Operator: Our next question comes from the line of Ray McDonough with Guggenheim. Please proceed with your question.
Ray McDonough: Great, thanks for taking the questions. Francois, given some of the changes you’re making to your software portfolio, it seems like in a way you’re, you’re simplifying or even converging some of your solutions. So as we think about the roadmap for Distributed Cloud in particular, what can you do to accelerate adoption and make sure you capture the potential voluntary churn that you’ve talked about or, or even how should we think about the priorities around Distributed Cloud next year.
Francois Locoh-Donou: Thank you. The — look our goal is to make it ridiculously easy for our customers to secure and deliver their applications. And Distributed Cloud is getting a lot of traction because it does that for, for our customers. So when you look at the priorities next year, of course, it’s scaling the platform, so it’s available in, you know, more markets in more environments and continue to add services to the platform. We have the two — I would say first two sets of services WAF and multi cloud networking. We have a backlog of other services that we want to add to the platform that our customers will want to add. We’ve recently added CDN capabilities on the platform, you know, after the [Acqui hire] (ph) of Lilac a few months back and we’re starting to get customers adopting our CDN because it’s convenient for them to like catch back to load balancing and, and security in some cases.
So the first priorities are, you know, scaling the platform and adding services. As far as go-to-market, frankly, the priority is going into customers that are already F5 customers, that have our hardware or software, but want a SaaS solution to make it easier to front — to use F5 to front a bunch of applications for which they don’t want to manage the lifecycle of deployable products. And if you look at the 500 customers or so that are on Distributed Cloud today, over two-thirds of them are actually existing BIG-IP customers. So about a third of them are net new customers that had never bought anything from F5 and two-thirds of them are existing BIG-IP customers. And we think actually with both net new and with existing customers there is a lot of growth and that’s where the focus is.
And the focus is going to continue to be with large enterprise customers where F5 has a strong presence.
Ray McDonough: I appreciate that. And if I could snick one more in, maybe for Frank. Certainly appreciate the continued focus on operating margins and EPS growth. But can you help us think through how we should think about cash flow margins in fiscal ‘24. I know you typically don’t guide cash flow. But should we think of cash flow growing in line with operating income, ex-some of the tax headwinds you had in fiscal ‘23, any even directional thoughts would be helpful.
Frank Pelzer: Yes. Ray, as you described, I think, that’s roughly correct. You know, cash flow is one of the hardest things for us to, to predict, but those dynamics are it should narrow a bit that net income growth with, you know, with some exceptions to the two tax impacts. Some of the restructuring expense we had last year that we don’t have this year that are real cash, but split out for non-GAAP purposes. So there is a few ins and outs, but it should be roughly, roughly close to that.
Ray McDonough: Great. Appreciate it.
Operator: Our next question comes from the line of James Fish with Piper Sandler. Please proceed with your question.
James Fish: Hey guys, thanks for snicking me in. I’ll just make it simple here. You know, you guys talked about in the prepared remarks about subscription renewals performing well. Any more color into specifically what products are seeing those better renewals, but the cross-sell that you’re seeing or any qualitative or quantitative color around net retention rates understanding, you, you have this headwind around specifically with the SaaS and MSP business about $65 million. You know, how should we think about that net retention rate within the term business or the aggregate overall when you kind of exclude even the impact of that SaaS please. Thanks guys.
Frank Pelzer: Sure. Fish I’ll start and then Francois wants to add anything that would be great. So you know, within our term subscription business, which is generally our BIG-IP software, as well as NGINX and that’s the expansion rates that we’ve seen. It’s not the easiest like task in the world to convert that term into an ARR type of business, because of all the moving parts, but when we’ve tried to do that and try to convert and look at what would you know an expansion rate would be or net revenue retention rate. It’s north of what you would think of as the industry norm of 120% let me just put it that way. And that combination of where it is, plus our SaaS managed service our net revenue retention rate is still north of that 120%. So that combination you know, is what gives us a lot of visibility and firmness in our expectation of those pieces of the business that will continue to do well.
James Fish: Makes sense. And just on the go-to-market side, any changes in terms of incentives or approach as we turn to page into this next fiscal year and as we have, you know, transitions now within the overall software transition.
Frank Pelzer: The incentive plans between the two years are largely the same Fish. There is always going to be a couple of tweaks here and there as we’re looking and seeing what was successful the year before and not but nothing major.
James Fish: Thanks guys.
Operator: Our last question comes from the line of Simon Leopold with Raymond James. Please proceed with your question.
Simon Leopold: Great, thanks for taking the question, I just wanted to get a better sense of where the systems business is stabilizing, in that I assume the September quarter did not have much if any backlog drawdown in it. And so, other than maybe some seasonal movement, I’m just trying to get a sense of if sort of it’s you know $120 million to $130 million per quarter level, sort of, the new normal for systems. And then just quickly on how the software is trending with the Silverline exit. Does that manifest itself gradually throughout the year or is that something that shows up in a particular quarter. Thanks for that.
Frank Pelzer: So I’ll start with the first one and then Francois, I don’t know if you want to take the second. But in terms of, what we’ve, what we’ve said I think in both the prepared remarks and some of the answers, we did both — we do believe that we hit a trough in FY ‘23 in terms of systems bookings. And, you know, what we’re equating that to the term demand. Now the offset or the balance of that is that, there was FY ‘22 bookings they were delivered in FY ‘23. And so the shipments that they actually received, which is the revenue that we recognized that came in in FY ‘23 and started to be utilized. Now, as that utilization started to increase and more capacity was needed, we started to see that come through in Q4, which was our best systems bookings quarter of the year.
It looks like on a revenue basis, that wasn’t necessarily the case, but from a demand perspective, our bookings perspective, that was the case. There will still continue to be fluctuations. There’s probably a bit of leveling or even improvement that we’ve seen in the enterprise side. On the SP as Francois mentioned service providers have been hesitant and we expect that to continue on. And in Q1, in particular, you know, we’ve got a federal government that isn’t necessarily functional right now, and we’ll see what that means as an impact to, you know, bookings for systems in Q1 and we’re trying to take that into account, as we, you know looked at the guidance and the expectations. We do expect as we’ve talked about many times in the past, there is that four to six-quarter long and the dynamics that I just talked about explains why sometimes that takes four to six quarters particularly in a supply-chain restrained environment.
