Great. Welcome back, everyone, to Needham Tech Week. My name is Matt Desort, Senior Security Analyst here at Needham. It's my pleasure to welcome next to the stage the management team from F5. We have with us today COO Tom Fountain. As a reminder, we will be hosting a fireside chat format. I would love to make this as collaborative as possible with you guys. So if you have any questions, please submit them through the queue, or you can email me at mdessort@needhamco.com, and I will be sure to prioritize those. And with that, welcome, Tom. Fantastic. Thank you, Matt. Great. Great to have you here. I guess, let's start at a high level. You guys just posted, you know, Q4, fiscal Q4 results, really strong close to the year. I think, you know, accelerating software better than expected, systems demand. I guess for you, if you could, you know, recap the print from your perspective, maybe, you know, what two or three KPIs really stood out for you and encouraged you? I guess before I respond, I need to get our safe harbor on record. So let me just read it for a second. "Please note that our discussion today may contain forward-looking statements which involve uncertainties and risks. Our actual results may differ materially from those expressed or implied by these statements. Please see our SEC filings for more information on these risk factors." Yes, indeed, Matt, we had a really good Q4, delivering a strong close to both the quarter and the fiscal year. The Q4 posted a record $747 million in revenue. That's a 6% increase year over year and surpassing the high end of our guidance range. You know, the Q4 growth was really driven by a 19% increase in software revenue, which I think really illustrates the successful shift in our business towards software and subscription-based offerings. When you look at the full year, you know, F5's transformation from a hardware-centric company to a leader in security and software for hybrid and multi-cloud environments, I think, is really unprecedented. In FY24, software revenue grew 11% compared to FY23. Subscriptions are now 85% of software revenue, which is a significant increase from just 20% in FY17. With this, we've significantly diversified our revenue streams. We've got a lot more visibility into the future revenue and earnings growth as a result of the recurring nature of our business. And we delivered Non-GAAP EPS growth of 14% year over year, which I think really highlights both the top-line growth and the improved operating margins that are coming from our strong operational discipline in FY24. So when I look to FY25, you know, the combination of our strong software renewals, the growing and improving software demand trends, and growing pipeline, we've guided to a 4%-5% revenue growth for FY25. This outlook is really based on strong visibility that we have to our software subscription renewals. And we think those will make up two-thirds of FY25's software revenue base. And then looking, you know, past FY25, I think we're really well aligned to take advantage of a number of meaningful industry trends, you know, whether that's the ubiquity of hybrid multi-cloud environments, the increased distribution of apps and APIs, the role of AI, and of course, the exponential growth of applications. Yeah, definitely a lot to chew on there. And I want to get to a lot of those points you made on some of the drivers. But to go back to the, you know, renewal visibility that you guys have, I guess you talked about that accelerating subscription growth next year with a weighting towards second half driven by the visibility you have from renewals. I think your assumptions around new growth are pretty modest. I guess what drives that visibility and confidence? What sort of telemetry do you have on customer usage that sort of gives you that confidence heading into fiscal 2025? Yeah. So we've guided this 4%-5% revenue growth for FY25 back-ended, weighted for the second half. And I think a lot like FY24, we've got really good visibility into the growing renewal base. You know, I think that's in part because of the cycle of our multi-year renewals. So we really started selling software subscriptions in FY18. And, you know, that consumption model really gained momentum in the second half of FY19 in particular. The majority of these software revenues are really three-year term subscriptions. And so the FY19 cohort, of course, then comes up for renewal in FY22, and then we'll be coming up again in FY25. And so the layering of these, you know, really gives us a lot of confidence. You know, we also saw through the challenging period of FY23 that despite sort of the macro-related cautions on new spend, that renewals continued to perform largely to plan. And then we also have really good telemetry data from our customers. So these multi-year renewals all have a component of them called a True Forward, where the usage from one year determines the baseline price for the remaining years. And so through that, we have really good visibility into the telemetry around how our customers are actually using our products. And so when you put all of those together, we've got a lot of confidence in our FY25 outlook. Got it. Yeah. No, I guess to follow up on something you mentioned, sort of the stacking of the 2019 and 2022 cohorts coming up here in 2025, you know, how are you feeling about your capacity to service and win those renewals? And how do we think about the maturity and retention of those cohorts throughout time? Yeah. So, you know, we saw some of this start in FY24, of course, with the FY18 and then the FY21. As we head into FY25, we've got the significant growth that we saw in FY20 and then the significant growth in FY22. And so, you know, when you see the sort of stack, we've seen really good renewals on the second-term renewals from FY18. So we expect FY19 second-term renewals to perform very well. And similarly, the FY22 renewals are coming up for their first renewal term. And again, we've seen really good success on those renewal rates. So when we put those together, we feel very good about the capacity that we have to be able to meet and capture the renewals that are coming up in FY25. Got it. I guess shifting gears to some of the exciting drivers you listed earlier, AI being the one I want to talk about first, you know, what are you seeing in your customer base regarding, you know, widespread AI deployments planned for 2025? And then maybe double-click for those less familiar on some of the wins that you guys have already talked about over the past couple of quarters that are AI-driven. Yeah. So let me start by, you know, we serve some of the largest enterprise service providers and governments. And I'd say for the most part, our customers are generally in the phase of experimenting with AI right now. And that's ahead of sort of wider-scale AI implementations. Having said that, you know, we've got some really exciting AI wins from some of the leading franchises that are early in adopting AI. And our AI opportunities really center on three principal use cases. So the first one is around AI data ingestion. And this one's all about high-performance traffic management around getting data in for either training purposes or retrieval augmented generation or RAG purposes. This requires really advanced traffic management to optimize that data ingestion. And, you know, no one does that better than F5. We have a number of deployments already. We talked about one of them in our Q3 earnings call that was an automotive manufacturer that was really leveraging BIG-IP to rapidly secure and transfer the data to the storage system into their large-scale clusters. And that significantly accelerated their model training. The second use case then is really focused on the AI factory and load balancing for the AI factory. And here, again, it's about optimizing the performance and scalability of these AI factories using traffic management to do that. And a lot like the first case, you know, this too really is an ADC opportunity. And that's certainly a market segment where we've been a leader for the last couple of decades now. And then the third AI use case that we're seeing a lot of success around really applying web application and API protection, or what people call WAAP technologies, to secure AI inferencing. You know, and this solution really requires an integrated offering that brings together the web application firewall, DDoS, anti-bot, API security, all into one converged solution. And again, we have a very differentiated WAAP solution and a number of customers that are early in applying that technology to securing AI inference workloads. Got it. Yeah, lots of exciting opportunities there for F5, it seems, multiple facets. I guess staying on AI, last quarter, I think you guys announced an exciting partnership with NVIDIA, where I think you're going to be placing your ADC software onto their infrastructure. You also talked about BIG-IP Next for Kubernetes now being compatible with their DPUs. Seems like a really exciting partnership. I guess what are the details of the partnership and how should we think about this as an AI opportunity for you guys near term? Yeah, no, thank you, Matt. We're very excited about the potential for both of these. And as you noted, there are really sort of two different solutions here. The first is our BIG-IP Next. It uses Kubernetes and it runs in a Kubernetes containerized environment. And enterprises and service providers who are building AI factories and have AI workloads, these almost always are built using Kubernetes technologies. And so BIG-IP Next for Kubernetes really brings the market-leading networking, traffic management, security capabilities that we're known for into this sort of AI workload environment. The second is really the partnership with NVIDIA. And, you know, here, this is really about making BIG-IP for Kubernetes work seamlessly with NVIDIA's BlueField-3 DPUs, or their data processing units. And, you know, when you combine BIG-IP Next for Kubernetes together with these DPUs, you effectively sort of create this AI accelerator. And that increases the performance and the security of the training and inference workloads. You know, this solution, I think, is pretty early to really size its potential. And there are a number of dimensions around the commercial model and terms that we're still working through. But we have been talking with customers about this solution. And I think that feedback has been very encouraging around sort of the ability to accelerate AI workloads by running BIG-IP Next directly on DPUs. Got it. I guess shifting gears to your partner program, I think you've announced some recalLs there. Any changes as you enter fiscal 2025? And especially, how are you thinking about incentivizing the more productive set of partners that you're focused on now as you roll out DCS? And you just launched NGINX One. You know, talk to us about some of the partner changes that you're making with your go-to-market. Yeah. So we've worked, I think, very successfully to evolve our partner program and our partner mix over the last several years, largely as our product portfolio has expanded pretty significantly. You know, I think today we feel like we've got a very strong partner base that provides us access both to the customers and the specific projects for which we are really well suited, and so, you know, while we make adjustments every year to the partner program, we didn't make any significant adjustments for FY25, but we did make some minor tweaks. You know, as it relates to our distributed cloud SaaS platform, you know, we already are seeing a really meaningful part of that business coming from partners, about two-thirds or so of it. You know, and our focus in FY25 is really in two areas. One is really around building out more and more customer reference stories together with our partners. And then the second is that we have increased the incentives for our partners around closing business with some of our largest customers. In terms of NGINX One and going after modern application solutions, you know, the focus with partners in FY25 is really about expanding the number of NGINX certifications that are out there. We think that this will increase the number of experts that are available to customers to be able to roll out and deploy the solution. So a lot of the partner activity this year is centered there. Got it. I guess I want to ask a question about cross-sell sort of between BIG-IP and NGINX. I think earlier this year, you guys called it out really strong. I think somewhere, you know, 50% of NGINX customers have become BIG-IP customers. Any update on that metric and plans to sort of accelerate that cross-sell vector that you guys have between BIG-IP and NGINX? Yeah, Matt. So I don't have an update for you on. But our land and expand motion is very strong. You know, I think our greatest growth opportunity is about expanding our footprint and our wallet share in our installed base of about 20,000 customers. And as I said, they're really the largest of enterprises, service providers, and governments. And I think doing that, we really have three principal levers that are available to us. The first is that we generally grow as an app's utilization grows over time. So it naturally grows. The second is that we have an opportunity to expand to additional apps within an organization. And as the number of apps expands within companies, we see growth. And then the third is that we really grow by expanding the numbers of services that F5 is able to provide. And so, for example, that may be about adding more and new security capabilities on top of some of the traffic management capabilities. And so, you know, I think this expansion motion, you see in action in a number of different places in our business. And I'll use F5 Distributed Cloud as an example. You know, we launched that platform in February of 2022. And as of Q4, we're up to over 800 customers now on that platform. And as I had mentioned earlier, two-thirds of those are existing F5 customers. And so, you know, seeing a very significant expand motion with these new offerings into our installed base. Got it. I guess shifting gears sort of towards product revenue growth, I think you guys guided to, you know, higher than mid-single digits in fiscal 2025. Waited for the second half. You know, I think this outlook assumes continued macro stability. No significant improvement to the macro environment. It also doesn't assume substantial growth in our customers' IT budgets. We've said before that customers had better clarity on their calendar year 2024 budgets, but early to see sort of calendar year 2025. You know, within that, sort of what we really are expecting is upper single-digit software growth and low single-digit systems growth. The software outlook, I think, as we talked about before, was really the visibility that we see in the sizable renewal base that's coming up over the course of the next year, coupled with the very consistent strong renewal performance that we've had. You know, I also think that the, you know, the systems view is really informed by the uptick that we're seeing in refresh activity. We started to see that here over this year, and we think that that will continue to drive some of the systems growth in FY25. Upside from here could come from a variety of different places, so that could be around new subscriptions that are more than we expected, larger expansions. We're seeing a really good expansion activity at the time of renewal. It could be around, you know, stronger refresh activity that's certainly been building here in FY24, and then stronger IT budgets overall, which we said we're currently assuming to be the same, but, you know, certainly that may change. Got it. Yeah. Appreciate all that color. I guess staying on product within systems specifically, I think last quarter, you guys announced a price increase. I believe, you know, any sort of details you can give us around the magnitude of that increase, you know, why now, you know, how do we think about balancing that versus sort of the mid, you know, persistent mid-single-digit unit decline growth that has characterized the ADC market? Yeah, so we talked a little bit on our earnings call that we announced a modest single-digit% price increase across the entire portfolio of both systems and software that will take effect January of 2025. You know, most of our sales cycles are six- to 12-month sort of engagements. And we're honoring any of the pricing that is out there already. And so, you know, we don't expect a meaningful impact to have an effect on FY25. And then in terms of sort of thinking about price increases, you know, we regularly monitor both the competitive environment and think a lot about the price performance value that we want to be able to deliver to customers. And so our price adjustments really reflect the combination of those factors. Got it. I guess shifting over to services now, I think, you know, you talked about lapping price increases from fiscal 2022 and fiscal 2023. You know, how are you thinking about the puts and takes for services growth from here? I think you talked about low single-digit growth in that sort of segment down from where it was, you know, last year when you benefited from the price increases. You know, what are the puts and takes for services growth? What would it take for services to exceed, you know, these modest expectations as you lapped the price increases? Yeah. So thank you. I'm proud of the services results in FY24. I think it really demonstrates the resiliency in our financial model. You know, we expect the global services business will grow low single digits in FY25. And we think that the services business over time really aligns best to our deployable products. And so that's our systems and our BIG-IP and NGINX software that a customer operates. And so we would expect that the services growth rate would over time align to those. You know, we think that, you know, if the SaaS business accelerates, that mix shift would actually naturally lead to more moderate service revenue growth than what we're expecting. But right now, we think that it's going to be in the low single digits in FY25 and then moderates accordingly in out years. Got it. Staying sort of in the financial model, I think last year you talked about net expansion rates that were world-class in software over 120%, I think, for your term licenses. Any color around where that net retention figure is today? You know, how is gross retention, you know, gross retention also trending for your SaaS business as that becomes, you know, a bigger piece of your overall pie? Yeah, so, you know, broadly, we continue to see very strong expansion rates across our software subscriptions. You know, and I think that really comes in two ways. One is continued strong utilization against these multi-year subscriptions, and then the second is that we're seeing significant expansion and additional opportunities across the portfolio that are at time of renewal, and that's why we see those opportunities grow pretty significantly in some cases. You know, we've talked a lot about some of the transitions in our SaaS business, and that has a very short-term impact on ARR, NRR, GRR for SaaS. You know, last year, we noted that we were retiring several of our legacy offerings and in some cases moving them to F5 Distributed Cloud. We thought at the time that a lot of that would happen in 2024 and 2025. You know, and in fact, our SaaS and managed services business ARR declined from $198 million to $182 million in FY24 as a result of those transitions. And the vast majority of that decline was really around that planned churn in the discontinued offerings. So, you know, the growth in the distributed cloud business within our SaaS portfolio is offsetting some, but not all of these transitions. But that portion of the business is growing quite quickly. Yeah. Let's stay here on those transitions. I think the Silverline unwind, you know, you're converting a subset of your customers from the legacy version to F5 Distributed Cloud. You've also had some planned churn. I guess how is this migration shaking out versus your guys' expectations so far? Yeah. So it's still somewhat early in this transition. We had expected it to be more weighted to FY25 than FY24. I think, you know, what we're finding is that it's actually even more back-end weighted than I think we maybe initially expected. And that's really a function of customer readiness. You know, these are pretty substantial technical migrations for customers. And of course, not every customer will ultimately make that transition. But those that have gone through that transition are very pleased with the distributed cloud platform. And we think that having them on distributed cloud platform creates a number of upsell opportunities with those accounts over time. Definitely. Yeah. Definitely see the benefit of getting them over to F5 Distributed Cloud. I guess shifting gears a little bit to sales and marketing spend. You know, I think it declined again this year, maybe the second straight year that's happened. But you've also said that awareness is the biggest limiting factor for F5, especially as you shift to distributed cloud and your other SaaS products. You know, so how are you thinking about incremental returns on investment, especially in sales and marketing? And what sort of plans do you guys have for quota carrying headcount expansion into fiscal 2025 and beyond? Yeah, so the year-over-year reduction in sales and marketing for FY24 was actually more a function of realizing the full year impact from the headcount reductions that we'd made in April of 2023 that were part of our broader cost-based adjustment, and so if you look at sort of the second half of 2024, sales and marketing spend actually increased roughly 5% year-over-year for the second half periods. You know, more generally though, our software subscription model, I think, is yielding the efficiency in sales and marketing that we'd hoped, and with that, a growing percentage of our revenue now is coming from renewals, which of course has a lower cost to serve than acquiring new business, and so, you know, in terms of building kind of market awareness, we believe we're investing at the appropriate levels. Last year, we launched a global marketing campaign that was really focused on creating awareness around the breadth of the portfolio that we now have. That was an event called App World that we took on the road globally, and we had a lot of success with it, and we felt the program delivered really good ROI, and so we're expecting a very similar sort of program in FY25. Got it. Makes sense. I guess shifting now to like the competitive environment and pricing a little bit, any changes to the competitive environment today across systems or software for you guys? I know specifically, you know, in the recent past, you called out Broadcom and VMware that tie-up sort of causing consternation amongst your customers. I mean, is that still impacting demand? Or, you know, what sort of shakeouts within budgets could that potentially drive benefits for F5? How do we think about that competitive environment? Yeah. So we can and are benefiting from some of our competitors' behaviors here. You know, we've had a very active competitive take-out program in effect for the last several years. And that's grown each year for us. You know, initially, I think we really competed on the fact that we were driving innovation in this product portfolio, whereas the competitors were not. But when our competitors are now de-emphasizing support and employing, you know, what I think customers feel are pretty unacceptable pricing practices, you know, that makes it even easier for us to win business. And so we are seeing really good results in our continued focus around competitor takeouts. Got it. I guess moving now to like security, you know, I want to ask about consolidation in WAF and API. I think you've called out some impressive wins for WAF as more cyber attacks are now coming through APIs than ever before. You know, do you have everything from a product perspective that you need to compete there? And what's the appetite in the market today for a consolidated offering around WAF and API security? Yeah. So you're absolutely right. APIs are already one of the greatest threats for organizations. You know, they're often exploited by adversaries. And very few organizations actually have a good handle on their API security. And of course, the proliferation of AI apps is only going to make the challenge around APIs even worse. You know, API security requires a greater level of expertise. You know, APIs can't simply be protected with a traditional web application firewall. You know, there's a lot of API-oriented attacks that really go after the application logic. And so the result is that, you know, signature-based WAFs are less effective in solving the API needs. Many customers don't yet fully understand this distinction. And in order to truly protect APIs, you need to do several things. You've got to be able to discover all your APIs. You must be able to scan and analyze the code for those APIs. You then need runtime protections that are able to monitor the calls against those APIs. And finally, you've got to be able to enforce and block malicious actors in line real time. And, you know, competitors provide point solutions around sort of each of those individual areas. You know, we instead have taken a single, holistic, best-in-class approach to bringing all of those together into a very comprehensive API security solution. And we feel very good about the completeness of our offering here. No one else is able to deliver this same range of what we call shift left and shield right. Got it. What sort of growth do you see, you know, coming out of the WAF market? Is it being, you know, cannibalized by the new API security solutions? How do you see them, you know, jointly, you know, surviving going forward? Yeah. So we see customers increasingly looking for WAF vendors that are able to bring all four of these technologies together. So web application firewalls, anti-bot, distributed denial of service, and API security all into one complete offering. We have a very complete offering that's highly differentiated in those areas. And so we feel very good both about the growing customer demand for these solutions as well as our competitive position. I guess staying in product, I think you guys did just announce you hired a new CPO, Kunal, I think, who's coming over from Imperva. So he's got a really strong background in security and sort of this realm. I guess what's changing with the new chief product officer, if anything, from a philosophy standpoint? Do you think, you know, he's going to come in and have a different vision around where WAF and distributed cloud services should go? Is it kind of more the same and just accelerating sort of the growth vectors that you see in security working? Yeah. So thank you. We're thrilled to have Kunal on board as our new Chief Innovation Officer. You know, he's taken responsibility for the product org and is really focused on tackling some of the biggest customer priorities. We've talked a lot about this rising complexity to delivering and securing apps, what we call our ball of fire problem. And we've spoken before about our solution to address that. Kunal and his team are really focused on addressing sort of three areas within this. The first is around delivering compelling SaaS services on top of the distributed cloud platform. The second then is around leveraging the F5 distributed cloud platform to really unify and converge the entirety of our product portfolio across both deployable and SaaS offerings. The third area that he's really concentrating a lot of energy around is ensuring that our customers are AI ready and that we have the solutions to be able to provide ADC capabilities for all of these new emerging AI workloads. Yeah. No, it's really exciting to see you guys bring him on board. And best wishes to Kara, who was incredible and I know is taking on an awesome seat over at HackerOne. Maybe shifting over to the CSP marketplace, the cloud service provider marketplace. You know, any updates that you can give us on growth in your partnership with AWS? How is that sort of, you know, taking off as we see cloud apps sort of re-accelerate coming out of the period of optimization? And now we have AI. You know, maybe just talk to us about what sort of opportunities you see with other cloud service providers as well. Yeah. So, you know, we have a really strong relationship with each of the major cloud providers. You know, and I think a lot of it for us, the CSP marketplace is for us just another example of ways that we can provide choice and flexibility for our customers to be able to consume our offerings in whatever commercial model best suits their needs and wherever those applications happen to be running. And so a lot of the focus with the hyperscalers is around their private offers. And we've been very pleased with some of the large transactions that we've been able to close through this model. You know, in terms of new activity with hyperscalers on AWS, we just launched our first PAYG offering to be able to consume and buy our SaaS offerings through their marketplace. And on Azure, we previously launched our NGINX as a Service offering. And we're now seeing really good customer adoption around NGINX as a Service on top of Azure. You know, and customers tell us that they really value both the simplicity of the offering as well as the comprehensive functionality that it provides. And being able to do all of that through a cloud-native environment has been quite compelling for our customers. So we continue to see sort of really good opportunity in partnership with the cloud service providers. I guess staying on NGINX, how have you seen since you guys acquired that asset, how have you seen the competitive environment change, if at all? Are there new entrants into that market? Just what's changing with NGINX and sort of market share and competitive environment? Yeah. So we haven't seen a lot of changes in the competitive dynamic. You know, a lot of our focus over the last year now has been around bringing together the NGINX portfolio. We historically had gone to market with a series of individual offers around NGINX. And what we came to appreciate was that customers didn't actually want all of that complexity. They wanted to be able to buy one SKU that provided them all of the functionality that they needed around NGINX. And so we've been bringing that together in a new combined offering called NGINX One. And then I think what's really compelling, and it's an example of sort of where we're going, is that's now available through the distributed cloud console. And so customers are able to get the benefit of some capabilities via SaaS, some in a deployable model, all through a single SKU. But I think it's a great example of customers being able to take advantage of distributed cloud to really help unify the portfolio and their experience, and we expect to be able to do more of that across more of the portfolio over the years to come. Got it. I guess a few minutes left here. I realize this is a CFO question. Maybe, you know, I know you go to don't guide to free cash flow, but how should we think about, you know, free cash flow conversion in fiscal 2025, especially as you have these large renewal cohorts coming up and you're talking about 35% plus operating margins into the future? How do you think about free cash flow conversion going forward? Yeah, you're right. So we don't guide to free cash flow, but we do guide to operating margin. And so we guided FY25 operating margin to approximately 35%, which is roughly 140 basis points up from FY24. And I think the way to think about free cash flow is that we expect the free cash flow to begin to more closely track net income going forward. And so we would expect those two to start to converge. From a growth perspective or a margin perspective? Yes. From a, yeah. I guess with a couple of minutes left here, Tom, I want to turn it over to you for any closing thoughts. If any investors are dialed in and you want to walk away with two or three, you know, things to take away from this conversation, what would they be? Yeah, so I think the most important is that, you know, F5's business has transformed quite successfully over the last several years, and I think we are ideally positioned to be able to capture the emerging opportunity around hybrid and multi-cloud. Organizations face just a really acute pain point around being able to secure and deliver their applications in these sorts of environments, and the work that we've done over the last several years really positions us with the portfolio of offerings that customers need in the era that we now find ourselves in, and I think that's a very compelling position for us to be in. We're seeing some of the benefits of that already, and as we've guided, we're, you know, excited about the prospects into the future based on the portfolio that we now have available for customers. Got it. That's great. Perfect, perfect synopsis. I think that brings us to time, so I want to thank you, Tom, Suzanne, for joining us from F5, and for all the clients that tuned in, thank you so much for your attention, and please enjoy the rest of the Needham Tech Conference. Wonderful. Thank you, Matt.