Frank Pelzer: Sure. Absolutely, Jim. So I appreciate the question. And when we take a look at the results of this quarter in relation to our expectations, where we saw a softer performance was in the system side, not the software side of the business. And that — when we take a look at the back half of the year, that’s really where we saw the strength of the pipeline in that area as well as for the renewals that we have in the outlook. And those renewals specifically are coming in the — in both quarters, they are stronger than what we have seen in Q2, but they just ramp up because of the nature of when the deals were done three years ago in Q4. And if you take a look back three years ago between Q3 and Q4, I think you’ll see a similar dynamic in the software growth that we expect.
And so that is really that $40 million swing that you’re referring to between those two quarters. So that’s really the visibility. It’s the strength that we’ve seen in the renewals. It’s the true forwards sense and the second or the interims of what’s available to renew in Q4.
James Fish: Anything on the duration side of what you’re seeing?
Frank Pelzer: The duration side really has not changed. These are not universally, but almost always three year deals.
James Fish: Thanks, Frank.
Frank Pelzer: Yeah.
Operator: Our next question comes from Ray McDonough with Guggenheim Partners. Please proceed with your question.
Raymond McDonough: Thanks. Maybe to start, Frank, as we think about cash flow dynamics going forward with term renewals and the opportunity in the back half, as you just discussed, and as renewals generally become a larger portion of the mix, combined with the product availability you mentioned earlier in the call, should we expect cash flow margins to continue to trend up from here as well?
Frank Pelzer: Ray, it’s a great question. So biggest dynamic of the cash flow changes between the quarters right now continue to be maintenance that just outweighs some of the subscription revenues that we’ve seen. And so the dynamics that you’re replying absolutely are happening just on the smaller base of the overall cash flow that is coming out of that deferred revenue bucket, which is still largely maintenance related. And so I think, obviously, we had a very large accounts receivable balance going into Q2. You saw us collect and we’re to a normalized level. So I think from where we had our cash flow from opt in Q2, likely, we’re going to come down in Q3 and then on my expectation would be back up in Q4. But that’s the dynamics of the SaaS business is, as you’re describing, it’s not just a major portion, though, of what’s driving the change in deferred right now and some of our cash flow from ops.
Raymond McDonough: Great. Maybe just a question for Francois. We’ve talked a lot about bringing hybrid multi-cloud environments kind of together and simplifying the management of that. And I’m just wondering, when we take a step back, you announced the distributed cloud console at AppWorld, I believe. What’s been the reaction within your conversations with customers? Are you seeing interest that’s resulting in cross-selling it or even better renewal or expansion rates, even if it’s not direct, just as a result of maybe the offering being out there and customers being more comfortable with the road map? Any thoughts there would be helpful.
Francois Locoh-Donou: Yeah. So the reaction at AppWorld on distributed cloud has been very positive. And most — so let me just give you some numbers there, Ray. So all of the — we shared in October that we had over 500 customers on distributed cloud. The number has grown since then, and we will share that number. And we said we would share it annually, so we’ll share it again in October. But over two-thirds of the customers on distributed cloud or existing F5 customers that were typically BIG-IP customers that choose distributed cloud as a complement to a hardware or software on-prem implementation. And in part because of our ability to bring in the future, bring both the hardware, software, on-prem and the SaaS services to a single pane of glass.
And then the other third, the other one-third of customers are net new customers to F5. And what we’re seeing is a number of customers have gone into hybrid and multi-cloud environments, either by accident or by acquisition and have not really had the opportunity to do this right, and we’re working with customers to say, there are now solutions like distributed cloud that help you do multi-cloud right. And multi-cloud right means having a consistent set of security policies across the board being to be able to automate the provisioning of application services across the board, being able to automate the network of these applications together. And customers are pretty excited about the ability to do that because it takes away very significant headache from them, headache around their operations, headache around the manual toil that a lot of their resources are spending, headache around the risk that they have of not running consistent application security policies across clouds.
So very positive reception overall and growing awareness amongst our customer base of the capabilities of distributed cloud have us pretty excited for the future.
Raymond McDonough: Great. Thanks for taking the questions.
Francois Locoh-Donou: Thank you.
Operator: Due to timing, our last question will be from Sebastien Naji with William Blair. Please proceed with your question.
Sebastien Naji: Great. Thanks for taking the questions. Good afternoon. Two for me. The first one, just following up on the competition question from the beginning. In those instances where you are displacing one of those ADC competitors going through a disruption, how do you typically land? Is it more heavily weighted towards like appliances or software or SaaS? And then my second question is just around cyber and AI, as we think about the ability for malicious actors to leverage AI and their own attacks, how do you think about being able to address some of these new types of AI attacks or in other words, do you need new techniques and solutions or can you use the existing systems at a broader scale and which of the solutions within F5 are particularly well positioned for those types of attacks? Thank you.
Francois Locoh-Donou: Well, they do. The — let me start with the question on AI and the type of attack. So we are already using AI today to block significant attacks, including automated attacks on a number of applications. This quarter alone, we blocked several billion API attacks in our distributed cloud capability. And a lot of that uses AI and automation, machine learning, specifically in AI to block these attacks. We think that attackers will continue to be — to get more sophisticated. They are already using generative AI for all kinds of attack vectors and we’re investing to, of course, stay ahead of criminals. In our bot solution, we probably have the most sophisticated fraud solution in the market, leveraging AI to block against all kinds of automated attacks.
And we’re now also investing in generative AI to actually make it easier for our customers to interact with our solutions and respond faster to changes in attack vectors. This is rapidly developing field, but we’ll continue to invest in our security solutions on that. The second part, on the competition. And you asked when we’re displacing competitors in ADC. Is it more hardware or software oriented. It actually is both. We — I wouldn’t have a percentage for you, but it is — we’re displacing customers that have taken a hardware implementation of a competitor and replacing the entire estate with our hardware. As you know, we invested over four years ago in a new generation of our hardware that brings a lot of the benefits of the cloud to on-prem implementation.
Others have not necessarily made these investments. And so we bring benefits to our customers in terms of multi-tenancy, automation, etc., that others don’t have. So that is a very clear difference in hardware. And then in software, similarly, we have invested to have a software footprint that is easy to consume in public clouds, and that’s creating a good difference relative to competitors. And some of these deals are both hardware and software in this – in some of these agreements for customers that are in hybrid multi-cloud environment.
Sebastien Naji: Great. Thank you.
Operator: Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
