F5, Inc. (NASDAQ:FFIV) Q3 2023 Earnings Call Transcript

Frank Pelzer: Yeah, Alex. It’s Frank. I’ll start and see if Francois wants to add anything. But the long and short, the 6% to 8% is more specific to the systems business, and that’s specifically related to the level of backlog that we had going into FY ’23. And so obviously, it’s been a boost to our recognized revenue in relation to where the demand has been for FY ’23. But going — looking ahead at FY ’24, that’s the 6% to 8% that we’ve referenced, which is largely associated with the hardware business. The demand side of the equation has been challenged in both. Obviously, it’s — have been better in Q3 than what we saw in the first half of the year. But it stabilized at a lower — much lower level than where we were in FY ’22.

And so we do expect there to be a change and we do expect specifically in systems to see a much larger change than where we have been in FY ’23 in terms of demand. But that intersection between that 6% to 8% total revenue headwind that we saw as recognition in ’23 that will not be there in ’24, that’s the piece where we’re hesitant to know exactly what point in ’24 we’ll see that change in the systems there. On the software side of the equation, we have seen great traction. Obviously, in the renewals as we mentioned, we have seen a challenging new environment so far. That will likely also change. But we are seeing that change likely come more in the form of SaaS revenue, which we’ll not necessarily recognize in the same rate in FY ’24 as what we’ve seen in our term-based agreements.

And so it’s too early to tell right now exactly how that will all play out. We’ll have more to talk about that in the next — on the next call, but that’s the early indication and the way to reconcile some of the comments that we made.

Francois Locoh-Donou: Thank you, Frank. I would just add so that it’s absolutely clear. When we talk about, Alex, the 6 to 8 point headwind, it’s not demand headwind. We — in fact, we expect demand next year in hardware to be higher than this year. But it is a shipment headwind that’s impacting recognized revenue. So wanted to be clear about that.

Alexander Henderson: So just to clarify, it sounds like you don’t expect your software revenue to recover enough to offset the headwind on hardware. And it sounds like your hardware expectations for demand is less than the headwind as well. Are we thinking that the outlook should be fairly flat or even down on the revenues? Because that’s the implication you’re giving us on these commentary relative to the product side of the equation.

Francois Locoh-: Well, look, Alex, we’re not ready to guide for 2024. We’re — what we’ve said about the 6 to 8 point headwind on total revenue is no different than we said last quarter. And it is simply math that we say, look, we want to make sure that one knows that the — this year, given that we’re shipping all of our backlog, we’re shipping the equivalent of 6 to 8 points more of revenue than the demand we’ve had for — from hardware. We’re not ready to guide for where revenue would be in 2024, but it’s clear that, that 6- to 8-point headwind is going to challenge growth for next year. That being said, I also want to be clear, we have been on a march of double-digit earnings growth, and we want to remain on that march. You saw that we took a number of actions to drive earnings growth this year, and we’re confident we’ll achieve double-digit earnings growth.