeline we have for these solutions. And our federal team was, early off the blocks with the solution And as a result, we had a pretty, pretty strong quarter there.
And with regard to your question about the difference between Cloud Edition and our cloud native application services. I'll call out a few of the distinctions. Our cloud addition is based on our industry leading big IP application delivery controller platform. And so what that is is effectively a, our virtual addition which is licensed in a per app model to allow for isolation of services for those those application services. With our big IQ centralized manager solution.
And that enables a whole bunch of new use cases for our customers. Including things like operating dedicated instances for each of their applications. So it's the per app model, as well as application troubleshooting. Such that application developers no longer have to go through tedious ticketing processes to get get things examined in terms of if applications go down. Another component of the cloud edition is it's something that is really targeted, for our customers that have already, invested heavily in our big IP, platform, and want to extend the reach of that platform to more applications in their environment.
Now in contrast, the cloud native application services is will be a pure software based solution. It will be only available as as a software subscription, and that will be targeted to more of a developer and a DevOps, audience and is intended to provide very easy to use, very intuitive insertion of application services into applications at the time of the application inception, which means that it will come out with very strong integration into CI and CD pipelines.
Thanks very much.
The next question is from Tal Liani of Bank of America Merrill Lynch. Now open.
I want to discuss the slowdown you discussed in the, in the prepared remarks. I still don't understand if the slowdown is it's more limited to just service providers, telecom service providers kind of slowing down purchases and then why is it just there? Or and or the government? And what about the general enterprise? What do you see in the general enterprise?
I'm trying to understand if also during the quarter, if you noticed the slowdown kind of throughout the quarter or it deteriorated kind of what was the seasonality within the quarter? Or linearity. I mean?
Hi, Tal. So let's take the 3 segments that you brought So no, in the federal space, we did not see a slowdown. Frank mentioned to you the situation we have right now where we've won business that cannot be processed, but we hope this resolves itself, over the next few weeks. So no change in the, in the federal government space. Largely in the enterprise space, if I look at it globally, would also say that generally there's been no change in buying behavior.
We do hear from our customers that they are, watching the macro environment and being a bit cautious, about their future plans. But that potential cautiousness hasn't translated yet into, any change in buying behavior has been the general enterprise space across the globe. In the service provider space, as I said, it was a, I believe it's a transition we're seeing a bit between 4 and 5G. And specific to what we've seen in terms of projects, tailing off and net new projects haven't really picked up yet. There wasn't a particular linearity, as you know, the service provider business can be quite lumpy.
So there wasn't a particular linearity in the quarter associated that.
Now 5G has a lot of edge data centers. How do you participate in edge data centers? Is it playing to your strength or is it going to be more generic solutions from other vendors?
No, so we participate, potentially in several ways in 5G, but the first way is we are in line of a lot core traffic for mobile service providers and 5G radios are going to bring more traffic onto these core. And so we expect to see capacity upgrades, as a result of these deployments. When the architectures evolve, to a different 5G core. And not every service provider will go to a 5G core, but when the architectures evolve to that, I think we'll have an opportunity to expand our role and we will get into that in future calls. But generally, we see we see ourselves having a probably an extended role in 5G from what we've had to date.
So far, we discussed just the demand side, not the supply side, just the customers and verticals. What about the supply side? What about your portfolio What are the plans for 2019 in terms of product launches and things that are coming out to the market and what do you think is going to could have or the potential of changing the growth trajectory more materially than other things?
And your question, Tal, is specific to service providers. No, no,
no, no, my question is more general. We spoke about the demand by based on verticals, but now my question is about the supply. Meaning, your product portfolio changes your planning for 20 just give us kind of an outlook given that we're at the beginning of the year, changes you're planning for 2019, things that you think could be material, more material than other things you're offering, etcetera?
Yes. So a couple of things, Tal, the first thing, if we're looking at it in the context of 2019, are actually products and solutions that we've brought to market in the last 6 months that are going to ramp up through the year. And I would point to, 3. One is our advanced web application firewall is gaining a lot of traction. We had actually a very strong security quarter.
We are specifically in, as you know, bot defense has become a very important team for both service providers and enterprises. And our performance and differentiation on bot, is unique and we believe unmatched in the industry. That's the last one. And that's we offer that, on our Advanced WAF today, and we'll bring more features and products around bot defense throughout the year. Second is consolidation.
I've talked about that. That will also continue to ramp throughout the year. And third is the new security offering around SSL orchestration. We had that offering in the past, but it was an offering that required significant involvement of professional services, we're we've just released a solution that can be deployed much faster and much easier by our customers and we're seeing normal traction with our solution. So I expect all of these things, to contribute to 2019.
I expect our NFV offering that we also released the fourth quarter of 2018 to contribute to our numbers in the service provider space in 2019. And then we're going to release new products, that I talked about in the first half of twenty nineteen, which will start to contribute, but again, will have a bigger impact in 2020. So when you look at it and aggregate, to use your term tile on the supply side, I think we have an exciting pipeline of of products and offerings that are going to contribute to the top line going forward.
Great. Thank you.
Thank you. The next question is from Catherine Trednick of Dougherty. Your line is now open.
Can you talk a little bit about Avi Networks? 4 or 5 years ago, we always heard A-ten nippy net your heels in the last 6 months, the buzz on obvious picked up. And can you tell us maybe or quantify the number types of use cases that you run up against them and then what's your strategy to outflank them? Thanks.
Thank you, Catherine. So specifically, so we're not dismissive of any of our, any of our competitor, however small there may be. And so in the case of Avi, we don't see them that often. When we do see them, we actually lack our win rate. And that's we probably haven't seen them as much.
Because we haven't played in the long tail of applications as much as we're going to be playing in the long tail of applications, in 2019. And as I mentioned earlier, both on our cloud edition and the cloud native app services platform that Kara described, We're bringing to the market a per app consumption model as well as really, lightweight, nimble, cloud native capabilities, combined with, our overall capabilities and service support and scale, and a heritage of 2 decades of supporting mission critical applications for our customers, And we don't think anybody is going to match that anytime soon. And so we actually feel very confident, about competing with them. When we see them, because that's again, that's it's frankly not, not a, a very frequent occurrence.
All right. Thanks. Appreciate it.
The next question is from Rod Hall of Goldman Sachs. Your line is now open.
You mentioned earlier, I think, Francois, that you guys are at least want to preserve some capital for acquisitions or maybe that's part of the capital plan. I just wonder, could you talk a little bit about, tech technology areas where you would like to expand the business in places where you think you may have deficiencies or are you thinking more something aimed at the core of the business? I mean, kind of help us understand without giving us, I guess, too much what sorts of areas you might, be interested in. Then I have a follow-up.
Yes, Ron. So, this one, this one's a difficult broad, as you can imagine, I would tell you, if you look at our expansion of reach and role, you'll see that expanding our reach, we evolved more around software and cloud. And expanding our role, revolves more around other application services that we might want to offer. And so those would be if you think about the horizon and the way we look at the world and the filters we use, those are the filters I would give you today for what we might, what we might do if in fact we find something that is of interest to us.
Do you can you just say
which of those 2 reach a role is more strategically important?
Both are. Okay.
And then I just had a housekeeping question. Do you have a minimum cash balance that you guys feel like you need to run the business?
Rod, I think we generally think of probably in the $400,000,000 to $500,000,000 range.
Okay. So you're kind of there, Frank, is that right?
I'm sorry, what do you mean there? We certainly have got more than our minimum. Yes, we've got 1,550,000,000. I just
Oh, okay. Of your one of your total cash and investment. So you could run that down to 400 or 500 comfortably below that, you wouldn't be comfortable.
That's right.
Okay. Thank you. I appreciate it.
Thank you, Rod. So with that, the last question for today's And that concludes today's conference. Thank you for your participation. You may disconnect at this time.