Good afternoon. And welcome to the F5, Inc. Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Also, today’s conference is being recorded. If anyone has any objections, please disconnect at this time. I will now turn the call over to Ms. Suzanne DuLong. Thank you, ma’am. You may begin.

Hello and welcome. I am 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 A copy of today’s press release is available on our website at f5.com, where an archived version of today’s audio will be available through July 24, 2023. The slide deck accompanying today’s discussion is viewable on the webcast and will be posted to our IR site at the conclusion of the call. To access the replay of today’s webcast by phone, dial 877-660-6853 and or 201-612-7415 and use meeting ID 13737373. The telephonic replay will be available through midnight Pacific Time, April 20, 2023. 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. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today’s discussion. Please see our full GAAP to non-GAAP reconciliation in today’s press release and in the appendix of our earnings slide deck. 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 hello, everyone. Thank you for joining us today. Our team delivered second quarter revenue at the midpoint of our guidance range and earnings per share above the high end of our range. These results come despite persistent macro uncertainty, which has led to broader and more severe customer budget scrutiny, impacting both our software and hardware demand. We have strong conviction that customers' constrained spending is a temporary headwind and that we are well positioned as a trusted and innovative partner for customers as they look to secure, scale, modernize, and simplify their hybrid and multi-cloud application environments. In my remarks today, I will speak to the quarter’s results, the near-term spending dynamics we are seeing, and why we remain confident in our positioning and growth opportunities longer term. First, on our Q2 performance. We delivered 11% revenue growth in Q2 as a result of stronger-than-expected system shipments and strong maintenance renewals. Our systems revenue grew 43%. As positive as this is for the quarter, it is more a reflection of our team completing comprehensive board redesign efforts ahead of plan than it is a demand marker. You will recall that last year, rather than just wait for supply chain to improve, we initiated multiple board redesigns with a goal of designing out the hardest to get components and opening up new supply. The successful completion of this work is making it possible for us to fulfill waiting customer orders sooner than we anticipated, and as expected, we have seen no order cancellations in the process. Our Global Services revenue grew 8%, driven by continued strong renewal rates, which improved across nearly all cohorts. Wrapping up our Q2 results, we also delivered operating expenses within guidance and non-GAAP earnings per share of $2.53, above the top end of our guidance range. So the quarter’s results were strong, but they obscure underlying customer spending patterns. Since our December quarter, we have seen customers scrutinizing budgets and deferring spending for anything except the most urgent projects. These dynamics were even more pronounced in Q2 when we saw previously approved projects going through multiple additional levels of approvals. In some cases, approvals are reaching the C-suite or Board level only to be delayed or downsized. The impact of this extreme spending caution is most evident in our Q2 software revenue, which declined 13% year-over-year. This was well below our expectations for the year and our long-term growth expectations. We believe there are several reasons why we are seeing this kind of impact in our software revenue. These include the relative size of the software projects we tend to be involved in and the percentage of our software revenue derived from term subscriptions. First, the majority of our software growth to-date has come from transformational type projects of size, often six-figure or seven-figure deals. We are seeing larger projects come under more scrutiny, resulting in delays, sometimes by multiple quarters or downsizing into smaller, more incremental additions. Second, the majority of our software revenue comes from term-based subscriptions, which have upfront revenue recognition. As a result, when we see a decline in new term-based subscriptions as we have in the last few quarters, it is immediately evident in our software revenue and much more so than it would be if our software was predominantly ratable or SaaS-driven. Now there is some good news to point to in software. We have a base of software renewals, which is growing. Our renewals consist primarily of second-term multiyear term subscriptions, and similar to Q1, in Q2 our software renewals performed largely as expected. In addition, our SaaS and managed services revenue is growing, and we expect it will become a more significant and predictable contributor to our software revenue over time. The spending patterns I have described were not limited to our software demand. We also experienced softer systems demand in the quarter as customers push the capacity of their existing systems, sweat their assets, and work to deploy delivered systems into production. We expect these headwinds on both software and systems will persist at least through the end of this fiscal year. As a result, we now expect low-to-mid single-digit revenue growth for FY 2023. This is down from the 9% to 11% growth we previously forecasted. I will now speak to my third point, why we are confident that the current demand environment is temporary and why we are uniquely positioned to help customers simplify their hybrid multi-cloud challenges. We are confident that current demand levels are temporary for several reasons. First, because of the direct commentary we are getting from customers. Customers are telling us that the delays we are seeing are a matter of budgets and approvals, not competitive pressures or architectural shifts. During Q2, I met personally with roughly 100 customers and partners. It was clear from my discussions with customers that they expect F5 will be a key part of their future hybrid and multi-cloud architectures as the only company capable of securing and delivering applications and APIs in all environments. Partners too are leaning into the new F5 and our rapidly expanding set of distributed cloud services are accelerating that movement. Second, because of our win rates. While the direct customer commentary is reassuring, we also consistently analyze our win rates. When we look at the first half of FY 2023 compared to the first half of FY 2022, we see broadly steady win rates across our theaters and product lines, confirming we continue to win our fair share of the deals we are involved in. Third, our factored pipeline, which accounts for the probability of a deal closing, is up from where it’s been in the last couple of quarters, suggesting customer activity is increasing and deals are reaching a higher level of maturity. This too is encouraging, but given what we have seen in the first half, we believe it is prudent to remain conservative on expected conversion of respective pipeline. Fourth, our strong maintenance renewal signal that customers are delaying purchasing decisions by sweating assets. We see this in the substantial attach rate increase on all the deployments where you would expect the behavior of sweating assets would be most pronounced. We also are seeing a substantial increase in deferred maintenance revenue compared to prior year trends. This behavior is consistent with what we have seen during past periods of macro uncertainty, with apps and APIs continuing to grow. However, customers can only postpone investment so long if they want those apps and APIs to remain performant and secure. In the meantime, we are focused on controlling the things we can control, including operating with discipline and ensuring we are prepared for when customer spending resumes. This includes reducing our cost base. We are reducing our global headcount by approximately 620 employees or approximately 9% of our total workforce. We expect these actions, combined with other cost reductions, including rationalizing our technology consumption, applying additional scrutiny to discretionary projects, and reducing our facilities footprint will drive ongoing operating leverage. In addition, we are substantially reducing the size of our corporate bonus pool in 2023 and further reducing travel. As a result, we expect to deliver FY 2023 non-GAAP operating margins of approximately 30% and non-GAAP earnings growth of 7% to 11%. Further, the leverage from these cost reductions, combined with our anticipated gross margin improvement, positions us to deliver meaningful non-GAAP operating margin expansion and double-digit non-GAAP earnings growth in FY 2024. While customers are spending only where critical near-term, they continue to face significant challenges ahead, including creating engaging digital experiences, managing resource constraints, and addressing technical debt. Their business velocity and long-term growth will rely on finding ways to connect and protect applications and APIs across distributed environments. With our unique ability to secure and deliver applications and APIs across all environments, we are differentiated in our ability to help customers with these challenges. We believe this position will drive sustainable long-term growth. As we have evaluated and adjusted our business in addition to reducing cost, we have also intensified our investments in areas we believe will drive the highest mid- and long-term impact for our customers, including software and hybrid and multi-cloud. Now I will turn the call to Frank. Frank?

Thank you, François, and hello, everyone. I will review our Q2 results before I speak to our third quarter outlook and provide additional color on our FY 2023 expectations. We delivered Q2 revenue of $703 million, reflecting 11% growth year-over-year. Global Services revenue of $363 million grew a strong 8% due to the high maintenance renewals and the impacts of the price increase introduced in Q4 of last year. Our revenue remained roughly split between Global Services and product with Global Services representing 52% of total revenue. Product revenue grew 14% year-over-year, reflecting strong system shipments against an easier comparison in the year-ago quarter. As François described, our successful redesign efforts enabled systems revenue of $209 million, representing growth of 43% year-over-year. At $132 million, Q2 software revenue was down 13% compared to last year. Let’s take a closer look at our software revenue, which is comprised of subscription and perpetual license sales. Subscription-based revenue, which includes term subscriptions, our SaaS offerings, and utility-based revenue totaled $109 million or 83% of Q2’s total software revenue. Within our Q2 subscription business, as François described, near-term subscriptions performed significantly below plan in the quarter. In contrast, and similar to last quarter, software renewals continued to perform largely in line with our expectations. Perpetual license sales of $23 million represented 17% of Q2’s software revenue. Revenue from recurring sources contributed 65% of Q2’s revenue. This includes subscription-based revenue, as well as the maintenance portion of our services revenue. On a regional basis, we saw growth across all theaters, though I’d note that these trends are more reflective of shipments in the quarter than current demand. Revenue from Americas grew 7% year-over-year, representing 54% of total revenue; EMEA grew a strong 22%, representing 27% of revenue; and APAC grew 9%, representing 18% of revenue. Looking at our major verticals, during Q2, enterprise customers represented 67% of product bookings, service providers represented 13%, and government customers represented 20%, including 6% from U.S. Federal. I will now share our Q2 operating results. GAAP gross margin was 77.9%. Non-GAAP gross margin was 80.4% in line with our guidance for the quarter. GAAP operating expenses were $441 million. Non-GAAP operating expenses were $374 million, in line with our guided range. Our GAAP operating margin was 15.1%. Our non-GAAP operating margin was 27.2%. Our GAAP effective tax rate for the quarter was 25.1%. Our non-GAAP effective tax rate was 20.8%. Our GAAP net income for the quarter was $81 million or $1.34 per share. Non-GAAP net income was $154 million or $2.53 per share, above the top end of our guided range of $2.36 per share to $2.48 per share. This reflects improved operating margins from strong cost discipline, as well as a benefit to our tax rate in the quarter. I will now turn to cash flow and the balance sheet, which remains very strong. We generated $141 million in cash flow from operations in Q2. Capital expenditures for the quarter were $11 million. Days sales outstanding for the quarter was 62 days, flat with Q1 and up from historical levels, primarily due to strong service maintenance contract renewals in the quarter and, to a lesser degree, back-end shipping linearity. Cash and investments totaled $760 million at quarter end. We did not repurchase any shares in Q2. We remained out of the market as we analyze the potential impacts of the cost-saving measures we discussed previously, as well as the changes we were seeing in the demand environment and its effects on our outlook. Deferred revenue increased 12% year-over-year to $1.8 billion, up from $1.76 billion in Q1. This increase was largely driven by substantially higher maintenance renewals on our installed base of products sold four-plus years ago. Finally, we ended the quarter with approximately 7,100 employees. This number does not reflect the reductions we announced today. We expect these headcount reductions will result in annualized savings of approximately $130 million. We expect to incur approximately $45 million in severance and benefits costs and other charges related to these actions in FY 2023. I will now share our outlook for Q3. Unless otherwise stated, my guidance comments reference non-GAAP operating metrics. We expect Q3 revenue in the range of $690 million to $710 million, with gross margins of approximately 82%. With the partial quarter impact of our announced cost reductions, we estimate Q3 operating expenses of $348 million to $360 million, and our Q3 non-GAAP earnings target is $2.78 per share to $2.90 per share. We expect Q3 share-based compensation expense of approximately $60 million to $62 million. Finally, we plan to repurchase at least $250 million worth of shares during Q3. We remain committed to returning cash to our shareholders and continue to expect to use at least 50% of our annual free cash flow towards share repurchases. I will now speak to our FY 2023 expectations. We expect low-to-mid single-digit revenue growth in FY 2023. Given our first half results and the environment for new software projects, we no longer see a path to 15% to 20% software growth in FY 2023 and are not offering guidance for the second half product revenue mix at this time. Based on current visibility and our earlier than anticipated systems recovery, we expect to see lower systems revenue in Q3 and Q4 than in Q2. We expect that we will continue to substantially work down our systems backlog over the second half of FY 2023. We expect FY 2023 non-GAAP operating margins of approximately 30% and non-GAAP earnings growth in the range of 7% to 11%. Incorporating our year-to-date results, we have narrowed our estimate for our FY 2023 effective tax rate to 21% to 22% for the year. I will now turn the call back over to François. François?

Thank you, Frank. Like last quarter, I’d ask that you take away three things from this call. We believe the current demand environment is temporary, and while we cannot predict when it will recover, we are confident it will for the very simple reason that applications and APIs continue to grow. We are also confident that as customers resume more normal levels of investment and begin to take on the challenges associated with hybrid multi-cloud environments, we will be a differentiated partner for them. And finally, while we have implemented cost reductions and continue to strive to achieve double-digit earnings growth, we also have intensified our investment in areas we believe will be most impactful for our customers over the medium- and long-term, including software and hybrid and multi-cloud. Operator, please open the call to questions.

Thank you, sir. And our first question comes from the line of Sami Badri with Credit Suisse. Please proceed with your question.

Thank you. I have two questions. First, Frank, could you help us understand the modeling parameters for the year? The reason I'm asking is that we weren't really forecasting significant growth from services revenue, but that seems to be changing as we approach fiscal Q2 and the second half of the year. What should we be assuming for services growth now, considering the shift and customers are investing in assets? Also, regarding products, I remember you mentioned that you wouldn’t provide guidance for software growth in the second half of fiscal year 2023. I need a bit more detail on that, especially in light of the commentary about the systems. I have a follow-up after this.

Yeah. Sure, Sami. So we did not update the mid-single-digit outlook that we did update in Q1 on services. Obviously, we outperformed that in Q2, and for all the dynamics that you highlighted, we continue to think services contribution is going to be strong through the course of the year as customers continue to sweat assets and particularly when we look at some of the aged assets and their decisions around that. And so, we don’t have an update, but I think that mid-single-digit is well intact, and we will see what happens. Specifically, we did not give any guidance on mix and product, and the results of looking at that services growth to what the product growth will be in that mix, I will leave that to you to model. But we are not giving any specific guidance to what we think software growth is going to be for the balance of the year and our systems growth for the balance of the year.

Okay. Got it. And maybe a question for François. I think one thing we really kind of want to know is, if you were to think about which customer industry group really caused the majority of the drag or the impact to the revision of the guide for fiscal year 2023, which customer cohort or customer vertical really kind of caused that if you could put your finger on one?

Thanks, Sami. In our second fiscal quarter, we noticed that the decline in spending has been widespread and more pronounced across all sectors and regions. I would say that every protocol and area is currently affected. If I had to highlight a couple, financial services stand out, especially in the latter half of March, as we experienced numerous deals being pulled, postponed, or scaled back, often by several quarters. Financial services were already experiencing challenges before the SVB collapse, but we noticed even greater caution in this sector afterwards, and we foresee this trend continuing. The other sector I want to mention is service providers. We had several customers who had certain budget expectations during our fiscal Q1 or calendar Q4, but when those budgets were finalized around February, they were significantly lower than anticipated. This is partly due to concerns within the MSO sector and cable industry regarding service providers possibly losing or reducing growth among their most profitable customers. We're also observing similar trends with certain mobile operators regarding their planned expenditures on 5G. I would say these are the two sectors where we have seen the most significant change from Q1 to the present.

And the next question comes from the line of Ray McDonough with Guggenheim Securities. Please proceed with your question.

Great. Thanks. Two if I could. The first one, François, can you comment or maybe even for, Frank, can you comment on how or if new business declines accelerated from last quarter, I believe. And with that, I also believe a part of the renewals that you expected to come in came from the true forwards. How have they performed versus expectations from the beginning of the year and is the move towards optimizing cloud spend from customers impacting those true forwards at all given pricing is somewhat based on what customers consume per year in those contracts?

Ray, I will start, and certainly, François wants to pick up he can. I think we saw a challenge in new business sales in both Q1, as well as Q2. Did it accelerate in Q2? Probably slightly versus our expectation, but not necessarily when you take a look at the raw number. So that’s how I’d answer that one for you. I think in terms of your second question around spend. On the true forwards that we saw, those were slightly below our expectation level. We do keep that in the renewal bucket. And so when we said that it largely performed to our expectation, that was the one piece that did not perform to our expectation where we think that people are being a bit more critical around their consumption and being much closer to what they had planned to consume and not going over, and that’s not what we experienced up until this year.

And the next question comes from the line of Tim Long with Barclays. Please proceed with your question.

Thank you. I have two as well on software. First, you guys said a few times the renewals came in as expected. It would be helpful if you could give us a little color about what you were expecting there, were you expecting them to be down or up? So any color you can give us on what your kind of expectations were for the renewals business? And then second, similar to a previous question, but if you could talk about kind of the weakness more on the product and solution lens. So how much of this is the core virtually do you see, how much of this is maybe not fully monetizing in NGINX, how much of this is not really able to bundle other software offerings on top of virtual ADCs. So anything you can give us kind of on that, what’s missing when you look back at the acquisitions and what it was supposed to do for the software business, what’s not happening? Thank you.

Thank you, Tim. I’ll address the second part of your question first, and then Frank will touch on the renewals aspect. Let’s start with the product segment. We've noticed an impact in the ADC area, affecting both hardware and software, specifically in traditional ADC systems and software. Our customers seem to be maximizing the use of their assets, which is reflected in our service renewals and attach rates. In cases where we can measure it, we've observed that some customers are utilizing our platforms more than usual. Conversations with customers indicate that they are looking to delay or avoid spending whenever possible. In the security sector, part of our business linked to ADC has also been impacted. The service provider vertical in security has seen a significant decrease as they quickly attempt to cut capital expenditures. Our software security business remains more resilient, and our SaaS and managed services in security continue to grow, albeit at a slower pace than last year. If you break this down, those are the key areas, and we have also seen continued growth in NGINX, despite a slowdown in growth rate. Stepping back to consider our overall portfolio and acquisitions, we have clear feedback from customers that the trend is increasingly moving toward hybrid and multi-cloud environments. Our portfolio is uniquely positioned to secure and deliver applications across all these environments—private and public clouds, and at the edge—through various consumption models like hardware, software, and SaaS. We are confident in our portfolio’s ability to support our customers' architectural needs moving forward. The short-term slowdown we’re seeing is primarily in ADCs, where customers might be able to extend the use of their existing assets for a while longer, but we anticipate that demand will pick up soon.

Tim, regarding the maintenance and renewal question, I want to distinguish between the strong performance of maintenance renewals on the services side and the equally strong software renewals. In terms of expectations, we've noted that STPs have been the main contributor to growth in our software business, and these renewals represent a significant portion of what we see each quarter. Overall, they have largely met our expectations, with many cases showing growth compared to year three levels. However, we've noticed some discrepancies this year, particularly in the second and third years of agreements, where actual usage hasn't aligned with our previous modeling. Customers appear to be more conservative, utilizing resources very close to their contracted amounts, which has resulted in fewer overages compared to prior periods. We believe this trend reflects what cloud providers are experiencing in terms of consumption. Looking at the renewal base, it has seen substantial growth compared to last year, aligning with our expectations as this year marks the first full year of STP sales when we analyze it against three years ago.

And the next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Yeah. Thank you and hi. Thanks for taking my questions. I guess for the first one, I think, just to clarify, I think François, you made a comment about fiscal 2024 talking about double-digit earnings growth. Just wanted to see sort of how you are thinking about topline sort of underpinning that expectation? I know you talked about gross margin improvement, as well as operating margin, but sort of maybe give us a bit more color about how you are thinking about the topline underpinning that guide? And I have a follow-up. Thanks.

Samik, I missed part of the question, but is it about topline in fiscal 2024?

Yes. I think you made a comment about double-digit earnings growth. So just curious sort of how you are thinking about the topline as you talked about margin expansion being the key driver there?

Certainly. When we consider fiscal 2024, we currently lack the visibility to provide guidance on the top line for that year. However, I can offer some insights. It’s evident that we will fulfill most of our backlog during fiscal 2024, likely by the end of the third or fourth quarter. This will impact the normalized backlog for 2024, resulting in a revenue growth headwind of approximately 6 to 8 percentage points due to this situation. Additionally, we are observing several delayed projects, and we believe that customer demand can only be deferred for so long. Eventually, we anticipate that pent-up demand will lead to an increase in activity, although the timing remains uncertain. While I can't specify revenue growth for 2024, we can manage our cost base, and we've made adjustments that should significantly enhance our operating margins in 2024 and support our target of achieving double-digit earnings growth.

Thank you. For my follow-up, regarding the cost structure and the actions you are taking, it seems you will have a significantly lower operating expense as a percentage of revenue compared to your historical levels. How much of this reduction is sustainable for multiple years, and how much is simply a reaction to the current macroeconomic conditions? Is there a more structural improvement in how you perceive margins while operating with a lower cost structure?

Our goal has always been to drive operating leverage in the business, and we believe that our current operating margin of 30% for the year reflects that. In the second half of the year, we expect to see significant improvements compared to the first half, which was around 26% to 27%. Our aim is to continue enhancing operating leverage into 2024 and beyond through increased efficiency and productivity, as well as continued revenue growth. Back in 2020, during our Analyst Day, we committed to investing in efficiencies and reducing costs, which we have been working on. Today, we are announcing updates to our cost structure while also intensifying our investments in automation to facilitate ongoing operating leverage. This is an ongoing process, and you can expect to see the benefits starting in the second half of this fiscal year, with continued momentum into 2024.

Thank you. And the next question comes from the line of Simon Leopold with Raymond James. Please proceed with your questions.

Thank you for addressing my question. It appears there might be some inconsistency in the way the situation is described as temporary while simultaneously making cuts to staff and expenses. This reduction in expenses seems to suggest a view on how long you expect these risks to last. I appreciate everything you've shared so far, but it would be beneficial to get more clarity on your perspective regarding the duration of these challenges and the reasoning behind your decisions. Specifically, where are these cuts coming from? I understand you may not be able to provide all the details, but some additional context would help clarify this apparent conflict.

Thank you for the question, Simon. Let me begin by stating that in the first half of our fiscal year, we spent significant time analyzing the demand signals from our customers. As you may remember, last year we faced revenue challenges in the latter half, primarily due to supply chain issues. We made a commitment not to reduce staffing levels during that time, as the issue was not related to demand but to supply. We also indicated that if we observed a decline in demand, we would reassess our cost structure and possibly adjust our staffing levels, which is precisely what we are doing now. This year, we are witnessing a decline in demand. While we recognize this is largely influenced by the broader economic context and is likely temporary, we are also maintaining a disciplined approach to our earnings performance. We aim to operate as efficiently as possible, which has led to our decision to reduce staffing levels. We believe that with these new staffing levels, we will be well-equipped to capitalize on growth opportunities when demand stabilizes. To provide a few insights on where we have made cuts, it's been broadly across the board, but I can categorize it into three main areas. In General and Administrative functions, we have sought to enhance productivity and streamline the organization to match the size of our company after the cuts. In sales, we have been realigning and consolidating certain territories while restructuring our go-to-market roles to create a more efficient approach focused on high-return territories in the near to medium term. Lastly, in product development, we have evaluated all our ongoing R&D projects to ensure we are concentrating on the ones that promise the best returns, resulting in cuts to more speculative projects with longer timelines. This strategy allows us to focus on our top priority projects and operate more efficiently in anticipation of normalized demand. I would also like to add that despite these adjustments, we are increasing our investments in our software and hybrid multi-cloud offerings. We are observing a growing interest from customers in these areas, particularly in how their applications are evolving and how we can address security challenges across various infrastructures, including multiple public and private clouds and edge environments. We believe we are uniquely positioned in this space, and thus, we are committed to continuing these investments.

Thank you for your question. Due to time constraints, we will take our last question from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Great. Thanks. A couple for me, maybe to start with, you mentioned that customers are kind of running their networks at higher utilization of the F5 equipment. Just wondered if you could give a sense of is that matching kind of previous levels that you have seen in prior kind of macro pullbacks or just kind of where we are on kind of how hot they are running their networks versus peaks that we have previously seen if there’s any way to contextualize that maybe as a first question?

I would say that our ability to assess customer behavior is limited to a small sample size. However, for those customers we can analyze, several are nearing or surpassing their usual capacity limits. This indicates that they are likely to expand their capacity soon. This trend aligns with our observations during past macro slowdowns, where customers have typically maximized their existing resources. Historically, this behavior has lasted from four to six quarters. While each macro slowdown has its unique characteristics, the patterns we have noticed remain consistent. Additionally, we are observing an increased attach rate for services on our platforms, particularly those that are four years old and older. This rise in maintenance attachment suggests that customers are making the most of their older assets, which is again typical in such economic conditions. Overall, this behavior indicates that customers are trying to optimize their assets rather than changing their architectural strategies or our competitive standing. We notice that customers are choosing to stick with us during this time.

I understand. That's useful. As a follow-up question, a lot of your software revenue related to cloud transformation projects is currently experiencing delays due to cloud optimization projects. Are the postponed projects mainly related to virtual ADC, while security projects are moving forward? I'm trying to determine whether this is a widespread issue or if specific security-related projects are receiving higher priority. Any insights on which software projects are being approved and which ones aren't would be appreciated.

Our security software business has shown more resilience. While all product lines are affected, the security software segment remains stronger. The managed services and Software-as-a-Service portions of our business, which are relatively small overall, are also impacted but continue to grow. The most significant impact we are experiencing is in large multimillion-dollar, multiyear projects that typically involve our ADC solution, sometimes accompanied by security features. These projects face extensive scrutiny. We have observed instances where approvals reached the CIO level, only for higher management or the Board to ultimately reject them. This contrasts with smaller deals, which typically face less scrutiny and do not experience the same level of pushback. In fact, this quarter, the number of multiyear subscription software deals we closed increased significantly compared to last year. However, due to the postponement of large multimillion-dollar projects, our software revenue was impacted. The distinction lies in how smaller deals are examined versus larger ones. Although feedback from customers indicates that these larger deals are merely delayed by one or more quarters, we anticipate a resurgence in demand in the future.

Thank you. Due to time constraints, we will take our last question from the line of James Fish with Piper Sandler. Please proceed with your question.

Hey, everyone. Most of my questions have been addressed, but I wanted to follow up. François, you mentioned that you expect some of the working capital issues to resolve by fiscal Q4. While I understand you don’t want to discuss backlog in detail, it seems that if things are going to improve by fiscal Q4, we should be looking to finish the year with a more typical backlog level. Is that a fair way to think about it at this stage?

Yes. Jim, that is the right way to think about it.

Okay. And just lastly, I know you called out SaaS being more resilient and that it’s still growing on a year-over-year basis. Just given now that, that’s become a more resilient part and it seems like it should be at this point a material part of the business. Any further color as to what percentage of the total recurring software business is now overall and if it grew actually sequentially?

Yeah. Jim, we have not split that out and we are not currently splitting that out now. In terms of growth year-over-year, yes, but we just have not split that out yet.

This concludes today’s call. Thank you for attending. You may now disconnect your lines.