Good afternoon and welcome to the F5 Fourth Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin.

Hello and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. François Locoh-Donou, F5's President and CEO; and Frank Pelzer, 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&A session. A copy of today's press release is available on our website at f5.com, where an archived version of today's call will be available through January 25, 2021. Today's live discussion is supported by visuals which are viewable on the webcast and will be posted to our IR site at the conclusion of today's discussion. The replay of today's call will be available through midnight Pacific time October 27 by dialing 800-585-8367 or 416-621-4642. Use meeting ID 6055259. For additional information or follow-up questions, please reach out to me directly at [email protected]. Our discussion today will contain forward-looking statements which include 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 will turn the call over to François.

Thank you, Suzanne, and good afternoon, everyone. Thank you for joining us today. While fiscal year 2020 was not the year that any of us expected, I speak for the entire executive team when I say how proud we are of the F5 team for delivering a very strong year under extraordinary circumstances. Our results show building momentum in our pivot to a software and subscription-driven business. They also show the value of our incumbency, the strength of our customer relationships, and the stickiness of our solutions. In the last several years, we have aligned our investments with our customers' most pressing priorities. As a result, we have built close to $450 million software product run rate business, and in FY 2020, it grew 52%. With $365 million in fiscal year 2020 revenue, the strength of our software business more than offset a decline in our systems business, which was down 10% for the year. Our services business grew 5%. For the year, we delivered 5% non-GAAP revenue growth and 5% non-GAAP product revenue growth. Today, our customers face exploding application growth and the reality that users expect more than they ever have from applications. Our customers' business depends, not just on whether their application loads, but how quickly it responds and whether it and its users are secure. New ways of working and the higher expectations for application performance have customers focused on solutions that enable them to work smarter and scale faster. We believe we are ideally positioned to serve this demand. Frank will review our fourth quarter and fiscal year financial results and our outlook. I will then speak to our fiscal year 2021 growth drivers, including some customer highlights from the quarter. Frank?

Thank you, François, and good afternoon, everyone. I will speak first to our fourth quarter and then to our fiscal year results before discussing our outlook for FY 2021. We delivered a very strong Q4. On a GAAP basis, Q4 revenue was $615 million. Fourth quarter non-GAAP revenue of $617 million was up approximately 4% year-over-year and above the high-end of our $595 million to $615 million guidance range. Please note, as I review our revenue mix, I will be referring to non-GAAP revenue measures. Q4 product revenue of $280 million was up 6% year-over-year and accounted for approximately 45% of total revenue. Software revenue was $113 million, growing 36% against a very tough comparison of 91% growth in the prior-year period. Shape contributed approximately $23 million in the quarter. Excluding Shape's contribution, software grew 9% against a tough comparison in the year-ago period. As we look ahead, we are seeing very positive trends in our software business and expect much stronger software growth in Q1. I will speak to that in greater detail when I discuss our Q1 guidance. Software continues to grow as a percent of product revenue, representing 40% of product revenue in Q4, up from 31% in the year-ago quarter. We also continue to drive subscription revenue momentum. Subscriptions represented 76% of software revenue in the quarter compared to 66% in the year-ago quarter. Services revenue of $336 million grew 3% year-over-year and represented 55% of revenue. Revenue from recurring sources, which includes term subscriptions as a service and utility-based revenue as well as the maintenance portion of our services revenue totaled 66% of revenue in the quarter. This is up from 63% in the year-ago period. The improvement comes largely as a result of the strong subscription software momentum I mentioned previously. Systems revenue of $168 million was down 8% compared to last year. On a regional basis in Q4, Americas delivered 4% revenue growth year-over-year, representing 58% of total revenue. EMEA delivered 9% growth, representing 24% of revenue. APAC was down 1% year-over-year and accounted for 18% of revenue. Looking at our bookings by vertical, we saw robust enterprise activity in the quarter, with enterprise representing 70% of product bookings. Service providers accounted for 15% and government customers represented 16% of product bookings, including 70% from U.S. Federal. Let me now share our Q4 operating results. GAAP gross margin in Q4 was 81.8%. Non-GAAP gross margin was 84.4%. GAAP operating expenses were $404 million. Non-GAAP operating expenses were $335 million. Our GAAP operating margin in Q4 was 16% and our non-GAAP operating margin was 30.1%. Our GAAP effective tax rate for the quarter was 20.4%. Our non-GAAP effective tax rate was 19%. GAAP net income for the quarter was $78 million or $1.26 per share. Non-GAAP net income was $150 million or $2.43 per share. I will now turn to the balance sheet. We generated $175 million in cash flow from operations in Q4. Cash and investments totaled approximately $1.3 billion at quarter-end. We repurchased approximately 358,000 shares of F5 common stock in the quarter at an average price of $140 per share for a total of approximately $50 million. DSO was 43 days and capital expenditures for the quarter were $12 million. Deferred revenue increased 6% year-over-year to $1.3 billion. We ended the quarter with approximately 6,110 employees, up approximately 90 employees from Q3. Let me now turn to our full-year 2020 results. For the year, GAAP revenue totaled $2.35 billion. Non-GAAP revenue grew 5% to $2.36 billion. Non-GAAP product revenue of approximately $1 billion grew 5% from the prior year and accounted for 44% of total revenue. Within product revenue, software grew 52%, while systems revenue declined 10%. Subscriptions represented 71% of software revenue in fiscal year 2020 compared to 55% in fiscal year 2019. Revenue from recurring sources totaled 65% of revenue for the year, up from 60% in fiscal year 2019. Services revenue of $1.32 billion grew approximately 5% during the year and represented 56% of total revenue. Our non-GAAP effective tax rate for the year was 20.2%. GAAP net income for FY 2020 was $307 million or $5.01 per share. Non-GAAP net income was $575 million or $9.37 per share. Now, let me share our guidance for the first quarter and some high-level modeling assumptions for fiscal 2021. Unless otherwise stated, please note that my guidance comments reference non-GAAP metrics. In our Q1 and fiscal year outlooks, we have attempted to factor in the expected impact of continued global uncertainty related to COVID-19 and the broader economic trends as we understand them to date. Let me start with sharing our expectations for the first quarter of 2021. Near term, we expect customers will continue to prioritize investments that enable them to serve the immediate needs of their customers and employees. We also anticipate continued focus on investing in application security. We expect to benefit from being a trusted and operationalized partner of the largest enterprises around the world as they continue to drive innovation and agility with our application strategies to increase business value. With this in mind, we are targeting Q1 FY 2021 non-GAAP revenue in the range of $595 million to $615 million. We expect Q1 2021 gross margins of 84.5% to 85% and we estimate operating expenses of $324 million to $336 million. We anticipate our effective tax rate for Q1 will be in the 21% to 22% range. Our Q1 earnings target is $2.26 to $2.38 per share. We expect Q1 share-based compensation expense of approximately $56 million to $58 million. As for our capital deployment, we retain the option to repurchase shares opportunistically in any open trading window. Now, let me share some of our operating expectations for the full fiscal year of 2021. We have made tremendous progress on our software transition and expect momentum to continue as the contribution from subscription software and SaaS grows. Accounting for this progress in fiscal year 2021, we expect to grow software revenue for the full year by more than 35%. Based on our strong Q1 software pipeline and increasing momentum from our software subscription offerings, we expect a software growth rate of at least 50% in Q1. We expect systems declines will moderate slightly compared to FY 2020 likely declining in high-single digits for the year. We anticipate gross margins of approximately 85% for the year. We expect to achieve at least a 31% non-GAAP operating margin for FY 2021. We also expect operating margins to move down from Q1 to Q2 and then to increase in the second half of fiscal 2021 following our typical seasonal pattern. We anticipate our full fiscal year effective tax rate to be in the range of 21% to 22%, with some fluctuations quarter to quarter. We expect fiscal year 2021 stock-based compensation in the range of $230 million to $240 million and capital expenditures in the range of $40 million to $60 million. We expect to update our longer-term outlook at our Analyst and Investor Meeting which we will conduct virtually on November 18. Please remember to pre-register on our Investor Relations site. With that, I will turn the call back over to François.

Thank you, Frank. It has been more than three years since we unveiled our strategy to transform F5. In the process of extending our reach and expanding our role, we have built the broadest available application security and delivery portfolio and significantly expanded our addressable market. As a result, the foundation of our business has grown stronger and we are on our way to becoming a predominantly software-driven company. Going forward, our software growth will be more diversified, thanks to a broader and growing subscription and SaaS-based revenue. We have a renewal flywheel that is starting to turn with momentum and true forward revenue opportunities on a sizable portion of our long-term subscription contracts. Demand for subscription-based consumption is growing across all geographies and verticals. As Frank mentioned, 71% of our fiscal year 2020 software revenue was subscription-based, up from 55% in 2019. We expect continued software momentum in fiscal year 2021 and I will speak to our growth drivers in turn. First, core BIG-IP software, much of the software growth we have delivered thus far comes on the back of BIG-IP. I have spoken previously about the extensive work we have done to reduce friction in purchasing, deploying and managing BIG-IP software. We have focused on flexibility in our commercial models and on enhanced automation in central management. During Q4, customers chose BIG-IP to refresh core business applications as well as for capacity additions. In one instance, a multinational delivery services company chose BIG-IP to handle both increased traffic to its consumer-facing dot-com site and to scale back-end processing. Looking ahead, we expect continued growth from BIG-IP driven by customers' need to support and scale mission-critical traditional applications in hybrid and multi-cloud environments. Our second growth driver is Nginx. Nginx brings multiple growth vectors to FY 2021 and beyond. In addition to continuing to expand Nginx Plus instances, we see increasing customer interest in Nginx Controller, our modern app orchestration and analytics platform. Controller is complementary to BIG-IP and bridges the divide between dev teams building modern apps and the infrastructure teams that need to secure, scale, and monitor them. We are also opening new application security opportunities with Nginx and App Protect, our vast solution for modern applications. Nginx's App Protect enables security professionals and developers to introduce application security early in the development lifecycle, making security part of the modern app stack. In Q4, we secured an Nginx App Protect win with a major video conferencing and collaboration platform. Nginx is already a key technology for this customer, enabling them to scale that platform to meet explosive COVID-19 demand. With that explosive growth, however, also came increased security concerns. Nginx's ability to scale rapidly with no impact on service delivery was a key differentiator. As with our ability to meet a wide set of requirements in a cloud-agnostic way, including load balancing, caching, and security with App Protect, this win not only expanded our existing footprint with the customer; it also positions us to capture additional use cases, including protecting login pages and preventing credential stuffing. Use cases like this one enabling best-in-class security on modern application architectures are gaining momentum and we believe will accelerate the appeal of Nginx to large enterprises. That provides a good transition to our third growth driver, application security. Application security is a large and growing focus for customers and understandably so. In the current environment, organizations are more reliant than ever on applications to enable employee collaboration and customer engagement. At the same time, the attack surface and sophistication of attacks have increased dramatically. During FY 2020, web application firewalls, remote access, SSL orchestration, and fraud protection led customers' security demands. As an example, during Q4, we secured a cloud win with a retailer with a significant dot-com presence. BIG-IP virtual editions outperformed both a cloud-native load balancing and web application firewall solution. As a result, the customer doubled its F5 consumption in just the first year of its multi-year term subscription. We expect the application security demands we have seen this year to persist and grow in FY 2021. As a result, we expect to expand our leadership in the space. Our ability to apply consistent and robust security across multi-cloud environments is fulfilling a significant and growing customer need. Within the context of application security, we also see Shape as a significant software growth driver. Customers are looking to Shape's AI and machine learning-enabled defense capabilities to protect against a growing number of threats, both bot and human. Shape has already been a strong contributor and a great addition to the F5 portfolio. In the roughly nine months that the Shape team has been part of F5, we have grown even more confident in the opportunity it brings to F5 than our customers. Shape's intelligent fraud and bot protection value proposition resonates with customers across multiple verticals. For instance, in Q4, we secured a Shape win with one of the world's largest social networking platforms to protect the platform and its users from artificially generated influence caused by inauthentic behavior. Shape's ability to deliver a high degree of efficacy with high confidence and actionable intelligence was a key differentiator in this win. Shape is also available via our Silverline managed services platform, which allows customers to benefit from Shape's capabilities with no integration work. We have secured several wins in a very short time frame, thanks to this integration and the ease of implementation it brings. In fact, one recent integrated win takes Shape, which is already installed on the majority of the top 10 U.S. banks and extends to thousands of small and mid-size banks using Silverline for their managed security needs. This is an example of one of the core premises of our combination with Shape. We are taking Shape's industry-leading anti-fraud solutions and making them available to a much larger customer base at a time when customers are facing tremendous increases in both the volume and sophistication of attacks. Our fourth growth driver is continued growth in cloud deployments. Our FY 2020 cloud business totaled more than $100 million. Security use cases are playing an increased role as customers rely on F5 to ensure robust and consistent application security. Our cloud presence has been driven both by our organic investments in FY cloud services and through our partnership with the cloud providers. Our strategic collaboration agreement with AWS is just one example of a highly complementary cloud provider partnership. In addition to a co-selling motion, which is generating new leads for F5, AWS and F5 have co-innovated on programs and cloud-native integrated solutions. Just last week, we introduced a joint solution combining Amazon CloudFront and F5 Essential App Protect. CloudFront is a fast content delivery network or CDN service from AWS. F5's Essential App Protect is an easy to deploy SaaS security solution for protecting web applications. Integrating Essential App Protect and Amazon CloudFront enables us to securely deliver data, video applications, and APIs to customers globally with low latency and high transfer speeds, all within a developer-friendly environment. We are leveraging the power of AWS to provide customers with application caching capabilities that reduce costs, strengthen security, and increase performance, and we are doing this in a single SaaS solution, which delivers a higher long-term return on customers' application investments and a better experience for their users. This integration illustrates the power of our collaboration with AWS and we continue to explore how our two companies can come together to help customers deliver more value through their cloud applications. I would be remiss if I did not also speak to the opportunity we see with service providers. In general, service provider RFP activity is up from last year and quote requests and informal activities are much higher. In addition, following our Rakuten win, we are beginning to see more movement and solid customer plans on their 5G strategy. At this point, we are engaged in multiple activities including trials with several customers. We have traditionally played a role as the preferred choice for Gi LAN solutions in 4G networks and we are well positioned to continue to own that segment and grow into new 5G functions. In fact, we have already secured multiple design wins in 5G architectures and we expect deployments to begin ramping in the second half of 2021. A few words on our systems business before we wrap up. As Frank noted, we expect our systems decline to slow in fiscal year 2021 compared to fiscal year 2020, likely declining in the high-single digits. While there is a tendency to think that accelerated digital transformation means 100% software deployments, it does not always. Our business, whether the software or systems, is tied to applications whether they are in the data center, the public cloud, or anything in between. We are supporting mission-critical applications globally. Many of these applications are experiencing rapid growth because of remote working and rising e-commerce demand. With this growth comes escalating application security concerns, including application fraud. F5 is there to help with whatever consumption model our customers prefer. As we look ahead, we see a significant opportunity to enable our customers to bring extraordinary digital experiences to life. We are reducing our customers' operational complexity, improving their application performance, securing all apps, no matter where they live, and unlocking valuable business insights. F5 has always been about solving our customers' most important application challenges. Over the last two years, we have built the broadest available application security and delivery portfolio for both traditional and modern applications. Our understanding and appreciation of our customers' rapidly evolving needs has also deepened over the last two years. Today, customers face exploding application growth and the reality that the baseline of user expectations from applications has been redefined. Think of your own experience and how markedly it has changed. The richness of your favorite app experience is reliable, fast, personalized, and trusted. How long do you wait if the application is slow? What do you do when an upgrade degrades your experience or worst yet, the app fails altogether? Switching brands has never been easier. A large insurer in an industry where competitive advantage has not historically been included in applications told us that if their homepage does not load in under three seconds, they lose the customer. A fast-paced digital world is just as fast to move elsewhere. Digital transformation has reset expectations for the experience an application must deliver to be compelling, to be competitive. Our customers need F5 to enable these rich experiences, and we have a unique position from which to help them do so. We see a world where our customers' application portfolios adapt as needed, where it automates redundant processes for greater efficiencies and they protect itself securing all points of vulnerability. We would expand and contract based on performance needs, and we're by mining and harnessing application data, it gets smarter, more insightful, becoming self-healing and evolving more quickly. F5 is uniquely positioned to deliver this vision because of the portfolio and capabilities we have assembled. We are looking forward to speaking more about our vision for adaptive applications and how we are making it a reality at our upcoming Analyst and Investor Meeting. In closing, we have made significant progress pivoting F5 and changing the way customers feel. We have built the broadest available set of application security and delivery services and expanded our total addressable market in the process. We are also successfully driving a more software-driven business and building a robust and growing base of recurring revenues. Let me wrap up our prepared remarks by thanking the entire F5 team again as well as our customers and partners. We are more confident than ever that our vision, our investments, and our innovation are well aligned with both near and longer-term customer demand. With that, operator, we will now open the call to Q&A.

Thank you. Your first question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.

Hi, team, this is Erik on for Meta. Thanks for taking our question. Maybe just going back to the comments you made on service provider side. And just on that vertical, specifically, have you seen any change to order behavior that maybe matches with some of the other equipment providers have noted? And I know you noted some design wins for 5G, but wondering if that near-term has had any impact just being mindful of the percentage of revenue from that segment is a little bit lower than it has been traditionally?

Hi, Erik. The short answer is, no. We haven't seen a fundamental change, Erik. The percentage of our revenue, of our bookings that come from service providers is basically in the same range it has been for the last few quarters. We are seeing momentum in 5G activity. But in terms of when that will turn into kind of meaningful contribution to our order book, we think that's more of a second-half of 2021, but we are seeing continued traction in security use cases with service providers and specifically our position as a consolidator of multiple functions, which is kind of a unique position that, I don't think you necessarily would see with other equipment providers in the telco. We have a unique position in consolidating a number of functions like CGNAT and DDoS and DNS, TCP optimization and increasingly as service providers virtualize their infrastructure. Our ability to consolidate all these functions in a software bundle is very appealing to them. And so that's a use case that is growing, but overall the business, the trends in the business has been the same over the last few quarters, so no specific change.

Got it. Thank you. That's very helpful. And then if I could sneak in one more, just on kind of the stronger expectations on the hardware side moving forward, what would you guys point to as the strongest reason maybe some customers are still choosing hardware, are there any incremental drivers?

I think we've always mentioned that several regions are increasingly consuming hardware form factors, and there are also various sectors where these form factors are vital, including service providers, government, and financial services. However, the significant change today is that security has become a larger component of our hardware business than it was a couple of years ago, and our hardware security business is not experiencing a decline. When you consider this, it contributes to a stabilization in hardware systems, primarily due to the current emphasis on security within our hardware offerings.

Thank you. It's very helpful.

Your next question comes from the line of James Fish from Piper Sandler. Your line is open.

Thank you, guys. Congrats on the great quarter. Couple of questions here. You're talking about the strength in application security. I guess, how do you feel about the portfolio as a whole, whether there are areas that you'd want to get at organically or inorganically? And any sense to how many customers are now using Shape Security?

Hi, Jim. So generally, we feel very good about our application security portfolio. We think we are one of the very few players who can protect an application, but also protect how an application is used with a combination of F5 security capabilities and now Shape's portfolio. So we feel very good about our competitiveness and differentiation in this space. And, in fact, our security business had been growing healthily, but that has accelerated as well with COVID because the amount of online fraud and attacks on digital channels, not just for retailers but all kinds of companies, has continued to increase and has increased dramatically in the last few months, providing significant tailwinds for us. So that's what we're at on app security in general. And Jim, we will probably say more about that at the Analyst and Investor Meeting.

Got it. Fair enough. And end of last quarter, you guys noted some weakness in sort of the APAC sales due to COVID-19 and not being able to get in front of customers. How did this change as you work through the quarter?

In the Asia-Pacific region, we are still facing challenges in some areas due to COVID-19, including instances of a second wave and lockdowns. There are specific locations that continue to pose difficulties for us. During our fourth quarter, we had to pause some software projects, but we are beginning to see that situation improve. We are optimistic about our pipeline for the first half of 2021. As mentioned in our prepared remarks, we anticipate that our software business will see over 50% year-on-year growth in the first quarter of 2021 and expect more than 35% growth for the entire year. We believe we have reached a turning point, with our software business now supported by a more extensive base of subscriptions, which has opened up various opportunities for renewals. Our subscription base has significantly broadened compared to last year, and currently, our software business accounts for more than 40% of our product revenue. Overall, we are confident that this inflection point will lead to strong growth for our software segment as we move into 2021.

Makes sense. Thanks for the color, François.

Thank you, Jim.

Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.

Yes. Hi, guys, thanks for the question. I wanted to start off. You talked about enterprise order momentum being good. And I wondered if maybe you could dig a little bit more into that in terms of the size of enterprise, are you seeing that more in large enterprises or medium-sized? Can you give us some color there? And just kind of how that order momentum looks from a verticals point of view, too? And then on the growth, my second question is, I can calculate based on the parameters you gave, growth it's a little slower than 20%, but I can also get up above 5% growth depending on some minor tweaks to that. And I'm just curious where do you think it's more likely growth does accelerate in 2021? And then what's your macro assumption there? Are you assuming macro improves? Or are you assuming the current environment persists? I'm just curious, kind of what do you guys think that demand environment will do on into 2021 in the context of that growth indication?

Hey, Rod, there were a number of questions there. So I'll make sure I'll try and answer.

Yes. Sorry, François. Thank you.

I'll begin with the macro outlook. Our assumptions indicate that the environment will not improve beyond its current state, but we also believe it won't deteriorate significantly. We've experienced this environment throughout the pandemic for three consecutive quarters, which has allowed us to assess our customers' behaviors and priorities, all of which we've incorporated into our 2021 planning. Essentially, we're maintaining the status quo. Regarding enterprise spending, we've observed two key points. Our enterprise numbers have shown strength, primarily in sectors such as financial services, technology, and government, where there's a consistent demand for more applications, application security, and multi-cloud deployments. On the other hand, we've noted weakness in sectors like retail and transportation, which are more directly impacted by COVID, but these sectors make up less than 10% of our business. Thus, while they are struggling, their effect on our overall performance has been minimal. Moreover, we have limited exposure to small and medium-sized businesses. Another factor contributing to our strong enterprise demand is the lingering perception that F5 is mainly a networking data center company. Consequently, results are often compared to campus switching or routing equipment. However, our expenditures are more closely aligned with customers' needs for application security and the deployment of applications in multi-cloud environments. Our business is more connected to the growth, complexity, and security of applications than to traditional network dynamics. Have I addressed your question, Rod?

The only other point was the growth quantification. If I add up what you mentioned, I can estimate a minimum growth rate of around 4%, but it might be slightly higher depending on service growth. I'm curious if you anticipate an acceleration in growth if the current environment persists, compared to 2020, or if you think growth will remain stable or possibly decline. What direction do you believe growth will take in 2021 if everything else stays constant?

Look, Rod, we're not providing full year top line guidance at this time. We will share our Horizon 2 guidance in three weeks at AIM, which should give you more insight. Generally, based on our observations in Q4 and our Q1 guidance, we feel optimistic about what we could achieve in 2021.

Okay, great. Thanks, François. Appreciate it.

Thank you, Rod.

Your next question comes from the line of Sami Badri from Credit Suisse. Your line is open.

Hi, thank you very much. The first question I have is related to the software strength in the quarter and I know, François, you made a couple of very granular examples in the drivers of cloud that we saw in the quarter that really drove solid results and are going to continue to be solid results. But when we think about the composition of product revenue and software revenues, is there any high concentrations on specific customers or was there any lumpy activity in the quarter? And then to take that a step further, does the fiscal 1Q 2021 also factor in lumpiness or concentration that are driving these solid results?

You know, Sami, the answer is no. And actually that is precisely why I see that we have reached an inflection point in our software business. If you look at our software results a year ago, we had pretty strong growth. If you remember, in Q4, we had 91% growth, but that was in part driven by a couple of large transformational deals. The results we have this quarter are really not. So it's a broad base of adoption for our software and our software subscription. You probably saw that in our results. Now, more than three-quarters of our software revenues or 76% of our software revenues this quarter came from subscriptions. And so we've got a broad base on adoption of our software subscription consumption models across all of our verticals, not a specific customer, not a specific vertical, and that's part of why we have confidence in growth in our software business, because now a larger number of customers have reached that point where they're thinking our software, and it's giving us a broader base of renewal opportunities going into 2021. We're starting to see the flywheel that you would see in a subscription business, where for a number of our multi-year subscriptions, we have a true forward opportunity at the end of a one-year subscription across a number of customers, and that's going to start contributing to the growth in our software, so that's what I would say about lumpiness. I would say, though, that we are also seeing a good pipeline of, I would say these larger projects going into the first half of 2021, some of the projects that have been delayed, we think we'll see some of them in the first half of the year.

Got it. Thank you for that. And then one question for Frank. I was hoping you could just help us think about the services growth rate of fiscal 1Q 2021? Is there a way we should be thinking about it, something similar to the last two quarters kind of guidance framework, any kind of real clarification on that would be great.

Yes. I'm not going to give a specific growth rate number, we'll have more to say as François said at AIM. I think the trend towards lower single-digit growth rate is likely in FY 2021. And so this is just consistent with the hardware, software attach rates, but we have been seeing consistent pricing, we've been seeing an increase in attach rates for all cohorts of the age contracts and so we're really happy with the overall services business.

Great, thank you. Solid results. Thank you for fitting in my questions.

Yes. Thank you, Sami.

Your next question comes from the line of Alex Henderson from Needham. Your line is open.

Thank you very much. We've heard from various companies in the industry discussing the emergency-oriented approach to IT spending, especially regarding security and remote work, including endpoint security. However, they also indicated that some of the more strategically important transitional programs have been delayed. This is due to the temporary focus on ensuring security for remote work. Are you beginning to see any real clarity around those larger projects returning, especially concerning digital transformations, cloud application deployment, and Kubernetes adoption? Or is that still something that seems further away?

Alex, I agree with you that there have been delays in some significant digital transformation projects. However, we are noticing that after addressing immediate priorities, organizations are returning to these projects and reigniting them. Therefore, I believe that in the first half of 2021, we should begin to see some of these projects come to fruition. This insight applies broadly to the trend of digital transformation towards cloud-based, software-first environments and major automation initiatives. Specifically regarding Kubernetes environments, there is growing enthusiasm for scaling these environments into production. We are still in the early stages of this development. With Nginx, which you know is the leading egress controller for Kubernetes deployments, we have a strong view on this trend. We are witnessing demand and an acceleration in this area, but we still consider ourselves in the initial phases of containerized deployments.

And then just one last question for me, just going back to the 35% plus growth in software, can you parse that between what portion of that is organic and what portion of that is inorganic?

We have provided information about Shape's contributions in our Q3 and Q4 results, which can help you understand the organic and inorganic components. It’s important to note that Shape was not part of F5 in Q1 of 2020 but joined in Q2 of last year. The overall growth rate is 35%, which we consider a minimum expectation, with the potential for better performance. The drivers I mentioned related to Nginx, the acceleration in the Kubernetes environment, and the growth in the cloud are significant factors. Our cloud business has now surpassed $100 million, and our partnership with AWS continues to thrive. We recently announced a product integration with AWS CloudFront, which we believe will act as a catalyst, alongside our broad base of subscriptions that will support organic growth next year. In summary, we believe our software business is accelerating and we are pleased with this progress.

Thank you very much. Great quarter.

Your next question comes from the line of Tim Long from Barclays. Your line is open.

Thank you. Yes, two quick ones, if I could. First, just curious if you could talk a little bit about revenue synergies from both Nginx and Shape. It sounds like Shape had a pretty good quarter. And there is a lot of traction for Nginx. But if you can kind of let us know where we are on that synergy basis and how much more room there is for cross-selling there? And then second question is, just want to get into a little bit of the kind of the BIG-IP moderating on the hardware side, but good traction on the software side, could you talk a little bit about, I guess there has been, there had been cannibalization. So do you think we'll start hitting a point where it's a lot more driven by newer workloads on the BIG-IP software side, so that the sum of those two could be more positive than maybe it was when there is just some hardware to software replacement? Thank you.

Thank you, Tim. To start with Shape and Nginx, we'll have more information at AIM in a few weeks, but here are some highlights regarding the synergies. The deal sizes for both Nginx and Shape are seeing a significant increase due to F5's go-to-market capabilities. Our engineers have been integrated with F5 for 18 months in Nginx and nine months in Shape. This integration has also led to a faster acquisition of new clients for both companies. The collaboration between Nginx and F5 is producing solid results. With Shape, we only have nine months of experience, but we are noticing similar positive trends. As for product synergies, Nginx came to F5 at a point when monetization was just beginning, and now we've launched two new solutions: the Nginx controller and Nginx App Protect security. These are in the early stages but are gaining traction and will significantly boost deal sizes. Additionally, we've quickly built integrations between Shape and both BIG-IP and our Silverline offering. For instance, we now provide Shape's bot defense technology as a managed security service combined with the existing WAF and DDoS features in our Silverline managed security service, which has already improved our Silverline business last quarter. We're very optimistic about these developments and will revisit this soon. Regarding your question on BIG-IP, we anticipate a continued decline in the hardware load balancing business. However, our hardware sales are increasingly supported by standalone security hardware or bundles that include security and ADC. While our standalone security hardware business is stable, it's taking up a larger share of our total hardware sales. Consequently, we expect the hardware decline, which was around 11-12%, to shift to the high single digits next year. On the issue of cannibalization, we foresee more ADC customers transitioning to a software-first approach, both on-premises and in the cloud, which is why we continue to expect declines in overall hardware.

Okay, thank you.

Thanks, Tim.

Your next question comes from the line of Samik Chatterjee from J.P. Morgan. Your line is open.

Hi, thanks for squeezing me in here. François, if I can just start with getting some color from you on the traction you're seeing for Shape. You talked about the opportunities that you're seeing. Can you just talk about whether you're seeing kind of this adoption happening just because there is more need for security solutions, or are you replacing any existing solutions, and how do we get comfort around not seeing like a wave of vendor consolidation and security, once we get post kind of COVID planning from the customers, and I have a follow-up. Thank you.

Hi, Samik. Could you explain that last bit around concern of seeing a wave of consolidation?

What I was trying to get to is, we've had a lot of momentum here for the security vendors overall. So once we get post-COVID planning from the enterprises, do we see kind of more consolidation and the number of security vendors like most enterprises work with?

Yes, I think what we're seeing and what you'll continue to see Samik, is that most large. So remember that F5 really is most exposed to kind of large enterprises and both large enterprises and service providers increasingly want to use a best-of-suite approach. So our approach to them is to offer a combination of application security technologies that allow their applications to stay online, so stay secure and allow us to protect the data and logic of these applications. That overall suite for application security is not a component. It's not a single slice of application security. It's essentially the broadest application security portfolio that you can have.

Ladies and gentlemen, this is the operator. I apologize for the slight delay in today's conference. Please hold until we reconnect the speakers' line. The conference will resume momentarily. Again, ladies and gentlemen, this is the operator. I do apologize for the slight delay in today's conference. Thank you for your patience. The call will resume momentarily. Ladies and gentlemen, our speakers have rejoined us, and we still have Samik Chatterjee in queue for question.

Hi, François.

Samik, sorry about that. Our line was dropped. And did you hear the first part of the answer?

Yes. So, overall services. Yes, yes. So if I can just follow-up maybe for Frank quickly, because I know you're also up on the hour here. Just looking at the operating margins here, Frank, when the Shape acquisition was announced, prior to that, you were looking at about 33% to 35% operating margin. Now, you're guiding to about 31%, I think from next year. When I think about the delta there, is it primarily Shape or do you think there is kind of the environments that have had an impact on this? And thank you for taking my questions.

Sure, absolutely. So yes, Shape accounted for the large majority of that. And I think Shape talks about 30% to 32%. We ended up on the low end of that range to make, and as always to get back above 31% for the fiscal 2021.

Thank you.

Thank you, Samik.

And your final question comes from the line of Jeff Kvaal from Wolfe Research. Your line is open.

Thank you. I guess I have a question for you, François, one for you, Frank. François, I'm wondering if you could sketch out a little bit for us. Now that your security portfolio is well integrated, where do you find yourself having the most success in security and where do you find some of your rivals to involve, do you run into Zscaler etcetera, etcetera? And then, Frank for you, I'm wondering if you could help us a little bit understand sort of the thinking behind the buyback. And what we might expect in the coming year from that?

Yes, Jeff, let me outline where we are achieving success in security. Firstly, our primary focus is on application security rather than endpoint or network security. We aim to protect applications, as many sophisticated attacks target these vulnerabilities, leading to breaches and incidents. We have developed a comprehensive portfolio that offers a suite of solutions for application security, rather than just a single solution. Few companies provide a combination of Web Application Firewall, DDoS protection, remote access, as well as bot and fraud protection, covering both access and usage of applications. Our success with this portfolio is particularly notable among large enterprises, including financial services where securing applications and digital interactions with customers is critical. Additionally, some of the largest social media platforms globally rely on F5 and Shape for protection, and we are experiencing similar success in government and service provider sectors. These are the areas where we find success and where our solutions are gaining momentum.

And then, Jeff, on the buyback, it's the same as it's been. It's certainly one of the uses of our strategic cash that we see. The other two uses are potentially M&A as well as paying down our Term Loan A that we took out to acquire Shape. So those are the three things that we're focused on. You saw in the last quarter that we did another $50 million of share repurchase and will continue to be opportunistic on that going forward.

Okay, that sounds great. And I will look forward to more detail on the security progress in a few weeks. Thank you.

Thank you so much, Jeff.

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